The future of federation
The states should take the lead in fixing our federation. By Dominic Perrottet.
The following is an edited transcript of remarks delivered by NSW Premier Dominic Perrottet to the National Press Club on 08 December.
Today my topic is the future of federation in a post-COVID world.
The pandemic may not yet be over.
But now is the right time to start thinking about the lessons COVID has taught us about our federal system of government – and how we can respond.
Because the pandemic has been a stress-test for federation.
It has demonstrated its many strengths, and obvious weaknesses, in ways that are tangible to our people.
So now, while the results are fresh in our minds, we have a rare opportunity – and I believe, an obligation – to apply the lessons we have learned and make our federation stronger.
What the pandemic has put beyond doubt is the importance of strong states to the fortunes of Australia.
There is a renewed sense of parochialism and state pride.
Pandemic Premiers have enjoyed unprecedented popularity.
As the Victorian comedian Sammy J put it, “even my child knows the name of the Tasmanian Premier – hasn’t she suffered enough?”
The Commonwealth government has obviously played a pivotal role as well.
The JobKeeper program saved the economy.
And while vaccination may not have started off as a race, it is certainly a race that we are now winning.
But the pandemic has been fundamentally a frontline crisis.
And when it comes to frontline service delivery, the responsibility lies with the states.
So I believe federation reform in a post-COVID world should be state-led, not Commonwealth led.
Reform should be driven from the bottom up. That will be our best prospect of success.
We need to move to an era of frontline federation.
Today I want to tell you how it can be done, and I want to propose two areas where we can make a start.
Board of Treasurers: a blueprint for success
One of the best innovations early in the pandemic was the creation of the National Cabinet.
The process may have been bumpy, but it has been a lot more productive than COAG ever was.
Obviously I haven’t been premier for long, so my personal experience with the National Cabinet is limited.
What I can talk about is my experience as Treasurer.
The Treasurers’ equivalent forum is the Council on Federal Financial Relations, or CFFR.
My first experience in a CFFR meeting left a lasting impression.
I remember going through the agenda before the meeting, and the one item that I thought was the most substantive was a submission by the Queensland Treasurer on state-based income taxes.
The same idea had already been floated by the PM at the time, Malcolm Turnbull.
This was real policy, and something that, in my naivety, I was looking forward to having a robust discussion about.
But it was the last item on the agenda – the only non-Commonwealth item – pushed right down near the “no man’s land” of general business.
And after a long day, when the Queensland Treasurer eventually spoke to the proposal – it was brushed off without any discussion at all.
It was a completely deflating experience.
We went to all that trouble to get all the right people in the room, but we let another opportunity for a serious policy discussion go begging.
When I left I turned to my chief of staff and said, “Well that was a complete waste of time.”
And I asked the acting Treasury Secretary, “Is this what they’re always like?”
And her answer was: yes.
What was of most interest to me is that the states didn’t support each other.
That meeting, its agenda and its outcomes were entirely driven by the Federal Government.
The night before the next CFFR meeting which was held a few months later here in Sydney, I organised an informal gathering of the state treasurers in the NSW Parliament.
And alongside the Victorian Treasurer, Tim Pallas, we signed everyone up to a new body: the Board of State and Territory Treasurers.
We realised that the Federal Government could take a “divide and conquer” approach to these meetings – because we weren’t working together.
And while we didn’t agree on everything, there were many areas where we had strong common interests.
The point of the Board of Treasurers is to get states working together across party political lines to develop good policies.
Not just the treasurers – but treasuries too.
And I believe the Board’s role in improving the working relationship between the state treasurers and their bureaucracies has turbo-charged our capacity to deliver better policy.
The states have so much in common with one another, even despite their differences
So it makes sense to work together – to share information, test ideas, and collaborate – all while maintaining a dynamic competitive tension.
I’ve often said that, on many issues, I have more in common with my Labor counterparts at a state level than a Coalition treasurer at a Federal level.
We might sledge each other every now and then, but within the Board of Treasurers politics doesn’t really have a place – the focus is “outcomes”.
And there have been some very important outcomes.
One example is the “no worse off clause” that eventually became part of the Western Australia GST changes.
The Commonwealth has legislated a GST ‘relativity floor’ which notionally applies to every state.
