The whole process of efficiency reform embarked upon by the Council of Australian Governments is under threat. The threat will come if the federal government attempts to shift responsibility for large amounts of health and aged care delivery to the states and territories without also shifting the wherewithal to do it in the form of an income stream. It will be no good if the federal government pushes out health and care to the states and keeps all the savings for itself. The costs of health and aged care are likely to rise faster than most areas of government spending. Yet the federal government proposes to shift much of the responsibility for them in this term of government. At the same time Prime Minister John Howard has ruled out any major tax reform this term.
The likely response from the states and territories will be to refuse to accept the responsibility despite the obvious attraction individual ministers might see in gaining more power or more efficiency in being able to allocate funds as they see fit rather than having a group of federal bureaucrats monitoring everything they do. Already the COAG process has been slowed with transfers of housing and child care responsibility being postponed.
There is much to be gained from the COAG process. There is a lot of duplication and inefficiency in health and welfare delivery. A lot of federal money is earmarked at a quite detailed level, which ties the hands of service deliverers on the ground. The federal government has promised to “”broadband” a lot of this money to give more flexibility to care deliverers, so they can take money out of one area and put it in a more urgent area, and back again later.
There is significant reservation about this, however. The efficiency is obvious, but the success of the whole COAG reform will depend on the competence and good faith of state and territory politicians and bureaucrats. It is no good giving them the flexibility (whatever the cost saving) if they misuse the money on pet political projects and other priorities. A good example of this was the Commonwealth’s handing over of the immunisation program to the states; they did not do it properly. Immunisation rates fell and all the efficiency gains have gone out the window in overall poorer health outcomes.
So there is a two-way onus here. One is on the part of the federal government not to cunningly wash its hands on health and welfare by handing responsibility to the states and territories without giving them the money to do it. The other is on the part of the states and territories, if the get the responsibility, to do the job properly. The Commonwealth originally got into these areas because it was thought the states were not doing it well.
That said, the COAG reforms deserve a try, provided they come with fiscal reform. The reasons are that service provision is often better when directed at a level closer to the need and that those who spend the money and deliver the service should be accountable for both the raising of the money, the spending of it and the value for money obtained. At present the Commonwealth raises more than 70 per cent of total government revenue in Australia and spends about 50 per cent of it. The balance it gives to the states and territories which raise for themselves only about a half of what they spend. It means that the states and territories can lay the blame on the Commonwealth whenever there are short-comings in service delivery.
To rephrase a well-known slogan: there should be no representation without taxation.
The states’ financing has been steadily squeezed and moved into more unsatisfactory areas. Part of this is due to their own stupidity in shooting themselves in the fiscal foot by engaging in destructively competitive conduct for short-term gain. Examples have been Queensland’s cutting of stamp duty on shares and abolishing death duties and Victoria’s and South Australia’s payroll tax holidays for some businesses. In the long term they erode the tax base of the states and force them into narrower and higher unsavoury taxes on gambling, alcohol, tobacco and petrol. In theory, these taxes should reduce consumption of these products; in fact the states encourage (or at least are less keen on dissuading) use of these products because they need the money. The states have been forced to increase stamp duties on the sale of dwellings and cars to ridiculous rates, thereby dissuading people from buying and selling into more suitable and efficient homes and vehicles.
ACT Chief Minister Kate Carnell warned about the difficulty of reforming present inefficiencies in the federal-state structure without a major reform of the tax system. She has called on other state and territory heads of government to block the COAG reforms unless something is done about funding.
To some extent she is right to put her foot down. However, it is no good replacing present arrangements with something less accountable. It is no good the Commonwealth just handing over a larger share of the money it raises in the form a guaranteed share of the pool raised by the Commonwealth. If the states are to take more responsibility for health, welfare and education they must be responsible for raising the money to do it and being accountable to their electors for doing so.
There is very little constitutional impediment to this. The states, with the agreement of the High Court, have already overcome the constitutional ban on them raising excise taxes, by the use of various legal artifices to level money at the point of sale. There is nothing to stop the Commonwealth handing back some income tax powers, or indeed levying and passing on state income taxes at rates set by the states.
There is nothing, but the paralysis of politics, from having a broad based consumption tax and a more broad-based tax on financial transactions.