Stronger states the key to wealth

IN the dying days of the campaign, Julia Gillard implored the electorate to distinguish between state governments and her government. Rather than punish her government for poorly performing state governments, she pointed to the allure of her "positive economic plan for the future".

The irony of her pleading was that for most of the campaign, her promises were precisely what we would expect from a state government: suburban railway lines, ring roads, CCTV cameras to boost law and order and the like.

To be sure, the Coalition played the same game, making various pitches to the electorate that would be expected of state governments, including redevelopment of a football stadium.

All this was reminiscent of the famous line of Henry Bolte, a former Victorian premier, who accurately predicted the future in the following way: "There will come a time when the federal government will be blamed for everything: an unmade road, the lack of an ambulance, a leaking school tap."

This latest development in the campaign is sadly part of a much longer run trend that has involved the effective trashing of the principles that underline the effective functioning of a federation. This point was made during the weekend by West Australian Premier Colin Barnett in an important address that was particularly critical of the Council of Australian Governments and the Commonwealth Grants Commission.

Under the Rudd government, the undermining of federalism came in the form of two slogans: ending the blame game and a seamless national economy.

Ending the blame game - a slogan that interestingly seems to have been ditched by Gillard - in effect involved the centralisation of functions by the federal government to the greatest extent possible.

Where complete centralisation was not possible - in the case of hospitals, for instance - a bureaucratic set of rules was established to bludgeon the states into accepting the program design and targets set by Canberra in exchange for additional funds.

This was very much the route favoured by Kevin Rudd in health.

But there remain serious questions about the workability of the so-called health and hospital reform package, leaving aside the fact WA has not signed on.

Serious questions were raised several weeks ago by senior bureaucrats from Victoria.

The so-called national seamless economy is another example of a misunderstanding of federalism by our federal political leaders. Mesmerised by the pleas of big business to reduce the burden of different state regulations, Rudd set up an unworkable solution through the quagmire that is COAG.

To be sure, there have been some success stories, most notably in terms of occupational health and safety laws, although it remains to be seen whether complete national uniformity will be achieved in practice.

A large number of "hot spots" were identified and various working parties were established, chaired by federal ministers but attended by state public servants.

Many of these working parties are now largely defunct, in part because of this basic governance mistake and the inability of state public servants to commit to any action without reference to their ministers.

And according to Barnett, the various working parts of COAG simply duplicated, overlapped and confused.

But the real problem with the whole process has been that the costs of regulatory differences between the states have always been overstated relative to the costs of poor and excessive regulation.

Working on the latter at state level and driven by the forces of competitive federalism, improving regulation and reducing its burden have always been the big prize relative to stamping out differences between the states.

The narrative around the mining tax is a further example of a federal government confused about the principles of federalism.

Notwithstanding Rudd's stated view that the minerals in the ground belong to all Australians, it is absolutely beyond doubt that they belong to the states.

To maintain that Australians deserve a fairer share of the profits generated by the exploitation of these minerals completely overlooks the complications of the federation.

In effect, what Rudd was saying was that the citizens of the resource-rich states should be prepared to accept further redistribution to the other states.

The voting outcomes in WA and Queensland are consistent with the proposition that these citizens did not necessarily share the view that the mining tax would lead to a fairer deal for them. Indeed, one of the problems with present federal-state financial arrangements is that the resource-rich states are in effect penalised by any efforts they may make to impose closer-to-optimal royalties or taxation arrangements on mining companies, as the proceeds are effectively redistributed to the other states within a short time.

When the federation was set up, it was clear that some powers would be reserved for the federal government, but only "as is necessary for the establishment of general government to do for them [the states] collectively what they cannot do individually for themselves", a point made by Samuel Griffith.

In other words, the original intention was that the states would be "autonomous bodies" and the federal government would act only in matters that affected the whole country and could not be undertaken effectively by single states. Defence, border protection, interstate aviation services and immigration are commonly cited examples.

More than 100 years on, it is clear that the federation is in trouble. Ambitious but misguided federal politicians, dysfunctional federal-state financial arrangements characterised by gross vertical fiscal imbalance and a centralising High Court have all contributed to this outcome.

The evidence is overwhelming: federal systems produce better economic outcomes than unitary states. This is reason alone to reform our federal system to reinvigorate state governments and reduce the scope and power of the federal government.

Judith Sloan is a professorial fellow at Melbourne Institute of Applied Economic and Social Research, University of Melbourne.