Howard’s sudden announcement of a proposal that the Commonwealth should take over the hospital system may be the result of desperation for a “Big Idea”, as some say. Still, since I have long advocated this idea myself (see the AFR article below), I’m happy to endorse it. The mixture of state and commonwealth funding for health is a recipe for cost-shifting and administrative duplication. If the Commonwealth took over health completely, and somehow managed to hand the GST properly to the states, it would also largely resolve the problem of vertical fiscal imbalance.
While we’ re in the business of tidying up spheres of responsibilities, I’d suggest getting the states out of the university and TAFE sectors (although they get almost no state funding, most universities operate under state acts of Parliament) and the Commonwealth out of school funding.
Update: It appears that I overstated the definiteness of this proposal. Here’s a semi-denial from Howard. In the current quasi-campaign environment, it’s increasingly hard to tell what’s policy and what’s not.
Commonwealth must take responsibility for services
Author: John Quiggin John Quiggin is professor of economics at JamesCook University and author of Great Expectations. Microeconomic reform andAustralia forthcoming from Allen & Unwin
Date: 07/08/1996
Words: 635
Source: AFR
Publication: Australian Financial Review
Section: News
Page: 19
Faced with the choice between lower taxes and improved services, the public will opt for the latter, writes John Quiggin.
Two of the most intractable problems faced by any Federal government are health policy and financial relations with the States.
In the case of health, the Federal Government, despite its free-market credentials, is now contemplating civil conscription as a remedy for the shortage of country doctors. This shortage results, of course, from the same government’s policy of seeking to hold down the total number of doctors to a target level determined by its central planners.
The relationship with the States has the same paradoxical features. As Michelle Grattan pointed out recently, a supposedly “States rights” government is rapidly discovering the need to be even more centralist than its predecessors.
The core of the difficulty in relations with the States is the problem of vertical fiscal imbalance, that is, the fact that the Commonwealth raises the bulk of tax revenue, while the States undertake most public expenditure. The gap must be made up by grants from the Commonwealth to the States, some for specific purposes and some for general financial assistance.
In an unbalanced relationship of this kind, the power of the purse is ultimately dominant. The Commonwealth Government holds the whip hand, and its interests are best served by keeping taxes low, maintaining own-purpose expenditure and passing the burden of expenditure restraint onto the States. The Fraser and Keating governments cut general purpose grants to the States by half as a proportion of GDP. Despite promises to the contrary, the Howard Government has carried on this tradition.
The difficulties of vertical fiscal imbalance are nowhere more evident than in the health sector. The interaction between the Commonwealth and the States involves cost-shifting and buck-passing. More importantly, the Commonwealth’s role as paymaster leads to the adoption of the view that health expenditure, as a proportion of GDP, should be kept as low as possible.
In fact, because health services are a superior good, their share of expenditure should rise as income grows. Moreover, technical progress in health has been characterised mainly by product innovations creating new services. In a properly functioning economy this would imply growth in output. Finally, the health sector is an intensive employer of labour, particularly skilled labour. Policies aimed at artificially constraining demand for health services have depressed labour demand and contributed to rising unemployment.
We could start to resolve the problems of the health sector if the Commonwealth took complete responsibility for health. This would go a long way towards eliminating the present cost-shifting and duplication. More important, voters would be faced with a clear choice between lower Commonwealth taxes and better health services. Survey research consistently shows that a majority would choose better health services.
In addition, a transfer of responsibility for health would eliminate much of the vertical fiscal imbalance problem. First, it would wipe out a large class of specific purpose payments. Second, it would remove the need for around half of the present general purpose Financial Assistance Grant. If a transfer of responsibility for health was combined with some smaller transfers of expenditure responsibilities to the Commonwealth (say, for housing and roads) and some modest transfers of revenue sources to the States, it would permit the elimination of general purpose grants. This would finally allow both levels of government to be fiscally self-sufficient and present voters at both levels with a clear choice between lower taxes and better services.
Self-proclaimed advocates of micro-economic reform and economic rationalism chide Australians for their unwillingness to embrace change. However, those same advocates will certainly dismiss out of hand the economically rational changes proposed here. Their true commitment is not to rational policy, but to cuts in public expenditure and taxes, particularly income taxes, regardless of whether such cuts are economically sensible or are desired by the electorate.
