1 ECON1110 AUSTRALIAN ECONOMIC INSTITUTIONS 1.FEDERALISM Economic activity is undertaken in Australia, and is influenced by government policies, within a federal system. There are two principal levels (or tiers) of government: namely a national (or commonwealth, or Australian) government and a number of governments of smaller geographical areas known as the states and territories. There are six states formed by the six colonies of Great Britain which federated in 1901 and two territories (the Northern Territory, which existed at the time of federation, and the Australian Capital Territory, which was established shortly after federation). The territories do not have the same status as the states and their governments do not have all of the powers. But they are sufficiently analogous for the states and territories to be considered together. (There is also a third tier of government, in addition to the commonwealth and the states/territories that is responsible for a more limited range of matters within even smaller geographical areas within states. (In Australia these are called cities and shires in other countries they are known as counties). This is generally referred to as local government. Although the role of local governments and the extent to which this role overlaps with that of state governments is of considerable importance with respect to some aspects of economic activity (the supply of water is a case in point), in aggregate terms the place of local government is relatively small and we will not consider it, and the issues relating to it, in any detail in this topic. Additionally, instead of always using the term states and territories, we will just abbreviate this to states. Hence the discussion in this topic will be confined to, and couched in terms of, the commonwealth and the states.) In both political and economic terms the issue of the allocation of powers across different tiers of government is an important theoretical issue (i.e. there are a number of matters of principle). This encompasses questions such as: which functions are best exercised by government at either a national, or a sub- national, level (that is by smaller jurisdictions, however these are defined and there are a number of ways in which they can be defined e.g. in terms of geographic area, number of people, or geographic characteristics); how many levels of government there should be; and (within whatever number of levels of government there are) how many sub- national jurisdictions there should be. However, the Australian system is more a product of historical circumstances than decisions about these theoretical issues. Australia (or, to be precise, European settlement of the continent) began as a series of (very different) colonies which decided at the end of the nineteenth century to join together to form one nation. 2 In this respect the Australian experience is similar to that many other countries that are familiar to us, e.g. Canada and the United States of America. Only about 15% of countries are federations; but they make up over 50% of world GDP. So the Australian federal experience is of considerable relevance for the world as a whole. Australian Federalism At federation, in 1901, the relative roles of the state governments and the newly-formed commonwealth government were defined in the Australian Constitution. More specifically the constitution defined the powers that would be transferred to the newly- created commonwealth government and, implicitly, left those that were unspecified in the hands of the states. Some powers were given exclusively to the commonwealth the most obvious (and subsequently least controversial) being that of defence, the states being explicitly excluded from raising any naval or military force. The commonwealth was also given exclusive power over customs, excise and bounties within the context of the clause of the constitution that provided for free trade between the states. In this way a national market was created, with the commonwealth government being given the power to levy tariffs on goods imported from other countries into Australia as a country a power that the commonwealth exerted increasingly in the early decades following federation. In some other cases powers were given concurrently to the commonwealth and the states (i.e. power was given to the commonwealth in cases where national considerations were involved but the states were not precluded). But in most cases the states simply retained the powers that they had possessed as colonies although, importantly, the Constitution did not actually bar the commonwealth from being involved. As it happened, quite rapidly the commonwealth came to exert a relatively much more significant role than the states even in areas where a role for the commonwealth government was not even envisaged at the time of federation. Two such areas of economic activity where this has been the case are the provision of health services and education. Indeed these are the two areas that can be seen to be at the pointy end of much current debate about the relative role of the commonwealth and the states. The commonwealth assumed a greater role in areas such as these simply because some national governments considered it desirable for government to take action, undertake expenditure, or influence what was being done, in cases where this was not being done, or seen to be done satisfactorily, by some or all of the states. (It has been expressed by some as the commonwealth elbowing its way into certain areas.) 