Treasurer Peter Costello should hold the line on competition payments when he meets his state counterparts today.
A new wave of public sector reform is certainly long overdue. However, pumping more money into the already overfunded and failing states will not advance the pace of reform.
The case for competition payments to states is starkly different today than a decade ago when National Competition Policy was first established. At that time many states were in a weak budgetary position and short of the funds needed to facilitate structural change. Most states, led by Jeff Kennett in Victoria, were in a reforming state of mind, so any money given for reform was likely to be spent on reform. There was a widely held view that the states lacked a tax that would expand with growth and would not adequately share in the benefits of reform. There was also the cynical, yet sadly accurate, view that the states would act only if paid to do so.
Now all states, with perhaps the exception of NSW, are in good fiscal shape, with low debt and surplus budgets. None of them are in a reforming state of mind, unless you call throwing money at every problem and interest group "reform".
Importantly, the states have and are continuing to reap a huge reform bonus. The idea that the states lacked a growth tax was always nonsense. Payroll tax, land tax and conveyance fees, even in the distorted form levied by the states, are growth taxes. And, of course, the states have received the proceeds of the GST for going on six years.
Between July 2000 and the end of June 2005, the states' revenues exceeded initial expectations by $70 billion. To put this into context this is nearly three times what the states are demanding from the commonwealth over the next 10 years to undertake the next wave of reform.
These windfalls have been generated by the application of high taxes on a fast growing, reform-charged economy -- in short, they constitute a reform bonus
Even NSW, the state that has whinged the loudest about lack of funding, has received a revenue windfall of $20 billion over the last five years.
Of course the states are aware of this largesse and where it came from: past reforms. However, they have decided to consume it rather than invest in more reform or new infrastructure.
About $65 billion or 94 per cent of the states' reform bonus has been consumed by additional, recurrent spending. The majority of this has gone on more and higher-paid public servants.
Less than 6 per cent of the bonus has been used to fund new infrastructure. Queensland has allocated the largest share (32 per cent) of its bonus to infrastructure, NSW and Tasmania the least, which is zero.
On the reform front, the states have done little more than was required to get the NCP payments and the GST revenue. Despite being awash with cash, no state has gone beyond what was forced on them by the commonwealth.
The electricity industry remains in public ownership in NSW and Queensland, which is distorting investment decisions in the national electricity market.
All states confront major structural challenges in their public hospitals, mental health programs, public schools, TAFE and public transport systems. Yet with few exceptions they have done little more than pump more money into failing systems.
Even though the NCP process achieved much, it had serious flaws and left much to be done. Its regulation review process had holes large enough to drive busloads of bureaucrats through, and most the states have done so. During the 10 years of NCP, the volume of state laws and regulation has increased by 75 per cent. New, flawed laws and regulations were passed without real scrutiny including in town planning, agricultural biotechnology, native vegetation management, alternative energy, occupation health and safety, and industrial relations.
While the states have taken and consumed the bounty from the GST revenue, they have failed to meet the letter, let alone the spirit, of the GST agreement. No state has eliminated in full the ranges of taxes agreed to under the GST deal. Moreover no state has used its bonus to reform its remaining tax system.
The states do not need more money. Indeed, if they get more they are likely to consume it. Rather, they need to start using their reform bonuses for reform.
Costello's response to his state colleagues should be: "You have got the money, be responsible, deliver the action or give it up".
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