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Policy from behind the scenes

By Ken Wolff

Any good public servant will tell you that policy is determined by government ministers. In Senate Estimates, and other committees, you will often hear public servants say they cannot comment on policy issues, that such questions should be directed to the minister. That is the way our system works in theory but does it actually operate that way in practice?

Recently in my piece ‘What can we expect in the coming election?’ I suggested that Turnbull’s proposal that the states and territories should be allowed to reintroduce their own income tax was a ‘thought bubble’. Now I am not so sure. Now I think it probable that it forms part of a continuing campaign by the Department of Prime Minister and Cabinet (PM&C) and Treasury relating to reform of the federation.

At least one journalist, Simon Benson in the Daily Telegraph, seems to have spotted this:

Most of Turnbull’s colleagues agree with the principle. It is the politics of it that are diabolical. It was for this reason alone that Tony Abbott roared down the idea when Treasurer Joe Hockey — after badgering by the then Treasury boss Martin Parkinson — took it to the Expenditure Review Committee.

Parkinson is now Turnbull’s top bureaucrat as head of the department of Prime Minister and Cabinet. No prizes for guessing who might be pushing it.

Ideas for reforming our federation go back a long time. Even before formal establishment of the federation Henry Parkes was suggesting that double the number of states may be better than the then existing six colonies. In 1920 Labor proposed 31 provinces to replace the states. At other times new states have been proposed.

The current approach to reform appears to go back to 1996. We have temporarily dropped the idea of changing the structure of the federation but issues about responsibility and funding are now central to the discussion. Howard’s Commission of Audit in 1996 commented on how to reduce duplication, overlap and cost-shifting between the states and the commonwealth:

Ideally, responsibility for the delivery of all services and the collection of revenue to meet costs should be with one level of government. In practice, however, there would be inefficiencies if this were located at the Commonwealth level when more appropriate decisions could be made at the local level; whereas if it were to be at the State level the Commonwealth would have to relinquish some tax powers or collect earmarked revenue on behalf of the States. [emphasis added]

The Commission noted that such reforms were beyond its terms of reference but I think you will recognise the highlighted part from the current debate. The idea obviously did not die but lived on in the bureaucracy.

In 2006 the Council for the Australian Federation (CAF) was formed. It comprises the state and territory leaders and has two major objectives:

  • work toward common understanding of the States’ and Territories’ positions in relation to policy issues involving the Commonwealth Government
  • take a leadership role on key policy issues, including the Federation, that are not addressed by the Commonwealth Government

In 2007 CAF proposed convening a Constitutional Convention in 2008. It didn’t happen but Rudd did hold his 2020 Summit. The summit’s idea for federation was:

Reinvigorate the federation to enhance Australian democracy and make it work for all Australians by reviewing the roles, responsibilities, functions, structures and financial arrangements at all levels of governance (including courts and the non-profit sector) by 2020.

A three-stage process was proposed with:

  • an expert commission to propose a new mix of responsibilities
  • a convention of the people, informed by the commission and a process of deliberative democracy
  • implementation by intergovernmental cooperation or referendum

As with most of the summit’s ideas, not much happened but it was another step to be considered and hung on to within the bureaucracy even if the bureaucracy would keep more of the process to itself.

I will jump ahead to 2014 when Abbott also conducted a National Commission of Audit and agreed to the development of White Papers on the reform of the federation and tax. The Audit was able to say:

  • The White Paper on the Reform of Federation has a broad remit aimed at clarifying roles and responsibilities between all levels of government to ensure that, as far as possible, each level of government is sovereign in its own sphere. [emphasis added]
  • However, in order to meet this goal, funding capacity is a key driver.

In April 2015 COAG ‘agreed the goal of federation reform is to improve the standard of living and wellbeing of Australians’. It also agreed that any reallocation of responsibilities between governments should aim to:

  • deliver better services
  • drive economic growth
  • be fair
  • provide clear responsibility — people should be clear which level of government is responsible for services so they can hold them to account [emphasis added]
  • be durable

Among the objectives for the White Paper were:

  • reduce and end, as far as possible, the waste, duplication and second guessing between different levels of government
  • ensure our federal system … enhances governments’ autonomy, flexibility and political accountability [emphasis added]

And in the ‘issues to be considered’, what about this?

