Reform principles In Australia, the State level of government is particularly responsive to differences in the circumstances and preferences of, say, North Queensland versus Tasmanian families. On the other hand, the Federal Government’s role is to ensure that both are treated equitably in the distribution of income and have access to services of a minimum national standard. Reform principles This chapter canvasses some guiding principles for consideration of reform to the way in which the two levels of government work together, in social policy areas and generally. Key Points >Both levels of government should be much less concerned, in considering what roles they should play, with who the service providers are than with efficiently achieving the best outcome for Australian families. That is, equity and efficiency are overarching principles, along with others such as simplicity and clarity, flexibility and choice. >Some well-known principles of good public administration apply to the issue of how the two levels of government should ideally divide roles in social policy between themselves: – the principle of subsidiarity, i.e. a function should be carried out by the lowest level of government able to exercise it effectively; and – where both levels of government need to be involved in the same area of social policy, the Commonwealth is naturally best placed to handle issues where a national perspective is required, whereas State Governments are more able to identify the needs of their local communities and develop policy and program responses to them. Both have roles in working collaboratively to resolve national aspects of issues in the interest of the Australian community as a whole. >Reform is about making our Federation work better — unlocking the benefits that only a federal system can generate: – maintaining a strong sense of being a single national community in which all families, wherever they live, have access to services at (at least) a minimum national standard overall; but – promoting diversity in how policies and programs respond to local needs and preferences — thus promoting service innovation and improvement across the nation. >Provision of health and education services — those which matter most to Australians and their families — should continue to be a shared responsibility between the Commonwealth and the States: – there should be a collaborative approach to the national aspects of policy development, and planning and budgeting for these programs, including minimum national standards and a national reporting framework; – each level of government should bear a major share of costs, bear financial risks which it can influence, and share other risks; – the Commonwealth has the primary responsibility for ensuring that all Australians have equitable access to quality services at, at least, the minimum national standards; and – the States have primary responsibility for identifying local community needs and preferences, shaping responses and driving innovative policy and program solutions to them. The States are also best placed to administer programs ‘on the ground’. > In the area of health, there is a need for new joint arrangements to span virtually all related publicly funded health (including aged care) services. > In the area of education, there is a need for a single consistent school funding framework for all schools that meet requirements for receiving public support. > Clearly the major redistributional tools will continue to rest with the Commonwealth. The Commonwealth could review the income tax system with the aim of restoring simplicity and lowering the marginal tax rates experienced by ordinary Australians, while paring back the range of available tax breaks. In social security, key themes include the need for rationalisation of the different payments, each with different terms of conditions, and ideally, the adoption of a uniform payment based more consistently on needs. 7.1 National objectives and reform principles Very broad community aims At the very broadest level, the aim of any reform should be to improve the wellbeing of the Australian community. The two major dimensions of this are: > efficiency – i.e. providing more or better services that the community values, for the same or less resources; and > equity – improving fairness and equality of opportunity and reducing disparities in social outcomes. Along with these two very broad dimensions there are others in which reform can improve things — e.g. simplicity and clarity, flexibility and choice are desirable attributes of all government programs that reform should seek to enhance. What families want From the point of view of Australian families and individuals, what is wanted from any changes to the way governments provide services is probably more specific and straightforward. As discussed in chapter 2, they want the two levels of government to cooperate rather than see inconsistent or conflicting approaches: > in respect of health, they want to be able to access the health care services they need, simply, without experiencing a maze of programs in the two levels of government; to be able to make choices that suit them, and to not be constrained in receiving services they need by any contribution they are asked to make to the cost; > in education, families want their children to have positive school experiences that develop them socially as well as in the area of learning, and help promote them on the way to a good career. Again, they want fairness and choice, and do not want cost to be a barrier to choosing a school that gives their children a quality education that they are happy with; and > they want governments to tax them simply and fairly and