The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

27 March 2008

NO.007

Modern Federalism and Our National Future

Address to the 2008 Economic and Social Outlook Conference

Melbourne

27 March 2008

Thank you to the Melbourne Institute and The Australian for the invitation to speak with you today and thanks Michael Stutchbury, [The Australian] for that introduction.

I speak with you today at a time of great economic challenges, despite the 17 years of growth that have now spanned three governments.

Developments in global financial markets, combined with significant inflationary pressures in the domestic economy – discussed by the Prime Minister earlier today – have reinforced our determination to build long-term productivity and growth in our economy.

The Government is confident that by pulling together, by displaying foresight and patience, and by seeking long-term solutions, not electoral quick fixes, we can turn today's economic challenges into economic opportunities for Australia.

I've heard some commentators say that because of the global turbulence and rising inflation and interest rates at home, last November's election was a good one to lose. I couldn't disagree more – the most important time to be in government is in the tough times, when hard decisions need to be made. In the end, I believe history will judge harshly parties that cruise through the easy years and fail to invest for the future.

Which brings me to the central subject of my speech today – a long‑term plan for our Federation, that builds productivity and delivers for working families.

Given the success of yesterday's watershed meeting of the Council of Australian Governments, it's an ideal time to sketch out the reform significance of our vision for federalism; and to put the activity of our first four months into a broader reform context. That's what I intend to do today, as I argue that after more than a century of federalism, we're finally getting it right. And we're getting it right precisely at a time when the economy is crying out for some courageous, modern, and future focussed reform. The buck‑passing of the past not only led to acrimony and reform inertia – it also led to short term political point scoring when the nation needed long‑term plans.

Today, I'll make the case that decisions taken yesterday, and the vision we have for the future of federalism, purposefully implemented over this year and beyond, represent the crossing of a significantly new reform frontier.

Previous governments took the bold step of opening up our economy, of removing the inefficient barriers to our successful engagement in the world economy. By introducing the National Competition Policy and enterprise bargaining reforms, the Keating Government ensured we could compete and prosper on the global stage.

This week the Rudd Government and its State and Territory counterparts embarked on a whole new era of reform – what others like to refer to as the 'third wave' of reform. I prefer to think of it as 'Modern Federalism' – and as the best available vehicle for delivering our commitments to better services for the working families of our nation.

We want to unite and harness the Federation – as part of a broader project of economic modernisation – to meet the big challenges we face and create prosperity into the future. Our six aspirations for micro economic reform, and Modern Federalism, are to:

  • build productivity growth;
  • deliver better services to working families wherever they live;
  • develop our human capital;
  • increase our international competitiveness;
  • create more effective markets for resources; and
  • end waste and duplication.

The reform task is made more pressing by the international turbulence and market volatility making its presence felt here. And more pressing still, by the challenge of building international competitiveness. For us to be competitive in the region, the conflict and confusion of old federalism won't do – in a globalised economy we can't afford the wasted effort of poor federal relations. We simply must build national productivity if we're to take advantage of the rise of China and India – to turn their success into an opportunity for Australia to prosper.

The Reform Dividend

Just as we rely on better markets to deliver quality economic outcomes, so too should we rely on Modern Federalism to tackle the microeconomic issues needed to build a more competitive, more productive economy.

The 'new growth' theory shows us that the best way to build long term prosperity is to invest in the micro‑drivers of the economy. These drivers defy state boundaries – which makes reforming the Federation so central to the Government's economic objectives.

The old approach to federalism was a drag on productivity and a drag on long-run economic growth. It prevented the nation from pulling together to tackle the key microeconomic issues which will determine our future productivity growth, and in turn, our economic future.

In a far ranging inquiry published last year, the Productivity Commission estimated that the economic dividends of a joined-up reform agenda, driven in concert by the Commonwealth and the States, will be substantial. The Commission found that enhancement of workforce participation and productivity through focused efforts on human capital reform alone – across health, education and workforce participation – could potentially result in increases in GDP of around nine per cent, after 25 or more years. Similarly, the PC found that improving productivity and efficiency in energy, transport, infrastructure and other activities could provide resource savings of around $10 billion.

The New Architecture

Fortunately for Australia, there is a mood for change in the community – a community tired of the old politics of vote buying and pork-barrelling. It is this thirst for a new style of politics that has given us this historic opportunity to rule a line under the mess federal-state relations had become by the time of last year's election. We see governmental cooperation as essential to the future prosperity of Australia.

