Fixing Australia's Federation (2010+)

CPDS Home Contact Australia's Governance Crisis and the Need for Nation Building  Australia's New 'Cooperative' Federalism  Infrastructure Magic?  Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government  Proposed National History Curriculum: Information without Understanding?  Is a National Health and Hospitals Network Progress?  Reinventing the Regions  TEQSA: Will Micromanagement Again Triumph over Government?   National Plan for School Improvement: An Example of Bad Policy?   More on Rethinking the Government's Northern Development Plan  Making Democracy Work Again   It is the Economy, and It Needs More Than the PM's Attention
Introduction +




Increasingly problems are perceived in Australia's system of government that require changes to the federal system. Solutions are often suggested through increasing control by the federal government over originally-state functions, or the elimination of state governments entirely.

Examples of the Case for Greater Centralization

Given national school curriculum and proposed federal takeover of hospital funding, it may be timely to consider abolishing state governments. Critics suggest that reform is overdue, and that states are increasingly irrelevant. Education and Health are the largest state departments, and if frontline staff answer to Canberra - why not transfer all responsibility there? A poll found that 56% of people thought that states should be scrapped to reduce cost of bureaucracy. States suggest that people have most contact with them - but this is being eroded. Mark Drummond (convenor of Beyond Federation) argues that duplications in federal and state systems cost $20bn pa. Drummond (a Canberra based teacher) argues that a national curriculum is a welcome move, and there are many areas where states have adopted a common approach. Since federation states have been defending their existence and jostling with federal authorities over powers since 1976. John Pyke (a constitutional lawyer at QUT) found that different schooling systems caused problems and welcomes a national curriculum. Critics of abolishing states argue that handing control to Canberra will result in remote areas missing out. Pyke argues that telecommunications makes this concern irrelevant, while Drummond believes that similar front-line services would be provided - all that would be missing was costs of state administrations. (Lund M. 'Time to put the nation on the same service track', Courier Mai, 5/3/10)

States have backed a greater role for the federal government in planning Australia's cities - because there is a need for federal funds to unlock traffic gridlock (Hepworth A etal 'States back federal city plans', AFR, 6-7/3/10)

Do states still matter? No PM will concede states have fewer rights but all since Billy Hughes have happily accepted more power. The states will be even more impotent when federal government changes GST funding. New initiatives to increase centralisation include: bypassing states in funding hospitals and national education curriculum. 64% of Queenslanders want to see end of state boundaries. Federalism leads to huge bureaucratic duplication and overlap. Some will warn that service delivery by Canberra will lead to failures - but states do so also. The rational for federalism in 1800s was (a) defending liberty through dividing power (b) governing in accord with regional needs and (c) responding to poor transport and communication. Now it is inappropriate because of well developed national democratic tradition; good communications / transport; and little geographically-based cultural differences. However the problems of constitutional change would be huge. Also (a) there is a need to bypass political short-termism (b) there would be a need for additional regional representation - eg in the senate and (c) a long lead time would be essential. (Williams P., 'Shift the state of play', Courier Mail, 9/3/10)

Since efforts were first made to convince Queenslanders of the need for higher urban densities, efforts to manage population growth have been mixed. The Urban Renewal Taskforce transformer some suburbs, but Brisbane's urban area expanded by 65% and commuter travel averages increased from 13.7 to 15.3 km.  Greenfield development has continued to dominate. The state government paid lip service to the problem, while the federal government ignored it. The Queensland Government adopted a SEQ Regional Plan intended to reduce sprawl and get more benefits from public transport, but did nothing. Only recently has it sought to gain control of the population debate. While polling suggests some public support for the medium density housing the state is promoting, this is easy to counteract. The government's great hope is the Urban Land Development Authority - and its vision for Fitzgibbon as a high density suburb. But its efforts have lost focus because so many interests are involved. The federal government (via Maxine McKew) indicates a desire to manage the region's rapid growth as a 'partner' with state and local governments. Also the PM has visions of a 'big Australia' which raises further concerns about managing population growth'. Commonwealth involvement (to get more sophisticated policy making, and break down barriers, is to be welcomed (Johnstone C., 'Growing pains need a shot of federal medicine', Courier mail, 20-12/3/10)

PM originally proposed a referendum on whether commonwealth should take over health functions - but there is increasing reason to extend this to consider whether states should be eliminated entirely (Keane B. 'Do we still need state governments?', Crikey, 19/4/10)

Federal government was right to try to take important issues like health from states. State Treasurers fear further federal raids on their GST revenues - but people have learned that nationally important issues can't be left to states. These areas now include: hospitals, mental health and state schools. In the future it will include the urban environment and failures in planning for transport. The federal governments main means of influence is money and states, while failing to meet service delivery responsibilities, have allowed themselves to become dependent on commonwealth revenue (a collective failure of states). They complain about VFI - but they have have economically efficient tax bases which they choose not to use properly (eg payroll taxes). The latter can be economically efficient - and was transferred to states in 1971 to provide a growth tax (as GST was), but states have squandered it with vote-buying exemptions. States have shown no more interest in providing quality services than in raising the money to pay for them. Federalists claim that this is the fault of Canberra's centralist tendencies - and that if states were given more responsibilities they would improve. This may be true but why bother? The federal government is right to do to states what the latter have done to local government - push them into role of subordinates. PM's health reform provides a roght model - under which federal government will purchase state services. The states will be suppliers but not necessarily the only suppliers in the long term. Federal state partnership in health will be like that between Woolworths and its suppliers - ie one side is much stronger. And the people like the sound of this   (Mitchell A., 'People have lost faith in the states', AFR,

States are losing a long term battle to retain their power / income. Australia's federation is decaying. John Howard despised it. Kevin Rudd spoke of cooperative federalism, but has proven to be like Howard (as shown by original health reform package) The Opposition leader, takes a similar view to Rudd. (Craven G 'For states, its all an ACT' AFR, 10/5/10)

This preliminary document will suggest that, while there are serious problems in Australia's federal system, what has typically been popularly seen as the obvious 'fix' (ie increased central control) has been one major cause of current problems, and that there is probably a simpler and better alternative.  

Moreover the more further centralization is sought as a 'quick fix' to particular problems that are due to defects in the federal system, the worse Australia's whole system of government will become.

An addendum includes comments on one observer's recognition of the need to move beyond the widespread view in the community that 'more centralization' is the best cure for anything that ails government. Other observers have also taken up the question of how Australia's federal system might be rejuvenated.

Cooperative federalism looks like old premier's conferences - under which premiers express outrage at miserly funding. Howard's decision to shift GST to states was supposed to end this - and it did for a while. Now federal government has taken 1/3 of this back. Now voters tend to favour abolishing states - but they are entrenched in constitution and are a counter-weight to Canberra. State power is likely to continue withering. Voters don't think they do a good job in service delivery. Some (eg Queensland Treasurer Andrew Fraser) argues that this results from their inability to control own destiny. State sovereignty without fiscal sovereignty is seen as unrealistic. PM's approach to health has been to try to increase commonwealth control to match its fiscal clout. But there are constitutional limits to this. OECD says that Australia's fiscal imbalance is greater than any federation except Belgium. The states have expressed concerns about these imbalances. Fraser proposed state income taxing 2 years ago - and Australia is the only federation in which states don't levy income taxes. They have constitutional power to do this - but find it politically easier to beg to Canberra. Given that Australia is stuck with states, there is a need to make them work properly (Steketee M., 'Federalism is a dead idea. So what now?', Australian, 24-25/4/10)

At end of 2010 election campaign PM implored voters to distinguish between state governments and her government - as she wanted her positive economic plan not to be ignored because of concern for poorly performing state governments. But at the same time she (and the Opposition) mainly focused election promises on what the community would expect from state governments. A Victorian premier once accurately predicted that the time would come when the federal government would be blamed for everything. Recent developments reflect final stage of long trend towards trashing the principles that underpin Australia's federation. Rudd Government undermined federalism in the name of ending blame game and seamless national economy. Ending blame game involved maximum possible centralisation of functions - or setting complex bureaucratic rules to force states to comply with targets set by Canberra in exchange for funds (as was the case for health and hospital reform package - which is now increasingly being criticised). Similarly business concerns about reducing the burden of differences in state regulations resulted in the creation of unworkable mechanisms through COAG. The latter has had some successes (eg with occupational health and safety laws) but most of its working parties are now largely defunct. WA premier argues that they merely resulted in duplication and confusion. Even more serious is that costs of regulatory differences were grossly overstated - as competitive federalism always acted to favour improved regulation and minimize differences. Similarly mining taxes reflect further confusion about federalism. Arguing that all Australians deserve to benefit from mineral wealth overlooks the fact that under Grants Commission adjustments are made to federal grants where states gain substantial mineral revenues. Present system actually penalises states for efforts they might make to improve tax regimes. When first established federal government was expected to have functions that apply to the whole country, and that the states would remain autonomous. However the federation is now in trouble because of ambitious / misguided federal politicians, gross vertical fiscal imbalances and a centralising high Court. Experience shows that federal systems produce better economic outcomes than unitary states. Thus there is a need to reform Australia's federal system so as to reinvigorate state governments. (Sloan J. 'Stronger states the key to wealth', The Australian, 31/8/10)

Better outcomes are possible when states are not subject to federal government dictates. Most federal politicians are centralists, who see states as an annoyance. They talk of cooperative federalism but this merely refers to federal bureaucracy dominating state bureaucracy. Many believe federalism just means duplication – but well functioning federations everywhere (eh Switzerland, US, Canada, Germany) involve competition, not cooperation. In US both states and federal government have income tax powers – and people have a choice between living in high taxing / high service states, or the reverse. Diversity in school curriculum leads to improvement over time. In Australia the proposed ‘one size fits all’ curriculum is not impressive. And effective federations tend to be wealthier than unitary states. It is wrong to assume that cental government will spend money more efficiently than states, and that outcomes should be the same everywhere. . Australia’s federal system is in disarray – because of High Court’s bad decisions to always side with Commonwealth over the states. Australia has the worst possible vertical fiscal imbalance, because (unlike functioning federal democracies) the states don’t have income tax powers. Conferences on fixing the federal system are not what is needed – rather getting tax powers back to the states is. In Canada premiers often tell national prime minister to get stuffed. But those in Australia are too weak – because standing up to centralising bullies would see one’s share of tax revenues cut. Working in a university shows every day the defects in one-size-fits-all regulation. Capitalism looks chaotic and has loads of duplication / failures compared with a centrally controlled economy. But the former outperforms the latter. Those who favour centralism: (a) think those at the centre have sufficient information and skill to make better decisions than through a decentralised arrangement; and (b) dislike having different regimes and competition (Allan J. 'Colin Barnett is doing us all a favour by standing up to Canberra, The Australian, 30/5/11).

A senior commonwealth public servant has defended the role of the states against suggestions that their power should be ceded to the commonwealth - on the grounds that federalism produces increased economic benefits and more stable / effective democracy (with a built in protection against authoritarianism) [1]

One observer suggested that the establishment of regional governments would be preferable to centralization as the way to deal with difficulties in state governments [1]. However, as noted below, if the problems created by centralization within federal / state relations were reduced, then state governments might emerge as viable 'regional' governments.

In June 2011 it was noted that states were increasingly resisting the Commonwealth government and seeking a rejuvenation of the federal system [1]

Problems, Possible Solutions and Advantages


Problems, Possible Solution and Advantages

Key Problems in Australia's Federal System

There is no doubt that states have become increasingly ineffectual and virtually irrelevant [1] - however that is arguably the problem, not a pointer towards a desirable solution.

One big problem in Australia's federal system has been that attempts to impose central government priorities in state functions has increased (mainly because the states lack independent tax capacity to undertake their constitutional functions) and this external interference seriously distorts the functioning of state governments, and contributes to intergovernmental duplication and conflicts.

While this is not the only source of deficiency, fiscal imbalances (which are more extreme in Australia than in any other federation) have been a very significant, though generally 'invisible', factor in undermining the effectiveness of Australia's government and in limiting scope for economic development (and thereby weakening the tax base relied on for government revenues).

The first point is explore in more detail in Federal State Fiscal Imbalances. The substantial and ever growing dependence of state administrations on funding derived from federal tax sources has apparently enforced:
  • a centralization of control within state government (ie placed power in the hands of those dealing with intergovernmental relations at the expense of those who have have detailed knowledge of what needs to be done, and how to do it); and
  • a political emphasis on lobbying for funding rather than getting on with the job, which is similar in effect to the crippling impact that tariff protection had on the effectiveness of management in Australian manufacturing for most of the 20th century.

This, and a corresponding willingness by states to accept passive dependence on federal dictates / handouts and on unearned benefits from other sources, has been a significant contribution to making states essentially incapable of performing, or being held democratically accountable for, their nominal functions.

Moreover, as states have responsibility for governmental effort to promote economic development (which function helps determine the overall tax base and thus the total amount of public finances available) there is a need for them to have appropriate financial incentives. However the federal government has sought to ensures that state funding meeds their 'needs' no matter what a states' tax base, so states have no real incentive to take economic strategy seriously (see Comment on Review of Grants Commission Arrangements and Economic Development Incentives).

Other constraints on the effectiveness of state administrations are outlined, using Queensland as a representative example, in The Growing Case for a Professional Public Service and Paying the Price of Ineffectual Public Administration. The latter notes: (a) the lack of strong civil institutions to provide good quality and up-to-date understanding to the community about the nature and functions of government (arguably a consequence of Australia's colonial history and resource dependent economy); and (b) the damage done to machinery of government by ill-informed political efforts to improve its performance (such as politicisation, and a consequent purging of relevant knowledge, skills and experience, and naive attempts to make governments more 'business-like' in the performance of their often non-business-like functions).