with a light touch, and to assist them financially when they are in real need, again in a way that is simple and fair and respects their dignity, as well as being adequate for their needs. All families want to be able to make choices of services that suit them. Particularly in health and education, many will make choices that they expect will require an extra financial contribution from them, and that may involve them receiving less public support. Reform principles In considering how the two levels of government should best work together to bring about social outcomes for Australians and their families, some principles need to be brought to bear. This is, of course, not a new issue. The general subject of how the two levels of government should work together in our Federal system has been canvassed many times since the late 19th century when the question of Federation – its merits, its shape and how it might work – was beginning to be actively debated in the Colonies. The context is rather different now, but the issue of how the Federation should work remains very much alive. In recent years there have been periods of very active discussion at the political level – notably in the series of Special Premiers’ Conferences initiated by Prime Minister Hawke in 1990, which gave birth (in 1992) to the Council of Australian Governments (COAG). COAG was intended to meet at least annually to discuss issues in the Federation other than finances per se. Several major expert inquiries have also examined the issue of Commonwealth—State relations in the modern context, as outlined in chapter 6. Among them were the 1996 National Commission of Audit (the Commission) and the 2001—2002 Review of Commonwealth—State Funding (the Review). The Commission paid particular attention to articulating the general principles that should apply to the issue of which level of government should play which roles. The Review focused on the areas where the Commonwealth was involved via specific purpose payments, especially health and education. The Commission was mainly concerned with the Commonwealth Government’s role per se, but with implications for the roles of the States. The Commission noted that the issue extended not only to what the two levels of government should do themselves, but also to how they should, on behalf of the community, engage with service providers, public or private: It does not follow that because the Commonwealth Government had a role/objective when the program commenced or was expanded that the same role/objective is relevant or appropriate now. Where government does have a continuing role/objective, this does not of itself require it to continue to deliver services. More efficient and effective delivery could be achieved by way of clearly defined purchase arrangements with other governments, agencies or private providers. A key point that comes out of these observations by the Commission is that it is necessary to distinguish the intrinsic government roles of strategy and policymaking, planning and public budgeting (in which all public priorities compete for resources), and the high-level provision of funding, from subsidiary roles which may be delegated in some appropriate way. The latter include: > operational program management and the detailed purchasing arrangements that this entails with providers of the services that government wishes the community to receive; and > the actual delivery of services. Both levels of government, especially in the post Hilmer era of National Competition Policy, should be much less concerned with considering what roles they should play, with who the service providers are, than with efficiently achieving the best outcomes for Australians and their families. The aim is to design arrangements so that Australians can readily access quality services that meet their needs and which are delivered efficiently – making good use of the public resources that fund or help to fund them. Arrangements that favour particular groups of providers, public or private, over others are not justified other than in exceptional cases where they are a means to the end of achieving the best social outcome. In other words, the ‘main game’ must be delivering the best outcomes for Australian families with the available resources, with competitive neutrality applying among providers, unless achieving best outcomes requires some limits or caveats to that. Principles guiding the allocation of roles As for the central question here, of how the two levels of government should ideally divide roles in social policy between themselves, some well-known principles of good public administration readily apply, particularly these: (i) the principle of subsidiarity, i.e. the concept that a function should be carried out by the lowest level of government able to exercise it effectively – and thus as close as possible to the ultimate clients, to allow them choice in how they receive services, noting that in some cases national considerations will point to the higher level of government carrying a function (e.g. progressive income taxation), even though it is within the administrative capacity of the lower level; (ii) functions should thus generally rest with the lowest level of government with the appropriate capability, provided that the totality of the responsibilities of each level of government is broadly aligned with its effective command over revenues; (iii) where both levels of government need to be involved in the same area of social policy (as in health and education): – both levels of government need to work collaboratively to resolve national aspects of issues, in the interests of Australia as a whole; – the States have primary roles in