Some progress has been made over time — most notably through the Keating Government's competition policy reforms. But there remain many areas of activity where regulation is still too fragmented, where activities are duplicated, where coordination and accountability are lacking.

Under the old system, the States received GST and around 90 different specific purpose payments (SPPs). Under the new arrangements, they will continue to receive all GST revenue, but the SPPs will be rationalised into a small number of national specific purpose payments; some general revenue assistance; and the new National Partnerships payments.

There is still work to be done, but it's fair to say yesterday's COAG meeting took important strides towards the future. Governments agreed to a new architecture of cooperative funding arrangements that will replace the inefficient and complex system of tied grants that has plagued areas of joint involvement in the delivery of services for decades. The new financial architecture will make roles and responsibilities unambiguous so that families and business will know which level of government is accountable, not just for the dollars they spend, but more importantly for the level of services they deliver.

The terms on which the Commonwealth and the States engage with one another will change in five important ways.

First, the Commonwealth will dramatically reduce the number of SPPs. Around 90 existing agreements will be collapsed into just five – in health, early childhood education and schools, vocational education, disabilities, and housing.

Second, the States will get the flexibility they need for resources to be allocated to areas where they will produce the best results. The Commonwealth will move away from the strangulating prescriptions of the past, by removing the input controls which inhibit State service delivery and priority setting. Instead, there will be a rigorous focus on the achievement of outcomes – that is, what the States deliver to the people of Australia – not how they deliver it.

Third, the Commonwealth will provide greater funding certainty to the States. The States will be financially better off and they will no longer be plagued with the uncertainty of not knowing whether they will receive Commonwealth payments. There will be no more five-year agreements with 'take‑it‑or‑leave‑it' offers when they expire. The new SPPs will be on‑going payments. And the Commonwealth and the States will review the level of funding periodically to ensure the maintenance of funding adequacy. In return for greater certainty around base payments, States have agreed to a much more rigorous outcomes framework.

Fourth, there will be more transparent public performance reporting. The performance of each state jurisdiction will be independently assessed by the COAG Reform Council. This will allow the people who use services and who drive our economy – the families of Australia – to hold their political leaders accountable. Finally, we will provide the States with National Partnership Payments to deliver on key economic and social reforms. This will reward those States which best deliver the services and outcomes their citizens need and deserve. But there will be no guarantees – those who do not deliver won't be rewarded.

Cooperation, Competition, and Innovation

This new architecture for Commonwealth-State relations will provide a solid basis for far‑reaching microeconomic and social reform in Australia. It will lead to greater cooperation and innovation across areas which are critical to the functioning of our economy: human capital formation, resource management, infrastructure delivery, and business regulation.

Just as our economic challenges demand we do not waste the efforts and ingenuity of a single Australian, so too does the magnitude of the challenges demand we not waste effort on intergovernmental conflict.

The old way of managing intergovernmental relations – using input controls – was the old fashioned 'command and control' approach. As is well documented, 'command and control' regulation can be economically inefficient and often fails to deliver the outcomes that it is intended to.

Focusing on outcomes – carefully measured and communicated to the public – will bridge information gaps, open up substantial benefits in terms of innovation, and ensure federalism is less adversarial, and more efficient and effective.

Where both levels of Government can work cooperatively together, administration and compliance costs will also be lower. This will ensure resources are invested in economic capacity and services, not on more bureaucracy.

As I've indicated, the new cooperative architecture will also lend itself to clearer accountabilities. Clearer roles for State and Commonwealth governments will mean that separate programs complement each other better, leading to higher quality, and more efficient service delivery for hard working Australians. The new, more flexible approach to Commonwealth-State relations will also use market principles to drive innovation and reform across government.

If we want federalism to function in a meaningful way, we need to give the States sufficient room to deliver services in different ways; experiment with new policy ideas – and to learn from one another's successes. By giving the States more room to move, and setting them clear, rewarding goals to reach for, the new architecture of Commonwealth-State relations will create a new wave of innovation and reform in policy development and delivery across the country.