But the only practical winner is Western Australia, which gets to keep a bigger share of GST even when its mining royalties are booming, like they are this year.
The GST is a zero-sum game, so if WA is getting a larger share, someone else’s must shrink.
So the Board of Treasurers resolved to get a guarantee written into the legislation that no state would be worse off.
And we did.
We only got that outcome by sticking together and applying pressure to senators.
Because the Senate is the state’s house, I wrote to every NSW Liberal and National senator, and reminded them of their obligation to stand up for their state, not their political party.
The animating force of the Board of Treasurers is an understanding that the states have a responsibility to be proactive, to generate ideas, and put them on the national agenda – not abdicate that job to the Commonwealth.
The Board’s work has made the states a more potent force in shaping federal financial relations again.
Rather than picking states off, the Commonwealth government on many issues is now confronted with a strong unified voice.
In contrast, the CFFR model, like COAG was, has been characterised by low expectations and low energy.
COAG might have been good for a headline, but it’s actually where good ideas went to die.
If that is the atmosphere states expect, they won’t make the effort, our federation stagnates, and people of every state pay the price.
Ultimately this is about the states accepting their share of responsibility for our nation’s destiny.
Federation reform must be driven from the bottom up – that is, from the frontline.
That’s how our modern nation came to life, and that’s the only way it can maintain its vitality into the future.
What I’ve seen with the Board of Treasurers is a blueprint for success, and we can do the same thing with first ministers.
There is already a council for first ministers – known as the Council for the Australian Federation.
When I checked the website this week, it said the most recent meeting was in 2018.
Now I’m fairly certain it has met since then. And it turns out we are due to meet again tomorrow.
But the lack of visible action says a lot about the prominence of this body in the life of our nation.
And with NSW assuming the Chair of CAF next year, I want to change that.
My priority will be to enhance the Council’s standing as a vehicle for proactive, state-driven leadership, and reform from the frontline.
And I will work with my fellow Premiers and Chief Ministers to make this happen.
This is not about fighting the Commonwealth. It’s about working constructively, and bringing more to the table, including at National Cabinet.
In my experience, the Board of Treasurers actually improved the working relationship between the NSW Treasury and the Commonwealth Treasury.
Because there is now an expectation that serious, considered ideas are being put forward, usually with the buy-in of multiple states – so they deserve serious consideration.
A reinvigorated Premiers’ Council can have the same effect.
It will bring a strong united position and ensure an influential seat at the table for states and territories at National Cabinet.
We can move federal-state relations out of the realm of combat, and into the realm of constructive cooperation.
Review of Federation
The first priority for the Premiers’ council should be to translate the experience of the pandemic into a better federation for all Australians.
And we should do that by conducting a federation review informed by two years of working together to deal with the COVID crisis.
On any objective measure, Australia’s performance has been extraordinary.
Not perfect by any means. But you only have to look around to see how much worse things could have been.
Our strength has been in our ability to implement tailored responses at the state level, but always in the context of the national interest, through regular meetings of the national cabinet.
From contact tracing and testing, to hotel quarantine, and the economic response, states have been able to try different things.
Now it hasn’t always been pretty.
States have disagreed fiercely, sometimes with one another, and sometimes with the Commonwealth.
Choice words – maybe strong language – have been used. Now I don’t comment on private meetings, but sometimes I have even been on the receiving end.
But that is how progress is made.
Our federal system and its varied approaches to the pandemic have been effective in ways that a one-size-fits-all approach could never have been.
Despite public animosity, there has been collaboration and information sharing behind the scenes.
Above all, the competitive spirit has been stirred, and states have spurred one another on to better performance.
All of this has helped the nation lift its game as a whole.
But the pandemic has identified weaknesses in our federation too.
And they are all familiar: lack of clarity around who is responsible for what; buck passing, blame shifting, and sometimes hyper-parochialism.
We are all Australians, and in times of crisis, we do best when every state works in the national interest.
When it comes to COVID, no response has been perfect. No response could be.
But we can learn from our mistakes.
And the best way to do that is to review the experience while it is still fresh.
That will be my priority for the Premiers’ council: working together with my counterparts to review our nation’s pandemic response, and identify practical changes that can make us stronger – and better ready for whatever comes next.
