FEDERAL-STATE RELATIONS COMMITTEE

TRANSCRIPT OF EVIDENCE

CORRECTD VERSION

Minutes of evidence

Melbourne - 5 November 1997

Members

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

Professor M. Painter, University of Sydney (affirmed).

5/11 Public Hearing

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The CHAIRMAN - The three distinguished experts who will speak in this second session will be Professor Martin Painter, from the University of Sydney; Mr Dick Rye, Chairman of the Commonwealth Grants Commission; and Ms Bronwyn Pike, from the Evatt Victoria Foundation.

Before calling on the first speaker, I issue a special welcome to the Honourable Bruce Chamberlain, the President of the Legislative Council and one of the members for Western Province. He will be with us for a short period; it is a privilege to have him with us.

Professor Martin Painter is head of the Department of Government and Public Administration at the University of Sydney. He has lectured in the department since 1974. He was awarded his PhD by the Australian National University in 1973. He has researched and published extensively in the areas of public policy and public management at all levels of government, and he has undertaken a variety of public sector consulting and training work. His most recent work has been a study of micro-economic reform and public sector restructuring, with particular reference to intergovernmental relations. Professor Painter was elected a national fellow of the Institute of Public Administration in 1988, and for six years was co-editor of the Australian Journal of Public Administration. His areas of expertise include fiscal arrangements and their impact on service delivery, tax reform, and the Council of Australian Governments.

I now invite Professor Martin Painter to speak to the meeting.

Prof. PAINTER - Thank you for the opportunity of addressing the committee. I wish to make a couple of points not so much about tax reform but about the general state of federal-state relations, in terms of both finances and roles and responsibilities. I shall also say a few words about recent experiences in reforming some of those relationships and the sorts of things that seem to have been conducive to success and the sorts of things that have got in the way of such reforms. I take a less pessimistic view of the prospects for change in federal financial relations than do some of the previous speakers. I will talk a little bit about COAG as an example, including some of the lessons to be learned from it.

With regard to roles and responsibilities, the textbook models and metaphors of federalism often distinguish between the marble cake and the layer cake as way of looking at the way federal-state relations are arranged. In the image of the marble cake everything is mixed up, jumbled together and intermingled, and you cannot distinguish the roles and responsibilities of different governments. We have interpenetration, overlap, dependency and, one would say, a great deal of confusion. In the image of the layer cake, the roles and responsibilities are clearly delineated and sharply defined. This a sort of neat-and-tidy vision of federalism. It is the one most commentators and reformers turn to for inspiration when they look to remove waste and inefficiency.

The problem with the layer cake image - I think one could say this about taxation powers as well, with certain taxation powers instituted at one level and certain taxation powers instituted at another - is that it is unworkable, for two main reasons. First of all, the constitution says we have a marble cake federation. We have concurrent jurisdictions, not coordinate or distinct jurisdictions, for most functions and activities of government. Governments have to cooperate, get together and intermingle their powers to get most things done in this federation.

The second thing to say is that the activities and policies of government never fit themselves into neat compartments. Even if you could fix a neat and tidy division of roles on paper in, say, housing policy, difficulties would almost certainly arise because different housing groups or clients also have other related needs and interests and demands on government, and they would bring their demands to other levels of government that have other responsibilities. So we have confusion, overlap, buck-passing, cost shifting and so on, without fail.

Having argued that roles and responsibilities are bound to be jumbled together and almost impossible to put into neat, separate boxes, I point out that the problem is not so much that it creates confusion and overlap and friction and cost shifting but that it is very difficult to solve or do anything about. The current federal system makes it very difficult to resolve these sorts of issues. The reason is that the essential character of the division of functions in the Australian constitution is concurrent - that is, it is jumbled together. But there are no constitutionalised mechanisms for governments pooling their executive authority to deal with these shared functions; they muddle along and try to cooperate in an ad hoc way to cope with these overlaps and duplications.

Practical exigencies bring governments together. We have a plethora of ministerial councils, intergovernmental working parties, officials, contacts and so on trying to deal with these problems. But this machinery can also be a source of tension as well as a place where cooperation may take place. That is in large part because the actors - that is, the governments, ministers and officials involved - are highly suspicious of the consequences of getting together with other governments and are highly threatened by some of the power plays they inevitably get into in those relationships.

The states normally take the view that these cooperative relationships can be very threatening and dangerous, largely because when they get into the smoke-filled rooms in the commonwealth they get beaten over the head, bullied and coerced - and the reason is the financial relationships that exist between the commonwealth and state governments. Cooperating to rationalise, say, service planning and provision in a particular field where there is a confusion of roles and responsibilities, such as in housing or health, always gets bogged down when it gets to the question of money. That is because the commonwealth insists on getting its own way, and it can insist on getting its own way with regard to the fiscal powers it has at its disposal. The commonwealth always seeks to ensure that those powers can be put to its policy uses, and it is very reluctant to surrender them.

Whenever the states call for a rearrangement of roles and responsibilities to get a greater devolution or a more rational allocation of roles at the point where a service is delivered - say, in housing - the commonwealth steps in and says, 'We have national policy objectives and we have the money to ensure some of those are implemented. We will get on with the job, and you will have to do all the asking'. That is very threatening to the states. When they get around the table and start talking about agreements, cooperative ventures and so on, the commonwealth is always there trying to say, 'Okay, we will cooperate with you, but on our terms'. The states are then more likely to seek as much of an arms-length relationship as they can possibly get. Of course, that is impossible given the type of marble cake intermingling I talked about earlier.

