Policy from behind the scenes

[Scott Morrison, Malcolm Turnbull and Martin Parkinson]

Any good public servant will tell you that policy is determined by government ministers. In Senate Estimates, and other committees, you will often hear public servants say they cannot comment on policy issues, that such questions should be directed to the minister. That is the way our system works in theory but does it actually operate that way in practice?

Recently in my piece ‘What can we expect in the coming election?’ I suggested that Turnbull’s proposal that the states and territories should be allowed to reintroduce their own income tax was a ‘thought bubble’. Now I am not so sure. Now I think it probable that it forms part of a continuing campaign by the Department of Prime Minister and Cabinet (PM&C) and Treasury relating to reform of the federation.

At least one journalist, Simon Benson in the Daily Telegraph, seems to have spotted this:
Most of Turnbull’s colleagues agree with the principle. It is the politics of it that are diabolical. It was for this reason alone that Tony Abbott roared down the idea when Treasurer Joe Hockey — after badgering by the then Treasury boss Martin Parkinson — took it to the Expenditure Review Committee.

Parkinson is now Turnbull’s top bureaucrat as head of the department of Prime Minister and Cabinet. No prizes for guessing who might be pushing it.
Ideas for reforming our federation go back a long time. Even before formal establishment of the federation Henry Parkes was suggesting that double the number of states may be better than the then existing six colonies. In 1920 Labor proposed 31 provinces to replace the states. At other times new states have been proposed.

The current approach to reform appears to go back to 1996. We have temporarily dropped the idea of changing the structure of the federation but issues about responsibility and funding are now central to the discussion. Howard’s Commission of Audit in 1996 commented on how to reduce duplication, overlap and cost-shifting between the states and the commonwealth:
Ideally, responsibility for the delivery of all services and the collection of revenue to meet costs should be with one level of government. In practice, however, there would be inefficiencies if this were located at the Commonwealth level when more appropriate decisions could be made at the local level; whereas if it were to be at the State level the Commonwealth would have to relinquish some tax powers or collect earmarked revenue on behalf of the States. [emphasis added]
The Commission noted that such reforms were beyond its terms of reference but I think you will recognise the highlighted part from the current debate. The idea obviously did not die but lived on in the bureaucracy.

In 2006 the Council for the Australian Federation (CAF) was formed. It comprises the state and territory leaders and has two major objectives:
  • work toward common understanding of the States’ and Territories’ positions in relation to policy issues involving the Commonwealth Government
  • take a leadership role on key policy issues, including the Federation, that are not addressed by the Commonwealth Government
In 2007 CAF proposed convening a Constitutional Convention in 2008. It didn’t happen but Rudd did hold his 2020 Summit. The summit’s idea for federation was:
Reinvigorate the federation to enhance Australian democracy and make it work for all Australians by reviewing the roles, responsibilities, functions, structures and financial arrangements at all levels of governance (including courts and the non-profit sector) by 2020.

A three-stage process was proposed with:
  • an expert commission to propose a new mix of responsibilities
  • a convention of the people, informed by the commission and a process of deliberative democracy
  • implementation by intergovernmental cooperation or referendum
As with most of the summit’s ideas, not much happened but it was another step to be considered and hung on to within the bureaucracy even if the bureaucracy would keep more of the process to itself.