In the medium to long term, it would appear desirable to adjust revenue capacity to match the responsibilities of each level of government (so as to reduce the economic, revenue and administrative costs of current imbalances) and to ensure that state revenues depended on the wealth created in their regional economies.

Some writers have suggested imbalances could be resolved if the federal government assumed responsibility for hospitals (and perhaps other functions) [1, 2]. However in any effort to match revenue and spending responsibilities, preference should probably be given to increasing state revenue capacity (eg by transferring GST and personal income taxes and perhaps reinstating death duties) rather than increasing federal operational responsibilities.

Alternative suggestions have involved restoring personal income tax power to states [1].

There is far more to be gained in terms of government efficiency in the use of resources by enabling state and local governments to be effective, than there is in attempts by the federal government to optimize resource allocation Australia-wide in the absence of the information required to do so and the responsibility for operational outcomes. Coordination of functions can be achieved without financial control - eg by promoting collaboration, research into and stakeholder / public understanding of strategic options and the establishment of professional standards (eg as promoted by the Standards Association of Australia in relation to technical issues).  In such an environment decentralised decisions in accordance with locally rational considerations can result in superior outcomes because: (a) inconsistent actions tend to get smoothed out though a process that Lindbloom first referred to as 'partisan mutual adjustment'; and (b) this adjustment process takes account of vast quantities of local and tacit information that central decision makers have no way to access. Centralised planning of complex government functions faces the same fundamental obstacles as centralised economic planning (ie excluding relevant information / knowledge / experience / initiative and commitment, and thereby generating solutions that tend to be unrealistic, no matter how politically popular they are). The initiative of rational / responsible individuals is the primary source of strength in Western societies - but this is lost where functions are centralised.

A second major problem with Australia's federal system involves the lack of any constitutional provision to formally and easily adjust the allocation of powers where this is deemed advantageous. This deficiency leads to constant disputes about powers at the expense of effective collaboration.

A Possible Constitutional Solution

Quite simple constitutional changes might overcome the above deficiencies. This might involve, for example:

  • a constitutional provision that legislative powers not specifically allocated to the federal government under Section 51 are to reside with the states;
  • the creation of an Australia Federal Council through which the states can delegate state legislative powers to the federal government where they deem it appropriate to do so in the national interest;
  • constitutional arrangements that oblige state and federal government to collaborate (eg making the federal Senate a true state house - with members appointed directly by state governments);
  • a constitutional prohibition on the federal government providing conditional funding to the states or entering into binding international agreements, except in relation to functions for which the states have delegated relevant powers to the federal government or for which the federal government has power under Section 51; and
  • a constitutional provision requiring that the allocation of taxing powers between state and federal governments must be adjusted periodically so that the revenue shares of the states and federal government are no more than (say) 5% different from their share of national public spending associated with their operational functions - with the Australian Federal Council to determine the nature of those tax powers.

This would create a system in which: (a) legislative and tax powers would be retained at the lower level within the federation, but be 'delegated upwards' when there is a clear benefit in doing so; (b) regional communities would be obliged to gain familiarity with state, national and international policy issues and take responsibility for the national interest; and (c) effective collaboration between federal and state governments would be ensured because the federal government would be able to exercise power in relation to what were generally accepted to be national issues, but would be obliged to adopt the role of 'nation builder' rather than 'national bully'.

Australia does not have a history of successful referenda to change the constitution - as most fail apparently because the community distrusts efforts to increase central government powers. Changes along the lines outlined above - though they would undoubtedly not be adequate in themselves and require more detailed consideration - would not face this barrier.

The Need for More Than Reform of the Federal System

Such constitutional changes would not in themselves be sufficient to ensure effective government because, as noted above, difficulties in federal-state relationships are by no means the only problems faced (see also  Decay of Australian Public Administration, 2002; Australia's Governance Crisis, 2003; Improving Public Sector Performance in Queensland, 2005; Restoring 'Faith in Politics', 2006; The Upper House Solution: A Commentary, 2006; Paying the Price of Ineffectual Public Administration, 2007).

In brief: Pre-existing defects in the capabilities of state governments related to the 'lucky country's' lack of up-to-date and practical policy support from competent civil institutions were compounded by (a) significantly increased federal government constraints in the 1970s to exploit fiscal imbalances and (b) politicisation and distortion of administrative machinery in ill-considered efforts promote public sector efficiency as a major response to economic challenges in the 1980s and 199os. The result was serious failures of state administrations (eg consider WA Inc and the problems experienced by Cain, Greiner and Goss Government). However rather than dealing with the causes of state failures, the problems in Australia's system of government were compounded, particularly (but not only) under the Howard Government, by: (a) increased federal attempts to micro-manage state functions; and (b) implementing federally the same sort of theoretically-efficiency-seeking 'reforms' that had distorted state government.

Moreover, unless reform is carefully managed, the outcomes are not necessarily beneficial (eg consider the lessons that emerged from the impractical idealism of Queensland's Worst Government).

A Federal System has Important Advantages

Priority needs to be given to reforming, rather than eliminating, Australia's federal system because (for example):

  • community engagement is desirable to reduce the risk of political instability;
  • central control is as ineffective in government as in a market economy;
  • diversity is vital to avoid the threat to the existence of simplified systems which can arise from totally unexpected and disruptive events; and
  • Australia's system of government faces many challenges, and can best avoid the risk of serious failures by building on what currently works (rather than trying to build idealised 'castles in the air').
  • community engagement in government is essential to inhibit the development of political extremism or instability. In many government systems the principle of 'subsidiarity' is sought (ie that government functions should be handled by the lowest / least centralised competent authority) partly to promote engagement. Moreover:
    • community engagement in (and thus understanding of) 'big picture' questions is vital both to provide an informed electorate, and also to the quality of leadership that can be provided within the community (see Queensland's Weak Parliament ). Communities who are not part of the solution are likely to become the problem (as illustrated by welfare dependency concerns);
    • the One Nation phenomenon several years ago provided a warning of the instability that can result from disengagement. That phenomenon largely reflected the frustrations of those who were disadvantaged by centrally-derived policies to promote economic change. Those in economically-underdeveloped peripheral regions had no way to understand this, or to cope with the impact on their lives - and so reacted by lashing out blindly against 'elites' and for a time they proved able to gain a destabilizingly significant political influence;
    • Australia's federal system is a quirk of history and it is by no means certain state and territories reflect the optimum level for political engagement about important social, economic, legal and environmental issues. However, if the constitution and tax systems were adjusted so that they could be effective, the inherited system of states and territories might provide a reasonable compromise as a 'regional' level for government - noting (for example) Australia's large sparsely populated land mass and the need for reasonable scale to make any government effective;
    • while debates about some political issues are increasingly national in scope - and in some cases even becoming global, the need for community engagement in seeking to resolve those issues (and their unique relationship with other local issues) remains local;
  • centralized control is no more effective in managing the affairs of government, than in managing an economy. In dealing with very complex problems, there are no simple 'rational' answers - and a process of discovery based on decentralized initiative is most effective. The price of this is that not everyone's solutions are the same (ie not all cars and computers are identical), but to compensate the best innovations tend to be rapidly copied. The price of centralization of control based on the 'power of the purse' is that decisions are separated from those whose tacit knowledge, commitment and initiative are essential if resources are to be used effectively and efficiently - and (in effect) the size of the 'purse' is greatly reduced.  These points are illustrated elsewhere in relation to:
    • the requirement of s simplified problem space if rational decision making is to be effective (see Cultural Foundations of Western Dominance). The strength of Western societies relies on the effectiveness of individual rationality - though rationality is widely recognised to fail in dealing with complex situations. The creation of systems of law and reliance on money in coordination economic transactions creates simplified problem spaces for individuals, and allows rationality to work. However the global financial crisis illustrated the failure of rationality when the role of money became a source of complexity, rather than simplification, of the decisions individuals needed to make (see GFC Causes);
    • the general corporate shift away from centralised strategic planning in the 1990s, because the problem was not the development of sophisticated ideas, but ensuring that ideas matched practical reality and mobilized lower-level commitment (see Strategy Development in Business and Government, 1997);
    • ongoing attempts to centralize control of infrastructure (both within states and through the creation of 'national' infrastructure programs). The problem is that infrastructure involves the capital component of some function and can't sensibly be planned and managed separately from other aspects of that function (see Infrastructure Constraints on Australia's Economy, 2005 and Infrastructure Magic?, 2008);
    • 2007 attempts by the present federal government to arrange a new system of 'cooperative federalism' - a rhetorical goal that was defeated by the imposition of national performance criteria on supposedly liberalized funding arrangements (see Federalism: Why 'Control Freaks' Don't Achieve Real Results, August 2007 and Australia's New 'Cooperative' Federalism, December 2007);
    • attempts by the present federal government to identify 'the answers' to what ails Australia through a National Ideas Summit (see Talkfest Magic?, 2008) and to fix difficult problems through largely symbolic actions (eg see Apology Magic?, 2008; Productivity Magic?, 2008 and Public Service Magic?, 2008);
    • there is a need for coordination amongst different functions on a regional basis which states (as Australia's de-facto if not idea regional administrations) should be best positioned to address;
    • proposals for changes in Australia's health system imply strong central control - and seem to contain serious defects - see Is a National Health and Hospitals Network Progress? (March 2010); and
    • the currently proposed National Education Curriculum (see Proposed National History Curriculum: Information without Understanding?, March 2010)
  • diversity is vital to avoid the threat to the existence of simplified systems which can arise from totally unexpected and disruptive events. For example:
    • monocultures are much more susceptible to catastrophic failures than are complex ecologies;
    • diversity as been recognised to be the defence against (so called) 'black swan' events.
      • Systems that seem stable can be fragile. The banking system is an example (see The Black Swan). Black swan events are: outside realm of regular expectations; have extreme impact; and tend to be explained only after the event. Nature is a complex system with webs of interdependence, non-linearities and robust ecology - as otherwise it would have blown up long ago. Nature deals with black swans through redundancies (offering insurance despite apparent costs). Naive optimization (n the search for apparent efficiency on the assumption environment is stable) is the reverse. Nature also abhors anything that is too big - ie at the risk that if one thing fails everything fails. Only fools thing that it is possible to eliminate randomness from social / economic life. The challenge is to ensure that mistakes are confined.  (Taleb N 'Song of the black swan', AFR, 16/7/10)
  • Australia's system of government generally faces severe difficulties, and great care is needed to preserve political stability. Diverse 'modern' challenges to government effectiveness that have not yet been 'officially' noticed are outlined in Australia's Governance Crisis, and unless these are carefully managed the consequences could be serious. In particular:
    • one major risk factor is now political 'populism' - which involves gaining political power on the basis of trendy sounding ideas which are not likely to be effective in practice. This phenomenon has emerged because the complexity of policy issues has become too great for simple answers, and the civil institutions needed to enable the community generally to understand that complexity have not yet been properly developed. In an environment in which public services have been politicised (ie rendered incapable of, and unwilling to, provide a 'reality check' on 'trendy' policies) the danger that populist politicians will do a great deal of damage is real. The risk can be illustrated by the populist claims that a republic could be created in Australia fairly easily involving a directly elected head of state with largely ceremonial powers - see Republican Realism: A Purely 'Ceremonial' Head of State?
    • in the face of complex requirements for change an evolutionary approach which builds on existing institutions is less likely to generate instability than one that involves eliminating existing capabilities in the idealistic hope that new and effective systems can materialize out of thin air. An example of destroying existing capabilities and then erecting 'castles in the air' that did not prove very substantial was the 'reform' efforts of Queensland's Goss administration (see Queensland's Worst Government?, 2005) .
  • Canberra may be unsuitable as a centre for government. Thus as part of any process to transfer state powers to the federal government, it might be necessary to shift the latter from Canberra to a less detached environment (ie Canberra is physically isolated and primarily involved in government and other services, which makes it difficult for those who live there to gain 'real world' information about many issues). The probably need for relocation creates a major obstacle as Canberra was only developed because neither Sydney nor Melbourne were willing to allow the other to be the national capital. Indicators of Canberra's probable limitations include:
    • recent suggestions that: (a) there is a lack of realism in the federal public service and that (b) Canberra is just a large company town - which is susceptible to problems of 'group think' (Gottleibsen R., Canberra's worse than we thought, Business Spectator, 25/3/10);
    • similar views expressed to the present writer some year ago. For example: (a) a Japanese visitor expressed wonder that Australia's national capital was in Canberra (because he perceived the city to be an artificial environment, remote from Australia's real economic and social challenges); and (b) a senior official in the Prime Minister's Department suggested that people in Canberra don't live in the same world as most other Australians (ie when they go to barbecues with friends they encounter one another, but not much of the 'real' world);
  • the Commonwealth has increasingly suffered from the same level of administrative incompetence as the states because of the adoption of 'quick fix' concepts for reform of public administration (especially from 2000 on) (see The Decay of Australian Public Administration);
  • the balance of power within a federation improves political stability - as all levels of government are unlikely to experience crises simultaneously;

The idealistic assumptions that are the basis for proposing increased centralization as a quick fix for what ails government in Australia (while typical) are unfortunately invalid because:

  • most of the defects that limit the effectiveness / efficiency of state governments (with the notable exception of federal interference related to fiscal imbalances) also apply to Federal Government administration (see Decay of Australian Public Administration);
  • Australia does not have a 'well developed national democratic tradition' of government but rather an increasingly dysfunctional system in which a loss of contact with practical reality is increasingly dangerous (eg see Australia's Governance Crisis). The fact that the electorate is oblivious to the dangers it faces does not mean that those dangers don't exist;
  • the biggest constraint on effective governance in Australia is the apathy and ignorance of the general community concerning the nature and functions of government - a 'Lucky Country' syndrome reflected in carefree expectations of effortless and inevitable success. Steps to overcome this problem might best involve forcing the community to a greater level of engagement and responsibility - which requires de-concentration of responsibility; however
  • community apathy and ignorance is often amplified by federal government efforts to micro-manage functions that would otherwise provide regional communities with opportunities and pressure to improve their awareness and understanding (see TEQSA: Will Micromanagement Again Triumph over Government?);
  • further increasing the centralization of power is anything but a panacea (see above). The problem is complexity rather than the absence of well-intended centralised decision making (see also Restoring 'Faith in Politics')

However, as Australia's political establishment seem incapable of understanding that electorally favourable outcomes can't necessarily be dictated without concern for practical / human constraints, it seems likely that real progress is only going to be possible after many more failures through policy and program centralisation (such as the 2010 COAG health and hospital reform arrangement is likely to become - see Making a Bad Sitution Worse?)

