From GST to gambling to gun buybacks, Australia’s federation isn’t working

GST distribution. National Disability Insurance Scheme reforms. Data centre regulation. The national gun buyback. These are just some of the big policy challenges the federal government is trying to navigate with the

states and territories, many of which were raised at this week’s meeting of National Cabinet.

Corralling the premiers and chief ministers around a specific legislative agenda has long been a challenge. But Australia’s federation – one of the oldest and most stable in the world – has that tension built in.

Australia’s federation is underpinned by a concept called “competitive federalism”. This shapes politics and policy at both the state and federal levels, for the better and the worse.

So what is competitive federalism and how is it supposed to work?

Racing to the top

Competitive federalism is the idea that state and local officials determine their own policies to compete with other jurisdictions. It’s said to reduce waste, improve accountability and citizen representation, and lead to more efficient economic and market outcomes.

According to this logic, citizens in Queensland have different policy preferences and priorities than those in Victoria, for example. This is why policies and laws differ from state to state.

Elected regional officials often have more information and knowledge about what their own states need or want. State politicians, therefore, can be better placed to deliver services on the ground.

And because state and territory governments have a lot of control over laws, they can also legislate to make their jurisdiction more appealing.

For example, a family might be more likely to buy a house in a state with lower stamp duty and more hospitals than one where housing is more expensive and quality healthcare is harder to get.

This means states and territories are competing against each other to attract the best people, business and investment, lifting the standard overall in a race to the top.

There’s a but

But Australia has become a lot more centralised since Federation in 1901.

Centralisation means most policy is driven by national priorities, and taxpayer revenue is held by the federal government.

This has led to a vertical fiscal imbalance that is one of the most pronounced among federations all over the world.

A vertical fiscal imbalance refers to the financial mismatch between the federal and state governments. Under the Constitution, the federal government is more able to raise revenue, but the responsibility to deliver public services is largely left to the states, leading to an imbalance.

The states themselves raise only about half of the revenue they require to fund their expenditure. This comes from a mix of employer payroll taxes, property taxes, gambling taxes, motor vehicle taxes, and mineral resource royalty rates in states such as Western Australia and Queensland.

This matters because the consistent erosion of states’ ability to raise their own money reduces their policy-making power and therefore weakens their competitiveness. It also constrains their ability to diversify their policy options according to the preferences of their local electorate.

How does this shape policy?

This puts the states and territories in a difficult position. While they are supposed to get their own competitive advantages, they are also increasingly reliant on the federal government for money.

The consequences can manifest in different ways. If you’re Queensland Premier David Crisafulli, you’re holding out on signing up to a national public school funding agreement to secure a better deal.

If you’re Chief Minister Lia Finocchiaro in the Northern Territory, you’re working to get a carve-out to allow the territory to use gas to power data centres because you’re about to get a lot more of it through fracking in the Beetaloo Basin.

And if you’re Premier Roger Cook in WA, you’re standing firm on one of the most contentious economic deals of recent times: GST distribution.

The way the GST is shared across the country is complex, but the central idea is simple enough. The federal government collects GST, then an independent body, Commonwealth Grants Commission, distributes the revenue to each state and territory. The allocation is calculated by the commission to ensure that each jurisdiction should be able to provide public services at a similar standard if it made similar efforts.

Naturally, this means some states get more than others, with the Productivity Commission finding WA has been receiving far more than it needs because of a special 2018 deal. But the idea is to ensure each gets a fair go.

While this improves financial security, state governments still don’t have much ability to make money on their own to fund services and offer new policies.

This means they can either double-down on the revenue they can raise (such as from gambling taxes, particularly in New South Wales) or they can borrow money. Many are choosing the latter, which is reflected in the state’s growing levels of public debt.

Does the public care?

While the politics of these debates is one thing, the public perception of them is another.

In recent research surveying more than 3,000 Australians, published by the Australian Centre for Federalism, we found 40% of Australians do not believe the state they live in receives its fair share of federal government spending.

Perceptions of fiscal “unfairness” are most pronounced among respondents in Tasmania, South Australia, Western Australia and the Northern Territory. This pattern indicates residents in smaller, less populous, or more geographically remote jurisdictions are more likely to feel that their state is disadvantaged by the federal government. This is regardless of how much their state actually receives and even after controlling for individual income.

Even states such as WA, the clearest winner of the current GST system, contain pronounced inequalities within the state. It has both urban affluence and large, disadvantaged rural or remote areas.

But despite this, a majority of Australians, almost 55% according to our research, support the current GST arrangements.

So while the current GST arrangements remain popular in WA, where they matter politically, only 29% of all Australians agree the state gets more GST than it deserves. This means reforming the GST alone will not make Australian federalism more competitive. The extent of fiscal centralisation in Australia stifles policy diversity and interstate competition, meaning the key principles of a federal system of government are absent.

Tracy Beck Fenwick does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.