Report
Referral
1.1
On 19 April 2016, the Senate referred the following matter to the
Finance and Public Administration References Committee (committee) for inquiry
and report by 4 May 2016.
- The outcomes of the 42nd meeting of the Council of
Australian Governments held on 1 April 2016, with particular reference to:
- schools funding;
- hospitals funding;
and
- taxation; and
- That the Senate directs the responsible ministers to
ensure that relevant officials of the Department of the Prime Minister and
Cabinet and the Treasury appear before the committee to answer questions.[1]
Conduct of the inquiry
1.2
Details of the inquiry were placed on the committee's website at www.aph.gov.au/senate_fpa.
1.3
The committee directly contacted a number of relevant organisations and
individuals to notify them of the inquiry and invite submissions by midday 26
April 2016. Submissions received by the committee are listed at Appendix 1.
1.4
The committee held a public hearing in Canberra on 27 April 2016. A list
of witnesses who appeared at that hearing is set out in Appendix 2.
1.5
The committee thanks those who assisted by providing submissions and
appearing at the hearing.
Prime Minister's announcement of 30 March 2016 and 'Statement on
Federation'
1.6
On 30 March 2016, at a media event at the Penrith Panther's academy, the
Prime Minister, the Hon Malcolm Turnbull MP, foreshadowed discussions to take
place at the upcoming Council of Australian Governments (COAG) meeting on 1 April 2016:
There is also a very big fundamental reform to federalism, to
the reform to our Federation that I'll be raising with the chief ministers
later this week. And we have, as you know, we've raised it with them in
advance, we thought it would be more important to let them know about our plans
for reform in advance rather than just reading about it in the press.
This is the big challenge. We are a federation in Australia,
some people say we shouldn't be but we are and we always will be in my
judgement. The Federation must work better and right at the heart of the
problems in the Federation is the fact that the states do not raise enough of
the revenue that they spend. In other words they're not accountable enough in
the way a government should be. This is often described as vertical fiscal
imbalance, which is a dreadful bit of jargon but it basically means the states
do not raise enough money and so they, as we know, every year and often several
times a year, they go cap in hand in Canberra, to Canberra and complain that
the Federal Government is not giving them enough money.[2]
1.7
The Prime Minister continued, announcing:
What we are proposing to the states is that we should work
together on this basis: that we, the Federal Government, will reduce our income
tax by an agreed percentage and allow state governments to levy an income tax
equal to that amount that we have withdrawn from.
So there would be no increase in income tax from a taxpayers'
point of view, he or she would pay the same amount of income tax. But the
states would be raising the money themselves.[3]
1.8
The Prime Minister gave the following explanation of how such a scheme
would operate:
We [the Federal Government] would obviously administer it and
collect it for them, so again there'd be no compliance costs.
But what this will do is give the states access to their – an
additional source of revenue so that they will have a tax base that includes
personal income tax, this obviously would not apply to companies but personal
income tax can be dealt with on a state by state basis.
At the same time, we would then, with agreement with the
states, withdraw from a number of the grants programs we have, so that from the
Federal Budget's point of view, the outcome would be, would net off, so that we
would not be, we would be making fewer grants to the states but we would be
receiving less income tax ourselves, the states would be receiving the income
tax to cover those responsibilities.[4]
1.9
The Prime Minister contended:
It will give the states real financial autonomy. It will mean
that instead of the marginal dollar for the states always coming from the
Federal Government and so you're always having to have this depressing blame
game where no-one really knows who's responsible for what. We will clearly
identify the areas of responsibility for the state and for the Federal
Government and the state will have access to the source of income tax, personal
income tax, to enable them to raise that money, to fund that expenditure.[5]
1.10
The Prime Minister suggested that such a change to the tax system would
be a 'once in a generation reform'.[6]
1.11
The Prime Minister also indicated that the Commonwealth, states and territories
would be seeking to reach agreement on new hospital funding arrangements which:
[W]ill be designed to ensure that we have the right level of
federal support and the right level of improvement in the effectiveness of the
delivery of health care and we're having very good discussions with the
premiers and the chief ministers and their senior officials in the lead-up to
that.[7]
1.12
The Prime Minister's announcement on 30 March 2016 was accompanied by a
'Statement on Federation', which also spoke in broad terms about the proposal
for a state income tax levy.[8]
In part, the Statement on Federation stated:
Currently, Canberra collects taxes and provides the states
and territories almost $50 billion a year in tied grants each year to fund
services and build infrastructure. This results in ongoing arguments,
negotiations and duplication in administration.
In many areas responsibility is far from clear and the only
thing in ample supply is finger pointing and blame.
We're all sick of it.
A way to solve this problem would be to give the states and
territories a proportion of personal income tax - rather than demanding money
from Canberra they would be raising money themselves and be accountable to
their own voters.
The focus of governments should be about delivering better
services – not arguing over funding.
The key principles will be that this is not about increasing
the total tax take - any income tax surrendered by the Commonwealth to the
States would be offset by a reduction in Commonwealth grants to the states.[9]
1.13
On 31 March 2016, the Prime Minister gave an interview to ABC Radio in
which he stated:
[Education] funding is committed
through to end of 2016-2017. We believe that the future of that funding of post
2017 should be bound up with these discussions about revenue sharing, that is
because for example the Federal Government provides money to state government
schools, you could make a very powerful case for example, that if there was
revenue sharing, if the states had access to a portion of income tax that they
would have the resources and the money and bear in mind income tax grows at a
faster rate than either GST or grants, they would then have the responsibility
for states schools which are the schools that they manage...[10]
Outcomes of the 42nd Council of Australian Government meeting
1.14
The Communiqué
of the 42nd Council of Australian Governments' (COAG) meeting on 1
April 2016 (Communiqué)
is attached to this report as Appendix 3.
