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The challenges before us: Federal Financial Relations Review Forum

17 Feb 2020

My speech delivered to the NSW Review of Federal Financial Relations:

OVER the course of today you’re going to hear about all of the major economic and fiscal challenges that lie ahead.

The ageing population, the fiscal gap, the productivity slowdown, horizontal fiscal equalisation.

We’ll hear about the immediate challenges too – the devastating bushfires, the unfolding coronavirus outbreak, the drought, and now floods.

But the challenges I want to talk about are the ones that have stalled every attempt at serious federation reform for the last two decades:

Politics and people.

Politics – particularly in Canberra – because politics has become so consumed by day-to-day survival that we seem to have given up on governing for the long term.

And people – because the biggest mistake a review like this one can make is to consult every economist, and every public policy wonk and construct a beautiful abstract plan for reform but fail to explain what that reform means for the typical working Australian.

I’m not interested in reviews that don’t get results.

But if we put politics aside – and if we can make reform relevant to the people we are here to serve – we will succeed where others have failed.

And for the sake of our state, our nation, and generations present and future – that is what we must do.

The political challenge

So first – the political challenge.

Last week the Sydney Morning Herald ran a great column from Jessica Irvine, commenting on our review.

She writes: The critical question the Thodey review is asking is this: How best to raise the money we need?

Answer: not the way we currently do it.

This is not a surprise, given former Treasury Secretary Ken Henry said the same thing in his tax review over a decade ago…

Ken Henry delivered his review to Prime Minister Kevin Rudd in January 2010.

Six months later Rudd was on the backbench, knives still protruding from his back.

Including Rudd’s first rolling, we have had a total of 5 changes of prime minister in just 10 years.

That’s one every two years.

You don’t need to be a professor of political science to know that if you can’t keep a Prime Minister in the job for a full term – you can forget about reform for the long term.

So it is no coincidence – and no surprise – that the Henry review has spent a decade gathering dust.

A wasted decade of what I call Canberra comatosis – a condition that’s part comatose, part sclerosis – and is crippling our nation’s capital.

I have said it before – and I will say it again – three year federal terms are part of the problem.

In today’s political climate, three years is not enough to get big reform over the line.

Governments are barely sworn in before they are getting ready for the next election.

And if the polls are looking iffy, so is the leader’s job.

Look at Canberra in just the last few weeks.

We are barely 6 months into the federal government’s new term, and already:

  • the deputy prime minister has faced a spill.
  • And there are reports of Labor MPs meeting in overpriced Canberra restaurants to undermine the opposition leader.

 

In this environment, Federal MPs end up in perpetual campaign mode.

They cannot afford to take risks.

And the result is a reactive brand of politics – not thoughtful, visionary leadership.

We live in an era of policy by soundbite, developed not in the halls and chambers of Canberra’s Parliament House, but in the green rooms and studios of Sky News.

And don’t get me wrong – I’m a big fan of Sky.

But policy on the fly is not policy for a better future.

Four year federal terms would absolutely improve our prospects of getting federation reform done.

But four year terms are not essential.

A simple change in attitude would go a long way.

When we first announced this review, the immediate response from both sides of politics in Canberra was: no.

We hadn’t even started before we had been shut down.

Well in my view, no one ever made progress by taking ideas off the table.

If Canberra is unwilling to even consider the possibilities, that’s all the more reason for states to have the autonomy to drive reform on their own.

The fact is, we are partners with the federal government in the common project of advancing the prosperity of our people.

For reform on this scale we need Canberra on the bus. We just need the states in the driver’s seat.

 

Bringing people on the journey

The second big challenge is people – and making sure that every reform we contemplate puts the people of our state at its centre.

It might sound strange, but for politicians, people can be scary.

We all want to be liked, and that can make governments overly cautious – afraid of rocking the boat.

The idea is if you just lay low and don’t do anything, people won’t have any reason to kick you out of office.

Well firstly, I think that’s wrong. 

The Baillieu Liberal government in Victoria was elected in 2010 after 11 years of Labor rule.

But they failed to do anything substantial, and Labor’s Daniel Andrews swept the Liberals out of power after just one term, with a bold vision for Victoria.

The lesson is: while it can be tempting for governments to avoid difficult but beneficial reform for fear of scaring voters, ultimately people want leadership.