identifying the needs of their communities, and in developing policy and program responses, to them; – the Commonwealth should have primary responsibility for the minimum standard of services overall that at the very least every Australian family should have access to; and – appropriate co-funding and risk sharing arrangements should apply, i.e. if a particular risk can be better managed or borne by one of the two levels of government, that level should primarily carry the financial consequences of the particular risk; otherwise exposure to risks should be shared as part of financial agreements. The meeting of Premiers at the end of the Special Premiers’ Conference process in November 1991 articulated another principle which they saw as a key to making our Federation work better – the ‘Australian nation’ principle, i.e. that all governments [should] work together cooperatively to ensure that national issues are resolved in the interests of Australia as a whole. Advantages of federal systems Reform is ultimately about making our Federation work better in ways that make a difference to families, noting that the term ‘families’ has been used as a shorthand for ‘all Australians’. A federation intrinsically has great advantages over a unitary state in that it allows, and can indeed be structured to actively promote, diversity across and within its sub-national jurisdictions (states, provinces or territories) in what and how services are delivered in response to local needs and preferences. It is very instructive to note the trend in some unitary states to devolve large areas of policy and administration, particularly in social areas, back to the subnational level. Nowhere has this movement been more dramatic than in the United Kingdom, where in the past decade a Scottish Parliament and a National Assembly for Wales have been established, along with corresponding executive governments. The Scottish Government on its website lists the following as its top two functions: > health; and > education and training. (Local government, social work and housing are the next three Scottish Government priorities.) The Welsh Assembly Government lists on its site essentially the same two top priorities, but with somewhat more elaboration: > developing education, training and lifelong learning in Wales; and > developing and funding NHS services in Wales. (The Welsh Government’s next three priorities are administering European funds, local government and housing.) Devolution in the United Kingdom was a response to a number of concerns and aspirations of the Scots and the Welsh, including no doubt the wish to maintain and express their distinct cultural identities and to have governments closer to and more responsive to them. However, it is remarkable that the areas in which those communities now appear to see that local responsiveness as most important are the ‘bread-and-butter’ core social policy areas of health and education – just as in Australia. In our own Australian context, the State level of government, being closer to the community, is inherently the more responsive – politically, in the development of policies and programs, and in the way that services are delivered – to differences in the circumstances and preferences of (say) North Queensland versus Tasmanian families. On the other hand, the Federal government may be best placed to ensure that both are treated equitably in the distribution of income and have access to services of at least a minimum national standard overall in those areas that matter most for equity and opportunity in life. Diversity as a key driver of improvement Thus it is very important that the concept of a nationally consistent approach is not confused with a one-size-fits-all uniform approach. On the contrary, it is essential that reform positively promotes diversity in the area of the particular services provided and how they are customised and delivered. Thus the achievement of minimum national standards must be understood and applied in overall outcome terms, not by imposing the same detailed policies, program mix or modes of delivery. This is a very critical point, since diversity is the key to unlocking the potential of our Federal system to serve families best: > Diversity is a key catalyst for innovation, without which service improvement cannot occur, since if new ways of doing things in different parts of the country are strongly inhibited, innovation can only occur by ‘bucking the system’. > In a collaborative federal model, the benefits of diversity and innovation can be picked up and adapted, or used to prompt new ideas, across the nation. The States have a key leadership role in driving policy and program innovation in this context. 7.2 Which level(s) of government? In some areas of social policy the foregoing principles imply that it will be best for a single level of government to take full responsibility for strategy and policy and to be program manager. Some examples are as follows: > clearly the major redistributional tools will continue to rest with the Commonwealth i.e. the Commonwealth will remain responsible for the income tax, and the overall mix of direct and indirect taxation, and for the system of social security payments which, together with the tax system, perform the major role in redistributing income among Australian families; and > on the other hand, many ‘on the ground’ community welfare programs assisting families, children and others (e.g. family support, child protection, juvenile justice etc.) are best managed locally under the full responsibility of the States in respect of policies and programs, although the latter also involve their local government authorities (LGAs) in administration