RUDD MOVES TO OVERHAUL FEDERAL-STATE RELATIONS

UNCLAS SECTION 01 OF 02 CANBERRA 000310

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON AS
SUBJECT: RUDD MOVES TO OVERHAUL FEDERAL-STATE RELATIONS

REF: CANBERRA 305


1. (SBU) SUMMARY: Since becoming Australian Labor Party (ALP)
leader, Rudd has spoken repeatedly about "ending the blame
game" between the federal and state governments. At the
heart of the "blame game" is the funding imbalance between
the federal and state governments. The federal government
raises around 80 percent of total government revenue while
the states are responsible for around 40 percent of total
government spending. Therefore the Commonwealth provides
significant funding, much of it conditional, to assist the
states, who still continually complain that the federal
financial aid is inadequate. In response, federal governments
have argued that the states need to spend their money more
efficiently. Rudd wants to "rebuild the Federation" through
co-operation and incentive payments to improve services,
rather than the sometimes confrontational approach of the
former Howard government. The relationship between Rudd and
the states has begun smoothly with a March 26 Council of
Australian Governments (COAG) meeting that reached an
agreement on a national water plan (reftel) and some funding
issues but this could change when Rudd starts to demand
results. He has threatened a takeover of public hospitals
from the states if they don't sign up to his hospital reform
plan. END SUMMARY

FEDERAL GOVERNMENT HAS FINANCIAL POWER


2. (U) The federal government is at a considerable advantage
over the states in collecting revenue because since 1942 it
has had the exclusive power to raise income tax. States raise
money through fees such as land tax, payroll tax (a tax on
employers),poker machine tax, mining royalties, motor taxes
and tolls. The federal government raises around 80 per cent
of total government revenue, but is responsible for only
about 54 percent of total government expenditure. In
contrast, the states collect about 16 percent of total
government revenue but are responsible for around 40 per cent
of total government expenditure. The states' revenue
shortfall is made up by the federal government distributing
all the revenue raised by the Goods and Services Tax (GST) to
the states (around 16 percent of total government revenue)
and through Specific Purpose Payments (around 11 percent of
total government revenue). What this means is that the
federal government transfers around a third of the money it
raises to the states and that, collectively, the states
receive more than half their revenue from the Commonwealth.


3. (U) The Commonwealth, largely due to its financial power,
has increasingly involved itself in areas formerly the
preserve of the states. A major mechanism for this is
Specific Purpose Payments (SPPs) - under the Constitution
"the Parliament may grant financial assistance to any State
on such terms and conditions as the Parliament thinks fit."
Introduced in 2000, the distribution of the GST (like the
Financial Assistance Grants proceeding it) is based on
"relative fiscal capacities" to assist states and territories
provide comparable services. Therefore, it is no surprise
that the Commonwealth Grants Commission has recommended that
the two states benefiting most from the mining boom -
Queensland and Western Australia - receive smaller shares of
the GST in 2008-09 than the previous fiscal year. For the
first time, Queensland joins New South Wales, Victoria, and
Western Australia "in having an above average fiscal
capacity." Under the Howard government, the larger states
regularly complained that they were being disadvantaged in
Qregularly complained that they were being disadvantaged in
the distribution of the GST.

RUDD'S AGENDA

4.(U) The intergovernmental process driving Rudd's agenda is
COAG, which consists of the federal prime minister and the
heads of each state and territory, meeting several times a
year. At Rudd's first COAG meeting in December, he
established seven working groups, each overseen by a Federal
Minister. These working groups are health and aging, the
productivity agenda - including education, skills, training
and early childhood, climate change and water,
infrastructure, business regulation and competition, housing,
and Indigenous reform. These groups will play a key role in
the implementation of Rudd's election commitments such as the
"Education Revolution", improved hospital services, the
establishment of a national infrastructure body, reducing red
tape on business and addressing indigenous disadvantage. A
key part of Rudd's federal/state reform agenda is modifying
SPPs. On March 26, at a meeting dominated by news of an
agreement on a national water plan for the Murray-Darling
Basin (reftel),COAG agreed to reduce the number of SPPs from
90 federal-state funding agreements to five or six broad
categories, without reducing their total value. Rudd and the

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premiers hope this will reduce duplication and yield greater
administrative efficiencies, freeing up resources for
frontline services. Rudd maintains the Howard Government
used SPPs for short-term political pork-barreling with no
national purpose. He will give the states more control over
how SPPs are delivered but will put greater emphasis on them
achieving results.

HOSPITALS BIGGEST TEST FOR RUDD


5. (U) Mindful of public dissatisfaction with federal-state
bickering over hospital funding, Rudd went to the election
promising that "the buck will stop with me on hospitals."
The state governments run the hospitals but the federal
government provides around 40 percent of the funding. Under
the Howard Government, the states - all of which have
Labor-run governments - consistently claimed that the federal
government under-funded public hospitals. The Howard
government's response was that the state governments were bad
administrators that had squandered the "windfall" gains from
the GST. Rudd will provide the states with AUD $2 billion
extra over four years if they sign up to his yet to be
developed hospitals reform plan, which will include
performance benchmarks. Rudd has said he will move to take
over responsibility for public hospitals if the states do not
make adequate progress implementing the plan. At the March
26 COAG meeting, Rudd and the states agreed to delay by a
year the commencement of the next five year hospital
agreement, pushing it out to July 2009. For the interim,
Rudd has pledged to index the 2007-8 allocation and provide
an extra AUD $500 million. He also pledged to provide 50,000
health workforce training places.

COMMENT: WORDS THAT COULD HAUNT RUDD


6. (SBU) A federal MP from Tasmania complained in a meeting
with us recently that the real problem with the current
system is that no one takes responsibility. The MP charged
that all too often, if you go to the state government about a
problem, it will say that the federal government does not
give them enough funding and if you go to the Commonwealth on
the same issue, it will say it is a state problem. To his
credit, Rudd is trying to change this buck-passing tradition
but he also has a vested interest in this reform as the
states' cooperation is essential for the implementation of
some of Rudd's key election commitments. A centralizer by
nature, Rudd is unlikely to reduce the Commonwealth's
dominance over revenue collection but, with all state
premiers from the ALP, he likely will work more harmoniously
with the states than former Prime Minister John Howard.
Ironically, Rudd's agenda is more a continuation than
repudiation of the Howard approach. Under Howard, COAG's
agenda also included regulation reform, boosting the health
workforce, overcoming indigenous disadvantage and a national
approach to infrastructure but COAG will be of greater
importance to Rudd who wants it to be the "workhorse of the
nation."


7. (SBU) Rudd and the states are working well together now
but this may change when Rudd and the public start to demand
improvements, particularly on hospitals. Almost daily, there
are negative stories about New South Wales hospitals and
state health minister Reba Meagher, who has been dubbed the
"Grim Reba." The Opposition will remind voters that Rudd had
said the "buck will stop with me on hospitals" - words that
could haunt Rudd.

CLUNE