The federal government's GST agenda has failed. More voters came to realise that tax increases can't reform an expensive and increasingly dysfunctional health system. Prime Minister Malcolm Turnbull's decision to rule out lifting the GST rate to 15 per cent is surely a welcome relief to Australians potentially confronting, in Paul Keating's words, a more intense "bang-you-over-the-head" tax.
Critics recited the regressive, distributional effects of raising the GST to powerful political effect, but there was also some recognition that tax reform shouldn't be divorced from questions about how governments might use the revenue they collect. As the tax debate went on, there was growing unease that loosening constraints upon the power to tax would merely validate inefficient spending ventures of the past, and enable extra spending that's probably unjustified given today's budgetary circumstances.
In this context, the biggest political losers from Turnbull's GST about-face are the state premiers, especially Mike Baird (NSW) and Jay Weatherill (South Australia), who pushed hard for a GST increase to bankroll public hospital financing.
The states' desire to access more revenue seems reasonable, at least on the surface, with forecasts that long-term population ageing will contribute to increasing demands for hospital and other health services that must be paid for somehow. Last year's Intergenerational Report indicated that Commonwealth real healthcare spending alone would increase from 4.2 per cent of GDP in 2014-15 to 5.7 per cent in 2054-55, with a considerable share of that coming in the form of extra public hospital funding to the states.
At the state-government level, several worst-case fiscal scenarios have been presented to suggest population ageing would lead to hospital costs absorbing most of the states' fiscal task in coming decades, supplanting other critical spending priorities. In the face of the looming healthcare financing crisis, it's telling that premiers are seeking even more GST revenue from the Commonwealth as their saviour, rather than microeconomic reforms that would ease healthcare costs in the longer term.
That the states prefer the Commonwealth to do the "heavy lifting" collecting the bulk of taxes is aptly reflected in an old poem about the attitude of state officials to intergovernmental financial arrangements:
We thank you for the offer of the cow, But we can't milk so we answer now, We answer with a loud emphatic chorus, You keep the cow and do the milking for us.
Successive federal governments have willingly played their hand in crafting this perverse fiscal-incentive structure faced by the states in preferring other parties to finance their spending for them. In the case of specific-purpose grants financed by federal taxes, the Commonwealth can dictate to the states how the money should be spent. But even with GST general revenue grants, the feds can politically pressure the premiers into doing "the right thing" on spending.
The Commonwealth wields great control and influence over the states through the ways it doles out grants. The flip side of this is the Commonwealth incurs the political brickbats for imposing Australia's major taxes. But by pressing pause on the prospect of increasing the GST, Turnbull effectively calculated that any political heat his government would incur in raising taxes would exceed any benefit it gets in seeing the states spend more federal money on healthcare.
Accordingly, the political focus should now be trained upon the core responsibilities of the eight state and territory governments to constrain the costs of their respective health systems. There is a lot of scope to make performance improvements to healthcare, especially within public hospitals owned and regulated by the states, without the need to spend enormous extra amounts of taxpayers' money in the process.
As reinforced in the recent Harper competition review, the capacity of government to compulsorily finance human services, such as hospital care, through taxes needn't imply that it must also provide the service, let alone maintain the buildings and other capital to ensure service provision. As the review's final report noted, "lowering barriers to entry can stimulate a diversity of providers, which expands user choice".
This reform vision could be facilitated by states enabling some of their existing public hospitals to be owned and maintained by traditional for-profit and not-for-profit providers, as well as mutual co-operative bodies made up of health practitioners and other interested parties. Greater diversity in service provision should enable providers to discover innovative ways to manage costs, including the exorbitant hospital labour costs now pressuring state budgets, and allow health professionals to better tailor medical caseloads for the benefit of local populations.
Encouraging greater structural diversity in hospital services provision should help to reorient the financing locus of control away from health ministers and their bureaucrats towards the patient, who can flexibly move their funding entitlement to their doctor, and thus hospital, of choice.
As well as more portable public funding entitlements, several health analysts have recommended arrangements such as "medical savings accounts", which encourage people to save more of their own incomes to attend to their healthcare needs. Individuals and families on low incomes could still have their hospital care fully subsidised, but they would benefit under a more abundant healthcare choice set, as compared with existing public hospitals and their lengthy waiting lists, crowded emergency rooms and chronic bed shortages.
Australian governments are already high-taxing by international standards and public hospital cost growth consistently outstrips general price inflation. Yet state governments, by and large, have stonewalled on health reform to keep costs down and provide even better services for patients.
Encouraging diversity in supply, empowering hospital managers, doctors and nurses to work together in providing the best available care, and enabling more flexible funding regimes should deliver significant improvements to healthcare outcomes and, thus, to people's lives.
Now that, rather than tax hikes to bankroll a state public hospital regime immune to structural change for too long, should stand as the real and genuine reform template for active community discussion.
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