Political and Fiscal Decentralisation: Benefit and Cost · Political and Fiscal Decentralisation: Benefit and Cost ... The myths about federalism that are not borne out by ... (PPP)

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Political and Fiscal Decentralisation: Benefit and Cost

Glenn Withers

Presentation to Crawford School Seminar Series August 2007

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Consumer Warning: The topic is decentralisation in industrial countries especially Australia

“For federal benefits to be reaped, relatively non-corrupt, socially stable and democratic conditions should be in place”

-Feld, Zimmerman and Doring, IZA, December 2006

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1. Australian Federalism Is Under Seige

The Commonwealth has been using its financial powers (as seen recently in the Murray Darling Basin plan) and increased legislative power (as seen most recently in NSW v Commonwealth) to intervene more and more in areas of State responsibility. Centralism appears to be the order of the day: there is almost a conventional wisdom among commentators that centralist solutions are the way forward for Australia (Abbott and Costello).

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International trends are the exact opposite

In the rest of the world, the prevailing trend is towards decentralisation and federalism. Belgium, France, Spain, Italy, Germany, Switzerland, UK in Europe alone.Federalism is now regarded as one of the best governmental systems to deal with the twin pressures of globalisation:

upward pressure to deal with some matters at the supra-national level; downwards pressure to bring government closer to the people.

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2. Myths about federalism need to be challenged

An historical accident or relicIrrelevant in a globalised worldGenerating excessive levels of GovernmentDuplicating government activityCreating complexity and inefficiencyGenerating conflict and buck-passingToo generously funded

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The Benefits of Federalism need clear restatement: the six C’s

ChecksChoice CustomisationCompetitionCreativityCo-operation

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3. Arguing and documenting the myths. Example: Tiers of Government

3673 devolved governments1United Kingdom

87,84950 States1United States

286726 Cantons1Switzerland

12,21589 regions1Russia

310047 Prefectures1Japan

8101 110 provinces20 regions1Italy

12,320439 districts16 Länder1Germany

36,679 96 departments22 regions1France

316010 Provinces1Canada

6736 States, 2 Territories1Australia

LocalRegionalStateNationalCountry

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Dealing with Myths: coping better with globalisation

Ratio o f Re al GDP pe r Capita, Australia and Ne w Ze aland, 1974-2004

0.971.05

1.14

1.28

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1974 1984 1994 2004Rat

io o

f GD

P pe

r Cap

ita: A

ustr

alia

to N

ew Z

eala

nd

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Dealing with myths: Excessive Government example

Ge ne ral Gov e rnme nt Re v e nue : Anglo-Ame rican Countrie s, 2005

32.836.7

40.7 41.8 42.9

0

5

10

15

20

25

30

35

40

45

50

USA AUSTR ALIA CANADA UK NZ

Perc

enta

ge o

f GD

P

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Dealing with myths: Central Government Efficiency example

Collins Class Submarines: $1 billion cost over-run including new combat systems and repairs.Project Bushmaster Infantry Transport: $170m contract in 1999 for 370 vehicles has escalated to $329m for 299 vehicles.Jindalee Over the Horizon Radar: Four years late and $500m over budget.Amphibious Ships: four years delay and cost overrun of $200m for two ships, Manoora and Kanimbla.Wamira RAAF Trainer: 1980s Australian-designed trainer project costing $70m scrapped.

And many others listed in the Report- such as immigration (Cornelia Rowe), IT acquisition, broadband, universities regulation, and even legislation itself (next chart)

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Commonwealth efficiency (cont’d): pages of primary legislation

0

10 000

20 000

30 000

40 000

50 000

60 000

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s0

10 000

20 000

30 000

40 000

50 000

60 000

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

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Dealing with myths: the Growth Tax example

Net payments to the States over the whole post-GST period remain at levels below the pre-GST average of 6% of GDP for the whole period of the 1980s and 1990s. During the same period, the Commonwealth’s revenue rose by a further 2% to 20% of GDP.

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4. Arguing and Documenting the Benefits. Example: Checks on Power

Pe rc e p tio n s o f In te g r ity in F e d e ra l a n d U n ita ry C o u n tr ie s : O EC D , 2 0 0 6

8 2 .1

7 7 .9

5 0

6 0

7 0

8 0

9 0

Fe d e ra l U n ita ry

Cor

rupt

ion

Perc

eptio

ns In

dex

(100

= N

o C

orru

ptio

n)

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Benefits Example: CompetitionP u b lic E mp lo yme n t L ab o u r F o rce S h are : F e d e ra l an d U n itary

C o u n tr ie s, 1990-2001

1 5 .5

1 3 .6

0

2

4

6

8

1 0

1 2

1 4

1 6

1 8

Fe de ra l Unita r y

Perc

enta

ge s

hare

of l

abou

r for

ce

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Benefits Example: Innovationroad safety campaigns and the compulsory use of seat-belts;the establishment of the first Environmental Protection Authority;the enactment of various kinds of anti-discrimination laws; the use of casemix funding of public hospitals;the establishment of health care call centres;the development of the mutual recognition scheme;the development of markets for the trading of salinity credits and biodiversity credits;

and many others specified in the report

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5. Estimating the Overall Economic Payoff from Australian Federalism