Taxation
1.15
The proposal for a state income tax levy, as announced by the Prime
Minister on 30 March 2016, was rejected by COAG. The Communiqué contained the following
comments in relation to taxation:
There was not a consensus among states and territories
(states) to support further consideration of the proposal to levy income tax on
their own behalf.
Leaders agreed to consider proposals to share personal income
tax revenue with the states to:
-
provide them access to a broad revenue base that grows in line
with the economy;
-
reduce the number of tied Commonwealth grants to the states,
providing them with greater autonomy and reducing administrative burden; and
-
create flexibility for states to meet their ongoing expenditure
needs.[11]
1.16
The Communiqué
continued:
COAG further agreed to continue pursuing initiatives that
will enhance transparency by providing Australian citizens with a greater level
of real time data on how government money is spent and on the outcomes and
performance of government initiatives.
COAG agreed that this work, along with the work on broader
opportunities for tax reform, including state tax reform, will be progressed by
the Council on Federal Financial Relations, with a progress report to COAG at
its next meeting.[12]
Hospitals funding
1.17
The Communiqué notes
'COAG reaffirmed that providing universal health care for all
Australians is a shared priority'.[13]
1.18
The Communiqué
continues, outlining an agreement on future funding arrangements:
Leaders agreed a Heads of Agreement for public hospitals
funding from 1 July 2017 to 30 June 2020 ahead of consideration of
longer-term arrangements. This will see the Commonwealth providing an estimated
additional $2.9 billion in funding for public hospital services, with growth in
Commonwealth funding capped at 6.5 per cent a year.
This Agreement preserves important parts of the existing
system, including activity based funding and the national efficient price, and
focuses on improving patient safety and the quality of services, and reducing
unnecessary hospitalisations.[14]
1.19
The Communiqué
points out:
As part of this Agreement, all jurisdictions agreed to take
action to improve the quality of care in hospitals and reduce the number of
avoidable admissions, by:
-
reducing demand for hospital services through better coordinated
care for people with complex and chronic disease – the current system does not
always provide the care the chronically ill need – this means they are
hospitalised more than is necessary;
-
improving hospital pricing mechanisms to reflect the safety and
quality of hospital services by reducing funding for unnecessary or unsafe care
– reducing hospital-acquired complications will improve patient safety; and
-
reducing the number of avoidable hospital readmissions – too many
patients are readmitted to hospitals as a result of complications arising from
the management of their original condition.[15]
1.20
The section of the Communiqué
dealing with hospital funding and health reform concludes:
The Commonwealth will continue its focus on reforms in
primary care that are designed to improve patient outcomes and reduce avoidable
hospital admissions.[16]
School funding
1.21
In relation to schools, the Communiqué
states:
COAG recognised the positive contribution high quality
schooling makes to both individuals and the economy. It noted that the
Commonwealth's contribution to school education is funded through to the end of
2017, and agreed that discussions on new funding arrangements should be
concluded by early 2017.[17]
State income tax levy proposal
1.22
The committee was interested in the timeline, consultation and processes
underlying the development of the 'state income tax levy proposal', which was
announced by the Prime Minister on 30 March 2016.
History of the idea
1.23
Mr Luke Yeaman, First Assistant Secretary, Economic Division, Department
of the Prime Minister and Cabinet (PM&C), noted that 'there has been a long
history' around the issue of state income tax.[18]
Mr Yeaman referred to the issue being raised by the National Commission of
Audit in 2014 and by various state premiers. Mr Yeaman noted that NSW Premier
Mike Baird had specifically raised a state income tax levy in March 2015.[19]
1.24
Mr Paul Drum, Head of Policy, CPA Australia, noted that although the
idea had a long history it had not been previously viewed as a serious policy
proposal:
I have been a member of CPA Australia for over 37 years. I
have been involed in every tax review – not the draft white paper in 1985, but
every review since then. There is often discussion about the states sharing,
but to me it is an academic discussion that is included for completeness to
show that we are thinking of all the options rather than something that is
being put forward as a silver bullet idea, as a great moment in tax reform. This
is not something that had been put out there as something that anyone was
seriously contemplating as a silver bullet moment or a eureka moment for tax
reform, in my opinion.[20]
1.25
Officers from PM&C stated that they had been looking at the 'broad
issues' involved with sharing income tax with the states as part of the
federation and taxation white paper processes.[21]
However, officers from PM&C confirmed that a state income tax levy proposal
was not considered at the COAG meeting in December 2015.[22]
Mr Michael Brennan, Deputy Secretary, Fiscal Group, Department of the Treasury
(Treasury), also confirmed that the state income tax levy proposal was not
discussed at the CFFR meeting on 14 December 2015.[23]
1.26
Officers confirmed that they first began work on the specific policy
proposal in January of 2016, as part of the process of preparing for the April
2016 COAG meeting.[24]
Preparation for the April COAG
meeting
1.27
Work on the state income tax levy proposal discussed at the April COAG
meeting was 'led by PM&C in consultation with other central agencies'.[25]
Briefings to the Prime Minister and
Treasurer
1.28
Work commenced on the state income tax levy proposal in January 2016. There
were three rounds of briefings provided by PM&C and Treasury to the Prime
Minister and Treasurer before COAG. During this period there were 'a variety of
tax options' worked on and that the state income tax levy proposal was not the
only option.[26]
Officers from PM&C and Treasury did not know whether the same sets of
options were set out in the briefings to the Prime Minister and the Treasurer.[27]
1.29
PM&C provided the Prime Minister with a general briefing on 'a range
of options in the revenue-sharing space' on 22 January 2016. That briefing
included discussion of the state income tax levy proposal.[28]
Treasury was not consulted on the specifics of this briefing, only the issues
and implications raised.[29]
1.30
Mr Roger Brake, Acting Deputy Secretary, Revenue Group, Treasury,
indicated that the Treasurer was separately briefed generally on the state
income tax level proposal 'around about the same time' as the Prime Minister.[30]
1.31
Mr Brennan, Treasury, confirmed that the briefing to the Treasurer was
general in nature:
I think it is fair to say, without going to the content of
the advice, that I do not think it was an outcome of that advice that the field
got particularly narrowed to a smaller range of options. [PM&C and
Treasury] did not share the letter of our respective briefs [of January 2016].
