A paper recently produced by Professor Jonathan Pincus “Six myths of federal-state financial relations” and published by CEDA, published at:
http://ceda.com.au/public/research/federal/six_myths_federal_state.html
has recently attracted commentary by Ross Gittins in the SMH. Pincus, a traditional economist, specialising in federal-state financial relations, welcomes the “new model of cooperation” to federalism by the Rudd government. His paper follows in the footsteps of the Research Report by Ann Twomey and Glen Withers, commissioned by the ALP State Premiers last year, entitled “Australia’s Federal Future – Delivering Growth and Prosperity”(April 2007).
The problems with the Pincus paper are many. Only a few glaring ones are mentioned here. This critique will also form the basis for advocacy of major changes to Australia’s system of governance, an end to the federal system. Any federal system is based on a legal division of sovereign powers listed and enshrined in the federal constitution. It is essentially a compact by which, at a given time in history, quite separate territories seek permanent unification for some important common interests, like defence and commerce, while retaining the remainder of their sovereign powers.
Through the passage of time, improvements in communications and transport, conditions that existed at the time of unification, have changed so much in Australia that federation and separate state constitutions no longer make sense. This is certainly not a myth. It is widely recognized.
The historical development of federalism - and its decline - has been predicted correctly by eminent Australia commentators as early as 1902 when Alfred Deakin, the second PM, said that the “Commonwealth would increase in stature, in financial dominance, and in the determination of national priorities”. Professor Greenwood, G. (1942) wrote” “Despite its achievements, the evidence points decisively to the conclusion that the federal system has outlived its usefulness, that the conditions which made federation a necessary stage in the evolution of Australian nationhood have largely passed away, and that the retention of the system now operates only as an obstacle to effective government and to a further advance.”
His book was reprinted in 1976 and he then prefaced it by writing that “the central argument of the book has not been damaged but has indeed been strengthened over time”. In 2008 we are witnessing the virtual implosion of the NSW State Government, Opposition and bureaucracy while still reading professors writing about the wonderful evolution of our federal system.
Conservative federalists like Pincus, Twomey, Withers and also Greg Craven cling to the old structures that may have been reasonably functional prior to 1942 by arguing that the problem lies largely in the fiscal imbalance but that the situation can be rescued by fruitful cooperation and adjustments and, even, in the case of Pincus, that some imbalance is actually positive. The other theme constantly running through their defence of federalism is that competition between the states is good and that, to the extent that it is not good, the powerless and ineffectual COAG body can solve that problem. Perhaps the most erroneous conservative defence is that unitary state equals centralization of power and this is very dangerous. It sounds like a remnant of cold war thinking.
Surprisingly, Pincus nevertheless points to France, which is politically highly centralized but administratively effectively decentralized. There are many other examples, which can demonstrate that many unitary states are actually more decentralized than federal Australia. Australia is in fact highly centralized at the state level a dysfunctional situation detrimental to both local government in non-metropolitan areas and regional development.
What is missing in the Pincus paper is a near-complete absence of the dynamics of the two-party dominance in conjunction with the federal-state financial and constitutional problems. Referring to six kinds of dissatisfaction with current federal state-relations, all of them “myths” in his view, each of them “wrong or overstated”, his answers do not address the core of the problem. I’ll state these “myths” here now:
1. We have had or will soon have too much federal government involvement in traditional state fields of activity
2. The states should implement uniform policies
3. The states should minimise duplication and overlap with federal government programs
4. The states should prevent further growth in their outlays
5. Richer states should cease to subsidise poorer ones - "horizontal fiscal equalisation" is outdated
6. Australia should seek to reduce the gap between state spending and the revenue that states raise themselves - "vertical fiscal imbalance".
These “myths” are only partly further discussed but an examination of the claims made suggests that most are not really myths at all.
As to the first point, yes, ardent state righters continue make these claims as they are frightened that Canberra will have too much power. These people don’t seem to realize that the national government of Australia has the responsibility of governing a huge resource rich continent and that the six states are remnants of the colonial past of an empire that no longer exists. The state righters’ remedy, almost invariably, is to simply return the income tax powers to match ossified constitutional state powers, in other words, to turn the clock back.