3 The commonwealth was able to become involved in these areas, constitutionally, by virtue of certain powers given to it in the Constitution (even though the powers had not been intended to be used in this way). Action was also enabled by the commonwealths greater fiscal capacity (i.e. the fact that it had more revenue than it needed to carry out its narrowly defined obligations which at the beginning of the century amounted to not much more than providing defence and running the postal and telecommunications services). While this greater fiscal capacity (and thus the issue of fiscal imbalance) existed right from the early years of federation (due mainly to the fact that the commonwealth assumed sole control over customs and excise duties which were the largest component of government revenue at that time these had formerly been under the control of the various colonies) the imbalance was exacerbated from the time of the Second World War when the commonwealth asserted sole responsibility for income tax which had by then become the major source of government revenue. The ability of the commonwealth to permanently maintain sole responsibility in this respect was subsequently confirmed by the High Court (in which lay the power to interpret the Australian Constitution) and further, in the post-war years, by interpretations of the Court in respect of the powers of the states to levy taxes. The fiscal issue in fact came to be the focus of discussions for most of the rest of the twentieth century of the economic implications of Australian federalism. For that reason this matter is considered in some detail in the following section. Fiscal Aspects of Federalism (Federal Finance) The central problem of federal finance that the commonwealth possessed greater fiscal capacity relative to the states emerged quite soon after federation. In order to sustain the federal system of government the commonwealth needed (increasingly) to give some revenue back to the states to permit them to undertake the provision of services that were constitutionally their responsibility. There followed a search for principles on which this could be done. There were two main issues. One was that of achieving vertical balance i.e. correcting the fact that the top tier of government the commonwealth had greater fiscal capacity in relation to its expenditure commitments relative to the second tier the states taken together. The second which was an inherent part of the redistribution process and was in some respects of even greater complexity was achieving horizontal balance (or correcting horizontal imbalance). This arose because the six states that made up the Commonwealth of Australia each had different expenditure needs (arising from a variety of factors, 4 including for example geographic size) and different revenue-raising capabilities. Thus a redistribution of the surplus revenue of the commonwealth based on a simple criterion such as population was not considered acceptable. It was intended that the redistribution be effected by way of general grants (indeed they became known as general purpose grants). In order to determine how surplus revenue would be redistributed by way of these grants (that is, how horizontal balance be achieved at the same time as vertical imbalance was corrected) an advisory body, the Commonwealth Grants Commission, was established in 1933. (The body is still in existence.) The recommendations of the Grants Commission were considered at the annual meeting of state Premiers (known as the Premiers Conferences). These conferences frequently became highly political events when the premiers of each of the states haggled with the commonwealth over the size of the general purpose grants they were given. The degree of vertical imbalance (and by implication the significance of the fiscal equalisation embodied in the way in which horizontal imbalance was addressed) was (as noted above) greatly increased during the Second World War when, in 1942, the commonwealth assumed sole responsibility for raising income tax (which the High Court confirmed that it was constitutionally able to do). The need for, and the significance of, the grants from the commonwealth to the states thus increased considerably. In the context of frequently expressed concerns that the states were not getting sufficient revenue to undertake their expenditure responsibilities (particularly in the area of health) principles upon which surplus commonwealth revenue was distributed to the states were the subject of on-going debate in the last quarter of the century and a number of changes were made. However, the commonwealth-state relationship remained an uneasy one, with the annual Premiers Conferences generally being somewhat rancorous affairs. The transfer of revenue from the commonwealth to the states was complicated by the way in which grants were given. We need to understand this, so a short digression is necessary. To an increasing extent grants were given not simply as general purpose grants but also in the form of grants where the purpose for which they could be used by the states was specified by the commonwealth that is in the form of specific purpose (sometimes referred to as tied) grants. Such grants were enabled by a clause in the constitution (s.96) which enabled the commonwealth government (with its greater fiscal capacity) to make financial grants to the states (known as Special Purpose Grants and more recently referred to as Special Purpose Payments - SPPs) which enabled the commonwealth to specify, quite precisely, how the money was to be spent. SPPs thus became a mechanism whereby the commonwealth could effectively exert an influence over the states. 