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Joint Committee of Public Accounts and Audit - 19/08/2011 - National funding agreements

PAPE, Mr Bryan, Private capacity

[13:42]

CHAIR: Welcome, Mr Pape. Thank you for attending. Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and warrants the same respect as proceedings of the House and the Senate. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Do you wish to make an opening statement?

Mr Pape : Yes, thank you, and thank you for the invitation to appear before you today. I wish to focus on the inadequacy of the parliament's scrutiny of the funding agreements. From my point of view many are properly seen as what I would call instruments of interference. So far as I can find there is no close examination of these executive agreements as to (a) whether they are contrary to the powers under the Constitution for the Commonwealth executive to enter into or (b) whether the terms and conditions of the grants used to finance them are so coercive as to bring about an abdication of parliamentary power to the executive. The Ombudsman's remarks on the advantages of these so-called executive schemes, which I have put in my supplementary submission, in my view are probably unhelpful, if not misconceived. He said:

The main advantage of executive schemes is their flexibility. Because there is no need to wait until legislation is drafted, considered and passed by Parliament, such schemes can be quickly established when the need arises, adjusted easily as circumstances change and closed down when the need for them no longer exists.

In short, they are arrangements, schemes, contrivances or artifices which can easily avoid parliamentary scrutiny. That language might be familiar to some of you. I think part IVA of the Income Tax Assessment Act on anti-avoidance arrangements talks about those sorts of things on the other side of the coin. On the income side we are talking about those schemes but on the other side we have what I would call schemes as well, on the expenditure side. If one takes that approach, even, it is tantamount to amending the Constitution by deleting the 40 paragraphs in section 51, which gives the Commonwealth parliament power to do most of the things it can do, and just ending it so it would read: 'Either the parliament or the executive shall have power to make laws for the peace, order and good government of the Commonwealth' full stop—which means you have a unitary system just like the United Kingdom parliament: a Westminster-style system, not a federal system.

The point I come to in my paper is that by entering into national partnership agreements, for example on the nation-building and jobs plan, particularly the $16.2 billion Building the Education Revolution, the executive in my view, on its face, overreached its power. Sanctions are imposed if a state fails to meet the benchmark expenditure—for example:

… by requiring the State to return the shortfall of expenditure to the Commonwealth, noting that the Commonwealth will reallocate the amount to other States and/or use it for Commonwealth own purpose programs.

In my view the BER was an illustration of the coercive way in which the Commonwealth has sought to invade the states'—dare I say it—exclusive function as to education. I have the document here, the Constitution itself, and you will not find the word 'education' in there. Nor will you find any authority for a department of education. Its very name as a national partnership agreement carries with it the legal concept of principal and agent. It works to promote the impermissible idea that the states are acting as agents for the Commonwealth. Doing so, in my view, in most sorts of cases can be an abdication of parliament's power under the grants power, section 96, to the executive. It is a step too far. So in my opinion the drawing down of the funds from the COAG Reform Fund to pay the BER program was contrary to section 96 of the Constitution and is unlawful.

The point that underlies all of this is that the Commonwealth raises more than 80c in the dollar of all taxation revenue in the country. It raises more money than it needs. It is probably the worst case of what is called vertical fiscal imbalance in the world—generally recognised. Years ago Professor Geoffrey Sawer remarked, 'Those who tax don't have to justify the spending and those who spend don't have to justify the taxing.' That is the conundrum really. The parliament needs to be reminded that roughly 90c in the dollar of Australia's physical public assets—that is the schools, universities, hospitals, roads, railways, power stations, dams and other water infrastructure—are owned and operated by the states. So you have the terrible problem that you have all this money on one side and yet the responsibility for running the country in a peacetime situation is very much a state one—absent, say, social security. The primary role of the Commonwealth is defence. And what do we have at the present time? We have 'fix the fleet' situations where one out of six Collins class submarines does not work. There is an opportunity cost there. What you have is the Commonwealth interfering in other activities for political purposes yet their primary function is defence and perhaps social security. It is very limited. What it comes down to, in my view, is that intergovernmental agreements just promote interference and irresponsible government at all levels. That is evidenced by the growth of large duplicate bureaucracies. You have a Commonwealth education department telling universities how to run their operations; school curriculum; how many pencils you have, HB pencils or whatever—to take a rather bizarre example. They are instruments of what I would describe as executive expediency. They are not a long-term solution. At best they are a bandaid solution. So—and this is the crux it comes down to—the solution is for the Commonwealth to keep the GST and allow the states to fix the rates of personal income tax but let the Commonwealth collect it as their agent. So you only have one administrative body doing it but then you start to match—you give them a revenue source. The states unfortunately do not want the odium of collecting it. So let us go to competitive federalism and be done with executive federalism.

