Research Paper no. 17 2007–08
Specific purpose payments and the Australian federal
system
Scott Bennett, Politics
and Public Administration Section
Richard Webb, Economics
Section
14 January 2008
Executive summary
- Specific purpose payments (SPPs) are grants the Commonwealth
makes to the states, usually subject to conditions as to how the
money is spent, in areas such as health and education, which the
states administer.
- A feature of Australia s federal system is that power over
spending and policy-making is becoming increasingly concentrated in
the Commonwealth.
- SPPs are a major mechanism for centralisation because they
allow Commonwealth involvement in areas beyond those stipulated in
the Constitution. Consequently, the Commonwealth now shares with
the states many functions which were formerly the preserve of the
states.
- Whilst there are valid reasons for the Commonwealth to provide
SPPs, some see the Commonwealth s use of SPPs, especially the
trends towards using SPPs for short-term political purposes and as
a means of imposing the Commonwealth s priorities on the states, as
undermining the federal system of government.
- Problems associated with SPPs include a lack of accountability,
duplication of administration, and blame-sharing. One estimate has
the fiscal cost of these problems at $9 billion annually.
- Numerous proposals have been advanced to improve the operation
of SPPs but few have been implemented. The proposals include
focusing on outcomes, the pooling of Commonwealth and state funds,
and expanding the states tax base. The Commonwealth s extensive use
of its SPP powers will continue while the states lack own-source
revenue. But no moves are afoot to give the states greater taxation
powers because this would entail fundamental change.
- The Commonwealth s involvement in ever more functions through
SPPs has led to the perception that the Commonwealth is primarily
responsible for a function even when responsibility rests primarily
with the other tiers of government. This involvement is leading to
ever greater expectations of the Commonwealth government.
- The Rudd Government has promised to provide incentive payments
to encourage the states to implement reforms that would include
SPPs.
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Contents
Executive summary
Introduction
What are Specific Purpose Payments?
The rationale for Specific Purpose
Payments
Problems with SPPs
The impact upon the federal
system
State and territory government dependence on
SPPs
Vertical fiscal imbalance
Conditionality
Inputs and outcomes
Proposals to improve the
SPP regime
Clarification of roles
and responsibilities
Expansion of the states tax base
Pooling of funds and broadbanding
Conclusions
Glossary
The Australian federal system is
notable in the degree to which the national government can
influence the spending and policy priorities of state and local
governments. An important instrument in this is the much-used
power, under section 96 of the Constitution, whereby the
Commonwealth can make conditional grants of money to the state and
territory governments. These have become known as specific purpose
payments (SPPs) for programs in a wide range of areas. The states
administer these payments which, in most cases, are subject to
conditions (so-called conditionality) that the Commonwealth
specifies.[1] In 2006
07, the Commonwealth spent almost $29 billion or about 11 per cent
of Commonwealth government expenses on SPPs.[2] Some see the Commonwealth s use of
SPPs, in areas traditionally the preserve of the states, as a key
problem in Australian federalism:
Most complaints about the operation of the federal
system concerning duplication, buck-passing, excessive
administrative burdens, lack of accountability and lack of
coordination can be traced back to the use of specific purpose
payments (SPPs) by the Commonwealth Government.[3]
One estimate has the fiscal cost of these problems that is, the
higher than necessary costs of government at $9 billion
annually.[4]
Election campaign activity during 2007 by the three major
parties threw into sharp relief just how much the Australian
federal system seems to be undergoing a major change in its nature
due to the rapidly increasing use of SPPs by national parties for
short-term political ends.
This Research Paper describes what functions specific purpose
payments perform, how important they have become, their
consequences for the delivery of services, how they might be
improved, and whether their use might be gradually altering
Australia s federal system in fundamental ways.
The disappearance of internal tariff barriers at the time of
Federation meant that the states lost a major source of revenue.
Section 94 of the Constitution was designed to guarantee the states
financial well-being by empowering the Commonwealth parliament to
provide to the states all surplus Commonwealth revenue. Despite the
apparent security that section 94 provided the states, some
Constitution-writers called for the Commonwealth to have extra
powers in this area. Section 96 was thus included in the new
Constitution, the key words of which stated:
the Parliament may grant financial assistance to
any State on such terms and conditions as the Parliament thinks
fit.
