Abbott releases federalism paper after Labor ramps up scare attack

Allowing states to raise their own income tax and changing the way the GST is carved up are among options put in the government’s discussion paper on reform of Australia’s federation.

Tony Abbott released the paper on Tuesday, as more drip leaks brought the prospect of continuing Labor scare campaigns over a range of policy areas.

The paper canvasses options for change in health, education, housing and homelessness, and federation finances. In the various areas, the options range across the spectrum – from giving maximum power to the states to substantially boosting the Commonwealth’s role, with intermediate positions. Labor mounted its attacks by highlighting the most extreme ones.

In the financing area, the paper stresses that reforms would need to be closely related to tax reform, on which a white paper is also being prepared.

While a disparity between revenue raising and expenditure responsibilities across levels of government is a characteristic of most federations, Australia’s level of vertical fiscal imbalance (VFI) is high by international standards, the paper says.

The Commonwealth raises 82% of total tax revenue, the states and territories 15% and local government 3%.

VFI “is not necessarily a problem in itself”. But it can create the wrong incentives for governments and facilitates the “blame game”, as well as affecting the stability of state finances that are dependent on the Commonwealth’s decisions, the paper says.

“There is no magic bullet to reduce or manage the level of VFI in Australia and any changes to revenue and expenditure responsibilities will involve trade-offs,” it warns.

It sets out options for changing the VFI or reducing its problems without indicating a preference.

One option would be to consolidate existing Commonwealth payments to the states into a single untied funding stream to be spent on areas such as hospitals and schools.

This would have to be transparent and not subject to ad hoc additional demands from the states or unilateral Commonwealth decisions to withdraw funds. While this option would not reduce VFI it would improve accountability and minimise the blame game, the paper says.

A second course would be to increase states' access to tax revenue.

This could be done by making room in the income tax base for the states to raise their own tax or by sharing the income tax revenue collected by the Commonwealth. The Commonwealth would retain overall responsibility for income tax policy. Other ways would be to expand the GST - a federal tax that goes to the states – or increase the states' own tax base.

Alternatively, VFI could be reduced by giving more spending responsibilities directly to the Commonwealth. “Any decision to change roles and responsibilities would need to be negotiated and agreed by all governments, rather than a unilateral action by one level of government.”

On the issue of horizontal fiscal equalisation, the paper puts up options for the future distribution of the GST, which has become a highly contentious issue given Western Australia’s deep resistance to the present formula.

One option is maintaining the present distribution but with improved transparency.

The second is having a less comprehensive equalisation, for example by establishing a GST relativity “floor”.

A third would be to have less comprehensive equalisation through a transition to an equal per capita distribution of the GST, with top-up grants to recipient states and territories. “If this option were to be implemented in 2015-16, the Commonwealth would need approximately $6.8 billion to top up current recipient states and territories so they reach the average fiscal capacity and are no worse off compared with the existing equalisation process.”

Labor in parliament homed in on the options for hospitals which include the states taking full operational responsibility for public hospitals, with the paper saying this would mean “the states and territories would be free to make decisions about the level of investment in, and delivery of, public hospital services”.

Abbott said of the paper: “this is officials talking to officials about what they think are interesting ideas for the future of our Commonwealth”.

Abbott has called a retreat with premiers next month to discuss federal-state reform.

Meanwhile, the government has some good revenue news on Tuesday when Labor backflipped on fuel excise indexation, agreeing to support the legislation in exchange for some of the funds being allocated to the regional roads program. The measure is worth A$3.6 billion over the forward estimates and $23 billion over a decade. The measure is already operating by regulation but has to be legislated.

Michelle Grattan does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.