Table of Contents
As outlined in previous chapters of this book, the current state of evolution of Australia’s system of federation has been the subject of considerable criticism in recent years. This chapter narrows in on those criticisms that focus on economic factors, including the assignment of expenditure responsibilities and revenue raising powers between the federal, state and local levels. It also recognises the emergence of new regional governance and service delivery arrangements and speculates on the capacity of these arrangements to act as an alternative to more substantive change in other elements of the system. The purpose of this chapter is not to provide answers as to whether or not change to current federal structures and/or financial arrangements will generate net economic benefits. The aim here is to point to some key directions in which debates surrounding federalism and regionalism need to move, to permit the development of a more appropriate analytical framework for generating such answers.
In the next section, various calls for change based on economic rationales are documented, and the case is made for a shift in focus to the functions to be carried out by the various levels of government in order to address these concerns. In the third section of the chapter, the relevant public finance literature is reviewed for insights into potential reform principles. In section 4, attention shifts to the literature on the economics of local government amalgamation, since reform agendas that have been popularly espoused in the past have either explicitly or implicitly involved a reduction in the number of units at this level. In section 5, previous attempts at identifying the net economic benefits to be derived from various proposed reforms are evaluated and suggestions made as to how their methodology could be improved. The chapter concludes with directions that should be pursued for the sound economic evaluation of potential change agendas, based on a more detailed initial set of representative change proposals.
Recent calls for change in federal-state arrangements, based on economic rationales, include the following (emphasis mine):
Australia’s federation needs new life breathed into it for the benefit of the community and business. In just about every major policy area our approach to intergovernmental relations presents barriers and obstacles to getting sensible outcomes … The time has come to take a more holistic approach to our system of intergovernmental relations so that our federation works for us rather than against us (Australian Industry Group 2005).
Where two levels of government are responsible for different parts of the same system it is difficult or impossible to achieve coordination in policy and funding … Lack of coordination gives rise to significant overlaps and gaps … with too much funding allocated to some types of service and not enough to others … poor coordination of services in areas of shared responsibility creates major problems for customers, who become confused and frustrated in their efforts to deal with a multi-layered system that shuttles them back and forth (National Commission of Audit 1998).
Australia needs a summit on federalism … Reform is overdue … Instead of each tier exercising the powers that are most appropriate to it, we have governments prone to administrative duplication and buck passing. We also have a system where states cannot raise the money needed to provide the most basic services. Instead they rely on Commonwealth grants, an economic and political dependency that is neither healthy nor consistent with the best delivery of services to the community (Williams 2006).
Through most of our past quarter century or more of improving government performance, we have had endless buck-passing between the two most important levels of government – in education and training, health, infrastructure, water management and other important issues. The States depend on the Federal Government for funding, Canberra relies on the States for implementation – and each relies on the other for deflecting accountability … Only by finally fixing federal state-relations will we truly become the world leaders in public policy and economic development and be able to build on our quality of life (Devenson 2006).
Common themes that emerge are those of overlap and duplication across various functional areas and the need for greater clarification of responsibilities, as well as the need for thought to be give to the reassignment of some areas of responsibility from federal to state governments and vice versa.
Recent calls for change in federal-state-local arrangements have been even stronger, recognising the inadequate level of revenue flowing through to local governments relative to the growing importance and array of functions for which they have become responsible. These criticisms are demonstrated elsewhere in this book (see Brown, Head, Bell, and Wiltshire this volume). Other such calls include:
Getting better results out of areas where Federal-State activities intersect is vital. Inconsistencies, duplication and additional costs associated with poorly coordinated or conflicting State-Federal (and local) government policies and regulations affect virtually every area … (Access Economics 2004).
Cost shifting is, ultimately, a symptom of what has become dysfunctional governance and funding arrangements. It is time to combine the best efforts of governments and choose a better way. There have been many demands for the three spheres of government to work more closely and eliminate duplication and wasted resources. In a shrinking and increasingly competitive world, the luxury of three spheres of government, with often different agendas, in a country of nearly 20 million people is straining our resources (House of Representatives Standing Committee on Economics, Finance and Administration 2003).
The problem of over-government has long been identified, and the solution offered is the same: the abolition of the States … they no longer manage their affairs in their own way … most of the power to do that has already leached back to the Commonwealth through its control of the purse strings…its not going to flow back … yet though states’ rights are outdated, the States are entrenched facts … reformers should seek to economise elsewhere – in the third tier, local government … NSW comprises an intricate patchwork of tiny fiefdoms. Nearly 40 councils run services for one city – Sydney. Though some share services, the unnecessary duplication is a drain on resources … The amalgamation of local councils should be the first step towards a two-tier system of government in Australia (Sydney Morning Herald 2006).
