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Wednesday, 3 June 1970

Mr CREAN (Melbourne Ports) - It is a pretty desperate duty to embark on a discussion of CommonwealthState financial relationships on the next day. This Bill authorises the expenditure of nearly SI 6m, $12m to be distributed between the 6 States in proportion to the financial assistance grants payable to them th:s year under the formula laid down in the States Grants Act, with an additional $1.5m to Tasmania. On top of that, further amounts totalling $2.5m will be expended to compensate the States for the estimated additional interest costs incurred by them up to 30th June 1970 as a result of the removal of the income tax rebate on Commonwealth loan interest in November 1968. In introducing this measure the Treasurer (Mr Bury) explained that the main reason for the additional $12m was the representations which were made at the recent Premiers' Conference by the States that they were facing difficult budgetary problems due to wage rate increases and other factors. There were actually 2 sets of circumstances, it seems, which have put the States in the position of requiring these grants. One was the effect of wage payments on the States and the other was the removal of the taxation rebate for interest. This means that loans raised by the Commonwealth now are raised at a higher interest rate than was previously the case.

If I may, I want to look at each of these 2 circumstances separately and I would like to draw the attention of the House to the document that was presented by the Premiers to the Premiers' Conference earlier this year. The document is entitled 'The Financial Relationships between the Commonwealth and the States'. It is a document of 30 or so pages and it is signed by all the then Premiers of the States. There has certainly been a change now in South Australia. It is signed by Mr Askin, Mr Bjelke-Petersen, Mr Brand, Sir Henry Bolte, Mr Steele Hall and Mr Bethune, the Premier of Tasmania. They began by outlining what they call the general statement of the problem. I want to mention the 3 matters they raised as leading to what they regard as their plight at the moment. They say that latterly the tendency has been for grants provisons in categories 4 and 5 - that is, special purpose provisions - to be expended significantly more than the provisions in categories 1 and 2. They had already been listed. The types of grants that are now made by the Commonwealth to the States in categories 1 and 2 were general purpose grants and advances. Then the Premiers observed:

This has meant that more and more the Commonwealth has been able by indirect means to take out of the hands of the States the determination of priorities of expenditures over a widening area of functioning in which the States have clear constitutional responsibility.

In other words, the tendency has been for the Commonwealth to make grants not for the overall purposes of the States but to select matters that it thinks the States should be prodded into doing. Of course, often it is tied with what is called a matching grant. I had a letter today from the Colleges of Advanced Education in Victoria which indicated the difficulty that they face in that State because for every $1 that the Commonwealth provides the State has to find $1.85. They find great difficulty in paying this amount out of a short budget. They are suggesting that instead of the matching being on the bas;s of $1 from the Commonwealth and $1.85 from the

State it ought to be at least on a $1 for $1 basis. But what is being suggested in this document is that the Commonwealth in essence is determining the priorities and the pattern of development of the States in those fields that are still the constitutional responsibility of the States.

The second matter that they go on to note is this:

The Commonweatlh serves the very same people as do the States. in other words, they are saying that as well as being Victorians we are also Australians; as well as being Queenslanders we are also Australians. The document continues:

The same people are served whether the public funds derived from them by the Commonwealth are spent upon, say, postal services and' civil aviation or upon education and hospitals, and whether they are spent by the Commonwealth Department of National Development or a Slate Department of Public Works.

Then they observe:

In point of fact those same people-

That is, the citizens of the States as States: . . would undoubtedly be belter served if the total funds they provide to all Governments combined were 'redistributed between the States and the Commonwealth in such fashion that they could be disbursed in priorities and in proportions as actual circumstances and requirements may justify.

In other words, they are suggesting that the Commonwealth has the luxury of choice. It collects the revenue first. It decides it will spend a certain sum on, let us say, post offices and civil aviation. I have pointed out in the House before that if the capital expenditure on civil aviation is taken with the expenditure on post offices, which are Commonwealth functions, as against the capital expenditure on education and hospitals, which are mainly State functions, it will be found that there is a higher capital expenditure on civil aviation and post offices than there is on schools and hospitals. I have suggested before that if the people as a whole had a free choice as to whether they wanted more schools rather than more post offices or whether they wanted Tullamarine Airport rather than hospitals, I do not think there would be much doubt as to what the choice would be. But the choice is made in the first instance by the Commonwealth because it collects the money first, has the luxury of its own choice, and then what is left over goes to the States. This is a point made by the Premiers in this document. The third point that they note is this:

There is a clear inference to be drawn from these comparisons that, as Commonwealth grants have failed to keep pace with the ' costs to the States of performing their functions at an acceptable level, the Stales have found it necessary lo increase rates of taxation and extend the fields of taxation to make good the deficiency. The strong evidence is that the States have not shirked their responsibility in this regard, though an untoward extension of State taxation can have undesirable community effects, apart from the increased severity of the levies.