The basic reason for the insertion of these words was the desire
to provide financial security for the states in the early years of
the Commonwealth, as well as a means of helping the poorer states
if they should require financial assistance. With section 94
becoming redundant in the first years after Federation as the
Commonwealth found ways of ensuring that no surplus existed, the
Commonwealth began to use section 96 to make annual payments to the
states to assist in the delivery of services to their communities.
Such payments came to be referred to as general-purpose grants, by
which it was understood that the states were free to spend the
money as they saw fit.
A key move by the Commonwealth, however, occurred in 1923 when
the Commonwealth Parliament passed the Main Roads Development Bill
which granted the states money that they could use only on the
development of main roads. This was the Commonwealth s first foray
into the provision of SPPs that were subject to conditionality.
With the failure of a Victorian High Court challenge against the
legislation[5], SPPs
became part of the Commonwealth-state financial relationship
although, for many years, they were a relatively small proportion
of section 96 grants. However, since the Whitlam Government s (1972
75) deliberate decision to use such grants to impose major policy
change on the states, successive Commonwealth governments have
increasingly done the same, as shown in Figure 1.
Figure 1: Specific purpose payments as a proportion of
total grants to the states
Source: Western Australia Department of Treasury and Finance,
Discussion Paper on Commonwealth-State Relations, April
2006, p. 25.
By the start of the 21st century, four of every ten dollars
given by the Commonwealth to the states had conditions attached,
and a large proportion of these grants was being made in policy
areas that were not included in the original constitutional powers
granted to the Commonwealth, such as health and education. Such a
high level of conditionality is a major feature of the Australian
federal model.
Under existing arrangements, SPPs which can be for current or
capital purposes take the forms of:
- payments to the states that supplement state funding of areas
such as public hospitals, government schools and roads. In 2006 07,
such payments accounted for about three-quarters of SPPs by
value
- payments through the states that the states pass on to targeted
recipients such as non-government schools and local
governments.[6] In
2006 07, payments through the states accounted for 20 per cent of
SPPs by value, and
- payments paid directly to local government for services such as
disability, children s and other welfare services, or payments made
under the Roads to Recovery program. These payments account for
about five per cent of SPPs by value.
Most SPPs are subject to conditions which are not legally
binding that the states must meet, and so are called tied
grants.[7] According
to an OECD working paper, such conditionality takes a variety of
forms:
- general policy conditions that may be attached to the grant of
money (e.g. that the states provide free public hospital access for
Medicare patients in return for funding under the Health Care
Agreements)
- expenditure conditions (e.g. SPPs for schools to be spent on
teacher salaries and curriculum development)
- input control requirements, in the forms of maintenance of
effort and matching funding arrangements, where the states are
required to maintain funding levels and/or match Commonwealth
funding in a program area
- performance and financial information reporting by the states,
and
- due recognition conditions, whereby the states are required to
acknowledge publicly the Commonwealth s funding.[8]
By contrast, general purpose ( untied ) section 96 grants are
not subject to conditions. The main component of untied grants is
the revenue from the goods and services tax. The value of other
untied grants is relatively small and includes, for example, the
compensation paid to the states for the revenue they have forgone
since the introduction of the national scheme for the regulation of
companies and securities.
Former ANU economics Professor, Russell Mathews, identified
several reasons the Commonwealth might provide SPP assistance to
the states.[9] First,
there is the presence of what Mathews called spillover effects. A
state may have a very narrow view of a particular program that it
is seeking to undertake, seeing it as relevant to its own
residents, but ignoring the fact that the activity might generate
significant benefits for residents of other States . This can lead
to the allocation of insufficient resources. The Commonwealth may
seek to encourage adequate expenditure by means of a SPP. Some
argue that this is the only legitimate reason for the provision of
tied grants.[10] An
example of such grants is funding for interstate highways.
A second reason for the use of SPPs is a desire to promote
co-operative arrangements between the Commonwealth and individual
states to achieve national standards in particular services, where
no individual State could be expected to effectively deliver
services or to deliver services in accordance with national
objectives . [11] A
well-known, and long-delayed, example was the standardisation of
Australian railway gauges.