  • the practicalities of limiting Commonwealth policies and funding to core national interest matters, as typified by the matters in section 51 of the Constitution

Section 51 of the Constitution includes:

  • trade and commerce with other countries, and among the States
  • postal, telegraph, telephonic, and other like services
  • lighthouses, lightships, beacons and buoys
  • astronomical and meteorological observations
  • quarantine
  • census and statistics
  • currency
  • banking, other than State banking; also State banking extending beyond the limits of the State concerned
  • weights and measures
  • bankruptcy and insolvency
  • copyrights, patents and trade marks
  • naturalisation and aliens
  • marriage

Ideally, they want an old style federation with the states exercising much more independence — but I thought we abandoned that in the name of a national economy and national consistency in services like education and health.

Vertical fiscal imbalance (VFI) is considered a major problem. VFI is simply that the commonwealth collects most of the money but the states deliver most of the services and so become reliant on transfers from the commonwealth. The Issues Paper on federal financial relations states:

The existence of VFI is not necessarily a problem in itself, but a high degree of VFI creates perverse incentives for both levels of government. It allows the Commonwealth to act in ways which can compromise the autonomy of States and Territories in their own sphere, thus creating confusion about democratic accountability … A high degree of VFI also creates incentives for the States and Territories to blame the level of Commonwealth funding for problems in State-delivered services, rather than to make the case to their own electorates for raising more funding from their own revenue sources. [emphases added]

From what I can glean, Turnbull has a proclivity for the number ‘2’. His approach to schools and taxation both appear to come from options 2 in the relevant sections of the reform of federation Discussion Paper.

For schools option 2 is:

States and Territories responsible for funding government schools and the Commonwealth responsible for funding non-government schools.

In considering this option, the paper blandly states that the states and territories ‘would need to consider how they could manage the issues relating to funding and regulating their own government schools’. [emphasis added] Despite that somewhat casual dismissal, funding is the key issue.

And on financial relations, option 2 is:

Increase State and Territory access to tax revenue

This could be by:

  1. reducing personal income tax rates by a certain amount and allowing the states to apply a ‘surcharge’ of an equivalent amount; or
  2. transferring a fixed percentage share of personal income tax collections to the states. (In both of these approaches, as regards the areas funded by the approach, such as schools, ‘it would need to be clear that the Commonwealth would not re-enter these areas of responsibility in the future’.) [emphasis added]
  3. expansion of the GST

We know that 1 and 3 have now been floated and rejected and only 2 remains on the table and is still being considered by Morrison.

In the light of all that has been written by public servants in the federation reform discussion papers, noting that even papers prepared by so-called Commissions are written by public servants who also assist and advise such bodies, take account of this statement by Turnbull after COAG rejected the state income tax idea:

If they’re not prepared to make the case to their citizens, through their Parliament, for higher taxes, they cannot seriously or credibly ask us to raise taxes to give money for them to spend.

Yes, echoes of the argument regarding the perverse incentives of VFI and the need for political accountability. So Turnbull did not pluck the ideas for state taxation, nor the commonwealth abandoning funding of schools, from out of the air. They were not ‘thought bubbles’ as I previously described them — so perhaps I owe Turnbull an apology for that — but no doubt a result of briefings he received and/or his own reading of some of the reform documents. As Simon Benson suggested, there are senior public servants strongly pursuing certain aspects of the reform papers (while ignoring other options actually mentioned in them).

Morrison supported Turnbull in his interview on AM on 4 April:

… what was basically put out there was the opportunity for them to have greater autonomy over these issues. They decided that they, they didn’t want to do that.

… the question really put to the states was a question about what level of sovereignty and autonomy they wanted to have over the revenue side of their budgets and the Prime Minister called that bluff last Friday.

Even the words ‘sovereignty’ and ‘autonomy’ feature prominently in the federation reform papers. So where do these words come from? — not from ministers’ own thoughts but from the influence of advice coming from their public servants (or advisers who have been briefed by public servants).

So who is really influencing policy? The ministers may still ‘determine’ policy, and do have to take account of the political implications (which public servants do not), but it seems many of the ideas actually arise in the public service. In the various reports and papers I have quoted, I think you will notice that the same concepts, phrases and even words recur which is a clear sign that the influence is coming from the public service.