Recognition that important areas such as natural resource management and economic development may be better dealt with at a level that crosses current local (and, in some cases, state) boundaries has led to the emergence of an ever-expanding array of regional bodies. Such bodies could be argued to comprise a fourth (fifth, sixth, etc.) tier within the federal system. Some writers point to these bodies as a vehicle via which existing formal levels of government can cooperate and thereby eliminate the need for more radical reform of the current federal system (Business Council of Australia 2006; Dollery, Johnson et al 2005; Dollery, Marshall et al 2005; Marshall et al 2003). However the costs associated with these bodies have not been fully documented and neither have the benefits of their achievements relative to their costs. More substantively there has emerged a set of concerns about these regional arrangements that deserve further serious investigation before they could be seen as a viable way forward. For example:
Beer et al (2003) highlight empirical research pointing to regional bodies afflicted by inadequate organisational size, low (usually non-existent) recurrent funding, ‘third world’-style birth and death rates, poorly directed central funds and duplication and coordination problems between and within governments;
the Regional Business Development Panel (2003) reported:
We were struck by the sheer number of (organisations) operating at a regional level with the objective of supporting regional and business development … There is overlap, duplication and at times competition between the layers of government … There are too many bodies trying to achieve common outcomes for the same area. As a result public money is spread too thinly and resource-starved organisations spend considerable time chasing additional funding… One region we visited has around 20 different development agencies, employing around 40 people. Five are Commonwealth bodies, five are state organisations, local government runs seven and business groups manage the rest …
and the Regional Implementation Working Group (2005) recommended with respect to natural resource management (NRM) that:
… the Australian and State/Territory governments clarify and articulate their respective roles and responsibilities in regard to the provision of support for regional NRM bodies … and determine the base level of core funding required to maintain an appropriate corporate governance framework to enable a regional body to meet conformance, performance and administrative requirements …
The themes that emerge in this area suggest that hopeful initiatives at non-traditional scales of policy and governance have tended to be unsupported by legal, administrative, financial, relevant professional expertise or other capacity. They also tend to rely excessively on the time of volunteers and to be short-lived when they fail to live up to expectations or when policy fashions change.
With such widespread dissatisfaction with various elements of the current system, it is not surprising that recent public opinion surveys by Brown and his colleagues indicate that the majority of residents in Queensland (Brown 2002a, b) and New South Wales (Brown et al 2006; Gray and Brown this volume) prefer a scenario different than the current system. In particular, a two tier system based on regional governments is the single most preferred option in both cases. Unfortunately, as yet the pilot research in this field has not provided details of the various options for change presented to respondents prior to asking them to rate these options; rather, broad descriptors were provided such as ‘same system as today’, ‘three-tiered, more states’, ‘two-tiered, regional governments’, and ‘four-tiered’.
This is not surprising since a scan of the relevant literature reveals multiple reform agendas, albeit with scant details on the specifics (Jaensch 2003). There are calls for the abolition of states and a move to a two tier system of government, but no consensus on what replaces them at the sub-national level (e.g. how many regional governments, with what boundaries, which current state government expenditure responsibilities and taxing powers would divert to the Commonwealth and which would be assigned to the new regional governments, and the system to be put in place to ensure horizontal and vertical fiscal equalisation). Similarly, there are calls for new states, but no consensus on how many or where they would be located. There are calls for local government amalgamations, but no consensus on which ones or on what criteria they might be selected. There are calls for a new or reformed set of regional institutions, but not what powers, functions, resources or reporting mechanisms they would be given from whom.
In order to move the debate on from speculation by a broad range of well-meaning reformers, consensus needs to be developed around a concrete reform agenda (or small set of such agendas). More importantly, however, in order for such agendas to be developed in a way that net costs or savings from change can be estimated, details are required with respect to how the functions of government would be distributed in any one of these agendas. That is, to be able to be costed, any given scenario needs to specify what functions (or components of functions):
currently exclusively federal, state or local would be better assigned to other level(s);
currently overlapping in terms of responsibility would be better allocated to a single level exclusively;
necessarily overlapping but in need of better co-ordination between levels to avoid duplication; and
fall between gaps with our current levels of government leading to the need for formation of regional bodies.
A substantial amount of relevant data is available in the Australian context at a functional level of disaggregation that would provide insights into an analysis aimed at providing such details – for example, from government finance statistics and from State and Federal Government Grants Commission reports. It is important to recognise, however, that when advocating revised assignment of expenditure responsibilities between levels of government, it is necessary to also address the machinery for shifting taxation and other forms of revenue sources necessary to carry out these responsibilities.