5 This mechanism was first used in 1923 to enable the government to ensure that money was spent on the development of main roads (not coincidentally at the time when the newly-formed Country Party, which represented the interests of rural voters, was first in coalition with the major conservative political party, then called the Nationalist Party under the prime-ministership of Stanley Melbourne Bruce). Special Purpose Grants were also used by the post-war Menzies government to ensure greater spending of government funds on universities (a particular concern of Menzies himself). These grants were then used even more extensively by the Whitlam government of the early 1970s to pursue many agendas of this (commonwealth) government. During this time Special Purpose Grants came to represent approximately 45 per cent of the total grants given by the commonwealth to the states. Until the closing decades of the twentieth century the correction of vertical imbalance was seen as the central issue in Australian federalism. It was only at the end of the century that a fundamental change to the system under which this was effected was introduced in conjunction with the introduction of a new form of taxation the Goods and Services Tax (GST). Under arrangements embodied in an Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations signed in 1999 (and brought into operation in 2000) the proceeds of the GST (which were to be offset by decreases in the level of income tax) were to be granted in total to the states. The arrangement was considered to finally give the states the financial capacity to undertake their expenditure responsibilities (or at least a substantial portion of them). The Premiers Conference of 1999 was thus the final meeting where the premiers gathered to argue over the distribution of commonwealth taxation revenue. Some problems remain. Firstly the distribution of the total GST take (and thus the issue of horizontal balance) is still subject to the recommendations of the Grants Commission in implementation of the principle of horizontal fiscal equalisation. (The most recent comprehensive review of equalization policy was undertaken by the Commission in 2010.) Specifically, rather than being based on a simple criterion such as the total amount of GST collected within each state, or each states population, the revenue is distributed according to recommendations of the Grants Commission which are made on a number of criteria. In the years since the arrangement was implemented, this has been subject to increasing criticism from some states, in particular New South Wales, where it has been claimed that other states among them Queensland have been getting more than their fair share of the revenue raised by the GST. More recently the state of Western Australia (for a long time the beneficiary of the principle of fiscal equalisation as per Grants Commission recommendations) has claimed unfair treatment in the context of a Grants commission review which held that the state had dramatically improved its fiscal capability (a result of the mining boom) and should receive a significantly lower proportion of the proceeds from the GST. 6 It has also been argued by the commonwealth that some of the states have not effectively and efficiently utilised (indeed have to some extent wasted) the revenue windfall that they received under this arrangement in providing the services for which they retained constitutional responsibility. Thus, while the financial situation has not been totally resolved, the mechanism of the GST being regarded as a states tax has blunted the problem. But it has not addressed what is now widely seen as the more fundamental problems of federalism. Who should be responsible for what? Towards the end of the twentieth century the problems of Australian federalism came to be seen in terms not just of the fiscal issues, although they stemmed essentially from the basic problem of vertical fiscal imbalance. The relatively greater fiscal capacity of the commonwealth had enabled the commonwealth to become involved in some aspects of economic activity, and the provision of certain goods and services, that had not been envisioned at the time of federation. This occurred because different commonwealth governments, at different times, sought to achieve certain goals (and score political points) by taking action. Some saw this as the commonwealth elbowing its way in. Action taken by different commonwealth governments in respect of the provision of certain health services, and the funding of tertiary education, are cases in point. The result has been a dual influence by the two tiers of government in many areas of economic activity, a dual influence that has led in the view of many to inefficiencies, overlapping, conflicts and, in some cases, gaps (where a particular good or service is not provided adequately or at all). Typically, each level of government blames such problems on the other hence what is popularly referred to as the blame game. There are a number of aspects of economic activity in respect of which this dual influence has been particularly controversial. Among these are education; health (particularly the provision of medical and hospital services); water supply (particularly in regard to agricultural use); industrial relations (i.e. the determination of the terms and conditions under which labour is employed); and 7 transport (especially rail