Former Queensland premier Peter Beattie argues that Australia doesn't need three levels of government. Credit:Glenn Hunt Overall, the Australian federation needs serious reform. Too often in Australian politics the debate centres on what leaders and governments will not do, rather than what they will do. Politics has become a battle to the bottom where personality attacks are more important than long-term policies. Former PM Tony Abbott and former premier Campbell Newman blamed the media for their demise. Indeed, the 24-hour media cycle and social media are often blamed for the state of our politics. The reality is, it is a question of leadership. Leaders should set the agenda and not be led by events and circumstances. So what are the key problems? The tax sharing arrangements in Australia between the Commonwealth and the states are a mess. There is no national strategy to build the nation's desperately needed infrastructure in partnership with the states, funding of education and health has become a blame game between governments, and the duplication in roles between the states and the Commonwealth is costing taxpayers billions. Australia must forge a clear delineation for the roles for the states and the Commonwealth and a tax revenue base to support it. High Court cases in recent years, particularly the Howard government's 2006 win on the constitutional validity of the Work Choices legislation, gave the federal government power over industrial relations, thereby seriously eroding the power of the states.

Mr Beattie says Campbell Newman could have won the 2015 election if he was honest about the impact of the GFC on Queensland's economy. Credit:Glenn Hunt This was one of the many reasons I retired from state politics. In the end the future for state governments is dim. By upholding the use of the corporation's power as a constitutionally valid basis for Work Choices, the High Court simply broadened the Commonwealth's authority at the expense of the states. Sadly there has been no redefining of the role of the states since and no reform of the distribution of tax revenue to the states. The whole core problem of Commonwealth-state relations will never be fixed until the states are funded properly or abolished. The choice is simple; fund the states properly, or go through a referendum to abolish them and give their responsibilities to the Commonwealth. Peter Costello's Newman government-commissioned audit was seriously flawed, Mr Beattie argues in his new book. Credit:Glenn Hunt At COAG, I was the last premier to sign off on the goods and services tax deal with the federal government when John Howard introduced the GST. This was because Queensland did not have the number or range of taxes the GST abolished in New South Wales and Victoria. The GST was meant to be a growth tax which ensured the states had a clear revenue source. Indeed, it allowed my Queensland government to fund an extra year of schooling for preschoolers. The inability of states to pay health and education costs had reached a critical stage.

Nevertheless, because Queensland had been a low-tax state, I would not sign off on the GST agreement unless it provided there would not be future increases in the GST rate of 10 per cent without the approval of all the states. I saw this as a necessary safeguard at the time. However, the GST is no longer a sacred cow. Indeed, the push by Treasurer Scott Morrison to link any extra Commonwealth payments from an increased GST to state competition reform is sensible and worthy of support. The ugly reality facing the federal and state governments in Australia is the collapse in revenue growth. This has made a significant contribution to our fiscal problems but no one has had the guts to tackle it honestly. The GST should be increased to 15 per cent and the increase earmarked for health and education. The spiralling costs of health are putting huge pressure on state budgets. To focus on cutting expenditure alone is only dealing with part of the problem. To fix the budget long-term, both levels of government have to fix the revenue base consistent with the economic and demographic realities of the next 20 years. My home state of Queensland is a good case study. There, the global financial crisis slashed mining royalties and cut stamp duty and land tax. Low jobs growth also meant weak growth in payroll tax returns. Low inflation savaged fiscal drag and revenues. Post-GFC Queensland politics was dominated by avoidance and the usual political blame game. The Newman government would have had a better chance of being re-elected in 2015 had it honestly told Queenslanders that the GFC had devastated the state's royalty's income, thereby savaging the state's financial position and with the end of the mining boom required a reengineering of the state's economy. Queenslanders would then have understood the problem.

The only bright spot was the onset of my government's liquefied natural gas strategy, which will deliver royalty revenue growth of 30 per cent in 2014-15 and 17 per cent in 2015-16 depending on the price of oil. The Newman government was too focused on cutting expenses to a level of obsession, blinding it to the revenue growth problem. This approach damaged the Queensland economy and the growth it needed. Its commission of audit, chaired by former federal treasurer Peter Costello, highlighted the importance of revenue to fixing the current fiscal difficulties. Unfortunately, it used ultra-cautious modelling to pump up its story to the point of being ridiculous, then ignored revenue in all but two of its 155 recommendations, focusing instead on expenses and asset sales. At the time Adrian Noon, a smart former Queensland Treasury official, pointed out the faulty analysis underlying the Costello report. It had been constructed on highly conservative, unrealistic assumptions. The Costello audit forecast revenue of between 1.7 per cent a year as its lower growth scenario and 2.5 per cent a year as its higher growth scenario. This analysis was confirmed as overcautious as early as the 2013-14 Queensland government's mid-year fiscal and economic review, where the four-year revenue growth for the general government sector was 28.1 per cent. Annualised, revenue averaged 6.4 per cent a year, way above the ridiculous modelling in the Costello report.

The politically motivated audit didn't need to overcook the story with ultra-conservative assumptions to show there was a real fiscal problem. Very few picked up on this fundamental difference between reality and Costello. The Newman government's focus on expenditure was important but its cuts to the public service, selling government offices and reducing expenditure in Queensland, would only have bought limited time in budgetary terms, perhaps three years if they had been re-elected. Even raising $7-10 billion from the proposed sale of assets such as the Townsville and Gladstone ports, the Mount Isa to Townsville railway line, government-owned generators at Stanwell and CS Energy and Sunwater's industrial assets, would only have bought time. To make matters worse, cutting sources of revenue and tax giveaways by the government cost the budget more than $402 million, rising to more than $518 million the following year. That money would have helped balance the budget and save public service jobs. Offering a tax holiday to the first consortium to get a mine going in the Galilee Basin fell into the trap of giving away revenue before it starts. The Costello audit acknowledged that my treasurer, Terry Mackenroth, delivered the three largest general government budget surpluses in Queensland history. They were $3.3 billion in 2003-04, $3.9 billion in 2004-05 and $3.7 billion in 2005-06. As a proportion of revenue, that was 13 per cent, 14 per cent and 12 per cent respectively. Mackenroth was Queensland's best treasurer.

Mackenroth understood revenue and expenses. Indeed, expenses had grown fairly slowly during the previous 12 years. Real per capita expenses growth was only 0.75 per cent a year in the six years to 2006-07 and it was 2.3 per cent a year in the next six years. That higher growth was driven in part by the response to the global financial crisis. Revenue grew by 65 per cent from $18.3 billion in 2000-01 to $30.1 billion in 2005-06 and expenses grew by only 38 per cent from $19.1 billion in 2000-01 to $26.4 billion in 2005-06. When higher revenues arrived, money was spent on long-running problem areas such as disability services, the health action plan and the extra year of prep school, and the infrastructure backlog in energy, the south-east Queensland plan and water. There is no doubt the GFC belted Queensland. The state's massive capital program should have been cut back when the crisis hit. I retired before the GFC in 2007 but I would have slowed the program until the budget improved. Now, with the slowing of the mining boom leaving an investment hole, expanding the economy is the best way to increase the revenue base.

Costello barely recognised the great structural change in the Asian century, which is why our investment in liquefied natural gas was a game changer. Peter Beattie's new book, Where To From Here, Australia? will be available for instant purchase in paperback, or for Kindle or Android, on the Strictly Literary website from Saturday.