Liberals need to fill policy vacuum

Three months into the job, and Prime Minister Kevin Rudd should feel pleased with himself.  He's made a good start at constructing his own monuments of symbolism:  ratifying Kyoto, apologising to the stolen generations, and getting Cate Blanchett to chair a session at the talkfest of the country's 1000 cleverest people.

Rudd's done an even better job at demolishing John Howard's legacy.  What's more, he's got federal Liberal MPs to help him.  Take the ''3 Rs'' of Australian politics -- refugees, reconciliation and the republic.  Howard was steadfast on each of these issues, and he spent a decade campaigning on them.  With Howard gone, the Liberals have decided to agree with Labor on two of these three issues.  At the weekend the Liberals announced that they accepted the shutting down of the Pacific Solution for refugees, while a fortnight ago they ultimately supported the stolen generations apology.

To this can be added a further three matters:  Iraq, Kyoto and industrial relations.  Rather than opposing Labor's withdrawal of combat troops from Iraq, the Liberals now claim that had they won the election they would have scaled down Australia's commitment anyway.  After spending years arguing against the Kyoto Protocol, and after Howard overruled Malcolm Turnbull's suggestion that the Liberals ratify it, the party has decided that ratification is a good idea.  And last week Brendan Nelson announced that his party no longer supported WorkChoices.

It's no wonder that the Liberals are doing some soul-searching.  In the space of a few months the federal Liberal Party has reversed or abandoned its position on five out of six of the central policy issues of the Howard era.  Whether such dramatic policy changes are justified is not the point.  In some cases changes were justified and in others they weren't.  The Pacific Solution had outlived its purpose, if indeed it ever had one.  On the other hand, ratifying Kyoto is merely gesture politics.

Political parties are more than just their policies.  A political party is as much a product of its history, its membership and its ideology.  But the problem for the federal Liberals is that in the last few years of Howard's prime ministership, as the party moved away from its core principles, it was defined by its policies rather than its philosophy.

Over the past few years, sometimes the Liberals' policies were derived from their philosophy, and sometimes they weren't.  For example, it often seemed as though the party paid only lip-service to federalism, and the notion that decisions should be made by the level of government closest to the people affected by those decisions.  Similarly, notwithstanding the Liberals' very capable management of the economy, they didn't often enough put into practice the principles of small government, lower taxation and less regulation.

Good policy doesn't turn into bad policy overnight.  If key policies can be ditched so quickly after what, in the end, proved to be a relatively narrow election loss, voters will inevitably ask whether Liberal MPs ever believed in those policies in the first place.  There's also the problem of what replaces the old policies.  Although the Liberals might be finished with WorkChoices, there remains the question of the party's position on further deregulation of the labour market.

None of this is to say that policies cannot ever be changed.  When circumstances alter, policies should be altered.  What's notable about each of the Liberals' recent policy changes is that each was done in a hurry and each was done in reaction to something that Labor did.  The Liberals can't afford to be put into such a position again.  But at the moment there's every chance that the Liberals will respond to Labor's moves on the republic in the same way as they responded to Labor's initiatives on the apology and the Pacific Solution.

Many Liberals would say that the very last thing they need is a divisive internal debate about the republic.  But if you can't have a divisive internal debate when the party is in opposition, federally and in every state and territory, then it's legitimate to ask when would be a better time.  It's a near certainty that renewed calls for a republic will come out of Labor's Canberra talkfest, even if Rudd waits until a potential second term to hold another referendum on it.  The issue will not go away.

It will probably take three years for the Liberals to arrive at some sort of position on the republic.  The advantage of starting the debate now is that they'll have the time to engage in analysis and reflection.  It's something the party hasn't done enough of since November 24.

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Execs' salaries: you get what you pay for

The Business Council of Australia's support for a freeze on MPs' salaries inevitably raises the question of sauce for the gander.  Would the Business Council also agree that executive salaries should be frozen like those of MPs?

Reporting the BCA chairman's refusal to endorse similar belt-tightening by business executives to that advocated for MPs brought none-too-hidden suggestions of hypocrisy.

There is, however, a bit of a difference between remuneration for those in public office compared with those in the private sector.  Business executives receive remuneration that is agreed to by the owners of their firms (or rather the representatives of those owners who comprise the Board of Directors).

There is a strong discipline on the level of corporate remuneration since every dollar paid to those running the company is a dollar less for those owning it.  This means a neat tightrope is walked by the shareholders to ensure they get the right executives, which in the end comes down to them paying the appropriate remuneration in the context of a competitive market for management talent.

In principle they need to satisfy themselves that every additional dollar of expenditure for a valued management resource will provide more than one dollar in additional profits.  Their stipends are voluntarily given on the basis of what people are prepared to have skimmed off their returns in order to get greater returns.

Similar calculations, with in most cases a somewhat different notion of profit, are made by football clubs, top tennis players, theatre companies and so on.

In each case, remuneration levels are set according to what their owners or the board think the executives are worth to the firm or club.

Although mistakes are made, the decision is no different from that we make for everything we buy that is not of an homogenous nature.

We trade-off money for a quality differential and sometimes we are pleased with the outcome and at other times we are disappointed.  However, on the whole, making such decisions of our own volition provides a better outcome than any other means of making the choices.