transport). Problems have arisen either because the commonwealth has become involved in ways not envisioned at the time of federation (e.g. health and education) or because the provision of the relevant goods and services has become a national rather than merely a state issue. One example of the latter case is the provision of rail services. An observation in regard to this, made by the Secretary of the Treasury as long ago as 2005, typifies the problem: an operator of an interstate train in Australia may have to deal with six access regulators [the issue of access will be addressed in a later topic], seven rail safety regulators with nine different pieces of legislation, three transport accident investigators, 15 pieces of legislation covering occupational health and safety of rail operations, and 75 pieces of legislation with powers over environmental management A particularly farcical example of rail services fragmentation is in train communications. Currently each State and Territory requires trains within its jurisdiction to have a particular type of radio for good measure NSW mandates two meaning that a train cannot operate nationally without eight different radio systems. And even with a cabin full of eight radios, trains cannot talk to each other. Some these areas are considered in more detail in later topics. The Council of Australian Governments (COAG) and the reform of the Australian federal system The increasingly evident problems of Australian federalism were addressed as long ago as the 1980s by the formation of the Council of Australian Governments (COAG). The logical forum to discuss the larger economic (as well as the narrower financial) implications of the federal system was the annual Premiers Conference (see above). However, as noted there, these Conferences were highly political occasions so Bob Hawke (in the early 1990s when he was prime minister and sought to address these issues) decided to call some special Premiers Conferences. These took place in 1990 and 1991 and the result was the formation of COAG as a forum for bringing together the prime minister and all the state premiers (along with the territory chief ministers and a representative of local governments) plus other senior politicians and bureaucrats. As it happened one of motivations underlying the formation of COAG was to establish a mechanism for tackling economic inefficiencies that had arisen not so much because of any overlap between commonwealth and state activities but because there were some areas of economic activity that remained the sole province of the states and were outside 8 of the control of the commonwealth government. The areas of economic activity of particular concern to COAG were mainly the production of electricity, gas, water and other public utilities, all of which were the responsibility of state-owned and operated government business enterprises (GBEs). At the time the late 1980s the commonwealth government was focusing on ways to increase productivity (and as a result implementing a number of changes which were described briefly in the Introduction and analysed in more detail in subsequent topics). But it was frustrated by its inability to involve itself, or intervene, in respect of a number of state government activities. COAG was thus seen as a mechanism for getting the states to agree collectively, and with the commonwealth government, in respect of a number of reforms to these areas. The adoption of a National Competition Policy (NCP) under the aegis of COAG was seen as a major early achievement of COAG as an organisation. NCP had particular implications for GBEs, including the monopolies until then held by the states over electricity generation. However, as COAG was able to hand over responsibility for the implementation of NCP to the states, it was able subsequently to focus its attention on other problems associated with federalism in particular the inefficiencies, duplication, and gaps that had occurred in respect of the production of, or the regulation of the production of, a number of goods and services that had come to be undertaken by both the state and commonwealth governments. For some time, however, COAG remained a fairly low-profile and ineffectual organisation, receiving little enthusiastic support from the Howard government. Increasingly during the 1990s and early 2000s the states came to be governed by Labor governments and there was little genuine cooperation between these and the commonwealth (Liberal-National) government. As an organisation COAG remained part of the commonwealth Department of the Prime Minister and Cabinet. It had a relatively small secretariat to support its activities and implement decisions (although a lot of its decisions, on the grounds that they were made collectively by all the states, were left for implementation at the state level). Some of the outcomes of discussions at COAG resulted in changes which, while doubtless a good thing were nevertheless, in the greater scheme of things, not of great economic significance. For example one of the matters decided by COAG was to subsume the functions of nine property-specific or jurisdiction-specific World Heritage Ministerial Councils into an Environment Protection and Heritage Council which was to become the body that manages World Heritage issues at the national level. Along with other matters where states had done their own thing this was undoubtedly desirable; but it was not likely to have a major impact on productivity in the Australian economy. 