New South Wales is the Mick Dundee of Australian employers. That’s not a payroll, this is a payroll.

With a public service head count just shy of 390,000, NSW puts the Commonwealth government, with a mere 270,000 staff, to shame. Macquarie Street employs 10% of the NSW workforce.

The Victorian Labor Party might have voted to abolish the states in 1917. Australian political parties and the High Court might have waged a relentless campaign to undermine and humiliate the pillars of Australia’s federation. But NSW has proved as indelible as the sandstone walls of Government House.

This is the irony of the push to centralise power in Canberra. Canberra’s bureaucracy bloats without offsetting retrenchment in Sydney. Canberra meddles but the states remain the paymasters and the administrators of almost all public services.

As the New South Wales government delivers its $60 billion budget this afternoon, Australians should ponder whether state politicians face the right incentives to do the best job. The new Coalition government has the biggest majority in memory, holding a greater fraction of the NSW Legislative Assembly than even Neville Wran’s government.

Voters are hankering for major change, not new slogans or bus signage. They want a budget that makes Peter Costello’s 1996 offering look generous. They would even stomach unpopular changes, in full knowledge the anodyne stasis of the past 20 years is not in their interest.

To pick some obvious candidates: replacing stamp duties with land tax, or car rego with a congestion charge; increasing private administration and ownership of schools, and paying education subsidies directly to parents.

States harbour the low-hanging fruit of beneficial reform, yet reform will likely proceed at a glacial pace.

Why?

Commonwealth meddling has eviscerated states’ democratic accountability. Imagine you’re a state government. Why bother coming up with good policies if you don’t have permission to implement them? Why care less about the quality and efficiency of state expenditure if you can credibly blame the Commonwealth for “insufficient funding” and for every perceivable public gripe?

Indeed, why bother even trying to implement, or obey, the Commonwealth’s plans when your own political payoff will be nought? Remember the negligently wasteful manner in which NSW bought school halls with Commonwealth money.

And if you’re a voter, why bother scrutinising state elections or politicians?

It is a vicious cycle, with huge unseen economic and political costs. Forget climate change; fixing Commonwealth-state relations is the greatest moral and economic challenge of our time.

Australia has all the costs of a federation, without any of the benefits. We have COAG where we had democratic accountability. We have interminable process where we had nimble parliaments. We have pointless uniformity, where we had diversity and experimentation.

Thankfully, Canberra’s encroachment is not difficult to unwind for two reasons. It is so patently contrary to the intent of the constitution. And it is so inimical to the natural division of powers. COAG is the ultimate political square peg.

Moreover, if there were ever a time to highlight the folly of centralisation, it is now. The federal government is struggling to appear competent. By contrast, governments in NSW, Western Australia and Victoria are laden with goodwill.

State premiers need a shot of political testosterone. They should band together and make the case for wholesale change.

Canberra should roll back its futile conditional payments to the states — another Whitlam government innovation championed by conservative politicians — and cut income tax, and its payroll, commensurately.

No matter how much one heaps obloquy on state governments, their politicians are simply observing the incentives the status quo offers. It would be better to align institutions and responsibilities with human nature and constitutional realities. The belief that states will wither away, or carry out Canberra’s bidding with alacrity, are naive, harmful fantasies.

Peter Fray

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