States Can’t Let Feds Carry All the Economic Load

The Age

By Greig Gailey

President
Business Council of Australia

Taxation and spending policies should align between state and federal governments, writes Greig Gailey.

The global economic crisis is a defining moment for Australia’s federation.

The Council of Australian Governments was reborn last year under the leadership of the Rudd Government. Our two main levels of government have shown they can work together effectively to tackle issues of national importance.

But the economic crisis presents new and significant challenges for state and federal governments, their budgets, and how they work together. The global downturn is now expected to be of a magnitude not seen since World War II and Australia cannot escape its effects.

To its credit, the federal government realised early that this downturn was different and serious. Despite Australia’s relative strengths, the federal government wasted no time in quickly announcing a significant stimulus package aimed directly at shoring up demand and economic growth in the near term.

The Business Council of Australia strongly supported these measures at the time and it appears that this package has had a notable effect on demand.

But in this deepening downturn, more is now needed – and the simple fact is that the actions of the states must follow the lead of the federal government. Recently, we have seen states raising taxes in the face of slower economic growth, and NSW has announced spending cuts, including removing $300 million from spending on the Pacific Highway.

In previous downturns, state governments have rushed to cut spending in other areas such as maintenance budgets.

Now is not the time for these actions.

The federal government has endorsed G-20 nations working together to restore global growth, including through the use of co-ordinated and decisive fiscal measures to stimulate demand.

The BCA calls on state and federal governments – the ‘A-8’ – to do likewise.

State and federal governments must align their taxing and spending policies to minimise Australia’s economic downturn. This should be the top priority for the first meeting of COAG this year.

All levels of government must pull together for the national budget to be as effective as possible. The importance of state governments demonstrating their support for growth and for the policy actions of the federal government cannot be understated in the current environment.

Decisive and clear action can help restore confidence at a time of considerable uncertainty.

Government spending can and should seek to limit the damage of this crisis by offsetting declining private sector spending and investment. The federal government has an important role to play in seeking to support demand over the months ahead.

Spending measures that are timely, targeted and temporary are likely to have the best short-term effect, while also limiting the effect on the budget over the longer term.

But the greatest benefit to growth now and in the future will be delivered by spending in areas that boost productive capacity – that is, education and infrastructure.

The BCA supports the bringing forward of spending on projects that will deliver long-run returns and that are able to be initiated quickly and executed well. In all respects, the role of state governments is crucial.

It is important states do not pull back on beneficial spending and commitments to tax reform for the sake of short-term improvements in budgetary positions.

It is equally important state governments ensure new programs, including those agreed to through COAG and funded through new national partnership agreements, are delivered in a timely and effective way.

While the BCA believes that fiscal deficits are likely and can be justified in light of the circumstances confronting Australia, they cannot become entrenched.

Fiscal discipline must continue to apply. Now more than ever the quality of government spending matters.

The BCA urges all governments to redirect ineffective and poorly targeted spending to better support economic and social objectives in the present environment.

And, while we are all worrying about this year’s problems, we must not lose sight of our longer-term aspirations for Australia.

This is particularly so when the reforms needed to achieve these aspirations are, on the whole, complementary to immediate policy challenges.

There are tough times and tough decisions ahead – but disciplined budgets and ongoing reform will support Australia’s resilience and position us to make the most of the new opportunities that emerge through recovery.