Tough global times demand strong leadership.

A tougher global economy is an opportunity to encourage and fast-track reform.

It is an opportunity to commit to nation-building investments in our physical and human capital.

It is an opportunity to reform how we deliver services, like health, to better meet the needs of an ageing population and meet growing demand.

It is an opportunity for Cooperative Federalism – for State, Territory and Commonwealth leaders to roll up our sleeves and work together on the challenges we face today, and to build the next era of economic prosperity.

That’s why next week’s Council of Australian Government is so crucial.

COAG is Australia’s only decision-making body capable of addressing the challenges and establishing the reforms that transcend the Federation’s levels of Government.

After years of dashed hopes from Canberra, we finally have a Commonwealth Government committed to COAG, committed to reform.

We finally have a Commonwealth Government committed to partnering with the States to address the issues at the heart of our prosperity and the quality of life of our citizens.

The Prime Minister deserves full credit for this.

National reform cannot stay in the starting blocks any longer.

This COAG meeting is a once-in-a-generation opportunity to respond to the big challenges facing Australia.

The November 29 COAG needs to deliver a range of outcomes:

• Real reform – Major medium and long term economic reform focused on reducing red tape, as well as reforms to Special Purpose Payments that encourage accountability and better performance;
• New performance arrangements – New arrangements that hold the States to performance benchmarks; provide incentives for measurable improvements; and encourage all States to strive for best practice;
• A big lift in capital works – Action from the Commonwealth to significantly lift its commitment to infrastructure;
• Real action on human capital – Action on the next wave of the Human Capital Agenda; and
• Better hospitals and healthcare – an Australian Health Care Agreement that drives better health outcomes for patients.

Tougher global economic circumstances challenge the Federation.

It would be all too easy to temporarily shelve reform.

But this would be the wrong direction for COAG, and the wrong direction for the nation.

The case for reform and the will to undertake it has never been stronger.

To shelve reform now would be unforgivable for our nation and our Federation. We need this COAG meeting to be the one that made the difference.

FEDERALISM – A BALANCED PERSPECTIVE

To get more out of Australian Federalism, it needs to be designed not merely to carve up the pie, but to keep growing it.

That is why it is so critical the COAG Reform Agenda reward those who perform well, rather than merely compensating those who fail to invest and who fail to reform.

Throwing good money after bad can never be the answer, if we are to give Australians the services they deserve and build for the future. Investment must come with reform.

Federalism is not only a function of how the Australian nation was born; it is also a reality of how we are governed today. There are very few areas of real policy significance that one level of government can address alone.

The debate is therefore not about whether Federalism works, but about how we can make it work a lot better.

In some cases, this will require greater national consistency across jurisdictions or to identify minimum national standards or benchmarks that all jurisdictions must meet.

In other cases, making Federalism work better will require policy diversity and competition, enabling the community to observe different policies at work and compare their effectiveness.

National Competition Policy demonstrated that with transparency and the right incentives, this approach can be a powerful driver of reform.

While there will be debates about when and where cooperative and competitive Federalism are needed, the test must surely be what works best.

It is often forgotten that Australian Federalism has served us very well:

• Our economy has enjoyed 15 years of consecutive growth, and grown at the fastest rate in the developed world;
• Our business environment is regarded as among the most competitive in the world; and
• Our health system delivers outcomes among the best in the world, at a lower cost than other nations.

THE “RIVERS OF GOLD” MYTH

The untold reality is not that Australian Federalism performs well, but that it does so despite excessive vertical fiscal imbalance.

States are often characterized as begging when they ask for more funding from Canberra. But the reality is that States have no choice but to depend on Commonwealth funding to provide quality school, hospital and transport services.

And the Commonwealth has no choice but to rely on the States to deliver school, hospital and transport services that respond to the needs of their local communities.

The Commonwealth and the States need each other to deliver the services and the infrastructure our citizens and businesses need.

With only the odd exception, the Howard Government chose not to work with the States and Territories on these critical issues.

Instead it chose political expediency – accusing the States of not doing enough with the so-called “rivers of gold” from the GST.

The facts tell a different story. The GST “rivers of gold” were – and are – a myth.

Since the introduction of the GST, Victorian Treasury confirms that net payments to the States have been below the pre-GST average of six per cent of Gross Domestic Product.

While Commonwealth tax revenue grew by an average of 26 per cent from 1999-2000 to 2005-2006, State tax revenue grew by an average of just 8.2 per cent.

Today I am releasing new data which shows unambiguously that between 2000-01 and 2008-09, GST revenue to the Victoria has shortchanged our State by an aggregate of $4.2 billion.

The Treasury data compares what Victoria would have received had we retained the State-based taxes versus the Guaranteed Minimum Amount and actual payments.

But this is just the first part of the story. In order to assess the full impact of the GST on a State like Victoria, you also need to take account of Horizontal Fiscal Equalisation.

Taking HFE into account, over that period Victorian taxpayers have been shortchanged a massive $11.4 billion in revenue from Canberra.

Peter Costello’s promised rivers of gold from the GST have turned out to be as elusive as Lassiter’s Reef.