In the case of the individual executive, as many will be learning right now, remuneration is not a sum of money that can be constantly ratcheted up.  The penalty for poor decisions or possibly bad luck can be economic ruin.

The salaries of politicians and other public officials are less subject to market tests.

The best-paid cabinet ministers in the world are reputed to be the Saudis ($5m a year) and among the world's worst paid politicians are the Swiss.  This is perhaps inversely proportional to the degree of their good governance (certainly to the degree of their citizens' liberty).  US Cabinet Ministers and public servants are less well paid than our own -- and have fewer perks -- and yet the US has as sound a government system as any in the world.

While this is not an argument in favour of lower levels of income for public servants and politicians, it underlines the difficulties of choosing the right levels of remuneration when the discipline of individual self-interest is absent.

Many politicians and public servants point to the often far superior remuneration conditions in the private sector as beacons that mark their own value.  Yet, hardly any actually make the shift to the private sector and those that do tend to do so in some variant of lobbyist.

This suggests a different skill-set between public and private sectors with no real correspondence between the two.  It probably also means that we are over-paying senior executives in the public sector because their next best employment opportunities, as revealed by their continuance within the sector many claim to be grossly underpaying them, is another public sector job.

Sub-prime and effects on Australian housing

Australia's federation: How it is broken and why it has to be fixed

Occasional Paper

INTRODUCTION

Two separate but complementary comments in a 2006 parliamentary library research brief, provide a neat summary of the history and contemporary positions on the issue of federalism:

The Australian federal system, which came into existence in 1901, has generally worked satisfactorily ... ⁽¹⁾

There is a general consensus, therefore, that the Australian federal system does not work as well as it might ... ⁽²⁾

Any review of the Australian federation should start by reviewing whether federalism remains an appropriate system of governance for the nation, before considering the recent history of the federal arrangements and prospects for future improvements.

FEDERALISM IN PRINCIPLE AND AUSTRALIA'S STATES IN PRACTICE

There are regular calls for the abolition of the Australian states.  There are three main reasons why these are ill-conceived.

The first is that it would seem odd for Australia to move away from federalism at the very time when the model seems to be becoming more popular in other parts of the world.  As Hueglin and Fenna explain in Comparative Federalism:  A Systematic Inquiry:

... more than half of the world's space and nearly half of its population are governed by some form of federation.  While some of the classic federations may be showing signs of intergovernmental fatigue, there has been an outburst of federalisation elsewhere. ⁽³⁾

Further, studies have shown that "over the past 50 years, federations have outstripped unitary systems in economic performance". ⁽⁴⁾

The second is that despite claims that their boundaries are anachronistic, or artificial, the Australian states do have real contemporary relevance.  While any drawn boundary is in one sense inherently artificial, the differences between Australia's states are, in fact, very real and would certainly be far more real than those between any replacement regional areas.  While there has been a huge increase in interstate commerce since 1901 the capital cities are still, in both an economic and cultural sense, the centre of their states.  Goods tend to move towards intrastate transport hubs and people gravitate towards their own capitals for higher education, specialist health and for cultural and sporting activities.

The third reason why calls for abolition of the states are ill-conceived is what could be called the democratic reason.  Whenever the people of Australia have been asked to express a view through the electoral process, they have supported the retention of the states' powers.  All 17 constitutional amendment proposals to increase Commonwealth economic power have been defeated, as have four non-economic ones.  Similarly, Australians have twice refused to grant local government a formal place in the constitution.  In fact, if we exempt the referenda that proposed structural change in our federal system from the list, almost half the others have passed.

It is hard to avoid the conclusion that former Queensland Premier Peter Beattie was correct with his practical assessment that "no referendum on the abolition of the states will succeed within the next 50 years". ⁽⁵⁾

Proponents of state government abolition can cite a couple of surveys done earlier this decade, which suggested that citizens in some Australian states would prefer a two-tier model, without the states.  However, it needs to be recognised that the sample sizes of the surveys were small and they may also have reflected the frustrations of the time with performance of particular state governments. ⁽⁶⁾

It is perfectly reasonable that people should think that we are over-governed in Australia.  Perhaps it is also a natural reaction if one of three tiers needs to be abolished for the middle one to be the obvious candidate.

This is a similar phenomenon to the one that seems to grip large segments of the business community.  In the lead-up to last year's election the Business Council of Australia and the peak body for companies building infrastructure, Infrastructure Partnerships Australia, both released papers arguing for a stronger Commonwealth role in a range of areas.  A recent article in BRW highlighted how short sighted this approach could be and pointed to the risks that the federal government is just as likely to wield power unwisely as wisely. ⁽⁷⁾

Business groups generally embraced the High Court ruling against the states challenge to the Work Choices legislation.  But as former ACTU Secretary, Bill Kelty noted in the aftermath of the election:

There will be one lasting contribution of the Coalition government and that is to provide unambiguous national power in dealing with the key issues of water, industrial relations, indigenous health and ultimately, public hospitals.  Future governments can now use that power constructively and consensually. ⁽⁸⁾

THE HOWARD GOVERNMENT:  COERCING THE STATES

Liberal Party historian, Gerard Henderson, made clear that John Howard was "a Liberal with a difference" when it came to his attitude to the federation.  Whereas Robert Menzies, Harold Holt, Billy McMahon and Malcolm Fraser were all federalists, the only previous Liberal Prime Minister with an attitude to the federation as centralist as Howard's was John Gorton and, as Henderson explained, his 1971 downfall was "partly due to the poisonous relationship he had developed with coalition premiers". ⁽⁹⁾

