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The Audit Commission's brave new world

Do you really want more of the nation’s future in their hands? Michael Pascoe investigates.

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I was fortunate to be introduced to the Dismal Science by an exceptional economics teacher, John "Wag" Wagner. My increasingly vague memory is that he grabbed our attention at the start of Year 11 by claiming communism was a superior system and then demonstrating that, unfortunately, it didn't work. It looks like the Commission of Audit could have done with a Wag.

The commission's most disruptive recommendation is based on the idea that competitive federalism is superior to cooperative federalism. In theory, it should be. Unfortunately, like communism, it just doesn't work as the ideologues believe. It ends up causing a greater mess.

Most of the commission's recommendations are matters of degree and quite a few are reasonable given the longer-term scenario. It's too bad that good bits - such as fixing the aged pension indexing, introducing an income test for the carers' allowance and partially including the family home in means testing - are overshadowed by an extraordinary casual brutality.

Mixed bag: National Commission of Audit chair Tony Shepherd.

Mixed bag: National Commission of Audit chair Tony Shepherd. Photo: Alex Ellinghausen

That is exemplified by recommending that governments do whatever is necessary to prevent doctors waiving the proposed $15 co-payments: "We'll have none of that charitable doctor rubbish here, Sawbones!"

The dangerous big suggestion though is what Crikey's Bernard Keane calls the report's most radical, "a return to pre-war taxation arrangements in which the states would partially control income tax".

While carefully not owning any of the commission's controversial recommendations, Joe Hockey casually declared that the federation was broken. Lo and behold, wrapped in the prosaic language of recommendations 7 through 11 under the heading "Reforming the Federation", the commission offers the solution of competitive federalism.

The idea is that, if the states are given more responsibility and control of their own revenue and expenditure without federal interference, they will compete to offer the best services most efficiently, thereby achieving improved outcomes at a lower cost. Market forces to the rescue and, praise the Lord, smaller Federal Government.

The real world is different. There are some practical problems for a start. Peter Hartcher reports that, according the report itself, the proposed reform of federation would increase overall government spending and the tax burden by $5 billion a year. Tasmanian and Bank of America Merrill Lynch chief economist, Saul Eslake, has explained that the poorest states with the lowest incomes would have to have the highest rates of tax to deliver comparable services. Neither are desirable outcomes.

Worse is the reality of what happens when our states compete: it tends to be a race to the bottom.

If you're ideologically driven by a dislike of taxes and government, Joh Bjelke-Petersen could well be your hero. He abolished death duties in Australia by dropping them in Queensland and boasting about running the lowest-taxing state. That may have been an incentive for a temporary rise in the number of people who thought Queensland was a good place to die, but the other states soon copied the move.

And while Queensland claimed the "lowest taxing" title, it also provided the worst or near-worst services, especially in education. Queenslanders ended up getting what they paid for - a backward state with a diminished long-term future - until other premiers brought it up to the national speed.

For all their whingeing about vertical fiscal imbalances, the states already have plenty of responsibility for trashing their own tax bases. Having ditched death duties, they routinely whittle away at their pay roll taxes and refuse to use their powers to get serious about land tax – removing all exemptions – while continuing with their inferior, inequitable stamp duties.

From time to time they compete to convince a company to set up its headquarters in one capital city rather than another, generally at another cost to revenue and no benefit to the nation.

And there is the little matter of the quality of state politicians. Heavens knows it seems difficult to get talented people to destroy their lives by entering federal politics, but the provinces? There are exceptions to all rules, but state governments and oppositions tend to be sorry lots, even when well-meaning. As star witness for the prosecution, we currently have both sides of NSW politics displaying their quality before the Independent Commission Against  Corruption.

This is not just an Australian phenomenon. The United States, spiritual home of the ideologically-driven right, is the model of competitive federalism. The result is a sadly divergent society suffering growing inequality – and that's before getting into the issue of rising education costs and debts. To be born in Mississippi means, on average, that you're a loser in the American lottery. Competitive federalism tends to keep the poor poor and the rich richer.

So the Commission of Audit's big, radical recommendation is a not a good idea.

Then there are the commission's two big misses, the dogs that didn't bark.

The terms of reference were wonderfully broad, including the catch-all "other savings or matters that the Commission considers should be brought to the Government's attention". But with its rushed time table, the commission apparently wasn't brave enough to address the bleeding fiscal wounds of tax expenditures – the high costs of income forgone.

So while slashing away at welfare costs, there was just a tiny snip around the edge of superannuation, passing the buck to the taxation review to have a look at the overly-generous aspects of a system that’s become an on-shore tax haven for the wealthy.

Secondly, the commission failed by making its recommendations in a vacuum: it lacked any context beyond a narrow focus on reducing government spending. It's like a doctor concentrating on the mechanics of a heart operation without considering whether blood flow is being maintained to the brain – the new valve might be brilliant, but the patient ends up a vegetable.

Sure, junking Gonski and increasing disincentives for teritiary education through higher charges will reduce debt, but you'll end up with a dumber, poorer nation when only better knowledge industries can sustain greater common wealth.

Yes, reducing the minimum wage may encourage more low-paying employment – but we shouldn't want an economy based on being competitive at the bottom of the market. That's not the model used by the world's most successful economies and we simply can't be cheap enough to compete with world's poorest in a global market.

Once again, it's more like what the USA has become, an economy that accrues ever greater wealth to those at the very top while the rest struggle to stand still. If Australians understand that, it's not the few dollars of a Medicare co-payment that will cause them to ditch the report.

Michael Pascoe is a BusinessDay contributing editor.