They point out in fact that they have no recourse for raising revenue except to indirect taxation. If one has a look at the total collections of the States as against the Commonwealth, whilst the States do not collect anything like the aggregate collections of the Commonwealth, nevertheless if a comparison was taken over a 10-year period - and the figures are available - it will be found that the States have increased their levy of taxation at a higher rate than the Commonwealth. Of course, they have had to recourse to this regressive indirect taxation. These are points that are made by the State Premiers to indicate the unsatisfactory sort of relationship between the Commonwealth and the States. I would not deny that there is a certain amount of special pleading in this document. I do noi accept everything that is in it. Nevertheless, the complaints are real enough that the Commonwealth in essence, by reason of the power of the purse or the financial domination, is able to set the pattern of development even in those fields that arc still the constitutional responsibility of the States.

If we exclude such fields as defence and social services and look at what might be called the working field, the tendency has been for expenditure to rise more rapidly in the States than in the Commonwealth. Because overall grants to the States have been inadequate in order to fill the gap, the States have had recourse to regressive indirect taxation. I know it is difficult in a federal system to arrive at anything like an equitable pattern of distribution of financial resources in relation to constitutional responsibility. The March 1969 issue of the journal 'Public Administration' is devoted to a consideration of national planning and intergovernmental relations. Ohe of the papers was presented by Professor Russell

Mathews. He entitled his paper 'National Planning and Intergovernmental Relations: Commonwealth Grants to the States'. He observes:

The ultimate reason for inter-governmental grants in a federation is a lack of balance between the financial powers and responsibilities of the different levels of government. In Australia this is exemplified by a situation in which the States have the chief responsibility for nearly all the major functions of government other than defence, external relations, cash social service benefits and economic policy, while the Commonwealth controls the major sources of taxation and loan revenue. There are several courses of action that may be followed with a view to achieving better balance between financial powers and responsibilities, including: transfer of functions from the States to the Commonwealth; transfer of taxing powers or other revenue sources from the Commonwealth to the States; action to provide for the sharing of administrative responsibility or the co-ordination of economic decisions by both levels of government: action by the States to make more effective use of their existing financial powers; and increased use of Commonwealth grants within the framework of the existing division of responsibility.

If one looks at the history of things to a great extent, one will find that all of those various devices have been adopted from time to time. I think that is also pretty clear from the situation that has developed in Australia. Professor Mathews has illustrated the various things that have happened. Use can be made of tax power directly and indirectly to do things that perhaps could not be done in a strict constitutional sense, and so on. He goes on:

It will be clear from the foregoing that the amounts and allocations of Commonwealth payments to the States have been determined by a hotch potch of political bargains. . . .

There was even a suggestion during the last State election in Victoria that certain things promised by the Premier had been guaranteed in advance by the Prime Minister of Australia. I do not know whether that is true, but at least the claim was made by the Premier of Victoria that the Prime Minister of Australia had guaranteed him that if he were returned the Prime Minister would give him certain things. In other words it was a political bargain. Professor Mathews goes on: arbitrary and inflexible formula and ad hoc arrangements which for the most part appear to be unrelated to national policy objectives.

He goes on to state:

From the point of view of national planning, however, the grants machinery of the federal system should be designed to achieve an efficient allocation of resources within the framework of national economic objectives and both Commonwealth and State governments should be concerned with establishing criteria for this purpose.

Mr Grassby - Who said that?

Mr CREAN - Professor Russell Mathews. I suggest that this is. just what has not happened in recent times. Australia is not evolving satisfactorily as a federal system. I suppose nobody gives greater lip service to the virtues of federalism than does the Government, and I suppose that nobody in practice does less to make it a satisfactory working system. As has already been pointed out, whether a person is in Victoria or in Queensland he is still an Australian. Surely the business of governments should be to secure the maximum overall development that is possible in terms of the available resources. I submit with all respect that that is not what is happening under the present arrangements.

I know that a lot of suggestions have been made but I do not have time to answer them. At this time of night I do not want to go into them. We will have an opportunity when the formula comes up for review later on. There have been suggestions about splitting the income tax. I must say categorically that for one I believe in the uniform income tax system. I think it is the most systematic way of doing things. It means that anybody anywhere in Australia on the same income pays the same amount of tax. There is need to lodge only one taxation return. Nevertheless a great deal has to be done about getting a better formula for distributing the available resources among the various levels of government. I would hope that in the years ahead what is called the 'poor relation' of the system, the local governing unit, will not be omitted when something is done to redress the balance.