Health
When we talk about reviewing our federation, often the focus is on intergovernmental relations.
What we should be focusing on is how our federation can better serve our people.
Two examples are health and education.
A health crisis naturally puts your health system under the microscope.
In Australia we have two health systems running in parallel – one state, one federal.
States are responsible for public hospital services.
The Commonwealth is responsible for primary and private healthcare.
The problem is, sometimes these two systems are not in harmony – they’re at cross-purposes.
And at other times, they’re completely disconnected.
Emerging from the pandemic – we should be taking this opportunity to embrace health care reform, designing services around patients based on what we have learned.
Above all, we need to better coordinate primary care with the public system – GPs and hospitals working in tandem, not in separate streams.
But it is difficult to even have the conversation when the responsibility for funding and running these services is split in two.
Arguments about dollars overshadow discussions about better care.
The ongoing response to COVID is a case in point.
For the past two years, state hospitals have been the focal point for testing, treatment and so much more.
Looking ahead, it makes more sense for primary care to play a greater role managing the load our hospitals would otherwise be carrying.
The shift is organic, and should be encouraged at both the state and Commonwealth level.
But it can easily devolve into an argument with the Commonwealth about cost-shifting.
I know this because as Treasurer I’ve been involved in many of them.
This principle applies to health services in general.
As our population ages, the demands on our health systems will rapidly rise.
In the Cahill budget of 1958, health accounted for expenditure of 25.3 million pounds – a bit over 17% of the total budget.
That has now risen to around 30 per cent.
And the Intergenerational Report forecasts the share of the state budget dedicated to health operating expenditure will increase to close to 40% by 2061.
We must act urgently to make our healthcare future sustainable and world-class.
We can start with small steps.
Extending GP operating hours could reduce pressure on Emergency Departments, and make more appropriate care more accessible to people when they need it.
Exploring opportunities for telehealth on a permanent basis could again take pressure off the system as an additional avenue for accessing care.
These kinds of changes are worthy of discussion.
But because the funding is convoluted, we just end up arguing about dollars and cents, and that’s not where the debate should be.
We should be laser-focused on providing the best care, and the right care for people when and where they need it.
That’s the only outcome I want, but in a fractured system where governments are constantly passing the buck, that outcome is almost impossible to get.
The people of Australia deserve a health care system that is unified and better integrated, because that is the only way we can design the whole system around the patient.
Education
The second focus for reform should be education.
Reforming education is about making the federation work for families.
The way responsibility for education is currently apportioned between the states and the Commonwealth makes no sense.
The Commonwealth funds childcare. The states regulate it.
The states fund early childhood education in community and mobile preschools.
But if it’s in long-daycare, it’s mostly funded by Commonwealth.
The states run schools. The Commonwealth funds before-and-after school care.
But independent schools, skills and vocational training – they’re all a mish mash mix of both.
This is a dog’s breakfast.
No wonder no one can understand it.
It’s confusing for parents and it limits the levers we can pull around affordability.
If you started again, there is no way that this is how you would fund or run education.
When it’s structured this way, reform belongs in the too hard basket because it is.
Education will always evolve.
More than ever, we understand the impact a strong start can have on the rest of a person’s life.
A child who gets two years of early childhood education before they start school walks into the classroom on average eight months ahead of kids who do not.
And there is a direct link between their educational ability when they first walk into the classroom and their academic prospects and earning capacity later in life.
But our system has evolved in a way that works against the objective we are trying to deliver. And it ensures reform is almost impossible to achieve.
Worst of all, it hampers our ability to set up our kids for success, and does not meet modern families where they are.
Like every premier before me, I want our kids to have access to the best education in the world.
But I refuse to believe the solution is to simply just pump in more money, while continuing to do things the way they’ve always been done.
We have to design education around students and their families.
Work and family life are changing – and the pandemic has accelerated that change.
Our education systems should make the juggle easier for mums and dads, while also getting the best outcomes for students.
There should be more flexibility. More options. More choice.
The best way to approach this kind of education reform is to do it from end to end.
At least from early childhood education up to the end of high school, where the evidence tells us we have the biggest impact.
Now it is hard enough to drive reform within your own state bureaucracy.
But it’s impossible to drive meaningful reform when there’s another layer of government bureaucracy involved too.