Addendum A : Moving Beyond Knee-jerk Responses

On Moving Beyond Knee-jerk 'More Centralism' Responses (Email sent 12/4/10)

Professor A. J. Brown,
Griffith Law School,
Griffith University

Re: 'Fix the broken wheel of state and give the boot to the knee-jerk reaction', The Australian, 10-11/4/10

I should like to endorse the suggestion in your article that Australians' knee-jerk 'more-centralization' reaction to any problem in government needs reconsideration, and also to suggest the sorts of changes that might help 'fix the broken wheel of state'.

In brief it is suggested (in comments, following this email, in relation to your article and on a couple of related articles) that:

  • problems affecting state governments are symptoms and examples of broader often-unexamined challenges facing Australia's system of government;
  • Australia not only has a federal system without a federal culture, but has a democratic system with only a weak democratic culture. A resulting grass-roots inability / unwillingness to take responsibility is the likely source of the knee-jerk 'more centralization' voter response to problems that your survey exposed;
  • the three recent years of intensive efforts to make the federal system work have arguably been a farce, because of their lack of realistic goals; and
  • the survey conducted on behalf of your federalism project to determine public attitudes largely reveals community ignorance - and the parallel between ill-informed community expectations and the federal government's suspect health and hospital reform proposal suggests that the latter may be another case of 'populism'.

As far as Australia's federal system specifically is concerned some preliminary suggestions about constructive directions for reform are in Fixing Australia's Federation. The latter also suggests key sources of problems affecting the the performance of Australia's governments (eg the way in which federal centralization separates decision making from the people whose commitment and tacit knowledge are needed for success, and forces states into equally counter-productive internal centralization).

My draft suggested reforms would be a significant change and be futile unless other issues raised in Australia's Governance Crisis were also addressed. However, unless a serious approach is taken to the crisis that is now besetting the whole system of government, the community's welfare is likely to be much reduced in future.

I would be interested in your response to the above speculations.

John Craig

Outline of and Comments on Articles

My interpretation of your article: The system of government needs reform, but care is needed in doing so. All sides of politics accept the need for reform of the federal system. After three years of intensive efforts to make the federal system work - Australia is up against the limits of what the present system can deliver. The federal government already has a pivotal role in driving policy change and controls most of the money. There is a knee-jerk reaction that the federal government should fix problems. The federal government's 'funded nationally, run locally' approach to health reform parallels John Howard's idea of 'aspirational nationalism'. - though the present PM is not as centralist. But the federal government can't and shouldn't do everything - as some recent programs demonstrate. In Queensland there is more confidence in local government - and further strengthening this may be a key to reform. Because Australians are scattered over a huge continent they need to be careful what they wish for. The fact that surveys show that more people think that decisions should be made centrally rather than at the lowest level is a chilling result. Cheryl Saunders, a global expert on federalism, has suggested that Australians' tendency to centralism indicates that we have a federal system without a federal culture.

My interpretation of related articles by Mike Steketee

4 in 10 voters favour abolishing states as the least effective level of government. Griffith university's federalism project conducted survey leading to conclusions that constitutional lawyer (George Williams) called a crisis of confidence in state governments. Project director (A. J. Brown, professor of public law) suggests that states will wither away unless structure of government is changed. Professor Brown suggested that there were long term structural problems with the federation. NSW and Queensland suffer worst because of their size and large cumbersome bureaucracies. Voters agree with PM's approach of seeking state cooperation on health, but forcing takeover if this fails. Centralizing government has broad appeal. The federal government is seen as better at doing its job - though this figure is falling. There is growing disillusion with government generally. Many voters favour reform of present system - perhaps to create regional governments. Professor Williams argued that, though radical reform has support, this could not be achieved quickly. There is a case for community consultation (or a convention) on federalism. (Steketee M., 'Support on the rise to abolish state governments', The Australian, 10-11/4/10)

Voters want a shake-up in the federal system. PM's alternating threatening and collaborative approach reflects a deeper purpose. People want governments to get their heads together to improve service such as hospitals - and if they can't they want the federal government to just get on with it. Griffith University's federalism survey clearly shows this. PM has invested a great deal in cooperative federalism through participation in COAG. But progress has been slow - and voters are dissatisfied with states. Though many Liberals used to argue about the importance of state's right (through inhibiting corruption and promoting diversity and competition) current Liberal leaders have changed their view. This does not mean abolition of the states - as constitutional change to do this would be impossible. However the community favours both local government and centralization of as many decisions as possible. This is why the survey fits neatly with Rudd Governments proposals for hospital reforms - even though increased federal control might not actually improve the situation. Professor Williams argues that survey results show strong dissatisfaction with present system - and thus make reform possible - though this should best be incremental. A starting point would be changes to the constitution to allow joint federal-state laws and regulatory authorities. Access economics argues that present federal system wastes up to 3% of GDP annually (Steketee M., 'Government should be on the level', The Australian, 10-11/4/10)

In relation to your article (and the associated reports by Mike Steketee) it is suggested that:

  • the community is right to be concerned that Australia's system of government no longer works well. However problems in state governments seem to be merely symptoms or examples of much broader difficulties. Australia's Governance Crisis (May 2003) was an attempt to deal with the 'bigger picture'. It noted newly-emerging and / or generally-unexamined problems such as: the difficulties that increased complexity poses for democratic institutions; the inadequate support to elected governments by civil institutions; the weakening of governments' administrative support (due to politicisation of public services and efforts to make governments act like businesses); a lack of Asia literacy; federal fiscal imbalances; politicisation of the head of state; and increasing moral policing as the behavioural standards needed for legal / governance systems that assume individual liberty have eroded;
  • Cheryl Saunders seems correct in suggesting (as you noted) that Australia has a federal system without a federal culture. However the problem is broader - as Australia apparently has a democratic system without a strong democratic culture. Australians do does not 'own' their system of government (ie the present system was inherited as a product of Australia's colonial heritage). Moreover the community suffers a 'lucky country' syndrome (ie believes that it is entitled to effortless success). Reliance has traditionally been placed on external investors in natural resources to ensure wealth and on government to share it around. However in the community there is little realistic understanding of the nature and functions of government, and little commitment to supporting the institutions needed to gain such understanding - and this facilitates abuses of power and political success with poor policies (see More Competent External Support to Parliament). As merely copying reforms made earlier in UK / US ceased to be automatic over the past few decades, a huge amount of damage has been done by pursuing ill-informed initiatives dreamed up by inexperienced idealists (see Decay of Australian Public Administration, November 2002);
  • what you described as the three recent years of intensive efforts to make the federal system work have likewise been a farce, because:
    • those efforts seemed like just more of the same centralization of decision making and impractical / idealized 'reform' that has been crippling governments for decades. The effect of practical defects (eg fiscal imbalances / enforced centralization within state governments / public service politicisation and inappropriate 'business-like' methods) were not addressed (see Federalism: Why 'Control Freaks' Don't Achieve Real Results, August 2007);
    • the current federal government tried to promote federal-state collaboration by a focus on a populist, but impractical policy agenda (see Australia's New 'Cooperative' Federalism, November 2007). While constructive organisational development can be achieved by presenting a 'vision' of a new arrangement that practitioners can commit to, this can't be expected from endeavours to enforce insubstantial political rhetoric;
  • the 'populist' rather than realistic policy basis for promoting cooperative federalism is a symptom of the weak institutional support mentioned above. Earlier experience associated with Queensland's Goss Government showed that going through the motions of 'reform' on the basis of a half-baked policy agenda can be disastrous - by creating organisations that merely have to pretend to be effective (see Queensland's Worst Government?, January 2005);
  • the survey conducted on behalf of your federalism project to determine public attitudes to the federal system largely reflects community ignorance. That survey showed dis-satisfaction with government generally (states in particular) and a growing view that reform is needed. However because of the lack of analysis or public awareness of the causes of problems in Australia's system of government, voter responses are not a reliable guide to anything except getting votes. If, as Mike Stekette implied, current proposals for health and hospital reforms would confer political advantage (because they parallel uninformed voter preferences) without necessarily resulting in real improvement (see also Is a National Health and Hospitals Network Progress?, March 2010), then those reforms are likely to be another example of the dangerous trend towards populism which besets Australia's political system
Addendum B: Re-imagining the Federation to Develop New Cities +

Re-imagining the Federation to Develop New Cities (email sent 6/7/10)

George Megalogenis
The Australia

Re: 'States the only tier that could deliver the goods, yet they are not up to it', The Australian 5/7/10

As your article suggested, reinventing Australia's federation is vital to grow the new cities needed to accommodate ongoing population growth with less congestion. But this is only part of the challenge.

My interpretation of your article: Australia needs another city if population and living standards are to rise, yet this won't happen unless we re-imagine the federation. The job is too big for one tier of government. The thinking / spending logically falls to Canberra, yet implementation remains with states. But they aren't equipped to do this, because default response to city congestion is to extend existing metropolitan boundaries. Existing cities could hold many more people, but governments don't want to put their name to high density developments. Thus can towns (eg Townsville) be turned into cities?. No matter where growth zones are selected, states can't be constructive partners because federation created the perverse incentive for states to run services badly so as to get top-up funding from Canberra. To break this cycle requires states to see themselves as planners, not service providers - and this requires that planning ministers have central roles. The first government able to refocus growth will deserve the compliment of nation builder.

The key to developing new cities is to avoid the temptation to just plan infrastructure and real estate - as the latter is equivalent to the building of phoney airfields by cargo-cultists in New Guinea in the hope of enticing aircraft to land and unload 'cargo'. Rather there is a need to focus first on the development of productive economic functions in regional centres so as to create high-wage jobs as strong 'magnets' for population growth, while tax reform is needed to motivate state governments to allow this to be achieved. Infrastructure and real estate must be provided efficiently in response to population growth, but they are secondary issues.

As your article correctly noted fiscal imbalances in Australia's federal system are a serious obstacle to any effective contribution by state governments, because the latter are not left with any ability to take real responsibility, or be held democratically accountable, for their nominal functions. This obstacle is artificial and could be overcome by a review of Australia's tax system to more closely balance revenue sources with responsibilities - as suggested in Fixing Australia's Federation (2010).

However the problem is not just that the deficiency in the quantity of tax revenues that are available to states undermines their efficiency and effectiveness. The nature of the tax sources that states have available means that, though they are the level of government with primary responsibility for economic development, they have no financial motivation to encourage the growth of new high value-added economic functions that might attract population growth. State tax revenues tend to relate to the volume of economic transactions, rather than to the value added - and this means that the types of economic activities they are motivated to encourage are often not those in the best interests of the community. Once again this artificial obstacle could overcome (see Providing Incentives for Effective Economic Development, 2009).

Techniques are available to accelerate the development of high value-added economic functions through stimulating market-oriented 'learning' within regional industry clusters - eg as suggested in Developing a Regional Industry Cluster (2000). This would achieve better results than traditional techniques for reasons outlined in A Case for Innovative Economic Leadership (2009). The main reason that better results could be achieved (and thus create population magnets to turn regional centres into major cities) would be that development would be responsive to 'market-pull' rather than 'political push'. There are solid reasons to suggest that economic development can not be successfully led by politically accountable organisations (see Economic solutions are beyond politics, 1995). Experiments conducted with the use of these alternative methods in the late 1980s, before Queensland's public service was politicised and de-skilled by the Goss administration, showed promising results.

As the process suggested above requires true 'nation building' (eg empowering others to achieve results by defining the protocols under which others would 'do things' that are market-responsive), there is a need for states to have a financial motive to value success in the development of productive economic opportunities more than the popularity they believe they gain by being seen to 'do things' themselves. Current financial arrangements in Australia's federation are counterproductive, as states are compensated for the weak tax bases that result if they do not take economic development seriously (see Review of Grants Commission Arrangements , 2001).

Developing new cities would be much easier if federal and state political leaders took a real interest in building the nation, rather than always striving to be seen to control outcomes themselves (eg by building 'things' for the nation).

John Craig

Reinventing the Regions - email sent 8/10/10

Professor Sandra Harding,
Vice Chancellor,
James Cook University

Re: Reinventing the Regions, The Australian, 15/9/10

I should like, belatedly, to try to add value to your constructive suggestions about improving the image and prospects of rural and regional Australia.