The solution is not to avoid reform.

The solution is to bring people on the journey.

Because in my view, if you pursue good policy – if you believe in it – if you are up front about the costs –  and if you are clear about the benefits – the people will back you in – even if it’s hard.

As an aside – I think this is what has been missing from the climate change debate, and is the biggest roadblock to progress.

If you can’t very clearly tell people what it will cost, and what is the benefit, you cannot earn their trust.

Here in NSW we have a recent example of tough, risky reform done right – former premier Mike Baird’s poles and wires campaign.

This was hugely contentious.

It was a massive risk going into an election.

But Mike explained the policy in terms that showed real empathy with the people of NSW.

He made it clear – this is our plan to build the roads, rail, schools and hospitals that would make people’s lives better.

It was the same for John Howard and the GST, and Hawke and Keating with the economic reforms of the 80s.

We know that reforming federal financial relations will not be easy.

We also know it is the right thing to do.

But unless we are able to connect federation reform with the lives of the people of this country – in very real, tangible ways – we cannot expect them to back us in.

So that is what we must do.

Why now is the right time

The dual challenges of politics and people are daunting. 

But they are not insurmountable.

In fact, I believe there has never been a better time to get federation reform over the line.

Let me give you three reasons why.

First, the timing is right.

For the first time in a long time the electoral cycles of the federal, NSW and Victorian governments are in sync.

As the two largest states, NSW and Victoria are instrumental in driving federation reform.

We now have an opportunity to work together in an environment of rare electoral stability.

This is a watershed moment that we cannot allow to pass us by.

Secondly, there is a real appetite for change at the state level, and a willingness to work together, across party lines.

Two and a half years ago we established the Board of Treasurers.

It’s a states-only body – not because we don’t like the Commonwealth, but because as state treasurers we have more in common with each other.

That is the case regardless of political affiliation.

States face very different challenges to the feds – and it’s important to have that forum where we can work with each other and learn from each other.

I should also say – this kind of state collaboration – independent of the Commonwealth – is exactly what Samuel Griffiths called for in the convention debates of 1891.

So I’m surprised it hasn’t really been tried before.

So far the Board of Treasurers has been incredibly fruitful and productive.

It highlights the opportunities that arise when Labor and Liberal governments work together to advance reform that’s in everyone’s best interests.

If NSW can use this federation review to generate options for reform, the Board will be a forum for the states to work together to drive the process forward.

Finally, I believe that the current climate of stalling productivity and low wage growth means people are more open than ever to new ideas.

Everyone knows the clock is ticking.

Everyone knows that tinkering at the margins is not enough.

Everyone knows we need bold, structural reform if we want our standard of living to keep rising.

That includes the federal treasurer – Josh Frydenberg.

We’ve had some very encouraging conversations in recent months.

And he knows the important role states must play in reform.

 

Conclusion

So the time is right, and success is ours for the taking.

The naysayers will say this attempt at reform is really just a cash grab.

Paul Keating once said, never get between a state Premier and a bucket of cash.

Well in some ways, it is about the money.

The way federal financial relations work today, reform can come with a hefty price tag.

For example, if NSW abolished transfer duty and replaced it with land tax, we would receive $1 billion a year LESS in GST under the current arrangements.

Our system should incentivise reform – yet ours does the opposite.

So it is about money.

But it’s not about money for money’s sake.

It’s not about commonwealth funding versus state funding – because it’s not my money, and it’s not Josh Frydenberg’s money.

It’s about reuniting taxpayers with the taxes they have paid – in the form of services and infrastructure funded in the most efficient way possible.

It’s about funding a more prosperous Australia today and for future generations.

We have come a long way since federation.

But I believe the top-down federation we live in falls short of what the founders envisioned.

I believe their vision was much richer –  a vision of thriving states on par with the states of Europe and the USA.

And that’s the future I believe we should be aiming for. 

A future where stronger states make for an Australia whose strength we can scarcely imagine.

We have come a long way, but we have barely scratched the surface in terms of what this nation is capable of.

Our federal relations have gotten off track.

The question is can we fix it?

Well as a father of young kids, I’m not sure if I’m quoting Bob the Builder or Barack Obama when I say the answer is: yes we can.

Thank you.

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