Speech - Modern Federalism Not Creeping Centralism




"Modern Federalism Not Creeping Centralism"




Thank you to the Institute of Public Administration Australia for the invitation to speak with you this morning.

Can I acknowledge Mr Ren Gongping, Consul General of the People's Republic of China; Mr Kang Bingjian, Chief of Economic and Commercial Office, Consulate of the People's Republic of China; IPAA Queensland President, Marg Allison; CEO of IPAA, Peter Rumph; and my friend Andrew Fraser, the Queensland Treasurer.

There is perhaps no more appropriate place for me to speak about the Government’s ambitious reforms to federalism than here at the Institute. Not only are you some of the very, very few people who understand what ‘vertical fiscal balance’ and ‘horizontal fiscal equalisation’ are – you are part of an even more select group that actually relish an opportunity to talk about these things, over eggs and coffee. Which is not surprising, given how influential the IPAA national and state branches have been in debates about the future of the federation.

Like me, you understand how exciting this agenda is. You understand that what we do in COAG over the next six months does provide the foundation for important social and economic reform.

It is also pleasing to be here with one of the architects of the new federal financial structure which I’ll outline today – Treasurer Fraser. Along with his fellow State Treasurers, Andrew has been integral to designing the new architecture for Commonwealth-State relations. He knows how important COAG is to the modern economy we’re trying to build together.

I am proud of the new framework which Australian treasurers have hammered out over the last eight months.

The changes we are making to the Australian federation come at a challenging time for our economy. It is being buffeted by powerful countervailing forces – slowing global growth, record terms of trade for our commodities, and a domestic inflation challenge. Navigating our way through these cross-currents will be difficult. That’s why the three significant economic reforms underway today are needed to help shore up our strong economic foundations.

The first is the introduction of our Carbon Pollution Reduction Scheme. The second is the most comprehensive review of Australia’s tax system in a generation. And the third, of course, is modern federalism and the creation of a seamless national economy. These are the three most important jobs I am involved in as Treasurer.

Because together these reforms will increase our competitiveness, lock in the fundamental drivers of sustainable economic growth and insure our economy against long-run risk.

These reforms represent the building blocks of a new era of economic prosperity and opportunity in this country. And because they take in almost every aspect of federal and state policy, the changes being driven by COAG are what hold these building blocks together.

It is widely agreed that there are a number of policy issues which, if tackled properly, could significantly improve our long run productivity and flexibility. And almost all of these issues straddle State and Commonwealth boundaries.

Issues like human capital formation, regulatory harmonisation, and the provision of physical infrastructure are issues which can only be addressed through effective and cooperative Commonwealth-State arrangements. And for too long they have been neglected.

In the past decade, centralised spending and stringent controls wielded by Canberra bureaucrats eroded the responsibilities of the States and shackled the country’s capacity to tackle important microeconomic and social issues.

The reforms I will outline today move us to a new plain. They will usher in a more ambitious and productive approach to federalism and nation building. They are geared towards achieving two essential outcomes: increased productivity, and sustained improvements in the efficiency and quality of services for all Australians. This is Modern Federalism, not creeping centralism.

Leaving Behind Creeping Centralism

These changes in the financial relationship between the Commonwealth and the States which we are putting in place represent a fundamental shift in the federal-state compact.

Under the previous system, the States received the GST and over 90 different specific purpose payments. Specific purpose payments are in areas of traditional State responsibility but in recent years many were tied to financial controls, matched funding or both. These financial controls resulted in duplication of effort as both levels of government administered the payments, wasting time, effort and money.

By requiring Commonwealth funding to be matched by State funding, the autonomy of the States to set their own spending priorities also became increasingly compromised. Most importantly, Commonwealth intervention in areas of State responsibility blurred the lines of accountability and fuelled a crippling and well publicised blame game.


This approach was conducive to short-term fixes and political machinations – but it stood fundamentally at odds with delivering high quality services and the necessary reforms to underpin future economic prosperity.

Towards a Modern Federalism

That’s why this year, Australian Governments – led by first Ministers and Treasurers – have moved decisively to strengthen and restore faith in the Australian federation.

Unlike our predecessors, we recognise federalism must undergo a continuous process of reinvention to remain relevant and responsive to the needs of the community. And that’s why we have not wasted a moment catapulting the federation into the 21st century. Just ask any sleepless Treasury official in an airport lounge somewhere in Australia, and they will tell you just how much progress has been made in a very short period of time.