Nevertheless, even those federal Liberal governments under the stewardship of avowed federalists have sometimes acted in a centralist manner.  The Menzies government increased commonwealth involvement in a range of areas such as education through the funding of science labs and libraries from 1963 onwards, and health with the introduction of commonwealth subsidies to private health insurance in the early 1950s.  Under Holt, the federal government's centralising tendencies were sufficient for the Victorian Liberal Party state council to consider a motion condemning the growing Commonwealth role. ⁽¹⁰⁾

The Fraser government attempted a more genuine piece of reform of the federation than any other modern Australian Liberal government.  Its "new federalism" accepted the legitimate role of the states, however, it founded in large part due to the states being legitimately wary of how their "guaranteed" share of the revenue could be altered by future federal governments.

In contrast, the Howard government set a new benchmark for centralism for non-Labor governments in Australia.  Howard was unapologetic about the federal government taking action when he believed it was required commenting that he had "little time for state parochialism" and denied that he had ever been one to genuflect uncritically at the altar of states' rights'. ⁽¹¹⁾  Other Howard government ministers, such as Tony Abbott also reflected on how their attitude to federalism had changed over their time in government.

There were two aspects to the Howard government's significant alteration of the federal-state relationship.  The first was to introduce the GST as a major funding mechanism for the states.  The second was a whole series of actions, many very small in themselves, but which were noteworthy for their collective rationale that they were being undertaken to rectify real or perceived specific state government shortcomings.  This phenomenon has tended to attract the title "opportunistic federalism".

The new tax system, including the GST, was announced, negotiated and introduced when there were still state and territory Liberal governments.  It is interesting to speculate whether the desire to give the states a "growth tax" would have been as strong if they had all been Labor at the time.  Similarly, it is hard to believe that the opportunistic centralism of the latter years of the Howard government would have been as pronounced a strategy if not for the fact that from February 2002 until November 2007 it was the only Liberal government in the nation.  The fact that this period coincided with the increased confidence in its own electoral popularity that the Howard government gained by its comeback win in the 2001 federal election was perhaps also a contributing factor.

Of course, there was no inherent reason to include federal-state relations as an element in the introduction of the GST.  Richard Eccleston has commented:

The least anticipated aspect of the package was the proposal to restructure fiscal federalism by allocating all of the GST revenue to the States via the Grants Commission in lieu of their general purpose grants, provided that they abolish nine existing State-based indirect taxes. ⁽¹²⁾

This is not the venue for a discussion of the merits of the new indirect tax per se, but in terms of the states and territories it presented them with a huge financial windfall.  In 2006, I wrote that:

In the main, the States have squandered their reform bonus.  While there is variation among the individual States in terms of fiscal performance, through a combination of sloppy budgeting, failure to control public service wages, and a propensity to throw money at problems, they have, in aggregate, consumed their reform bonus without undertaking reform or investing in infrastructure. ⁽¹³⁾

It was perhaps only natural when many critics were pointing out the failings of state Labor governments, the federal government would see an opportunity to attack the Labor brand.  Oddly, it tried to combine these attacks with a position also maintaining that the GST was a state tax and should not be included on the federal books.

Also contributing to the growing federal interest in state areas of responsibility was a campaigning paradigm that placed huge emphasis on exploiting local issues.  Federal coalition MPs were told by strategists not to "pass the buck" and to use state, and even local, issues to demonstrate their own credentials as a grass roots local member. ⁽¹⁴⁾

MPs not only responded to problems raised by constituents, but also through the use of mechanisms such as questionnaires at railway stations found out about perceptions of crime on public transport, knowing full well that both public transport and policing were state responsibilities.  This fact, in many ways, added to the perceived attraction as it meant that federal MPs could hardly be criticised for the problem having arisen, while they could claim credit for attempting its rectification.

Huge increases in MPs' printing and postage budgets exacerbated this tendency to blur the traditional lines of responsibility.  Newsletters and brochures tend to be full of pictures of MPs presenting grants to local sporting clubs and environmental groups, or announcing federal funds for a black spot on a local road.  Campaigning strategists quickly realised that specific local material was more likely to be read than general policy information, so the simple need for content actually overrode states' rights.

Most of these projects were small enough to only gain local attention, but sometimes there were big enough sums of money involved, or radical enough policy implications to attract national attention.  A classic example was when the federal government offered $40 million and a takeover plan for the Mersey Hospital in Devonport.  While the people of Devonport were understandably upset by the loss of services at the local hospital, it certainly appears as if the decision of the Tasmanian government to rationalise services in north western Tasmania was a logical one, given the availability of medical professionals and funds.

Undoubtedly, the use of state issues had been made more attractive for the federal coalition from 2002 when the last non-Labor state government was voted from office.  There seemed to be little downside in attacking their Labor replacements.  However, even in the short-term there were.

