In my view, as a CONSTITUTIONALIST we have a very good Constitution of 1900 just that it is being manipulated wrongly by political and judicial powers, such as the application of Section 96.
We should restore the division of surplus as all along was intended by the Framers of the Constitution.
The design of the Constitution is not at fault but the for ever unconstitutional grab of legislative powers from the States is where duplication and problems are arising from.
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Re your comment about R v Public Vehicles Licensing Appeal Tribunal (Tas); Ex parte Australian National Airways Pty Ltd (1964) 113 CLR 207 as a CONSTITUTIONALIST I happen to be more alert to what really is applicable and as the Framers of the Constitution stated (see below) and reality is that any reference of legislative powers within Subsection 51(xxvii) requires a Section 123 State Referendum of every State that refers such powers and it cannot be changed afterwards once the commonwealth has legislated, regardless if the High Court of Australia pretend otherwise.

Hansard 27-1-1898 Constitution Convention Debates
Mr. DEAKIN (Victoria).-
Any other matter of general Australasian interest with respect to which the Legislatures of the several colonies can legislate within their own limits, and as to which it is deemed desirable that there should be a law of general application.
And
Mr. DEAKIN.-
Another difficulty of the sub-section is the question whether, even when a state has referred a matter to the federal authority, and federal legislation takes place on it, it has any-and if any, what-power of amending or repealing the law by which it referred the question? I should be inclined to think it had no such power, but the question has been raised, and should be settled. I should say that, having appealed to Caesar, it must be bound by the judgment of Caesar, and that it would not be possible for it afterwards to revoke its reference.
and
Dr. QUICK (Victoria).-
But this matter has struck me also from another point of view, and it seems to me that the provision affords an easy method of amending the Federal Constitution, without referring such amendments to the people of the various states for their assent. Now, either when the state Parliaments have referred these matters to the Federal Parliament, and the Federal Parliament has dealt with such matters, that becomes a federal law, and cannot afterwards be repealed or revoked by the State Parliaments-that is one position, and in that case, of course, the reference once made [start page 218] is a reference for all time, and cannot be revoked, so that to that extent it becomes an amendment of the states’ Constitution, incorporated in and engrafted on the Federal Constitution without the consent of the people of the various states. On the other hand, if that be not so, and the states can, after making such reference, repeal such reference, what is the result?

A couple of things.

1. I haven’t checked it out but I think GST revenue is not growing as a result of the excision of health and education from the base, rather than the excision of exports. Exports have not been growing. And in any event over the long term they grow in line with imports which have GST imposed on them at the consumption stage.

2. As you point out, our attitude to vertical fiscal imbalance is a bit schizo. I recall when in government in the 1990s lots of people saying ‘VHS is a big problem, we’ve got to fix VFI’ and ‘We’ve got to have a broad based consumption tax’ almost always envisaged as a federal tax – which would worsen VFI. The Industry/Productivity Commission got itself into this bind arguing both positions. Ultimately there are stong benefits from federal revenue raising many of which you’ve identified.

3. This is now not ‘a couple of points’ but no-one expects the Spanish Inquisition. In any event you’re dead right about the regulation review aspects. The Feds should resource regulation review around the Commonwealth, including a fairly substantial central capability with national agreed principles – the latter is pretty much what we have now – though the principles need quite a bit further development. The whole agenda could be developed quite a bit.

4. The policy delivery distinction ‘fuzzy’ though it inevitably is, is in my opinion definitely the right distinction – again from the regulatory point of view. Policy and regulation is something which has a similar status to ‘informational goods’ – often costing next to nothing to develop compared with the extent of its influence. That means it has economies of scale in production, but there are also probably much stronger economies in ‘consumption’ ie in the adherence to regulations. As I’ve argued in Lateral Economics reports and on this blog, if you think of regulation as standard setting, this captures the importance of not fragmenting it by state jurisdictions.

5. On standard setting, if you think about the dynamics of referral of powers to the Feds, once the Feds get the power and regulate that will generally create such a strong standard that the states won’t be able to re-regulate in their own way. They might in a fit of pique – justified or not – resume the power and make certain high profile deviations from the national standard (a more extensive ‘no disadvantage’ test for instance). But this won’t challenge the bulk of existing Federal/National regulation as the standard. It will just introduce a few local variations which are what you’d want in a Federation in any event – so long as the transactions costs don’t swamp the democratic and possibly economic efficiency benefits (broadly considered) of local variation.

So it’s all good, as they say these days. Actually they seem to be cutting down on that little saying – and ‘moving on’ and ‘building a bridge’. Summer Heights High was good last night. Like Totally. My first episode. But I digress . . .

Ken, how true is this really though? One of the (many) things that go into a CGC assessment is the amount of revenue the state has gained from SPPs. Since they consider the SPPs as contributing to the revenue of the state government, they offset the balance against the proposed equalisation payment. See here for the basics. The exact description of what is/isn’t included is here.

State Governments don’t seem to lose as much as they seem to think by refusing unquarantined SPPs (meaning, assessed by the CGC). As can be seen by figure 3.3 in the first report, Victoria seems to be doing so in many areas with little noticeable effect – but then they’ve been fairly strong critics of the CGC in recent years.

I’d like to hear yours and Nick’s thoughts on the CGC though?

In fact, what I’m proposing is much LESS subservience for the States. Under our present system, the Commonwealth dictates the terms and conditions under which the States may spend funds delivered by way of Special Purpose Payments. They amount to 11% (and increasing) of total federal revenue collected. GST revenue, which is nominally untied, amounts to 16% of total federal revenue. However, given that the States could not survive without the SPPs (because they lack the power to raise the revenue themselves), they are effectively powerless to do anything other than accept the SPPs and comply with the Commonwealth’s terms and conditions (usually very detailed). This affects the way in which the States are required to run schools, hospitals, universities etc way beyond the actual amount of the SPPs. It is difficult to imagine a more subservient situation.