I know in our case, without going to the content of the advice that we provided,
the brief that we provided [to the Treasurer] would have gone to fairly general
propositions rather than specific, concrete models...I think the raising of the
issue of a state income tax levy would have been done in fairly broad terms.[31]
1.32
The second round of briefings occurred in February. Mr Yeaman provided
the following information on further briefings to the Prime Minister on the
state income tax levy proposal:
There was a further briefing provided on 26 February to the
Prime Minister and a briefing was provided in a minimal way ahead of the COAG
meeting itself as part of the COAG briefing papers [a week or so before the
meeting].[32]
1.33
Mr Brennan stated that his recollection was that the Treasurer would
have been briefed again 'in early February' and that briefing would again only
'have gone to the broad range of options' around taxation.[33]
1.34
A final briefing was provided before the Prime Minister's announcement
on 30 March 2016.[34]
Analysis and modelling
1.35
Officers confirmed that no modelling of the state income tax levy
proposal was undertaken.
1.36
In terms of the extent of the work underpinning the briefings provided
to the Prime Minister and Treasurer, Mr Yeaman stated:
We provided analysis and data information around the
proposal. Modelling is one of those terms that is difficult to define. There
was not a large-scale modelling exercise attached to it, but we provided a
series of analysis and data.[35]
1.37
Mr Yeaman advised that PM&C carried out the analysis and Treasury
provided the dataset and general advice.[36]
1.38
The committee pressed officers from Treasury on whether modelling had
been done on the state income tax level proposal and how that would look at
different rates. Mr Brennan stated:
I would not describe it as modelling, no.
...
We have done quantitative analysis, yes.[37]
1.39
Mr Jonathan Rollings, Division Head, Commonwealth-State Relations
Division, Treasury, informed the committee that the quantitative analysis was
limited:
Because the proposal was at its early stage and broad
concept, the extent of the quantitative we were doing was around the dimensions
and impact of the Commonwealth reducing its tax rates to make room for a state
levy and broad observations on the quantum of state payments that are currently
made.[38]
1.40
There was no analysis about how the state income tax levy proposal would
interact with the principle of horizontal fiscal equalisation (HFE).
Mr Rollings stated:
Broad commentary on the fact that HFE impacts would have to
be a consideration that would be part of further work if this were to be
progressed.[39]
The Commonwealth's negotiating
position
1.41
The Commonwealth's negotiating position for the April 2016 COAG meeting,
including the proposition of a state income tax levy, went to Cabinet on 22
March 2016.[40]
1.42
Both the announcement and the Statement on Federation on 30 April 2016
indicated that, from the point of view of the taxpayer, the overall level of
income tax would not increase, because the 'income tax surrendered by the
Commonwealth to the States would be offset by a reduction in Commonwealth
grants to the states'.[41]
1.43
However, on 30 March 2016, the Prime Minister was subsequently
questioned about the possibility that states and territories may raise taxes to
increase their revenue. The Prime Minister responded:
[T]he way I believe this would work, just to expand a little
bit on your question, the way it would work is that we would envisage it
working, is we would withdraw from a certain amount of income tax that would be
available to the states and we would agree that that would be the maximum they
would levy for a period. But in future, of course, on the longer term, a state
should be free to lower that amount or indeed raise it and then they are
accountable to their own voters.[42]
1.44
The committee asked officers from PM&C if, at the time of the Prime
Minister's announcement on 30 March 2016, the Commonwealth was contemplating a
proposition for discussion at COAG that any arrangements would permit a state
to lift taxes beyond an agreed amount. Mr Yeaman answered:
As I understand the comments, the proposal was that in the
short term there would be no additional increase in taxation. So the
Commonwealth would vacant a certain share, a space, and the states would be
allowed to fill that. That would be a period of transition and then at some
point in the future it was possible, subject to further discussions and
negotiations with the states, that they may have the capacity to then vary
income tax rates as they can with land tax, payroll tax, stamp duty et cetera.[43]
1.45
The committee pressed officers from PM&C as to whether there was an
agreed position, as a result of a cabinet decision or other Prime Ministerial
decision which contemplated different rates of income tax across the Federation
and the possibility that a state or territory could raise taxes beyond the
agreed amount. Mr Yeaman set out his understanding of the government's
position:
As I understand the government decision, it was an agreement
to approach the states with a proposal to offer them the capacity to levy their
own income tax under the parameters discussed. The details of that was a matter
for discussion and subject to the states' interest. So I think those broader
parameters were things that still needed to be settled, but the broad concept
and the idea was what was going to be raised with the premiers at COAG.[44]
1.46
In terms of the length of transition period being contemplated before
states could raise their tax rate beyond the amount the Commonwealth had
reduced its rate, Mr Yeaman indicated that these were matters to be settled in
discussion with the states.[45]
1.47
Mr Yeaman stated that the contemplation of a ceiling rate to which
states could raise their income tax rates was also a matter to be settled in
discussion.[46]
1.48
When asked when officers from Treasury became aware that the
Commonwealth's position included a proposal that, after a transition period,
the states would be able to raise income tax levels beyond the level reduced by
the Commonwealth, Mr Brennan responded:
As unsatisfactory as this may be, the way I would
characterise it is that we were aware of the proposition that was being put, as
per the press release of 30 March. We were also aware that the Prime Minister
and the Treasurer's view was likely to be that they wanted to initiate a
discussion and there was a degree of openness about where that discussion might
ago.[47]
1.49
The committee noted statements by the Treasurer on 30 March 2016,
following the Prime Minister's announcement to the effect that the Commonwealth
had 'no appetite' for states to be able to increase taxes. Mr Brennan indicated
that the officers from Treasury had nothing to add to the Treasurer's statement
in terms of explaining its apparent inconsistency with the Prime Minister's
statement.[48]
Consultation with states and territories
1.50
In terms of the consultation with states and territories on the state
income tax levy proposal, Ms Alison Larkins, Acting Deputy Secretary, Social
Policy, PM&C stated that PM&C led these consultations.[49]
Mr Yeaman indicated that subsequent to the Cabinet meeting on 22 March 2016,
PM&C were not tasked with consulting with the states and territories.[50]
However, Mr Yeaman stated that the Secretary of PM&C, Dr Martin Parkinson
PSM, 'may have had some informal discussions with his counterparts in the
lead-up to the COAG meeting' on 1 April 2016.[51]
Mr Yeaman's understanding is that those discussions took place over the weekend
prior to the COAG meeting and were only 'broad discussions covering the whole
agenda'.[52]
1.51
Mr Brennan indicated that there was no formal consultation between
Treasury officials and their state counterparts:
Senator
WONG: ... Did Treasury officials
consult with any state or territory officials ahead of the COAG in relation to
the proposition of a state income tax levy?