Since its first meeting under the Rudd Government in Melbourne last December, COAG has already made significant progress including:

  • A move towards a seamless national economy including a national trade licensing system, which will allow workers to move much more easily from State to State;
  • An allocation of $1 billion to the States to relieve pressure on public hospitals;
  • A National Plan to Boost Organ Donation to improve the flagging donation rate;
  • Agreement to establish a single body to manage the Murray-Darling Basin; and
  • Initiatives to address the decline in housing affordability, including a Scheme to build 50,000 new affordable rental properties across Australia in the next four years.

COAG Financial Reforms

These outcomes have only been possible because the Commonwealth and the States have agreed to new rules for engaging one another on policy.

The new architecture for Commonwealth-State financial relations has, and will continue to be, a great enabler of policy change. It will underpin policy reform in the same way that an architect’s designs are integral to building a great building. It will provide a point of coherence and certainty, while still leaving room for innovation and policy entrepreneurship at the State level.

The new architecture centres around five key changes.

First, the number of specific purpose payments will be reduced from more than 90 to five or six – in the areas of healthcare, early childhood education and schools, vocational education, disabilities, and housing.

Second, the Commonwealth will give the States the budget flexibility they need to allocate resources where they will produce the best results.

Third, the Commonwealth will provide the States with more funding certainty.

Fourth, there will be more transparent public performance reporting. Roles and responsibilities will be clarified and the performance of each jurisdiction will be independently assessed by the COAG Reform Council.

Finally, the Commonwealth will enter into incentive arrangements with the States – or National Partnership payments – to deliver key economic and social reforms. National Partnership payments will reward those States which best deliver the services and outcomes to their citizens, and not reward those that don’t. In so doing, they will drive a new microeconomic reform agenda in this country.

Modern Federalism: Cooperation and Competition

This new framework aims to strike a balance between the key drivers of a well functioning modern federation: between cooperation, on the one hand, and competition, on the other. In a system in which six States, two Territories and an overarching national government depend on each other for resources and delivery of services, cooperation is necessarily a key driver of social and economic progress.

A federation is only as effective as the sum of its parts – and it’s only when those parts pull together in one direction, that it is possible to achieve lasting and holistic reform across areas like health, education and infrastructure.

By giving the States more flexibility and funding certainty, we are reaching out to the States in the spirit of cooperation. It is this cooperation that has enabled us to achieve progress on substantive policy matters in such a short period of time – and it will continue to underpin positive outcomes in the future.

But it is the market principles and clear line of accountability and responsibility which sit at the centre of the new architecture that are the unwritten story of the new modern federalism. Removing the stifling effect of Commonwealth input controls will give the States room to deliver services in different ways and experiment with new policy ideas.

At the same time, new reporting standards will ensure that the public has access to data which it can use to evaluate the performance of their own State against others – and across a range of policy fronts.

Together, the increased scope for innovation and greater public reporting and accountability will foster innovation and learning at the State level. This innovation and learning will inevitably result in improvements in the way Australians live their lives.

Let me give you a couple of examples.

Public Reporting: The Case of Hospitals

As someone who once lectured in public administration, I know that there are countless examples of ways in which public information can lead to real improvements in policy outcomes.

My favourite example – which stands as a striking monument to the theory – is the introduction of public reporting of cardiac surgery outcomes in New York State.

In the late 1980s the New York State Department of Health began collecting information on every patient receiving heart bypass surgery at a hospital in the State. Information was collected and publicly reported, identifying the hospital involved in the procedure, and how the patient fared following the procedure.

The introduction of this level of public reporting may have created a stir in the New York medical community, especially with the high level of media attention focused on the data. But when, between 1989 and 1992, mortality rates for cardiac operations in New York State hospitals declined by over 40 per cent state-wide, the controversy quickly dissipated.

So how did this happen? It happened because hospitals and surgeons didn’t want to be labelled as the worst in the State and the public reporting led to improvements to their cardiac surgery programs.

There are many examples of what individual hospitals did to improve outcomes for their patients.