I will jump ahead to 2014 when Abbott also conducted a National Commission of Audit and agreed to the development of White Papers on the reform of the federation and tax. The Audit was able to say:
  • The White Paper on the Reform of Federation has a broad remit aimed at clarifying roles and responsibilities between all levels of government to ensure that, as far as possible, each level of government is sovereign in its own sphere. [emphasis added]
  • However, in order to meet this goal, funding capacity is a key driver.
In April 2015 COAG ‘agreed the goal of federation reform is to improve the standard of living and wellbeing of Australians’. It also agreed that any reallocation of responsibilities between governments should aim to:
  • deliver better services
  • drive economic growth
  • be fair
  • provide clear responsibility — people should be clear which level of government is responsible for services so they can hold them to account [emphasis added]
  • be durable
Among the objectives for the White Paper were:
  • reduce and end, as far as possible, the waste, duplication and second guessing between different levels of government
  • ensure our federal system … enhances governments’ autonomy, flexibility and political accountability [emphasis added]
And in the ‘issues to be considered’, what about this?
  • the practicalities of limiting Commonwealth policies and funding to core national interest matters, as typified by the matters in section 51 of the Constitution
Section 51 of the Constitution includes:
  • trade and commerce with other countries, and among the States
  • postal, telegraph, telephonic, and other like services
  • lighthouses, lightships, beacons and buoys
  • astronomical and meteorological observations
  • quarantine
  • census and statistics
  • currency
  • banking, other than State banking; also State banking extending beyond the limits of the State concerned
  • weights and measures
  • bankruptcy and insolvency
  • copyrights, patents and trade marks
  • naturalisation and aliens
  • marriage
Ideally, they want an old style federation with the states exercising much more independence — but I thought we abandoned that in the name of a national economy and national consistency in services like education and health.

Vertical fiscal imbalance (VFI) is considered a major problem. VFI is simply that the commonwealth collects most of the money but the states deliver most of the services and so become reliant on transfers from the commonwealth. The Issues Paper on federal financial relations states:
The existence of VFI is not necessarily a problem in itself, but a high degree of VFI creates perverse incentives for both levels of government. It allows the Commonwealth to act in ways which can compromise the autonomy of States and Territories in their own sphere, thus creating confusion about democratic accountability … A high degree of VFI also creates incentives for the States and Territories to blame the level of Commonwealth funding for problems in State-delivered services, rather than to make the case to their own electorates for raising more funding from their own revenue sources. [emphases added]
From what I can glean, Turnbull has a proclivity for the number ‘2’. His approach to schools and taxation both appear to come from options 2 in the relevant sections of the reform of federation Discussion Paper.

For schools option 2 is:
States and Territories responsible for funding government schools and the Commonwealth responsible for funding non-government schools.
In considering this option, the paper blandly states that the states and territories ‘would need to consider how they could manage the issues relating to funding and regulating their own government schools’. [emphasis added] Despite that somewhat casual dismissal, funding is the key issue.

And on financial relations, option 2 is:
Increase State and Territory access to tax revenue
This could be by:
  1. reducing personal income tax rates by a certain amount and allowing the states to apply a ‘surcharge’ of an equivalent amount; or
  2. transferring a fixed percentage share of personal income tax collections to the states. (In both of these approaches, as regards the areas funded by the approach, such as schools, ‘it would need to be clear that the Commonwealth would not re-enter these areas of responsibility in the future’.) [emphasis added]
  3. expansion of the GST
We know that 1 and 3 have now been floated and rejected and only 2 remains on the table and is still being considered by Morrison.

In the light of all that has been written by public servants in the federation reform discussion papers, noting that even papers prepared by so-called Commissions are written by public servants who also assist and advise such bodies, take account of this statement by Turnbull after COAG rejected the state income tax idea:
If they’re not prepared to make the case to their citizens, through their Parliament, for higher taxes, they cannot seriously or credibly ask us to raise taxes to give money for them to spend.
Yes, echoes of the argument regarding the perverse incentives of VFI and the need for political accountability. So Turnbull did not pluck the ideas for state taxation, nor the commonwealth abandoning funding of schools, from out of the air. They were not ‘thought bubbles’ as I previously described them — so perhaps I owe Turnbull an apology for that — but no doubt a result of briefings he received and/or his own reading of some of the reform documents. As Simon Benson suggested, there are senior public servants strongly pursuing certain aspects of the reform papers (while ignoring other options actually mentioned in them).

Morrison supported Turnbull in his interview on AM on 4 April:
… what was basically put out there was the opportunity for them to have greater autonomy over these issues. They decided that they, they didn’t want to do that.