My interpretation of your article: Regional Australia has won from the 2010 federal election - including $500m for regional education. However in considering a cash injection it is important not to miss the historic opportunity of securing vibrancy in rural and regional Australia (which requires more than money). The key is a change of mind. Without this, efforts to enliven regions / regional education will be shallow. It is wrong to assume that high quality institutions and economically productive / culturally satisfying life is only available in cities. Other advanced economies don't assume this. Australia is held back by extreme urbanisation and negative views of regions. In US, Britain Europe non metropolitan regions can be excellent - but in Australia this is not so. The question is, is Australia serious about nation building - or simply placating sectional interests? But the backlash is on - with (laughable) talk of inequity for metropolitan areas / regions. The time is right to build vibrant regional economies - as Menzies Government understood in the past, and Queensland government understands now. There is a need to shift urban population to rural and regional Australia. While new infrastructure is welcome, there is a need for much more. There must be vibrant regional economies - and these won't exist without quality higher education delivering human capital and innovation directly into regional communities. But while quality education is needed, NBN also offers brilliant prospects of raising ambitions for 21st century. It will affect where businesses locate and people live. The NBN offers greatest prospect to de-urbanise - to relieve pressure on cities. Regional Australia should get NBN first to provide competitive advantage. But NBN, regional education, health, economic and social development (while needed) are just planks which mean little without a change of mind. But some don't see this - because they live in shadow of extreme urbanisation (as in Plato's cave). Australia needs to come out of the shadows, and this can't happen until Australia comes out of shadows also. There is a need for true nation building

By way of background let me make clear that I have some knowledge of, and sympathy for, the challenge of development in north Queensland. While working for the then Coordinator General's Department in 1973, I was the first (though only acting) Regional Coordinator for north Queensland, and supported local groups (including those from James Cook University) in producing a preliminary study of the region's prospects and problems. I note also that I wrote the first substantial report on how Queensland might develop its capacity as a 'smart state' while working for the then Premier's Department in 1983.

In relation to the issues you raised it is suggested for your consideration that:

  • your article is quite correct in noting that, to boost rural and regional prospects: (a) there is a need for more than cash injections; (b) many different elements are needed (eg communications, education, health etc); but little will happen unless these 'planks' are bought together into a cohesive whole. Development theorists often advocated the provision of 'missing strategic factors', and it was then found that whatever 'strategic factor' was provided was wasted, because of the lack of complementary assets. For example, education was often emphasised and produced a brain drain (because of the lack of job opportunities for the better educated). Similarly efforts to provide 'smart' inputs (eg research and education) into Australia's economy in the hope of generating 'smart industries' have tended to fail, because nothing effective was done to increase the commercial ability of the economy generally to use those inputs productively (see Commentary on 'Smart State', 2003 and The Economic Futility of 'Backing Australia's Ability 2', 2004);
  • the key requirement for drawing the various 'planks' of regional development together into a cohesive and dynamic whole is not a change of community or political minds. Rather it is to create the capacity in the region to meet market demand for goods and services in competition with the world's best - and thus start attracting people to the region by providing good job prospects. Regional development can be accelerated by 'market pull' (because it requires and encourages different entities in a region to integrate their efforts), but won't be sustainable if it is only supported by 'political push' on various poorly-related inputs;.
  • some suggestions about how such economic capabilities can be 'bootstrapped' are in Re-imagining the Federation to Develop New Cities. In simplest terms this involves a process that encourages accelerated 'learning' about new market / technological opportunities within an embryonic industry cluster. Information is well recognised by economists as the key factor in economic growth, and it is most powerful if used as a way of motivating and enabling changes in economic systems. Such a process can't be effective if undertaken through politically accountable entities. Thus changes in the financial incentives facing state governments are suggested, so that states might enable progress to be achieved in spite of the political benefits they gain from trying to control outcomes (and thus taking away the 'market pull' that could make resulting actions sustainable). It can be noted that supporting such processes can potentially be VERY profitable for those with strategic land holdings - because the value of land tends to be a function of the incomes of the people and businesses nearby. Some years ago it was guess-timated that a $50m investment by a major property developer over 25 years could yield a $5-10bn increase in the value of their residual land holdings;
  • if a 'natural' (ie market driven) population 'magnet' can be created in a regional centre, then there are feedback effects associated with what can be called 'migration industries' (ie the provision of support services for the people who start to move to the region) who will accelerate this process (see Towards Effective Management of Both Growth and Development). Such feedback effects clearly had a major impact on population growth in SE Queensland - ie migration to the region stimulated initially by low taxes and a sun-state phenomenon created large numbers of job opportunities, which in turn attracted further migration;
  • there are now structural obstacles to the further growth of Australia's major cities which will tend to make it easier to attract migration to well developed rural and regional areas. A key example involves transport, where it is clear that significant problems have emerged in developing viable strategies (eg see Brisbane's Transportation Monster, 2008). Urban footprints have been defined for major cities on environmental grounds, and this makes it impossible to access the cheap rights of way required for freeway-based transport systems (which are traditionally associated with urban sprawl). However urban densities in Australia's cities are not sufficient to support good mass transit systems, and attempts to boost urban densities have proven problematic. If viable transport systems can not be created, the amenity / attractiveness of cities relative to other locations will be severely affected. Similar constraints on the amenity of major urban centres are arising from the rapidly increasing cost of utilities;
  • a process of 'nation building' is now needed which goes well beyond the sorts of changes that would enable rural and regional Australia to become better developed (see Australia's Governance Crisis and the Need for Nation Building). Australians' bias towards major cities is complemented by a bias towards central authorities as the source of solutions to their problems and the source of opportunities. Reversing both biases is needed to build a strong and prosperous nation in Australia.

Thus the question is: is Townsville and North Queensland serious about wanting a vibrant rural and regional Australia? Such outcomes should be achievable though accessing information about available opportunities and stimulating networks of local entities to consider mutually reinforcing initiatives to address them - without creating dependency on political decisions or government support. The latter must be a later stage in the process.

I would be interested in your response to the above speculations.

John Craig


Addendum C: More Statesmanship: Less Politics

Addendum C: More Statesmanship: Less Politics (email sent 2/9/10)

Professor Judith Sloan,
Institute of Applied Economic and Social Research,
University of Melbourne

Re: 'Stronger states the key to wealth', The Australian, 31/8/10

I should like to try to add value to your useful suggestions about reinvigorating Australia's state governments.

My interpretation of your article: Towards the end of the 2010 election campaign, the Prime Minister implored voters to distinguish between state governments and her government - as she wanted her positive economic plan not to be ignored because of concern for poorly performing state governments. But at the same time she (and the Opposition) mainly focused election promises on what the community would expect from state governments. A Victorian Premier once accurately predicted that the time would come when the federal government would be blamed for everything. Recent developments reflect the final stage of a long trend towards trashing the principles that underpin Australia's federation. The Rudd Government undermined federalism in the name of ending the blame game and a seamless national economy. Ending the blame game involved maximum possible centralisation of functions - or setting complex bureaucratic rules to force states to comply with targets set by Canberra in exchange for funds (as was the case for the health and hospital reform package - which is now increasingly being criticised). Similarly, business concerns about reducing the burden of differences in state regulations resulted in the creation of unworkable mechanisms through COAG. The latter has had some successes (eg with occupational health and safety laws), but most of its working parties are now largely defunct. WA premier argues that they merely resulted in duplication and confusion. Even more serious is that costs of regulatory differences were grossly overstated - as competitive federalism always acted to favour improved regulation and minimize differences. Similarly mining taxes reflect further confusion about federalism. Arguing that all Australians deserve to benefit from mineral wealth overlooks the fact that, under the Grants Commission, adjustments are made to federal grants where states gain substantial mineral revenues. Present system actually penalises states for efforts they might make to improve tax regimes. When first established, federal government was expected to have functions that apply to the whole country, and that the states would remain autonomous. However the federation is now in trouble because of ambitious / misguided federal politicians, gross vertical fiscal imbalances and a centralising High Court. Experience shows that federal systems produce better economic outcomes than unitary states. Thus there is a need to reform Australia's federal system so as to reinvigorate state governments.

Your article noted that the poor performance of state governments (who are mainly ALP controlled) led the Prime Minister to fear that her government might be punished in the recent federal election. It seems that this may have happened, and (if so) it would have been partly deserved. Administrative and political distortions, resulting from decades of manipulation of state functions by successive federal governments, are arguably the main (though not the only) cause of ineffectual state government (see Fixing Australia's Federation, March 2010). The latter offers some speculations about how this particular problem might be reduced. It also mentions the need for stronger external and internal support to state political systems, as well as changes to operating arrangements and very careful management of reform. Related reforms to make Australia's system of government generally more effective are speculated in Australia's Governance Crisis (from 2003).

However difficult reforms requires statesmanship (ie a commitment to reform of dysfunctional systems, rather than merely seeking political popularity by exploiting them), and there is little sign of this amongst Australia's current political leaders.

Even an independent MP who reportedly claimed an intention to ''... support the party or parties that ... will deliver stable, competent and ethical government " (Nadar C., Wilkie may yet reject all suitors , 31/8/10) seems to believe that a key characteristic of such a reformed system of government would be generous federal handouts to his electorate. As some of these handouts seem to require micro-managing state functions, federal compliance with such demands would presumably make the effective provision of public services and economic development much less likely.

Seeking State Pork in the Federal Barrel: "The 22 demands set out by Wilkie, the new Denison MP, show how difficult the task [of effective government] will be. In March, Wilkie stood for Denison at the Tasmanian state election and won 8 per cent of the vote. At the federal election he won 21 per cent, taking votes equally from the Liberals and the Greens. One reason was that this time he had a new issue, telling southern Tasmanians they were not getting their fair share of federal funding because they were in safe Labor seats. So, naturally, his wish list yesterday began with 10 local demands, starting with a new Royal Hobart Hospital, and including funding for broadband, roads, public transport, including a light rail for Hobart's northern suburbs, and a demand that the government withdraw its formal approval of the proposed Gunns pulp mill. Then there are 12 broader issues ..... (Colebatch T., 'A climate for change', 31/8/10 )

Despite such discouragement, your efforts in advocating fundamental reforms to make Australia's system of government workable are to be applauded, because in 5-10 years the need for change may have been accepted in the community sufficiently for political leaders to respond.

In conclusion, I note that brief comments on various other issues that were mentioned in your article follow this email.

John Craig



Centralised strategic planning, which was widely adopted by major corporations as the best way to respond to rapidly changing conditions, had largely been abandoned by them by the late 1980s - because it proved unable to mobilize the knowledge, experience and commitment of those not at the centre any more than central economic planning could do (see Strategy Development in Business and Government - 1997). However this constraint seems to have escaped the attention of many advocates of public sector 'reform' in Australia.

Emerging criticism of health and hospital reforms.

This reform package seems likely to have made a bad situation worse, because unworkable administrative arrangements have been established (eg trying to manage hospital services by fixing 'efficient prices'). The failure of Soviet economic models in the USSR showed that activities can't be effectively controlled by administratively-determined prices.

Well established nationwide sharing of mining revenues by the Grants Commission

The RSPT proposal seemed to suffer other defects which have not yet gained public recognition (see RSPT won't hurt miners: But pity help naive Australians ). The latter suggested that a lack of Asia-literacy by policy makers risked adversely impacting Australia's total mining-related tax revenues.

Penalization of state initiatives by the Grants Commission

Arrangements for revenue sharing under an overly-centralised federal system also seriously limit Australia's economic prosperity, because: (a) states have the lead role in governmental efforts to catalyse economic development, but (b) they have no financial incentive to take that responsibility seriously - because of: (a) the narrow tax base they have available; and (b) Grant's Commission formulas that compensate them if they fail to create the strong tax base that a well developed economy would provide (see Economic development incentives).


Addendum D: Infrastructure: A Big Picture View

Infrastructure: A Big Picture View - email sent 16/4/12

Glenda Korporaal,
The Australian, 7/4/12

Re: Where there's a bill there's a way, The Australian, 7/4/12

Your article identified Australia’s serious problem in providing infrastructure. However the solutions advocated by the sources you have quoted do not seem to reflect a ‘big picture’ understanding of either: (a) why problems exist; or (b) what might be done to manage infrastructure development more effectively.

My interpretation of your article: Australia’s capitals need major transport projects that states can’t pay for. Infrastructure NSW chairman (Nick Greiner) says states no longer have the operating surpluses needed for big new infrastructure projects. NSW Government is under budgetary pressure, Queensland is having its financial problems assessed and Commonwealth is seeking to eliminate a $40bn deficit. Greiner identified two options: (a) asset recycling; or (b) private funding. COAG report on why cities are not progressing rapidly will be released soon. Cities generate 75% of jobs, and 80% of economic output. Strategic planning for capital cities is at a watershed due to: population growth; increasing energy costs; and shift to a knowledge economy. Report suggests further work is needed on: improving freight transport and intermodal networks to support port / airports; more public transport emphasis; and integrating transport / land use decisions. While there is general agreement on the need for better infrastructure, federal and state governments have not agreed on what is needed – and states periodically change their priorities and can disagree with Infrastructure Australia which seeks to prioritise major infrastructure projects nationally. Infrastructure Australia examine projects put forward by states in four categories (ie it classifies them as: early stage; real potential, threshold; and ready to proceed). Infrastructure Australia seeks to make cities work better and more efficiently (especially in terms of roads, rail, and freight). Lists of potential projects are available. Infrastructure Partnerships (Brendan Lyon) suggests that there is general agreement on the need to fund these – and governments will need to reorganise their budgets to do so. This could require asset sales, and introducing competition into government service delivery to cut costs. They will need to consider what assets they hold, and privatisation. Lyon suggests that NSW and Queensland consider sale of remaining electricity assets to fund new projects (eg for mass transit, completion of Pacific Highway upgrade and efficient freight connections). The private sector will need to be involved, but has been burned by big losses on tunnels.