Mr
Brennan: We did not have a formal
structured consultation process, no.
Senator
WONG: And heads of treasury did not
meet?
Mr
Brennan: No, as I said the most
recent heads of treasury meeting was in March.
1.52
Mr Brennan indicated that he 'would have had some informal conversations
with some of [his] counterparts in the days leading up to COAG' about the state
income tax levy proposal.[53]
Mr Brennan clarified that these included 'private conversations', and that
the income tax levy proposal would have 'popped up' as part of a 'broader
conversation'.[54]
1.53
Mr Brennan confirmed that 'we did not provide any documentation to our
[state and territory] counterparts'.[55]
Preparation of agenda papers
1.54
Ms Larkins outlined the preparation of the agenda papers for the April
COAG meeting:
We were working on papers straight after the December COAG.
We worked through January on various papers that were being prepared.[56]
1.55
Ms Larkins agreed that this work is done in partnership with the states.
For example, in relation to the health and hospitals issue under consideration:
Primarily PM&C do that engagement with the premiers' departments.
At various points we might bring in the Department of Health and the premiers
might bring in their health departments.[57]
1.56
The product of this work is, ultimately, the agenda papers and
supporting papers to the agenda.[58]
1.57
Ms Larkins informed the committee that no agenda paper was prepared for
COAG which included the state income tax levy proposal.[59]
Mr Yeaman confirmed that the formal papers for COAG did not incorporate the
state income tax proposal:
There were papers prepared in the context of the discussion
around state tax reform more generally for the COAG meeting and around other
economic matters, but it did not encompass the state tax-sharing proposal.[60]
1.58
Mr Yeaman attempted to clarify the Prime Minister's intentions as to the
course of action in relation to the state income tax levy proposal:
I think that, drawing on the Prime Minister's comments, he
indicated that he wanted to have a discussion with the state premiers on this
issue, on the concept of this idea, and that, if they were agreeable, a series
of further work would occur after that point on the details of the proposal.[61]
Preparation of the Statement of
Federation and the announcement on 30 March 2016
1.59
Both Ms Larkins and Mr Brennan indicated that they became aware of the
'Statement on Federation' '[w]hen it was released'.[62]
Their respective departments were only aware that the state income tax levy
proposal was going to be a 'topic of conversation' at the 1 April 2016 COAG
meeting.[63]
Ms Larkins stated that PM&C were not aware that the Prime Minister was
going to make a public announcement about the state income tax levy proposal
prior to the announcement being made.[64]
1.60
In relation to the 'Statement of Federation' released on 30 March 2016,
Mr Yeaman advised that PM&C had not been involved in the preparation
of the 'Statement on Federation'.[65]
When questioned as to who prepared the 'Statement on Federation', Mr Yeaman
stated:
I presume it was in the Prime Minister's office.[66]
No support for state income tax
levy proposal
1.61
The state income tax proposal was not agreed to by the Premiers and
Chief Ministers.[67]
1.62
Mr Paul Drum, Head of Policy, CPA Australia, noted his concerns about
the approach to tax reform:
CPA Australia and I think the community at large would say
there has been a bit of a squib on tax reform, and it is at every level. We
really need to wait to see the outcome in the federal budget next week, but we
were promised a white paper and we were promised packages, and now it seems as
though, in a decreasing spiral, we have gone from a root and branch review to
items being slowly taken off the table one by one and the states walking away,
in absolute terms, from looking at embracing greater taxes on consumption.[68]
1.63
Mr Drum suggested that the Prime Minister's announcement of state-levied
income taxes was a 'curve ball':
That skewed the whole debate before the meeting happened two
days later. Again, from the outside, it did not do much to imbue community
confidence in where our governments—our leaders—are taking that particular
discussion.[69]
1.64
Mr Drum noted the lack of consultation which had occurred on the
state-levied income tax proposal:
We were not engaged in any discussion on the reintroduction
of income taxes at the state level, so that is not something that we have been
privy to any discussion on. That is why I think, to us, this was like curve
ball—something out of the blue—because it was not something that had been part
of the narrative. It had not been something that had been promulgated around to
capture people's ideas.[70]
1.65
Mr Drum also addressed the concern that the Prime Minister had raised
over tax imbalances:
A lot of people lose sleep over horizontal and vertical
imbalance, but we lose less sleep over that. As long as the revenue comes in
and pays for the services that Australians expect and need, then that is a
pretty fair outcome.[71]
Health funding
2014 Budget
1.66
In 2014 the then Abbott Government announced significant changes to the
funding of health and education.