The rivers of gold have not flowed to the States. The bulk of them have flowed inland – all the way to the Federal Treasury at Langton Crescent.

The great tragedy of those Rivers of Gold flowing to Peter Costello and John Howard was how little the then Government accomplished with them.

When they should have invested the proceeds of the good times in nation-building infrastructure and human capital, Howard and Costello vacated the field.

We are already paying a high price for their failure to invest in our nation and its people.

Across the country we cannot squeeze much more out of our roads, our ports, our railways – and we have a national skills shortage requiring immediate action.


COAG REFORM AGENDA

This failure to invest in our nation and its people has slowly eroded Australia’s productivity.

The first two waves of national reform saw Australia’s productivity – after decades of lagging internationally – grow at unprecedented rates in the mid-1990s.

From a high of 3.3 per cent annual productivity growth in the mid-1990s, the Howard Government’s failure to invest saw it drop to 2.1 per cent between 1998-99 and 2003-04 – and to just 1.1 per cent since then.

Australia’s workforce participation rates among women with dependent children, older people and unskilled workers still fall well short of international benchmarks.

We now need a generational step-up in Australia’s productivity and workforce participation – and the only way to deliver that is through an ambitious national reform effort.

National reform is worth the effort.

The second wave of reform through National Competition Policy was funded at $500 million per annum over a decade.

This payment was to accelerate reforms as well as provide the States with at least a share (albeit modest) of the bigger economic pie that resulted from NCP.

According to the Productivity Commission, that $500 million a year investment produced ongoing economic benefits to Australia of $20 billion a year.

That is an extraordinary return on investment – and the benefits of the next wave of national reform – particularly with its focus on human capital through education, skills and preventative healthcare – are estimated to be many times greater.

The Productivity Commission estimates the potential benefits from the National Reform Agenda – which Victoria initiated and developed – are up to 11 per cent of GDP.

Retreating from national reform would be a false economy – a short-term paper saving with a far greater long-term cost in lost jobs, lost investment and lower economic growth.

The only economically responsible strategy is to invest in the reforms that will drive the next wave of growth and jobs.

Hard Budget choices will need to be made. But they must not be made at the expense of jobs, growth, sustainability and prosperity.

If, as a nation, we have to choose between short-term Budgetary concerns and long-term jobs growth and sustainability – the long-term view must prevail.

There is no higher priority than a third wave of national reform.

Australia urgently needs to lift our performance on productivity and workforce participation.

The current lag in productivity and participation can be reversed if we implement COAG’s National Reform Agenda – with its commitments to cutting regulatory red tape and investing in human capital.

INVESTING IN INFRASTRUCTURE

But investment in human capital alone won’t complete the job.

The state of major urban infrastructure across Australia is at the crossroads.

Generational investments are required. The States have significantly increased their infrastructure investment. In Victoria, we have quadrupled infrastructure investment since 1999.

When it comes to infrastructure, simply the States cannot pedal any faster.

But more needs to be done. The time is right. It is time for the Commonwealth – after years of underinvestment – to join the States in making these nation-building investments.

Investments which are – it needs to be said – in the national interest if we want to drive new growth and greater productivity.

For far too long, the States have been left to do the heavy lifting on infrastructure.

For example, in the five years to March, the Commonwealth delivered $41 billion of infrastructure across Australia.

This is pales into insignificance compared to the $140 billion by State, Territory and local governments.

Commonwealth delivery of infrastructure has flatlined, while State, Territory and local government investments have been climbing rapidly.

In his first Budget in May, Federal Treasurer Wayne Swan announced the establishment of three nation-building infrastructure funds with a combined value of $41 billion.

We welcomed that announcement as well as Federal Infrastructure Minister Anthony Albanese’s confirmation that the Building Australia Fund will not be distributed to States on a per capita basis.

At the last COAG, the Commonwealth agreed to bring forward consideration of infrastructure projects by Infrastructure Australia.

And, thanks to the work we have been doing for our upcoming Transport Statement, Victoria has a suite of projects of national importance that are ready to go.

Priority should go to those proposals that offer integrated solutions contributing to the national interest, rather than just ad-hoc projects.

And the focus should be on the best proposals for the future, not compensation for those who have failed to invest in the past.

Requiring Infrastructure Australia to prioritise projects according to transparent criteria makes sense – and will ensure taxpayer funds are invested for productivity, not politics.

Progress to date has been encouraging. And after years of the Commonwealth vacating the infrastructure field, expectations in the States and Territories are rightly high.

It’s time for the Commonwealth to shoulder its share of the load …

.. and the global financial crisis should not be used as a Budgetary excuse to back away from that responsibility.

SEAMLESS NATIONAL ECONOMY

One of the areas in which Victoria has led Australia in recent years has been in regulation reform.

Indeed just last week, Treasurer John Lenders announced the latest data on our Government’s Reducing the Regulatory Burden initiative, which aims to save businesses $256 million per year by mid-2011.

The data shows that progress to date has been strong, with Victorian businesses expected to save over $160 million annually through cuts to red tape, including initiatives such as payroll tax harmonization with New South Wales.