Third, SPPs may provide a means of giving additional budget
support to enable the states to meet their expenditure
responsibilities. Such grants may take the form of cost-sharing
arrangements between the Commonwealth and the states. Grants which
assist the states to meet their hospital running costs illustrate
this form of assistance.[12] Typically this is related very much to the states
having an inadequate range of taxes with which to fund their
responsibilities.
Fourth, at times, Commonwealth action may effectively amount to
a Commonwealth takeover of a particular policy area as it seeks to
achieve economies of scale:
A single national government may more efficiently
provide a service than several state governments; for example,
social security administration.[13]
Such takeovers can, of course, also be motivated by the
Commonwealth s desire to impose its own policies in preference to
those of a state or states. Commonwealth activity during 2007 in
regard to the handling of indigenous affairs in the Northern
Territory is a recent example.
One problem associated with SPPs can be the intrusion of
politics; this can affect the delivery of services in unexpected
ways. The Howard Government was one of the two post-war
Commonwealth Governments that have pushed hardest to change basic
features of the federal system. In John Howard and Gough Whitlam we
have seen two Prime Ministers who have not been enamoured with the
Australian federal system and sought to change it.[14] These governments have been
important in pushing the Australian federal model to outcomes that
seem to have more to do with the Commonwealth s determination to
intrude in state matters, than with any state desire for the
introduction of particular policies. A case in point has been the
Commonwealth s funding of school chaplains with the aim of
lessening the role of school counsellors (see Box 1).[15]
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Box 1: School
counsellors
The desire for central control can have unexpected consequences.
Twomey has shown that in the school chaplain issue, the price of
such an appointment is not simply the sum of the grant handed over
by the Commonwealth, for there are also the high levels of
administration that must be dealt with by both the school and the
Commonwealth government that has given the money. The
administrative load includes:
∙ satisfaction of the terms and conditions of the funding
arrangement
∙ insurance requirements
∙ child protection requirements
∙ progress reports and financial acquittals of income and
expenditure by Commonwealth bureaucrats
∙ on-site monitoring by Commonwealth bureaucrats
∙ feed-back interviews, and
∙ examination of the documents kept by the school.
All this is a matter of normal bureaucratic procedure. There is
also a political aspect to the red tape that comes as a consequence
of the conditions involving the recognition and acknowledgement of
the involvement by the Commonwealth. In accordance with the
National School Chaplaincy Program Guidelines , all published
materials relating to the program were required to include a
national coat of arms and an acknowledgment of the fact that
funding has been Commonwealth-sourced. Any school involved in the
program must demonstrate in its progress and final reports that it
has given effective recognition to Australian Government
initiation, ownership and support through the National School
Chaplaincy Program .[16]
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Clearly, the Commonwealth s determination to have an impact on
traditional state and territory areas of responsibility plays a
major part in modern intergovernmental relations. However, this
desire is closely linked with the possession of a huge purse,
combined with a determined use of section 96, that enables the
Commonwealth to buy into any state area it wants to, and in the way
it wants to .[17]
What do SPPs do to the federal system? Some argue that
contemporary tensions in the federal system are due to the
increased importance of SPPs since the Whitlam Government years,
and that this has radically altered the federal system. Garnaut and
Fitzgerald note, for example, that:
In reality, the enlarged role of SPPs since the
1970s has effectively converted some areas of state responsibility
into areas of shared responsibility between the Commonwealth and
the States.[18]
The use of SPPs means that today, a great many functions are
shared between the Commonwealth and the states to a much greater
extent than would have been envisaged by most of Australia s prime
ministers or premiers since Federation. Indeed, when compared with
other federations, Australia has a relatively high and increasing
degree of shared governmental functions .[19] Associate Professor Neil Warren of
the University of New South Wales notes that SPPs can provide
national benefits such as:
- achieving the implementation of national priorities in policy
areas that are not covered in the Constitution and, therefore, are
a state responsibility gun control, for example
- achieving national priorities in the problematic policy
questions that cross state borders national land transport,
salinity and water quality are cases in point
- enabling the Australian nation to comply with its international
obligations in such matters as the protection of world heritage
properties, and
- compensating the states for policies in areas of Commonwealth
constitutional responsibility that adversely impact on State
finances Warren cites the example of the liberalising of access to
Commonwealth pensioner concessions.[20]
It must be noted, however, that sharing responsibilities creates
problems for Australian federalism, including:
the inefficiencies which may emerge as a result,
usually, of a blurring of government responsibilities from cost and
blame-shifting among government levels, wasteful duplication of
effort or under-provision of services, and a lack of effective
policy co-ordination.[21]
The problems of blame-shifting and buck-passing that arise when
responsibilities are shared are illustrated in the case of health.
