Federal comfort zones must be abandoned

Much has been said about the contest between political expediency and visionary leadership in the recent conduct of public policy.

Expediency is ahead, but leadership gets another chance to fight back as the prime minister, premiers and chief ministers convene this week for a special ‘retreat’ on reform of Commonwealth-state relations.

Changing the format, so the thinking goes, will encourage participants to climb out of their trenches and engage in a free exchange of ideas. We should hope the tactic succeeds, because federalism remains one of the potentially most fruitful areas of governance and economic reform.

There are some favourable portents, such as Tony Abbott’s declared aim of making the states ‘sovereign in their own sphere’ and South Australian premier Weatherill’s floating of the idea that states be given full responsibility for education up to TAFE level free of any Commonwealth intervention.

But the obstacles to reform are formidable. The rate, coverage and interstate distribution of the GST are highly charged political issues; and premiers relish the opportunity to tackle the Commonwealth over its ‘$80 billion in cuts’ to health and education grants. These are relevant issues, but if progress is to be made in reconstructing the big picture of federalism, every retreat participant must be willing to leave their ultimata and taboos at the door.

The main obstacle to reform is none of the above, but the culture that has evolved through the practice of federalism over decades. Much of the fractious nature of federal-state relations is theatre; the reality is that all the players operate in a comfort zone, and one that bears little resemblance to true federalism.

For the Commonwealth, the comfort comes from its near monopoly of the major tax bases and the policy leverage that comes from granting the states and territories almost half (on average) of all the funds they spend. Prime ministers since Menzies have exploited the opportunities this fiscal power provides to be a key player in services (such as education) the constitution never assigned to the Commonwealth.

For the states, the comfort of their diminished role comes from avoiding too much of the odium of taxing their own electorates, while being able to blame inadequate federal funding for service deficiencies.

The retreat and the processes that follow it will need to go back to first principles and determine what kind of federation we want to be; how the functional roles and responsibilities of government should be distributed, and how each tier of government should be funded.

If the answers amount to an endorsement of the status quo, the leaders will not have done their job. If it amounts to a tidying-up exercise that maintains the decades-long thrust towards a more centralized federation, the result will be a great disappointment to those who wish to maximize – not repudiate — the economic and governance benefits of federalism, such as greater accountability, responsiveness, competition and efficiency.

To reap the benefits of reform the leaders need to do abandon their comfort zones and embrace the principles of federalism. The Commonwealth needs to withdraw completely from policy, regulation and funding of at least some state functions (such as school education and public housing) it currently performs jointly. The Abbott government’s willingness to do so will be a key test of its sincerity in calling for states to be ‘sovereign in their own sphere’. But the Commonwealth also needs to recognize that withdrawing from state functions means giving up its near monopoly of control over major tax bases and allowing the states more of their own funding sources.

For the states’ part, they need to recognize the Commonwealth’s withdrawal from functions will be permanent and accept full responsibility for them without the safety net of Commonwealth funding. They will need to take full responsibility for the quality and efficiency of services without Commonwealth ‘incentive’ grants. They must also accept responsibility for raising more of their own revenue and the political discomfort that goes with such responsibility.

Explaining the necessity and benefits of change and persuading the public to accept it is an essential part of political leadership. This will be no small task, for Australian public opinion has grown up with the anti-federalism culture that pervades political behaviour. Commonwealth withdrawal from key state services and greater devolution of taxing power — although the best way to go — will jolt many people, and leaders at all levels have a responsibility to explain the why and the how of such reforms.