… the question really put to the states was a question about what level of sovereignty and autonomy they wanted to have over the revenue side of their budgets and the Prime Minister called that bluff last Friday.
Even the words ‘sovereignty’ and ‘autonomy’ feature prominently in the federation reform papers. So where do these words come from? — not from ministers’ own thoughts but from the influence of advice coming from their public servants (or advisers who have been briefed by public servants).

So who is really influencing policy? The ministers may still ‘determine’ policy, and do have to take account of the political implications (which public servants do not), but it seems many of the ideas actually arise in the public service. In the various reports and papers I have quoted, I think you will notice that the same concepts, phrases and even words recur which is a clear sign that the influence is coming from the public service.

And if we go back a little in history, the GST can be shown to be another idea from the public service. Ever since the late 1970s the treasury boffins were concerned about what would happen to government revenues when the baby boomers left the workforce and income tax revenue fell. Their answer was a broad-based consumption tax so that even when they retired the baby boomers would continue to contribute to government revenue. It appears it was first tried when Howard was treasurer in the Fraser government. Howard took the idea to cabinet in 1981 but it was rejected. When a new government was elected in 1983, and a new treasurer appointed, Paul Keating, they rolled out their next attempt to get it through. Keating supported treasury’s advice but had to take it into Hawke’s 1985 Tax Summit in the hope of getting consensus. He didn’t and the idea was dead, at least so far as the government was concerned, but not in treasury. In 1996, 13 years later, along came another new government and another new treasurer, Peter Costello, so treasury rolled out the idea again, despite the political fact that John Hewson had lost the ‘unlosable’ 1993 election with a consumption tax as the central plank of his policy. Howard had promised there would ‘never, ever’ be a GST under his government but by the time of the 1998 election, treasury had gotten its way and that consumption tax became part of the government’s platform. When it won the election (on seats, not overall votes) the government negotiated a deal with the Democrats to get the GST through the senate and it came into effect on 1 July 2000.

Treasury didn’t get everything it wanted in that deal but it had won a battle (if not yet the war) it had fought for 20 years. Treasury would have liked a higher GST on a broader range of goods and services but politicians have to negotiate what is possible, which is what Howard did at the time.

But as we have seen in the past 12 months, the GST was placed back on the agenda, this time on pretence that it would assist the states and territories and help fund hospitals and schools. For treasury that doesn’t matter, as any increase in that way in state revenue allows for the reduction of other commonwealth payments to the states. So the issue, almost 40 years after it was first conceived, is still burning within the public service and, although it has been laid aside for now, will no doubt raise its head again.

Similarly, I have no doubt that, although Turnbull has had the idea of state income tax rejected, the idea is not dead in the public service. It may be two or three governments into the future (perhaps ten years) but it will also raise its head again. In the meantime, there will be continuing efforts by Treasury and PM&C to transfer more powers to the states so as to reduce commonwealth expenditure. They will find other ways in the short term but as the fiscal pressure builds on the states expect another round of discussion on state levied income tax.

Governments come and go and the public service is effective in providing continuity. It is meant to be continuity in administration but I think my two examples in this piece also suggest that it plays a significant role in the continuity of policy, despite the fact that public servants will continually tell you that policy is a matter for the minister.

What do you think?
Is policy ‘a matter for the minister?’

Is reform of the federation needed?

Let us know your thoughts in comments below.

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28/04/2016Read all about it!!! Turnbull drops federation White Paper. http://www.abc.net.au/news/2016-04-28/malcolm-turnbulls-$5-million-tax-white-paper-scrapped/7367204 Proving that this is really all about money, the idea will be progressed by the Commonwealth and State Treasuries. Perhaps this is one that Martin Parkinson has lost for now but there will be much to come as the treasuries try to sort out some sort of deal.

