The blame game

An interesting feature of Australia is its constitutional and political federalism. The Commonwealth Government, based in Canberra, receives the lion’s share of tax receipts, coordinating the spending of this as well as financial allocations to States. Meanwhile, State governments, such as Queensland’s, lever some resource through local sales tax, though an insufficient amount to fully deliver on the responsibilities to which they are locally accountable, not least of which is health care. This, of course, results in an elaborate and fragile structure of negotiations between state and federal agencies about exactly how public services will be funded and delivered.

The key, and evident, problems with this are:

• Perverse incentives in arrangements to shift costs onto the other side, particularly in health and social security;


• A lack of delivery clarity among businesses and the community about who actually has responsibility for what;


• Weak accountability between Commonwealth and State governments with opportunities for one to blame the other whenever things go wrong; and


• Distortions, duplications, and double-running costs in the administering of public policy.

An unfortunate manifestation of this is something called Specific Purpose Payments (SPPs) whereby the Commonwealth bypasses the States with ring-fenced conditionality in the pursuit of particular policy objectives. Effectively, States are required to fulfill specific conditions in order to receive these SPPs. Since the 1960s these have represented a major source of State funding, to the extent that they now total around two-fifths of all payments from the Australian Government to States.

What to be done?
The incoming Rudd Government identified the situation as a priority for reform, and it’s a central issue coming up in the range of policy overhauls underway. Clearly, reform needs to be guided by some set of subsidiarity principles about which government functions to, and which not to, aggregate up. These principles should include:

• Where there are spillovers or economies of scale in more centrally delivering something;
  Where there are significant concerns about the equity of outcomes within or between regions;


• Where there are coordinating or complementarity efficiencies in policy – such as education and training policy;


• Where there is a compelling need for uniformity in the given service, or where diversity of rules would create inefficiency; and


• Where the funding, delivery or monitoring of the service is aligned at a similar level.

For example, there is a strong a priori case for aggregating functions like defence, international development, trade, and most aspects of law to a national, or even supranational level (e.g. to the EU in the case of the UK). On the other hand there’s probably little sense in aggregating services like the delivery of community services for the elderly to a higher level merely for the sake of doing so. Indeed, one of positive features of current arrangements is that State governments are much closer and more locally responsive to the needs of their citizens than the equivalent in the UK.

So… where next?
It seems there may be a number of potential options for reform, several of which are within the boundaries of achievability. These include:

• A process of horse trading whereby the different governments swap areas of shared responsibility so only one government retains responsibility for a given service;


• A clearer split between funder and provider to separate responsibilities between Commonwealth and State, so that Commonwealth government either becomes the sole funder of a service, or a purchaser of discrete components from the State;


• A new performance management role for the Commonwealth, where it monitors States performance on functions of national priority with the right to intervene as a measure of last resort; or


• A competitive bid process, whereby States bid for Commonwealth funding for the delivery of certain functions, with performance criteria negotiated as part of the partnership.

Practically, some mix of these different approaches could suit different service areas – for example the alignment of responsibility for provision of roads is likely to be more amenable to the horse trading model than the performance management approach (and equally vice versa for health). And, indeed, the relative attractiveness of these different approaches to constitutional reform depends on the extent to which the Rudd Government is prepared to expend hard earned political capital in the pursuit of any gains from a more enlarged and empowered federal administration.