9 The fact that problems such as that reflected in the observation about national rail services quoted above could be made more than a decade after the formation of COAG indicated that the formation of COAG did not represent any quick fix. And there are some areas (such as education and health) where there remained (and remain) problems of greater economic significance. One of the biggest failings of COAG to solve a problem was in the area of industrial relations. Whilst the issue (referred to briefly above and discussed in more detail in Topic 2) was placed on the agenda of several COAG meetings it never got beyond the stage of being noted politics having prevailed (the state Labor governments being loathe to see any of their powers in respect of the labour market eroded in any way). The decision by the commonwealth government in 2005 to simply assume sole powers in this regard (see Topic 2) was an indication of frustration at the inability of COAG to deal with the issue or perhaps the lack of commitment on the part of the commonwealth government to cooperative federalism. This was an example of what has been termed big bang reform, implicit in which generally is the commonwealth government taking sole control or state governments ceding it to them. Such reform involves a structural solution by simply eliminating one level of government from the production/regulatory process. In practice this has been done, or is contemplated, by eliminating the states leaving the commonwealth in control (as was the case with industrial relations). It simply sidelines COAG. The contrast to a big bang solution is incremental reform, whereby the problem is addressed by way of measures which correct obvious problems and seek to reform decision-making in those areas which have the greatest potential to yield productivity increases. Implicit in this approach is a mixture of the belief in the benefits of federalism (or, to put it in reverse, in not having just one government make national decisions unilaterally) and the pragmatic view that the egg having been scrambled for better or worse it is practically, and politically, impossible to unscramble it. COAG in recent years COAG has pressed ahead with incremental reforms, though (until the end of 2007 at least) without much support from the commonwealth government which until then was a Liberal-National coalition while all the state governments were then Labor governments. Indeed the states appeared themselves to undermine COAG when in 2006, independently of the commonwealth, they established a Council for the Australian Federation (of which only they were members). This was the result of a sort of them and us attitude having developed during the early 2000s as the states found themselves increasingly required to defend their very existence and role. One of the principal aims of the CAF was in fact to 10 assert the advantages of a federal system and affirm the role of the states (and territories) in its own words to promote and communicate to the Australian people the benefits of Australia's federal system in providing diversity of policy options. But the body has had an even lower profile than COAG and it has been a good example of what is often described pejoratively as a talkfest. The ideas that have been explicated under its auspices (speeches, papers and reports) as well as those which it considers supports its federalist stance are reproduced on its website which constitutes a valuable repository of pro-federalist ideas. These have probably informed actual negotiations at a political level. However, the CAF itself has not been a major influence on policy. Which brings us back to COAG. There is a widely accepted view that many reforms achieved by COAG, while in themselves desirable, have been, in the larger scheme of things, relatively insignificant. The two major problems of federalism (education and health) remain issues where the states and the commonwealth have very publicly disagreed both on matters of principle and with respect to funding responsibilities. At COAGs most recent meeting (in April 2013) a proposal that the funding of schools be made jointly by the commonwealth and each of the states, and that this be done according to certain principles putforward in a Report commissioned by the government (the Gonski Report) and made public in 2012, was discussed but has yet to be agreed to all by all states. A major sticking point appears to be not only the share of funding to be borne by the commonwealth and the states but the level of control over policy relating to education that will be entailed if the states sign up to the deal that is proposed by the commonwealth. An aspect of the work of COAG where some progress has in fact been made (though little publicity has been given to it) relates to an initiative made in 2006. By this time, National Competition Policy (one of the most significant creations of COAG in its early years in the 1990s) was drawing to a close NCP had in fact been a ten year plan. Thus the then premier of the Victorian state Labor government Steve Bracks, in what was essentially a move to maintain the role of the states via COAG (and which some saw as an attempt to actually hijack the organisation) proposed, and had COAG agree to, a National Reform Agenda (which quickly came to be referred to as the NRA). The need for the NRA was explained by Bracks as follows: This new wave of collaborative reform builds on the success of a quarter of a century of national economic and social policy reform, which has fundamentally reshaped the Australian economy and increased living standards [these reforms are considered in subsequent topics in this course]. [But] as national demographic trends begin to bite and global competition intensifies, it is vital that all governments work together to deliver [further reform]. Complacency is not an option. 