Fiscal decentralisation

Australia’s biggest political problem, Tony Abbott wrote in Battlelines, is the “dog’s breakfast of divided responsibilities” between Commonwealth and State:

Tackling the dysfunctional federation turned out to be a lost opportunity for the Howard Government…  Certainly, it would have been a political objective worthy of a great prime minister. It could have been the principal element in the fifth-term agenda that people ultimately concluded the government lacked.

It is clear from Tuesday’s budget that the Prime Minister intends to take up the challenge, though not by extending the Commonwealth’s reach, the option he once considered .

The emphasis Joe Hockey put on the possessive determiner in his interview with Alison Carabine on ABC Radio National Breakfast this morning is instructive:

If they (the states) want to maintain that level of funding for their schools and their hospitals, which is well in excess of what the base funding has been over previous times, then they have to get it from the taxpayer as we would have to get it from the very same taxpayer.

Carabine concludes that Hockey is signifying changes to the GST when he says:

We will sit down with the states and work out a way that the people who actually run the schools and run the hospitals can be more efficient and actually raise the money that needs to be raised to run them

But there is another option, canvassed by the Commission of Audit: state income tax. As I wrote last week:

If Rudd accomplished nothing else in office he did at least perform a useful service in disabusing us of the notion that Canberra knows best…

The lines of overlapping responsibility must be disentangled, but Canberra should be doing less, not more…

Fiscal decentralisation is an idea worth reconsidering. Federal income tax would be slashed, since Canberra would have to send fewer cheques to the states. States could set rates as they pleased, allowing them to compete with one another.



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28 Responses to Fiscal decentralisation

  1. Baldrick

    Hockey is obviously wedging the States into agreeing with changes to the GST, at the next election, so they can fund the education and health cuts announced in the budget.

  2. Rabz

    States could set rates as they pleased, allowing them to compete with one another.

    Fine in theory, unworkable in reality.

    State governments (as with the Commonwealth) are addicted to taxing and spending.

    And to be honest, I’m not really interested in debating this self evident truth. This may have been the case in the past, but decades of utterly incompetent and corrupt labor state governments addicted to taxing and spending have fucked it for everyone.

    Exhibits A and B: The Victorian and NSW Liberal governments.

  3. H B Bear

    Reversal of the 100+ year trend of Commonwealth centralism and the establishment competitive State jurisdictions would be the most constructive political development since Hawke-Keating. Short of moving to Singapore, there is almost no scope for exercising political choice in Australia. I have my doubts that Abbott is the one to deliver it but it looks more promising than ever.

    KRudd’s greatest strength was his utter incompetence while simultaneously believing himself to be the smartest man in the room.

  4. H B Bear

    This may have been the case in the past, but decades of utterly incompetent and corrupt labor state governments addicted to taxing and spending have fucked it for everyone.

    People haven’t had a low tax option since Bjeke-Petersen in the 80s. Look at the US and compare Alabama, North Carolina, Texas to California and NYC. Businesses go to where costs are lower. People follow to jobs and cheap housing.

    Until now in Australia it is not until Labor bankrupts the State (Cain/Kirner in Vic) or chokes it off (Carr in NSW) that people are forced to move.

  5. .

    The solution is not only more states, but to devolve to local authorities and have more states.

    It won’t work here until shires are not a plaything of the DLG.

    The constitutional recognition amendment wasn’t the way either.

  6. incoherent rambler

    Ahh. For a period.

    Australia’s biggest political problem, Tony Abbott.

  7. .

    My proposal about local recognition, if it must be done:

    My parting words:

    Shires should be recognised as permanent jurisdictional polities – in fact the fundamental one. They decide where a State gets formed, and the State ought to decide what they do cooperatively by interstate treaty and what outside immigration, national security and general defence roles that the Commonwealth ought to do.

    Responsibilities of nationwide, non Federal interest shouldn’t be referred, they should be agreed to interstate, without the Commonwealth’s involvement.

  8. I’m forming the opinion that the Federal government should keep the lowest tax bracket only, and leave every thing else to the states.

    This is a far better outcome that changing the GST.

  9. Boambee John


    As with Senate reform (your proposed urban/regional electorates in each state), I’m with you on this one.

  10. Yes, but in the initial instance it must be managed such that there is zero net change in total income tax. Governments could then adjust rates in subsequent budgets such that each would face the direct wrath of their electorates.

    Apart from the constitutional challenges however, I suspect the first outcome would be an initial tax hike in eastern states and potentially less in the west. Of course, people would sceptically view such a change as an overall tax hike. I suspect they would be right.

  11. KRudd’s greatest strength was his utter incompetence while simultaneously believing himself to be the smartest man in the room entire universe, and of all time, and the most wise.

    There, fixed.

  12. As with Senate reform (your proposed urban/regional electorates in each state), I’m with you on this one.

    Add to that a minimum wage based on the regional average salary and the nation transforms over time.

  13. ChrisPer

    each would face the direct wrath of their electorates.

    You wish.

    What a pity tar and feathers are not approved under OHS standards for politicians. Even more a pity that hung Parliaments in Australia use so few lamp-posts.

    We need more wrath than we can deliver. Voting the bastards out every so often is not enough.

  14. Rococo Liberal


    NSW is now top of the heap in relation to most of the economic indicators. When the Coalition was elected in 2011, it was at the bottom or the middle. So I suspect your problem is you have been listening to the fundamentalist lefties for too long. because they want government on the front page every day with huge initiatives, you want huge cuts. You mistake big activism for government. Most of the cuts and changes are pretty invisible.

