Gains in restoring powers to states

This weekend sees yet another round of executive federalism at work, with Kevin Rudd to meet premiers and chief ministers on funding issues.

Since its ascension to power 12 months ago, the Rudd Government has repeatedly proclaimed its determination to fix federalism through cooperation between governments.  This strategy was to take advantage of the alignment of the then wall-to-wall Labor governments, and through it end the much despised "blame game".

After a considerable honeymoon period between the Commonwealth and the states, the rumblings of discontent have emerged once again.  Drawn from the top shelf of political opportunism, the states are again firing their well-worn charges of federal under-funding at Rudd and Wayne Swan.

The first salvo was from an economically and fiscally crippled NSW Government over funding contributions from the Commonwealth's so-called digital education revolution.  Then the states criticised the feds, and warred among themselves, over the prospective division of money from the infrastructure fund.

The federal mid-year economic outlook document sent shockwaves through the states over the prospect of reduced GST funding, and now the blame game is back on in earnest.

This strained environment sets the backdrop for the Federal Government's ambition to push through some changes to federal financial relations.  The Commonwealth aims to streamline the labyrinth of existing specific-purpose payments into five or six broad funding agreements.  This will be complemented by National Partnership Payments for specific agreed projects.

As always, funding will be central to whether or not these changes are approved.  The states see more funding from the Commonwealth as the key to reaching just about any agreement.  However, with a federal budget likely to descend into deficit, the Commonwealth's capacity to deliver more funding compared with that already budgeted is questionable.  On that score alone, the Council of Australian Governments' meeting may deliver political fireworks similar to intergovernmental meetings of the past.

Another source of tension is likely to be the kind of performance benchmarks the Commonwealth will impose on payments to the states.  A number have already resisted conditions flagged by federal ministers, such as consistent school and hospital performance reporting.

One is struck at the extent to which the states participate in the vehicles of executive federalism from a position of weakness.  The Commonwealth holds the lion's share of revenue, and can use its powers to subject the states to a vast array of policy and program targets.  This will remain the case even after this week's COAG meeting.

With such extensive Commonwealth involvement in state affairs, the benefit of federalism in dividing up total government power among governments is substantially weakened.  Taxpayers are left with the problem of working out which government is responsible for what substandard service.

With two levels of government involved in the same field, be it education, health, transportation or community services, it also becomes more difficult to restrain the total size of Australian government.  With other countries reducing their taxes to attract capital and skilled workers, our government spending duplication and overlaps are holding us back on the global stage.

These basic problems will be left unchanged after the COAG meeting, as the much-touted reforms being pushed through are simply more of the same.  Australia should instead capture the true spirit of federalism.

The Commonwealth should not only relinquish its policy controls over state services but return personal income tax powers to the states.  With sufficient revenues to fund essential services, the states can transform themselves from begging bowl-holders of federation to serious competitors for footloose economic resources.

A more competitive federalism will ensure that services are better tailored to communities' needs.

This "federalism first" agenda is not on the agenda for the COAG discussion, but should be if we want to put our federal relations on a more sustainable footing.

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