Monday, 9 July 2018

Horizontal Fiscal Equalisation: a window into the Indigenous policy maelstrom




What we do determine, oft we break.
Purpose is but the slave to memory

Hamlet Act 3, scene 2.

The Productivity Commission report on horizontal fiscal equalisation (HFE) was released last week, along with a Government announcement that it would not adopt the Commission’s recommended approach and instead would be revising the HFE system to establish a floor of 70 and then 75 cents based on the injection of a billion dollars a year of extra funds to ensure that no jurisdiction would be worse off. While the Commission’s report was largely an exercise in devising a technical solution to the issues raised in its terms of reference, the Government’s decision is largely driven by political considerations. There has been plenty of media analysis, but this piece in The Conversation by John Freebairn is a good and succinct summary (link here).

In relation to Indigenous issues, the Commission’s draft report made brief reference to the issue in its last chapter, and recommended a process be initiated by COAG to allocate clearer responsibilities across the federal government and the states and territories, and in this context, to make clarity of responsibilities in relation to Indigenous policies a priority.

In response, I made a brief submission (link here) and included it in a November 2017 blog post (link here). I raised two broad issues: first that the nature of Indigenous disadvantage differed across the country and thus needed to be taken into account by the Commission in addressing HFE, and second, that there were structural impediments driving Indigenous disadvantage which meant that fiscal equalisation was not in itself sufficient to drive better outcomes for Indigenous interests. An example is the fact that there is no link between the adjustments made to address Indigeneity within each jurisdiction and the spending outcomes of each jurisdiction; a matter also raised by the Yothu Yindi submission to the Inquiry (link here). A second, and in my view more significant structural impediment is that while HFE addresses recurrent fiscal capacities between jurisdictions, there is a significant capital / infrastructure deficit in remote regions which is not addressed by HFE and which reinforces Indigenous disadvantage. To take just one simple example, many NGOs and Indigenous organisations do not have access to staff housing and this is the major constraint on their ability to deliver effective services.

In its Final Report (link here) the Commission made virtually no change to its draft report recommendations on Indigenous matters (refer pages 275-278 for the relevant discussion). In a discussion at the end of section 6.1 (pages 165-166), the Commission appears to argue that there is inadequate accountability on jurisdictions at present, that greater accountability is required and it makes a number of suggestions in section 6.5, but concludes that ultimately greater accountability will require more fundamental reform of federal financial relations.

Section 9.3 of the Commission’s Final Report is titled ‘Broader reforms to federal financial relations’, and has headings such as ‘A complex policy environment’ and ‘A web of Commonwealth transfers to the states’ reinforcing the general theme that jurisdictional accountability for the delivery of services is confused and blurred (to use terms which appear in the report). The Commission goes on to discuss a number of options which have been advanced by various players (such as replacing the indigeneity disability factor in the HFE process with specific purpose payments to the states), but ultimately falls back on the proposition that greater clarity of responsibilities between the Commonwealth and the states is required within a context of broader reform. In its last paragraph, the Commission concludes:

Reforming HFE in isolation will only go a small way to improving federal financial relations. Without addressing this broader environment, the system is likely to come under further strain. The sustainability of the GST pool as a source of funding for States will likely come under increasing pressure, due to Australia’s changing consumption patterns. Like many inquiry participants, the Commission considers there is a need to revisit the broader operating environment in which HFE takes place, and to renew efforts to reform federal financial relations in the broad.

It goes on to recommend:

RECOMMENDATION 9.1
Improvements to the HFE system can only go so far. The Commonwealth and State Governments, through the Council on Federal Financial Relations and recently formed Board of Treasurers, should work towards meaningful reform to federal financial relations.

 In the first instance, the process should:

· assess how Commonwealth payments to the States — both general revenue assistance and payments for specific purposes — interact with each other, given the significant reforms to payments for specific purposes that have occurred in recent years

 · develop a better-delineated division of responsibilities between the States and the Commonwealth and establish clear lines and forms of accountability. Policies to address Indigenous disadvantage should be a priority. (emphasis added)

Following this, options to address the vertical fiscal imbalance should be considered and advanced.