  15. Riverina Matt

    A three year “pause” in the indexation of the Financial Assistance Grants paid to local government (via the states) will either mean rate rises or expenditure cuts.

    Larger metropolitan Councils won’t be greatly affected – rates and other charges (parking etc.) are the largest revenue streams. For those Councils where FAG makes up a significant part of their income – i.e. smaller, rural Councils – the pause will have a huge impact. Those Councils also have a very small rate base to recover any of the lost growth in funding. Will be interesting to see the impact on the viability of these smaller rural Councils.

  16. .

    I thought they were changing the structure so state corporations were going to pay rates…that would change the rate base. Hell, some could even cut rates and be well off.

  17. Rococo Liberal

    Nothing would be worse than having yet another taxing bureaucracy for us to deal with.

    I suggest that the Feds continue to collect the tax, but that the States each nominate a top up rate that they get from each person resident in their State. This would have to be done carefully, because of the Constitutional bar against the Commonwealth charging different rates of tax in different States.

    Maybe, the Commonwealth could firstly drop its rates. The States could then pass legislation mirroring the Commonwealth Acts imposing an income tax at whatever rate they wish. The ATO would then be appointed by the States as its agent to collect the State income tax.

    I think it could work

    There may be some interesting cases on residency, but other than that, it is an idea whose idea has come.

    I would suggest that the States should get at least half of the tax take.

  18. .

    Err, R.L., the OSR and ATO are still gonna be around.

    How would changes make a second OSR or AO?

  19. James B

    The GST kills competitive federalism. It just utterly ruins the idea of competitive federalism. Thanks Howard, you piece of shit.

    We need to allocate GST on the basis of population. Do that, and the states can start competing again.

  20. wreckage

    Income tax is still the lion’s share of taxation.

  21. Notafan

    Imagine if different states had the potential to have different GST rates ( as the US has different state sales tax rates)
    Then they could go to the voter and ask them directly how much they wanted to spend on schools and hospitals, and what the GST rate would be to pay for it.

  22. Michel Lasouris

    Let’s start with the kindergarten/farmyard in Canberra.
    I listened to the ABC broadcast from the Reps as it was Budget Day and was appalled at the standard of ‘skill’ and the level of knowledge.
    One Labor bimbo was tackling the PPL and said that it was restricted to “rich people, who got between $50,000 and $75,000. What?!
    And the standard of delivery of speeches was just awful. Whilst evidently speaking from a script, those sent to lead us in Canberra, stumbled over simple words and the grammar was execrable. I’ve heard 11 years old pupils in school speak with greater confidence . Who writes this crap?
    Moreover those who spoke verbatim were barely intelligible. All this was accompanied with constant cat-calls, abuse and interruptions. In the Senate the President shouts “order” several times a minute; often for a complete minute, and nobody takes the slightest notice. Are things different in the Senate, in that the President cannot eject recalcitrant Senators?
    I suggest that a start be made to impose order on both the Legislature and the Senate. All members should sit in sound-proof booths, and ‘log-in’. They would signal their wish to speak, or make a point of order, using a button connected to the Speaker/President. Not even Bronnie would have an excuse not to know each members name and constituency. Only the member speaking can be heard, and in the event of hysteria or bad behaviour, the Chair can immediately disconnect the Member. Members’ attendance can be logged, and votes would take a fraction of the time taken for the archaic method currently used. I can see that this could cause some Members ( Conroy, Albanese, and Cameron spring to mind) heads’ to instantaneously explode. Wonderful.
    If the ESNs who find their way into governing our lives won’t behave in a civilised manner, it must be imposed on them.

  23. H B Bear

    State Premiers starting to bleat about the shift in position by Hockey and the Feds. It suits both levels of government to be able to blame the other.

    This looks promising.

  24. I suggest that a start be made to impose order on both the Legislature and the Senate. All members should sit in sound-proof booths, and ‘log-in’.

    You’re almost right. MPs should remain in their electorates and contribute to debates by video link; this would save millions of dollars otherwise spent in flying MPs to Canberra and back to their electorates dozens of times a year.

  25. Michel Lasouris

    Deadman, I completely agree, but let’s do first things first. The poor lambs can’t cope with too much change, too quickly. You’re right, 90% of their ‘business’ could be done in a local office connected by Conroy’s solid gold NBN and this save heaps of time and money, and carbon ( if you must) in air craft costs and not a few marriages I guess. but they will still have to get together say twice a year, and we can’t risk them ‘breaking out’ They need containing and controlling.

  26. Michel Lasouris

    I forgot to say…Why? because we PAY them; they’re ours to do with as we will.

  27. danger mouse

    Not state income tax please. Far too complicated.

    Better to use payroll tax applied to all businesses at a flat rate. Then relieve businesses of the requirements to withhold income tax via PAYG, and simplify the compliance burden.

  28. Yohan

    Broadening the base of the GST to include food, education and medical – will raise 70 billion apparently.

    Give all that money to the states, then make them entirely responsible for all health and school funding. In return the federal government then vastly reduce personal income and corporate tax rates and corresponding amount.

    So now the States own the problem. But they will hate this idea, because for them broadening the GST is a means to just spending more money on local populist projects, not taking on more responsibility like health and education.

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