It is submitted for your consideration that:

  • Effective infrastructure development does not require lists of ‘major’ projects for federal funding, but rather the development of functionally specialised government agencies that are competent and supported in identifying, resourcing and implementing large numbers of major and minor projects that are the capital component of the public functions they are dealing with;
  • Australia’s machinery for developing infrastructure is highly dysfunctional due (for example) to federal fiscal imbalances, and attempts over the past couple of decades to apply commercial / competitive methods to functions that are subject to serious market failures;
  • Lists of major projects put forward by entities such as Infrastructure Australia should be questioned because: (a) such proposals have typically emerged from apparently dysfunctional machinery; (b) claims about the need for urban infrastructure seem to be overstated; and (c) centralised strategic ‘planning’ passed its use-by date many years ago; and
  • While there is a need to work out how infrastructure is financed, the issues involved go well beyond options such as asset recycling and increasing private financing. For example, there is probably a need to: strengthen the tax base by a more serious approach to economic development; and recognise that private infrastructure financing does not actually increase available resources.

These points are developed further on my web-site.

John Craig


Infrastructure in Context

Infrastructure involves the capital components of basic systems that are needed for a society and economy to operate (ie the capital components of systems for transport / water supply / sewage / electricity / telecommunications / flood mitigation / etc).

Much infrastructure is best provided by government because it involves functions that are subject to market failures, which make it impossible to provide those systems satisfactorily on a purely commercial basis through a competitive market (eg because of the existence of externalities / monopolies, or the lack of appropriate pricing mechanisms, or the need to manage large complex networks as a whole). And those capital components are related in many ways to other regulatory and ongoing operational aspects of those public functions, and of other government responsibilities.

It makes no more sense to separate the capital components of functions that are legitimately-public responsibility into ‘projects’ that can be chosen by central planners than would be the case for (say) the shops traditionally required by retailers. Likewise it makes no sense to deal with 'major' elements of infrastructure systems whose usefulness depends on many complementary 'minor' investments.

What is needed for effective public infrastructure development is not a list of major projects, but rather functionally specialised, responsive and democratically accountable government agencies that are competent and supported in identifying, resourcing and implementing large numbers of major and minor capital projects on an ongoing basis while: (a) also undertaking non-capital aspects of those functions; and (b) managing the relationship with other functions (eg see Focusing on projects is a bad way of developing infrastructure or the public sector).

Dysfunctional Machinery

Australia’s machinery for the planning and development of infrastructure is highly dysfunctional as a result of both long term distortions in the federal system and of efforts over the past two decades to improve efficiency by applying commercial and market mechanisms without really considering the effect that this would have on government effectiveness generally, or the effect of commercial / competitive arrangements on functions subject to serious market failures.

An attempt to outline these structural defects is in Infrastructure Constraints on Australia's Economy (2005). The latter referred to;

  • Numerous factors that seem to have contributed to problems in infrastructure development in the case of Queensland with which the present writer is most familiar. This included:
    • the inability of states to take proper responsibility for their functions or deal with them effectively that results from Australia's massive federal fiscal imbalances. Federal financial control encourages: (a) centralisation of control within states that separates decision making from those with the detailed knowledge and experience required to make good decisions; and (b) a focus on lobbying for funding, rather than on what needs to be done (which is similar to the predicament that manufacturers faced when their viability depended on tariff protection);
    • fragmentation of responsibility for particular infrastructure systems as a result of seeking competitive / commercial methods since the early 1990s;
    • loss of human capital from government machinery (as a result of politicisation of 'senior' positions, which ensured the dominance of 'yes men');
    • unrealistic attempts at centralized strategic planning;
    • Queensland's ‘corporatisation’ approach to government enterprises;
    • privatisation of a monopoly; and
    • Commonwealth attempts at central planning.
  • the complexities generated by public-private partnerships which: (a) add costs in contract management that offset expected operational efficiency gains; (b) create problems in dealing with integrated infrastructure systems as a whole; and (c) risk distorting / corrupting the political process because of self-interested lobbying which the agencies that support governments may be unable to counteract because they lose access to the necessary information;
  • the diversity of constraints on Australia’s economic productivity all of which need attention, and of which infrastructure is only one component;
  • constraints on infrastructure financing (see further below).

Inadequate Infrastructure Proposals

While there are undoubtedly lists of projects that have been submitted to, or developed by, Infrastructure Australia (or Infrastructure NSW) there are many reasons to doubt the adequacy of such lists, because:

  • the existing machinery for developing such project proposals seems highly defective (for reasons suggested above), and has a history of fiascos.

Many problems have arisen in infrastructure development in Queensland such as those briefly mentioned in A Dysfunctional and Difficult Environment

For example the Queensland Government apparently endorsed the Traveston Dam proposal to boost SE Queensland’s water supplies after a brief desk-top study though there seemed to be technical reasons to doubt its viability. Queensland's premier then publicly committed to the project 'whether or not it was feasible'. And hundreds of millions of dollars were wasted before the project was scrapped - nominally on environmental grounds (see Evaluating Additional Water Supplies in SE Queensland). 

  • the perceived need for, and cost of constructing, major urban infrastructure projects may well be much greater than necessary – because:
    • tunnels have routinely been developed to complete links in the freeway networks in major cities – and often proved financially disastrous. Freeway-based transport systems require cheap rights of way that can only be available if urban sprawl is tolerated. For valid environmental reasons Australia’s cities have adopted urban footprints and have thus limited access to cheap rights of way. This (combined with likely future escalation in fuel prices and the fact that tunnelled freeways apparently cost some 5-7 times as much as surface routes) arguably makes freeway-based transport systems inappropriate as a significant component of future urban transport systems (see Brisbane's Transportation Monster, 2008). And, because population densities are too low for the development of effective public transport alternatives, Australia’s existing major cities face perhaps-insoluble constraints on their future growth;
    • Options exist to boost economically viable regional development, and thus to limit the concentration of population growth in existing cities (eg see Reinventing the Regions);
    • high rates of immigration both: (a) creates a need for massive infrastructure investment; and (b) escalates construction costs by contributing to labour shortages and thus raising wage rates (see Developing Australia's Economy: The Role of Migration, 2010 – which refers to the high labour demand generated by ‘migration industries’). Given problems in financing infrastructure (see below) and skilled labour shortages, reducing  migration perhaps needs to be considered as a way to moderate those pressures;
  • Strategic ‘planning’ (the method apparently expected to be used by bodies such as Infrastructure Australia) is an inappropriate way to identify infrastructure options. The notion of strategic ‘planning’ by central staffs was perceived in the 1970s as enabling organisations to decide strategy in the face of a complex, changing environment. However it had apparently been rejected by major corporations by the 1990s (in favour of strategic ‘management’ which basically involves leaders posing strategic questions for others to answer) because of the inability of central strategic ‘planners’ to acquire the information and commitment required to make appropriate decisions (see Strategy Development in Business and Government , 1997).


While there is a need to work out how infrastructure can be financed, the issues involved go well beyond just considering asset recycling (ie privatising some existing infrastructure to free up capital) and encouraging private financing. For example:

  • Australia’s grossly unbalanced federal fiscal regime not only makes it essentially impossible for states to effectively undertake their nominal functions (as noted above), but also provides them with no incentive to take economic development (and thus the creation of the strong tax base needed to finance infrastructure and other public goods and services) seriously – see Economic development incentives;
  • states lack the capacity to fund the infrastructure they are expected to provide. This can be illustrated by concerns expressed about NSW (see above) and about Western Australia's situation (Taylor P., Opposition rises in the now-flat boom state, The Australian, 7/4/12) and by Queensland's apparently more dire predicament (see Recovering from Queensland's Debt Binge). The latter also demonstrates that limited state revenue constrains infrastructure funding (eg only a fraction of its revenues can be increased by state decisions about taxes and charges);

  • through private involvement (eg on contract) in the development of genuinely public infrastructure can be highly advantageous,  private funding does really not provide additional resources because it will always depend on user pays arrangements. Similar additional resources could be mobilized by governments, if the latter were also prepared to adopt a user-pays philosophy. Moreover, private financing and control of parts of infrastructure systems creates complexities that offset likely production efficiency gains (as noted above).


Overcoming current problems primarily requires seeking effective organisational and funding systems whereby infrastructure needs can be identified, financed and implemented. It is not sufficient to simply apply a band-aid over dysfunctional machinery by encouraging Infrastructure Australia (and similar bodies) to make lists of 'major' projects for federal funding. 

Addendum E: Infrastructure's New Road

Infrastructure's New Road - Email sent 11/5/12

Professor Ken Wiltshire,
University of Queensland

Re: ‘Let’s get infrastructure on the right road’, Australian Financial Review, 9/5/12

While there is no doubt that Australia’s machinery for dealing with infrastructure needs renewal, the challenge seems more complex your article suggests.

My interpretation of your article: It has been uneconomic for the private sector to fund infrastructure because of Australia’s low densities, and the public’s desire for equal standards everywhere. Thus government was responsible for infrastructure in 1901, and the states engaged in wasteful competition while accumulating large debts. The Loan Council was then created to facilitate federal takeover of state debts. Australia is the only federation with a constitutional base for infrastructure coordination. But the Loan Council lapsed. Infrastructure lags 10-15 years behind what is required. Thus there is a need for a new approach.Infrastructure Australia has done good work, especially on infrastructure funding. But it is a Commonwealth body. States must be at the table. The constitutional provision for the Loan Council should be used as Infrastructure Australia’s legislative base. This would allow: (a) addressing regulatory inconsistencies; (b) assessment of projects on a national basis; (c) applying transparent / evidence-based public policy principles; (d) analysis of horizontal fiscal equality formula for GST; and (e) embracing and eliminating problems with PPPs (eg problems such as: excessive bidding costs, poor governance, imprecise risk sharing and poor dispute resolution). There is a need to consider why governments should undertake activities that the private sector is willing to undertake.

My reasons for suggesting the need for reform to go down a different road are outlined in Infrastructure: A Big Picture View. In brief this suggests that: (a) infrastructure that involves true public goods and services (ie functions subject to serious market failures) can’t realistically be assessed as ‘projects’ on a national basis separated from the other aspects of the public functions of which they are the capital components; and (b) private ownership of elements of such infrastructure is likely to create serious problems.

Some specific comments on issues raised in your article are outlined on my website. These suggest, for example, that:

  • problems with the private ownership of infrastructure functions that are subject to significant market failures were recognised in the UK in the mid 19th century. This resulted in machinery of government reforms that led to the system that Australia inherited, and abandoning this is now allowing those problems to re-emerge;
  • those problems relate to the complex relationship between much infrastructure and other functions of government, as well as the potential for corruption;
  • while governments have again run up excessive debts as Loan Council discipline was lost, discipline is also needed in accounting standards, because abuses have apparently emerged from the use of pseudo-commercial methods;
  • Infrastructure Australia’s efforts (ie to identify needs and suggest ways of financing these as separable projects) have failed to address the real problems in infrastructure planning and delivery;
  • the 10-15 year lag in infrastructure provision across Australia is the result of decades of poor government; and
  • reforms to allow governments and infrastructure investment to be effective must go well beyond establishing Infrastructure Australia under the Loan Council’s constitutional provisions. 

I would be interested in your response to my speculations.

