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ANZSOG Dean Ken Smith’s Federalism fix: forget turf wars, focus on outcomes

29 November 2017

News and media


ANZSOG chief executive Professor Ken Smith discussed Commonwealth-state relations at the 2017 Institute of Public Administration Australia national conference in Canberra.

See below for a summary of his speech.

Across the world, nations are rediscovering the benefits of federal systems and devolving power to state or regional governments. Yet in Australia for the past several decades, our own federal system is often dismissed as a relic of history, and further centralisation is seen as inevitable and beneficial.

We need to stop ignoring the benefits of federalism, fix the financial imbalances that are currently reducing its potential, and build a new relationship based on trust and collaboration by working together to deliver public value.

For a nation with the geographical size and economic diversity of Australia, federalism is a natural fit, but the system we have needs fundamental reform. We need to recognise that federal systems of government are flexible and offer the ability to balance the challenges of globalisation, with the public desire for services to be delivered at a local level.

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In Europe, many countries including Germany, France and Italy are devolving powers in areas such as health, education and taxation, to states or regions. In the UK, devolution has seen more powers given to regional governments in Scotland, Northern Ireland and Wales.

Research by academics Glenn Withers and Anne Twomey in their 2007 report, Australia’s Federal Future, found that in the previous 50 years, federations had consistently outperformed unitary states in economic terms. As well as being economically efficient, federations can give nations the flexibility to innovate and adapt government to local conditions. Redistribution within a federation can lift equity, while allowing service delivery which is appropriate for diverse communities.

A well-ordered federation does not just foster collaboration between states but also competition between policy ideas, resulting in continuous improvement and ‘ratcheting up’ to the best model. Resolving issues through discussion and debate between different spheres of government is inherently more democratic and produces better results than central control, whether at a state or national level.

Both our democratic and bureaucratic systems need to consider how we move to a better federation where states and territories and the Commonwealth work together as equals.

How we do this is underpinned by the broader, and more important question, of how we maintain and build trust in our democratic systems. Participatory and informed democracy are important concepts for the federation to foster.

The Commonwealth sees the revenue it raises as its money and believes that state sovereignty is subordinate to its own agenda.

Research led by Griffith University’s AJ Brown as part of the Australian Constitutional Values Survey (ACVS) over the past decade shows a decline in the community’s perception of how democracy works in Australia. The ACVS shows a worrying trend from 2008 of 81% responding that our democracy works “very well” or “quite well” to 66% in 2017. Almost a 1 in 5 decline in confidence in our system of representative democracy in less than 10 years. This problem is not unique to Australia and is repeated in surveys in other democracies, particularly in cohorts younger than the baby boomers.

Specifically, trust in the Federal Government has dropped from a high of 80% in 2008 to just 49% in 2017, while trust in state and local governments has hovered between 50% and 60%.

How much of the decline in trust can be put down to fatigue with the chronic policy gridlock and leadership instability in Canberra, and how much runs deeper in our representative democracy, is open to debate, but it appears that there is still strong support for our federal system.

The research shows that, in 2017, 60% of people say the three-tiered federal system works “well” or “very well” – a slight drop from 68% in 2008. There is also strong support for redistribution within Australia, with 80% saying money should be transferred from rich to poor parts of Australia so everyone can enjoy equitable access to a range of services.

When asked what our systems of government should look like 20 years from now there are some extremely interesting trends:

Only 22% like the status quo, but only 3% want to solely have a federal government;
20% want to abolish states, but replace them with regional and local governments;
23.5% (doubled from 12% in 2008) want a system that adds regional governments to the existing three tiers.

The survey result in 2017 was surprising for any state abolitionist: the option with the biggest support was expansion to four tiers of government. Understanding the sentiments behind this response will be important for those keen to build our approach to the reform of our federation, and particularly how best to increase community confidence in both representative and participatory democracy.

Most states still adopt Joh Bjelke-Petersen’s maxim that “the only good tax is a Commonwealth tax”.

While I, like most Australians, am a supporter of federalism, the long-running unaddressed issue of Vertical Fiscal Imbalance (VFI) is damaging our federation.

The National Commission of Audit found that in 2010-11 states and territories were raising 20-30% less revenue than they needed to cover expenditure and that this figure had risen in the previous decade, despite the GST allocation to the states.

This is out of step with other federations and is a major problem at the heart of federal-state relations.

Imbalance in funding reduces discussion about our federation to constant zero-sum arguments over money rather than constructive debate over better ways to collaborate and innovate.

The Commonwealth sees the revenue it raises as its money and believes that state sovereignty is subordinate to its own agenda. The reality is that funds collected by the federal government or in specific states are held in trust for the whole Australian community.

The Commonwealth has increasingly given itself the unilateral right to spend on almost any issue, without taking full responsibility for outcomes. It uses funding as a lever to achieve its own objectives, sometimes valid, but at other times misplaced. As a result, funding for vital services is subject to the political considerations of the day, rather than a long-term consideration of whether the Commonwealth is best-placed to address the issue.

On the state and territory side, while there is continual unease about the distribution of GST revenue, there has been no appetite for taking more responsibility for setting tax rates or raising taxes. Most states still adopt Joh Bjelke-Petersen’s maxim that “the only good tax is a Commonwealth tax”.

Making the Commonwealth responsible for raising revenue, while the states have responsibility for the great bulk of spending for key service delivery, enshrines problems with accountability. It severs the important link between taxation and spending, and acts to reduce citizens’ trust in their governments.

At the political level, reform has ground to a halt. We therefore cannot rely on a politically led grand settlement between states and the Commonwealth to reshape our federation, at least not in the short term. We need all levels of government to begin rethinking how we can make our federation work.

Despite VFI, progress is possible. In many areas of health services, for example, over the past decade, we have arguably seen real improvements based on the mutual desire to untangle complex arrangements and put health funding on a more sustainable foundation.

We need to do this by rethinking the way our tiers of government relate to each other, and begin working on a basis of trust. Effective collaboration between levels of government in Australia can’t just be rule-based, it must have inherent integrity and legitimacy. Trust is only possible where there is a clear agreed purpose that subsequently defines public value.

As Nik Kirby, the Australian leading Oxford University’s Building Integrity in Government group, states: “A lack of clear purpose, even amidst strict rule compliance, simply negates the first principle of institutional integrity.”

State and Commonwealth relations need to be based on a genuine assessment of which tier of government — or the not-for-profit or private sector — is best placed to commission and deliver services. Forget the turf wars and protection of revenue streams. We need more focus on outcomes, not squabbling over inputs.

At the political level, reform has ground to a halt.

Borrowing an analogy from a previous Secretary of Prime Minister and Cabinet, Terry Moran, the Commonwealth needs to stop seeing itself as a “Swiss Army knife” that can do anything it turns its mind to. In some areas, its most productive role may be assessing which states are doing best, and ensuring expertise and ideas can flow from state to state.

Equally, state and territory governments need to stop worrying about states’ rights. The debate needs to move beyond one based on a traditional rule-based approach. It needs to focus on the concepts of public value and public purpose. All levels of government (whether that be three or four) need to work towards more effective collaboration, and a relationship based on developing a common purpose of providing the highest quality services for all Australians.

* This article originally appeared on The Mandarin.