Labor's disability scheme will cast a long shadow

THE National Disability Insurance Scheme is now positioned as a political and financial time bomb to strengthen Julia Gillard's leadership and derail the Coalition election campaign at its point of maximum vulnerability - costings across the forward estimates.

There are four certainties about the NDIS before the election: Labor will legislate the scheme; it will crucify the states on a shared funding model; it will announce a start date for the scheme; and it will include the NDIS's massive costs across the forward estimates devoid of any unpopular levy to finance such ambitions.

This constitutes a daunting task for Labor. Once done, it puts vast new pressures on the Coalition's costing base. There are, in fact, two contradictory ways of seeing the NDIS - as an epic reform that makes the Prime Minister into a Labor hero for the ages or as proof of the monumental recklessness of dying governments who know they will not survive to deal with the consequences of their actions.

The NDIS will cast a shadow across the next election.

Every move taken by Gillard verifies her fierce intent - to create the scheme's framework and to assert Labor's monopoly ownership against the Coalition.

Consider the Productivity Commission's annual costs: it estimated $900 million for initial regional rollouts and, with the scheme starting in 2015-16 and taking four full years to complete the rollout, a total cost of $19 billion with the final year cost of $6.5bn.

Labor now says the annual costs will be higher. Indeed, it estimates the final year cost at $7.5bn.

Such costs dwarf virtually any other policy initiative of the Rudd-Gillard period. Injecting such projections into the forward estimates will be a nightmare for Labor.

Gillard says politics is about choices. Yet these choices will be extremely tough given the commitment to a surplus budget and weaker revenues.

Might Labor be dishonest enough to announce the scheme but not fund it across the forward estimates? No. That would destroy Labor's financial credibility. It would constitute deception and political fraud against the disabled people Labor was purporting to assist.

Interviewed by The Australian, Disability Reform Minister Jenny Macklin said: "We have demonstrated in previous budgets our ability to deliver major social reforms in a fiscally responsible way, for instance, our pension increases and paid parent leave scheme."

In short, as Gillard has spelt out, Labor will fund this scheme from general revenue without any Medicare-type tax levy. Nobody should doubt the depth of commitment from either Gillard or Macklin. Their ambition runs high: this involves insurance cover for all Australians against significant disability and, over time, a doubling of the carer workforce generating about 100,000 new jobs.

But how can Labor square the fiscal circle? There is an obvious answer: it will squeeze the states, now essentially a Liberal Party domain and, if last week's events are guide, clueless and easy prey for Gillard as she turns public sympathy against them with accusations that they don't really care about the disabled.

Labor has been brilliant at seizing the political gain from an NDIS without, to this point, either finalising or funding its scheme. It implies the deal is done but that's false. Yes, the last budget provided $1bn for trials and other costs. But nearly all the big and tough decisions lie ahead.

The refrain, cultivated by Labor, that disability should be beyond politics is a neat ploy since this project has multiple political objectives: bringing back the ALP base vote; keeping Gillard as prime minister: affirming Labor's reform credentials; and, as much as possible, wedging the Coalition.

Tony Abbott and Joe Hockey have known this from the start. But their different jobs drove their differing reactions. The Opposition Leader decided not to be wedged; he became a champion of the NDIS and offered Gillard a parliamentary committee to devise a bipartisan approach. Gillard refused. She plans to use the NDIS against the Liberals.

Hockey, aware of the dreaded fiscal implications, called Labor's policy a "cruel hoax" because it wasn't funded. Interviewed by The Australian, Hockey said: "I expect the Treasury and Finance departments to hold the government to account and for announced policy to be provided for in the budget estimates."

But Hockey's problems deepen once this happens. The Coalition has done a spending review to accommodate its abolition of the carbon pricing deal and the mining tax and securing a strong surplus. Now its spending cuts must extend even further to finance the huge costs of the NDIS. It puts even more strain on the Coalition. If Abbott wins the election his first term budgets will be dominated by funding the NDIS - a great Labor project.

The Productivity Commission's first recommendation was that the national government be the single NDIS funder but that the states put in their hefty payments (about 70 per cent of total disability spending at present) with other tax offsets.

Gillard rejected this option in favour of a direct shared federal-state funding model.

Labor has now given the states a document with a range of options: a state-federal split of 70:30, 60:40, 50:50, 43:57, 36-64 for respective funding shares of the new NDIS.

Negotiations are yet to begin but there are two certain outcomes - the national government will pay a lot more than its present 30 per cent share of disability funding and the states will carry a significant amount of the extra NDIS costs. Yet the states are unprepared and maybe not equipped to do this.

This is why some state premiers, notably Campbell Newman, floated last week at Gillard's dinner the option of a tax levy. Consider what this means. It gets the premiers off the hook, saves their budgets, saddles Gillard with a new tax and creates a major political problem for Abbott because it would bring him into direct conflict with Gillard over the NDIS since Abbott opposes any levy. The NDIS, in fact, triggers a conflict of interest between Abbott and the Liberal premiers.

The politics of the levy are tricky. This option would have dangers for both Gillard and Abbott. If a permanent levy is ever going to be saleable, it would be for disability insurance. But Labor has drunk from the tax levy well too much. Gillard is right on immediate political grounds to reject it. However, this raises the question of how a viable long-run funding basis can be devised for the NDIS.

A strong reformist government would surely use the NDIS to confront the tougher issues of tax reform (including raising more from the GST) and addressing the broken state government tax base. That won't happen. The NDIS, however, has unpredictable political and policy consequences that will run for many years.