A new federation: tollways, tax and fixing the fiscal imbalance

By David Donaldson

October 27, 2014

Australia should consider bolstering the GST, giving the states a portion of income tax and extending the use of tollways on city roads to help overcome the vertical fiscal imbalance, argues a report on the federation released today by the Committee for the Economic Development of Australia.

The alternative, it says, is expanding the rollout of activity-based funding in health, education and welfare policy.

The report comes as Prime Minister Tony Abbott declared in a speech on Saturday that “a century of encroachment has left the Commonwealth financially responsible for vast services that it doesn’t actually deliver and can’t control”.

A Federation for the 21st Century also recommends instituting a series of federation conventions in the lead-up to next year’s white paper, so as to broaden public interest and input into reform, as well as increasing transparency in the Council of Australian Governments and creating a new “Federation Reform Council” to take the place of the recently abolished COAG Reform Council.

The report includes 16 contributor chapters on a range of issues.

To help tackle the vertical fiscal imbalance, former secretary of the Department of the Prime Minister and Cabinet and Mandarin editorial board member Terry Moran argues for a fixed proportion of income tax being allocated to education, an area in which the states should dominate; charging tolls for the use of existing city roads to fund the construction of new roads; a land tax or property charge with a broader base at a lower rate to help fund public transport; and the Commonwealth bureaucracy sticking to providing advice and technical expertise while leaving service delivery to the states.

Moran states the success of the federation is built on the “six Cs” originally theorised by professors Anne Twomey and Glenn Withers:

  1. Checks on power;
  2. Choice in voting options;
  3. Customisation of policies;
  4. Co-operation;
  5. Competition; and
  6. Creativity in addressing policy challenges.

Former premier of Victoria John Brumby uses his chapter to consider the benefits of the federal structure, providing as an example how high levels of migration from Victoria to more economically successful states encouraged policy innovation and major reform during his time in office.

In Case study of reform in the Federation: Vocational Education and Training, Dr Vince FitzGerald and Professor Peter Noonan propose an alternative means to undermine the vertical fiscal imbalance: shifting the focus of service delivery from supply to “a demand-driven, citizen-centric model”. Using vocational education and training as an example, they suggest expanding an activity-based funding model in education, healthcare, and key areas of welfare, as is already being implemented in the National Disability Insurance Scheme, would go a long way towards eliminating the imbalance.

Professor John Cole outlines the historical context of Australia’s federal system by looking at what drove the colonies to join together in the first place.

Fred Chaney and Professor Ian Marsh put forward their ideas for encouraging effective federal co-operation in Entrenched disadvantage: Helping remote indigenous communities. Chaney and Marsh recommend implementing a combination of provisional centrally determined outcomes; local agents having the power to adapt to local conditions; and accountability for the exercise of ability, including feedback on current COAG approaches to indigenous disadvantage.

Professor Bhajan Grewal argues in Economic perspectives on federalism that a lack of a strong co-ordinating mechanism between the states will lead to the expansion of Commonwealth powers, which is currently the case.

Dr Tina Hunter examines how the regulatory burden of competing jurisdictional claims can be reduced, while adjunct senior research fellow Jennifer Menzies argues that poor relations between governments in Australia has undermined the potential for the states to act as mechanisms for social policy experimentation.

Former Sydney Lord Mayor and Mandarin editorial board member Lucy Turnbull finds that Australia’s city governance measures are lacking, as neither local nor state governments have picked up the slack. She recommends the creation of discrete bodies tasked with overseeing urban planning.

More at The Mandarin:  Terry Moran: rebalancing government to save the federation

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