Our federation functions well, but we can do better

A healthy and working federation is critical to the livelihoods of all Australians.

The federal and state governments share responsibility for funding essential services, with the states having primary responsibility for service delivery.

More than 80 per cent of taxation revenue collected in Australia is by the commonwealth, and the states receive on average 45 per cent of their revenue from the commonwealth.

The notions of vertical fiscal imbalance and horizontal fiscal equalisation have allowed citizens to share equally in the prosperity of the nation, irrespective of which state they live in.

A patient in Hobart is able to receive the same quality of care and treatment as a patient in Sydney, even though Tasmania’s economy is a 10th the size of NSW’s.

It has been said that if our founding fathers started again with a blank sheet of paper, knowing what we know now, they might not have landed on the federal system we have.

However, they did and our federation, for all its faults, has served us well.

People in different states have developed and retained a parochialism that can be seen on the football field and the cricket pitch, but their overwhelming sense of loyalty and identity is with our nation.

Unlike the American experience of unity born of conflict, our pathway to nationhood was a peaceful one, and the federation has remained intact for more than 100 years.

What is more, as our federation has matured, the barriers have broken down.

Systems are increasingly uniform, be it around taxation, education or transport, where we now have a common approach to aviation, shipping and rail freight.

In important areas of the economy such as corporations law and the regulation of credit, we now have a single national approach through commonwealth legislation.

But despite this progress we should be under no illusions about the inefficiencies that exist in our federation and the handbrake it represents on our productivity.

This is where we can and must do better, knowing full well that a new bucket of money will not make our economy more efficient or businesses more productive.

As we seek to lift our productivity from today’s five-year average growth rate of 0.6 per cent, commonwealth and state governments need to work togeth­er and treat the productivity challenge as a national imperative.

The Productivity Commission has given us a blueprint of micro-economic reforms with 28 recommendations in the Shifting the Dial Report, 22 of which are the sole or joint responsibility of the states.

The economic and social dividends from these reforms, which are largely on the supply side, is immense, with changes in the health sector alone worth up to $140bn across two decades.

Cognisant of these opportunities, federal, state and territory treasurers met recently to advance a program of work to boost the nation’s productivity and to develop actionable items in areas of transport, health, skills and environmental regulation.

At the same time, the commonwealth and the states are individually pursuing their own reform agendas.

For example, at the state level we have seen NSW develop its own body of work that looks at its tax mix, including payroll tax and stamp duty.

The conclusions it draws will no doubt inform its decision-making, given the policy levers at its disposal.

At the federal level, we have made significant reforms to our tax system for income earners and small and medium enterprises; enhanced competition through the implementation of the Harper review; and, more recently, legislated the Consumer Data Right.

We also are rolling out a 10-year, $100bn infrastructure program that will see major projects in every state and territory.

The government’s infrastructure plan involves not only direct commonwealth funding, often in partnership with states, but also using our tax system to tap the growing pool of global savings for nationally significant projects.

On Thursday I am releasing a Treasury paper that outlines a framework where investors can access a tax rate of 15 per cent, instead of the 30 per cent that would otherwise apply.

To qualify, these projects will have an estimated capital expenditure of $500m or more and cover a diverse range of economic infrastructure projects including the areas of transport, energy, communications and water.

This tax rate will apply to projects that are in the national interest and “significantly enhance the long-term productive capacity of the economy”.

This tax incentive maintains Australia’s competitiveness in a global market where the infrastructure funding gap is estimated to be $15 trillion by 2040.

As our federation evolves and we work together across all levels of government to meet challenges such as an ageing and growing population, we must make sure the lines of accountability between levels of government are not blurred.

We may often have joint responsibility for funding, but not always joint responsibility for delivery. The best case in point is in relations to our schools and our hospitals.

Despite 28 years of consecutive economic growth, a AAA credit rating and a federal budget back in balance for the first time in 11 years, there is no room for complacency.

The global economic headwinds are real and the devastating drought at home is affecting the budget and weighing on business and consumer confidence.

While we conceived our economic plan laid out in this year’s budget cognisant of these threats, we must continue to look for every opportunity to take the country forward.

Making the federation work better is essential to this task.

It’s not about pitting the federal government against the states, or the states against each other, but recognising that we’re all serving the interests of the same people — 25 million proud Australians.

Originally published in The Australian