Weak States Lap up Federal Largesse

The Australian Federal system is broken and needs to be either scrapped for fixed.

While this has been apparent for years, the situation is getting worse.

Nothings illustrate the flaws of the system better than the ways and means by which the Commonwealth allocates grants to the states.

As a result of tax reform and the GST, some States have become inordinately dependent upon the Commonwealth for revenue.  In 2003-04, the Commonwealth will provide grants totalling $55.8 billion, representing over 40 per cent of total state sector receipts.  While Victoria and New South Wales retain a degree fiscal independence, all the other states rely on the Commonwealth for over 50 per cent of their revenue.

The problems lie not just with the level of dependence but with the way the grants are allocated amongst the states.  The bulk of the grants are provided as untied grants and allocated according to the principle of fiscal equalisation.  That is, they are allocated in a manner which allows each state and territory to provide an equivalent level of services, irrespective of cost or the state's own revenue raising ability.

While the Commonwealth Grants Commission, which oversees the process, goes to extraordinary lengths to avoid creating perverse incentives and to base decisions on accurate, objective data, it falls far short on both counts.

The main flaw with the process is that allows states, particularly the smaller states, to develop a hand-out mentality and to avoid necessary structural adjustments.

For example, Tasmania has long been a net beneficiary of the process, receiving a disproportionate high share of total grants.  In 2003-04, Tasmania received grants totalling $3,026 per person, which was 56 per cent higher than the all-state average.  Victorians, in comparison, received only $1679.

The main reason for Tasmania's large share has been its relatively backward economy.  However, as detailed in the Report of the Nixon Committee, released in 1995, Tasmania's poor economic record is largely a result of poor state government policy;  excessive regulation, high taxes, poor investment climate and poor infrastructure decisions.  The grants system has allowed successive Tasmanian Governments to sustain these poor policies, in spite of their deleterious impact on the state's economy and their ability to raise funds.

Tasmania has also benefited from alleged "special disabilities" in the provision of state services.  While some of disabilities, such as the State's high proportion of retirees and low income people are real, others are either a result of policy choices or statistical illusions.  For example, the state's largest so-called disability is its disproportionately large number of small scale schools, hospitals and state facilities.  However, the reason for the small scale operations is that Tasmanian Governments have been able to avoid the rationalising of services which has taken place in the larger states, thanks to the grants process.

Tasmania is not alone.  South Australia and the Northern Territory, which this year will receive per capita grants of respectively 39 per cent and 493 per cent above Victoria's also suffer from growing dependency.

While all Australians suffer from the perverse effects of the federal system, the main victims will be the people who get trapped in the declining economies of Tasmania and South Australia.

Its time for a change.  Unfortunately, leadership is lacking.

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