I have a horrible suggestion to help fix ACT finances.
Kate Carnell imagines that the ACT’s operating loss will be under control in three of four years. Spending will stay the same a revenue will go up gradually as greater employment yields more payroll tax and people pay steeper parking and speeding fines.
She’s dreaming.
The central problem is a narrowing tax base and in the ACT a failure to check spending.
The states have given away or lost to the Commonwealth a huge range of taxes in the past 25 years. Most recently the states have lost about $6 billion worth of tobacco, alcohol and petrol taxes to the Commonwealth under a High Court ruling. Of course, the Commonwealth has arranged to pass the money on to the states, but the long-term consequence is that the 1997 rates and arrangements are frozen. The states have lost tax discretion.
Earlier, under competitive federalism, under which the states compete to see how big a tax holiday they can give business to attract overseas industry or poach it from other states, the state lost chunks of stamp duty and some payroll tax.
They have had to turn to gambling in desperation.
The woes of state taxing began in 1942 when the Commonwealth took their income-tax powers. But competitive federalism began in earnest in the Bjelke-Petersen era in the 1970s when he progressively eliminated death duties. All the other states and territories have followed suit.
Well, it is time to reverse competitive federalism and what better to begin than where it all started.
The ACT should re-introduce death duties. It would be an excellent piece of lateral thinking. For so long now, the states and territories have been reducing tax in order to attract worthwhile industry and people.
Why not look at it the other way. They should be increasing tax to repel undesirable industry and people.
Death duties would result in some elderly people leaving the ACT. Any budget framer would tell you, the aged put much higher demands on government spending than other groups, except, perhaps, the very young.
Initially Queensland abolished death duties to attract people with large estates to retire in the sun. The result was that the Queensland public sector inherited a lot of unnecessary liability for aged care, including extra medical spending, nursing homes, rebates and concessions on transport and so on.
So death duties will not only increase revenue and broaden the tax base, they will also reduce spending as burdensome older people move to other tax-free states and territories.
At least initially that is what would happen. But my guess is that every other state and territory would follow suit. And if they did not, the Grant Commission would say they were not maximising their revenue effort so their Commonwealth grants should be reduced.
A death duty would raise about $20 million a year. It would have to be coupled with a gift duty to prevent tax avoidance with people giving things to their children before they die.
In any event, as soon as the states foolishly left the death-duty field, the Commonwealth stepped in. It introduced the capital-gains tax. A lot of that is a de-facto death duty, payable on capital inherited.
Short of the death duty or some other radical reform of revenue, the ACT has to attack spending.
This Budget the Government introduced a new accounting mechanism called comparative pricing. Not much coverage was given to it. It works by separating an agencies budget into two elements. The first is how much best practice would cost to deliver the services an agency is delivering. The second is how much extra it is likely that the agency will actually spend to deliver the services. The agency gets both amounts, but the latter amount is called “”injection for operating requirements”. In plain English that is a subsidy for inefficiency.
In a Budget of $1124 million of ACT spending, the inefficiency subsidy comes to $45.3 million, or about 4 per cent.
That is calculated by agreement with the agencies, like the hospital and the departments of education, urban services etc. The starting point is the Australian average and private sector costings are also used.
The big subsidies go to health and the hospital at $14.8 million and education and the CIT at $16.4 million. (I am not including ACTION’s commercial loss of $14 million in this.)
The theory is that public-sector workforces get a goal to work towards. Also they get the threat of privatisation or out-sourcing if they do not get close to best practice.
In some respects it is a better path than aiming at privatisation no matter what, like the Howard Government. The threat of privatisation causes demoralisation of workforces; privatisation carries a risk because it may not turn out to be more efficient and might replace a public monopoly with a private one. Ultimately it might be better to keep the advantages of public monopoly if only the workforce attained private-sector efficiency.
By quantifying and highlighting the inefficiency, Carnell hopes to spur workforces into attaining it.
Let’s hope she is not dreaming.