John Craig

Detailed Comments

In relation to the issues raised in the article it is suggested that:

  • Public investment in infrastructure has not simply been a consequence of (say) low population densities. The major reason that Australia's governments initially took responsibility for infrastructure was arguably that problems with private ownership and control under official patronage had been recognised in the 19th century in the UK (from where Australia’s institutions were copied) and reforms to address those problems had been a goal of the Northcote-Trevelyan report of 1854 which was seen to have been effective in “removing corruption, delivering public services (even under the stress of two world wars), and responding effectively to political change” because it had resulted in the creation of a professional / apolitical public service (see Her Majesty’s Civil Service, Wikipedia);
  • Problems with private ownership of elements of infrastructure functions that are subject to serious market failures were suggested in Public-Private Partnerships for Infrastructure (2002). The latter referred to:
    • the inevitable complexity of such infrastructure which causes contract management and regulatory costs to escalate to offset likely efficiency gains from private provision; and
    • the difficulties of maintaining enough technical competence and information in government agencies to maintain control of the agenda and the consequent potential for corruption of government.
  • There is undoubtedly a need for disciple in relation to public finance, like that the Loan Council used to provide. States (notably Queensland) have again indulged in wasteful spending and run up huge debts (eg see Recovering from Queensland's Debt Binge). However the problem is not only the loss of borrowing discipline that the Loan Council had provided, but also that the adoption of pseudo-commercial accounting methods permitted creative accounting that has apparently misrepresented the state’s financial obligations. New discipline in defining accounting standards is urgently needed; 
  • efforts by Infrastructure Australia (ie to identify infrastructure needs and devise means for financing these as separable ‘projects’) have largely been a waste of time, because: (a) central planning is no more likely to be effective for government investments that have complex interactions with related functions than is the case for activities within the market economy; and (b) nothing has apparently been done to address the real institutional and financial obstacles to the effective provision of infrastructure;
  • Based on Queensland’s experience, it seems likely that the current 10-15 year lag in infrastructure provision is the result of decades of poor government (see Defects in Infrastructure Planning and Delivery in Queensland , 2002). This referred, for example, to:
    • the escalation of Commonwealth special purpose funding in the 1970s that largely deprived states of the ability to take responsibility for their nominal functions, and distorted their machinery of government (eg by requiring unrealistic centralisation and more focus on lobbying for funding than on effective provision of goods and services);
    • the shift in the 1980s away from a systematic approach to government, as emphasis was given rather to supporting private investors' major projects to exploit the state’s natural assets;
    • the breakdown of effective machinery of government in the early 1990s that resulted from politicisation, purging of accumulated knowledge and experience, fragmentation of responsibility and attempts to apply business-like methods in undertaking primarily non-business-like functions;
  • While there is a need for states to be at the table in terms of making decisions about the future of government functions, it would not be sufficient to do this through a revamped Infrastructure Australia which sought to plan and facilitating private investment in major infrastructure projects (while operating under the Loan Council’s constitutional provisions).  Rather what is probably needed is an arrangement that allows the rationalisation of government functions and revenues between levels of government to both: (a) eliminate the distortions associated with extreme fiscal imbalances; and (b) facilitate coordination. Suggestions that an Australian Federal Council might allow these goals to be achieved are in Fixing Australia's Federation (2010);
  • Much more than reform of Australia federal system is needed to allow government to become effective (eg as suggested in Australia's Governance Crisis and the Need for Nation Building (2003+). The latter referred, for example, to: (a) better support to the political system; (b) more effective approaches to economic development to promote economic growth and a strong tax base that is not dependent on commodity booms and busts; (c) coping with a (possible) 'Asia century'; and (d) ensuring the continued viability of liberal legal and governance institutions;
  • There certainly is a need to consider why governments should be undertaking functions that the private sector would be willing and able to undertake. The privatisation of various government assets in Queensland was undertaken some years ago without any apparent evaluation of whether this was desirable - under circumstances in which conflicts of interest seemed to be a very real risk (see About the 2009-10 Budget).
Addendum F: Loss for Federal Government

Loss for Federal Government - email sent 22/6/12

Bernard Keane

Re: Chaplains outcome another belated loss for the Howard govt, Crikey, 21/6/12

Might I respectfully suggest that the constraint that the High Court imposed on the federal government in relation to spending on functions that it does not have a legislative basis for, is as much a belated loss for the Whitlam Government (which escalated the use of special purpose federal funding in the 1970s) as it is for the Howard Government.

There are two reasons to suspect that legal constraints are now likely to be imposed on the federal government’s capacity to spend on whatever it likes.

The first is that the financial capacity to provide funding for popular new programs is evaporating (eg see Australia's Federal Budget Surplus?). When there is no money to buy votes, federal governments are likely to welcome High Court decisions that constrain their ability to do so.

The second is that the distortion of Australia’s machinery of government (and the constraints on a serious approach to economic development) associated with Australia’s world-beating level of federal fiscal imbalance is also likely to be increasingly seen to be unaffordable from now on (see Fixing Australia's Federation, 2010 and Economic development incentives, 2009).

John Craig

Addendum G: Centralization is Part of the Problem: Not the Solution

Centralization is Part of the Problem: Not the Solution - email sent 1/1/13

Troy Bramston
The Australian

Re: 'Scrap states' to drive reform: Bob Hawke, The Australian, 1/1/13

Your article quoted suggestions by a former Australian prime minister (Bob Hawke) that increasingly centralized governance (by scrapping state governments) would expedite necessary reforms. This unfortunately does not reflect any realistic understanding of the greater benefits that societies such as Australia can potentially gain by doing more to facilitate competitive / collaborative decentralized initiative.

My interpretation of your article: Bob Hawke has called for abolition of the states in the interests of achieving more effective government. He expressed concern about being unable to get agreement on a national land rights framework because of WA government opposition. Australia’s system of government is now the result of the way it was explored 200 years ago – and would not be what would exist if established now. Mr Hawke also urged business and unions to work more closely with governments, and pointed to the need to educate the public on the merits of reform.

The strength of societies such as Australia, which have a Western cultural heritage, lies in the ability of individuals in various community / business / administrative contexts to mobilize the power of ‘rationality’ (ie the use of abstract concepts as models of reality) to make incremental rational decisions which taken together generate solutions to a society’s social, economic and governance challenges (see Cultural Foundations of Western Strength in Competing Civilizations, 2001+). For example, a market economy is preferred to a centrally planned economy because of the limits to rationality facing central authorities (eg their inability to acquire all the information needed for appropriate decisions and to ensure the commitment of others to their decisions). Similar constraints lead to recognition in management literature about the limits to centralized decision making, and the role of decentralized incremental initiative. And public administration literature makes frequent reference to the counter-productive outcomes that well-meant policies sometime suffer because the complexities of the social and economic systems involved were not appreciated (eg consider the effect of land rights on isolating many Australians with indigenous ancestry from the opportunities that others enjoy and exposing them even more than the general community to the ‘curse’ of rich natural resources).

Whether Australia’s state governments are geographically or functionally optimal is an open question. However the naïve belief that centralizing control of all government functions (rather than (say) ensuring that states can be effective in undertaking their constitutional functions) has contributed to making government complex, ineffective and excessively costly (see Federal-State Fiscal Imbalances in Australia’s Governance Crisis, 2003+).

There are moreover other reasons to suspect that increased reliance on decentralized incremental initiative would be more constructive than reliance on the limited rationality of central decision makers. For example:

  • the issues that governments have to deal with are becoming increasingly complex (and thus less amenable to simple solutions), and the ability of governments to deal with complexity has simultaneously been eroded (eg by politicisation of public services which means that governments tend now to be supported by ‘yes men’, rather than by broad knowledge and experience) – see Challenges to Democratic Institutions;
  • economic constraints are causing fiscal difficulties for governments in meeting ever-rising demands for social spending while also providing infrastructure. Modern democratic government emerged in Britain in the 19th century (and was transported to Australia) partly as a means for sharing the wealth generated by capital in industrial economies. Generating wealth that has been ever-increasingly challenging for decades (eg due to the boom-bust character of industries involving exports of basic commodities, tough international competition, the need to shift to knowledge-intensive industries, environmental constraints, and international financial instabilities). And taxing wealth has become harder due to the effect of economic globalization. Moreover limits are increasingly emerging in: (a) boosting economic productivity by traditional methods for economic reform (eg those based on market liberalization); and stimulating growth with counter-cyclical fiscal or monetary policies. Alternatives are available (see Lifting Productivity: Considering the Bigger Picture, 2010), but these require that governments focus on ‘governing’ (ie enabling collaborative initiatives by others) rather than just on the things that they directly control.

Some undoubtedly-inadequate suggestions about mobilizing competitive / collaborative decentralized initiative to reduce the problems in Australia’s federal system that concern Mr Hawke are outlined in Fixing Australia's Federation (2010), while broader suggestions about achieving more effective government are in Australia's Governance Crisis and the Need for Nation Building (2003+).

John Craig

Addendum H: Major Budget Savings or a More Complex and Expensive Public Sector?

Major Budget Savings or a More Complex and Expensive Public Sector? - email sent 7/2/13

Robert Gottleibsen
Business Spectator

Re: Super tax backdown PM's only choice, Business Spectator, 6/2/13

Your article suggested that, in relation to resolving structural budget difficulties facing the federal government, the Opposition will be able to “raise large sums by rationalising state and federal activities” and in the process “actually improve services’.

There is no doubt that there is a huge potential to benefit by eliminating the current duplication, complexity and cost of Australia’s government operations (see Federal Fiscal Imbalances). However the Opposition’s Real Solutions for All Australians plan does not clearly specify what is intended, and risks making a bad situation worse because of an apparent failure to understand the nature of the problem.

The Opposition’s plan refers (for example) to:

  • Getting “spending down by fixing the overlap between different levels of government and reducing the size of the bloated Commonwealth payroll” (p17);
  • “delivering a more effective and responsible public services focused on your needs” (p17);
  • “unleash the real economic potential of our education and research sector” (p30);
  • Delivering modern infrastructure (eg by developing a 15 year plan for national infrastructure projects; empowering Infrastructure Australia to ensure better value for money; and encouraging more private investment in infrastructure) (p31);
  • Delivering major roads and highways (p32), and better local roads (p35);
  • Building more dams to provide water security (p32);
  • Improving cooperation with state governments through COAG (p38);
  • Improving local hospital performance (p39);
  • Improving the local performance of schools (eg by encouraging schools to become independent, ensuring a rigorous curriculum, continuing current funding, increasing science investment, reducing red-tape, ensuring stable infrastructure funding) (p40);
  • Improving housing affordability in collaboration with the states (p40);
  • Establishing a national safe streets program (p42);
  • Developing land in northern Australia (p42).

This mainly involves the Opposition (as a future federal government) using its fast-fading ‘power of the purse’ to continue trying to undertake / control spending on functions for which states and territories have the constitutional / legal / operational responsibility.

State / territory functions can’t be disentangled from their administration by making operational functions (eg schools, hospitals, roads, water supplies, housing and land development) into notionally separate entities that can be directly funded / regulated by the federal government.

The primary function of government is ‘governing’ (ie creating a regulatory framework in which others can do things) and ‘doing things’ (such as providing schools, hospitals, etc) involves functions that are subject to: (a) market failures; and (b) diverse regulatory / policy consideration which always involve interaction and thus a need for administrative coordination with other aspects of state / territory administration.

Without completely rewriting the constitution this obstacle can’t be overcome – so what seems to be being proposed would simply add to the complexity, red tape, duplication and cost of public functions by continuing to:

  • Enforce centralization of control within state / territory administrations (in the hands of those dealing with financial affairs and intergovernmental relations) which ensures that decision / control is taken out of the hands of those with the greatest policy / operational understanding and experience (see Federal Fiscal Imbalances);
  • Suppress collaborative decentralised initiative (see Centralization is Part of the Problem: Not the Solution);
  • encourage state / territory governments to focus on lobbying for funding (as the managers of manufacturing firms were encouraged to focus on, rather than customer demand, in the days of heavy tariff protection);
  • provide no incentive for states / territories to develop strong tax bases by taking economic development seriously.

The Opposition’s goal is to be applauded – but its proposed method of implementation seems impractical. An alternative approach to eliminating the duplication, complexity and cost associated with current federal / state problems is outlined in Fixing Australia's Federation (2010). This suggests, for example, that

  • The focus should be on ensuring that all levels of government have their own financial resources appropriate to their responsibilities – and promoting competencies and collaboration within such a fiscal framework;
  • Canberra would probably not be a suitable location for Australia’s national capital if it were expected to take primary responsibility for operational government functions – because of its remoteness; and
  • Rather than encouraging Infrastructure Australia to make a list of, and seek to control, major ‘projects’ (all of which would have complex policy and practical entanglements with other state / territory considerations) it would be better employed finding ways to fix the mess that has been created in the machinery for planning and developing infrastructure over the past 2 decades (see Infrastructure: A Big Picture View, 2012).

I would be interested in your response to my speculations.

John Craig

Fixing Australia's Federation for Economic and Well as Public Administration Benefits

Fixing Australia's Federation for Economic and Well as Public Administration Benefits - email sent 22/8/13

Andrew Lynch and Shipra Chordia
University of NSW

Re: Federal-state reform: is Abbott offering the real deal?, The Conversation, 21/8/13

Your article questioned whether the federal opposition was genuine in offering a new approach to Commonwealth State relations by clarifying the ‘responsibilities so that each level of government, as far as possible, is sovereign in its own sphere’, given that Mr Abbott’s 2009 book (Battlelines) had suggested that “the only way to sort out responsibilities in areas where the two levels of government are both involved is to put one level of government in overall charge.’

Might I respectfully suggest that the only way to genuinely create a workable federal system (one that is not plagued by the duplication, buck passing, uncertainty, pork barreling and unnecessary costs of Australia’s present arrangements) is through reform of the taxation system (ie to end the extreme federal fiscal imbalances that create the impression that the federal government needs to have the dominant role in what could otherwise be state functions). Some suggestions about this are in Fixing Australia's Federation (2010). The latter referred not only to the prospect of better public administration, but also to giving states a financial incentive to take economic development seriously and thus both aid economic adjustment to the end of the China boom and provide a stronger tax base to reduce governments’ fiscal difficulties.

John Craig

The Politics of Reforming Australia's Federation

The Politics of Reforming Australia's Federation - email sent 25/4/15

Professor Andrew Lynch,
University of Western Sydney

Re: Federalism at stake if $4b is cut from schools and hospitals, The Conversation, 24/4/15

I should like to try to add value to your suggestion in this article that the Federal treasurer seems to be alienating the states, rather than mobilizing their support, in efforts to reform Australia’s federal system. It is possible (though by no means certain) that there is method in that apparent madness.

Tax revenues and spending responsibilities within Australia’s federal system are extremely unbalanced (ie as your article noted the federal governments gets 80% of revenue and transfers about 25% of this to the states because the latter’s own-revenue sources are well below their spending responsibilities). This fiscal imbalance generates severe distortions in the provision of public goods and services (for reasons suggested in Federal Fiscal Imbalances, 2003+). Those distortions could be reduced if states’ own-source revenues were roughly equal to their spending obligations. And the fact that most state revenues are currently provided on a ‘needs’ basis through the Grants Commission gives the states no financial incentive to take economic development seriously (ie to develop a strong tax base and thus to maximize government revenues overall). States, who have most influence on economic development, derive a great deal of revenues from particular types of economic turnover (which they thus have financial incentives to maximize by the types of economic functions they encourage) but very little of their direct revenue depends on the economic value added that would do most to maximize government revenues overall (as well as increasing household incomes and business profits). There should be considerable benefits in terms of strengthening Australia’s economy (and thus the tax base) if state taxes were not as narrowly based as they have been (see Economic development incentives, 2009).