and delivery. Chapter 6 of this report concluded that the major core areas of social policy should be regarded as areas of shared responsibility between the two levels of government. Indeed, the discussion there implied that this is the community’s preference, and indeed would still be, broadly speaking, even if the relative financial capacities of the two levels of government were significantly different to how they stand today. > The two major areas in this core sphere are those which matter most to Australians and their families for equality of opportunity, fairness, and equity of social outcomes – namely health and education. The Review of Commonwealth— State Funding identified these two areas as the ones in which the present overly-diverse range of Commonwealth specific purpose payments to the States should be concentrated in two national (i.e. collaborative) programs, and with the Commonwealth taking prime responsibility for a third national program, Indigenous Community Development, although with the States heavily involved in the development and delivery of that program. Outside those major areas both the Review and the National Commission of Audit (among others) have identified considerable scope for transfers of functions between the Commonwealth and the States – for example in the area of public housing. There is also much scope for exit of the Commonwealth from smaller involvements in social programs. The Commonwealth is involved in many miscellaneous areas where it appears that limited value is thereby added, but where these involvements do certainly entail duplication, administrative overlap, confusion of the families or individuals accessing the services, and a general degree of inefficiency. The Review of Commonwealth—State Funding’s proposal for reform of the Commonwealth—State interface recommended that outside three national cooperative programs it proposed in Health, Education and Indigenous Community Development, and that with some limited other exceptions, the proliferation of small SPPs should be comprehensively rationalised. That is, most of these SPPs should be terminated, with compensating increases in the resources provided to the States under the three national programs. The National Commission of Audit noted that in areas which the Commonwealth exited there would still generally be an important community interest in national reporting of outcomes etc. (especially for programs important to families) – but without maintaining any duplicated administration: any national policy bodies that are retained should limit their activity to joint work on national coordination and strategic directions and the development of standards, benchmarks and performance measures. They should not be involved in service delivery or approval of projects. 7.3 Efficient governance, efficient delivery, families better served Essentially, what is needed in the core areas where the community clearly wants both levels of government to be involved is a genuine partnership. The two levels of government should allocate responsibilities for strategy, planning, budgeting, program management and delivery between themselves in a way that is clear, efficient and well coordinated.> This requires ‘integrated governance’ arrangements. Such arrangements need to be founded on: – agreed goals and objectives; – agreed broad policies to achieve them, national minimum standards etc.; – agreed outcomes to be achieved, but with diversity of approaches to achieving them positively encouraged; – an agreed, and clear, allocation of respective roles and responsibilities in pursuing those outcomes; – agreement on financing and bearing of risks; and – agreed reporting and accountability arrangements. Such arrangements must be made as transparent as possible to Australian families, who care little about which level of government plays what part in the simple, seamless delivery of quality services that they want. Nevertheless it is critically important to good governance that the matter of which level plays which part in the process is clearly decided, consistent with the principles outlined earlier (subsidiarity etc.). The Review of Commonwealth—State Funding emphasised the importance of explicitly establishing the following key elements in the core national programs that would be conducted under that compact, and set down explicitly in intergovernmental agreements: Joint responsibility at the strategic level for setting broad priorities. Outcome objectives and agreed measures to monitor results in the three key areas of health and aged care, education and training, and Indigenous community development. Administrative responsibility for each of these key areas residing with one level of government. Generally this would be the State level since in the relevant areas they are predominant in service delivery capacity. There would be a single integrated program for these areas and the administering level of government would be free of input controls and micro-management from the other level of government. Rationalisation of existing functions and funding arrangements. Opportunities would be sought for rationalising functions within or closely related to the three areas between the levels of governments. 