11 The most significant element of the NRA related to the area of human services (or what is referred to as human capital reform) essentially to aspects of the general areas of health and education for which the states had been responsible and in which concerted reforms on their part could contribute to the improvement of productivity and maintain their relevance. While several policies implemented by various states can be seen as consistent with the goals of the NRA the basic question remains: can COAG satisfactorily address the fundamental problem of the way in which different elements of the overall health and education systems, and the production of services such as transport and water supply, are controlled and undertaken by a mixture of commonwealth and state governments in a manner that appears to have no real national rationale? As a result do we have to accept as inevitable that in a federal system there are inefficiencies and buck-passing between different tiers of government? Or can Australian federalism be made to work better? In the lead-up to the 2007 commonwealth election, federalism and in particular the blame game was made a prominent issue. Subsequent to the election of the Rudd government in that year there was an increased focus on COAG. Very soon after its election the new Rudd government, as if to underline the importance it attached to this matter, conspicuously called a meeting of COAG only a few days before the Christmas break. This meeting (attended by the commonwealth and all state governments [which were then all Labor governments]) established seven working parties to recommend action on issues which have been perceived as problem areas in federal-state relations (including health; the productivity agenda [which includes education]; and climate change and water). The first of these working parties met in January 2008. But the fresh spirit of goodwill that accompanied these events soon evaporated in the face of two developments. The first was that the political pendulum started to swing against Labor at the state level, exacerbating differences between the states and the commonwealth, both philosophical and financial. The second was that the effects of the global financial crisis, felt from late in 2008, and the implementation (in large part by the states) of commonwealth initiatives to maintain the level of expenditure in the economy sidetracked discussions of matters of making federalism work. Where agreements between the commonwealth and the states were in fact made during this time, they were typically made outside the COAG framework and, in the context of worsening vertical fiscal imbalance, often only on the basis of the commonwealth granting the states additional revenue. This was accompanied by a feeling on the part of the states that their agreement was being secured only by it being bought. In 2014 a general recognition by political and economic commentators that the failure to make federalism work is resulting in a great deal of economic inefficiency, and is being reflected in the lowering of GDP per capita in Australia below its potential, hasheightened the issue of federalism. There are two broad camps: those on the one hand who consider that things could be made work better and those who consider that the commonwealth should simply withdraw from some areas where it was never intended that it be involved. This latter view is most clearly manifested in policy suggestion that, for example, the12 commonwealth Departments of Education and Health simply be abolished. Perhaps it will mean that the achievements of COAG despite them being incremental, unspectacular and not widely discussed will, in retrospect, be seen as significant. An example is the establishment in 2012 of a new National Business Names Registration System to replace the business names registers previously operated by the various states As a consequence it is now necessary for a business trading in more than one state to pay only one renewal fee for the name to be registered nationally, instead of arranging, and paying for, registration in each state and territory. Another example (but even less widely appreciated) are reforms to heavy vehicle regulation which CAOG estimates to deliver a $30 billion benefit to the national economy over 20 years. Issues of principle All this matters in that it has considerable significance for the way in which economic resources are used in Australia to produce goods and services. And there are some important matters of principle associated with a federal system of government. The principal advantage of a system of government that includes one, or more, lower levels (in Australia the states and local governments) is that it allows for goods and services (i) to be produced by government (in cases where production is accepted to be a responsibility of government), and/or (ii) (in instances where the production is undertaken by private business firms) for the production process to be regulated, in ways that accord more closely with the demands and needs of people in smaller jurisdictions (typically smaller geographical areas consisting of a smaller number of people) or for what is often referred to as more responsive government. The contrast is with one