The Australian Model of Federalism in 2015 is bad for Business and is Stifling the Country’s Economy
The government policies and structure of the law is critical in determining the competitiveness of a country in the business sector globally. The interrelation of business and the law has been a central issue in Australia due to the current changes in the relationship between the corporate sector and government in the country. The current dynamic nature of the global business sector requires an evaluation of the governance of the country to determine whether it favors competitiveness of the country. Australia currently uses a centralized governance in its provision of the public services and financing.[1] A balance between state autonomy and federal control is critical in determining financing and provision of public services. The Council of Australia Governments (COAG) was created to oversee this balance.
Despite the unification resulting from the centralized federal governance, the system is maiming the business sector of the country. The creation of COAG would not be effective in solving the current economic requirements necessary for attaining global competitiveness. This failure is due to the financing problems that would still prevail in the presence of the body. The body does not have institutional provision for relations.[2] Moreover, the system does lacks transparency and accountability. Consequently, the systems cost Australians high amount of taxes and has compromised quality for quantity.[3] Therefore, it is evident federalism is bad for business and could stifle Australia’s economy. There is need hence for an effective system of governance favorable to the corporate sector. In ascertaining the ineffectiveness of the current system, this paper considers critical areas in which the current system has failed to address. However, the paper also gives areas in which centralized system has achieved. The discussion goes forth to give areas that require reforms in the current governance structure in Australia.
Drawbacks of centralized federalism on businesses and economic growth
For a federal system to be considered effective, it must address all issues holistically and should not work intermittently. The current federal governance in Australia faces various drawbacks that have imparted high cost to the taxpayers.[4] The system is costing taxpayers approximately $9 billion annually. The following discussions consider areas where the system is ineffective. It also considers the repercussions of the ineffectiveness.
Responsibility delegation
Firstly, the system has failed in addressing the issue of proper delegation of responsibilities. The current system favors duplication and overlap of responsibilities. BCA explains that some of the state governments tax less than they should.[5] These states end up requiring funding or transfer of the responsibility to the federal government. Consequently, this inefficiency results in a cost of approximately $861 million to the taxpayers.
Moreover, the structuring of the responsibilities in the current governance is not conducive for business in the country. There is absence of strong incentives for effective delivery of services. Such absence of the strong incentives has compromised the ability to create a strong economy. The states ought to provide these services. However, these services are provided at a subsidized rate by the federal government. Such provision of services has resulted in the problem of cost shifting.[6] This problem costs the taxpayers approximately $836 million.
The current governance is having a problem of overlap of jurisdiction. The Commonwealth lacks proper and effective oversight and coordination in its jurisdiction. Consequently, states have misappropriation of funds by the states as evidenced in overspending and underspending. The overspending or underspending by states aims at maximizing grants given by Commonwealth.[7]
According to Twomey subsidiarity is an essential component of the federal government.[8] This concept is essential for ensuring that the needs of people are addressed properly, and proper selection of target people is achieved. Centralization deprives the system this component and hence preventing the ability of the businesses to operate within conducive local financial circumstances. Brown explains that the centralized federal government will not be able to formulate policies that will allow meeting of local requirements.[9] The federal government requires a proper delivery system. Centralization of the central government will be a hindrance to such delivery system to ensure that local requirements are meet.
Accountability and transparency
The centralization of the federal government has been associated with opacity in the functioning of the federal government.[10] The failure to dissolve responsibilities has compromised accountability in the functioning of the federal government. Decision-making processes are not transparent resulting in the formulation of policies that are detrimental to service delivery. Consequently, policies that do not favor the economic growth of the country have been formulated such as over taxation. The system also favors blame game in the country. Lack of proper delegation of the roles of the federal and the state governments is likely to facilitate failure in service delivery and financing.[11] Such complacency has adverse effects on the business sector and can result in poor economic growth.[12] VFI emergence has also resulted in poor accountability in the federal government.[13]
Industrial relations
The federal government promotes state-by-state fragmentation. Lack of balance and the presence of inflexibility hinder such relations.[14] Due to the various circumstances determining policymaking, various inconsistencies that are detrimental to the operations of the corporate sector exist. According to Brown, several industrial relations are operational in the country.[15] Such multiple industrial relations may cause boundaries issue in the country.
Business taxation
The current system of taxation by the centralized federalism is detrimental to business operations. Taxation is divided into federal and state systems. Wiltshire explains that there are taxes imposed by the federal government, states, territory and local governments.[16] Moreover, the introduction of GST taxes required a reduction of taxation by the state government. However, Wiltshire states that state government had not honored that requirement and consequently impacted a high cost to the taxpayers. These weaknesses in ,the taxation system, are detrimental to the operations of businesses and can drag the country’s economy.