The key question is not what the problem is or how to solve it but 'There's the problem; here's the solution—what's stopping us applying it?' It must be constantly borne in mind that the powers of the federal parliament and the executive government under the Constitution are limited. They are limited powers. Australia is not a unitary state; it is a federation. That is the nutshell of what I am suggesting. Intergovernmental agreements are at best useful devices. I heard some remarks as I was coming in—I think somebody was looking up the COAG website to see whether they could find a partnership agreement. I was in Perth at the end of June or beginning of July when Professor Cheryl Saunders spoke about the partnership agreement dealing with noise insulation of Fort Street boys' high school, so I thought just for fun I would look that up before I came. I could not find it on the COAG website, which disappointed me, but of course Dr Google came to my aid and I just googled it and up it came. What the source is and its validity I do not know but the interesting thing about it is that it came in in 2009 and is due to expire next year, so it has been there and they have spent the money in accordance with quite a strong Commonwealth prescriptive plan. That is the problem, as speakers before me were adverting to: how you find where they are and what they mean, one does not know. Those are my opening remarks.

CHAIR: How does the idea of heading towards competitive federalism align with particularly the Work Choices case in 2006 but also High Court interpretations of things like the corporations powers and others under section 51 over nearly a century now that are arguably pushing back on the concept of competitive federalism? How do you read that dynamic?

Mr Pape : I see the corporations one and Work Choices as looking at more of a national economy for 22 million people having one rule. On one view I would say it is unfortunate. As far as the corporations and Work Choices go I would probably say Justice Callinan got it right and the majority got it wrong. But that is the way it is. I do not think it is inconsistent in terms of the finance side. That is one area of perhaps having uniform rules. There are lots of the states—there is cooperative federalism. For example, even under the Trade Practices Act—now it is called the consumer act—which started on 1 January this year there is a whole range of rules which the states have adopted. It is the same, for example, with the Evidence Act—a uniform act which the states have adopted themselves. That arrangement works. There are other situations—for example the Water Act. The Water Act only works because the states transferred sufficient powers to the Commonwealth under paragraph 37 of section 51 to get a cohesive act for the Murray-Darling Basin. If the states want to do that, the Constitution has provided for that to happen. But what we have on the finance side is that the Commonwealth, because it has more money than it really needs, wants to invade other activities. That is the problem. I think it is a matter for the states. If the states want to do it, there is no reason why they cannot. One may well argue that the states, by turning a blind eye to this arrangement and virtually acquiescing to it, have condoned it. But the citizens of this country have not had the opportunity to say anything about it. That opportunity, whether you like it or not, comes from section 128. You have to amend the Constitution by referendum. There is no reason why you cannot do it; it is just that the way it is being done at the present time is the easy way, the lazy way, but it is the wrong way.

CHAIR: Correct me if I am wrong but I thought you said one of the options for the solution was to keep the GST at a Commonwealth level and give the income taxing powers to the states.

Mr Pape : Yes.

CHAIR: Professor Anne Twomey gave some evidence earlier today along the lines of a slightly different option, which would be to create a central pool and almost like a grants commission, and then it is about how you divvy it up and using section 94 with regard to the issues around the surplus and making sure it gets distributed accordingly. I do not understand the logic of why flipping those dynamics necessarily answers the problem you have raised.

