GST sure to rise under Rudd's health takeover

Bookmark and Share Health | Sinclair Davidson
The Australian 4th March, 2010

Do we really want some Canberra bureaucrat determining how much should be spent on our wellbeing?

WHILE Kevin Rudd acknowledged the "long-suffering Australian taxpayer" in his healthcare policy announcement at the National Press Club in Canberra yesterday, there was much more to dislike than like in his speech.

He is proposing that the commonwealth provide dominant funding of the health system, increasing its share from 35 per cent of the cost to 60 per cent. The devil is in that detail.

There are, of course, aspects of the policy that are good. Published performance standards should be welcomed. Ideally they would be at a sufficient level of detail so league tables can be established, something yet to happen in education. The pledge of "no net increase in bureaucracy" also should be welcomed, although I cannot see this being met.

At the least federal and state governments will have to establish a hospital inspectorate and auditors to ensure the national standards are being met. Otherwise doctors and nurses will spend more time filling out forms for Canberra than treating patients. Just look at the administrivia drowning universities.

The financing and governance aspects of the announcement are troubling; on that basis it is poor policy. Separating decision-making and financing creates what economists call "agency costs". In this policy, decision-making is far removed from financing.

Rudd tells us that his plan will eliminate waste and duplication, but greater agency costs imply greater waste and duplication, not less. It is difficult to see how clinical decisions will drive the system when the dominant funder will be dealing with a large number of small hospital networks. This is the typical Canberra strategy of "divide and conquer". It is cold comfort that an "independent umpire" will determine "efficient prices" for procedures.

Do we really want some Canberra bureaucrat (note the ``no net increase in bureaucrats'' promise) determining how much should be spent on our health? Do we really want to have health spending allocated on the same basis that the Commonwealth Grants Commission divvies up the GST?

This policy is to be financed by one-third of the GST revenue. People may think that to be sensible, but hang on to your wallets. Rudd promised further ostensible reform. He identified that the gap between expected GST revenue and demands on the health system is expected to increase.

That's code for a future increase in the GST rate. No doubt, through time the commonwealth will find that it needs to spend more and more on health. "GST up" will become the new perennial budget headline.

Unlike many other countries with a GST-type consumption tax, the 10 per cent rate has been very stable. The long-suffering Australian taxpayer has been fairly confident that the rate wouldn't escalate to very high levels. That was the genius of the Howard government's implementation. The commonwealth bore all the political costs of the GST while deriving none of the benefit.

Once the commonwealth starts to derive benefit from the GST, we can expect the rate to escalate fairly quickly to European Union-type levels. In the context of revenue-neutral tax cuts elsewhere in the system, that may be a valid policy choice. Rudd, however, has spending plans.

Rudd points to Australia's high vertical fiscal imbalance as being part of the problem in health care. It is true that the healthcare costs are expected to grow rapidly in future and that the states have poor fiscal bases to meet those costs. It is not clear that greater centralisation is the solution to this problem. It is especially unclear whether Canberra is up to the challenge. The home insulation program was a locally managed, centrally funded program and that just didn't go well.

The solution to high vertical fiscal imbalance is not stripping authority and funding from the states but ensuring that the states have a sound fiscal basis for service delivery. That means the commonwealth needs to collect less revenue and the states more revenue. It looks like the Henry tax review won't be making that recommendation.

Effective service delivery requires that decision-making and funding be localised as much as possible. That means greater powers to the states and less to the commonwealth.

Rudd also spoke of directly funding regional areas and bypassing the states. That is a recipe for a huge boondoggle. He will also need a constitutional amendment to do so. Hopefully the states will refuse to co-operate and force a referendum.

This will be the largest healthcare reform in Australian history. The electorate deserves an opportunity to express an opinion of this reform separately and over and above considerations that come bundled up at elections. This policy isn't only about health; it is about taxation and about the nature of our federation.