The Abbott government has reignited debate about the carve-up of the goods and services tax (GST) after releasing a reform blueprint that includes the option of tying allocations to the population of states and territories.

Another option is a new “floor” to ensure that no state or territory’s allocation fell below a set level – an issue Western Australia has complained about given its share is set to fall below 30 cents for every dollar it contributes next financial year.

The ideas are outlined in a new discussion paper on federation reform (pdf), which also floats a federal takeover of state responsibilities for universities and the potential for the states to take charge of all homelessness services.

The government released the paper on Tuesday, after facing two days of criticism from Labor over leaked extracts which floated radical options in health and education. Tony Abbott was forced to quickly rule out means-testing access to public schools.

The discussion paper says the various options “are presented ‘without prejudice’ with a view to generating public discussion about how reform of the federation should proceed”.

It suggests potential changes to the system for distributing GST revenue – an issue that has long divided state and territory leaders.



In the current system, the Commonwealth Grants Commission recommends GST allocations based on a formula intended “to ensure all jurisdictions have the fiscal capacity to deliver services and infrastructure of the same standard”.

This principle is known as “horizontal fiscal equalisation”.

The paper presents three options:

Maintain the status quo but improve transparency of the process to ensure the public understands how the system works;

Change the system, either by introducing a “floor” for each state or territory’s allocation, or by adjusting the revenue and spending information that is taken into account in the calculations;

Replacing the system with a carve-up based on population, with “top-up grants” to states or territories that were the losers of the new system.

The third is the most radical option for change to the GST carve-up. The paper says it would require the unanimous support of the states and territories to move to a simple per-capita formula.

“If this option were to be implemented in 2015-16, the commonwealth would need approximately $6.8bn to top up current recipient states and territories so they reach the average fiscal capacity and are no worse off compared with the existing equalisation process,” it says.



The discussion paper points to the well-established tension between the commonwealth, which has greater capacity to collect revenue, and the states, which are the main service deliverers and which rely on payments from the federal government.



It says the commonwealth raises 82% of total tax revenue, while the states and territories raise 15% and local governments the remaining 3%. About 45% of total state and territory revenue comes from commonwealth transfers, including the GST.

The paper says it focuses on health, education, housing and homelessness because these are the key areas of social policy “which provide universality of services to Australians, have high levels of expenditure from all governments, and where there is a significant degree of overlap in roles and responsibilities between levels of government”.



It suggests making it simpler for universities to meet regulatory requirements by giving states and territories the option of referring their responsibilities for public universities to the commonwealth.

Public universities are established under state and territory legislation but the commonwealth “is already largely accepted as the system manager and provides the majority of funding”, the paper says.

“If states and territories opt in, this option will reduce red tape for universities in those jurisdictions. For those that do, the commonwealth would take on responsibilities that are currently set out in university establishing acts, such as financial reporting, auditing, annual reporting, governance and oversight of commercial and financial decision-making.”



In the area of housing, the paper suggests a “split system manager” in which the states and territories would have responsibility for regulation of social housing and homelessness services, while the commonwealth would maintain responsibility for rent assistance.



Other options are a shared system manager, where social housing and homelessness services would continue to be jointly funded, or for the states and territories to take full responsibility.



The paper also examines the health system, which it says is coming under pressure from rising costs fuelled by an ageing population, higher demand for health services, and technological change leading to improved but more expensive treatment.



“The commonwealth provides the majority of government health funding ($61bn), but the states and territories also provide a significant amount ($39.8bn). The remaining funding ($46.4bn) is provided by private health insurers, other third-party insurers and individuals, through direct out-of-pocket payments.”



One of the options presented in the health chapter is ensuring the states and territories are fully responsible for public hospitals.

But it acknowledges major pitfalls from this idea: “The ongoing financial durability of this option is likely to be challenged if the level of avoidable hospital admissions cannot be reduced, or if failures in the primary care system lead to public hospitals picking up the slack. Durability will also be challenged if the states and territories do not have access to adequate revenue.”

Another option is for the commonwealth to establish a “a hospital benefit for all hospital treatments and procedures, regardless of whether they are performed in a public or private setting or whether individuals elect to be treated as private or public patients”.

The private health insurance rebate – a key Howard government policy – would be discontinued, with the funds to be redirected into the new hospital benefit.

“The states and territories would be asked to cover the difference between the commonwealth benefit and the cost of the service for public patients to ensure they continue to receive free treatment in a public hospital in line with the Medicare principles and international agreements. This would be the public hospital equivalent of bulk-billing in general practice. People choosing to be treated as private patients could take out private health insurance to cover the difference, or choose to pay the gap themselves.”



The paper also suggests the federal, state and territory governments could be jointly responsible for funding individualised care packages for patients with chronic or complex conditions, in a bid to reduce avoidable hospital admissions.

Other ideas are the creation of a commonwealth health purchasing agency, to purchase health services from private and public providers. State-operated services could compete for contracts with other public and private providers.

“The reform options have been identified by the commonwealth, in close consultation with the states and territories, the prime minister’s expert advisory panel and a range of stakeholders,” it says.



“While a range of reform options have been presented, this does not mean they are supported or agreed by all levels of governments as the solution, or that they must be pursued through the federation white paper.”