FEDERAL-STATE RELATIONS COMMITTEE
Inquiry into overlap and duplication of
roles and responsibilities
Minutes of evidence
Melbourne - 5 November 1997
Members
| Mr A. Andrianopoulos | Mr M. John |
| Mr G. B. Ashman | Ms L. J. Kosky |
| Ms L. T. Burke | Mr B. T. Pullen |
| Mr D. Dollis | Ms W. I. Smith |
| Mr K. S. Jasper |
Chairman: Mr M. John
Deputy Chairman: Mr B. T. Pullen
Staff
Executive Officer: Ms L. Topic
Office Manager: Ms N. Papal
Research Officer: Mr P. Emerton
Witness
Mr N. Economou, Lecturer, Monash University (affirmed).
Mr Economou, will you address the committee?
Mr ECONOMOU - First of all, I appear in my capacity as a private individual: I do not represent any group: I cannot claim to speak on behalf of the university or my department. However, I come as someone who has been invited to make a submission and as someone who is a higher education teacher and a student of Australian politics. I have prepared a paper that I intend to submit to the committee for tabling, and I would like to spend my 10 minutes talking to it. I apologise in advance to the Hansard reporters for rambling or making comments that do not make sense! We will all just have to look at the transcript to understand what I have said. The title of the paper is 'Between a rock and a hard place: Victoria and the politics of federal-state financial reform'. The brief I have set myself is to try to unravel some of the political dynamics that underpin this important issue.
Questions about federal-state financial relations have re-emerged in the current debate as a result of problems that have arisen in Australian public policy following economic changes, political debate and recent legal events, including the High Court's recent decision on section 90. The question of taxation reform has been central to discussions about how federal-state financial relations might be reformed because, quite simply, taxation and federal-state financial relations are intimately related.
The recent High Court decision has added a sense of urgency to this matter because, as the previous speakers have clearly demonstrated, there is the potential for the states to lose a substantial amount of revenue at a time when the commonwealth has been imposing cuts in real terms in total commonwealth transfers to the states. In my paper I have tried to set the context for discussions about the politics of federal-state financial reform. To do that I looked at the performance of two recent federal governments in particular - the Whitlam and Hawke Labor governments, which I think went out of their way to try to impose their political will on the states and in so doing exacerbated some of the deeper problems associated with federal-state financial relations. The central problem, of course, is one of autonomy. With the sorts of federal-state financial relations that have emerged since the Second World War, state autonomy is clearly at risk. It could be argued that the true nature of the Australian federation is being undermined as a result.
The paper next addresses the prospects of reform and what sorts of reforms we should have. I would argue that there will be no meaningful reform of federal-state financial relations until we have meaningful taxation reform. That leads on to the next important point, which is that the politics associated with that sort of taxation reform are very tricky and very complex and may not result in any meaningful changes.
The final thing I want to stress today is that it will be a very brave set of politicians, federal but especially state, that grasps the nettle on making major changes to state-financial relations in the event that a major reform of taxation occurs. I envisage that the only real change that could occur to federal-state financial relations would depend on a federal government adopting a consumption tax, or a goods and services tax, and unless we go down that very radical taxation reform path, the future will basically be one of the states and the commonwealth staying as they are.
I will not spend a great deal of time talking too much about the Whitlam and Hawke years, except to reiterate that ever since 1942 the commonwealth has been using general purpose and specific purpose grants to impose its financial will and its policies on the states. The Whitlam government used section 96 of the constitution to try to encourage or move the commonwealth into areas previously considered to be the reserve of the states. I would characterise the Whitlam approach to federal-state financial relations as: if you see a public policy problem, throw lots of public money at it.
It is interesting that the Hawke and Keating governments were also not averse to using section 96 to try to impose their political will on the states. Keating, as Treasurer, added an extra policy instrument and insisted that the states respect global borrowing rights. Therefore, I would argue he was able to force the states to adopt the commonwealth's preferred privatisation policies. Like Whitlam's, the Hawke and Keating governments used federal-state financial relations to impose their will on the states, but the approach was quite different. The Hawke and Keating governments were influenced by economic rationalism. They wanted to enforce small government and fiscal rectitude on the states by making cuts in real terms in the transfers to the states. This is where the problem of vertical fiscal imbalance has arisen. VFI, as we know, is the result of a decrease in the amount of revenue available to pay for government services, but the demand coming from the community for government services continues unabated.
I would suggest that the current spate of problems that the states are experiencing in federal-state financial relations was made worse after the 1987 stock market crash when there was a collapse of the real estate markets for both Sydney and Melbourne. Real estate had been providing a useful source of revenue for the states, but this fell apart as the real estate boom dissipated. Some states exacerbated their financial situations by having policies in place that restricted their room to manoeuvre to recoup indirect revenues as a result of the collapse of revenues coming from the real estate boom. I think particularly here of John Cain's family basket pledge, whereby the Cain government set a cap on the rate at which it would allow increases in charges and taxes in line with the CPI. For purely political reasons, it was an attempt to encourage the view that the Victorian Labor government was not a high-taxing government. The problem was that at the same time as the Cain government needed alternative sources of revenue, politically it had closed them off. The area of state taxation is very difficult for state governments and state politicians. It is very hard to tiptoe through the minefield, if you like.
