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Time to look under the hood and fix federal financial relations

12 Aug 2019

As a proud New South Welshman I enjoy giving South Australia, and its capital Adelaide, a bit of a ribbing, contrasting Sydney’s global pull with Adelaide’s slightly lower international profile.

While there is truth in jest, Adelaide is steeped in the history of Australian federation, something I reflected on when visiting last week for a meeting of the Board of State and Territory Treasurers.

It was in Adelaide that the first Constitutional Convention was held in 1897, and just a few years later, a new Australia was born. Almost 120 years on, we live in one of the most free, equitable and prosperous nations on earth. Credit is due to the architects of the federal system that has made our extraordinary way of life possible – they got a lot right.

But we should not expect federation to be a set-and-forget exercise.

From time to time changes are required, and to my mind, the most pressing need for change today is fixing the complicated tangle of federal financial relations.

As a state treasurer, I spend every day working to make sure there are sufficient funds to provide the services and infrastructure the people of NSW need. But I also see the inefficiencies entrenched in our federal system that make that task harder than it should be.

States have primary responsibility for delivering services and infrastructure, but are far more limited than the Commonwealth in their capacity to raise revenue.

This has left states to rely on inefficient and volatile revenue sources like stamp duty, or otherwise come rely on the Commonwealth, often reduced to pleading for a fairer share of the money their own citizens have forked out in tax.

To give you an example: in 2019-20, almost 40 per cent of NSW revenue will come from the Commonwealth, including $18.7 billion of GST payments and $13.3 billion in tied payments flowing from a matrix of National Agreements, National Partnerships and Project Agreements.

This situation largely stems back to the Commonwealth taking over the states’ taxation powers during the Second World War – a federal change that drastically shifted the balance of power in favour of the Commonwealth, significantly neutering the states’ autonomy.

Meanwhile our GST distribution system is one that effectively penalises states that perform well and undertake beneficial economic reform.

I believe it’s long past time to fix federal financial relations. This is not just about funding schools and hospitals – it’s about the vitality of our federation itself.

That’s why in this year’s budget I announced a comprehensive review of federal financial relations from a NSW perspective, and this week we have announced the panel who will undertake that work.

It is a panel packed with firepower, chaired by David Thodey AO, and including former New Zealand Prime Minister Sir Bill English; former Australian Deputy Prime Minister John Anderson; Constitutional law professor Anne Twomey; economist Professor John Freebairn; and highly experienced Commonwealth public servant Jane Halton.

The scope of review is broad. It will encapsulate internal state reforms, like making state-based revenue sources more reliable and sustainable, while also addressing concerns that productive state reforms can actually leave states worse off from a federal funding perspective.

I expect it will also consider larger-scale reforms, including a more methodical appraisal of a range of piecemeal proposals put forward over recent years, such as reducing the number of funding agreements between NSW and the Commonwealth, assessing changes to the structure of the GST, giving the states a share of income tax revenue, and even the merits of returning direct taxation powers to the states once again.

That’s not to say any of those proposals will find their way into the review’s final recommendations. That will be for the panel to decide.

But this is not designed to be an exercise in academic speculation, or inflating political thought bubbles for the sake of a headline.

My goal is to generate practical, beneficial, workable solutions that the community can get behind, and the review will involve substantial community engagement.

The point is to identify what we can do – from the small scale to the large – to make funding our federation more sustainable and more equitable, and above all, to lower the tax burden on the people we represent.

This is a can that has been kicked down the road far enough. Australia should have a federal system that recognises the sovereign role of states and incentivises economic reform at the state level, so every state is operating at full throttle.

As Australia’s most populous state, and the economic driving force of the nation, this is a job for Australia’s premier state, and I look forward to getting down to work with the panel, and engaging closely with the community in this important endeavour.

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