Strong states help themselves and contribute to a unified federation

Artwork: Eric Lobbecke

No country in the world has a constitution that permits secess­ion. Founders of nations are ­always optimistic and do not want to make any provision for their creation to fall apart. The only way a state or region can secede is at the point of a gun or through some violent revolutionary process. Kurds and Catalans are facing this prospect at present despite holding their own referendums in favour of secession.

The European Union feigns shock and horror at the prospect of secession in any member state but blissfully carries on giving grants for very visible infrastructure directly to regions, thereby undermining member nation-states and fanning separatist ­ambitions.

The other place that constantly dabbles in secession is Quebec in Canada, which has conducted two referendums in ­recent history that have obtained almost majority support, but even the Canadian constitution would not permit it to happen legally. Scotland has seriously flirted with secession but has gone cool for the moment; if it were to happen there would be a legal quagmire, despite Britain having no formal written constitution.

Therefore Australia should be glad that attempts of states to ­secede are rare. Western Australia passed a referendum to this ­effect in 1933 but failed in its ­appeal to the Privy Council in ­England, which ruled that it had no jurisdiction. However there is a lot of silly political talk going on at the moment regarding ways to address regional discontent ­especially in Western Australia, South Australia and even NSW.

Owing to the constitutional debates of the 1890s, the states are well protected in the Australian Constitution. All states have an equal number of senators. The federal government cannot discriminate between states, ­especially regarding taxation. Section 92 ensures freedom of trade between states.

But the strongest factor uniting the nation has been the system of horizontal fiscal equali­sation that recommends distrib­ution of the goods and services tax receipts, introduced following the discontent in Western Australia and similar sentiment in South Australia and Tasmania. Administered by the Commonwealth Grants Commission, it has been described as “the glue which holds the federation together”. It simply seeks to ensure that every state has the same fiscal capacity to ­deliver its functions. It is the most comprehensive system of its kind in the world because it ­assesses both revenue-raising ­capacity and spending responsibilities, and is greatly admired by many other federations.

Therefore it is completely out of order for today’s political leaders, and the business community, at national and state level, to prattle on about using this system to “punish” states or manipulate their policies. The Grants Commission operates an approach that is a passive instrument, not an active one — it follows state ­actions not precedes them. Moreover, its methodology is based on inputs, not outputs, and is based on ­internal standards that are the ­average of the states’ actions, and is policy-neutral.

If the federal government wants to assist Western Australia or any other state or territory facing budget difficulties, it can use direct grants, or location of federal offices and infrastructure programs, or require business to locate their high-employment call centres in Australian regions rather than in foreign countries, (which would also materially ­improve the abysmal standard of service they offer).

It might also address some hidden factors — that the Reserve Bank makes its interest rate decisions largely on economic conditions in Sydney and Melbourne rather than elsewhere where ­regions are undergoing contrary economic cycles. Similarly, interest rates do not take in to account the uneven regional impact of tariff and subsidy policy on industry across the nation.

But of course the most sensible way to address regional discontent comes from the recent ­Productivity Commission report to the government, recommending again that the states should take back their income taxation powers so that they can address their own needs and be held ­responsible for the level of ser­vices they provide, particularly in health, education, energy and transport. As prime minister, Robert Menzies, Malcolm Fraser, Bob Hawke, Tony Abbott and Malcolm Turnbull have pressed for this reform but all caved in, usually because they or their mates in states were facing elections. COAG is constipated whenever the issue is raised, and remember that COAG itself is an unconstitutional body.

States such as Western Australia and Queensland need to play ball by using their resource- led boom times to create state sovereign wealth funds to address their own bad times, along the manner in which the resource-rich Canadian province of Alberta created its Heritage Fund.

So leaders should not tinker with the sinews of our federation, which was designed to create unity in diversity, and start ­accepting the challenge for its real reform.

Kenneth Wiltshire is emeritus professor at UQ Business School, was co-author of the CEDA monograph A Federation for the 21st Century, and is a former member of the Commonwealth Grants Commission