Reforming the Federation
Recommendation 7: Reforming the Federation – clarifying roles and responsibilities
There is significant overlap between the activities of the Commonwealth and the States. The Commission recommends that a comprehensive review of the roles and responsibilities between the Commonwealth and State governments be undertaken, informed by:
- the principle of ‘subsidiarity’ so that policy and service delivery is as far as is practicable delivered by the level of government closest to the people receiving those services;
- ensuring that each level of government is sovereign in its own sphere; and
- ensuring minimal duplication between the Commonwealth and the States and, where overlap cannot be avoided, ensuring appropriate cooperation occurs at all times.
Recommendation 8: Reforming the Federation – addressing vertical fiscal imbalance
A closer matching of the revenue-raising capacity of States and Territories and their expenditure responsibilities would make them more responsible in their own sphere. The Commission recommends that:
- the degree of vertical fiscal imbalance in the Federation be substantially reduced. This should be achieved by providing the States with access to the Commonwealth’s personal income tax base;
- to facilitate this proposal, the Commonwealth should make room and reduce its personal income tax rate by an equivalent percentage point amount to a new State surcharge to ensure that taxes do not rise overall. Revenue raised would be hypothecated to the States; and
- the States be provided with a capacity to periodically vary the surcharge they impose as a means of injecting further competition into the Federation.
Recommendation 9: Reforming the Federation – arrangements for addressing horizontal fiscal equalisation
The practice of fiscal equalisation between the States is a central and longstanding feature of our Federation. The Commission recommends that, as part of a reformed approach to addressing vertical fiscal imbalance, new arrangements also be implemented to address issues with horizontal fiscal equalisation. This would involve:
- sharing all GST revenue on an equal per capita basis;
- the Commonwealth providing an additional grant to current recipient States to ensure that no State is worse off compared to the existing equalisation process; and
- distribution of the additional equalisation grant from the Commonwealth being determined by the Commonwealth Grants Commission.
Recommendation 10: Reforming the Federation – reduced tied grants to the States
Proposed changes to financial arrangements within the Federation should involve a transfer of responsibilities for areas of spending where the Commonwealth currently makes tied grants.
The Commission recommends that, should reforms be made to address vertical fiscal imbalance and horizontal fiscal equalisation as outlined above, existing tied grants from the Commonwealth to the States should be reduced by an amount equivalent to the additional untied revenue received by the States. Determining which grants would be reduced would be a matter for negotiation.
Recommendation 11: Reforming the Federation – Reducing the administrative burden
Steps need to be taken to simplify the large number of existing Commonwealth State agreements and associated reporting arrangements. The Commission recommends:
- the administrative burden between the Commonwealth and State governments be substantially reduced by rationalising the number of National Partnership Agreements and streamlining and reducing reporting requirements; and
- the COAG Reform Council could be abolished with its reporting role and staff moved to the Productivity Commission.