The paper comments
What’s the problem we are trying to solve? In embarking on any reform agenda, the first question that needs to be asked is—what is the problem we are trying to solve? According to the Australian Constitutional Values Survey, over 80 per cent of Australians thought the performance of the Federation could be improved. Clearly, in the public’s mind there is a problem. What is not as clear is whether that problem is with the model of federalism, a perception of being ‘over governed’, or something more concrete.
The stakeholder roundtable consultation process (undertaken during February and March 2015 to inform this Green Paper) revealed that, while the checks on the power of any one government provided by the Federation is valued, the way governments work together could be improved, especially in the design of policies that affect the delivery of public services.
The consistent messages from the stakeholders included:
- The need for all governments to either get out of one another’s way, or if there was a genuine need for multiple governments to be involved, there should be a co-design of policies, to ensure they were done well and were the right fit, accompanied by mutual respect for each other’s competence and contribution.
- Related to this, the importance of preserving diversity as to how services are designed and delivered—taking account of local considerations, cultural sensitivities, and that all providers should have a freer hand to design, or adapt, services based on what was actually needed at the local level.
- The importance of clear responsibility and public accountability and the role of independent mechanisms (like independent bodies or institutions) to provide clear and easily understood information on the performance of all governments, including how governments are spending their money—participants were more reassured when independent and credible bodies that were at ‘arm’s length’ from all governments had a role in reporting on their performance.
- The need for all governments to provide durability of funding and policy direction, while still allowing room for different governments to implement their electoral mandates—participants felt competing policy agendas did more harm than good in improving services, and there was far too much chopping and changing by governments on their policies and how services were delivered, which meant they could never really have any certainty about their funding, see anything through, or plan well for the future.
- The desirability of the Commonwealth continuing to play a national leadership role by bringing the States and Territories ‘to the table’ to seek agreement in the setting of high level policies and strategies, national goals and standards (whether they were funding, quality, performance or achievement, reporting, content or regulatory standards)—participants considered that a range of important national policies or architecture would ‘collapse’ if the Commonwealth withdrew.
All agreed that any reallocation should not just be a ‘rearranging of the deck chairs’, or a theoretical exercise in changing what already exists.
The overarching goal should be to ensure governments have the right incentives to continuously improve the services provided to Australians, which in turn will improve their wellbeing and standard of living.
This goal was ratified by the Council of Australian Governments (COAG) at its meeting on 17 April 2015, where it “agreed the goal of Federation reform is to improve the standard of living and wellbeing of Australians through better services”.
Stakeholders frequently stated that too much of their time was taken up sorting out the requirements of the different levels of government, both trying to achieve the same outcome in the same area.
In the end, it is not clear to the person on the street—the patient, the student, the tenant—who is responsible for what. Numerous commentators, including the Business Council of Australia and the Committee for Economic Development of Australia, have also cited the overlap and duplication caused by the involvement of multiple levels of government in a policy area, and that more consideration needs to be given to the effect this has on businesses and service providers.
The result is less efficient, more costly, and in some cases, poorly coordinated, services.
If the goal of this reform process is to improve the services provided to Australians, the first question to ask is what prevents this from happening now?
One of the largest problems intruding on the delivery of better services to Australians is how the current arrangements within the Federation are structured and the impact this has on the incentives within each sector—whether the current roles and responsibilities create strong incentives for better quality services that are delivered efficiently and support a strong economy. This, therefore, requires a careful assessment of who is responsible for what, how those responsibilities are being carried out, and how this drives the behaviour of key players in the sector.
In some instances, roles and responsibilities between the Commonwealth and the States and Territories are clearly delineated. For example, in higher education the Commonwealth’s role as the major player in the system is uncontested and universities—most of which are established under State and Territory legislation—deliver services independently.
In other sectors, however, roles and responsibilities are increasingly shared or overlapping.
The Issues Papers on education, health, and housing and homelessness (released in December 2014) showed there is overlap and duplication in these areas, where governments share responsibilities and roles within those responsibilities.
If the challenge is to develop a set of arrangements that allow for better services to be designed and delivered for all Australians, then consideration should be given to the best way to determine the configuration of roles and responsibilities to achieve this.
One of the weaknesses in how roles and responsibilities in Australia’s Federation have evolved is that they have largely arisen based on governments’ separate desires to take on for themselves a specific role, to initiate a specific policy or programme in a particular area of responsibility, or in response to a specific issue, rather than being a consequence of genuine collaboration between governments to co-design reforms.
This has led to an increased blurring of roles and responsibilities between the Commonwealth and the States and Territories, with each level of government performing different, or in many cases, overlapping functions.
At its worst, these kinds of blurred arrangements have meant:
- there is no way of governments looking at how the whole system comes together, how it is working for Australians, and whether the incentive structures within the system are the right ones to ensure the delivery of the most efficient and high quality services;
- different governments have license to, and are usually tempted to, pursue the objectives that matter most to them in exercising their roles and responsibilities which often compete with another level of government’s objectives for the same sector, and which organisations delivering the front-end services to the public often have to try to reconcile, or make sense of, by themselves;
- there are incentives for one level of government to shift costs to another, leading to higher costs and lower quality services for Australians;
- there is often ‘buck passing’ between levels of government, meaning no one really knows who is responsible for what; and
- the incentive structures in the system are usually (but not always) geared towards governments’ interests, or have been shaped in response to advocacy by providers, rather than being focused on what Australians need and want, including choice and having a voice in how services are designed and delivered.
