Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 12: Overall Assessment
and the Need for Reform
12.5 Simplicity, transparency and
accountability
A complex and little-understood system
One of the most striking features of the Australian system of HFE, whether viewed in
isolation or compared to the systems of other Federations, is its extraordinary
complexity. The methodology for calculating allocations has, over time, been elaborated
in increasingly fine detail.
As observed in Issues in Commonwealth–State Funding (Garnaut and FitzGerald 2002),
the system reflects what appears to be a particular Australian genius for almost infinite
bureaucratic elaboration, usually in pursuit of a perceived concept of equity.
Complexity has a number of adverse effects, even if the principles on which
arrangements are being elaborated are sound, including:
• increasing transaction costs in running the system
• difficulty in evaluating performance and efficiency
• weakening democratic accountability because it almost always limits public
understanding of what is being done.
The CGC claims this complexity makes its calculations more precise, but in reality it
generates increasing complexity that requires unavailable data to make the necessary
calculations. Invariably, more weight is placed on the judgment of those making the
assessments.
To its credit, the CGC has not generally been controversial and at times has acquired
something of the status of an arbitrator. However, the CGC removes important national
budgetary decisions from the accountable political process to officials acting with a great
deal of autonomy. Donor States have questioned this recently in reaction to the CGC’s
increasingly extreme approach to equalisation.
Overall, the current system of HFE implemented by the CGC is a mystery to almost the
entire Australian community.
Complexities in specific purpose payment allocation
The most important source of complexity in the SPP arrangements is in the interaction
between Commonwealth and State Government responsibilities. The Commonwealth
places conditions on funds it provides in areas of primary State responsibility, but the
States in practice can exercise considerable discretion. With the SPPs, the
Commonwealth is providing, to some extent, fungible money (Garnaut and FitzGerald
2002).
When both levels of government seek to influence spending and emphasise their own
roles to the electorate, the public has understandable difficulty in allocating responsibility
for good or poor performance. Federal election campaigns can be fought on issues that
are primarily the States’ responsibility (such as health) without the public being able to
assess properly the extent of real Federal or State influence in these areas.
FINAL REPORT [179]