As to the second point, this is certainly no myth. The lack of uniformity of policies is a widely acknowledged hindrance to business, educators, professionals, parents, police, transport systems, etc. Especially citizens living in border areas, like Albury-Wodonga, Tweed-Coolangatta, Queanbeyan-Canberra are well aware of this as well as every citizen who moves inter-state.
Third, the duplication and overlaps are serious and costly. The BCA as well as, for instance, Dr. Mark Drummond have gone to great length to establish precisely that. Pincus tries to show that some duplication and overlap is actually desirable and can be, in his view, even cost effective. Where Pincus welcomes “synergies” and “spill-overs” in reform he overlooks the fact that such synergies would be readily available in the much larger unitary state organization. Australia doesn’t need the federal structure for that.
The fourth point, presumably, is argued by those who claim that states should not spend money that they don’t have, that is to say it is collected by the federal government and distributed on the basis of a particular formula and agreements only. Yes, some people say that but it is the system that creates this situation. After much wrangling most Premier conferences end in a more or less acceptable redistribution but what a waste of time and effort it is. The more important point to make here is that the vertical imbalance is already huge and growing so that the potential for controversy, time wasting and political grandstanding will continue if the current federal system continues.
The fifth “myth” is more a misconception of those who don’t see Australia as one national unit but rather as a collection of competing states. “If you don’t pull your weight as a state face the consequences” is their mentality. This is not what is happening of course. There is a great deal of equalization but federal government, again, complicates this endeavour and its abolition could only simplify the equitable distribution of consolidated revenue. The justification for horizontal equalization is virtually beyond question and it is merely hindered by those who think in terms of state competition – which has many other disadvantages as well.
The sixth point relates closely to point four.
In a section Policy responses in a federal system Pincus suggests that our Constitution has “evolved” and ”gives the Commonwealth scope to choose between:
excluding the States from policy determination and implementation
co-opting the States, as agents of the Commonwealth
cooperating with the states, as partners
leaving matters entirely to the States”
Excluded here is the option to call a referendum to abolish the states altogether and replace the federation with a new structure of governance.
In welcoming the initial Rudd Government response to federal-state problems, that is to seek cooperative arrangements with the six ALP state Premiers to first fulfill election promises, such as the hospital crises, the environment and water management, Pincus does not really look beyond the exceptional situation that exists now. Australia has wall-to-wall ALP Governments for about one year but it would be equally unusual for this to continue for much longer. Cooperation can be achieved quite quickly now. However, a Coalition return to government of the states, especially in WA, would see a return to adversarial approaches and the old intrinsic problems of blame shifting and buck passing can be expected to re-enter the political arena. The real test of the Rudd Government will be if they, the ALP jointly, can bring themselves to end federation.
Pincus’s assertion that “the Australian federal system must be judged as one the most successful in modern history” is a no more than a lofty patriotic statement. He provides no evidence for that. By what measure can he make such an assertion? Presumably, as he is an economist, by some economic measure but it is not stated. Nor is there a comparison with either unitary states or other federations, on the basis of which, however flawed, Twomey and Withers selectively attempted to make their case.
Pincus argues that the key to Australia’s success is the “evolution of Australian federal arrangements to assist Australians in achieving their aspirations”. The reality is that the fiscal imbalances, blockages and major party bickering have become one big headache. Alternative governance arrangements, if introduced much earlier, could have made Australia a much stronger, better decentralized country with more highly developed infrastructure and transport systems. Much of the huge natural resources of Australia have not been used wisely as a result of lack of concerted national endeavour. The environment has been damaged dangerously as a result of lack of national resolve. Decision-making on such important matters has often been extremely slow and inadequate. Many services for the citizens are plainly sub-standard as compared to many other OECD countries.
Such prosperity as has been achieved in Australia may not be due to particularly sensibly managed federal-state financial relations or effective cooperation between federal and state governments. Much more likely it is due to the fortuitous natural resources of the lucky country and the enormous input of mostly highly motivated and hardworking post WWII immigrants. It has even been achieved in spite of quite mediocre private sector management practices as three official critical inquiries into these practices have demonstrated. In the last few years luck has again struck Australia, fortunately, but Australians should get away from the misguided notion that a repair job on federation is all that is required for continued prosperity.