1.67
The 2014 Budget made the following funding cuts:
In this Budget the Government is adopting sensible indexation
arrangements for schools from 2018, and hospitals from 2017-18, and removing
funding guarantees for public hospitals. These measures will achieve cumulative
savings of over $80 billion by 2024-2025. [$50 billion from public health]
The Government will also reduce or terminate some
Commonwealth payments that are ineffective or duplicate state responsibilities.
These include National Partnership Agreements on Preventative
Health, Improving Public Hospital Services and Certain Concessions for
Pensioners and Seniors Card Holders.
The States will be expected to continue contributing to these
arrangements at their expense.[72]
Health cuts
1.68
Budget Paper No. 2 (2014-15) outlined that initial hospital savings
during the next four years would be achieved by removing previous funding
guarantees as of July 2014 and changing hospital indexation from 1 July 2017.[73]
1.69
The government's plan in the 2014 Budget was met with apprehension by organisations
such as the Australian Medical Association (AMA). Professor Brian Owler,
President of the AMA, told the committee:
So the AMA has been very concerned about the funding formula
that was put forward in the 2014 budget—basically, CPI and population as the
formula for funding public hospitals.[74]
1.70
Professor Owler expanded on why the AMA was concerned about the 2014
Budget:
What I can state unequivocally is that the arrangements that
were put forward for funding from 2017 in the original proposal were going to
be grossly inadequate.[75]
Decisions made at 1 April 2016 COAG
1.71
On 30 March 2016, the Prime Minister referred to the upcoming COAG
meeting and the consideration which would be given to hospital funding:
[W]e will be seeking to reach agreement on new funding
arrangements for hospitals which will be designed to ensure that we have the
right level of federal support and the right level of improvement in the
effectiveness of the delivery of health care and we're having very good
discussions with the premiers and the chief ministers and their senior officials
in the lead-up to that.[76]
1.72
Chief Minister Andrew Barr informed the committee that the ACT
Government sought to remedy the 2014-15 Federal Budget, where indexation was
reduced and funding guarantee payments were abolished, at COAG. The proposals
meant the Commonwealth's contribution to the ACT's health sector would be
diminished by:
...approximately $600 million over 10 years- the equivalent of
58,000 elective surgery procedures. By 2026, that funding could have delivered
a further 1,200 nurses, or 80 intensive care unit beds, or 340 general
inpatient beds in the Territory. Clearly, the Federal Budget cuts meant a severe
reduction in health services for Canberrans over the coming decade.[77]
1.73
Dr Kathryn Antioch, Adjunct Senior Lecturer, School of Public Health and
Preventative Medicine, Monash University summarised the 1 April 2016 COAG
meeting:
COAG considered hospital funding and health reform and
reaffirmed that providing universal health care for all Australians is a shared
priority at the 1 April 2016 meeting. COAG agreed a Heads of Agreement for
public hospitals funding from 1 July 2017 to 30 June 2020 prior to considering
longer-term arrangements. The Commonwealth will provide $2.9 billion in
additional funding for public hospital services. Growth in Commonwealth funding
is capped at 6.5% per annum.[78]
1.74
Chief Minister Barr's submission outlined that securing $50 million for
ACT health funding at the April COAG, while positive:
...only partially ameliorates the cuts by the Federal
Government in the 2014 Budget.[79]
1.75
The Australian Healthcare and Hospitals Association (AHHA) supported the
additional $2.9 billion pledged annually between 2017-20 by the Commonwealth at
COAG, but emphasised that this is only:
...a partial turnaround from the $57 billion cuts to health
funding imposed in the 2014 budget.[80]
Outcomes of COAG
1.76
Mr Brennan, Treasury, noted that the 'centrepiece' of the COAG deal on
hospitals is the continuation of the key parameters which existed under the
National Health Reform Agreement (NHRA). Mr Brennan explained that the activity
based funding (ABF) and the National Efficient Price (NEF) will 'really drive
what the ultimate health spend will be'.[81]
1.77
Ms Larkins, PM&C, advised that officers of PM&C were unable to
provide the committee with an estimate of the funds that each state and
territory would get under the formula in the Heads of Agreement.[82]
1.78
Mr Brennan informed the committee that the amount each state and
territory receives will:
...depend on the activity levels of the individual states going
forward as to what share of the $2.9 billion they each receive. So that is why
a state may or may not end up getting its population share, depending on the
activity levels[.][83]
1.79
Mr Brennan also referred to the 6.5 per cent cap:
[T]here is a 6½ per cent indexation cap put in place in
relation to this funding deal, because it is not a block funding deal it is not
as simple as saying there is 6½ per cent indexation and we will just divide
that up among the states.[84]
1.80
Ms Larkins advised:
We are still to work through the details of how the cap will
work, but it is a cap on growth of Commonwealth expenditure...[85]
Is the funding sufficient?
1.81
The AMA commented that although states and territories have accepted the
additional funding offered at COAG:
...in most cases they have also made very clear that the
funding is not enough, arguing for the full amount of education and health
reductions in the 2014-15 Budget to be restored. The specific effects of the
new agreement for smaller States and Territories in particular is uncertain.
The AMA believes the COAG agreement is an inadequate
short-term public hospital funding down-payment to appease desperate States and
Territories ahead of the Federal election. It is an inadequate agreement that
will not be sufficient to meet current and future demand for services which
will put lives at risk.[86]
1.82
Chief Minister Barr also emphasised his concerns over longer term
funding:
The issue of long-term certainty for health and hospital
funding is critical for the jurisdictions, given our service delivery responsibilities.