However there is a political obstacle to such reforms.

For decades states have gained political credit for providing public goods and services that they do not pay the political cost of collecting taxes to finance. Thus states have little enthusiasm for eliminating Australia’s federal fiscal imbalances. And, in the past, federal governments also benefited politically from those imbalances – because federal ministers could announce popular increases in spending and be directly identified with the outcomes through special purpose federal programs.

Now, however, the game is changing. There are likely to be severe structural difficulties in generating sufficient tax revenues to provide the goods, services and transfers that the Australian community expects (for reasons outlined in A Broader Approach to Tax Reform, 2015). Thus federal governments can’t be expected to have any enthusiasm for struggling to raise taxes merely to enable state governments to gain political applause from spending them.

Rather the federal government can be expected to favour states gaining broader tax powers so that they bear the political cost of struggling to raise the revenue their functions require in the much more difficult environment that is emerging. However, for the same reason, the states can be expected to resist any such reform for as long as they can. Tightening the fiscal noose on the states, as your article points out that the federal government is doing, may be the only way to get them to be serious about negotiating a new arrangement. And, as your article noted, the federal government seems to see changes in federal financial relationships as complementing its white paper on tax reform.

Though the fiscal pressures the federal government is applying to the states are ham-fisted, it is possible that they may have a serious purpose.

John Craig

The Need to Rethink Malcolm Turnbull’s New Strategy to Unlock the North

The Need to Rethink Malcolm Turnbull’s New Strategy to Unlock the North - email sent 12/1/16

David Crowe,
The Australian

Re: ‘Malcolm Turnbull’s new strategy to unlock the north’, The Australian, 6/1/15

Your article referred to the federal government’s proposal to stimulate development in northern Australia primarily by providing financial support for large scale infrastructure and resource projects. While this would presumably lead to the growth of some economic activities, such an approach is likely to restrict and distort the real development of northern Australia. Enhancing the economically-relevant knowledge and capabilities of people in larger existing north Australian communities would be a better option, as this would start a sustainable process of locally-initiated growth and development for which public sector support would be provided through normal government machinery.

My Interpretation of your article: The federal government has widened the scope of its $5bn plan to spur new growth across northern Australia. This involves loan guarantees for major infrastructure and resource projects. This is expected to boost investment in the north in the aftermath of the mining boom. Debt guarantees are under consideration and draft legislation will be available soon. Northern Australia has only 1.2m people but makes up half the land mass, generates $178bn economic output and is expected to grow faster than the rest of Australia. Investments in transport, mining, energy and agriculture could be encouraged. Loan applications could be taken from mid-2016 – on condition that private funding accounts for 50% of any project. Long term capital would be provided by government. Applicants are likely to seek funding for: an airport; a rail line; a waterfront precinct; a dam; roads; and water storages. Tony Makin (Griffith University) said government loans would be a form of ‘industry assistance’ / ‘picking winners’ that would have budget risks. Sinclair Davidson (RMIT) warned against industry assistance for projects that were not commercial – and that governments should not carry out private sector tasks. Gary Gray (Opposition resources spokesman) said that projects would need to satisfy public benefit test – not just marginal electorate benefits

As your article noted, economists have warned that the proposed arrangement could result in government funds being directed to ‘assist’ projects that would not be particularly economically beneficial. In response to this Richard Holden (University of NSW) argued (in Turnbull needs community of believers for northern growth’, The Australian, 11/1/16) that the provision of government loan guarantees for infrastructure would not be a misguided form of ‘industry assistance’ because:

  • Australia is verging on ‘secular stagnation’ and (as economists worldwide are now recognising) there is thus a need for public investment to counter this, as the ability of monetary policy to provide an economic stimulus is now limited; and
  • Businesses are not going to invest in relatively underdeveloped regions unless they are convinced that a lot of other people are likely to do so – as otherwise the support services they require won’t be established. The proposed government loan guarantees might provide a reason for a large number of businesses to conclude that the plan will succeed, and thus significantly increase the regional development impact of government efforts through their own investments and activities.

Both of these observations seem valid. There is indeed a risk that government funds could be misused (ie ‘pushed’ for electoral gain into projects for which real market demand is limited; or co-opted to primarily benefit private interests with good political connections). And, as Richard Holden suggested, there is a need for many support functions to attract large scale business investment in northern Australia.

However creation of a federal government fund to help finance major infrastructure and resource projects in northern Australia would not be the best way to go about this.

Why: Resource rich regions such as northern Australia are usually economically ‘cursed’ (ie remain relatively backward economically) because they attract external investment in their natural comparative advantages (ie resources) which have little to do with (and do little or nothing to enhance) the competitive advantages of the regions’ people and businesses. Political and business elites support such investment because they themselves profit (politically or commercially) from doing so. However by doing so they provide very poor economic leadership to affected regional communities.

The current scheme would require those who propose infrastructure or resource investments to lobby the federal government (ie central planners) for funding. History suggests that this can make it hard for them to meet real needs. When tariff protection was seen as the key to developing manufacturing industry, lobbying government was more important to manufacturers’ success than developing competitive advantages in meeting customers’ demands. And the ongoing need for states to give priority to lobbying for federal funding is a major cause of the difficulties they have in the efficient / effective provision of the public goods and services that are their constitutional responsibilities (see Federal Fiscal Imbalances, 2003+).

The proposed ‘strategy to unlock the north’ might attract investment in north Australia’s comparative (ie natural) advantages that outsiders control and benefit from, but do very little to: (a) create regional industrial clusters with strong competitive advantages; (b) start a sustainable process of locally-initiated growth and development; and (c) attract large numbers of migrants to north Australia with high levels of skills and income prospects.

Much more could be achieved by boosting, in north Australia’s larger centres: (a) knowledge of market and technological opportunities; and (b) the commercial competencies and organisation that are required to take advantage of them. This might not result initially in the sorts of ‘grand’ projects that are currently envisaged to receive government financial support, but it would really develop north Australia.

Some suggestions about how market-driven progress might be accelerated were outlined in Reinventing the Regions (2010). As noted in the latter there are limits to ‘missing strategic factor’ theories of regional development. A very large number of ingredients must be in the mix and must be developed in such a way as they can operate as an integrated whole. However emphasising one missing strategic factor (eg infrastructure) and doing nothing to stimulate the development and integration of all the others means that much of what is spent on the favoured ‘missing strategic factor’ is likely to be wasted.  The economic futility of responding to lobby groups who can provide 'missing strategic factors' (without a primary emphasis on creating an economy that can use them productively) can be illustrated by the reported inability of highly qualified individuals (in Australia and Canada) to gain appropriate employment [1]

There is little doubt that Australia (probably) faces ‘secular stagnation’ because of: (a) the ending of the resources and housing investment booms; (b) China’s financial, economic and political vulnerabilities; (c) potential global crises linked to ultra-high debt levels that have been incurred in recent years to sustain growth; and (d) the apparent ending of easy money policies as a viable means for macroeconomic stimulation. Thus very significant domestic efforts are needed create a sustainable path for Australia’s economic and employment growth. However, even though those efforts might include fiscal stimulus:

  • simply encouraging the development of one of northern Australia’s ‘missing strategic factors’ (ie infrastructure) would probably be a waste of time and effort. Moreover (for reasons suggested here) infrastructure investments especially in northern Australia probably now require serious consideration from a security viewpoint. Potential economic benefits can’t be the only (or perhaps even the main) criteria in evaluating such investments;
  • sustainable and productive development of north Australia primarily requires introducing strategic economic information and commercial competences into its major communities, so that competitive advantages and the seeds of economic leadership of balanced development can emerge from within the region itself;
  • there would be a huge potential to enhance Australia’s economic performance by reform of the machinery by which economic affairs are managed (eg see Broken Governance and Ineffectual Economic Strategy: Two Sides of the Same Coin?);
  • there is a need to revisit issues that the G20 put into the ‘too hard’ basket after the start of the GFC to deal with the international structural incompatibilities that are largely (though not solely) responsible for the world’s emerging stagnation and crises (see G20: Peace for our Time'?, 2009).

John Craig

Developing the North for the Benefit of Australians

Developing the North for the Benefit of Australians - email sent 31/3/16

Senator the Hon Matthew Canavan,
Minister for Northern Development

Re: Lets develop northern Australia for the benefit of us all, The Australian, 30/3/16

There is no doubt about the benefit to all Australians of genuinely developing northern Australia. However the most effective / beneficial way to achieve this may not be the massive government funding of infrastructure / industrial investment that your article mentioned. A better approach would probably involve building on, and building up, the ‘competitive advantages’ that north Queensland’s existing population already has, or could create.

My Interpretation of your article: A great deal can be achieved in times of crisis (eg developing the Hann Highway during WW2). That route could now be upgraded under the federal government’s proposed North Australia Roads Program. Northern Australia lacks infrastructure not opportunities. It receives 60% of Australia’s rainfall, involves 40% of the land and produces 55% of exports. 6% of Australians live in northern Australia and the region produces 11% of national GDP. Nationally full time employees produce about $186,000 of economic output annually. In the north full time employees average $370,000. It makes sense to reinvest in regions that are already making money. This is why the government has a $6.2bn plan for northern Australia (eg for roads; water resources). Support would also be provided for: R&D; changing land tenures; investing in tropical medicine. A bill to establish $5bn concessional loan facility for north Australia (that would be subject to strict controls / conditions) was introduced last week in conjunction with Resources Minister (Josh Frydenberg). Growing north Australia will benefit all Australians – as 80% of taxes flow to Canberra. Developing wealth will best position Australia relative to Asia where 2/3 of world’s middle class will live. The government’s white paper on development of northern Australia is the first ever. Australians should support it no matter where they live.

Your article argued that the federal government should provide several $bn for new infrastructure and to subsidise industrial investment in northern Australia because: (a) north Australia produces 55% of Australia’s exports; (b) the region produces 11% of GDP though it only has 6% of Australia’s population; (c) average GDP per full-time employee for Australia as a whole is $186,000 while in north Australia it is $370,000; and (d) there are many economic opportunities in the region. It also referred to investing in R&D and industries where north Australia has technological strengths (eg tropical medicine).

However this argument is a bit simplistic because:

  • The major opportunities in northern Australia that could be supported by infrastructure or industrial investment are likely to be those involving exploitation of the region’s natural resources;
  • Exports based on exploiting rich natural resources were long the basis of Australia’s reputation as a ‘Lucky Country’ (ie Australians enjoyed a good living standard despite the nation’s comparatively under-developed economy). However Australian’s ‘luck’ was steading running out during the first 8 decades of the 20th century. National GDP / capita was in constant decline by international standards;
  • That decline was the reason that efforts were made to diversify Australia’s economy from the 1980s through various economic reform initiatives (which largely involved market liberalization). A desire to shift from exploiting ‘comparative’ advantages (ie the pre-existing characteristics of a region) to developing ‘competitive’ advantages (ie those associated with knowledge / skills / strategy) was a hoped-for consequence of those reforms. In part this reflected new economic understandings at that time about the need (usually but not always) to develop ‘competitive’ advantages if a region’s / nation’s industries are to support high income levels (see Creating Competitive Advantage, 1994);
  • Competitive advantages in knowledge and skill related activities won’t be achieved by government investment in R&D and related industries in northern Australia. Rather creating the capacity to benefit economically from innovation primarily requires building up commercial competencies and organisation – ie a region’s ability to turn ideas into new or more successful businesses (see Australia is Still Not Serious About Developing Its Innovation Systems, 2016);
  • Natural resource-related industries have long tended to be:
    • associated with relatively underdeveloped and low income economies (see Curse of Natural Resources, 2001). Rich resources can lead to poor economic leadership by local political / business elites if they: personally gain political / profit benefits from collaborating with investors in a region’s ‘comparative’ advantages; and thus don’t explore options to develop ‘competitive’ advantages that would better advance the economic prospects of their communities as a whole;
    • subject to extreme boom-bust cycles – a fact which recent history demonstrates yet again. A ‘stronger for longer’ hypothesis (involving the presumed end of commodity boom / bust cycles because no limits were seen to the growth of demand from China and other emerging economies) was put forward in Australia a few years ago, but was predictably invalid (see Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?, 2011);
  • The high current contribution to GDP from north Australia is largely derived from capital intensive resource-related industries – ie from exploiting the region’s ‘comparative advantages’. However while such industries’ and north Australia’s contribution to GDP is high, their contribution to GNI (gross national income) is significantly lower. Much of the income that derives from highly capital-intensive operations flows to (often offshore) investors. Australia’s GDP has recently been rising by (about) 2.5% pa – but GNI (gross national income) has been declining. And it is GNI that determines what Australians actually earn – and thus their ability to stimulate the economy by their spending as consumers.