And if we go back a little in history, the GST can be shown to be another idea from the public service. Ever since the late 1970s the treasury boffins were concerned about what would happen to government revenues when the baby boomers left the workforce and income tax revenue fell. Their answer was a broad-based consumption tax so that even when they retired the baby boomers would continue to contribute to government revenue. It appears it was first tried when Howard was treasurer in the Fraser government. Howard took the idea to cabinet in 1981 but it was rejected. When a new government was elected in 1983, and a new treasurer appointed, Paul Keating, they rolled out their next attempt to get it through. Keating supported treasury’s advice but had to take it into Hawke’s 1985 Tax Summit in the hope of getting consensus. He didn’t and the idea was dead, at least so far as the government was concerned, but not in treasury. In 1996, 13 years later, along came another new government and another new treasurer, Peter Costello, so treasury rolled out the idea again, despite the political fact that John Hewson had lost the ‘unlosable’ 1993 election with a consumption tax as the central plank of his policy. Howard had promised there would ‘never, ever’ be a GST under his government but by the time of the 1998 election, treasury had gotten its way and that consumption tax became part of the government’s platform. When it won the election (on seats, not overall votes) the government negotiated a deal with the Democrats to get the GST through the senate and it came into effect on 1 July 2000.

Treasury didn’t get everything it wanted in that deal but it had won a battle (if not yet the war) it had fought for 20 years. Treasury would have liked a higher GST on a broader range of goods and services but politicians have to negotiate what is possible, which is what Howard did at the time.

But as we have seen in the past 12 months, the GST was placed back on the agenda, this time on pretence that it would assist the states and territories and help fund hospitals and schools. For treasury that doesn’t matter, as any increase in that way in state revenue allows for the reduction of other commonwealth payments to the states. So the issue, almost 40 years after it was first conceived, is still burning within the public service and, although it has been laid aside for now, will no doubt raise its head again.

Similarly, I have no doubt that, although Turnbull has had the idea of state income tax rejected, the idea is not dead in the public service. It may be two or three governments into the future (perhaps ten years) but it will also raise its head again. In the meantime, there will be continuing efforts by Treasury and PM&C to transfer more powers to the states so as to reduce commonwealth expenditure. They will find other ways in the short term but as the fiscal pressure builds on the states expect another round of discussion on state levied income tax.

Governments come and go and the public service is effective in providing continuity. It is meant to be continuity in administration but I think my two examples in this piece also suggest that it plays a significant role in the continuity of policy, despite the fact that public servants will continually tell you that policy is a matter for the minister.

This article was originally published on The Political Sword

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  1. keerti

    on a day to day level the duplification of states services is wasteful and limits real flexibility in so many areas. Drivers licenses are an example.if someone changes states they have to go through a largely stupid process to satisfy licensing. Then if they have special additions such as a bus or taxi permitthey have to repeatthe performance through which they got the original. As part of my job requirements I have to have a working with children card. When I changed states and employers I had to go through the whole process again regardless that the first card had 2 years left to run. I’m sure that there are many such examples, builders licences etcIn border areas especially NSW/Vic and NSW/Queenslandthere are people who cross state lines to work on a regulr basis. The cost and inefficiencies must be ridiculous.

  2. Ken Wolff


    Agree entirely and it will become worse if some of the bureaucrats have their way and we return to a ‘federation’ where States are more independent and have more pressure placed on them to raise their own revenue. As I said in the article, I thought we had moved away from that in the name of a ‘national’ economy and some consistency in services, as well as many of the issues you mention. One we did at least overcome years ago was the need for most tradesmen to have a separate ticket, requiring proof of their qualifications, in each State. Your ‘working with children’ card, certainly seems one that should come into the same category. It is actually an infringement on your right to work and, even under the constitution, the federal government should be able to enforce some consistency because it is a work issue that crosses State boundaries.

  3. Miriam English

    Wow. I normally think of the Public Service as being a buffer that helps to protect Australians against political ideologues. Who knew that that high-up elements of the Public Service are in effect working against the people’s best interests for their own, with the despised politicians being a kind of last line of defence against them?