It was therefore disappointing that the health funding offer made by the Prime
Minister at the April COAG meeting is a short-term, interim
arrangement only.[87]
1.83
Professor Owler commented that the AMA was pleased by COAG's acknowledgement
that there should be a better method of funding based on ABF and NEF.[88]
However, the AMA has:
...concerns about the complexity of how the national efficient
price is reached. Clearly this method of back casting, where the figures are
sort of revised—usually downwards—does create a level of opaqueness to how the
national efficient price is calculated. It is clearly a tool that will be used
to drive down costs, and there is a danger that if the national efficient price
is potentially set too low that we could actually see a budget cut in disguise,
if you like, in terms of reducing funding to hospitals, particularly hospitals
that might be struggling.[89]
1.84
Professor Owler outlined the AMA's concerns about the adequacy of current
and future funding for public hospitals:
Our analysis of the public hospital systems...shows that the
system is under enormous pressure and is dealing with an incredible amount of
patient demand for not only emergency department services but also elective
surgery. I think we are a long way from being able to meet that demand.[90]
1.85
Professor Owler further commented on the implications for hospitals
without adequate funding:
What often happens is positions go unfilled; they save money
by not employing people or replacing people when they retire; and they close
outpatient clinics. So often the services offered are reduced.
Other hospitals we have seen extend their closure period, so
they shutdown elective surgery for longer periods...The only reason for doing
that is to try to save money, or the budget, of the hospital. That is the sort
of thing that hospitals do.[91]
Education funding
School funding
Arrangements under the previous
Government
1.86
In 2010 the federal government initiated a 'collaborative, thorough, and
open' review of school funding.[92]
The then Minister for Education, the Hon Julia Gillard MP, explained the need
for a review, noting in particular the criticism of the funding arrangements
which had been in place for the previous 12 years.[93]
The SES
[socioeconomic status] system uses a particular statistical method to determine
funding entitlements for non-government schools that reflects a number of
aspects of the communities from which students come.
It
provides funding to non-government schools as a percentage of the average cost
of educating a child in a government school.
Many
critics have attacked this policy decision and criticised the distributional
effects.
The most
persistent and deeply felt criticism of the system has arisen not because of
the way the SES formula distributes funds between
non-government schools but because of its perceived injustice to government
schools.
In
particular, public education advocates believe that because the system uses the
average costs of public education as its base, every win for public education
flows to non-government schools and public education can never make up ground.[94]
1.87
The composition of the expert panel to conduct the review was announced
on 1 May 2010 and was to be led by Mr David Gonski AC as Chairman. The
final terms of reference were released on 9 July 2010. The expert panel's final
report was presented to Government in November 2011 and released in
February 2012.
1.88
On 3 September 2012 the Gillard Government announced Better Schools:
A National Plan for School Improvement (NPSI) – a new national school
funding model and increased funding in response to the findings of the Gonski
Review. The aim of the improvements were to:
Ensure
that by 2025 Australia is ranked as a top 5 country in the world for the
performance of our students in Reading, Science, Mathematics, and for providing
our children with a high-quality and high-equity education system.[95]
1.89
Primary among the proposed changes to existing arrangements was a new school
funding model based on the needs of individual students enrolled through a new benchmark
for every student. This benchmark would be based on the costs of high achieving
schools. A further feature of the new funding system was an additional loading
for schools with students who face disadvantage.[96]
Other features included:
-
All
government schools would continue to be fully publicly funded.
-
Special
schools (like schools for students with disability) would also receive full
public funding.
-
Like
the current system, the government funding provided to
non-government schools would be adjusted based on parents' capacity to
contribute.
-
Current
annual indexation would be replaced by a new measure that reflects the real
cost increases across all schools.
-
Every
school would see its funding rise every year.[97]
1.90
The announcement further noted that funding details would be worked
through in discussion with states and territories and that any extra
Commonwealth funding would be contingent upon the states signing up to the new
arrangements.[98]
Implementation of the new funding model
1.91
The National Education Reform Agreement (NERA) incorporated funding
under the NPSI to apply from 2014-2019:
The NPSI was designed to create a national approach to school
funding by adopting a needs-based Schooling Resource Standard...that would apply
to all students, irrespective of whether they attend government or
non-government schools. The Australian Education Bill 2013 underpinned the
provision of Australian Government funding to states and territories, as well
as non-government schools. Gaining Royal Assent on 27 June 2013, the Australian
Education Act 2013 provided for states and territories to receive recurrent
funding provided that they were party to the National Education Reform
Agreement (NERA) and had signed a bilateral agreement with the Australian
Government.[99]
1.92
The Gillard Government's 2013-14 Budget included a $9.8 billion
commitment to increase school funding over six years, in addition to better
indexation and reforms to lift student achievement.[100]
This funding increase included:
The
Gillard Government is offering to pay around 65 per cent of the additional
investment needed to fund all schools properly and reach our goals –
essentially a 2 for 1 offer for all states and territories.
The
Gillard Government has also committed to annual growth in school education spending
of 4.7 per cent indexation – provided states commit to grow their own school
budgets by 3 per cent.