Au stra lian G DP p e r Cap ita

39 ,666

43 ,091

45 ,946

36 ,000

37 ,000

38 ,000

39 ,000

40 ,000

41 ,000

42 ,000

43 ,000

44 ,000

45 ,000

46 ,000

47 ,000

Withou t Fede ra tion W ith Pres en t Fede ra tion W ith Be tte r Fede ra tion

$ A

ustr

alia

n

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6. Reform Options

1. Abolish the States and establish regional governments

2. Continue the centralist drift: including through opportunist federalism

3. Make federalism work better: co-operation and/or competition?

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DiagnosticsTaxatio n Pe r Cap ita , C o m m o n w e a lth an d Sta te s , 2000 -05

2 ,3 0 5 2 ,0 2 5 2 ,0 5 3 2 ,2 0 7 2 ,4 0 4 2 ,4 6 2

8 ,0 4 39 ,1 0 6 9 ,1 0 6

9 ,8 6 01 0 ,4 8 6

1 1 ,3 3 6

0

2 ,0 0 0

4 ,0 0 0

6 ,0 0 0

8 ,0 0 0

1 0 ,0 0 0

1 2 ,0 0 0

1 9 9 9 -0 0 2 0 0 0 -0 1 2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5

$ Ta

xatio

n Pe

r Cap

ita

Sta te Ave ra g e C o m m o n w e a lth

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Diagnostics

The Commonwealth collects $11336 per capita in taxIt transfers $3060 to States and Territories (including GST) and retains $8275 for own delivery purposesGST transfers (“entitlement”) represent $1813 and SPPs (Commonwealth discretion) represent $1247 per capita

ABS Taxation Revenue 2004-2005

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DiagnosticsCo m p an y Tax an d G ST G ro w th , Au stra lia , 2002 -07 ($m )

2 0 ,0 0 0

2 5 ,0 0 0

3 0 ,0 0 0

3 5 ,0 0 0

4 0 ,0 0 0

4 5 ,0 0 0

5 0 ,0 0 0

5 5 ,0 0 0

6 0 ,0 0 0

2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7

$ M

illio

n

C o m p a n y Ta x GST Pa ym e n ts to S ta te s

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Diagnostics

V ertica l F isca l Im b a lan ce: S e lec ted F ed era tio n s , 1990s

39.7

58.7

66.4 66.3

54.2

17.2

44.1

29.3

40.4

31.7

0

10

20

30

40

50

60

70

A us tra lia Canada G erm any S witz erland US A

Per

cent

age

of T

otal

Pub

lic O

utla

ys o

r R

even

ue

S tate and Loc al S hare of Total P ublic S pendingS tate and Loc al O wn-S hare of Total P ublic Revenue

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DiagnosticsS ta te G o ve rn m e n t A cce ss to In co m e T a x e s: S e le cte d F e d e ra tio n s,

1965-2004

0

52 .8

43 .4

50

75 .9

38 .8

0

10

20

30

40

50

60

70

80

A us tra lia A us tr ia Canada Germany Sw itz e r land USAInco

meT

axes

as

Perc

enta

ge o

f Sta

te a

nd L

ocal

Ow

n R

even

ue

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Diagnostics

National-State Share s in Public He alth Outlays: Se le cte d Fe de rations, 2004

52

68

7

97

2

48

32

93

3

98

0

10

20

30

40

50

60

70

80

90

100

Aus tra lia Aus tria Canada Germ any Switzerland

Perc

enta

ge S

hare

of T

otal

Out

lays

National States

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Making Federalism Work Better

Reallocate roles between Commonwealth and State governmentsImprove mechanisms for inter-governmental co-operation Reform federal-fiscal financial relations Hold a Constitutional Convention for constitutional reform

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Conclusions:The myths about federalism that are not borne out by the evidence.

We need a more constructive debate that takes into account international experience; it needs to balance fairly the advantages against the disadvantages.

Such a debate will assist reform of our federal system, taking full advantage of the benefits while eliminating or reducing the problems.

The potential ‘reform dividend’ from a new federalism is an estimated $86 billion pa or more.

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Appendix

Other Studies (Costs Only): Drummond, Access EconomicsPrevious Studies Updated: Dowrick & Nguyen, Castles & DowrickPrevious Studies Extended: Twomey& Withers

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Regression Evidence: Model 1

Equation 1: Federal InstitutionsDependent Variable: GROWTH in per capita GDP (PPP)Method: Least SquaresSample: 1 21g= 4.69(21.1)-0.0017(-8.14) +0.38(1.84) r2=0.80Implies 15.1% advantage from politically autonomous sub-national governments

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Regression Model 1

Equation 2: Fiscal DecentralisationDependent Variable: GROWTHMethod: Least SquaresSample: 1 21G=4.48(20.55)-0.0017(-8.65) +0.017(2.12) r2=0.81Implies 10.46% federation benefit from average fiscal decentralisation relative to practice of unitary states

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Regression Model 3Equation 3: Federal Institutions and Fiscal DecentralisationDependent Variable: GROWTHMethod: Least SquaresSample: 1 21g=4.61(21.02)-0.0018(-8.61) +0.27(1.25)+0.01(1.66) r2=0.83Implies a 10.46% political autonomy effect and a 5.63% federal fiscal decentralisationeffect

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Source

Drawn from A.Twomey and G.Withers, Australia’s Federal Future, Federalist Paper No. 1, A Report for the Council for the Australian Federation, April 2007.Accessible on Crawford School website: Glenn Withers’ staff page: www.crawford.anu.edu.auOr contact [email protected] for supply of an electronic copy.