The Howard-Costello Government demonstrated a competitive federalism of sorts — if by competition you mean a cage fight between the States and the Commonwealth, with the latter seeking to compete against the States in service delivery, rather than work with them to improve service delivery standards. But this just exacerbated the problems of duplication and inefficiency. By the late Howard period, input controls had descended to petty politicking, like insisting schools had a functioning flagpole as a condition upon Commonwealth funding. The satirists were finding it hard to keep up with policy innovation like this.

The Rudd Government is taking a very different approach to competitive federalism – a more modern and innovative approach to federalism. In a similar manner to the Hawke and Keating Governments' reforms of the 1980s and 1990s — which lifted the counter‑productive regulations from exchange rates, financial markets, public monopolies and infrastructure — we aim to remove the inappropriate use, and stifling effect of, Commonwealth prescription from State service delivery. Instead, we seek to improve State performance by putting the right incentives in place.

Any decent economist will tell you that incentives matter a great deal – that the right incentives can be a significant driver of positive change. But until now, we haven't had the right incentives sitting at the centre of our federation.

The new architecture will drive improvements in the lives of ordinary Australians by ensuring that those States which reform their service delivery – providing people on the ground with better quality services – will be suitably rewarded with incentive payments.

The other powerful incentive which was dealt into play at yesterday's COAG meeting is outcomes-based performance reporting. Lest anyone think this new era of federalism is a free kick for State governments, I invite you to look closely at the performance reporting which will underpin the new regime. Performance outcomes – independently assessed by a bolstered COAG Reform Council – will make more accurate intra-state comparisons possible, and will give rise to a new era of democratic accountability – by identifying saints and sinners for the entire nation to see.

A New Wave of Economic and Social Reform

In addition to better services, the agenda I'm outlining today is also focussed on economic and social reforms which will drive productivity and workforce participation and deliver economic benefits now and well into the future.

That's why, in a break with previous practice, COAG has set up seven new working groups to progress a work agenda for 2008, covering: health and ageing; the productivity agenda – including education, skills, training and early childhood; climate change and water; infrastructure; business regulation and competition; housing; and Indigenous reform.

Let me turn first to the human capital components of the COAG work agenda.

Effective, well-targeted investments in education and health will boost productivity and participation, while also lifting the standard of living for every Australian.

Modern microeconomics demonstrates that investing in people to increase their capacities – most notably their education, skills and health – is the best way to increase productivity and workforce participation. So lifting the nation's human capital through the COAG process is about economic progress; but it is also about human progress and ensuring all Australians are carried with the rising tide of prosperity.

In health, the Commonwealth and the States are committed to delivering better health outcomes through practical improvements to our health and hospital system. For too long, Australian families have been the victims of the cost and blame shifting that has occurred in health. Most Australians probably don't mind too much about which level of government is responsible for health services, so long as they are provided well. They just want an appropriate standard of service delivered at the lowest cost possible to the taxpayer.

The new National Healthcare Agreement will provide unprecedented flexibility to the States. Several different payments will be rationalised into one agreement — in one stroke simplifying administration and freeing up resources once devoted to bureaucratic red tape.

Yesterday the States and the Commonwealth already agreed to some of the far ranging reforms that will ensure all Australians have access to high quality health services.

  • The States will be given a $500 million increase in funding for public hospitals;
  • A national registration and accreditation system for health professionals will be introduced, making our health workforce more geographically mobile and integrated; and
  • The health workforce shortages will begin to be addressed with 50,000 new training places allocated to the sector.

Education is the other key element of our human capital agenda – and so vital to lifting the productive capacity of our economy. Education enables people to acquire the knowledge and skills to participate effectively in a modern, global workforce. And this illustrates something I believe strongly – that in the modern global economy, where human capital is king, a fairer society is a stronger society. Leaving the unemployed and the disadvantaged behind makes no economic sense in a situation where we cannot afford to waste a single Australian's talents.

Evidence informs us that it is important to begin investing in education at an early stage and to ensure that each level of education effectively links into the next. That is why yesterday early childhood education was brought within a national education agreement for the very first time. We also agreed that rather than dictating how the States should go about providing high quality schooling, we will use the new financial arrangements to improve outcomes, by putting the right incentives in place.

The focus on outcomes-based public accountability will replace input controls and give the States the flexibility they need to improve the quality of their schools. We also aim to provide parents with the best possible information on their child's educational progress and the performance of their school. This will further encourage the delivery of high quality schooling.