The
Government is negotiating with state and territory governments on the Plan, to
ensure all schools around Australia can look forward to funding security and
increased investment.[101]
1.93
When fully implemented the NPSI would:
...provide
an additional $14.5 billion over six years in government funding for schools,
of which the Australian Government would provide 65.0% ($9.8 billion) and
state and territory governments the remainder.[102]
School funding policy under the
Abbott Government
1.94
Leading into the 2013 federal election the Coalition policy document for
schools Students First stated that '[t]here will be no cut to school
funding under a Coalition government.'[103]
1.95
Following the change of government in September 2013, there appeared to
be a lack of clarity regarding the new Abbott Government's position on school
funding policy with a number of inconsistent statements on the policy.[104]
On 2 December 2013, the Government stated its commitment to maintain the
previous government's school funding model over the next four years.[105]
1.96
The Abbott Government subsequently committed to 'matching' the funding
allocation for schools funding by the previous government until 2017, but would
not match the previous government's funding for years five and six (2018 and
2019) of the NPSI. For jurisdictions not signed up to the NERA (Queensland,
Western Australia and the Northern Territory), the Abbott Government announced
the restoration of $1.2 billion in school funding over four years. The
Government also indicated that the loading for disadvantaged students would
also be delivered over the next four years.[106]
Education funding proposal to 1
April 2016 COAG
1.97
As part of the proposed tax reform proposal for the 1 April 2016 COAG
meeting Prime Minister Turnbull suggested that the states and territories could
directly fund public schools with the federal government divesting itself of
this responsibility. Under this proposed reform the Commonwealth would still
support non-government schools.[107]
1.98
The committee sought details on briefings provided to the Prime Minister
prior to his announcement of potential changes to the arrangements on school
funding responsibilities for the Commonwealth and states and territories, and
was advised by Mr Luke Yeaman from PM&C that there:
...was not
an education-specific briefing; it was briefing on the whole range of national
partnerships and specific-purpose payments that are currently in play between
the Commonwealth and the states.
...
There are
two streams here essentially. One is that, as you would be aware, there have
been ongoing discussions in the context of the Federation white paper around
education funding more broadly and education arrangements. Separate to that,
there were the proposals around revenue-sharing options including income tax
sharing. The material that was in our briefing regarding income tax sharing
covered the full sweep of national partnerships and specific-purpose payments
in terms of what the Commonwealth currently provides to the states and what
that funding is for. It did not go to the detail of specific education
arrangements.[108]
1.99
The Reform of the Federation Discussion Paper referred to by Mr Yeaman raised
a range of concerns about the withdrawal of the Commonwealth from public school
funding:
This
option could, however, lead to very different funding models being applied
across the States and Territories and between the government and non-government
sectors, leading to differences in the level of public funding for schools with
similar population characteristics.
This
is likely to give rise to concerns about fairness, as well as introduce
perverse incentives for governments to shift costs within the system.[109]
1.100
PM&C officials did not answer the question whether the Prime
Minister was briefed about these concerns.[110]
1.101
PM&C also outlined its consultation processes and confirmed that it
did not specifically consult with the Department of Education on this
particular proposal in relation to a change in policy of education funding
responsibilities. It was also confirmed that there were no discussions with
state and territory departments about the proposal in the lead up to the COAG
meeting.[111]
1.102
Officials from the PM&C advised that no decision has been taken for
the Commonwealth to withdraw from public school funding and that no work is
currently being undertaken on that proposal. Mr Yeaman elaborated:
When the Prime Minister used education as an example in the
media interview, we took that as him using that as an example of those kinds of
choices that would need to be made across all of the areas. But, as Ms Larkins
said, no decision had been taken for the government to proceed on that basis in
the education space.[112]
1.103
Given the lack of detail in the COAG Communiqué on future school funding arrangements, the
committee asked officials about planned processes for determining arrangements
after 2017. Ms Alison Larkins from PM&C advised:
My understanding is that it is not scheduled to come back to
the next COAG meeting. It is being taken forward by Minister Birmingham in
negotiation with his state and territory colleagues and the non-government
schools sector.[113]
Tax and Federation White Papers
1.104
Officials from PM&C stated that the Federation green and white paper
processes had ceased:
There
will not be a green or white paper, and the work on Federation will be taken
forward in the context of the work that Treasury is doing arising out of the
COAG meeting in April.[114]
1.105
Officials confirmed that the decision was made by the Prime Minister
after COAG.[115]
1.106
In response to a Question on Notice, PM&C stated that the Federation
White Paper process had cost $4,449,687 to date.[116]
1.107
Officials from Treasury stated that there would not be a Taxation White
Paper:
The
white paper sets out the government's proposals. As the government said, these
proposals will be set out in next week's budget.[117]
1.108
In response to a Question on Notice, Treasury states that a total of
$5.4 million has been spent on the Tax Reform Taskforce (formerly Tax
White Paper Taskforce) from 2014 to March 2016.[118]
Committee view
Taxation
1.109
In the words of the Prime Minister on 30 March 2016, at a football
academy in Penrith, two days before the COAG meeting on 1 April 2016, the state
income tax levy proposal is 'a very big fundamental reform to federalism', and
'a once in a generation reform'.
1.110
The committee examined how this purportedly fundamental reform to
federalism was handled by the government. It found that the processes
undertaken to raise and consult on this issue with the states and territories and
the scant work undertaken within the government did not match the government
rhetoric about its importance.
1.111
The committee feels strongly that this inadequate process goes nowhere
near matching the claim by the Prime Minister that this proposal is a
fundamental reform to federalism. Almost $10 million has been spent on the
abandoned tax and federation white and green paper processes. Given this, it is
staggering that there was no proper consultation, analysis, modelling or policy
work done.
1.112
The committee attempted to discover when work began on this proposal
with limited success. The first work that officials could point to was a
briefing was prepared by PM&C, in consultation with Treasury, for the Prime
Minster on 22 January 2016 and a brief was provided to the Treasurer by
Treasury officials around the same time. Both briefs still contained a range of
options but did include the state income tax levy proposal. It does not appear
to the committee that either of these briefs resulted in the options being
narrowed down to the state income tax levy proposal. Officials told the
committee that work continued on a variety of tax options leading up to COAG.
1.113
The committee heard that no modelling of the proposal was done.
Officials pointed to quantitative analysis being undertaken but again, because
the proposal was at an early conceptual stage, the committee was told the extent
of the analysis was limited to the impact of the Commonwealth reducing its tax
rates to allow a state levy and broad observations on the quantum of state
payments that are currently made.