By its piecemeal involvement in a variety of state issues the Howard government achieved the counterproductive outcome of making people feel that the Commonwealth was equally culpable for the failings of the state governments in areas like hospitals, roads and ports.  This was backed up by research on the 2006 Queensland state election which showed that a significant number of voters blamed the federal government for failing to fix the state's hospitals apparently "believing that there are enough funds at a federal level to fix everything". ⁽¹⁵⁾

Many people pointed out how odd it was in the lead-up to last November's federal election that so many of the issues being debated were in fact state issues.  Tim Colebatch observed in The Age, in the final week of the campaign, that "almost the entire election has been fought out on state government turf". ⁽¹⁶⁾  After the election one Labor candidate somewhat crudely said of his Liberal opponent using state issues in the campaign -- "They thought people were stupider than what they really are". ⁽¹⁷⁾

One by-product of the actions of the Howard government was to create real problems for state Liberal oppositions to define their roles.  The federal government was effectively delivering a message to voters disaffected with state government performance that the appropriate method of redress was not at the ballot box, but through Commonwealth intervention.

However, perhaps the most serious consequence that the Howard government's attitude towards the states had was to build up an enormous duplication in bureaucracy.  This duplication was a significant factor in the growth of almost 50 per cent in the federal bureaucracy from 1998 to 2007.

THE RUDD GOVERNMENT:  CO-OPERATING OR COERCING?

In some ways, federalism is an easier issue for Labor than for its opponents.  It does not have to deal with an avowedly federalist tradition, nor does it have the philosophical commitment to small government which motivates at least some elements of the Liberal Party.

Thirty years ago progressive opinion, from Gough Whitlam down, was united in its view that Australia would be a much better place if the states were abolished and the powers of the Senate were dramatically reduced.  The traditional progressive, or left, position on Australia's federation was described by Brian Galligan in 1989 as "an influential body of expert opinion" which propagated a view that "colours much of the post-war commentary on Australian constitutional politics". ⁽¹⁸⁾  The general position of this expert opinion was to lament the conservatism of the Australian people in refusing to amend the constitution when presented with progressive referenda.  Geoffrey Sawer explained this attitude:

The Australian labour movement, and the Australian Labor Party (ALP) which emerged from that movement, have never been enthusiastic about federalism as a form of government.  Like most political movements and parties, the ALP has been more interested in social aims and policies than in the structure of government by which they are to be achieved. ⁽¹⁹⁾

While Whitlam himself has maintained a degree of consistency, the latter years of the Howard government saw much of the same body of progressive opinion lamenting the government's Senate majority and arguing for the traditionally conservative idea of a check on its power.  Similarly, with Labor governments in power in all states and territories, supporters of the states were certainly more numerous on the left than they had been in the days of Joh Bjelke-Petersen or Charles Court.  The issue which underscored both of these views was Work Choices, which was only passed due to the government no longer being frustrated by the "states' house" and then survived a High Court challenge from the states.

Trying to predict the actions of an incoming government based on previous speeches and policy announcements is always problematic.  The fact that in the area of federalism the Hawke and Keating governments are mainly remembered for the reforms of the early 1990s which led to the setting-up of COAG and the introduction of competition policy underscores this point.  No one was predicting that in March 1983.

In 2005, Kevin Rudd delivered a paper entitled "The Case for Co-operative Federalism", ⁽²⁰⁾ a sentiment that seems to have been maintained in most of his public utterances.  The promotion of the concept of cooperation continued in the early days of the new government when it was claimed that the Commonwealth providing an additional $150 million to the states to cut hospital waiting lists was some sort of federalist breakthrough.  It was, of course, nothing of the sort.  Providing some extra money was hardly likely to meet opposition.

What undoubtedly would arouse controversy is Rudd's statement that he will take over running all the country's 750 public hospitals if state and territory governments have not agreed to a national reform plan by the middle of 2009.  He has said that such a move would be designed to "end the blame game between Canberra and the states on health and hospitals".  This is hardly what most would consider "co-operative federalism".  Anyone who believed that having all governments of the same political persuasion would solve the nation's problems has already had the Victorian government's on-going refusal to sign up to the national water plan to add to the many historical examples of unco-operative federalism.

It has been reported that the Prime Minister recently told his Cabinet colleagues that the setting up of Infrastructure Australia "could be the most important move in commonwealth-state relations since Federation". ⁽²¹⁾  If accurate, this comment reflects both hyperbole and over-optimism.

While clearly many of the state governments have been too busy blowing their budget windfalls on spending on recurrent programs, and the bureaucrats to administer them, it is unclear that the Commonwealth will make wiser infrastructure choices.  One can see the prospect of many more Goodna bypass type debates coming up where there is conflict between the Commonwealth and a particular state about the best way to deal with problems.  Then there will be the conflicting priorities between states.  The howls of protest from the Western Australians who felt that the Howard government did not provide them with a sufficient proportion of Auslink roads funding will only increase as, under the Rudd government, the Commonwealth determines priorities in an expanded number of infrastructure areas.

There appears little cause for optimism that there will be any reversal in the trend towards greater Commonwealth interference in areas of state responsibility under the newly elected government.  When Rudd said at his campaign launch that "The buck stops with me" it was hardly a promising moment for a federation in which both Commonwealth and the states shoulder their share of the responsibility.  A rare positive was the announcement by the incoming administration that henceforth the GST would be counted as a federal tax, ending the previous charade.

THE WAY FORWARD:  COHABITING WITH THE STATES

The first component of the way forward is to recognise the benefits of federalism and to cut out any ideas of abolishing states and accept that they have a fundamental place in the Australian system of governance.  This requires a particular vigilance as the threat to Australia's federation is most likely a form of de facto abolition that would see the states' powers incrementally taken away by Commonwealth action, backed by the rulings of the High Court.