7.4 Future Commonwealth and State roles in social policy The Commonwealth’s role in income redistribution As already argued, the Commonwealth Government will have clear responsibility for the key instruments in the redistribution of income in the Australian community — the income tax and the social security payments system. As the National Centre for Social and Economic Modelling (NATSEM) analysis of the impact of governments on outcomes for families shows, these systems of taxation and payments are responsible for, by far, the greater part of the redistribution of incomes and social outcomes influenced by all Australian governments through all their programs combined. In respect of the income tax, a major issue arising out of this study is that the system is unduly burdensome as felt by ordinary Australian taxpayers — even though, overall, taxation in Australia is not unduly high by OECD standards. In part this is attributable to the extensive leakages from income tax collections that have proliferated through deductions, rebates and the like — predominantly those identified in the Commonwealth’s annual Tax Expenditures Statements. The income tax system has also been used to administer a variety of elements of social policy including the higher education contribution scheme (HECS) and, in part, the private health insurance (PHI) rebate, as well as some assistance to families. The aim of income tax reform should be to restore simplicity and to lower the marginal tax rates experienced by ordinary Australians, while severely rationalising the range of tax breaks that have been cumulatively responsible for a substantial leakage of tax revenues. The current situation is analogous to that which existed when the Asprey Committee looked at the income tax system in the 1970s – a time at which deductions and other tax breaks had also proliferated. As a result of the Asprey recommendations, tax rates came down for everyone and, while almost everyone in the community lost the specific benefit of some particular deduction or tax break, the taxpaying community as a whole, and nearly all individual taxpayers, were better off – including in terms of greater simplicity and transparency and perceived fairness in the reformed income tax system. In the social security system the present Commonwealth Government itself has placed major emphasis on systemic reform. Key themes of reform that have been identified include the need for radical rationalisation of the range of different payments, each with different terms and conditions, and ideally the adoption of a uniform social security payment based consistently on real needs. A difficulty with such a reform is that some people who have been enjoying higher payments than others with the same objective income needs may be losers. Therefore, phasing is likely to be needed, involving a transitional cost. Nevertheless, such a reform would make the social security system fairer, much simpler and more transparent, and would minimise incentives to ‘shop’ among benefits. The core social policy areas in which responsibility is shared Consistent with the principles described in Section 7.3, in health and education the Commonwealth and the States should share responsibility for strategic policy: > there should be a collaborative approach to the national aspects of policy development, planning and budgeting, including the definition of minimum national standards and the establishment of a national reporting framework; and > the Commonwealth and the States should enter into, and carry out, agreements that detail the agreed approaches to policy development, planning, funding, program management, and delivery and reporting in respect of national aspects of these policy areas. Neither level of government should intrude into administration of programs by the other; agreements should be in output, or ideally outcome terms, leaving the administering level of government free to determine how results are achieved. Within this collaborative approach, the Commonwealth and the States should have the following roles: > the Commonwealth should have primary responsibility for ensuring that all Australians, wherever they live, have equitable access to quality services at, at least, the defined minimum national standards. > the Commonwealth and the States should both bear a major share of the responsibility for funding the core health and education services broadly to those national standards. The Commonwealth should bear financial risks that it can influence (but which the States cannot); conversely, the States should bear the financial exposure to risks that they can influence (but which the Commonwealth cannot). The Commonwealth and the States should share the risks which neither level can readily influence, and in proportion to their overall levels of expenditure. In addition, States should take financial responsibility for any enhancement of services that they choose to provide to their own citizens. > The Commonwealth should have principal responsibility for identifying national needs and reform directions in these policy areas. > The States should have principal responsibility for identifying local community needs and preferences, shaping responses to those needs, and driving innovative policy and program solutions to them. > The States should have primary responsibility for efficient program management, purchasing and management of most service provision ‘on the ground’, including dealing with both government and non-government providers who provide services that receive public support. This role would include reporting within the agreed national framework. New Commonwealth—State institutional arrangements The discussion above has been focused on how the Commonwealth and the States should work together in major social program areas where they are both involved. However there is an implied need for reform of the overarching governance structures in our Federation (The Council of Australian Governments, COAG, the various Ministerial Councils etc.), to provide from the top the drive for the new collaborative arrangements. Directions for top level governance reform are canvassed in chapter 10