In this case, there have been accusations of cost-shifting and
arguments over responsibilities.[22] Box 2 illustrates the complicated nature of
health funding and service provision that give rise to such
problems.
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Box 2:
Division of government responsibilities in health care
The main features of the current funding arrangements are as
follows:
under the Medicare system, the Commonwealth provides access to
medical, pharmaceutical and hospital services for all Australians
through: i) The Medicare Benefits Scheme rebates
for listed medical services ii) the Pharmaceutical
Benefits Scheme of subsidies for listed prescription drugs;
and iii) the Australian Health Care Agreements
(where funding is jointly shared with the states), ensuring access
to free public hospital services based on clinical need. Moreover,
the Commonwealth provides a premium rebate of between 30 to 40% for
private health insurance holders
the largest source of funds for residential and aged care comes
from the Commonwealth, which also has responsibility for regulating
residential aged care
the states are responsible for most acute and psychiatric
hospital services. They also provide and fund the majority of
community health care services and public health care activities,
including school dental services, child and maternal health care
services, disability support, disease control and various
inspection functions
local governments may also provide residential and community
old-age care services, home care and personal preventive services,
such as pre-school immunisation clinics
private providers deliver a significant proportion of primary,
specialist and allied heath care through general practitioners,
specialists, pharmacists, physiotherapists and dentists. They are
funded by a combination of user charges, Medicare and private
health insurance.[23]
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Garnaut and Fitzgerald have noted
that the confused state of contemporary Australian federalism has
been compounded by the considerable level of acceptance by the
broad Australian community of the sharing of responsibilities.
Garnaut and Fitzgerald believe that it is not possible to solve the
problems of SPPs simply by abolishing them .[24] Arguably, public acceptance flows
from a general satisfaction with how SPP money is spent. This was
illustrated graphically by the apparently high level of local
popular support in Devonport when the Commonwealth announced its
takeover of the Mersey Hospital during the 2007 federal election
campaign.
Not surprisingly, the level of funding of SPPs is an on-going
issue between the Commonwealth and the states. The
Intergovernmental Agreement on the Reform of Commonwealth State
Financial Relations has governed Commonwealth-state financial
relations since the introduction of the goods and services tax
(GST). Paragraph 5(v) of the Agreement states:
The Commonwealth will continue to provide Specific
Purpose payments (SPPs) to the States and Territories and has no
intention of cutting aggregate SPPs as part of the reform process
set out in this Agreement, consistent with the objective of the
State and Territory Governments being financially better off under
the new arrangements.
The reason for this provision is that the states were concerned
that the Commonwealth would reduce funding of SPPs following the
introduction of the GST and the Commonwealth s undertaking to
provide all revenue from that tax to the states. But from a state
perspective, the provision is weak because it cannot ensure that
the Commonwealth will not reduce the level of SPPs. Further, the
wording of the provision is vague. Cutting , for example, is not
defined. Ultimately the provision is meaningless because
constitutionally, the Commonwealth cannot bind a future government.
Hence any commitment in the GST legislation could be repealed by
any later Act appropriating funds for SPPs, if the amount were cut.
While politically it might have been important for the states to
obtain some kind of commitment from the Commonwealth, because the
provision is not binding on the Commonwealth, whether its terms are
weak or strong is ultimately meaningless.