In 1989 in the face of strong criticism over its high mortality rate, one University Hospital revamped its cardiac surgery program. Cardiac surgery was concentrated onto a single floor and clinical nurses and physician assistants were directly assigned to cardiac surgery. They installed a dedicated cardiac anaesthesia service. As a result, the hospital’s mortality rate halved between 1989 and 1990 to the state average and halved again the following year.

Another hospital in the State capital of Albany concluded that physicians were not taking enough time to stabilise their patients prior to surgery – and took steps to rectify this. As a result, the mortality rate for emergency cases in that hospital dropped from 26 per cent in 1992 to zero per cent in 1993.

I’ll let you draw your own conclusions as to whether these new approaches to cardiac surgery would have occurred in the absence of the new reporting system. I doubt they would have.

To me, what happened in New York is a very practical example of how performance reporting can lead to improved community outcomes.

And it is a ringing endorsement, of the performance reporting framework that Treasurers like Andrew and I have injected into the new federal financial architecture.

National Partnership Payments: The Case of Education

Let me give you a second case.

One of the key things that public reporting will focus on is whether or not States have achieved the performance standards the Commonwealth has set for them. These standards will cover all aspects of policy – but most importantly they will determine whether the Commonwealth provides States with reward payments for delivering on key reforms which they have agreed to.

While the Commonwealth is committed to increasing budget flexibility and certainty for the States, it is equally determined to promote national reforms in areas of policy which have been neglected.

But just how will these reform payments work?

The National Partnership reform payment on teacher quality that Julia Gillard has initiated, together with State Education Ministers, provides an important working example.

Research tells us that the most important driver of student success is teacher quality. So we want some of the brightest school leavers in Australia to enter the teaching profession. And once they are in the profession, we want them to stay in the profession.

We also need to have the right incentives in place to make sure that some of those teachers stand in front of the most disadvantaged students.

There is much that governments can do to attract the best people into teaching, keep the best in the profession, and reward the best for teaching in the most disadvantaged schools. This includes promoting a culture of professionalism in our schools, offering better financial rewards and opportunities for the best teachers, providing greater flexibility for school leaders, and working more effectively with the surrounding community.

In parts of the US and in the UK, imaginative public policies have substantially improved the quality of teaching – and with it, student outcomes. Greater transparency, along with new investment and greater flexibility, has been key to these improvements.

The Prime Minister, Deputy PM and I firmly believe that, through the COAG national partnership arrangements, we can achieve similar outcomes across Australia – outcomes which will inevitability help lift productivity and ultimately economic growth.

To this end, the Commonwealth has committed to put money on the table for National Partnership payments aimed at lifting the quality of teaching. Upfront payments will be negotiated depending on what reforms each State and Territory is prepared to commit to. And reward payments will also be available to act as an incentive to drive reform outcomes.

Modern Federalism for the Future

Similar payments will be offered up across a range of policy areas to drive key reforms.

Relevant Commonwealth Ministers have been chairing working groups of Commonwealth and State Officials in different policy areas for the past eight months.

But in many ways the hard work is only just beginning. These Groups will finalise reform proposals for COAG's consideration in October. I will then sit down with my State colleagues to determine how to allocate resources across these reform areas, consistent with the new financial framework.

The final reform funding package that we negotiate will be put to COAG for their agreement in December. The reforms will then be implemented from 1 January in the New Year.

Now, these reforms I have described to you today – to modernise the Australian federation – will not be easy. There will be hurdles. There will be disagreements. There will be distractions. All of this is inevitable. But our Government is determined not to baulk at the big reforms just because they are hard.

Unfortunately our opponents are too focussed on short term political fixes and leadership brawling to focus on long term plans – they just don’t get it.

In contrast, we are determined to be nation builders, not shirkers.

What we do in the COAG space in the next six months will determine many of the new ideas that get injected into Australian public life in the coming years.

We believe Australia’s federated structure can finally be harnessed to drive change in this country. Change which will make our economy stronger, our lives better, and our appetite for continued progress even greater. Change which ensures States undertake reforms in the national interest.

Change to a more modern federalism, which delivers better services and a seamless national economy.

We see this as one of the three biggest reforms – along with the Carbon Pollution Reduction Scheme and tax reform – the Australian community has trusted us to responsibly implement.

After 100 years of trying, we’re going to get federalism right, for the long term.

Thank you and I look forward to Andrew’s thoughts, and the discussion.