COAG also agreed to develop an incentive payment focused on addressing the educational needs of low socio-economic status school communities. Through these and other initiatives we are grasping this opportunity to work across state boundaries to ensure we have the best educated, most productive workforce in the world. Enhancing our human capital is vital to building productivity and securing Australia's future prosperity, but we also need further modernisation of our economy. This means dealing with cross‑border issues, such as water, climate change, infrastructure and regulation. Across all these areas we need to allow national markets to develop fully so that we can have a seamless economy where it's easier and more efficient to do business. Across all these areas we also need to remove some of the distortions to business investment decisions, to allow efficient price signals to operate properly – to facilitate timely and efficient investment and resource utilisation.

Yesterday we took an important step down the modernisation path when the States and the Commonwealth ended a year long stalemate, and over a decade of inaction on water management. The historic deal to secure the long-health of the Murray-Darling Basin will establish the independent Murray-Darling Basin Authority, and give the Commonwealth Minister power to approve a new cap on the amount of water used in the Basin. The fact that the deal was clinched just four months into the life of the new Government is a testament to the cooperative spirit of Modern Federalism. Unlike the arrangements put forward by Malcolm Turnbull last year, the governance arrangements were agreed to yesterday in no small part because they ensure that all affected States are consulted on the Basin plan.

The deal on water also included investments in physical infrastructure – another key driver of a modern, seamless economy.

Well‑planned investment in, and efficient use of, economic infrastructure is critical to taking our economy forward — to lift the productive capacity of the economy. Infrastructure investment to address current bottlenecks should not just be a quick fix that transfers problems to other parts of a supply chain. Future needs and priorities must be recognised and attended to on an integrated basis and with better coordination by governments and industry.

Through the COAG process, and together with Infrastructure Australia, for the first time ever this country will have an integrated, coordinated infrastructure priority list for every corner of this country. The pipeline of projects created through Infrastructure Australia's priority list will assist governments to match billions of investment dollars to infrastructure priorities. It will also provide the construction, development and financing sectors with the long‑term certainty they need to make best use of skills and resources.

The Rudd Government has also taken significant steps to address regulatory burdens which are stifling productivity, innovation and geographic mobility. Businesses must comply with multiple regulations when operating across state borders. Complying with this maze of regulation costs time and money. The Productivity Commission has estimated that compliance costs could be as high as four per cent of GDP per annum. Through the COAG reform process we are working to lower the regulatory burden on businesses across this country.

That's why yesterday, we agreed to:

  • harmonise State occupational health and safety laws;
  • address key regulatory hotspots, such as environmental assessment and approvals; rail safety regulation; and a national system of product safety regulation; and
  • assume responsibility for the regulation of mortgage broking and non-bank lending.

By increasing competition and enhancing the role of market mechanisms in energy and the provision of key economic infrastructure, and removing inefficient and duplicative business regulation, we can lift productivity and the economy's growth potential.

Federalism and the Future

In finally getting federation right, after more than a hundred years of trying, we are giving this nation every chance of creating a new generation of prosperity for the future.

All of us here today know the economic challenges that we face are difficult, and that it will take years of foresight, and dedication to the modernisation task, for us to prevail. But we also know this: individual governments, whether Commonwealth or State, cannot tackle all of these issues acting alone.

I am confident that, through a reinvigorated COAG process, we can unlock the benefits of Modern Federalism, and as partners overcome these challenges. There are significant gains to be won.

The new financial architecture announced yesterday provides the States with the flexibility and the incentives they need to deliver the quality of services that Australians deserve. And I expect significant economic benefits to flow from the increased inter‑jurisdictional competition and innovation that the financial reforms will encourage. The new architecture also provides the platform from which to launch a new wave of economic and social reform, to enhance our human capital and build a stronger nation.

Let me conclude today by inviting you to look beyond the progress made in this area in just four months, which I've outlined today. And to look beyond the personalities involved – beyond Rudd, beyond Brumby, and Iemma, and Bligh; beyond Swan and Costa and Fraser and Foley. Because our vision for Modern Federalism extends beyond the political careers of current leaders and treasurers. It's an architecture designed to survive the inevitable arrival of a time where not all governments are Labor.

It's a longer term plan, to build productivity and make the next century of federalism deliver for Australian working families much better than the last.

Thank you.