BCA further explains that the system has imposed unnecessary taxes to the taxpayers.[17] For instance, there are land taxes and insurance tax. Such taxes ought to be replaced by more effective taxing methods such as GST. Moreover, there is over taxation to cover for the high level of spending. Moreover, the centralization of the current federal government has resulted in much of the taxes being collected by the Commonwealth. Such collection leaves the states with less fund to cater for regional programs. The state governments has consequently depended on the federal government funding. Such reliance has caused adverse effects in service delivery that affects that are nonconductive for business operations.
Innovation and creativity
The presence of various jurisdiction sections promotes innovation and creativity as one section seeks to outdo the other. Moreover, different ideologies help to ensure that various jurisdictions are performing differently with some of the sections acting as yardsticks for others. The current centralization of industrial relations offers a hindrance to creativity and innovativeness.[18] Consequently, business performance, and hence economic growth, is hindered.
The challenges of the centralized federal government can be summarized by vertical fiscal imbalance (VFI).[19] VFI can be used to explain the current failure of the centralized federal government. VFI is not conducive to business and the economy because it promotes fiscal irresponsibility, prevents democratic accountability and promotes overlap and duplication. Consequently, VFI results in a high cost to the taxpayers as illustrated in the examples given in the discussions above.
Advantages of centralized federalism on businesses and economic growth
The advantages of a centralized federal governance cannot be overlooked. The system is characterized by several possible advantages in improving the performance of the country. One of the benefits of the centralized federal governance is that it allows for the creation of a common market through COAG.[20] Creation of a common market favors the business and the growth of the economy. A common market is essential in reducing the cost of businesses. Moreover, common markets facilitate the competitiveness of businesses in the country.
Moreover, the centralized system has been effective in promoting cooperation in the country. According to Bennett and colleague, the system has facilitated the unification that has been essential in reaching intergovernmental agreements.[21] For instance, some intergovernmental agreements such as Food Regulations Agreement and surface transport security have been reached. Such agreements facilitate the performance of the business in the country. Centralized federal government is essential to ensure that there is uniformity in the country. Such uniformity has been proven to be vital in addressing matters of critical concern to the country and in power and responsibility allocation.
Reforming Australia’s Federal government
As earlier stated, there is need for a balance between the benefits and drawbacks of governance ought to be maintained. The discussion above has highlighted critical areas that may maim business activities in Australia. Therefore, there is need for reforms to ensure proper service delivery and financing in the .country. Some of the areas that require consideration in the undertaking of the reforms are as discussed in this section.
Health sector
Australia’s health sector is among the best in the world. However, the sector may offer hindrances to the performance of the count globally. For instance, there are prospects that the cost for health sector is likely to increase as its demand rises and technological changes in the country.[22] The federal government is required to fund health sector. Current funding is centered on service providers. To improve performance in this sector, funding by the federal government ought to aim outcome and improvement rather than service providers. Financing of the health sector ought to aim at providing quality and cost effective services. Durable funding methods should be formulated and implemented. Such methods would be essential in ensuring consistency in funding the rising demand of the health sector.
Cooperation should be institutionalized
The current system has been shown to suffer from overlap and duplication in the delegation of responsibilities. There is need to develop a clear and effective way of ensuring sharing of responsibilities between Commonwealth and the state governments. Such effective delegation would be attained if efficient and strong structures and cooperative processes are implemented.[23] COAG has shown positives results in attaining this requirement. However, there is need for the institution to have stronger and effective bureaucratic and political role to enable it to perform oversight roles in the country. Institutionalizing COAG would help it to be more effective in its role.[24]
Fiscal decentralization
Centralization has been shown to present hindrances to the performance of the country. According to a study by Twomey and Withers, fiscal decentralization would result to a 7.8 percent advantage compared to unitary systems, in this case the centralized federalism.[25] Twomey and colleague state that the centralization in the country is maiming maximization of the federal dividends. Decentralization would require a reform of the specific purpose payments (SPP). Use of SPP allows the Commonwealth to control state policies. Twomey and Withers explains that SPPs impair creation of partnerships and improvement in the country.[26] Therefore, there is need for the SPPs use to be revised and consequently scrapped if possible.