Christopher H

28/04/2016Vertical fiscal imbalance is much the same as it has been from the time of federation, though its composition has changed. That is, the States collect about as much of their total revenue themselves as ever; and they rely on the Commonwealth for about as much of the States' revenue as ever. (They used to raise more from State enterprises; and the revenue elements among State taxes and charges have changed in composition, and in operation, over time.) But the 'give States more of their revenue in their own taxes' push is just silly. Suppose the States markedly increase their own revenue as a share of their total revenue. Nothing will change, if the Commonwealth is still the source of a substantial and critical part of funding: and if the Commonwealth is still able to make funding conditional on doing what the Commonwealth wants, or not doing what the Commonwealth abhors. And it's impractical (to use a euphemism) to increase State own revenue without removing Commonwealth payments entirely. The history of payroll tax (formerly Commonwealth), of land tax (formerly Commonwealth), of death duties (formerly Commonwealth) and of many other elements shows that Commonwealth changes to an element of State revenue have no necessary or sustained effect even on the proportion of State revenue that comes from State raising. Certainly at no time since Federation have Commonwealth changes to State funding increased State budget autonomy. (And many changes that, nominally, reduced State autonomy actually had a lot less of that effect overall than was argued.) The Federation White Paper approach doesn't even admit the prospect of States raising more and being docked, more, by the Commonwealth appropriating the real benefit. And there's nothing in the White Paper approach to allow States any freedom to manage their expenditures and their revenues without consequent adjustments in Commonwealth action. The Commonwealth position is purely political and has no actual or intended substance. The States are not meant to get any greater autonomy: they are merely meant to provide cover for Commonwealth cost shifting at their expense. This is the mirror of the sort of fiscal shenanigans States routinely try against the Commonwealth - and it's bad policy in either direction. The Commonwealth keeping credit for funding 'private' schools, while dumping responsibility for public schools and overall school education in Australia, is the sort of disregard of overall Australian policy that the Commonwealth position would enlarge.


28/04/2016Christopher H Welcome to TPS and thank you for your excellent comment. Yes, VFI has been an issue for a long time and, as you suggest, the proportion of commonwealth funding to the states (around 45%) has been similar for some time. You are right about all the changes not achieving anything in the longer term. When Costello was introducing the GST it was described as a 'growth tax' for the states; with all that extra income states were supposed to abolish 'inefficient' taxes, like payroll tax. States still have payroll tax. And now they are saying they are not getting enough from the GST. It wouldn't be anything to do with Abbott, Hockey and now Turnbull leading the economy into a deadend!! If there is little or no growth in the economy; if there is a lack of consumer confidence; and consumers aren't spending as much, then obviously the states are going to lose out. Some economic stimulus may help! It is all about the money. All that PM&C and Treasury are worried about is commonwealth expenditure (again a product of a poorly performing economy). I think all the 'fluff' about responsibilities and political accountability is just screening that issue. Yes, cost shifting has been going on for decades (that I am personally aware of) and as you suggest this is just the commonwealth performing its version. I think we all agree that there are greater benefits in having some sort of uniformity and consistent quality in services like education and health and the proposals as they stood would likely destroy what has already been achieved in that regard.

John Kelly

1/05/2016We live in a world of fact and make believe. We believe that taxes fund spending and that any spending over and above tax revenues must be borrowed or drawn down from savings.....just like a household. The fact is we live in a fiat currency world where taxes don't fund spending, where all government spending is newly created money and there is no need to borrow anything. Why would a currency issuer ever need to borrow?


3/05/2016John Thank you for your comment and 'crossing over' from AIMN. I know about MMT but must admit I don't think I've quite got my head around it yet even though I follow Bill Mitchell and have read and watched pieces on it. It worries me that inflation still remains an issue under MMT and can limit how much money is created. But keeping inflation low is of benefit mainly to the big financiers. They know that inflation reduces the value of the loans they have made. So my worry is that if MMT also considers inflation as important, is it no more than another variation of neoliberal economics?
T-w-o take away o-n-e equals?