Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 12: Overall Assessment
and the Need for Reform
Health care represents a major area of spending for States, with over 20 per cent of
their expenditure committed to it. States are major providers of public hospitals and
community health services and therefore will also be susceptible to uncertain health
care costs with the introduction of new drugs and treatments and the impact of an
ageing population.
An ageing population is also likely to place particular pressures on other State public
services and infrastructure. An older and less mobile population may increasingly turn to
public transport, seek special accommodation and require home-based services. This
effect will be especially important in regional areas, which will generally experience
greater levels of population ageing than cities.
State Governments are also major providers of education. An important conclusion of
the Intergenerational Report is that State Government finances will benefit from falling
education expenses as the proportion of people aged fifteen years and under declines.
However this is a narrowly focused view of future education requirements. Knowledge
and innovation appear to be increasingly important inputs to all stages of production,
suggesting that the role of education in successful economies may become more critical
in coming decades.
A broader perspective would consider education as part of the solution to the problems
of an ageing population. Better utilising a labour force that is a smaller proportion of the
population suggests the need for more intensive use of capital in the production
process. This includes developing human capital through longer and better education,
training and retraining the workforce and broader adoption of lifelong education.
Education can also help maintain higher labour market participation rates and reduce
long-term unemployment, especially in older age groups. This broader perspective of
Australia’s future education requirements suggests the potential for a growing rather
than declining role for education in the economy.
Major components of State Government revenues may also face pressure as a result of
population ageing. Consumption patterns of older people favour spending on health
care and more basic foods. Both are largely exempt from the GST and may see GST
revenue lag behind economic growth over time. The lower propensity of older people to
change residence may also result in property conveyance duties declining as a
component of State revenues.
These impacts on State finances need to be understood in the context of the widely
varying revenue raising capacities of the different levels of government. The
Commonwealth raises over 80 per cent of taxation in Australia, compared to
approximately 15 per cent by the States combined. If GST revenue is excluded from the
calculation the Commonwealth, largely through its broadly based income taxes, still
raises over 4.5 times as much as all the States through their much more narrowly based
taxes. The Commonwealth has much greater capacity to absorb the risks of population
ageing than the States.
There is a fairly long lead-time – at least fifteen years – before the ageing population
exerts significant pressures on the finances of Australian Governments. However reform
of financial relations needs to recognise the long-term context in which it will be
expected to operate.
In the lead up to these demographic and other changes, all Governments will need to
manage their major programs and overall finances more closely to ensure they are in a
sound financial position. Current financial arrangements blur the line between
Commonwealth and State responsibilities, and force Governments – and particularly
State Governments – to plan and manage in an uncertain environment.
FINAL REPORT [189]