Some speculations about a potentially better approach to accelerating the economic development of north Australia in ways that would be in Australians’ interest are outlined in The Need to Rethink Malcolm Turnbull’s New Strategy to Unlock the North . Those speculations suggest that the ‘competitive’ advantages of north Australia’s population should be emphasised in driving economic growth and development, rather than continuing to emphasise ‘comparative’ advantages. Information is the key factor in economic growth and development. Boosting north Australians' ability to access market and technological intelligence and turn this into economic opportunities will achieve more than pouring $bs of taxpayers’ money into infrastructure and subsidies for industrial investment on the assumption that the ‘stronger for longer’ theory (ie that resource exports will be Australia’s best economic option over the next 2-3 decades) is valid.

This does not imply that natural resources would not play a role in north Australia’s development. However it does mean that the importance of building north Australians’ ability to play important roles in initiating / organising those, or any other, economic activities should be emphasised. Also there is no implication that infrastructure would not play a part in north Australia’s development. There will be situations where infrastructure is justified by: (a) the ‘national interest’; or (b) current populations and economic opportunities. However it does imply that governments are unwise to ‘pick economic winners’.

John Craig

A Financial Wedge to Start the Reform of Australia's Federal System?

A Financial Wedge to Start the Reform of Australia's Federal System? - email sent 1/4/16

Hon Mr Malcolm Turnbull, MP
Prime Minister of Australia

Re: Owens J., and Lewis R., States taxing power a fundamental federation reform, Turnbull says, The Australian, 30/3/16

You reportedly argued that reform of Australia’s federation is needed - and that this could be started by changing the tax system to allow states / territories to access some income-tax revenues. I would like to suggest why there could be large fiscal and economic benefits from increasing and broadening state / territory revenue sources, and also draw attention to the need for much more than changes to tax arrangements to achieve effective reform of the federal system.

My Interpretation of the above article in which you were quoted: Malcolm Turnbull announced plans to provide states and territories with independent income tax powers – suggesting this would be the most fundamental reform to the federation in generations. He saw this as the only way to address the vertical fiscal imbalance that is at heart of the failure of Australia’s federation. The Commonwealth would reduce income taxes to some degree and allow states to levy income tax at a rate they choose. In a federation state citizens should determine how much revenue their state government raises. States have traditionally demanded federal funds for underperforming functions, rather than raising state levies / charges. They have not had any other tax bases to raise money – and one will now be provided. It would be important to ensure that the system did not disadvantage smaller states. The failure at the heart of Australia’s federation is that states lack access to revenue sources. Mr Turnbull argued that his proposal would end the blame game / arguments / duplication. The move would not be about increasing total taxes, and the ATO would raise all income taxes. Opposition spokesman, Chris Bowen, suggested the proposal would result in mangled system / higher and more complex taxes – even though government had promised lower / simper taxes. Greens leader (Richard Di Natale) labeled the proposal a ‘cop out’ (by dumping problems on states / territories) to avoid hard decision on federal taxes. State are divided on the proposal. Private sector observers offered both support and cautions about the proposal.

I should like to support your reported suggestion that vertical fiscal imbalances (ie state responsibility for most spending while the federal government has most revenue sources) has been a major cause of the problems that have beset Australia’s federation. The effect (eg irresponsibility, buck passing, duplication and complexity) has been most serious in undertaking public functions where the federal government has come to provide special-purpose funding (see Federal Fiscal Imbalances, 2003).

The distortions generated by vertical fiscal imbalances have had non-trivial, but hard to quantify, costs. Offsetting the cost of those distortions has been the federal government’s ability to use its ‘power of the purse’ to promote ‘national’ programs to address issues for which the federal government sometimes has had no constitutional authority. But that benefit is unlikely to exceed its costs because:

  • Federal governments (and the national political process) have come to be expected to take the lead in dealing with ‘everything’ – because, until the GFC and the ending of the huge capital gains derived from resource investment boom, their revenues used to grow sufficiently to meet all perceived needs. However that expectation (and the political appeal to federal governments of taking financial responsibility for 'everything') now seems to be unsustainable without significant reforms (see Restoring the Viability of Democratic Capitalism, 2014). For example, overcoming governments’ fiscal challenges arguably: (a) requires changes to boost the effectiveness / competence of government machinery; and (b) faces obstacles because of problems in the international economic environment (see The Challenge and Potential Cost of Inequality and Insufficient Income). Amongst other things the latter refers to structural incompatibilities amongst various different systems of socio-political-economy that lead to international financial imbalances and credit constraints on global economic growth because of rising debt levels (constraints that also arguably apply to Australia because of escalating dependence on borrowing to drive economic growth);
  • The effective development of Australia’s economy (and thus of the tax base) has been impeded by existing federal financial arrangements. States have more influence on specifically what economic capabilities are encouraged in various regions than the federal government does. However the tax sources available to them have mainly been based on ‘economic turnover’, rather than on economic ‘value added’. Thus states have not had strong financial incentives to take the development of high value-added economic activities seriously – even though emphasising value added would have done most to maximize wages, corporate profits and federal taxes (see Economic Development Incentives, 2009). The present writer had a decade-long involvement in issues related to the development of Queensland’s economy during the 1980s (see CV) and found progress to be impeded at that time by that state’s Treasury’s emphasis on maximizing the state’s narrow tax revenue sources. States have also been discouraged from serious attention to the requirements of developing high value-added economies by the fact that large components of their revenues have come from the federal government on a ‘needs’ basis (ie under Grants Commission procedures) rather than as a consequence of the performance of their regional economies;
  • Australia inherited Western-style political, administrative and economic institutions. Their strength lies in creating scope for incremental rational initiatives by diverse organisations / individuals to respond to the emerging problems and opportunities that they perceive – initiatives that others then observe, copy and improve upon. The centralized financial control that is implicit in Australia’s world-champion vertical fiscal imbalances (which is comparable in the sphere of government to central economic planning) has arguably been a major obstacle to Australia’s overall ability to respond quickly and appropriately to emerging problems and opportunities that affect government functions (see Centralization, 2003 and Centralization is Part of the Problem: Not the Solution, 2013); and
  • Large financial imbalances give states / territories strong financial incentives to emphasise lobbying the federal government for finance rather than focusing on ‘their job’ (see Reducing the Adverse Effect of Vertical Fiscal Imbalances on Government Administration, 2009). This has had much the same distorting effect as heavy reliance on tariff protection used to have on manufacturers (ie requiring them to focus on lobbying governments rather than on their markets' changing demands).

The present writer’s experience / study of methods for coordination in government suggest that action to address ‘national’ aspirations could be promoted without the distortions associated with primary reliance on the centralized financial controls that large vertical fiscal imbalances allow.

Action to address the massive problems that fiscal imbalances (and the nature of states’ revenue sources) pose for the effectiveness of government in Australia is long overdue. Your suggestions might provide a way to start a reform process. However even transferring some income-tax revenues and greater responsibility for (say) health and education to states / territories will be a disaster unless attention is given to enhancing their competence in dealing with such issues. The need to overcome the competency problems that have developed in recent decades is illustrated here. Some suggestions about what reform of the federation might require in addition to changed tax arrangements are outlined in Fixing Australia's Federation (2010+).

John Craig

Response from a Contact with Experience in Public Administration in Queensland

"Some 50 years ago one of the main tasks of staff of the Queensland Audit Office was ensuring that Commonwealth funds for the health system, $2 per  patient day stay in hospital , that were being claimed were legitimate.

This checking had to be done physically in every hospital  in Queensland . A specific accounting program was approved by the  Queensland Health Dept to make sure that all was correct  and done more efficiently.

Hospitals are also still apparently spending large amounts of money to ensure their share of the cake.

Many many other certified statements covering other aspects eg drought relief had to be supplied to the Commonwealth.  It was certainly a paper war. State Treasury was always trying to maximize the cash flow from the Commonwealth as funds were always very scarce. The surmise is that it is still happening.

The costs to Queensland  of doing all this exceeded the return on a cash basis but no effort was known to have been made to measure the economic costs. This type of problem is thought to have escalated since so it is right to go for efficiency now.

The matter of Australian states being able to raise taxes through the Commonwealth system seems logical If one goes for  accountability by state administrations as against the current system of handouts. However the business sector will be very happy as it enables it to  play games with the States by locating business operations physically in the state that gives the best deal similar to what goes on in America now.

It is understood from press reports that Queensland’s  premier just paid out millions to attract  an ethanol plant to the state that was likely to have located here anyhow. This is the type of problem that will emerge.

Politically a number of prime ministers have stumbled with this problem – Rudd, Gillard, Abbott. No party is immune.

Will be interesting to see who wins this one eventually. It’s a high risk strategy anytime and bigger just prior to an election."


Reducing Congestion by Accelerating the Growth of Australia's Second-tier Cities

Reducing Congestion by Accelerating the Growth of Australia's Second-tier Cities - email sent 14/1/17

James Pearson
Australian Chamber of Commerce and Industry

Re: Second-tier cities key to unclogging our future, The Australian, 13/1/17

I should like to endorse your suggestion about the potential benefits of strengthening Australia’s second-tier cities. However to achieve this, improving a regional community’s access to and ability to use strategic information to attract migration will be better than (say) public investment in land and infrastructure (eg because Australia needs to reduce its dependence on rapidly increasing debt to drive economic growth).

My Interpretation of your article: Regional Australia will make an important contribution to Australia’s economic future. Major cities have the greatest potential to create new businesses / jobs. The ACCI put forward proposals to the Productivity Commission regarding improved planning and infrastructure to help cities grow. Transport infrastructure is needed to unclog congestion. At present 75% of growth will occur in 4 major cities (Sydney, Melbourne, Brisbane, Perth). Determining what to build can be tricky – so there is a need to rely on objective analysis by Infrastructure Australia. However there are limits to growth by these 4 cities so smaller cities should be targets for growth. This requires connectivity to existing cities. Record low funding costs make now an ideal time to invest in infrastructure – but governments should engage private sector to design, develop, operate, maintain and finance it. Innovative financing options include value capture and incentives for asset recycling. Australia has had very poor collaboration between industry and researchers. Improving performance requires grouping instigators of activity with research facilities. Thus special innovation zones are envisaged. Silicon Valley is an example, but Sydney also has an action plan to promote clustering of networks amongst innovators and entrepreneurs. Half of all jobs growth in Australia is within 2km radius of Melbourne and Sydney city centres. Success is needed not just in those major cities, but in all capitals and regional cities.

For decades, information has been recognised by economists (under so-called new growth theories) to be the most important driver of economic growth – and much more significant than inputs of labour and capital.

The concentration of diverse types of information in major cities (and especially in the CBD) is the reason that they are strongest in creating new businesses and jobs. Promoting collaboration amongst those involved with research and the development of new businesses can stimulate growth – though trying to do this just through establishing ‘innovation zones’ is too narrow. The potential for innovation / new business development does not just come from research – eg consider also inventiveness and process enhancement in existing enterprises. And turning potential innovations into competitively successful enterprises requires much more than entrepreneurs. Silicon Valley has succeeded because of the depth of business competencies and organisation required to finance and support initially-inexperienced entrepreneurs. The whole of a cities’ economy needs to be linked into networks that can identify opportunities and provide support to new enterprise development – not just entities on particular sites or involved with networking organisations.

How this can potentially be achieved was suggested in Reinventing the Regions (2010). This involved methods to build on and build up the competitive advantages that exist in regional communities (ie by improved access to strategic market and technological intelligence / ideas to stimulate discovery of opportunities through collaboration by networks who have or could develop the competencies needed to address them). By creating increasingly competitive / productive regional industry clusters a high-income ‘magnet’ for regional population growth would emerge.

There are problems with public or subsidised-private investment in regional land and infrastructure in the hope that developed land and infrastructure will encourage population growth - for reasons mentioned in Will Infrastructure Australia's Project List Meet Australia's Needs? (2016). In particular:

  • Many analysts have warned that Australia has a national debt problem (ie a very high national debt / GDP ratio and a dependence of rapidly increasing that debt to drive economic growth) – see Australia's Risk of Financial / Banking Crises as Growth is Driven by Rapidly Rising and Often Misdirected Debt. Thus, for reasons further developed in More on Rethinking the Government’s Northern Development Plan (2016) and Queensland’s Appalling Governments (2016), traditional expectations that debt-driven public investment should be used to drive economic / regional growth are likely to be hazardous because this might not (and often does not) yield significant gains in GDP for a decade or ever. Emphasis rather needs to be placed on investments that will generate guaranteed improvements in GDP in the short term. By creating ‘magnets’ for population growth (ie by building on and building up regional competitive advantages) a real ‘demand’ for land and infrastructure investment will emerge in second tier cities and thus: (a) provide certainty about what is needed; (b) ensure that economic value is really added from investments in second-tier cities; and (c) reduce the pressure of population growth in Australia’s 4 major cities;
  • Your article validly noted that planning infrastructure is complex, so it is hard to be sure what is needed. You thus suggested that it is necessary to rely on ‘objective analysis by Infrastructure Australia’. However this can’t yield reliable projects. The criteria Infrastructure Australia considers can identify infrastructure deficiencies. But this will not allow the details of the investments needed to rectify those deficiencies to be identified. New infrastructure needs to be integrated with other aspects of a region’s development. Infrastructure Australia does not have information about this. Australia’s machinery for planning and developing infrastructure is a mess (eg because it assumes that central planning can work). That machinery needs to repaired rather than being asked to guess where public funds might usefully be invested.

Developing regional cities would have many advantages (eg in reducing congestion and the cost of dealing with it in major existing cities). However the best way to achieve this is likely to involve creating population growth through market ‘pull’ (ie by building on and building up existing regional competitive advantages) rather through government ‘push’ (ie by increasing public debts or by providing government guarantees to ensure land and infrastructure investment many years in advance of uncertain need).

John Craig