Percy Allan: reforming the Australian federation like dominoes

Some hope a Hawke-style grand bargain can bring about reform to our federal-state tax problems. It’s more likely change will come in the form of domino-like self-interested reactions, says former NSW Treasury secretary Percy Allan, and indeed it’s already underway.

Reforming the Australian federation is not easy because it requires near unanimity by all governments. So the question is not only what should be done, but more importantly how it will come about?

Any academic specialising in this area will say the challenge is correcting “vertical fiscal imbalance” and simplifying “horizontal fiscal equalisation”. But my guess is that most people don’t understand, let alone care about VFS and HFE. Instead they are concerned about news reports that:

  • The Commonwealth is living beyond its means with the gap between revenues and expenditure widening each year forcing increased borrowings that swell public debt;
  • Hospital spending at state level is growing three times faster than the general economy so is unsustainable unless new funding is found and hospitals are run more efficiently;
  • Australia’s personal and company tax rates are amongst the highest in the world and nothing is being done to stop ordinary wage earners drifting into higher tax brackets;
  • Inefficient state taxes, namely stamp duties on property transactions and insurance policies, are a barrier to young people buying houses and older people downsizing to apartments; and
  • Recent social reforms offering national support for all disabled persons, equalisation of schooling resources and universal childcare subsidies are unfunded.

These burning platforms are realities, not fabrications. Attempts to ignore them won’t boost confidence and make the economy grow faster, but rather make voters lose trust in their leaders. We need to acknowledge that the above problems pose a threat to both our economic growth and social fabric. The federation faces a crisis that won’t go away without a national discourse and hard decisions.

Lobby groups are pushing for either tax relief (businesses calling for a higher GST to reduce company tax) or higher spending (welfare groups asking for higher income taxes to fund social programs). But such pleadings won’t win broad support because their demands are too narrow and sectional.

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