Mr Pape : The reason I prefer it is this. One of the great advantages of the GST was supposed to be that it is a taxation revenue-raising operation but it also gives you the opportunity for fiscal management. You can raise the rates quite easily, or lower the rates. For example, in the last global financial crisis the UK, I think, dropped the rate from 17½ per cent to a lower rate. That is just not open to us in this country because you have to get all the states to agree to it. So there is an economic lever available to the Commonwealth to administer the economy which they have denied themselves by saying, 'Here's your 10 per cent. We won't move it around; it's all fixed and it's all set in concrete.' They have denied themselves that lever, which would work quite easily and quite quickly. So there is that. But if you turn it around and get the states to raise their rates, then you can have—Western Australia, for example, might be like Texas and say, 'We're not going to have an income tax; we'll raise all our taxes from royalties.' Another state might say, 'We'll have an income tax' and set certain rates. There will be competition between the states to run effective governments.

Bear in mind that before the Second World War, in fact up to 1942, the states collected the income tax on behalf of the Commonwealth. Most people in this country did not pay Commonwealth income tax; most of it was state income tax. The reason they had a uniform tax is that we were running a war. New South Wales was a high-tax state and Victoria was a lower tax state, so Victoria had what was called taxable capacity. They said, 'Let's have one uniform rate; we need it to run the war.' As with all taxation measures, it was supposed to be temporary. On this basis it was all supposed to end on 30 June 1947. Just before, in 1946, they turned around and said 'No, this is very good. The war has put the Commonwealth in the box seat.' It has being toing and froing ever since and the key to it has always been the grants situation. I do not think there is a problem about the Commonwealth administering it and putting it in one fund like that, so long as you match up spending and raising tax with responsibilities and we try to eliminate this grants power with strings attached, because all it is being used for by any government of any political persuasion is political advantage and expediency. We have Roads to Recovery, Regional Partnerships, the Fort Street whatever it is, the Launceston hospital—just name it. At election time there is money for the surf clubs on the coast if it is in the electorate—all of that. And it does not do much for the community. Whether here or in the UK, Western parliaments are in difficulties. The stench of the UK parliamentary expense scandal flows everywhere. This all goes back to the rule of law. The less you can have of grants commissions making decisions—by letting it run by the law, you are going to get a better result and more respect, in my view.

Mrs D'ATH: Professor Twomey's evidence was along the same lines. Do you think, though, that in society there would be acceptance of moving to a model where once again the federal government just collects this and then hands money over to the states without outcomes being prescribed—the states are responsible for all of these areas and if the state fails to deliver the services that the public expects then the federal government is not going to be held accountable to the public? Do you really think we can get back to that point of saying, 'Look, the state can manage the money—we will hand it to them and it is a state responsibility; if the state does not do it properly then the public is not going to hold the federal government to account for that'?

Mr Pape : What I am trying to do is avoid or in fact eliminate the number of grants in the whole community so that each state is responsible for raising its own revenue. In a state election, if I am unhappy with the way the education department is running, I only have one person to look at—the minister for education in New South Wales. I do not want to be talking about the minister for education in the Commonwealth. That person who is the minister for education in New South Wales or Victoria is wearing the cap—they are responsible for it, not somebody down in Canberra who has a bureaucracy and is about policy but not development, although they try to be. It is the same thing with universities. What a bizarre situation we have. All of the universities are incorporated under state acts of parliament. The Auditor-General audits them. Not only does the Auditor-General audit them; the states tax them for payroll tax as well—charitable institutions. They are vast sums of money.

Mrs D'ATH: How would that work, though, if you take education or businesses operating over borders? There is expectation about what kids are taught in one school and what they get as far as the quality of education in one school and one state goes. If we have each state again administering everything themselves and there is no national consistency in those areas—

Mr Pape : I do not think it is a problem. I suppose I say that because in 12 years of education I think I went to six schools—every two years—and a couple of them were interstate. Somebody used to say, 'Well, you've been expelled from all of them.' The point about it is that I do not think it makes a great deal of difference. Look at the main body of it. I do not think you can turn around and just say that the Commonwealth can do that. The people in Queensland and northern Queensland are a lot different from those down in Geelong or Dandenong or over in Perth. That is what this country is made of.

CHAIR: Can I clarify this. To follow what you are suggesting, are you saying that you give up the concept of national objectives—

Mr Pape : Absolutely.

CHAIR: via harmonisation of national and state laws? Are you saying that we should not even bother with that or are you saying that you would achieve that better through a competitive model? Like the rail gauge argument, education is probably one you can probably accept—you should have been expelled from different schools in different states.