The states have interpreted the provision to mean that the level
of SPPs should be measured in real per capita terms using the
consumer price index to remove the effect of inflation. Thus
defined, the Commonwealth has, to date, met this criterion.[25]
It is therefore clear that the Commonwealth s ability to involve
itself in the states provision of services ultimately rests on its
financial power. The consolidation of financial power in the
Commonwealth particularly the power to levy taxes is a key feature
of Australian federalism.[26] The National Commission of Audit observed:
In the Australian context the reality is that the
roles and responsibilities of the Commonwealth and States cannot be
easily separated. This is largely because the Commonwealth has
control of most of the revenue available to governments and because
the political opportunities for expanding Commonwealth involvement
flow directly from this.[27]
The difference between the relative revenue raising capabilities
and spending responsibilities of the Commonwealth compared with the
states is called vertical fiscal imbalance :
Vertical fiscal imbalance refers to situations
where the revenue raising powers of one level of government are
insufficient to meet their expenditure responsibilities and, for
the other level, excessive, thus requiring a system of
intergovernmental transfers or grants to correct the imbalance.
[28]
The level of vertical fiscal imbalance in Australia is among the
highest of any federation.[29] This is reflected in the fact that the Commonwealth
collects around 80 per cent of taxation revenue but currently is
responsible for around 54 percent of own-purpose spending.[30] In contrast, the
states collect about 16 per cent of taxation revenue but account
for 40 per cent of own-purpose outlays.[31]
Critics argue that a high degree of vertical fiscal imbalance is
antithetical to an effective federal system. Former senior Treasury
official, Mr Robert Carling, for example, argues:
The point that requires emphasis here is that
fiscal autonomy of sub-national governments is a sine qua
non of an effective federal structure. A high degree of
financial dependency on central government stifles federalism. The
dependency culture is the antithesis of financial responsibility
and accountability. Expenditure responsibility needs to be matched
by revenue responsibility if sensible public choices are to be
made. Vertical fiscal imbalance breaks the link between expenditure
and revenue raising decisions. It raises a confusion of
accountability in the minds of voters and a tendency for the
central government s influence on sub-national expenditure choices
to grow, resulting in overlapping responsibilities. It works
against efficiency in public expenditure. And it curtails the
flexibility of individual states to carry out their
responsibilities differently from other states and to cater to
their own residents different preferences.[32]
Some argue that expenditure assignment should be matched by an
ability to raise taxes to fund those expenditures:
where the subsidiarity principle supports the
allocation of a function to a lower level of government both the
necessary expenditure and taxing powers should also be delegated to
that level of government.[33]
Much of the criticism of the Commonwealth s role in SPP
provision pertains to conditionality, that is, the practice whereby
the Commonwealth requires the states to meet certain undertakings
as a condition of the states receiving grants. While accepting that
there are valid reasons for conditionality, some argue the
Commonwealth has taken conditionality too far:
There is also a very limited legitimate role for
tied grants where the recipient (lower) levels of government left
to their own devices would deliver a suboptimal national level of
service provision or there is an agreed national policy objective
that can only be achieved through coordinated sub-national service
delivery. However, tied grants in Australia have gone well beyond
this narrow scope.[34]
The states have argued that conditionality has negative
consequences for them. For example, it has been argued that
conditions are often poorly designed, and can adversely affect the
states ability to provide services by requiring the states to
contribute additional resources without giving thought to what the
states already do.[35]
A proposed solution to problems of conditionality is to replace
SPPs with untied grants:
Consideration [should] be given to replacing major
SPPs ... with unconditional grants (possibly as Identified Funding
Grants) to provide greater flexibility, lower risk for States and
reduce duplication and administrative costs.[36]
However, from the Commonwealth s perspective, replacing SPPs
with untied grants would mean that the Commonwealth would have to
abandon its reasons for conditionality and lose an important
control mechanism over the states.
As noted, conditionality sometimes takes the form of so-called
input controls such as the states having to match Commonwealth
funding. Short of replacing SPPs with untied grants, another option
that has been proposed is for conditionality to focus on outcomes
and results.[37]
Problems input controls generate include:
A focus on input controls does not place clients
first, particularly for SPPs providing services directly to
individuals and groups within the community.
A focus on inputs distracts attention from meeting
SPP objectives and does not provide any indication of what is being
achieved via the service provision.
Input controls limit incentives for service
providers to improve their efficiency, and prevent the redirection
of efficiency savings into other areas of expenditure.