centralised national government which makes blanket decisions for everyone. There is an argument in principle (sometimes referred to as the subsidiarity principle) that holds that economic power should rest with the lowest level of government in so far as the lower level of government will have the best knowledge of the needs of the consumers and businesses affected by their actions and policies. (This is sometimes expressed as decision-making being closest to the people it affects) In addition, a decentralised system allows for beneficial competition between these lower levels of government (i.e. to see how they can govern best). But there is a counter argument that favours responsibility being handed to the highest level of government, particularly in cases where there is/are a high degree of commonality in the types of services being demanded by people across different jurisdictions (i.e. states) its for this reason that defence is one 13 area where there has been little argument about it being undertaken by the national government; significant economies of scale to be reaped by having only one tier of government provide services, or a high degree of mobility of individuals between jurisdictions (hence, for example, the frustration of those citizens members of the defence forces for example subject to being moved between states with differing education systems for their children). In such circumstances decision-making undertaken by just one tier of government allows for a more coherent and holistic system to be developed. It avoids inconsistency between sub-jurisdictions, the duplication of services (and hence waste of resources), and the shifting of responsibilities between different tiers of government with the result that some services are not adequately provided. The practical issue for a society that has inherited a federal system (in both political and economic terms) is to devise arrangements that reflect a balance between centralist and decentralist principles so as to maximise the virtues that attach to each and minimise the disadvantages. In striking such a balance in a federal system it is necessary to find a balance between competition and cooperation among the different elements. Accordingly the principles of competitive and cooperative federalism are an issue that inevitably crops up in debates about policies and institutions. Note that these principles apply both horizontally (i.e. between different governments at the same level [in practice between the states] and vertically (i.e. between governments at different levels [in practice between the commonwealth, and the state governments collectively]. It should be noted that competition is not necessarily thought of as being a bad thing Indeed, it is widely regarded as being one of the advantages of a federal system Competition can occur between the states (i.e. horizontally) in the pursuit of economic policies and institutions which better promote the welfare (however that is defined) of their citizens. It may involve an individual state government themselves providing services (such as health and aged care, or education), or providing them in a way, that more effectively meets the demands of consumers for services. Or it may simply involve a state government providing a more favourable environment for private business enterprises to work within. Alternatively competition may be between the commonwealth and the states (i.e. vertical). For example, a national government may create an alternative regulatory 14 regime (for example in relation to the terms and conditions under which labour can be employed) that permits workers to opt out of a particular state regime without moving geographically to a different state. On the other hand, competition between second-tier governments can also have negative consequences. For example the competition to create a low tax environment (or as a means of securing popular approval to eliminate some taxes such as death duties) may mean that all states have to follow the leader and thereby undermine their own revenue base. More commonly (and this is the focus of current debate in Australia) competitive federalism (or at least different state governments doing their own thing) has resulted in inconsistencies between states and the incentive to avoid responsibility in some areas where it is considered to be more appropriately the province of the commonwealth. Cooperation on the other hand (both between the states and between them collectively and the commonwealth) has been seen more unequivocally as a good thing and desirable to avoid the problems alluded to above. This view is not totally unchallenged. A curmudgeonly view of cooperation sees it as resulting in a compromise position which imposes a less than optimum set of policies on everyone and indeed being analogous in some ways to decisions made by a cartel (an issue discussed in more detail in a later topic). Whither Australian Federalism? Discussion of major issues for example, that relating to education and the implementation of the funding levels recommended in the Gonski Report continue to be rancorous. There appears to be no simple solution. Differences of opinion between the commonwealth and the states (and between the different states and territories themselves) on a number of subjects are exacerbated by both vertical and horizontal fiscal imbalance. By virtue of its sole legal power to collect taxes based on income (both personal and corporate) and expenditure, the commonwealth has much greater revenue-raising powers than