Mr Pape : I know, and I can speak from experience on the railway. For a short time I was at school in Melbourne and when I used to come home from school I got off the train at Albury. The gauge was five foot three in Albury and then in the middle of a late Friday night or early Saturday morning you are on a four feet 8½ to Wagga.

CHAIR: But doesn't that suggest that there is an argument for national objectives?

Mr Pape : In certain situations there may be, but if the states agree to that then they can do that complementary type legislation.

CHAIR: But isn't the fact that we do not have the same rail gauge an example of the fact that they do not agree, even for absurd reasons?

Mr Pape : We do now, or at least in Victoria and New South Wales.

CHAIR: And we do now based on processes such as COAG and the corporations power being used or misused, depending on your view of the world.

Mr Pape : The deputy chair asked me something a moment ago about businesses just floating between the states. Just on the taxation—and I used the word advisedly; personal income tax, not corporations tax—corporations tax is consistent with what you were saying, Chair, about a national objective and businesses' freedom of trade between states and all of that sort of thing. It is a small market. As to less regulation, I agree with that. The harmonisation of certain laws is a good thing. I do not have a problem with that. But it all comes back to what I call the accountability argument. That is what we are missing in this country. Nobody has ownership of one issue. No man or woman can serve two masters. You really have to bite the bullet and say 'Education: you are responsible for this; health: you are responsible for this.' There is no toing and froing between them. The Commonwealth has enough work on its plate.

It is one of the sad things, in my view. There is an opportunity cost involved in all of this. My defence argument or the foreign affairs argument in fact goes into Asia and China and the growth of China. We are weak—we are closing embassies and all of that sort of thing. We are concentrating on what I call politically expedient things, which are health and education, bread-and-butter stuff like subsidiarity, getting decision making down to the lowest possible level so that members of parliament can actually walk down Macquarie Street and talk to somebody about it. I am an advocate of more states. Chapter 6 provides for it. If I could have 12 or 20 states in the place it would be terrific.

CHAIR: I thought I read New England in there somewhere.

Mr Pape : Well, there you are. That is a classic example. There was a referendum there I think on 29 April 1967. If you had taken Newcastle and the Hunter out of it, you would have had two out of three in New England who voted for a new state. The Riverina has been the same too.

Senator THISTLETHWAITE: Isn't the problem with your submission, Mr Pape, that you are asking us to interpret the Constitution in the literal way when it comes to interpretation of the powers under section 51 and budget allocations but in other areas—for instance, administration of the national economy—to adopt a more expansive approach, as the High Court has?

Mr Pape : No—

Senator THISTLETHWAITE: Isn't there an inherent inconsistency in your argument there?

Mr Pape : That is a great question—thank you, Senator Thistlethwaite. It is the same question that Justice Crennan asked me when I was running my case back in 2009: 'How do we manage the national economy, Mr Pape?' You do not need anything; you have the taxation power. You have managed that quite easily. In that case they wanted a stimulus package—they gave $900. During the Menzies government, back in the early 1960s there was a credit squeeze on—1961 and 1962. What the Menzies government did was give a five per cent rebate of tax right then and there, and it stayed on for about 2½ years. That rebate flowed through the paymaster each week—right then and there. Apparently because they wanted to do it in a lump sum—the $900—that was good enough to get the Commonwealth home under the executive power. But with the taxation provision and the banking regulation there is enough power there under section 51—that head of power in those paragraphs—to manage the economy to do whatever they like.

Senator THISTLETHWAITE: But, if we accept that submission, isn't it also the case that then businesses have to accept six different forms of regulation of occupational health and safety and workers compensation and different registration for businesses in different states under the corporations—

Mr Pape : Most businesses these days trade as corporations. Bearing in mind that, to make the corporations power work, the states referred some of the matters dealing with incorporation of corporations, which was a problem to the Commonwealth. It hangs by a thread. They could revoke that easily. It is not set in concrete. If a state, as it were, said, 'We've had the Commonwealth—we will abandon our referral to it,' they could do that quite easily. It is not set in concrete. The point about it is that, in order to make the whole system work, which is what you are coming to, and so that you have one uniform corporations legislation and administration, the states conceded that. They say that it is in their interests for everybody to attract business because they want business. So there are things. If the states say, 'We think this is a great way to go,' it is their call, not the Commonwealth's call.

