Address to the Productivity Commission Roundtable on Federal Reform
at Old Parliament House, Canberra on 28 October, 2005
The past two days have provided an excellent opportunity to consider the strengths of Australia's federal system, and how that system can continue to provide a framework for further economic and public policy reform. In this context my remarks will come under three headings:
- the nature of federalism;
- the nature of the issues confronting Australia; and
- the impact of globalisation and its relationship to federalism.
THE NATURE OF FEDERALISM
A comment that has been made about the discussion on school funding in Australia could also be applied to the topic of our current considerations -- debate on federal-state relations is like a Russian novel "... long, tedious, and everybody dies at the end".
The statement was made earlier at this roundtable that anyone involved in public policy in Australia will undoubtedly need to consider the issue of federalism. Nothing could be more true. That is a little like saying that anyone wishing to play cricket will sooner or later come up against the need to have a bat and a ball.
The point about federalism in Australia is that it is believed in theory but ignored in practice. The arguments for federalism are well-known and I do not propose to list them. However, sometimes familiarity with the propositions can breed contempt. We cannot consider federalism in the abstract -- in 2005 we need to ask the question, what do we want federalism to do?
This question must be considered within a broader framework of what should be our policy objectives: "equity", "economic development", "sustainability"? All these objectives are laudable but they are in conflict and they involve making policy choices. Politicians and the public do not usually like to admit that there must be tradeoffs. Australia could have an even lower unemployment rate than it has now if we were willing to reduce real wages, but to many the equity consequences of this would be an unacceptable trade-off.
FEDERALISM AND EQUALITY
For much of the last century policy pressures actually mitigated against federalism. Certainly the States had more financial and policy autonomy than they do now, but overwhelmingly the desire was to equalise economic and material conditions across the nation. "Equality" was relatively easily measured, and we had a tendency not to be much interested in the cost.
There is still the legacy of such attitudes in the debate about telecommunications for example. Those who live in remote areas expect the same level of telephone service as those living in inner-city Sydney. Usually policy-makers have acceded to such demands. The transfer of wealth to non-urban areas from urban areas, and to small States from large States has long been, broadly, accepted. Ideas of "federalism" have not had much to do with this process. To a large extent the national government has operated as the mechanism for initiating the transfer of wealth.
Occasionally national governments have acted in the name of "national interests" as, for example, when it promoted population and land settlement policies for defence purposes, but often they have operated on the assumption that circumstances across the country should be "equal". The notion of federalism, as a system in which levels of government operated in different spheres of policy, was compromised in this country from the very start.
Instead of calls for "equality" we have now in the twenty-first century demands for "efficiency" and "national markets". Critics of a federal system cite the need for "efficiency" and "national markets" as one of the reasons why the overlap and duplication of state jurisdictions should be abolished, and why regulation should be centralised. While it is true that further economic reform does require some degree of administrative clarity, such administrative clarity only needs to exist in the markets for products that are traded on a global basis.
Reform to the regulation of such products is only one-half of the reform challenge confronting Australia. There is a significant reform challenge in many areas of government activity for which no market exists, such as in areas of social policy, and in such realms it is not necessary or desirable to streamline every aspect of regulation, if such a process results in a reduction of diversity in the way services are offered to the community.
In the debate about efficiency of regulation the states are automatically taken to be the "bad guys", holding out against reform in the name of petty-minded parochialism, while the national government are the "good guys" fearlessly pursuing reform against the entrenched self-interest of rent-seekers. Such a picture probably has more to do with the superior media management techniques of Australian Government press secretaries than with reality.
Federal Governments are no less effective at pandering to self-interest than are State Governments. Recent decisions on the regulation of pharmacies, the electronic media, and international air transport are examples of this. And this is not to mention the matter of tariff protection. The policies of protection pursued by Federal Governments (of both political persuasions) have had a far more deleterious effect on the economic welfare of the nation than any economic policy ever pursued by a State Government.
There is one respect in which Federal Governments are better placed than State Governments to pursue reform. The political pressure points of Federal Governments are different from those at the State level, and reform which impacts on, for example, public sector employment can be more easily pursued by a government in Canberra, than by one in a State capital. There is a sense in which the political (and geographical) isolation of Federal Governments is an advantage.
FEDERALISM AND SIMPLICITY
The desire to "reform" and make regulation "simple" is perfectly understandable. And sometimes the solution to a problem is simple -- but often it is not. The claim that providing the Australian Government with regulatory powers over areas which were previously the province of the States is sometimes made.
However, as has been discussed at this roundtable, the track record of the Australian Government in relation to "simplicity" is mixed -- income tax, industrial relations, the regulation of financial services and superannuation are all the responsibility of the Australian Government, and the laws governing these areas are not particularly simple.
WASTEFUL COMPETITION
In the course of the roundtable a number of remarks have been uttered about federalism resulting in "wasteful competition".
My view is that competition is seldom "wasteful" -- and anyway we have to define what we mean by "wasteful". Certainly in one sense it is "wasteful" that we have more than one television channel -- but the existence of "waste" must be matched against the benefits of choice and diversity.
Competition, by its very nature, involves "waste". As an argument against federalism, "waste" is not strong. It may be wasteful for each State and Territory to have its own school curriculum, and indeed this is one of the arguments for a "national curriculum". Few proponents of a national curriculum, however, pause to consider the practical consequences.
The example of "wasteful" competition provided to the roundtable was that of State Governments offering subsidies and inducements for industries to locate in their State. Whether this is "wasteful" is extremely debatable. Given that States have so little capacity and so few means to compete against each other for inward investment it is perfectly understandable that State Governments will resort to using one of the few mechanisms they have left to them to attract business. Subsidies might be legitimately criticised as a means of economic policy, but this has nothing to do with federalism.
THE NATURE OF THE ISSUES CONFRONTING AUSTRALIA
In the 1980s the economic policy challenges had answers that were more clearly defined than are the challenges we currently face. The term used during this roundtable to describe today's challenges was "vexed". The issues of the interface between economic and social policy are not obvious. As Andrew Podger identified in his paper, there is an intimate relationship between education, health, and welfare issues, and they cross traditional portfolio boundaries. It is unlikely that there will be one single "answer" to the problems of the future.
Discussions of social policy will inevitably involve all three levels of government -- a "one size fits all" model across the country to, for example, improve indigenous employment outcomes will be inappropriate. State and Local Governments will have varying areas and levels of expertise, and only a federal system can provide solutions that take advantage of these differences.
THE IMPACT OF GLOBALISATION
The impact of globalisation on the Australian economy and on national politics is yet to be fully appreciated. However, one consequence that is already apparent is the different rates of economic development of our States and regions. Western Australia, for example, with its energy and mineral resources and its exposure to Asia is a State whose economy is rapidly "internationalising".
On the other hand, the economy of South Australia is not. In Queensland, when one talks of China the word "opportunity" comes to mind, while in Victoria because of its manufacturing industries, China is more often associated with the threat of job losses.
All of this demonstrates the need for the application of different sorts of policies according to individual circumstances. The capacity of States and regions to respond to fiscal challenges is obviously hampered by the existence of a single national currency. The point has often been made that if during the 1980s Victoria had had its own freely floating currency the worst depths of the recession in that State might have been avoided.
This is not to argue for such a policy, but simply to recognise the costs and benefits of single national systems. If Australia is to take advantage of the opportunities that globalisation provides all levels of government must be able to respond with policies that take account of the differences between States and regions -- and only a federal system allows this to occur.
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