While the Commission’s analysis has some merit, it reflects the overwhelming bias towards incrementalism not only in day to day public policymaking, but also in the approach to ‘reform’ in public policymaking circles. Moreover, there is real doubt as to whether it is possible in today’s complex world to entirely differential the policy responsibilities of sovereign jurisdictions. While policy incrementalism has much to recommend it in terms of social and economic certainty and order, it becomes an almost insurmountable hurdle for interests who are not beneficiaries of the status quo such as Indigenous citizens.

One of the points that John Freebairn makes in his analysis mentioned above is that the losers of the GST compromise adopted by the Government are unknown, and as he puts it, are ‘left to the imagination’. One obvious set of losers are interests whose existing programs are being cut, and past readers of this blog will be unsurprised when I note the likely cuts of up to $300m per annum in remote housing by the Commonwealth provides an indication of at least one set of losers from the GST deal.

Saul Eslake in a 2017 Conversation article (link here) made a persuasive case for the proposition that the HFE system was not broken insofar as Western Australia was concerned. The key paragraphs in Eslake’s analysis are these:

Despite the sharp decline in its share of GST revenues, the WA government’s total revenue per head of population in 2015-16 was just A$67 (or 0.7%) below the average for all states and territories. By contrast, by 2015-16 the WA government was spending over A$1,000 (or 10.5%) more per head of population on “operating expenses”, than the average of all states and territories.
WA’s present fiscal woes are the result not of a flawed system of distributing revenue from the GST among the states and territories, but rather of its inability to control its own spending.

The Commission itself pointed to this issue in its report. See in particular pages 137-140, and in particular the Box 4.2 on page 139 which makes clear that the Barnett state Government ignored the advice of its Treasury and made an assumption at a political level that the HFE system would be changed in the future to justify continued spending beyond its means. The key paragraphs are these:

Consistent with this notion, the then WA Treasurer (Porter 2011, p. 3) stated in his 2011-12 budget speech:

What we reasonably anticipate is that in 2013-14 the CGC will have brought in a new GST system. We expect it will produce a floor of about 75 per cent of our population share of the GST. Therefore we expect extra revenue of $1.8 billion in 2013-14 and $2.5 billion in 2014-15. These amounts will allow for reduced borrowings and will be used to progressively reduce existing debt to less than $18 billion while maintaining strong infrastructure investment. … If that change does not occur in that year, the State Government will then have no choice but to wind back infrastructure investment to decrease debt.

In the 2011-12 budget papers, the WA Government’s spending over the forward estimates (2011a, p. 33) did not explicitly include additional GST revenue from the anticipated relativity floor. However, the asset investment program in the key budget aggregates (p. 6) is identical to that shown in the assumed budget aggregates if a floor of 0.75 were introduced (p. 64). This suggests the State was on a higher course of spending than would be the case if there was no expectation of a floor. A recent inquiry into WA Government expenditure (Langoulant 2018) reached a similar conclusion (p. 54), stating that ‘if the warnings Treasury provided that the policy settings of the day would cause major difficulties in the future had been heeded, it is highly likely that the State’s current budget and debt positions would have been mitigated, and in a material manner’ (p. 55).

So in 2011, the then West Australian Treasurer (and current federal Attorney General), Christian Porter ignored Treasury advice and blew the WA budget. Interestingly, his justification was that there was a ‘reasonable anticipation’ of a ‘fix’ effectively identical to the arrangements announced by Treasurer Morrison (ie a 75 cents floor on GST redistributions). Ironically, it was the huge fiscal disaster visited upon WA by those decisions which ultimately led to Porter’s anticipated changes occurring.