I saw a statement the other day that 1 person in 5 in Australia lives in Sydney. Near enough to another 1 person in 5 lives in Melbourne. If we take all the capital cities of Australia they certainly aggregate more than half the population of Australia. It is extremely doubtful, when we take into account such complaints as are being made now about things like pollution and the sprawl of cities, whether they can be encompassed within the rather archaic arrangements that are called 'municipal governments'. I was having a look at some figures today for something else. In Australia there are something like 899 separate municipal bodies. Some of them must be pretty small. Some of them must be pretty puny. Some of them must be pretty inadequate when it comes to trying to solve the problems that beset us at the moment.

In this document that the Premiers prepared they dealt in particular with the 2 matters that are the subject of these additional grants. The $12m is mainly to compensate the States for the effects of wage increases, and the other sum is to allow for alteration in interest policy, which I want to say something about afterwards. In part 4 of this document entitled Differential Effects of Wage Increases on Commonwealth and State Finances' it is pointed out that nowadays something like 1 person in 5 who is employed is employed in a government agency of one kind or another. Some people deplore this. Candidly, I think it will become more than I in 5 rather than less than 1 in 5. Nevertheless wages are a significant item in the budgets of both the Commonwealth and the States. On the other hand, when wage increases are made overall in our mixed economy something like 4 out of 5 of the increases are paid by private employers who are able to pass it on in prices or who have some other way of doing it. lt also increases the return of income tax, and increases it more than proportionately. This is what the Premiers say - and 1 am accepting the figures as fair enough:

In summary, as a consequence of the $1.35 a week wage increase, the Commonwealth in 1968-69 gained $16m-

That is the difference between what the Commonwealth had to pay in the wages of its own employees and what it collected in tax from all the employees in the Commonwealth - and the States lost $14m, whilst for a full yea the Commonwealth would gain $24m and the Stales bear an impact of $13m.

Then the Premiers go on to list a number of other difficulties that faced them. They state:

A detailed analysis of the movements over the 10 years to 1969-70 in average wages and in other measures relevant to the escalation of the general purpose financial provisions of the State reveals the following estimates of average annual rates of increase:

They are taking the 10-year period from 1959-60 to 1969-70. In that period population rose each year by an average of 1.96%. The number of wage and salary earners rose by an average of 3.31% each year. Aggregate wages and salaries rose by an average of 8.76% per annum. Average wages and salaries are distinct from aggregate wages. The aggregate wages reflect that there were 3.31 more people per hundred in the work force each year. Average wages and salaries increased 5.24% per annum. Pay-as-you-earn income tax at constant rates increased by 13.69% per annum. Pay-as-you-earn tax per wage and salary earner increased 10.01%, although the wages had gone up by only 5.24% . The yield of tax went up by nearly double - 10.01%. Pay-as-you-earn tax per 1000 of population rose by 1H% per annum. Other income lax on individuals at constant rates rose by 8.88% and income tax on companies at constant rates rose by 8.22% per annum. They simply cite these as the sort of difficult situation which faces them., a community that is growing in numbers and in costs,, and they are- dependent on a static formula for reimbursement. I mention these matters as part of the difficulties that face the States. Later on, when another measure comes before us, perhaps we can go into this matter in greater detail.

I now want to refer to interest rales. Recently, as a matter of financial' policy, the Reserve Bank of Australia raised interest rates. Ultimately the Government is responsible for what the Reserve Bank does. At least, if the Government does not like what it does then it can complain. In the event of dispute the will of the Government prevails. However, interest rates increased. This has meant, of course, an overall rise in borrowing rates. Some 12 or 18 months ago there was removed from the taxation laws a rebate that previously had been made available to those who invested in Government securities.

The rebate had been at the rate of 10c in the dollar and it had the effect of lowering the real interest rate payable. As a consequence the Commonwealth for the most part was able to float its loans at a lower interest rate than, for example, the semi-government and other bodies in the community. Of course, once the rebate was removed the Commonwealth had to pitch its interest rates somewhat higher. Since the money that the Commonwealth raises is lent in turn to the States at whatever the prevailing rate happens to be, it means that the prevailing rate to the States is now higher than previously. At least part of the Bil] before us is to compensate the States for the additional interest rate payable. This gets us into what are sometimes called circular arguments.

Mr Kevin Cairns (LILLEY, QUEENSLAND) - Not a vicious circle?

Mr CREAN - No. not a vicious circle; just a circular argument. This leads to some rather curious bookkeeping results. One of the things which seems to disturb the State governments greatly - again J think it relates to the financial dominance of the Commonwealth - is that the Commonwealth mainly is able to finance its obligations, whether they be of an annual or a capital kind, out of revenue. The tendency in recent years has been for the direct part of the total national debt applicable to the Commonwealth to decline. On the other hand the amounts that are advanced by the Commonwealth to the States, even though some part of them is advanced out of revenue, are charged nevertheless to the States at the prevailing rate of interest. The other poor relations in the system, the semigovernmental and the local government bodies, have to raise their loans on the loan market at whatever the prevailing rate happens to be.