Let’s dare to think differently.
I want to work with the Commonwealth for NSW to take on full responsibility for childcare and early childhood education.
This would come at a significant cost to our budget.
So we would need to work through ways to address that, and mitigate that cost.
For example the Commonwealth could assume full responsibility for something like the NDIS, which continues to face challenges under shared state-federal administration.
It’s another service where confused design and funding hampers the outcome.
The point here is to allocate services to governments in a way that actually makes sense.
Having responsibility for education end-to-end makes sense. So let’s do it.
Federal Financial Relations
To make these changes workable, they need to be properly funded.
And the guiding principle should be that the government responsible for the delivery of services should have access to the funding, and the freedom to decide how it is spent.
To put it another way: if Australia’s states are to be “laboratories of democracy”, and drive reform from the frontline, we need more funding autonomy.
Conditional funding often treats every state as the same, ignoring the different needs of diverse populations around Australia.
Block funding – or untied funding – gives the states the freedom they need to develop the right policy settings for their people.
For example, other states might not have any interest in taking on responsibility for childcare.
But if NSW did, we should also get the funding and the flexibility to do it on our own terms, because that’s what we need to drive better outcomes.
Having said that, there are constructive ways for the Commonwealth to support good policy outcomes at the state level, without adopting a “one size fits all” approach.
Incentive payments are a great example.
Hawke and Keating understood this with the national competition reforms of the 1990s – which prove COAG wasn’t always a talk-fest.
Abbott and Hockey also understood it with the Asset Recycling Initiative seven years ago.
Today, there are so many opportunities for productive reform that the states could be incentivised to pursue.
The education reform I have proposed today has been heralded by both state and commonwealth productivity commissions as hugely beneficial.
In NSW, our property tax proposal – to swap stamp duty with a broad-based property tax – is another example.
By lifting productivity in Australia’s biggest economy, it would boost Commonwealth revenue in the process.
By contrast, at the state level, it would cut something in the vicinity of $2-3 billion out of our budget each year.
The short-term disincentive is on the state side – and the benefit is on the Commonwealth side – yet to date the Commonwealth hasn’t expressed interest in this idea.
This is just another example of the way that fiscal financial relations in this country stand in the way of good reform.
Fixing this problem is long overdue – but we must have the will to look past politics.
Politics is what gets you the Western Australia GST deal, which both sides of federal politics continue to openly support.
This is disappointing to say the least.
The distribution of GST is supposed to broadly equalise service delivery and infrastructure across the states, specifically by taking into account the states’ own revenue – the principle of horizontal fiscal equalisation.
But this year’s Western Australian Budget made an absolute mockery of that principle.
It was a glut of mining royalties, and for that they received a GST top up.
When states like Victoria and NSW have had their budgets hit hard by the pandemic, giving WA more GST this year was totally unjustifiable.
That’s why the WA Premier went on the offensive, warning other states off his cash before we’d even become aware of it.
Now I may not have handled that situation in the most diplomatic way – calling him Mark McGollum.
But sometimes you need a bit of colour to draw attention to the travesty.
But the fact is, the current GST settings are a piecemeal arrangement. They are not fit for our federation in the long run – our people deserve better.
So let’s just get on with fixing it properly.
In conclusion
Paul Keating famously said never get between a Premier and a bucket of cash.
That single line has become the reflexive dismissal of so many Premiers’ ideas to make our federation better.
Well I’m less interested in a bucket of cash, and more interested in a bucket of outcomes.
If NSW has to take on a bigger burden to deliver better services, so be it.
In vital services like healthcare and education I want to drive real reform that puts people at the centre – reform that designs services around what people need.
But we cannot achieve coherent reform if these services are divided between the states and the Commonwealth
This is not a problem for the Commonwealth to solve.
The responsibility lies with the states.
Our federation was the product of strong states making limited concessions to a national government – to advance the “common wealth” of all Australians.
The pandemic has reminded us how strong states are indispensable to that mission.
So as we move beyond the pandemic, let us revive that spirit of reform among the states.
Let’s build a stronger federation for a new generation.
And let’s build it from the frontline.
This is an edited transcript of a speech given by NSW Premier Dominic Perrottet to the National Press Club on 08 December in Sydney.
