Tax and Transfer Policy Institute

The reform of Australia’s federation is under review, with a White Paper process currently underway. In this piece previewing Thursday’s Renewing Australian Federalism event, former Leader of the Opposition, Professor John Hewson considers the future of the federation when it comes to democracy.

Australia has built a very effective federalism that has provided us with a pretty effective national economy and society, operating with a common currency. This success should not be underestimated or forgotten as we work towards a review and further reform.

The recent decision by the Scottish electorate to remain part of the UK avoided what could have been devastating economic and social consequences.

So much was uncertain: what currency would Scotland use? How would it run monetary policy? What share would it be allocated of UK debt, and how would this be determined? Would it be allowed to remain in the EU and, if so, on what terms? What rights would it have over North Sea oil? What would happen to its financial services sector – one of the biggest in Europe? And, of course, how could the Scottish government possibly deliver on the promises made to increase government expenditure, especially social spending?

These, and many other, questions would probably have bedeviled/constrained the break up of the “old” UK for years, if not decades. Similar issues/questions must be addressed, explicitly or implicitly, in the reviews of our Federation and taxation, as we consider the division of policy and service delivery responsibilities, and their most effective funding.

The “romance”, especially among the young, of an independent Scotland, was effectively mugged by the reality of the difficulties, if not unsustainability, likely to be encountered by attempting to structure the break-up of the UK. Some of the initial enthusiasm for an independent Scotland came from the simplistic notion that North Sea oil (NSO) was the basis of their wealth and ensured their future financial viability. However, in the process it has been recognised that NSO had “peaked” and future potential would be constraining.

Sharing both the good and the bad

At times in our past, resource rich states such as Western Australia and Queensland have “contemplated/threatened“ to pursue “independence/secede”, as they felt the wealth they created, and thereby the national revenue they generated, was not sufficiently recognised by other states, yet they were unjustifiably required to share it with those other states.

These arguments seem to emerge with most vigour in the “good” years, when it is all too easy to overlook, aside from the historic constitutional and legislative structures, that resources are national assets, owned by all Australians, and that a successful federation necessitates that we develop an effective mechanism that ensures that their benefits are fairly distributed across all Australians. It is also easy to forget that these same resource rich states had their “bad” years in the past, years in which they were significant recipients of support from the other States.

It is also worth recalling that, to a very large extent, our Federation is an “historical accident” - up until the last of the Conventions of the 1890s that negotiated the structure of our federation, New Zealand was in and NSW was out – a situation that was reversed at the last Convention. Of course, some are still envious of the “independence” of NZ that has been able to operate as a nation without states (and without an Upper House).

Recognising the value of the Federation

Clearly, the White Paper review of our Federation should attempt, once and for all, to determine which level of government is responsible for what, in terms of both policy development, and service delivery.

Then, to decide the most effective way to finance this structure, obviously linking with the Abbott Government’s Tax review, which needs to focus on both State and National tax structures, actual and potential.

One of the thrusts of the debate here is to minimise the so-called “vertical fiscal imbalance”, essentially to ensure that “those who do the spending should also do the taxing”, notionally to ensure the discipline that such a requirement would impose on government spending.

However, it has been a failing of state taxation that some of the most technically efficient tax bases, such as payroll and land taxes, have been so easily “neutered” by short-term politics, as states “compete” with each other to attract business and population.

It is so easy to “hypothecate” a percentage of say, income tax and GST revenue to the states to fund specified responsibilities - but so hard to stop them furthering competitive federalism.

Let’s begin these reviews by recognising the value of what we have created in our Federation, and thinking as a nation first, and a confederation of independent states, second.

The Renewing Australian Federalism event will take place at Crawford School on Thursday 2 October. To register for the event: https://crawford.anu.edu.au/events/4661/renewing-australian-federalism-starting-conversation

This piece was originally published in The Conversation.