Finding success stories that demonstrate how these kind of blurred arrangements have worked, and translated to actual improvements in the delivery of services, is hard.
There have been some successes for collaboration in joint areas of responsibility, including the National Competition Policy, gun control reforms in the wake of the 1996 Port Arthur tragedy, and the AIDS campaign in the 1980s.
More recently the structured collaboration on the design and implementation of the National Disability Insurance Scheme (NDIS) is a good example of successful cooperation. These, however, are not widespread across other areas of responsibility.
Instead, many advances in the delivery of better services have come through competitive forces within the Federation, rather than through genuine or deliberate efforts from governments to co-design and collaborate upfront on policies of shared need.
It is not necessarily a bad thing to have competition between State and Territory governments driving service delivery improvements. Reforms that are shown to work in one jurisdiction can put pressure on other States and Territories to adopt similar reforms, resulting in a ‘race to the top’ in the delivery of services to the public. The failure of some programmes can also assist other jurisdictions in avoiding pitfalls, or observing how some of the incentives in the system have actually been working against the provision of better services.
In terms of the Commonwealth’s involvement in the development of shared arrangements, it has largely been ‘horses for courses’ and has usually depended on how important it considered the issue to be.
It varies between providing leadership in complex national markets and policy areas—where leadership could mean a more ‘light touch’ role in facilitating the development of national standards—to taking a far more ‘hands-on’ and direct role in areas such as the delivery of services specifically aimed at assisting Indigenous people.
If getting the incentives right for improved service delivery for Australians is the main game, a better approach would see all governments working together upfront to co-design reforms, systems and markets; roles and responsibilities for each level of government would then be rationally and deliberately determined as a consequence of that.
This is what the Reform of the Federation White Paper is trying to do now, within our existing constitutional framework. This could include governments agreeing that either (1) one level of government is solely in charge of the system, with the other level of government ‘vacating the field’ and getting out of the other’s way, or (2) where this is not practical for various reasons, governments better coordinating and formally sharing their efforts with an eye on greater equity, efficiency and effectiveness in delivering outcomes to citizens, or (3) some combination of both approaches.
This kind of approach would mean that the commitment to ensuring the allocation of roles and responsibilities is amplified; all governments would have some ‘skin in the game’ and have a mutual interest and common goal in ensuring that the configuration of roles and responsibilities—including the incentive structures—are right to deliver services well.
The current state of federal financial relations, and the degree of the Commonwealth’s financial power in the system which makes the States and Territories dependent on it to finance their spending responsibilities, contributes to the complexity of our federal system. It creates perverse incentives that make genuine intergovernmental partnership difficult.
This underlying structural feature of our Federation—the mismatch between revenue and expenditure responsibilities between the different levels of government—is known as vertical fiscal imbalance (VFI), which is discussed in more detail in Chapter 5:Federal financial relations.
Australia’s degree of VFI is very high by international standards.
The Commonwealth raises 82 per cent of total tax revenue, the States and Territories raise 15 per cent and local governments the remaining three per cent.15 By contrast, in Canada (another federation with similar characteristics to us), the central government raises only 45 per cent of total tax revenue.
Further, Commonwealth transfers (including the GST) comprise about 45 per cent of total State and Territory revenue ... While there is no ‘easy money’ to be found by governments, there are arguments that can be made about whether all governments are using their tax bases as efficiently as possible—the current situation sees the States and Territories rely on the Commonwealth to fund a large proportion of the delivery of their services.
Australia’s high degree of VFI is a problem because it can create a situation where the States and Territories blame the Commonwealth for not passing on enough funds to deliver their services, or where the Commonwealth can blame the States and Territories for not using taxpayers’ funds properly (blame shifting).
This is compounded by the ability of the Commonwealth to attach detailed conditions, or matching requirements, to funds—in effect constraining the flexibility and manner in which a State or Territory spends, not only Commonwealth, but State or Territory money. While the Commonwealth has made considerable use of its superior fiscal power in the Federation, the States and Territories have generally responded in such a way that suggests they would rather have the funding—with the conditions—than not have the funding at all.
Addressing the mismatch between revenue and expenditure in Australia would go a long way toward ensuring governments can no longer shift the blame of policy failures and the costs of policy responses between them.
This is one reason why the relationship between the Commonwealth Government’s Reform of the Federation White Paper and the Tax White Paper is so important.
The Tax White Paper is looking at revenue for all levels of government through a comprehensive analysis of Australia’s tax system. The Federation White Paper is looking at expenditure responsibilities and how revenue should be shared between governments so they can meet these responsibilities. Given the link between the two, the Federation and Tax White Papers are being progressed together. As the current arrangements now stand though, they leave Australians with a confusing type of federalism that may make some kind of sense to some bureaucrats and academic experts but leaves the public—the ultimate users of the services—with services that do not have the right kind of incentive structures or perhaps are not designed or delivered as well as they could be, and unclear about who is responsible for them.
Ultimately, Australians want high quality public services—regardless of who delivers them—but they also want to know who is responsible when those services are not up to standard or fail to deliver.
The Federation as it currently operates does not always allow this to happen.