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6 – Reforming the Federation

As outlined in Chapter Three, the current operation of Australia’s Federation poses particular challenges to the delivery of good, responsible government.

Achieving productive reform in our Federation offers significant potential for better government. The competitive dimension of a federation can inject the right incentives into the system for governments to improve public sector efficiency. It can also improve accountability and encourage more responsive government.

The Commission was invited to comment upon the current architecture of Commonwealth-State financial relations and asked to assess the current split of roles and responsibilities between the Commonwealth Government and State and Territory governments.

The Commission recommends that the degree of vertical fiscal imbalance within the Federation be substantially reduced with a corresponding reduction in the Commonwealth’s taxation revenue.

This would have a beneficial impact on the efficiency and effectiveness of governments. It would also increase the accountability of Commonwealth and State governments as the link between their taxing and spending decisions would be clearer to their electorates.

Any reform of financial arrangements cannot be done in isolation of the need to rationalise the duplication of expenditure responsibilities between different levels of government.

The Commission has examined four related areas:

  • rationalising roles and responsibilities;

  • addressing the issue of vertical fiscal imbalance;

  • adopting a new approach to horizontal fiscal equalisation; and

  • reducing the administrative burden imposed by federalism.

The time has arrived to be ambitious and bold in reforming and improving Australia’s Federation.