the states who are, to varying degrees, heavily dependent on the GST revenue that is passed back to them by the commonwealth. By contrast, the states have more limited powers to raise revenue in order to provide the sort of services (such as school education and hospitals) to which they have traditionally been committed since federation and which they see as their province to provide. In fact not only do state taxes raise relatively little revenue they have been subject to criticism for the economic inefficiency they imply, particularly in the case of one of the major 15 sources of states revenue taxes on the transfer of property (generally referred to as stamp duties). An agreement by the states at the time the GST was introduced to reduce or completely abolish many of their taxes (though the nature and strength of this agreement varies considerably in the minds of those who were involved) has not, by and large, been realised. While the states are reluctant to relinquish any of their limited revenue-raising capabilities the commonwealth government is equally reluctant to increase the rate of GST even in the face of the pressure faced to reduce the governments budget deficit. The substantial reduction in the amount of revenue provided by the commonwealth to the states that was announced in the 2014 government Budget (though largely unheralded) actually exacerbated the fiscal imbalance and was seen by some as an essentially political act designed to cause the states (who would therefore take the political blame) to campaign for an increase in the GST (and as a result an increased source of income for themselves). A White Paper was commissioned by the commonwealth government in mid-2014 although the study will be undertaken primarily by the commonwealth department of the prime minister and cabinet and it remains to be seen if it will provide any significant solution to the problems of Australian federalism. The abolition of the COAG Reform Council, announced in the 2014 Budget, while the Council was not created specifically to address the issue of federalism, will only serve to weaken the scrutiny applied to the spending of governments at different levels. Ultimately of course the issue, even though it has considerable economic implications, is a political one. The prime minister himself is regarded as having no clear view on the matter indeed to have expressed different, even diametrically opposed views, on the relative roles of different tiers of government. Other ministers have also indicated that they have very fluid and selective views on the implications of the Australian Constitution for the role of the commonwealth. COAG itself seems to have been largely sidelined indeed to have sidelined itself from discussion of the fundamental issues of the federal system. The minutes from its most recent meeting (in May 2014) merely recorded its response to the proposed White Paper in typically bland terms: COAG agreed there are opportunities to ensure Australias federation is functioning well, supporting a strong, dynamic economy and delivering effective services to the community. All governments committed to work closely and collaboratively on the White Paper. A Steering Committee, chaired by the Commonwealth and involving all States and Territories and the Australian Local Government Association, will be established to oversee the development of the White Paper. Some commentators have called for the states to be abolished in their entirety in view of the fact that disagreement between the states and the commonwealth merely serve to delay the implementation of important reforms, and the continued existence of the states 16 only prolongs the duplication and inefficiency, and sometimes gaps, which has come to characterise Australian federalism. And indeed to some extent the states may be abolishing themselves by amalgamating local government jurisdictions. Some see Australia as on a path towards a two-tier (rather than a three-tier) system where larger regional governments will come to replace the states. However, where amalgamations are taking place (as is the case in many states, including Queensland) the larger regional bodies are showing little sign of wanting to assume responsibility for functions currently undertaken by the states as distinct from merely taking on responsibility for the functions they have traditionally undertaken (sewerage, rubbish collection etc.) on a larger scale. And given the political pressures likely to be involved its probably not likely that the states (even if they are as has been said a historical accident and an anachronism) would accept their own demise. A possible way forward is that suggested by a prominent economist and former politician (John Hewson). Hewson has suggested that the problems of Australian federalism be addressed by a Federal [or Federation] Commission made up of non-political figures to chart a way forward that takes advantage of diversifying political and economic power (as a federation does) while addressing some of the particular problems of duplication, overlap, waste and acrimony that accompanies the Australian federal system at the present time and acts as a drag on GDP. It remains to be seen whether this or some similar body (or perhaps even COAG) will be able to chart a way forward or whether we should just accept that the task is impossible, resign ourselves to the present mess as an inevitable cost of diversifying economic and political power, and be pleased with the incremental improvements that COAG continues to make.