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Issue #1681      April 22, 2015

Dismantling the Federation

The meeting of Commonwealth of Australian Governments (COAG) last week was characterised by the all too familiar battles over the allocation of money – in this instance the carve up of the GST takings between the states and territories*. The situation was made even more difficult by the Abbott government’s decision to cut funding to hospitals and education by $80 billion over the coming four-year budgetary cycle. It is also cutting funding to national partnership agreements (specific purpose payments).

The Abbott government then expected cash-strapped states to come to the table begging for an increase in the GST – either its rate or application to presently exempt goods and services. The GST exemptions include fresh food, education, heath, childcare, water and sewage.

The government’s plans failed dismally. The Labor states – South Australia, Victoria, ACT and Queensland – refused to wear it. After all it would be political suicide.

West Australian Coalition Premier Colin Barnett was up in arms over the proposed carve-up of the GST between states. WA is facing a slight reduction in its share to just under 30 cents in the dollar on income collected there. He has no intention of backing down. He is demanding 100 percent.

The share of the GST takings allocated to each state is underpinned by a society-wide equity objective, depending on a state’s capacity to raise revenue from its own taxes (mining royalties, land tax, stamp duty, etc) and other factors that might affect equity.

Prime Minister Tony Abbott announced a “leaders’ retreat” with his state and territory counterparts to directly debate long-term structural reform without the “interference” of officials. He is looking for unanimity around plans to revolutionise state-federal relations – their roles, responsibilities and financing. The GST is an integral part of that agenda.

Towards these ends a number of reviews are underway. Issues papers were published late 2014 or earlier this year on a range of issues including industrial relations, taxation and five papers on federalism*. The aim is for Green papers mid-2015 and final White Papers by the end of 2015.

These papers are all interconnected and run in tandem with each other – who provides what services, how they are funded, etc.

Reform of the Federation Paper 1, A Federation for Our Future, is clear as to the government’s objectives: “The White Paper will seek to clarify roles and responsibilities to ensure that, as far as possible, the States and Territories are sovereign in their own sphere.”

It is not just about clarifying but changing many of the roles and responsibilities of all three levels of government and how they are funded.

The federal government is looking at how to restrict its policies to “core national interest matters”, such as defence, intelligence, national security, foreign affairs, international trade, quarantine, financial regulation, currency, immigration and citizenship and possibly other areas listed in Section 51 of the Constitution.

Clearly, it would have to retain responsibility for free trade and investment agreements and adherence to UN Conventions (not that it does now) and other international laws.

Sovereign states

Abbott hopes to gain agreement from the states and territories “about their distinct and mutually exclusive responsibilities and subsequent funding sources for associated programs.”

As far as possible the government wants to eliminate any involvement by federal and state governments in the same area. The federal government would keep “core national” responsibilities such as those mentioned above. One of the tasks of the White Paper is to determine the role it would play as a government and what responsibilities it would keep.

The states and local government would have complete responsibility for everything else and raise the funding themselves. For example, if the states are responsible for education, they would fund it. They could do as little or much as they like, but without the money from central taxation revenue. The for-profit, private sector could also play a greater role.

There would be a transition period as these changes were phased in.

The $80 billion in cuts to health and education and the slashing of funding under national partnership agreements are just forerunners of what is to come as the federal government bows out.

One of the key aims of the federal government is to reduce company tax to zero.

Targeting the GST

One of issues raised in the Federalism and Taxation papers is how the states and local governments could raise enough revenue to meet their responsibilities. They have enough difficulties already without the loss of federal government revenue.

The GST is the first obvious target. Present sources of other income include land tax, tollways, user pays, council rates (local government), stamp duties, payroll tax, insurance, royalties on resources, gambling and motor registration and licensing.

The Taxation discussion paper, Re:Think, examines these and other means of raising additional income for states and local government such as applying land tax to the family home and charging for the use of main roads based on distance travelled.

At present states receive 23 percent of their income from the GST and 31 percent from state-levied taxes.

The GST raised just over $50 billion in 2013-14 as a 10 percent tax, mostly coming out of the pockets of workers, pensioners and unemployed – the corporations do not pay a cent. If this flat, regressive tax was extended to presently exempt goods and services that would reap around an additional $50 billion – bringing total to $100 billion.

If it were then increased to 15 percent the total take from people’s pockets would be around $150 billion. As far as Abbott is concerned it would fill some of the hole created by the federal cuts and would more than fund the removal of company taxation – $78.7 billion in the same year.

This would still not be enough to cover state needs if the federal government withdrew funding from areas which states had responsibility for.

“Competitive federalism”

An Audit Commission was commissioned by the Abbott government following its election in 2013. The Commission promoted the concept of “competitive federalism” whereby the states could compete with each other to attract investors.

It recommended giving state governments access to personal income tax revenues: the federal government would lower income tax rates and “allow room for the states to levy their own income tax surcharge”.

States would be able to compete by offering different income, payroll and other tax rates or concessions in a deregulated and decentralised environment. The workplace relations discussion paper sets the scene for states to be able to set their own employment standards (wages, working conditions, etc) in the place of existing awards and so compete for investors in a race to the bottom. It is also proposed that states could set up investment zones.

Undoing federation

In the name of “federalism” the government is attempting to dismember the federation and turn the clock back to the 19th century after more than a century of gradual centralisation and consolidation as a nation. It is an extremely backward and regressive move, especially for the working class.

The Australian nation as we know it today was not born at Gallipoli but on January 1, 1901, when six self-governing colonies became states in the new Commonwealth of Australia. The process leading to federation was difficult one with states not wanting to relinquish their considerable sovereign powers.

It was an important and progressive step forward and the beginning of a process that involved a number of compromises over the allocation of legislative powers but saw further consolidation and centralisation as a nation over the decades that followed including a uniform taxation system, social reforms and other legislation that provided protection and support for the people. Of course not all government actions were pro-people, far from it.

In the coming years the federal government took responsibility for the development of a welfare system, which applied uniformly across the states and territories. This and many other gains were the result of hard won struggles by the trade union movement and other community forces.

If the federal government dumps responsibility and funding on states for social welfare, then each state could have its own system, creating gross inequalities and opening the way for the end of “the age of entitlement” as Treasurer Joe Hockey has promised.

People could be left without a proper welfare system, living from hand to mouth, fearing ill health, in a system where user pays applies to everything.

In reality, “competitive federalism” is a proposal to take Australia backwards, to break the nation up into competing “sovereign states” in a race to the bottom wooing global investors at the expense of wages, working conditions, social security, and who knows what else. That is one of the tasks of those drafting the White Paper to determine how much to reveal at this stage of the process.

Defeat of such a backward agenda will depend on how strong a movement can be built against it by trade unions, the broader community and other political parties. It should not be forgotten that there are conservative forces in the states that may well resent the surrender of former sovereign powers in 1901 and be eager to grab back what they can.

There are opportunities for public submissions in response to the issues papers (some have passed that deadline) and the Green papers later this year. Readers are urged to send in their views. It is not necessary to write an academic paper, just type some views on a single sheet if you wish. Details of where to send submissions can be found on the websites below.

* For the sake of brevity states and territories are referred to as states.

** Discussion papers:bettertax.gov.au;federation.dpmc.gov.au;pc.gov.au/inquiries/current/workplace-relations.

*** National Commission of Audit report:ncoa.gov.au

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