Budget Review 2014–15 Index

Brenton Holmes

Federalism and the practice of inter-governmental relations are central elements of Australian public administration—generally characterised by consultation and flexibility.[1] In pursuit of a smaller national government, the 2014–15 Budget reveals a shift in the way Commonwealth-State relations have typically been conducted. The Prime Minister wants ‘to ensure that, as far as possible, the states are sovereign in their own sphere’.[2] A White Paper to that end will be settled by the end of 2015.[3] Guided in part by the National Commission of Audit, the Government seeks to re-establish the Federation on a more decentralised basis, rekindling interstate competition—a notion designated ‘competitive federalism’. The states could, for example, compete with each other on taxes as well as services and citizens could in theory relocate to states whose arrangements suited them.

There is an existing COAG Intergovernmental Agreement on Federal Financial Relations (IGAFFR) which implements a framework for financial relations, collaboration on policy, service delivery and economic and social reforms. State treasuries are responsible for distributing the Commonwealth funding. The Agreement is meant to operate indefinitely unless COAG agrees to revoke it.[4]

Critics of competitive federalism say it ‘runs directly counter to decisions by successive Commonwealth governments … to centralise in Canberra decisions about tax, health, schools, roads and industrial relations’.[5] The Prime Minister has said the Government would be looking to how things could be made better, but ‘we’re not going to turn the world on its head here’; it is a matter of ‘sensible incremental change, where it can ensure that services are delivered better in an accountable and transparent way’.[6]

2014–15 Budget: impacts on COAG relations

State premiers insist that budget savings measures and changes to the dynamics of federalism will have significant repercussions.[7] For example, the Commonwealth’s $80bn savings over ten years to 2024–25 in healthcare and education will be keenly felt (see School education and Health funding agreements) especially as many National Agreements currently in place will soon expire.[8] The Government will save $1.2 million in 2013–14 by withdrawing uncommitted Local Government Reform funds and freezing future grants, costing councils $925 million by 2018.[9]

The range of savings measures has angered State premiers, setting the scene for renewed debate about raising the GST.[10] There are claims that the states are being bullied into raising the GST.[11] But the Prime Minister will not re-convene COAG, and makes ‘no apologies for wanting the states to be grown-up, adult governments that take responsibility for the programs that are theirs’.[12] NSW Premier Mike Baird arranged a premiers-only meeting to consider the implications of the Budget for the states and the future of federalism.[13]

The independent, jointly-funded COAG Reform Council ceases on 1 July 2014, notwithstanding its robust annual reports and comparative analytical work that resulted in ‘significant progress’.[14] The Council critically assessed and reported on the achievements, outcomes and benchmarks specified in National Agreements, and made relevant reward payments to the states under National Partnerships.[15]

Asset sales, privatisation and fiscal decentralisation

The Government has budgeted $5 million over five years to encourage the states to recycle assets (see Infrastructure growth package).[16] Investors are pleased, but the states have been warned to monitor carefully the risks of ‘suboptimal privatisation decisions’.[17] One public administration expert has accused the Government of making ‘simplistic propositions’ about public and private sector management and of failing to recognise ‘the impact that changes to the regulatory regime [have] on market behaviour and [the] eventual success’ of the privatised entity.[18] While the Productivity Commission has tended to endorse privatisation—for example in the energy sector—other economists have ventured criticisms.[19] In short, results are mixed, and parliaments have ‘failed to demand a full analysis of the pros and cons of privatisation’.[20]

One of the common arguments advanced in favour of fiscal decentralisation is that ‘the preferences and the needs of citizens … are better known to the local government officials than …the central government… This argument is assumed to be strong enough to neutralize the advantages [of] economies of scale’.[21] But the relationship between decentralisation and the assignment of taxes and expenditure is crucial. It means being very clear about what are the responsibilities of the national and of state governments:

Like contracts, these decisions are never, and can never be, precise and final. …  The problem is that it is difficult to assign precise expenditure responsibilities... [The] experience gained in a large number of countries … suggests caution.[22]

What happens if each state pursues its own objectives, not just through taxes and public spending, but also through regulations? Some will be ‘necessary and useful; many will be much less so or even damaging’.[23] It has been suggested that ‘Business loves competitive federalism—up to a point … But they don’t love the multiplicity of regulatory environments that competitive federalism creates’.[24]

For copyright reasons some linked items are only available to Members of Parliament.

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.