My point in traversing this depressing ground in a blog about Indigenous policy is to make two points:

First, the Barnett Government’s spending spree was not directed towards structural reform, and in particular was not directed to Indigenous structural reform. A cursory perusal of the Langoulant Review (link here) makes plain that instead, it was directed to significantly increased recurrent expenses in the roads, health and education portfolios, and huge increases in borrowings were used to fund a series of capital projects (refer pages 152 to 164). While Indigenous citizens would have benefitted to an extent from increased mainstream services, remote communities saw little of the ‘boom dividend’, and there was no explicit effort to ‘lift’ the state’s most disadvantaged citizens to a higher level.

Second, the West Australian budget experience points to the ubiquity of political motivations in driving policy processes, and the toxic combination of political hubris, absence of countervailing accountability and the absence of transparency in producing policy outcomes which are not in the public interest.

In other words, Indigenous interests (and particularly remote communities) failed to benefit during the WA boom when the state was in the best position to drive structural reforms. Now the Commonwealth Government is bailing out West Australia for its mismanagement and once again Indigenous interests are positioned at the margin of the debate, with little prospect of structural reform emerging, and are amongst the most prominent losers in terms of the funds found to ensure no state is worse off.

If, as the Commission suggests, reform of HFE on its own will not be adequate in driving greater jurisdictional accountability and thus addressing Indigenous exclusion in public policy outcomes, and fundamental reform of federal financial relation is required, the question becomes, what would effective reform look like?

 I have two practical suggestions:

First, the current Thodey Review of the Australian Public Service should take a close look at the Western Australian experience as laid out in the Langoulant and PC Inquiries, and in particular explore options to introduce greater transparency into the policymaking process generally, but particularly in relation to Indigenous affairs.

The Langoulant review identified (among others) the following systemic issues in play in WA between 2008 and 2017:

• temporarily high recurrent revenue growth was used to pay for permanent expenditure promises, leaving behind structural budget deficits;
 • decision makers lacked the capacity to act upon signs of unsustainable growth in net debt;
• the quality of financial information supporting Cabinet Submissions deteriorated;
• capability gaps emerged in the public sector especially around project planning and evaluation; and
• the Government defaulted to confidentiality around major projects rather than transparency (page 8).

Fifty years ago, Bill Stanner in the 1968 Boyer Lectures, After the Dreaming, referred to a ‘history of indifference’ in attitudes to Aborigines. In other lectures, he referred to a ‘cult of forgetfulness’ and a ‘cult of disremembering’ in relation to the nation’s history. Australia continues to shift Indigenous issues to the margins, and to conveniently overlook our incapacity to address deep disadvantage. The lack of a culture of transparency plays a large and under-appreciated role in allowing such indifference and forgetfulness to flourish, to the point where it becomes impossible to mount a persuasive case in favour of the fundamental structural reforms which would be in the public interest.

Second, there is a pressing need to develop a detailed reform agenda focussed on structural changes to the broader Australian political and policy systems which will reverse the embedded nature of Indigenous disadvantage. In this context, it may be time for a comprehensive review of the structural underpinnings of Indigenous disadvantage. While increasingly Indigenous leaders are pointing to the need for structural change, the complexity of the Australian public policy realm is such that there is a need for rigorous analysis and understanding of how the nation might proceed if reform is to be effective. While a parliamentary inquiry might be considered, or perhaps the Productivity Commission, the best model might be a Commission of Inquiry along the lines of the Coombs Royal Commission into Australian Government Administration which was established by the Whitlam Government with four or five Commissioners and expansive terms of reference.

It is past time the nation understood and ‘remembered’ that Indigenous disadvantage is a product of the complex array of mainstream institutional and policy structures which either explicitly or implicitly drove dispossession and extermination, then assimilation, later child removals, welfare dependence, and the inter-generational transfer of disadvantage into the present where we have adopted the rhetoric of closing the gap, but as a nation have failed to design and resource the policy to ensure it makes a difference.