1.114
The committee contrasts this approach with the reported processes,
modelling and costings undertaken by the Commonwealth for the development of a
range of GST tax options and Medicare levy changes taken to the December 2015 COAG
meeting[119]
where heads of Treasury were closely involved.
1.115
The committee considers that even to begin considering this proposal
there are essential framework issues that would need to form part of the
consideration by jurisdictions even at a conceptual level, such as whether the
principles of horizontal fiscal equalisation (HFE) would have been regarded as
immutable. For example, if the principles of HFE were to be applied unaltered,
it would result in different levels of GST allocation.
1.116
Given the significant implications of this proposal, the committee
therefore attempted to discover at what point this particular proposal was
agreed by the government to take forward. PM&C officials told the committee
that further briefing was provided to the Prime Minister on 26 February 2016
and further briefing was provided 'in a minimal way' around one week ahead of
the COAG meeting. This did not include modelling but only 'analysis and data information',
drawing on information from the Treasury and the Department of Finance. Treasury
officials confirmed that briefing provided to the Treasurer in February 2016
also still contained a range of options.
1.117
The committee also attempted to discover when consultation began on this
proposal with limited success. Despite broad discussions around revenue sharing
arrangements, this specific issue was not discussed at the 15 December 2015
COAG meeting. It was not taken to and no modelling was done for the Council on
Federal Financial relations (CFFR) meeting the previous day where aspects of
that meeting are considered by COAG.
1.118
Officials confirmed to the committee that the state income tax levy was
not presented at the 1 April 2016 CFFR meeting prior to COAG either. Oddly no
formal meeting was held of the heads of Treasury in jurisdictions. Treasury
admitted to some general and informal discussions with state and territory
counterparts in the days leading up to COAG but could not confirm whether these
discussions contained the proposal.
1.119
Papers for the 1 April 2016 COAG meeting still contained state tax
reform generally but not the state income tax levy proposal. Officers tried to
convince the committee that it was not unusual to raise an issue at COAG without
papers. The committee finds it astounding that a reform of this magnitude would
be put to COAG without papers being provided.
1.120
The committee notes that the negotiation position of the Commonwealth
for the COAG meeting is taken to Cabinet and this occurred on 22 March 2016.
The Prime Minister has confirmed that the proposal was taken to Cabinet for
consideration.
1.121
Officials advised that following the Cabinet meeting PM&C officers,
although aware that the Prime Minster was likely to raise this issue with premiers
in the context of COAG, were not asked to provide formal advice to the
jurisdictions or engage with them directly. However, PM&C officers thought
that the Secretary of PM&C had some informal discussion with his
counterparts leading up to the COAG meeting which may have included the
proposal but were probably focussed on the hospital funding agreement.
Specifically, these discussions occurred over the long weekend prior to COAG.
1.122
Officers from PM&C confirmed to the committee that they were not
aware of the Prime Minister's Statement on Federation before it was released,
indicating that it was prepared in the Prime Minister's office as a media
statement.
1.123
The committee is astonished that this proposal, cast as 'a very big fundamental
reform to federalism' appears to have been raised with the states over a long
weekend and put out in a media statement prepared by a political adviser. No
modelling or costings were done, there was no discussion at the officials level,
no specific papers were prepared and the briefings for the Treasurer contained
a range of options on tax reform right up to the Prime Minister's media
announcement. The evidence suggests that the Prime Minister may have received a
slightly more specific briefing on 26 February 2016 but this was not
clear.
1.124
Flow on questions from this proposal appear to have been disregarded in
the rush to make the announcement such as, following a transition period, the
ability for the states to lift taxes beyond the agreed amount. This important
issue also did not seem to have been canvassed at the jurisdictional or
Commonwealth officials level. As no ceiling was contemplated, in theory, this
could result in separate multiple tax rates across multiple jurisdictions.
1.125
Furthermore, it is clear there was no agreed position between the Prime
Minister and the Treasurer on this issue of the states being able to lift the
level of tax. The Prime Minister mentioned that states could increase the level
of tax in the future.[120]
However, Mr Morrison stated that the Commonwealth had no appetite for states to
be able to increase taxes.[121]
Health and education funding
1.126
The committee believes that linking the state income tax proposal to the
states meeting the costs for health and education into the future was yet
another announcement given little detailed consideration.
1.127
The COAG outcomes on health, with an extra $2.9 billion being put on the
table, demonstrate that the government knows more funding is required in this
important area after the cuts they inflicted. The draft heads of agreement
which was leaked to the media[122]
contained a heading of tax reform which appears to make extra funding from the
Commonwealth conditional on signing up to tax reform. The draft agreement also
proposed that the Commonwealth government retain $70 million each year from
2017-18 to 2019-20 from public hospital funding to pay for its own primary
health care reforms. This did not end up in the final agreement.
1.128
The committee notes that key parameters that existed under the National
Health Reform Agreement negotiated under the previous government are back in
place such as activity based funding based on a National Efficient Price.
However the funding guarantees are gone.
1.129
The Prime Minister also floated the idea of states assuming funding for
state schools under the proposal.[123]
When raised in a discussion and issues papers in the context of the Reform of
Federation process, a number of concerns were pointed out including running the
risk of different funding models being applied across the jurisdictions and
between the government and non-government sectors, resulting in questions about
fairness. Again officials were unable to detail to the committee any work done
or consultations carried out on this proposal for the 1 April 2016 COAG
meeting.
1.130
The committee heard that the process in place now to formalise school
funding agreements after 2017 is being carried forward by the Hon Simon
Birmingham MP, Minister for Education, through the ministerial council and is
not scheduled to come back to the next COAG meeting. However the ministerial
council due to meet in March 2016 was cancelled and now due in June 2016.
1.131
The committee notes that the gap in health and education funding
remains. The government remains committed to policies that deprive these areas
of the much needed funds.
Senator Jenny McAllister
Chair
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