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An opportunity to lead economic reform and drive change

22 Oct 2019

Labor’s last great reformist Prime Minister, Paul Keating, famously quipped those holding the purse strings in Canberra should never stand between a state Premier and a bucket of money.

My federal counterpart Treasurer Josh Frydenberg would likely say Mr Keating’s words ring as true today as they did almost two decades ago.

For my part, I think the children’s nursery rhyme There’s a Hole in My Bucket might be just as apt when taken from a state’s point of view.

As any parent who has sung this ditty knows, little Henry is left holding a bucket and trapped in a perpetual Catch-22 dilemma of needing to fix a leak while depending on the very same container to fetch the water he needs to help him solve his problem.

Replace water with billions of dollars of funding and it’s not such a different situation.

Almost 40 cents in every dollar of our revenue is derived from the Commonwealth – primarily through GST payments which totalled $18.7 billion (around 22 per cent of revenue), and a complex web of National Agreements which totalled $10.4 billion (around 13 per cent of revenue), and National Partnerships of $2.9 billion (around 4 per cent of revenue).

This money is not some sort of fiscal manna from heaven bestowed upon NSW by a benevolent commonwealth, it is derived directly from tax paid by ordinary people – it’s your money.

But are the states, and more importantly NSW taxpayer getting value for this contribution? And does this system create incentives for growth, reform and productivity?

NSW is not exactly crying poor, we have the strongest economy in the country, the lowest unemployment rate and a record $93 billion pipeline of infrastructure projects.

But the challenge of a good government is not just to deliver for the here and now, but to have the courage to look ahead at what reforms need to be made for future generations when things will be different.

We live in a time where attention spans have shortened dramatically. What is on our phone screen right now takes more importance than the longer game. In politics this means pushing for genuine reform is harder than ever before.

But opportunity knocks, with electoral cycles closely in unison between NSW, the commonwealth and Victoria there is greater scope to work collaboratively in the nation’s interest. And the need is obvious.

According to the 2016 NSW Intergenerational Report , the gap between our revenue and expenses will grow to 3.4 per cent of Gross State Product by 2056 as our population ages and demand for services and infrastructure grows.

Without reform, hard decisions between cutting services, compromising quality, increased taxes, or burdening debt, would be inevitable in the future.

This is why earlier this year NSW established an independent panel headed by noted businessman, David Thodey, to conduct the NSW Review of Federal Financial Relations.

The Panel released its first discussion paper this week and raised a range of issues on how states can work with the Commonwealth to make the system work better for all parties.

A case in point is GST distribution.

The commonwealth government downgraded its GST forecasts by $8.3 billion over four years in its 2019-20 Budget. The net result is NSW will lose $2.3 billion in GST over four years. That is a big hole in an already diminished bucket.

While there is an agreement in place until the end of 2026-27 that no state will be worse off under the latest GST sharing arrangement, the reality is that over time the pie is being eroded as spending on services that are exempt increases.

The review itself is at the point of raising issues and seeking feedback and does not offer an opinion on how GST should be collected or distributed.

It does flag the need for the distribution of funding between states to complement reform.

As NSW Treasurer, for me an eternal frustration is to see funding effectively heading across the border to benefit less reform driven and fiscally responsible states.

Another issue highlighted was the number and complexity of the aforementioned National Partnership Agreements and other arrangements.

NSW is party to around 50 funding agreements with the Commonwealth, Around half of these are for relatively small amounts of money – less than $5 million.

Some agreements come with complex reporting requirements but are not always linked to priority outcomes which a state may want to deliver. For example the current arrangements for health funding lack a holistic strategy around preventative health.

This misalignment of objectives between the two levels of government may always be a challenge, finding ways to limit funding uncertainty, reduce overly prescriptive agreements and encourage innovation can help us deliver a more productive and efficient system.

For more than 100 years federation has made our country stronger and better as a whole.

This has helped our nation grow, and bestowed upon those lucky enough to call Australia home, a level of wealth and security which is the envy of much of the world.

It’s our role to embrace reform and keep it that way.

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