Input controls do not allow service providers the
flexibility to move funds between program elements within SPPs to
ensure that overall objectives are achieved. [38]
Not surprisingly, the states have advocated replacing input
controls with outcomes measures.[39]
Benefits that might derive from funding SPPs on an outcomes
basis rather than an input basis:
include an improved use of state resources,
through granting states greater flexibility on the allocation of
federal funds, and incentives to service providers to raise
efficiency. Moreover, a focus on outcomes could enhance
transparency and accountability.[40]
This assumes, however, that performance in service delivery can
be measured. A challenge is to develop outputs and outcomes and a
reporting framework for each SPP:
This is an ambitious task as outcome/output
measures of service delivery are difficult to define, measure and
enforce in a robust way. [41]
The experience of developing outcomes and reporting frameworks
for Commonwealth agencies underscores these difficulties.[42] A review prepared for
the OECD of results-oriented budget reforms in Australia and the
United Kingdom concluded:
When the effects of the results-oriented financial
management reforms are examined, it can be stated that the reforms
are not a panacea which will solve all financial management
problems, but do generate positive as well as negative
effects.[43]
The Commonwealth has moved towards placing a greater emphasis on
results. As SPPs have been renegotiated, the Commonwealth has
sought to clarify objectives, while requiring the states to provide
agreed financial information and performance indicators. An example
is the requirement that state governments meet a number of new
performance conditions in order to obtain federal funding for
education over the period 2005 08.[44]
However, a reason the Commonwealth imposes input controls is to
prevent the states from shifting costs on to the
Commonwealth.[45]
According to some commentators, the Commonwealth s emphasis on
inputs thus seems likely to continue:
While the new approach represents a step towards
an outcome accountability framework, funding for SPPs will continue
to be input-based as, in the Commonwealth s view, input controls
remain the best way to protect the federal government against
financial risks associated with service delivery, which is the
responsibility of the states. Input controls are further seen by
the Commonwealth as a means of ensuring that state sub-national
governments do not shift responsibility for service provision over
time to the central level.[46]
The need to define clearly the respective roles and
responsibilities of the Commonwealth and the states has assumed
additional significance following the endorsement of the National Reform
Agenda by the Council of Australian Governments in February
2006. The Agenda encompasses human capital, competition and
regulatory reform issues and thus entails considerable joint
responsibility. For example, with respect to provision of economic
infrastructure which is mainly a state responsibility processes for
its planning, funding and regulation vary and overlap
considerably.[47]
A theme of recent reports on problems in Australia s federal
system is that the magnitude of such problems would be reduced if
the roles and responsibilities of each tier of government were
clarified. For example, an OECD report on fiscal relations across
the levels of government in Australia concluded:
The current pattern of widespread shared
government involvement increases the necessity to clearly define
roles and responsibilities [48]
Some argue that this should entail a better allocation of
financial resources between the Commonwealth and the states, with
each managing and funding its own responsibilities.[49]
This raises the question of the basis on which functions could
be allocated to the different tiers of government. An attempt to
reallocate functions is beyond the scope of this paper. Suffice it
to say that there is no best model.[50] The subsidiarity principle may,
however, provide some guidance. This principle holds that the
central government should limit its activities to those which lower
levels of government cannot perform effectively, that is,
responsibility should rest, where possible, with the lowest level
of government.[51]
With respect to the appropriate role for the Commonwealth, the ALP
Advisory Group on Federal-State reform has argued that there are
two fundamental principles which must be balanced: the national
interest principle, and the subsidiarity principle:
The Commonwealth should be engaged when there are
genuine national interests at stake, but only to that extent.
Otherwise the subsidiarity principle should prevail
But as a general principle the Commonwealth should
only become involved in those issues traditionally managed by the
States where Commonwealth-State inter-action is necessary to
enhance efficiency, equity and/or access, or the basic rights and
heritage.[52]
The subsidiarity principle would suggest, for example, that the
Commonwealth should be responsible for defence, state governments
for the delivery of public transport and public hospital services,
and local governments for household garbage collection.
Carling argues that applying the subsidiarity principle would
not result in a narrowing of state responsibilities and would lead
to a reduction in central government interference in state service
delivery through the conditionality of tied grants.[53]
It has been argued that assigning complete responsibility for a
function to only one tier of government would eliminate some of the
problems associated with SPPs.[54] Warren has noted that there is an international
trend in this direction. For example, in the case of health,
responsibility is largely confined to a single level of government,
whether national or subnational.[55]
However, national interest considerations mean that
responsibility for some functions should be shared:
it will never be possible to completely delineate
the respective responsibilities of the Commonwealth and the States.
