The Prime Minister and his Government ought to be commended on initiating both the Reform of the Federation White Paper and the Tax White Paper, thorny issues of public policy as they are. However, the fact that the local government was almost entirely overlooked in the Reform of the Federation Discussion Paper released this week is a blight on the work to date.

The President of the ALGA, Mayor Troy Pickard, expressed concern that local government has thus far been largely left out of the reform dialogue, stating: 'the outcomes of the reform process through the Federation White Paper must also address how the needs of communities at the local level can be better met'. Indeed. In this brief discussion I 'think through' this virtual absence by examining the options canvassed for reforming federal financial relations in the 'Discussion Paper' – in essence I provide a summary of what the Government's options for reform are with an eye to local government. It's not pretty.

The first point is that, yes, local government is remarkably absent from the 'Discussion Paper'. In fact the only discernible mention is on p. 92 in Chapter 5 'Federal Financial Relations', where (in a text-box, no less) it is asserted that 'own-source revenue accounts for about 90 per cent of total local government revenue nationally' and that 'the options [for fiscal reform] are not intended to foreshadow any potential changes to local governments funding arrangements', in particular the funds allocated under the Local Government (Financial Assistance) Act 1995. 

These claims represent local government as: (a) largely self-funded; and (b) existing within a hermeneutically-sealed vacuum pack moving into the future in the face of potentially radical reforms to Australia's fiscal federalism. Both claims are spurious: The extent of local government self-funding is highly variable across the Federation (as is the self-funding by the states and territories); further, this government has already eliminated the indexing of FAGs grants, a fact not lost on the ALGA as evidenced by Troy Pickard's recent visit to Canberra to point out that the sector would be short of $925 million over 2017-18 as a result. That similar reforms would not be entertained in the future is by no means guaranteed. 

What I am referring to as the 'hollowing out' of the Federation (in other words being devoid of its third tier) commences from the beginning of the 'Discussion Paper'. For instance the work of A. J. Brown, specifically the Australian Constitutional Survey 2014, is cited as evidence that: 'most Australians believe that, while the Federation is mostly working well, it is not working as well as it could'. This places to one side the fact that the work of A. J. Brown writ large has fundamentally been about addressing the issue of regionalism (inclusive of localism), not a 'clean lines' approach to Australian federalism. ACELG discussed the work of Professor Brown comprehensively as part of our Background Paper released last year.

But I digress. The 'Discussion Paper' canvasses six options for reform of Australia's fiscal federalism: three to address Vertical Fiscal Imbalance (VFI) and three to change Horizontal Fiscal Equalisation (HFE). 

For VFI (p. 91) these are:

1. Consolidate existing payments into an untied service delivery stream using a revised and reaffirmed Inter-Governmental Agreement;
2. Increase State and Territory access to tax revenue, by:
1. Allocating a share of personal income tax to the states by either [i] 'making room' in the tax base for the states and territories to set their own income taxes (which would be collected by the Commonwealth) or [ii] the Commonwealth transferring a fixed share of income tax to the States and Territories;
2. Expanding the GST; or
3. Expansion of state and territory own-source revenue (e.g.: payroll tax or land tax) offset by reductions;
3. Reallocate expenditure responsibilities to the Commonwealth (i.e.: increase Commonwealth responsibilities).

We can reflect upon the various virtues – or indeed otherwise – of these options for reform to VFI, (as indeed the Discussion Paper does, alongside reminding us of the benefits of high VFI in the first place). Nevertheless, noticeably absent from these possible reforms is any mention of local government. As such, both a heightened assumption that local government will be self-financing and that they become even more beholden to the states is clearly envisioned.

With respect to HFE, the Discussion Paper (p. 100) canvasses the view that per capita equalisation, while serving the goal of equity, 'implicitly discourages the economically efficient movement of individuals or investment to States and Territories with better economic opportunities or lower costs'. The three options for reform are:

1. Maintain the status quo, with changes to improve transparency;
2. Less comprehensive equalisation through changing the current methodology. This would be achieved by:
1. Establishing a GST relativity 'floor', where a minimum level (50%) GST revenue to which any State or Territory is entitled is set [and per capita equalisation is presumably dispensed with]; or
2. Apply a discount on all revenue and expense assessments used by the Commonwealth Grants Commission (CGC) [in other words, ring-fence some revenues from the individual jurisdictions from the calculations of the CGC]; or
3. Less comprehensive equalisation through a transition to an equal per capita distribution of the GST, with top-up grants to recipient States and Territories.

Again, we can reflect upon the relative virtues – or indeed otherwise – of these options, with options 2 and 3 seeing less equalisation (option 3 radically less so). Again, noticeably absent from these possible reforms is any mention of local government. Again, we can envisage both a heightened assumption that local government will be self-financing and that beyond their own revenue-raising powers they become – even more so – supplicants of the states.

Make no mistake about it: Local government is, at present, off the table in the current considerations of reforming the federation. To pursue a reform agenda devoid of its consideration is to ignore the robust debate on the issue represented by the work of the ALGA, A. J. Brown (above) and others (including ACELG). It is to hollow-out the Federation.

Dr Bligh Grant is Senior Lecturer in Local Government Studies at the UTS Centre for Local Government.