    It’s hard for me to understand why they would think fracturing the nation by increasing separation between the states was ever a good idea. Schools, for instance. Wouldn’t it make sense to have a completely unified school system? The same with health. If visiting or moving to another state, surely it would make sense to have assurance that the same quality of health be available? What is to be gained by having spotty service in the different states? Surely the high-level Public Servants should be arguing the reverse.

    In the case of education, it makes me think of the terrible situation over in USA where Texas has great control over textbooks because of its buying power and the utter idiots preaching creationist drivel there demand evolution be left out of their textbooks. It is too expensive for a textbook publisher to make two versions, and because of its size Texas has great buying power. So, because of the separate control of education by the states, a numerically tiny number of crazed fundamentalists get to dictate the content of textbooks, and thus education, for the entire country. A travesty.

  4. Vicky

    So much Liberal policy seems to come from the IPA. This is another item on the IPA’s Wishlist. In addition to taking over the LNP how many public servants are members of the IPA and actively working for the IPA and its sponsors?

  5. Ken Wolff


    There are times when public servants do their best to dissuade ministers from some of their more ridiculous idea or implement such ideas much more slowly than the minister would like (in the hope that it will eventually drop off the minister’s radar and the public service will then quietly drop the idea altogether or offer it up as a ‘saving’ at the first opportunity).

    But as I have pointed out, there are also many times when it is the public service pursuing its own policy agenda. One of the main differences is that the public service is willing to pursue its ideas over many years – particularly every time there is a new minister.

    I am in total agreement that the idea of a federation where each state raises its own revenue and runs its own schools and hospitals in any way it wishes is a step backwards. We do have COAG as an attempt to coordinate policies and approaches across the country. It has given us a national curriculum.

    I cannot understand the current approach except that it is about dollars. All Treasury and PM&C seem to be concerned about is reducing commonwealth spending and at this stage they don’t seem to be considering the full implications of returning to an older style federation.


    I don’t know about public servants being IPA members but from the department I was in at the time I do know that there was a large increase in staff with conservative views during the Howard years. That became a problem when Labor was elected in 2007. Although Rudd, and then Gillard, sought changes in policy and approaches there was a ‘club’ of conservative bureaucrats who did their best to undermine (or at least implement without enthusiasm as I described above) the new ideas. I really think we need a decade of Labor government to again increase the number of progressive thinkers in the public service.

    The other issue, of course, particularly regarding Treqsury, is that most of the economic graduates who would have entered Treasury in the past 20 years or so would have been educated in economic rationalist views.

  6. totaram

    “The other issue, of course, particularly regarding Treasury, is that most of the economic graduates who would have entered Treasury in the past 20 years or so would have been educated in economic rationalist views.”

    By economic rationalist,you mean neo-liberal views, and you would be spot on. Martin Ferguson was the head of treasury who probably encouraged Wayne Swan in his foolish endeavour to “deliver a surplus”. This was not only bad for the economy which had just survived the GFC, but it also made Labor look foolish and provided even more ammunition to Abbot and the coalition. By now, after Joe Hockey’s promises of similar surpluses, it should be clear to everyone that the final fiscal position of the govt. (budget surplus or deficit) is endogenously determined and any treasurer that promises surpluses is an incompetent or a liar or both.

    This whole nonsense of the States raising their own revenue completely ignores the fact that it is the federal govt., through the RBA, that is the sovereign issuer of our (now fiat) currency. The huge policy space this provides to the federal govt. just cannot be compared with what is available to the States. Unless the states go back to issuing their own currencies, they will be hamstrung like the members of the Eurozone (think Greece etc.) who can be bullied by all manner of unelected functionaries in the ECB, IMF, etc.

    This is part of the IPA agenda of dismantling the welfare state, by denying govt. the policy space to implement policies that are for the benefit of the people, rather than for the benefit of so called “free financial markets”, as happened in the Eurozone. The trouble with Neo-liberal macro-economics is that it insists that govt. “fund” its policy initiatives by taxation or borrowing, a hangover from the days of gold-backed currencies. Thus, deficit spending is seen as “debt and deficit disaster”, “intergenerational theft” etc. all of which are only appropriate for a household and completely inappropriate for a sovereign issuer of its free-floating currency. Govt. “debt” is currently issued in the form of “bonds” which form a valuable financial asset that is held by the non-govt private sector. Most super funds hold those bonds, so who will our children have to pay to “pay off the debt”?

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