The tendency in recent years has been that the amount of interest payable by the Commonwealth has declined and the amount payable by the States has increased considerably. In fact I think that the annual interest bill of the States, in aggregate, on a debt of something over $8,000m is in execess of $400m. I suppose the Commonwealth says: 'We take this interest liability into account when we make the reimbursements'. On the other hand, the local governing authorities and the semi-governmental bodies do not have that kind of defence available. They do not get any reimbursement.

If one looks at the finances of some semigovernmental authorities one finds that more than half their total revenue is absorbed in paying interest on the debt. I refer to bodies such as the State Electricity Commission of Victoria. In the other States similar bodies have various names. Something like 10% of the total rates of local governing bodies are absorbed in interest rates. The Prime Minister (Mr Gorton), in one of his rather categorical statements, said recently that he would partly cut this rather difficult knot by saying that in future that part of the advance made by the Commonwealth to the States out of revenue would not bear interest any more. Whether in the long run this makes very much difference is arguable. A rather curious situation is being created by the intricate pattern of the financial relationships that apply particularly between the Commonwealth and the States whereby the Commonwealth, rightly or wrongly, calls the tune.

I suppose that in theory I am a unificationist. lt will take a long while to get anything like a unitary system. Until we reach that day we have to make our existing pattern workable. I do not think anybody could suggest that the working arrangements at the moment are continuing without a great deal of friction. Whether the friction is imaginary sometimes rather than real leads to fine points of argument. Nevertheless I believe that by and large the States, in terms of the responsibilities that they still have to undertake - responsibilities such as education, health, public law, public transport and so on - really are inadequately reimbursed by the Commonwealth in relation to their responsibilities. Whether that means that the Commonwealth has to forgo some of the things that it does now or whether that means that in aggregate we may have to pay more taxes, I do not know, but I am sure that if the people in the States were asked they would agree that something has to be done.

One has to look only at the sample of Slate elections recently to see that one of the most dominant issues was education. Education in Australia will not be improved unless the Commonwealth provides considerably more than it provides at present. Professor Karmel of the Adelaide University stated that at least 1% more of the gross national product should be spent on education- in the foreseeable future. That 1% of the gross national product is more than $270m. Whether this will be achieved by the Commonwealth cutting down on something it does already or whether it will be achieved by raising taxes is for the people to determine. Nevertheless, the situation that we have reached is rather serious. I hope that when the Bill to adjust the formula which, I believe, expires in June 1970, comes before us the matter will be given more serious consideration by the House than this Bill has received.

The Government has brought this Bill on for consideration at midnight. I do not think anybody enjoys having to make the sort of speech that I am making at this time of night. I am sure that those listening to such speeches enjoy them less than do those who have to make them. But I think that there is a certain degree of irresponsibility about a parliament that will pass a Bill for the expenditure of $16m without really examining the legislation seriously. The Government is putting this Bill through at midnight, hoping that there will be only one speaker on it so that, when the Bill is dealt with, the House can pass on to some other matter. I think that the issues are too important to be escaped in that way.

I hope that the Bill introducing the formula readjustment will be given more than cursory examination. Meanwhile, I would hope that those honourable members who have not done so already will read the submission which was made recently to the Commonwealth by the State Premiers. In fact I would think that, whether the Commonwealth likes it or not, it ought to make copies of the submission available to all honourable members of this House. I would suggest that course to the Treasurer. Even if it is not a Commonwealth document, it is a document submitted to the Commonwealth by the State Treasurers. A certain amount of special arguing is to be found in it but I think that sometimes a lot of special arguing on the part of the Commonwealth. takes place on this matter. Honourable members ought to be aware of what the views of the State Premiers are. This was a submission on which the 6 Premiers united.

I seriously commend to the Treasurer the suggestion that he make arrangements to get sufficient copies of this document so that it can be circulated to all members of this House. If this is done, when the formula rearrangements are considered later at least this document will be part of the documentation that is available. If the Commonwealth believes that some of the statements in the submission are not based on sound grounds, I would hope that it would prepare a rebuttal of those statements and that that rebuttal might be circulated for the use of honourable members also. I am one who believes that the more information that we have on these complex problems the better it is. We are dealing with an amount of pretty large magnitude. When we take into account the reimbursement payments plus the capital works payments we find that the Commonwealth is providing approximately $2,000m to the States. If honourablehonourable members like, this is 8% of the gross national product. It is not small money and ! think that we should appraise it a little better than we do. The appraisal would be helped if we had available to us documents such as the one that I have mentioned. I conclude by restating that the Opposition does not oppose this measure because we think that it will give to the States a little bit more of the great deal more that they really need.

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