Brass In Pocket


As the COAG meeting enters its second day of arm-twisting negotiation over health reform, a new sticking point has emerged.

It’s not about the way hospitals are run or the clinical challenges facing Australian health care. It’s about the money. Specifically, it’s about the GST.

Recall the deal being offered to the states by Kevin Rudd is for a kind of swap. Canberra will take on 60 per cent of the "efficient" funding (a term that itself allows for some wriggle room) of public hospitals, plus 100 per cent of the funding of primary health care — in return for clawing back 30 per cent of the states’ GST revenue. In addition, Rudd has offered a number of sweeteners over the past fortnight for things like emergency departments, GP training places and aged care beds. Late yesterday, even more money for the states was announced.

But the GST is the sticking point. This shouldn’t surprise us, because the GST is one of the main funding sources for state governments. That, indeed, was one of the key concepts behind Peter Costello’s "new tax system": giving the states a growth tax that would provide a sustainable funding base for state service delivery.

As Western Australian Premier Colin Barnett told the ABC, "After all, the GST was meant to be a permanent deal put in place from 2000 and under that arrangement, the states gave up a number of taxes so the GST is state revenue."

Strictly speaking, Barnett is correct. The states were required to give up a range of taxes and duties as part of the GST agreement.

But so what? In Australia’s hopelessly muddled federal system, money tends to flow downhill from Canberra to the states and then eventually on down to local government. The GST is actually a federal tax: it’s collected by the ATO and then given back to the states by Canberra. And the states still have a number of other taxes that they collect themselves, including payroll tax, which has the potential to raise much more revenue if small businesses were included.

It’s hard to argue that the states deserve the GST in perpetuity simply because they signed an agreement with Peter Costello. After all, the states used to levy their own income taxes, but no one now believes Australia should return to a system of seven or eight different income tax jurisdictions. Recent history has run the other way. There has been an obvious trend towards a more centralised Australian polity in recent decades, with the High Court consistently backing Canberra’s jurisdiction over the states.

But the problem of state revenues and expenditure is a perennial one in the Australian federation. The economists at Treasury call it the "vertical fiscal imbalance" — which is a complicated way of saying that while Canberra levies most of the tax, the states provide most of the public services. Hence, large transfers from the Commonwealth are required for the states to pay for roads, schools, hospitals and police. And this is why the states are always begging for money from Canberra.

Health is simply the most extreme example of the vertical fiscal imbalance. As Rudd and Roxon have been pointing out at every opportunity, on current trends health expenditure will eventually gobble up nearly all of the states’ spending in 30 years. Long before that happens, a major crisis will develop in our schools and hospitals.

As I argued last week, in the long run it makes sense for the states to accept Rudd’s health funding offer. They will be more than compensated for lost GST revenue in the event of a federal takeover of one of their biggest cost burdens.

But the states are terrified of a cash grab from Canberra and particularly of the precedent of giving up GST revenue. Many state bureaucracies fear that they will become a mere branch office of federal departments in Canberra. Rudd is therefore hoping that greed will trump fear, as he piles yet more cash on the table to win over wavering state premiers. $1.5 billion was enough to convert Kristina Keneally this morning. Eventually, I expect John Brumby and Colin Barnett will follow.

The real problem for the states is that they are increasingly unpopular. The polls this week show voters firmly in favour of a Commonwealth takeover of health. Healthcare reform has unleashed a new wave of state-bashing, and "abolish the states!" sentiments can regularly be heard everywhere from the front room of your local pub to the opinion pages of the newspapers and the ABC.

Australia is admittedly a vast country, but our population is roughly the same size as just one of the larger US states. Do we need three levels of government for a nation of 21 million? The UK has 60 million people and gets by with only a national and local governments; France is similarly centralised. There are some arguments that diversity among the states allows for competition in things like innovative regulatory reforms and different payroll tax rates. But there are just as many arguments in favour of doing away with seven, eight or even nine separate sets of laws for everything from liquor licensing to the storage of dangerous chemicals.

No one seriously believes the states will be abolished any time soon. But a further drift of power and money to Canberra seems inevitable.

Ben Eltham is New Matilda's National Affairs Correspondent.