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Economy

May 15, 2014

Commonwealth-state funding clash has big economic implications

The government's outsourcing of its budget problems to the states in health and education funding will have dramatic effects on our capacity to handle the challenges of an aging Australia, Bernard Keane and Glenn Dyer write.

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The government’s budget strategy to slash funding for education and health via lower indexation because the states should take more responsibility for them raises three particular problems.

First — the most minor of the three, in the long term — is that it is likely to have mixed results as a spur to a proper debate about the GST. Remember, the government’s pre-election position on changes to the GST wasn’t that there’d be no changes in its first term (that was its initial position) but that there’d be no changes, full stop. Ever. Labor scared the Coalition into retreating to that position during the campaign.

Now, given the government appears intent on trashing as many promises as it can, that might not necessarily be an insurmountable hurdle — Tony Abbott could become the second Liberal prime minister to go to an election with a GST proposal despite a “never ever” commitment. If he does, good luck to him — perhaps fortune will favour the brave. Also remember that there are big benefits from GST changes other than increasing the rate — the food exemption will cost $7.4 billion per annum in lost revenue by 2017-18 (thank you, Meg Lees), while the education and heath exemptions will cost, together, nearly $10 billion by then. They could go before you need to lift the rate.

But if the government’s strategy is to force the states to join together and do its political dirty work for it in selling the case for a rate rise, it’s likely to be disappointed both in the level of unity the states can achieve, given they’re deeply split on how the GST should be split, and on their enthusiasm for helping out a federal government that has just dudded them of tens of billions of dollars. That sort of decision, made without consultation or advance warning, is reminiscent of the old Premier’s Conferences of the pre-Council of Australian Governments era, when every year premiers and chief ministers assembled in Canberra for a ritualistic punch-up with the prime minister and treasurer over federal-state grants (COAG was supposed to end those unedifying scenes).

No matter how much you challenge the states, co-operation with them will still be needed by the Commonwealth on a wide range of issues. That is now in doubt after this ambush. What hope do you give Tony Abbott’s Federalism White Paper of being anything but a flop, when it should have been the start of something more worthwhile and possibly nation-changing?

Second, it dumps back on the states responsibility for finding the funding for one of the fastest-growing areas of expenditure in any level of government. As we explained last week, a huge economic challenge for Australia will not merely be finding the workers of the 2020s and 2030s, but finding those with the skills required by the Australia of that time — one in which health will become an even bigger employer than it already is, and is even more services-oriented than it is now — and in working out how to lift productivity in that sector when we struggle to measure it currently.

To reinforce the point, look at this paper by Treasury’s David Gruen, which shows just how rapidly the health (and education) workforce will be growing between now and 2030. The government wants the states to be on the hook for that growth and isn’t interested in helping them out, as the Gillard government was via its hospitals funding and Gonski education funding deals. The government’s position is a blank refusal to acknowledge that the national interest is affected by how well states are able to educate the next generation of workers, and how effectively they can run the health sector, which will not merely be crucial to an ageing population, but will become a major economic sector in its own right — to the extent that it isn’t already now.

Third, the “devolve it to the states” approach undermines the benefits of having an appropriately national approach to these key areas. It’s fine to talk about competitive federalism, but we’re just 23 million people heading towards 30 million, still smaller than a lot of American states. A more fragmented health system (and education system) means a poorer ability to monitor how effectively they’re performing and less information about how productive they are, especially if state governments have the arse out of their pants and are likely to regard investments in performance monitoring as a waste better directed to more hospital beds or teachers.

And it also wishes away the differences between the states. How is Queensland, a huge and highly decentralised state by Australian standards, supposed to operate a health or education system with the same efficiency as Victoria? How is Tasmania, with its perpetual economic struggles, supposed to fund a hospital or school system as good as that of New South Wales? The losers won’t just be regional Queenslanders or Tasmanians, but the national economy through poorer health and education outcomes.

As Gruen points out, there’s a direct link between education outcomes and workforce participation, which as Glenn Stevens noted in a speech last month is a crucial input to meeting the “where will the workers come from” challenge. Stevens also noted that “migration adds to the workforce as well, though migration also adds to the number of people not working and retiring.”

Higher levels of immigration might end up being part of the solution — that they can’t be the whole solution — but there was nothing in the budget about that or from senior ministers when they have been talking about lifting retirement ages.

Adding an unnecessary process that will see the states repeat their failures of the 1950s, ’60s, ’70s and ’80s and allow differing standards of education (and health services for that matter) to emerge at a time when a more focused national approach will be vital to economic growth and prosperity, is nothing but ideological short-sightedness.

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