Most importantly, the extent of inter-relationships between
different policies (eg education and economic performance) means
that whole-of-government solutions that necessarily involve both
the Commonwealth and the States are increasingly called
for.[56]
Twomey and Withers have argued that where responsibilities are
shared, an approach needs to be taken to reallocation not in
relation to responsibilities but in relation to allocating roles in
managing shared responsibilities.[57]
It is important to distinguish between responsibility for
funding and responsibility for service provision. Under SPPs, the
states are responsible for service provision. Funding, on the other
hand, is sometimes shared between the Commonwealth and the states
and sometimes not. Reform proposals envisage different combinations
of responsibility for service delivery and funding. For example, in
the case of health care where funding is shared, it has been
suggested that:
Either Canberra or the states can take full
responsibility for funding health care, or the state and federal
governments can pool their health funds, as proposed by the
Victorian government.
The options are not as different as they may sound
If the Australian government became the sole public funder of
health care, the states could still play a major role in the
provision of health services. That is, the federal government in
effect would buy acute health-care services from the states and the
private sector.[58]
Proposals that the states assume additional responsibility for
funding services are meaningless unless they are also accompanied
by an increase in the states ability to raise revenue. Assuming
that is desirable to reduce vertical fiscal imbalance, a question
that arises is: what additional revenue-raising powers should the
states have?[59]
Given that the states are constitutionally precluded from imposing
a broadly-based consumption tax, an option is for the states to
impose a surcharge on Commonwealth income tax.[60] This would, however, probably
require the Commonwealth to make room for the states by lowering
personal income tax rates. In 1978, the Fraser Government
legislated to allow the states to impose an income tax surcharge to
allow the states to broaden their tax base. The initiative failed
partly because the Commonwealth did not cut tax rates to make room
for surcharges.[61]
State income tax surcharges would have advantages and
disadvantages. An advantage is that the cost of administration
would not increase greatly if the base were unchanged and identical
across the states, and the Commonwealth administered and collected
the tax.[62]
Another possible advantage is that competition among the states
would be likely to limit any increase in surcharge rates. A state
surcharge could, however, face considerable barriers because it
would entail a fundamental change to Commonwealth state financial
arrangements. That would require the agreement of all jurisdictions
which may not be forthcoming.[63]
Proposals to reduce problems associated with shared
responsibilities include pooling and broadbanding. Pooling is where
funding from both the Commonwealth and the state for related
programs for example, health is placed in a pool and not earmarked
for specific programs. Broadbanding is the grouping together of
SPPs that are directed toward broad outcomes for particular groups.
The National Commission of Audit, for example, proposed:
For programs where there is joint
Commonwealth/State responsibility, funding should go to pools that
extend to all related programs, rather than being earmarked to
specific programs. Again, this allows the States some allocative
discretion within funding pools.[64]
With respect to broadbanding, the National Commission of Audit
advocated:
Where specific purpose payments (SPPs) are
considered necessary, the Commonwealth should focus on specifying
policy objectives and establishing improved accountability
frameworks and give the States greater freedom in designing program
delivery. This would facilitate a reduction in the number of SPPs
by grouping together or 'broadbanding' SPPs which are directed at
broad outcomes for particular groups. This would reduce
administrative duplication, overlap and inefficiency.[65]
The states have also advocated broadbanding to reduce
duplication and administration costs.[66]
An example of broadbanding is that proposed by Garnaut and
Fitzgerald:
The centrepiece of the proposed reform is a new
cooperative model for SPPs in the key merit areas of health and
aged care, and education and training. SPPs in these areas would be
broad-banded into two national programs in which the States have
clear authority over service delivery, without micromanagement and
input controls. A third national program would be established in
indigenous community development. The Commonwealth would have
primary control over services provided under this program but would
work in cooperation with the States. Opportunities would be sought
for rationalising responsibility for functions within or closely
related to these three areas.[67]
Advantages of broadbanding include clearer responsibility for
administration, reduced administrative costs, and increased
flexibility as to how funds are spent.[68] However, from the Commonwealth s
perspective, broadbanding would entail a loss of control over how
the states spend grants.[69]
Australia s federal system has changed fundamentally since 1923
when SPPs were first made available to help fund the provision of
roads. Power over spending and policy-making has become
increasingly centralised in the Commonwealth government, a
consequence of the consolidation of financial power in the
Commonwealth s hands. SPPs have been a major mechanism for
centralisation by allowing the Commonwealth to become involved in
areas well beyond those stipulated in the Constitution to the point
where the Commonwealth shares many major functions with the
states.