The second fundamental issue is vertical fiscal imbalance (VFI).  As a recent overview of the world's federal systems noted:

Australia represents the most acute case of VFI, with the Commonwealth controlling all major tax sources and engaging in massive annual transfers to the states. ⁽²²⁾

Obviously, it is a fundamental problem with Australia's federation that the Commonwealth raises 82 per cent of the tax revenue, but is only responsible for 36 per cent of the spending.  There is always going to be a huge difficulty when those figures are so divergent.

In recent years one of the more comprehensive and sensible reform proposals for addressing VFI was compiled by Robert Carling of the Centre for Independent Studies in 2006.  He proposed a state income tax of around 10 per cent offset by a similar reduction in commonwealth income tax and a range of other off-setting tax measures.  He argued that "over time state income taxes would vary, but with competition limiting any upward drift". ⁽²³⁾  A more modest set of worthwhile proposals were contained in Anne Twomey's 2007 paper "Australian Federalism:  Options for Reform". ⁽²⁴⁾

In 2008 and beyond, I will be undertaking a major program to develop reform options for fiscal federalism.

An ongoing frustration is that more common than proposals to fix VFI are proposals which would exacerbate it.

On the revenue side, the most commonly criticised types of tax are all ones levied by state governments -- payroll tax, stamp duty and gaming taxes, particularly on poker machines.  Lower unemployment has somewhat reduced the profile of the first of these as a tax on employment, but rising property prices have added weight to calls for stamp duty reductions.  The opponents of poker machines claim that the main reason why reduction in their numbers is not achievable is because the states are addicted to gaming revenue.

When it comes to expenditure, the combination of VFI and the prosperous economy meant that in its later years the Howard government was awash with funds.  This not only led to the voters considering that this provided them with the greater responsibility in fixing problems in areas of joint responsibility, but also led to various calls for them to commence providing funds in areas which had not previously been considered areas of state responsibility at all.  A classic example of this is the ever-increasing demands from a diverse group including the bus and rail industries, local government bodies, environmentalists and some media commentators to gain direct Commonwealth funding of urban transit.

Proponents of federal involvement argue that Australia is one of the few OECD countries where the national government does not put taxpayers' money into urban mass transit.  This ignores the fact that a lot of these countries have more unitary government structures than Australia's federation.  It is also argued that federal funding of urban public transport is required to provide equity because the Commonwealth already funds urban roads.  For many years, Commonwealth involvement in both rail and road was on interstate routes.  However, in recent years under both "Auslink" and "Roads to Recovery", a significant proportion of federal funds have also gone into urban roads.  Whatever one thinks of federal roads funding, there is an important distinction between roads and public transport.  It is only in the latter that government has a role in providing services as well as infrastructure.  Just as the nation's health system is currently bedevilled by duplication and buck-passing, a joint federal-state funded, and state-operated, urban public transport model is a recipe for major problems.  One can imagine both federal and state governments clamouring to fund sexy new rail extensions in marginal seats, while the need to fund less glamorous, but more urgent, signalling upgrades and other key maintenance would probably be ignored.

To add to the confusion many local governments, as well as lobbying for federal funding, are also claiming a policy role for themselves in public transport.

Citizens looking for easy-to-understand accountability must be shuddering at the prospect of the three tiers of government all arguing over levels of funding and priorities and blaming each other for poor performance.  Instead, what Australia needs is a more clearly delineated federation, not one where every level of government buys into every area.  A good start will be to keep urban public transport as a state government responsibility.

Urban transport also demonstrates another advantage that states provide -- an opportunity to assess the costs and benefits of different policy approaches.  The differences between the Victorian public transport privatisation, the massive public investment in Western Australia and the more traditional approaches in other states can be compared.  In most states there would be more funding available for additional public transport infrastructure if only the respective state governments would reform the operational and maintenance side of their systems.  The Iemma government continues to rule out contracting out rail maintenance services in NSW, instead bowing to the will of Unions NSW to maintain current inefficient practices.  In Queensland, the split-up of QR is a small step in the right direction, but more radical reform is required.  Only in Victoria, with the combination of efficiency gains under the Kennett government and subsequent private operation, can one say that there is not significant fat in the operational public transport budget.  The BRW article referred to earlier contains a list of other policy innovations that the states have generated. ⁽²⁵⁾

In asserting the ongoing value of the role of the states, there is no reason to preclude a reassessment of which areas are the responsibility of which tiers of government.  However, whatever the split up, it is crucial that the federal government accepts that if something is deemed a state area, the Commonwealth cedes any form of interfering or oversight role.

If the Australian federation is to be improved all involved need to appreciate that what is required is not coercion of the states by the Commonwealth, nor is it co-operation with both parties having a finger in every pie.  What is required is a system of cohabitation by equal parties that guarantees the states and territories explicit responsibility for key areas.

The coercion of the states, if there is to be any, should come from the voters in the states.  The co-operation should be limited to avoid a particularly unnecessary growth in the size of government.

The cohabitation will only work if the Commonwealth accepts that they have equal partners in the running of the nation and if the states accept the responsibility of that role.