The states' vulnerability and their dependence on the commonwealth make it very difficult for them to see a chance of getting their own agenda up when questions about the reform of federal fiscal relations, roles and responsibilities, the division of powers and so on are put on the table. Not only is there a climate of fear and vulnerability in relation to the commonwealth, but also there is also a beggar-my-neighbour relationship among and between the states. They see finances and resources in the context of relativities, partly because they are so vulnerable and partly because they feel so threatened. This climate of beggar my neighbour, threat and suspicion bedevils financial relations and makes it very difficult for the states to cooperate among themselves on the agenda of reform.

The states may agree on the principles and the need for reform, but the possibility of losing something in the short run as a result of those reforms breeds excessive caution, and they cling to the status quo. When the status quo becomes untenable, such as it is becoming at the moment with the recent High Court decision and the growing scarcity of funds generally and the increased demands on services, there will be pressures for change and reform from which the states will not be able to step back and in which the commonwealth presumably might have the need to be involved as well.

When that kind of urgency or crisis of reform arises, the experience of COAG gives us some important lessons on how those reforms can be brought about. COAG failed to achieve any substantial reforms in the areas of federal finances and roles and responsibilities. Until recently the Council of Australian Governments has worked away on the agenda of federal-state relations in areas such as national competition policy and so on and has achieved a certain amount of success in some of those areas. Where it has succeeded in reaching nationally agreed reforms across all jurisdictions, it has occurred in areas of policy where the vulnerability and threats that are so characteristic of the politics of financial relations are not present.

Reforms have occurred where the fear of being a loser has been overcome by creating a sense that everybody can be a winner, even if some are bigger winners than others. Trust and assurance are the long-term gains in an agreed set of reforms, and they have to be established and maintained for this kind of reform process to be successful. These sorts of changes have occurred in relation to a number of very contentious and politically sensitive issues on COAG , and that sort of trust and assurance among the states and the commonwealth has developed as a result. Despite a lot of name calling and traditionally adversarial political relations, there has been a high degree of cooperation on a number of the reform agendas. That has been achieved in a number of ways - and if one looks at the COAG experience one can see how it has been achieved.

The first way has been by, in some cases, acknowledging the different conditions and circumstances of each state and allowing each to exercise real choice and discretion within some broader national framework or agreement - that is, by allowing the states to do their own thing, to opt out or to be different where it has been necessary within the limits of such a national framework. So agreement to cooperate rests on each government, mutually respective of the others' wishes, having some autonomy. Many of the agreements COAG has reached on national policy frameworks have written into them the possibility for particular states to do their own thing within the framework of agreement.

The second way agreement has often been reached and maintained has been by establishing new jointly owned and mandated national bodies to administer and regulate areas of activity under joint state and commonwealth oversight and supervision. Such bodies have a long history. The one with the longest history is the Commonwealth Grants Commission. Such bodies, which have a legitimate foundation in both state and commonwealth government agreements, have established their own reputations and standing among all governments as independent, impartial, positive and trusted forces for future change and reform. Those kinds of bodies, whether it be the National Competition Policy Review Committee or the National Road Transport Commission - I am talking of the ones COAG has set up - are important examples.

Talking about taxation reform among the Australian states, I would imagine that an intergovernmental body on tax harmonisation might be a way of getting ahead with the taxation reform agenda in that context. One of the main reasons that the beggar-my-neighbour behaviour in tax competition among the states has not yet been mentioned by the states is that they are in the situation in which they have eroded their own tax bases through unnecessary and unproductive competition with each other. I hark back to death duties, which is an example of an area of taxation the states vacated as a result of interstate competition. An intergovernmental body which was jointly mandated and which dealt with the harmonisation and regulation of such competition might be a possible engine of change and reform in the government system.

Another element in this sort of change process that we have learned from COAG is the importance of formal intergovernmental agreements which bind parties to timetables and courses of action, to which everybody is committed, and which give all governments some confidence that they can plan ahead and feel secure that some long-term benefits will be delivered to set against any short-term pain. I think that was a significant ingredient in the success of the national competition policy agreement.

Finally, agreements often have written into their fine print some carrots and sticks that are collectively acknowledged and automatically or externally enforced. They usually takes financial forms, such as competition policy payments under the national competition policy. The point about these agreements is that the states and the commonwealth are in it together. They come to a point where they see the possibility of mutual gain and then bind each other to the terms and conditions under which that mutual gain might be achieved by signing an agreement, by setting up a national body of some kind, by jointly mandating it, by maintaining joint supervision over it by ministerial council, and so on. In these cases the commonwealth has engaged in a genuine bargain with the states and has come to an agreement on that basis - and it has not just been bullying. The point is that the conditions under which that happens are not necessarily there when we look at fiscal intergovernmental reform. The major reason why the commonwealth, in particular, will come to such an agreement is that it relies on the states to achieve some of its objectives.

Of course, the power relationship or the dependency relationship is entirely in the opposite direction when it comes to fiscal financial relations, although in terms of service provision the commonwealth relies on the states to achieve its objectives. But in relation to the financial reform agenda of COAG, the reason it did not get very far was that the commonwealth saw no reason to trade or deal with the states. It simply had the power to say, 'Take it or leave it'.

Now I believe there are clear and widely acknowledged problems and costs that are becoming more and more urgent and apparent to both levels of government in relation to general financial reform. At present there is an opportunity - in the next few days we might see whether the opportunity will be grasped - for this kind of cooperative intergovernmental process of reaching agreement and making progress on reform to be reactivated. There has certainly not been much evidence of that in relation to this issue, but I believe there are some pressures on all governments at present to engage in such a process. There are some lessons to be learned by governments from COAG. They have just been through those lessons. If they reflect on them they may see ways of dealing with some of the problems in a cooperative way.

The CHAIRMAN - Thank you, Professor Painter; we are grateful for your contribution.

Witness withdrew.

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