By contrast, the system I am proposing would mean that:

(1) ALL federal revenue delivered to the States would be untied, to be spent as the States saw fit;
(2) The funding would be adequate to meet the States’ needs, and distributed equitably as assessed by an independent, impartial umpire in the Grants Commission;
(3) The Commonwealth could only impose policy-oriented (rather than micro-managing operational cosntraints) where the States collectively agreed to that through COAG.

Manifestly there is vastly less State government subservience to the Commonwealth involved in this proposal than in our current federal arrangements. My concern about the realpolitik situation is almost exactly the opposite of yours: it’s somewhat doubtful whether even a new Rudd federal Labor government would agree to constrain federal power so radically.

Hard to translate that into the federal context, I suspect. And Kevin Rudd might even combine the power of Presidents Hu with the charisma of Clinton, the spirit of Lincoln, the brains of Jefferson, and the foresight of Washington, I still doubt he could convince the States to sign up to such an essentially subservient relationship. So no opportunity, now or ever, for that kind of reform, in my view.

Wilful, the policy/operational division works tolerably well in the corporate sphere. I see no reason why it can’t be successfully applied to government in the way I’ve outlined. I agree that the boundary between policy and operations is potentially rather blurry, but there is no need to define it with precision. It will be worked out dynamically in practice, just as it is in the relationship between corporate board and management. Don’t forget, what I’m proposing is a referral by the States of policy oversight functions, subject to a requirement that all Commonwealth policy proposals be subject to COAG approval i.e. the States will retain a collective veto, and will therefore be in a position to ensure that the Commonwealth does not engage in “micro management” under the guise of policy.

“The areas that I think would achieve real value if reformed – and I spent longer as a Territory public servant than a Commonwealth one – would be for a specific percentage of Federal revenue to be provided for distribution on the Grants Commissions recommendations (lets put the GST con job to one side) and for an agreement to be reached in COAG about the future use of SPPs.”

David, that is essentially the Glenn Withers proposal to which I referred in tmy primary post. It is central to my concept that the States would offer an extensive referral of powers to the Commonwealth in return for an assured share of federal revenue distributed in accordance with Grants Commission recommendations. I expect that SPPs would largely disappear under such a system, because the States would receive enough untied funds to meet their ongoing needs from the combination of GST revenue and an assured top-up either to a specified percentage of total federal revenue (as you suggest) or a specified percentage of GDP.

It really comes down to accountability, more precisely which level of government can reasonably be held accountable for particular policy and operational decisions.

Take the health system for instance. It would be impossible for a resident of my local community to try hold the Federal Government accountable for the operation of our local health centre – whether it be for the operational decisions made or the policies that dictate its method of operation. While my Federal rep might understand the issues of this community, there is little chance that the needs of a small NT community are going to get much of a run in a Federal bureaucracy. My local MLA on the other hand will feel the pain if he doesn’t pay attention and, while the Territory bureaucracy may not wish to listen, it will often have no choice.

The current system with the Grants Commission trying to maintain some level of horizontal fiscal equalisation and with mechanisms such as COAG and the MinCos providing a means of establishing some national policy directions generally works well. Not perfectly but there is a balance of sorts achieved I think.

The areas that I think would achieve real value if reformed – and I spent longer as a Territory public servant than a Commonwealth one – would be for a specific percentage of Federal revenue to be provided for distribution on the Grants Commission’s recommendations (let’s put the GST con job to one side) and for an agreement to be reached in COAG about the future use of SPPs.

Such an agreement might provide that no SPP would be provided where COAG had agreed on the policy that would direct service activity. It might be possible in this way to remove the constant Commonwealth ‘fiddling’ in operational delivery.

In my regular dealings with the Canberrra bureaucracy on a range of natural resource issues, they almost uniformly do not add any value whatsoever, they have no appreciation of local issues and conditions, and try to impose inappropriate one-size-fits-all prescriptions.

The best way forward with cooperative federalism is the States working together to share experience and harmonise practices where desirable. Imposed solutions are so often flawed, costly and doomed to failure.

Well there’s the problem – how do you really separate policy from operational control?

How about the Commonwealth sets targets or outcomes, the States set the inputs?

By the way, as a Victorian who knows somewhat about water, I strongly support the Bracks/Brumby position on the Murray-Darling ‘takeover’. The sole and only thing going for Howard’s plan was that it had a great wad of cash attached. But the cash could have been far better spent, and recognition could have been given to Victoria’s painful reforms of the past decade.

Also, in reference to the Grants Commission, Vic and NSW have always accepted the need to subsidise poorer States such as Tassie and SA, but giving free money to QLD based on the fact that they’ve got lots of National party senators is complete bullshit. Time for reform of that.

The problem with the Australian approach to federalism is that is always about who can provide the best services and the lowest cost. The main purpose of federalism is to stop a dominant central government from making the out-lying arms (states or provinces) submit to their will. The vertical separation of powers is supposed to ensure liberty and balance between nationalism and federalism in the same way that separation of powers between the branches does at the vertical level.

You never see Australian politicians or commenteriat discuss federalism in terms of liberty. Your previous article was about how a central government without constitutional checks tramples all over property rights. That is a danger of a national structures; liberties and rights get trammelled by arbitrary government from the central entity.

Co-operative federalism doesn’t solve that when you give all policy to the national government and the federal entities (states) are reduced to bureacratic outlets. We get one blanket central policy; and competition on policy, tax rates and development between states is reduced to one canberran mudpile of electoral whim.

A strong federal character protects liberty.