It is a structure that is archaic and increasingly unworkable with a two-party system in both spheres, federal and state. Papers like that of Pincus and other high profile academic commentators carry with them the danger that the real threats to this country are trivialized, even completely misinterpreted. The Pincus message that the problems are exaggerated or completely wrong and that further piecemeal tinkering is all that is required is false in my view.
A further major flaw in the paper is that there is little or no consideration of the serious constitutional blockages, which have frozen the federal structure. Pincus answer is that the financial relations can be adjusted such as the 1927 loan debt agreement. However both that arrangement and the 1942 income tax centralisation have strengthened the position of the federal government considerably and have therefore increased the scope of their concurrent powers. The GST collection further strengthens the federal government. The equalization grants, after 1933, have had the effect of redistributing funds to ensure comparable standards of living between the states, with some success, but mostly at the expense of some states to the benefit of others. The distortions of that system are obvious and today, the problem exists of a kind of dual economy because two states, WA and Queensland are doing very well out of the mining boom while other states are struggling with a declining manufacturing base. Pincus argues that the federal government therefore has an important redistributing function.
In reality this undermines the federal compact consistently as the legislative and constitutional powers of the states become meaningless. Only if full taxing powers are restored to the states would it make some sense to continue with the federation but the role of the federal government has become of such great importance to Australia’s future that is nonsensical to even contemplate that. In any case Pincus does not provide any real solutions at all.
Replacing federation with an alternative, more effective structure of governance requires considering a number of alternative options. The informal umbrella group Beyond Federation has done that for the last seven years at thirteen different congresses. Others have written or edited books about one or more of these options like e.g. Hudson, W. and Brown, A.J., the former ALP Minister Chris Hurford; and Patmore, G and Jungwirth, G.
We should remember that a sovereign people can always rewrite their constitution. We are not governed from the grave, we live now and our national government has a duty to provide functional structures that suit the times and aspirations.
Basically there are three options:
A two-tier system comprising a national government and much improved local government level plus adjunct regional organisations of councils (a mezzanine level);
A two-tier system comprising a national government and a large number of new regional/provincial governments (but no local government), some see this as a new type of federation;
A new non-federal, three-tier system with around 30 regional/provincial governments, plus improved local governments.
Moves towards federal structures elsewhere, like devolution in the UK and the trend in the EU, for instance, may well be positive and appropriate in those circumstances, but it is different here. Federalism is no longer appropriate. Centralism in Australia has been a curse at the state level. We need to move towards much better system of decentralisation radiating from Canberra. That can take the form of functional decentralisation as well. Many unitary states in the world are much better decentralised than Australia. Twomey and Withers argue that federalism is something that is becoming fashionable again and that this is a reason for Australia to maintain, improve, repair what we have. This is not a good argument at all.
Also the language that we heard at the 2020 Summit, e.g. "fixing", "repairing", apparently meant to make "cooperative federalism" acceptable as a new form of piecemeal tinkering, is unhelpful. Let's call a spade a spade: the time has come to replace the federation. That is what the ALP COAG love-in should be used for and a transitional strategic scheme be put in place to allay the understandable concerns of state politicians and public servants.
So much has changed in Australia since 1901 that it makes no sense to continue with nine parliaments, five of which bi-cameral, totaling over 800 politicians, nine civil services, and a ramshackle federal Constitution that can hardly be amended. The cost of this structure has been estimated to be from $9 billion to over $ 30 billion, every year. This is not counting the frustrations and the cost of opportunities missed. Australia has only 21 million habitants and in terms of numbers is grossly over governed. That could be somewhat justified 50 years ago by the tyranny of distance but this justification has largely dropped away as a result of better communications and transport systems. These arguments are not mentioned at all in the Pincus paper either.
Dr Klaas Woldring is a former Associate Professor of Southern Cross University.
This article first appeared on Online Opinion e-journal.
