Australia’s states are inadvertently harming their own economies and the national economy by failing to collaborate effectively. The Productivity Commission is currently investigating the complex web of state-specific occupational licensing rules, which are often contradictory. Aligning these rules could potentially boost the economy by $846 million annually, with the electrical trades sector alone seeing up to a $62 million increase.
Currently, licensing requirements for electricians vary significantly between states. For instance, in some states, electricians with “ARCtick” accreditation can install split-system air conditioners, while in others, they must complete an additional qualification costing up to $5000. This discrepancy creates challenges for electricians seeking to work across Victoria, New South Wales, and Queensland, which have different accreditation systems.
The inquiry, commissioned by Treasurer Jim Chalmers, aims to implement changes that could save consumers money and facilitate worker mobility across the country. Chalmers has drawn inspiration from the National Competition Policy of the Keating government, which John Howard extended into the early 2000s. This policy, which included payments to states for adopting economically beneficial changes, increased the economy’s size by an estimated 2.5%.
Reviving National Competition Policy
The first payments under this renewed effort have already begun. Last month, Chalmers offered the Northern Territory government $1.2 million to reform its planning rules, making it easier for supermarket chains like Aldi to enter the market and compete with Woolworths and Coles. This move is reminiscent of the original national competition policy program.
Former Treasury Secretary Ken Henry highlights the necessity of federal financial incentives to secure cooperation between the Commonwealth and states. “It’s simply being realistic to assume, I think, that something of that sort will be required,” he says.
Chalmers has established a $900 million productivity fund to encourage states to undertake reforms they might otherwise overlook. “It’s actually a big thing,” he states, referring to the fund and the broader regulatory agenda aimed at harmonizing regulation, planning, and approvals.
The Role of the Commonwealth Grants Commission
The National Productivity Fund’s early success underscores a fundamental issue within the federation: the distribution of tax dollars. This is where Chalmers, Prime Minister Anthony Albanese, Opposition Leader Sussan Ley, and Ted O’Brien face a significant political challenge—the allocation of the GST.
This year, the GST is expected to generate around $100 billion. The Commonwealth Grants Commission, a small agency within the federal Treasury, is responsible for deciding how this money is distributed among the states and territories.
New South Wales Premier Chris Minns expresses frustration with the commission’s opaque process, which he describes as a law unto itself. The commission employs a complex system to determine each state’s share of the GST pool, considering factors such as natural disaster costs and urban density. This process, known as horizontal fiscal equalization, aims to ensure all states can provide similar levels of service to their residents.
“One of the things that makes Australia a much better country than the United States is that it doesn’t matter where you live, you will get quality health care, education, policing, environmental protection and the like.” — Saul Eslake, Economist
The GST Review and Its Implications
The Institute of Public Affairs’ Daniel Wild argues that without changes to the GST allocation system, the federation is effectively doomed. “I don’t think you can fix the federation without making changes to the way the GST system works,” he asserts.
The Morrison government’s reforms, supported by the Albanese government, have placed a significant burden on federal taxpayers and distorted an already strained system. For instance, New South Wales, the most populous state, is expected to receive $25.5 billion from this year’s GST pool. However, if it received its population share, it would have $29.6 billion to invest in services.
Meanwhile, the Northern Territory will receive $4.5 billion, or more than $17,600 per person. If the GST were allocated on a per capita basis, the territory would receive less than $1 billion.
Critics like Saul Eslake warn that the current GST deal, which disproportionately benefits Western Australia, risks undermining the entire system. “The WA GST deal and the way it is rewarding the richest state… is risking the entire system,” he says.
The Morrison-era reforms included a requirement for a formal Productivity Commission review by the end of next year. Chalmers has initiated this inquiry, which is expected to recommend significant changes.
Revisiting COAG and the National Cabinet
In the past, the Council of Australian Governments (COAG) served as a platform for federal and state collaboration. However, it was replaced by the more secretive national cabinet during the COVID-19 pandemic. Angela Jackson, a panel member reviewing the federal government’s pandemic response, notes that while the national cabinet initially worked well, it has since reverted to traditional power dynamics.
Constitutional law expert Anne Twomey suggests that reintroducing COAG could drive reform and ensure changes are effective. “With an independent body back in place, you could improve the efficiency of the federation with money on the table to act as an incentive for legislative change,” she says.
Deloitte Access Economics lead partner Pradeep Philip believes COAG would bring more objectivity, analysis, and measurement to how taxes are spent.
The Challenge of Local Government Reform
Australia’s 538 local councils oversee a myriad of rules and regulations, with significant variations in size and capacity. The debate over housing highlights the critical role councils play in the economy. However, attempts to rationalize local government have often met resistance.
Peppermint Grove Shire in Perth, for example, successfully resisted a merger plan, arguing that smaller councils are more efficient due to their local knowledge. Shire President Karen Farley contends that efficiency is not necessarily linked to size.
The resistance to council mergers exemplifies the challenges of policy reform in Australia. As Twomey notes, even modest reforms can face significant opposition, reflecting a broader reluctance to pursue major changes.
Looking forward, the federal government faces the daunting task of navigating these complex issues to foster economic growth and improve the federation’s efficiency. The path to reform is fraught with political and practical challenges, but the potential benefits for the Australian economy and its citizens are substantial.