John Quiggin 
‘More important, voters would be faced with a clear choice between lower Commonwealth taxes and better health services’.
It must indeed be important if you had to say it twice (did Trollope resort to this trick too?). But I agree, it is very important. So is the the related point about buck passing, which for us clients of the public health system is the most exasperating aspect of the current setup.
What is lacking in this piece, however, is any systematic discussion of the appropriate responsibilities of state and federal governments. Setting aside the constitution and historical revenue arrangements, what responsibilities should states have? If not health, then why school education or criminial justice?
Could this be the beginning of the end for state governments?
Err, JQ, John Howard has announced no such thing!
I could wish it would happen. I work in mental health in NSW and the system here makes me crazy. The rumours I could tell you about cost-cutting and where the money goes would make your head spin. Alas I am gagged. More or less.
What I do want to know, though, is what the hell happened to “lets have a lottery and use the profit from that to fund hospitals” (1930 something i think). Thats how people with no private health coverage *used* to get care in hospital (before the scare tactics that allowed medibank to exist). Love to know where the profits go now…
“Faced with the choice between lower taxes and improved services, the public will opt for the latter.”
how, as an economist, can you see this as anything but irrational for the majority of citizens.
unless taxation is redistribution from the wealthy to the poor, where the marginal utility of a dollar for the extremely wealthy is insignificant compared to the utility for the poor, it is irrational to want more taxation for services.
its like saying to the government, force me to pay more money into the hospital system. for the middle class (the bulk of the tax money, and the bulk of the taxpayers) they could simply spend this money on health if and when they need it.
how do you address the lost value through running it through the government, plus the inefficiencies associated with providing non-user pays services.
either the tax is regressive (and you should oppose it as an economist), or it is churn (and you should oppose it aswell) or its progressive and then should only be given to the poor (on a smooth curve, so as not to create downward envy at the level just above poor)
there is a case for government spending when there is clear and justified market failure (eg insurance) or natural monopolies, or when its in the best interests of society and theres a largely irrational public. for example, the government should force people to save for retirement and spend on education, otherwise most would just waste their money on short term goods. but note with these types of taxes, they are a good thing for the government to do, but irrational for someone to want to be forced to do. as i said above, its like saying to the government “force me to save because im too weak/stupid to do it myself”
Well gosh c8to, I guess us citizens are just plain irrational. Why do economists have so much trouble accepting the real world?
thats almost an argument zoot.
the fact is, most citizens are irrational. many have little to no understanding of economics, and when polled think the government should simply spend more on everything.
the first question on polls about taxation and services should be “do you know what churn is?”
the government should only provide services that wouldnt work privately funded. for example, its hard to see that the army or police would be sustainable if funded privately. i also support the government forcing people to save super, since in the long run, these people will be thankful, and if they didnt save, they would simply place a huge burden on the rest of the taxpayers once they retire.
what i dont support is increased spending of my tax dollar on health. there are old people who go to gps, under medicare, simply for a chat. do we really need our most highly trained and paid professionals wasting their time doing this. if there was some reflection of the true cost of healthcare it wouldnt be abused as much. (and this is an abuse. instead of paying a GP $50 to talk to this person, that money could be more efficiently spent paying someone without a medical degree $10 an hour to chat to lonely pensioners)
why should i pay for free healthcare for the rest of society. australians have to stand on their own two feet when it comes to healthcare, and at least be presented with some of the cost (either directly or through a co-payment) the only role the goverment should play in this is to prevent private enterprizes from making the situation even worse (that is, they should regulate strongly to prevent market failure when it occurs)
Australians have demonstrated overwhelmingly that they want universal health coverage paid for through the tax system (that’s why your tax dollars are part paying my private health insurance).
Surely the rational way to go is to use the Medicare Levy to fund our health services (don’t just add it to consolidated revenue) and make the levy reflect the true cost of those health services.
With the Medicare Levy at a realistic level and the private health funds off the government teat we punters would be able to make much more rational decisions; the words market forces almost seem appropriate.
I think that most people would support this proposition. It has obvious benefits in terms of simplicity, uniformity and accountability.
I think everyone is sick of the state govt blaming the federal govt for a lack of funding, and then the federal govt blaming the state for mismanagement. That sort of back and forth gets us nowhere in terms of actually improving health services.
Idealistic, John, it would be good if it were that simple … the reality is that the funding *is* mismanaged.
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