Another Tenterfield needed to drive reform: Professor the Hon. Stephen Martin

With the 125th anniversary last Friday of Henry Parkes's oration calling for the formation of an Australian federation and the federal government's Reform of the Federation white paper process under way, we need another Tenterfield moment to engage the imagination of Australians about what our federation should look like in the future.

While federation took another 12 years after the Tenterfield oration, and unfortunately did not come in Parkes's lifetime, his address largely was seen as the turning point in building the necessary momentum.

The question is whether Tony Abbott's speech will be the catalyst for similar leadership and momentum to drive an adult discussion.

In truth, our federation has largely worked well, delivering political stability and economic prosperity, but it can do better.

The Prime Minister's call for a grown-up conversation with state governments is a start, but what we really need is a national conversation about federalism. This is not new. Debate about the structure of our federation has been a recurring issue since its introduction and the federation has evolved along the way.

What the federalism debate must focus on is correcting the level of vertical fiscal imbalance - with the commonwealth collecting most government revenue while state and local governments are responsible for delivery of most public services.

The Prime Minister's comments last weekend acknowledging the need to harmonise revenue and spending responsibilities is hopefully a promising sign that the federal government is open to reforms that are necessary and to compromises that will be required by both federal and state governments to make them happen.

In the Committee for Economic Development of Australia research report A Federation for the 21st Century, released yesterday, a key recommendation for addressing this imbalance is increasing state government control of revenue, which would be targeted specifically for schools, health, public transport and roads.

We need to move away from state governments being held to ransom by the federal government, as we have seen in the past, and match service delivery responsibility with funding.

For example, the federal government doesn't deliver sufficient funding for transport infrastructure because while it collects most of revenue, it is not responsible for delivery.

Distribution of federal funding to states in vital areas, such as health and education, should not be swayed by politicking.

Options for aligning revenue and expenditure requirements should include assigning a fixed portion of income tax to states for funding schooling; allowing state governments to develop a comprehensive land tax or property charge with funds raised to be used specifically for public transport; and state government extending road-use charging and receiving the fuel taxes collected by the commonwealth, specifically to build and maintain roads.

Activity-based funding reforms in education, health and welfare could also be extended.

The reforms to hospital funding in Victoria are a good example of how this can work well. Hospitals are funded on each activity undertaken rather than individual hospitals having to lobby for an overall amount each year.

This also stands as an example of the issues due to vertical fiscal imbalance - the rollout of this approach to other states has been stalled because the federal government removed funding promised by the previous government in the May federal budget.

Whatever options are put on the table as part of reforming our federation, the best outcomes are likely to be achieved not by a single solution but by a combination of different approaches. That's why we need a national conversation, run in conjunction with the federal government's white paper process during the next year, encouraging the participation of as many people as possible.

History shows that the best outcomes in federalism have been achieved when the public is engaged, not just politicians. Another Tenterfield moment will ensure we get the right reforms for our federation.

This is an opinion piece by CEDA Chief Executive, Professor the Hon. Stephen Martin published by The Australian on 28 October 2014.