Beyond the Blame Game: Political Strategies for State Funding Reform

Abstract

There is growing concern that intergovernmental financial relations in the Australian federation are becoming increasingly acrimonious and dysfunctional. This paper argues that it is necessary to analyse State funding as a whole, including the critical relationship between State-level taxation and its reform and the broader Commonwealth Grants Commission regime, if we are to establish a system of State funding which is financially sustainable, promotes economic efficiency and is broadly congruent with established norms of Australian federalism. Above all, based on international experience, we argue Commonwealth leadership is required to achieve this goal. We conclude with a case study concerning resource taxation which demonstrates how the Commonwealth could provide leadership using a 'bundled' approach to policy reform. It is argued that such an approach has the potential to alleviate wider intergovernmental conflicts which currently afflict Australian federalism.

Pathways to housing tax reform

“…Their effect is reinforced by the financial relationship between the Australian Government and the states (Eccleston, Woolley et al 2013;Eccleston and Smith 2015;Smith 2012;Warren 2010;, and deeply institutionalised relationships between major political parties and commercial interests which corrode capacity to implement reform proposals (Eccleston and Marsh 2011). These political challenges are compounded by a wider concern that Australia's political leaders are no longer willing or able to promote economic reform in the national interest.…”

“…Thus, individual options have become politicised within Australia's adversarial twoparty system.  Australia's federal system, especially financial relations between the Commonwealth Government and the states, adds further complexity (Eccleston, Woolley et al 2013;Eccleston and Smith 2015;Smith 2012;Warren 2010;). For example, there is a risk that some states may be penalised for implementing subnational property tax reforms due to the operation of Australia's fiscal equalisation regime.…”

“…For example, the efficiency gains to the Australian Government if states transition to a recurrent property tax (Eccleston, Woolley et al 2013) could be directed to a program of incentives encouraging state governments to pursue reform. The Australian Government should also administer and underwrite deferral regimes to ensure that low-income, asset-rich households are not unduly affected by the introduction of a recurrent property tax or changes to the pension asset test.…”

Pathways to state property tax reform

“…In particular, financial relations between the Commonwealth Government and the states have significant implications (Eccleston, Woolley et al 2013;Eccleston and Smith 2015;Smith 2012;Warren 2010;Wood, Stewart et al 2010b). Some of the challenges posed by Australia's federal system include:…”

“…The Commonwealth Government will benefit from an efficiency dividend (Eccleston, Woolley et al 2013), and part of this windfall could be used to encourage state governments to undertake reforms. This strategy was central to the successful implementation of national competition policy in the early 1990s while a more recent OECD study of successful subnational tax reforms also highlighted the importance of national leadership (Blochliger and Vammalle 2012).…”