1.4 Spending and fiscal pressures within the Federation

Any consideration of the scope and efficiency of government must necessarily extend to the operation of Australia’s Federation.

Australia’s federal financial relations are characterised by shared roles and responsibilities, which have evolved over the past century. A consequence of these shared roles and responsibilities is duplication and overlap between the Commonwealth and the States and blurred accountability. This reduces the efficiency and effectiveness and fairness with which services are delivered.

There have always been substantial imbalances between the States’ access to revenue bases and their expenditure responsibilities, including high demand services such as health care. The Commonwealth has always stepped in to fill the gap through the provision of grants to the States and more recently by providing revenue from the Goods and Services Tax.

These imbalances have significant impacts on the incentives and accountability of governments across the Federation. Furthermore, the extent of the imbalances has major implications for the capacity of State and Territory governments to address their own budgetary challenges. It is time to deal decisively with this situation.

Once the impacts of an ageing population and expected lower growth prospects in the longer term are taken into account a growing fiscal gap will emerge at all levels of government across Australia if current expenditure and revenue policies remain unchanged.

The change we face is stark. Today we have five people working for every one retired person, by 2050 we will only have 2.7. This means those 2.7 people working will need to produce as much as the 5 today just to maintain our standard of living.

By mid-century government expenditure allocated to health and ageing will account for over half of the Commonwealth’s and the States’ spending. Today, it’s around a quarter.

There is no easy solution. Overcoming the challenge is not insurmountable but will require an integrated approach – a hard headed examination of spending, a preparedness to embark on meaningful tax reform, a bold approach to recasting Commonwealth-State relations and, above all, a concerted reform agenda to support productivity and growth.

In the end, a strongly growing economy will provide a big part of the solution because through growth, wages and jobs are more abundant and taxation revenues are higher.

In undertaking the Audit and formulating its recommendations, the Commission has been guided by the importance of fairness, recognising that fairness has a strong relation to our sense of confidence and our ability to work effectively together. As a nation we are renowned for our sense of fairness.

Inevitably, vested interest groups will try to exempt themselves from shared sacrifice and common purpose, but they must reassess their expectations of government support in light of the overall good. National interest and not special interest must prevail.

It is only in this way that we can maintain a fair and cohesive society and afford the level of support to the deeply disadvantaged which is the hallmark of a truly civilised society.

The Commission has developed a set of common sense principles to guide its deliberations. These core principles have shaped the approach taken and helped the Commission formulate its recommendations.

Following them will ensure our fiscal goals can be achieved in a way the community understands and supports.