The Australian federal system is at a crossroads. It needs to be reinvigorated or it will become a costly vestige of a noble but failed experiment.
There is no possibility of the states disappearing altogether. Australians are far too constitutionally conservative to allow this to happen.
However, the states are on a path to become little more than administrative units of the Commonwealth -- and costly ones at that.
While a federal system remains theoretically the optimal system of government for a large, economically diverse country such as Australia in a rapidly globalising world, it depends on how the system is structured and how well it works. Federal systems can and do fail. While this point has not been reached in Australia, it is fast approaching.
The signs of a failing federal system abound. States are receiving near record revenue growth generated by the potent combination of a booming economy, the GST and high state taxes.
But despite this overflowing wealth, the states have shown an intense unwillingness to reduce taxes.
Instead, the states are spending money on virtually everything. State spending over the past two years has been growing at 8.6 per cent a year. Public servant salaries have been growing at between 5-7 per cent a year and in Queensland the salary bill has been growing in excess of 10 per cent a year.
As a consequence, innovation and value for money have ground to a virtual halt in the states.
Sure, good economic times have lured the states into complacency. However, the centralisation of taxing and spending has greatly stifled the incentives for states to act responsibly with taxpayers' funds.
The states now collect less than half their spending needs. This imbalance gives states strong incentives to spend rather than innovate.
The GST has generated huge increases in funding to the states. However, it has further undermined their responsibility for effective and efficient spending. The GST is a commonwealth tax, not a state tax, and its proceeds are distributed to the state on a welfare criterion, rather than based on where the tax is collected, or who paid the tax, or efficiency of spending or innovation.
The state's responsibility for spending has been further diminished by the growth of tied grants. These grants now account for more than half the total commonwealth payment to the states. They come with a plethora of restrictions which not only blur the lines of responsibility but generate wasteful levels of overlap and duplications. They also give significant policy power to teams of unaccountable bureaucrats.
It is wrong to assume that the erosion of fiscal independence of states has been totally foisted on them by the Commonwealth. While the states have at times resisted the process, they have often quietly accepted or even actively promoted it.
But it is also wrong to see all the efforts of co-operation among government as wrong.
Over the past 100 years some powers have naturally and appropriately migrated to the Commonwealth.
It is time to reconsider the allocation of government functions. Specifically, it is time to move to a unified national health market driven by individual needs and with a diversity of competitive providers and where the role of the states is greatly diminished.
It is also to time to simplify the arrangements for schools by shifting the responsibilities for funding and oversight of government and non-government schools to the states -- subject to them meeting and reporting on a few valid national standards -- and continue to make payment to non-government schools.
The National Competition Policy process must also be renewed and expanded. The NCP has enhanced the status of the states by buttressing them against the slide into central control. Its core principals are simply the underpinnings of good government.
It is particularly suitable for those areas where the roles of state and federal governments are inextricably intertwined and where there is a agreed reform agenda -- such as vocational education, aged care and management of native vegetation and salinity.
In the end, however, any redesign of state-commonwealth relations must provide the states with greater responsibility to raise their own revenue and to spend it.
This means that the states must regain access to a share of income taxing powers; that fewer funds are distributed through the Grants Commission's process and special purpose grants are both reduced in number and made more outcome focused and transparent.
This will require leadership and institutional support, but it will be worth the effort.
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