Senator THISTLETHWAITE: Yes, but then doesn't it only take one state to pull out for the system to fall over?

Mr Pape : Well, it hasn't, has it. It hangs by a thread. I think they have only—

CHAIR: There are instances where it has.

Mr Pape : Yes—

CHAIR: Classification is the latest one that I can think of.

Mr Pape : Yes, there is a whole stack of things that you can—

CHAIR: The horses and Tasmania running booking agencies and—

Mr Pape : You cannot get everything perfect. But the point about it is that, in the main, my argument on all of this intergovernmental agreement funding stuff is really about accountability. You do not have it. The parliament has no idea. Somebody came to me recently about a question in the Senate. I think it was about whether they had power to amend the Social Security Act or have certain amendments. They wanted the amendment of about three words to the Social Security Act. The issue was whether this was a money bill. I said, 'No, it is not a money bill.' Of course, the House of Representatives says it was a money bill. When I went and looked up Odgers' Australian Senate Practice there is a lovely little quote in there that I think about 80 per cent of the appropriations in this country go through as a standing appropriation. The parliament never sees it. For example, when I challenged the tax bonus legislation, which was $7.6 billion, it went through section 16 of the Taxation Administration Act as a standing appropriation. The parliament never saw it. I cannot think of anything more bizarre. If I was a director of a corporation and money was flowing out and I never saw it, I would be staggered. The Auditor-General probably should have jumped up and down about it too. But there it is in the Hansard. Somebody has jumped up and down about it but nobody does anything about it. The day will come. I do not have standing to run any more cases, or any more money to. But it is inviting me, particularly the section 96 grants power. I say that is an abdication—where you turn around and start to be prescriptive. I will give you an example. The history of the grants power goes back to 1926 with the roads funding case. The High Court in that case—and Sir Robert Menzies appeared in that with Justice Fullagar—dismissed the application by Victoria in six lines. It was not a reasoned judgement; it was just an answer. You then go along to 1939 and the Moran case, which was about wheat stabilisation and giving money back to various people. Chief Justice Dixon in the Second Uniform Tax Case in about 1957 said he had misgivings about the reasoning in that case. And then we had the DOGS case and a few things.

So in my view there is a case there to be run to in fact fix up section 96, which hits right at the so-called intergovernmental arrangements that we have at the present time. All it has to be—and this is where it becomes difficult—and all the executive has to do is form an agreement and the terms and conditions are there. So long as that agreement exists, you are authorised to debit the COAG reform account. The parliament has no idea. They have never seen the intergovernmental agreement. It could be for anything on any topic outside the Constitution, because the grants power allows you to do it. You may as well pick the document up—and this comes back to a rule of law argument—and put it in the wastepaper basket. That amounts to how the parliament is in fact treating the Constitution. They are not deliberately doing it, but that is the effect of it, because it is too hard. Maybe there is a requirement for a realignment of functions.

I come back to your comments, Sir, about the section 94 surplus. That came in 1901, when the Constitution came in. In 1901 there was no income tax. It did not come till 1915. The only income tax was I think in South Australia—that was in 1884 or 1885—and maybe some in New South Wales. Most of the revenue was excise revenue. I wrote a piece years ago and got it published in the Adelaide Advertiser. It was the only paper that took it. It was about the time of the Rudd government—they had a surplus and it was about what they were going to do with the surplus. They were going to freeze it. I thought that was section 94 territory—the very matter that you have identified, Chair. When you read section 94, you can understand why it was framed the way it was. The Commonwealth says that the parliament may provide on such basis as it deems fair for the monthly payment to the several states of all surplus revenue of the Commonwealth—not at the end of the year or next year but on a monthly basis to in fact fund the normal operations of the various states. That money came from excise and customs.

CHAIR: So, listening to you, you would say that today's meeting in Canberra of premiers and prime ministers is not only inefficient and immoral—

Mr Pape : I do not know about immoral.

CHAIR: Well—

Mr Pape : Unhelpful.