The current volume of material being produced on federalism is indicative of the fact that the problems, many of which have been steadily accumulating over the 107 years since federation, are serious, and do need to be addressed.  In that 107 year period the relationship between the Commonwealth and the states has been altered radically.

However, far more dramatic has been the change in the nature of the size and scope of government activities at all levels.  While the power of state governments viz a viz the commonwealth may have been eroded, the power they wield over their citizens has increased dramatically.

Consideration of the appropriate responsibilities for particular tiers of government should also necessitate an evaluation of whether activities are appropriate responsibilities for any tier of government.

---

REFERENCES

1.  Scott Bennett, "The Politics of the Australian federal system", Parliamentary Library Research Brief, December, 2006, intro

2.  Bennett p. 292.

3.  Thomas O. Hueglin and Alan Fenna, Comparative Federalism:  A Systematic Inquiry (Toronto 2006) p. 11

4.  Anne Twomey, "Australian Federalism:  Options for Reform", National Industrial Relations Conference paper, 11 September, 2007

5.  The Australian, 24 January, 2008 p. 10

6.  Mike Steketee, The Australian, 27 April 2006 p. 10

7.  Anthony Sibillin, "Power & the free market", BRW, January 17-23 2008 p. 19

8.  The Age, 3 December 2007 p. 11

9.  Gerard Henderson, "For this radical conservative, it's nation first", The Sydney Morning Herald, 26 June 2007

10.  The Bulletin, 5 August, 1967 p. 20

11.  John Howard, Reflections on Australian Federalism, Address to Menzies Research Centre, April 2005

12.  Richard Eccleston, Taxing Reforms:  The Politics of the Consumption Tax in Japan, the United States, Canada and Australia (Cheltenham UK, 2007) p. 80

13.  Richard J. Wood, Opportunity Squandered:  How the states have wasted their reform bonus, Backgrounder, June 2006

14.  Richard Allsop "Modern Campaigning and the federal system", Review, October 2006 and "Four Points on Federalism", Review, January, 2008

15.  Scott Bennett, Parliament of Australia Research Brief.  p. 16

16.  The Age, 20 November, 2007 p. 13

17.  The Australian, 10 December, 2007 p. 5

18.  Ed. Brian Galligan and JR Nethercote, The Constitutional Commission and the 1988 Referendums (Canberra, 1989) p. 121

19.  Geoffrey Sawer, Federation under strain:  Australia 1972-1975 (MUP, 1977) p. 1

20.  www.dunstan.org.au.

21.  The Australian 28 January, 2008 p. 30

22.  Hueglin and Fenna op. cit. p. 327

23.  Robert Carling, "State Taxation and Fiscal Federalism:  A Blueprint for Further Reform "(CIS, 2006)

24.  Twomey op. cit.

25.  Sibillin op. cit.

Mission impossible

Professor Ross Garnaut is looking to the world stabilising emission levels at year 2000 levels ''soon after 2020''.  Following this he sees a need for halving them by 2050 and reducing them to less than a quarter of 2000 levels by 2100.

He also considers that emissions must be based on some level of equality on a per capita basis.  Realistically he recognises that there would need to be a phase-in to this and that population trends would need to be taken into consideration.

But, notwithstanding the cheer squad who were able to comment on detail about the report as soon as it was released, Garnaut barely scratches the surface in recognising the enormity of the task.  Throw-away lines like ''stabilisation at a uniform per capita level'' mask economic turmoil.

Australia's emissions per capita are presently 16 tonnes of CO₂ equivalent.  Largely because much of the OECD has (unlike Australia) outsourced its heavy energy intensive industries, the OECD average is 11.5 tonnes.  The world average is 4.5 tonnes.  Given population growth, the world average would have to fall to under 4 tonnes by 2030 to get to stabilisation.

In other words, to meet the level that Garnaut sees as necessary, Australia would be emitting less than quarter of its present level of CO₂.  That degree of self discipline is possible only by accepting returning living standards to similar as those currently experienced in the developing world.  Still more difficult would be the 90 per cent reduction that Garnaut speculates as being necessary.

Nobody purposefully emits CO₂ (though until a few years ago it was not a concern).  The simple fact is that its emission is a by-product of earning income.  We know of no other way to enrich ourselves and raise living standards of the poorest countries than to do so using energy and that means carboniferous sources.

As Garnaut acknowledges, easy gains in emission reductions have been made, especially with the dismantling of the command economies of the Soviet bloc and China.  Those countries' CO₂ intensities have now stopped falling, and in fact are rising.  Indeed, China has already surpassed the magic 4 tonnes per capita and has only pulled a fifth of its population out of poverty.

He hints strongly about the necessity of trade pressures on developing countries to reinforce their sense of public spirit.  That in itself would destroy the world trading regime and retard all countries' living standards.

Mr Garnaut suggests that Indonesia and PNG could become vast sinks to offset other countries' emission levels.  This is a pipe dream.  It may allow for a windfall gain for the two economies but there are not enough trees for this to offer anything but a pinprick.  Only by foregoing the use of oil, gas and coal is it possible to reduce CO₂ emissions.  And, though there are minor measures that could reduce emissions, a very high price or regulatory equivalent effect is required to achieve this (or his foreshadowed incentives to buy quotas from PNG and Indonesia).  Nuclear could be useful, but Penny Wong was quick to rule this out for Australia.