Conclusion
The federation system of government is still the most suitable mode of governance for Australia. However, the progressive increased and concentrated power of the Commonwealth may prove detrimental in the performance of the country’s global competitiveness. Subsidization is an essential component of federal government. It is essential in ensuring the services and financing is done at the local level to ensure conformance with the needs of the people. Centralization of power and responsibilities hinders proper delegation of responsibilities and hence masks the local needs. Moreover, centralization has been shown to contribute to cost shifting and hinders accountability. Moreover, centralization is detrimental to the promotion of cooperation and facilitation of competitiveness in the country.
Proponents of centralization of federalism in the country argue that it is essential in facilitating unification. Centralization is essential in promoting uniformity of policies in the country that is critical in ensuring businesses are provided with a similar working environment. However, unification is also detrimental to achieving diversity that is critical in ensuring innovativeness of policies. Such innovativeness could prove indispensable in achieving global competitiveness of the business sector and hence promote economic growth. Moreover, proponents argue that COAG would help to curb the current issues of overlap and duplication experienced due to centralization. However, COAG does not have sufficient political and bureaucratic power that enables it to be effective in its roles.
In attaining proper global competitiveness, there is need for the country to make reforms in its policies. Such policies are those related to taxation and financing of such as health and education. Moreover, institutionalization of cooperation would go a long way in helping the country to attain global competitiveness as it would reduce the cost to taxpayers due to overlap and duplication. Reforms that would promote decentralization of financing in the country would also be essential. Such decentralization would help improve the country’s dividends and hence improve business performance and economic growth.
[1] Koutsogeorgopulou, Vassiliki, and Annamaria Tuske. “Federal-State Relations in Australia.” (2015) 3.
[2] Appleby Gabrielle, Nicholas Aroney, and Thomas John, eds. The Future of Australian Federalism: Comparative and Interdisciplinary Perspectives (Cambridge University Press, 2012) 400.
[3] Business Council of Australia Modernising the Australian Federation: A Discussion Paper (Business Council of Australia, 2006) IV.
[4] Business Council of Australia Modernising the Australian Federation: A Discussion Paper (Business Council of Australia, 2006) 7-11.
[5] Ibid
[6] Business Council of Australia Modernising the Australian Federation: A Discussion Paper (Business Council of Australia, 2006) IV.
[7] Ibid
[8] Twomey Anne, ‘Reforming Australia’s Federal System.’ (2008) 36 Fed. L. Rev 57, 59-60.
[9] Brown Alexander Jonathan. ‘Reshaping Australia’s Federation: the choices for regional Australia.’ (2007) 13(3) Australasian Journal of Regional Studies 235, 337-238.
[10] Saunders Cheryl, and Michael Crommelin. ‘Reforming Australian Federal Democracy.’ (2015) U of Melbourne Legal Studies Research Paper 711, 1.
[11] Department of the Prime Minister Cabinet. ‘Discussion Paper: Reform of the Federation.’ (Government of Australia, 2015) 20-21.
[12] Bennett Scott, and R. Webb. ‘The politics of the Australian federal system.’ (Parliamentary Library , 2006) 9-12.
[13] Wiltshire Kenneth. ‘Australian Federalism: The Business Perspective.’ (2008) 31 UNSWLJ 583, 607-612.
[14] Ibid
[15] Brown Alexander Jonathan. ‘Reshaping Australia’s Federation: the choices for regional Australia.’ (2007) 13(3) Australasian Journal of Regional Studies 235, 337-238.
[16] Wiltshire Kenneth. ‘Australian Federalism: The Business Perspective.’ (2008) 31 UNSWLJ 583, 607-612.
[17] Business Council of Australia Modernising the Australian Federation: A Discussion Paper (Business Council of Australia, 2006) 9.
[18] Twomey Anne and Glen Withers. ‘Federalist paper 1: Australia’s federal future.’ ( A report for the Council for the Australian Federation, 2007) 13.
[19] Wiltshire Kenneth. ‘Australian Federalism: The Business Perspective.’ (2008) 31 UNSWLJ 583, 607-612.
[20] Business Council of Australia Modernising the Australian Federation: A Discussion Paper (Business Council of Australia, 2006) 24.
[21] Bennett Scott, and R. Webb. ‘The politics of the Australian federal system.’ (Parliamentary Library , 2006) 18-19.
[22] Department of the Prime Minister Cabinet. ‘Discussion Paper: Reform of the Federation.’ (Government of Australia, 2015) 28-43.
[23] Business Council of Australia Modernising the Australian Federation: A Discussion Paper (Business Council of Australia, 2006) 35-39.
[24] Twomey Anne and Glen Withers. ‘Federalist paper 1: Australia’s federal future.’ ( A report for the Council for the Australian Federation, 2007) 40-49.
[25] Ibid.
[26] Ibid