CHAIR: But you would also take it to the next point and say it is unconstitutional?

Mr Pape : Probably.

CHAIR: Probably or yes?

Mr Pape : I am not sure what they are doing. It really comes down to the way in which the grant agreements are funded. In my view section 96 agreements should probably say, 'We are going to give $10 billion to New South Wales and the first drawdown will be on such and such a date' and that is all you need to say. That is what the terms and conditions are—not that you will spend it on such and such a topic and that topic will be administered in that way and bear in mind that, if you have any difficulties, we will send somebody from our department of education in Canberra down to inspect it. The question you may well ask is: what is the authority for the various departments in Canberra to administer these funds?

CHAIR: As a believer in new states, you are an example of the power of one person in the Australian democracy. You have 500-odd councils around Australia frightened about their existence and their place as a recipient of the surplus. The question is: are you challenging that to try to drive reform?

Mr Pape : To drive reform—

CHAIR: So you are arguing a case to protect the role of the states or drive an outcome that sees at some point constitutional reform of three tiers, turning into two tiers?

Mr Pape : No, the only argument I am running is that we have a Constitution—

CHAIR: The black letter—

Mr Pape : and you run it according to that. There is a provision there on the way you amend it. You use that; you do not use some anti-avoidance arrangement to try to get around it in some other way.

CHAIR: And if there is a problem we have to change that?

Mr Pape : Precisely.

CHAIR: Right.

Mr Pape : And Sir Owen Dixon would say that. To use section 128 requires courage. Every time you have attempted to amend section 128 to centralise power, it has fallen over. If you went the other way, you may well get a different result. But, to come back to your point on local government, the thing that is really disturbing is that, in the case that I took to the High Court, the Commonwealth's primary argument relied upon section 81, which was that that was a spending power. That authorised the giving of the $900 bonus. The judges of the High Court ruled that out seven to nil. The Commonwealth was supported by the states of New South Wales, South Australia and Western Australia. They all lost on what I might call the spending power of section 81—the Garran doctrine where, if you have a situation there, you can spend it. They got up on the emergency power four to three.

The interesting thing about the payments to local government is that they have not ceased. Local government today is still getting receipt. The Senate select committee did a report which was handed down on 30 June. It is on page 145—I cannot remember the gentleman who gave evidence from the Department of the Prime Minister and Cabinet, but he was asked by the chair of the committee, 'What is the basis of you still giving money to councils? What is the legal opinion?' They would not do it. No doubt, like the Commissioner of Taxation sometimes says, this is a special case therefore we are going to keep doing what we are doing until you take us to court. What is so irksome here is that the Commonwealth is still giving money to local government. They may well be able to justify it if they give it to the states, which is a straight 96 grant, and say, 'Give it to the councils to do this.' I do not have a problem with that. But, as I understand it, with this giving of money directly to councils they are in fact still bypassing the state government. It is on page 145 of that Senate select committee report. In the Financial Management and Accountability Act—I sometimes read it when I go to bed—section 14 says that, if a public officer or minister misapplies public money, that offence carries a term of imprisonment of seven years. What you mean by 'misapplies public money', particularly when the High Court said that, if you are using section 81, you cannot use it? The Commonwealth was in court last week with the chaplaincy case. There again, what is the authority to spend that money?

Whatever you say, as I said in my opening remarks, a federation is a limited government. Unfortunately, in federations you have a demarcation. You have demarcation disputes in industrial relations and you have a demarcation dispute here. The Commonwealth, because it has more money than it needs, says, 'We want to do other things.' That is the big problem. Unfortunately, in my view we are as a nation suffering because of that. There are things that the Commonwealth should be doing that it is not doing. There is an opportunity cost there.

CHAIR: There are no more questions. Because we started ahead of time, we are also going to finish ahead of time. Thank you, Mr Pape, for certainly challenging us on a number of structural considerations before us. Thank you for making the time to come and speak to the committee today. If you have any additional information for the committee, feel free to pass it through to the secretariat. I look forward to your reflections on our report when we release it.

Mr Pape : Thank you very much.

CHAIR: On behalf of the committee I would like to thank all witnesses who have given evidence at the public hearing today. I now declare this public hearing closed.

Committee adjourned at 14:21