As noted, a large number of complaints about the federal system
revolve around the Commonwealth s use of SPPs, and this paper has
examined ways in which their operation could be improved. But major
change to arrangements for SPPs does not seem in prospect.
Consequently, the problems associated with SPPs blurring of
responsibility, cost and blame-shifting among government levels,
wasteful duplication of effort and so on are likely to remain.
Several factors are relevant.
First, Commonwealth involvement in the provision of services
will continue while the states lack the own-source revenue to fund
those services, and no moves are afoot to give the states greater
taxation powers because this would entail fundamental and difficult
change. Second, there is an element of political convenience in
existing arrangements in that the Commonwealth and the states can
blame each other when problems arise. One level of government
assuming full responsibility for funding a particular function
would mean that it would be unable to blame the other when things
went wrong. For their part, the states would be likely to be
reluctant to assume increased taxing powers because they would have
to bear the opprobrium of having to impose taxes.
The Commonwealth s involvement through SPPs in ever more areas
has led to the perception that the Commonwealth is primarily
responsible for an activity even though responsibility rests
primarily with the other tiers of government. An example is road
funding where calls for additional funding are often directed to
the Commonwealth even though it accounts for only about 20 per cent
road-related expenditure (the states and local government account
for about 40 per cent each).[70] Policies such the Howard Government s take over
of the operation of the Mersey Hospital and the Labor Party s
proposals to take over the operation of public hospitals in certain
circumstances can only reinforce such perceptions.
The Rudd Government has promised a new era in Commonwealth state
relations. At the December 2007 meeting of the
Council of Australian Governments (COAG), it was agreed to that the
focus would be more on outputs and outcomes. The Commonwealth also
undertook to provide payments to the states in return for their
adopting reforms including reform of SPPs.
Broadbanding: the grouping together of SPPs
that are directed toward broad outcomes for particular groups.
Capital purpose grants: payments made by the
Commonwealth to the states for investment purposes such as
constructing roads.
Conditionality: the practice whereby the
Commonwealth imposes conditions with which the states must comply
in order to receive funding.
Cost-shifting: the practice whereby a tier of
government attempts to move the cost of funding a service to
another tier of government. Cost-shifting is most marked when
functions are shared.
Current purpose grants: payments made by the
Commonwealth to the state for non-capital purposes, for example,
legal aid.
Economic infrastructure: refers to physical
infrastructure such as roads, airports and power stations. Social
infrastructure includes schools, hospitals and libraries.
General purpose grants: grants the Commonwealth
makes to the states (and local government) which the recipients can
spend as they wish. The main form of such grants is the goods and
services tax revenue the Commonwealth provides to the states.
Input controls: requirements that the
Commonwealth places on grants often in the form of requiring the
states to match Commonwealth funding dollar for dollar or to
undertake certain activities.
Outputs: the production of goods and services
that contribute to outcomes.
Pooling: where funding from both the
Commonwealth and the state for related programs for example, health
is placed in a pool and is not earmarked for specific programs.
Specific purpose payments: grants the
Commonwealth makes to the states under section 96 of the
Constitution on whatever conditions the Commonwealth government
thinks fit.
Subsidiarity: the principle which holds that
responsibility for a particular function should, where practicable,
reside with the lowest level of government.
Tied grants: another name for specific purpose
payments. Grants are called tied because they are subject to
conditions the Commonwealth imposes.
Vertical fiscal imbalance: the imbalance
between the expenditure responsibilities of each tier of government
and its own-source revenue. Australia is characterised by a high
degree of fiscal imbalance with the Commonwealth raising about 80
per cent of taxation revenue but currently being responsible for
around 54 per cent of own-purpose spending. In contrast, the states
collect about 16 per cent of taxation revenue but account for about
40 per cent of own-purpose spending.
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