I want to talk briefly about taxation as the primary instrument of reform. I return to the idea that we will not see any major reform in federal-state financial relations until we see major reform in taxation arrangements. By virtue of the fact that the commonwealth has a political monopoly over the most important taxes that are levied - that is, income taxes - it is really the commonwealth that will have to lead this debate. The states do not have a great deal of scope to put much pressure on the commonwealth other than in ways that sometimes involve premiers having a go at the Prime Minister. I suggest that the last real opportunity we had to see a major change in federal-state financial relations occurred with the federal coalition's Fightback! proposals. Although most people in the community saw Fightback! as a manifesto that talked about the imposition of a goods and services tax, we must remember that Fightback! was a much more complex policy document. In addition to the promise to impose a goods and services tax, there was a proposal to make substantial reductions in federal income taxation and also - this is something that is not often remembered - substantial cuts in transfers to the states. I would argue that politically Fightback! would have forced the states into imposing their own income taxes. That seems to be the key issue.
I have not put this down well on paper, but I was reflecting on this issue as I was listening to Professor Norman. It is interesting that premiers and state politicians get a lot of political mileage out of criticising the commonwealth for the way it treats federal-state financial relations. They talk about the need for real reform from a position of political comfort because the onus is really on the commonwealth to make these changes. If Fightback! had been adopted as a policy, the political burden would have actually shifted onto the states because the commonwealth would have made the big cuts and transfers to the states. It would have retreated from levelling federal income taxes, which is something all premiers have been calling for. Ever since Malcolm Fraser's new federalism policy, successive state premiers have said that they would like to impose their own state income taxes and that the commonwealth must retreat from levying income tax. Fightback! would have allowed for just such a retreat.
My view is that we will not get major federal-state financial reforms until we have major taxation reform. I will go one step further and suggest that the reform that has to occur is the movement away from direct taxation towards indirect taxation. To put it another way, there must be a massive reduction in commonwealth income taxing and its displacement by the imposition of a valued added or goods and services tax.
Now I get to the fun bit, where I suggest that any move towards imposing a goods and services tax by the commonwealth is fraught with great political danger. In fact, if you look at the track record of goods and services taxes, you will see that it has not been very good. The first person, of course, to try to make major changes was Paul Keating in his role as Treasurer. He was stymied at the 1985 tax summit. John Hewson had a go in 1993 as we know and succeeded in losing the unloseable election. I suggest that the issue of a goods and services tax was also broached at the recent South Australian election, once those dreadful Adelaide Crows supporters calmed down after that terrible travesty of justice at the MCG - but I don't want to say anything more about that!
At the last moment a document was released that had apparently been written by the department of budgets in South Australia making a recommendation for major changes to taxation arrangements, in which a goods and services tax figured prominently. It is probably drawing a long bow to suggest that the South Australian election was won and lost on the indirect taxation issue, but again there is evidence to suggest that the community is not as attracted to the idea of indirect taxes or consumption taxes as are captains of industry, some politicians and some economic commentators in the press.
If the federal government was to embrace the idea of major tax reform and was to try to institute a major change based on imposing a goods and services tax, the states would face a series of complex issues and problems. If the commonwealth responded to the calls for the removal of a commonwealth presence in levying income tax to allow the states to take up the slack, as I suggested earlier I think the onus of the political burden of the debate would fall onto the state premiers. State premiers, state governments and state politicians would have to try to put an income tax system in place.
I will conclude my submission by leaving you all with a very pessimistic view of what can happen to those who try to institute major reform. I reiterate that any realistic attempt to try to reform federal-state financial relations, which I think has to be done because there is an urgent need to address the problems of vertical fiscal imbalance, will require substantial reform. I leave you with the words of Niccolo Machiavelli and his view of what happens to politicians who attempt to reform. Machiavelli once wrote:
And one has to reflect that there is nothing more difficult to handle nor more doubtful of success nor more dangerous to conduct than to make oneself the leader in introducing a new order of things. For the man who introduces it has for enemies all those who do well out of the old order and has lukewarm supporters in all those who will do well out of the new order. This lukewarmness arises partly from the fear of their adversaries who have the laws on their side and partly from the incredulity of mankind who do not put their trust in changes if they do not see them in actual practice. Thus it arises that whenever those who are enemies have the opportunity to go on the attack they do so forcefully and the others put up a lukewarm defence, so putting themselves and their cause at risk at the same time.
Drawing on Machiavelli's very pessimistic view, I conclude by saying that there is an urgent need for financial reform and an urgent need to address vertical fiscal imbalance. However, I suspect it would be a very brave politician, either at the federal or the state level, who grasped this issue. I thank the committee for the opportunity to make this submission.
The CHAIRMAN - Thank you for your valuable contribution, Mr Economou.
Witness withdrew.
5/11
Public Hearing