In any event, emission reductions for Australia are exceedingly difficult.  Our economy is built on low cost coal-based energy.  Coal is also one of our most important exports.  In a masterly understatement, Garnaut says, ''Some coal mining and coal-based power-generating firms in Australia would be negatively affected ... and may struggle to operate profitably in a carbon constrained economy''.  As the Financial Review editorial made clear this morning, the New South Wales Government power stations, under the Garnaut regime, are stranded assets and almost worthless.  That would only be a start.

Even if Australia were to restructure its electricity industry so that it became fundamentally nuclear-based (solar can only ever be a trivial and very expensive alternative) we would still be twice the 4 tonnes per capita level.  It is barely imaginable to foresee what sort of economy could operate in the 90 per cent reduction scenario that Garnaut points to.

And in moving to that position the corollary must be a vast jump in prices.  There is no other way of ensuring the constricted use of the energy.  Already in Australia, with what to the environmental lobby is seen as totally inadequate measures at mitigation, prices of electricity are rising.  Anticipating the measures foreshadowed the wholesale price of electricity for delivery in the first half of 2011 in Victoria and NSW is 50 per cent above present levels.  And we have seen nothing yet.

The residual value of coal-based power stations must sharply decline with any move towards the foreshadowed emission cuts.  So also will be the value of other energy assets -- the cuts in emissions and consequent price increases must bring very sharp reductions in electricity and other energy consumption levels.

Garnaut is correct that the Kyoto agreement is only the start -- and most signatories including Australia have found it impossible to meet their agreed targets without cheating.

In highlighting the fact that cuts of 90 per cent are necessary if we are really serious about stabilising emission levels, then Garnaut is, perhaps inadvertently, drawing attention to the Mission Impossible.  Even with a nuclear future, unless some totally unexpected technical breakthrough comes along, the outcome of the measures proposed is a vastly poorer Australia and a much poorer world;  the denial of income to those countries needing fossil fuels for growth and those countries rich in them would exacerbate such difficulties by creating intense political tensions.

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One for the country -- hardly a bonus to build on

Anybody who remembers that photograph of Peter Costello gleefully surrounded by newborn infants knows one thing:  it isn't only aspiring parents who can go a bit baby crazy.  Few areas are as familiar with poorly designed government policy as childhood and parenthood.

So when the Federal Government this week announced an inquiry into the possibility of paid parental leave, it was tough to remain optimistic.  You need only to look at the baby bonus to see that the black hole of bad policy is deep.  Costly, blunt and poorly designed policy instruments have just as many unintended negative consequences as benefits.

The exact details of Labor's parental leave scheme won't be known until after the inquiry reports back next year, but most proposals for paid parental leave would require the Government to pay a nominated parent roughly the minimum wage for a dozen or so weeks.

Certainly, this is far better than simply requiring businesses to pay the cost of the leave out of their own pockets.  The biggest risk that government-mandated workplace entitlements pose is that they make it more costly to hire workers -- and the unintended consequence is that employers are reluctant to hire in the first place.

Nevertheless, for a government that proclaims itself eager to cut spending, the addition of what will probably be at least a half-billion dollar expenditure into the federal budget is not going to help the Labor Party nurture a small government image.

Paid parental leave could also break a fundamental principle of good welfare policy -- the most effective policies are means-tested policies.  There is no good reason for taxpayers to give the $5000 baby bonus to a family that is already comfortable enough to look after its newborn.  At least the issue of parental leave has been referred to the Productivity Commission -- the government's independent research department that can claim much of the credit for advancing the cause of economic reform since its inception.  This contrasts with the worrying reluctance of Labor to trust the commission with anything else important.

Inquiries into climate change, car manufacturing and international trade have all been established separately -- Kevin Rudd may not trust the government's experts to give him the answers he wants.

But the biggest problem with a paid parental leave scheme is how it encourages the redefinition of our relationship with government.  The baby bonus has already established in the mind of Australians that having children is more than just a personal decision -- it is part of a long-running negotiation between parents, the Federal Government and the tax office.  The former Liberal government shamelessly encouraged this idea, but if what appears to be the instinct of Kevin Rudd and Julia Gillard is followed through, soon no one will start a family without lengthy consultations with the Australian Taxation Office and Prime Minister's Department.

Of course, from the Government's perspective, this is a perfectly rational approach.  All those newborns that surrounded Peter Costello are future taxpayers.  And business lobbyists keep urging the government to do something about the skills shortage and ageing workforce.  So the government wants us to breed.

But the people whose decision could be influenced if they are given a few grand by the government may not actually be the best parents.

And the problems of ageing populations and skills shortages don't have to be resolved by funnelling subsidies to young families.  It would instead be better for children if individuals were allowed to come to their own decisions about parenthood uninfluenced by politicians desperate to pay their way out of the latest political crisis.

Perhaps if the government really thinks that we have a population problem, it could be looking carefully at increasing immigration -- skilled and non-skilled -- and relaxing the high costs of work visas.

Nevertheless, introducing subsidies to new parents conveniently supports Rudd's working families narrative.  It's politically savvy to pay off your supporters.

The fundamental question that the Labor Government's proposal for parental leave raises is whether parents should have children for themselves, or for society.  But that answer is fairly clear.  After all, what parent spends time thinking about how starting a family could help Australia's OECD rankings?  Hopefully none.

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Victoria spending its way into backwater

Melbourne may well be a more liveable city than Sydney, but in most respects Victoria is decidedly disadvantaged in its rivalry with New South Wales.

In spite of this, Victoria's average levels of output and living standards exceeded those of NSW in the years prior to 2006.

For most of the period 1992-2006 the average output per Victorian, in real terms, was 15 per cent above that of NSW.

Doubtless much of this was due to the rigorous reforms and privatisations that Jeff Kennett initiated between 1992 and 1999, but some of the credit can also be claimed by the much-maligned Kirner government.

Prior to 1992 Joan Kirner's government had already started fat-cutting exercises in the public services.

At the same time Kennett was ejected from office, things started going pear-shaped for Victoria.

The lead over NSW in income per head gradually disappeared until, by 2007, perhaps for the first time in living memory, NSW output per head overtook that of Victoria.

Relative performance of states is a reflection of their basic endowments and the efficiency of their governments.

The people of NSW had more than their fair share of poor government under a weak-kneed Carr government that grovelled to interest groups, especially green activists and the unions.

But NSW has a greater resource-endowment than Victoria.

Though NSW lacks the mineral base of Western Australia and Queensland, it shares some of those states' good fortune in that regard.

Furthermore, it has developed the infrastructure to support the booming financial sector, and it has a superb natural port serving a vast interior.

These attributes provide buffers that will forgive poor efficiency of government service delivery.

Victoria has not been helping itself to overcome its natural disadvantages.

Last year economist Henry Ergas examined relative state government performances.

He found that on some measures, like education, Victoria has performed better than NSW.

Other measures, like the productivity of the health service and peak travel speeds, had shown deterioration in both states.

The bottomline of the Ergas analysis was that Victoria and Queensland were the worst performers among the states.

They tied for the dubious honour of logging the fastest increases in government spending between 1999 and 2006.

In terms of government spending restraint, WA has performed best among the states.  This has enhanced the strength of WA's mining boom.  That state's production per head in 2007 was 40 per cent above that of NSW and Victoria.

The Kennett administration, privatisation and careful economic management brought Victoria a government efficiency dividend.

The state needed this because its relative lack of natural wealth means the government has to spend more carefully.  The present government forgot this and has frittered away the gains patiently won by the Kennett reforms, with little to show for the increased expenditure.

For Victoria the penalty for relaxing is to drift towards the backwater that John Brumby rather unkindly depicted Adelaide as occupying.

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Car tariffs drive competition -- what nonsense

Following the closure of the Mitsubishi plant in Adelaide, the Australian economy and consumers would support Prime Minister Kevin Rudd and Industry Minister Kim Carr freezing car tariffs.

Instead, Rudd and Carr should use the closure as an opportunity to reduce tariffs, bolster the economy and reduce prices for consumers.

It is always difficult for workers when a factory closes.  The loss of jobs, the need for reskilling and fears for workers' ability to put food on the table is an understandable reaction.

The immediate response from the Government is to try to save jobs.  A large proportion of their response is driven by the need to "be seen" to be compassionate and caring.  Rudd and Carr should not follow this formula.

The Mitsubishi plant closed because it was inefficient and produced cars that few wanted to buy.  Days before the closure, Carr asked whether there was anything the Government could do to keep it open.  Had Mitsubishi taken his offer, it would only have delayed the inevitable.

Now, Rudd and Carr are focusing on how to bolster the rest of the car industry.  Their solution is to consider "freezing" tariffs that are due to be lowered in 2010.

In the late 1980s, tariffs on cars were 45%.  Since then, tariffs have been reduced to 10% until 2010, then to 5% until 2015.

The argument for tariffs is that they make inefficient car makers competitive and keep workers in jobs.  This logic is poppycock.

No job is "saved" by a tariff.  Like most government-imposed regulations, tariffs keep people out of jobs.

Tariffs act to increase the cost of imported cars and aim to make Australian-manufactured cars more price competitive.

Every time an inefficient job is "saved" by government intervention, consumer capital is directed away from an efficient job to keep an inefficient job alive.  This is simply not sustainable.

Sustainable jobs are necessary to provide long-term economic security to workers and the Australian economy.  Tariffs provide a false foundation for job growth.

Tariffs also remove the incentive to innovate.  They limit exposure to competition and remove incentives for car makers to innovate.

In the Productivity Commission's latest Review of Automotive Assistance report, it identified a core justification for the industry becoming an "exporter and innovator" since the late 1980s.

It was a "reduction in tariffs that exposed the industry to increased international competition and also reduced costs for consumers and increased their vehicle choices".

The point has not been lost on Mitsubishi.  Its chief executive in Australia, Rob McEniry, admitted that one of the main reasons for closure was the domestic decline in the large-car market and changing consumer demand.

A tariff freeze will also have wider, negative consequences -- it will keep prices high for consumers.

At the last election, Rudd claimed he would stop price rises in petrol and groceries.  He has already expanded government regulatory power to try to stop price rises.

Rudd cannot stop price rises on groceries and petrol, but he can reduce car prices.  Tariffs add to the price of vehicles.  For consumers, that means higher loan repayments, particularly when coupled with rising interest rates.

Instead of pretending to care, Rudd and Carr should act in the best interests of Australians.

They should ignore the temptation of a tariff freeze and continue the gradual reduction in car tariffs to deliver sustainable jobs, a more innovative industry and cheaper prices for all Australians.

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