At the Australia 2020 Summit, the Prime Minister and business leaders called for COAG to embrace a seamless national economy.

COAG has risen to that challenge, agreeing to coordinated national action in 27 priority areas of regulation reform.

The toughest item on the agenda is occupational health and safety.

OH&S is an area where there has been more protest than progress over the past decade.

Such reforms are critical to COAG’s credibility, and a breakthrough was only made possible by the Prime Minister’s July commitment to provide NCP-style incentive payments.

Such incentives have a track record in leveraging difficult reforms, with the OECD noting that:

“Reform [in Australia] would have been far slower and less comprehensive without competition payments.”

Victoria will push ahead with all regulation reforms proposed by COAG – and more. But – to deliver a seamless national economy – all jurisdictions must play a part.

The Prime Minister’s commitment to NCP-style incentives is essential to delivering these reforms.

HUMAN CAPITAL

By far, the largest economic benefits from the COAG Reform Agenda come from developing our human capital.

As the OECD puts it, human capital is “the fundamental building block for prosperity in the knowledge economy” (2005).

The global financial crisis means the human capital agenda is more important than ever before. Human capital is about investing in economic security and economic opportunity for our people – at a time when such investment is desperately needed.

The human capital agenda is very broad and needs to be seen as a decade-long project. I will use health as an example.

The joint Victorian-Commonwealth Government $60 million blitz on elective surgery announced early this year provides a valuable template for future reform.

Set up to deliver elective surgery to 9400 additional patients – we have exceeded our aim by 500 additional patients and we did so two months ahead of schedule.

This joint initiative worked because it set clear performance benchmarks against which we could measure progress.

And it was underpinned by financial incentives for the States to undertake reforms in order to meet those benchmarks.

In negotiating the Australian Health Care Agreement, I believe this combination of investment, reform and performance-based accountability should be extended – including to areas such as hospital emergency departments.

Hold the States to performance benchmarks. Provide incentives for measurable improvements. Encourage all States to strive for best practice.

Victoria is ready to hold up our end of any such deal.

Much of the COAG discussion will focus on hospital funding, after years of Commonwealth under-investment.

This must be addressed.

But COAG also needs to address the long-term challenge of preventative health.

One-third of the chronic disease burden is attributable to lifestyle risk factors – smoking, alcohol abuse, lack of exercise and poor diet.

Prevention of chronic diseases remains the single biggest health challenge facing Australia.

Victoria has led the way on prevention, with our $110 million COAG diabetes initiative, our $132 Go For Your Life program for healthier living, and our $218 million WorkHealth initiative partnering with employers to tackle chronic disease.

Now is the time for a national approach in health prevention – and time for a national approach on skills reform.

With a slowing global economy, skilling our workforce takes on a new urgency.

The uncomfortable truth is that Australia’s workforce is not equipped for the challenges ahead of us.

In August, I announced Victoria’s skills reform package – Securing Jobs for Your Future.

The package includes a world-first: the introduction of a training guarantee in post-compulsory education, with uncapped public funding supporting Victorians without a foundation qualification.

It also includes reforms that put purchasing power in the hands of students and enhances competition among providers.

With the support of the Commonwealth, students studying a Diploma or Advanced Diploma will be able to access an income contingent loan through FEE - HELP.

This was a great example of how State leadership and a reform-minded Prime Minister can make reform happen.

I will be urging other States to embrace similar reforms at COAG.

A REFORMING CULTURE

If the COAG Reform Agenda is to deliver on its promise, governments need to commit to new standards of accountability and performance.

Improved accountability will be aided by the major streamlining of specific purpose payments – from over 90 to just 5.

This will result in clearer lines of responsibility between governments and greater policy flexibility for the States, particularly with the removal of outdated input controls from SPPs.

There is also broad agreement on the framework needed to improve performance and accountability:

• Clear agreement on the outcomes to be achieved;

• Independent assessment and transparent reporting of the performance of all governments in pursuing those outcomes; and
• Strong incentives for governments to achieve those outcomes.

National competition policy demonstrated how such a framework can facilitate hard reforms in the face of vested interests – and drive major change over the course of a decade.

Holding governments accountable for performance is only possible if COAG resists the temptation to subsidize failure.

One of the critical choices COAG faces is the structure of funding.

The choice is between rewarding success – or subsidizing failure …

.. backing funding arrangements that encourage all States to keep striving to do better – or settling for those that merely compensate States that have failed to invest and reform.

Of these two models, the right choice is obvious.

If you want to grow the economy – if you want to create jobs – you have to encourage better performance.

The alternative to the performance-based approach is to keep fighting over your share of a shrinking pie.

To get more out of Australian Federalism, it needs to be designed not merely to carve up the pie, but to keep growing it.

FUTURE OF COAG

I believe that COAG can seize this opportunity, because I can say that – in 25 years as a Federal and State Parliamentarian – I have never seen the Commonwealth, States and Territories work together with such focus and with such positive outcomes.

Since the last Federal Election, the COAG process has doubled in frequency – and intensity. But we need to do more.

To turn what’s been a year of action by COAG into a decade of action and national reform, we need to elevate the status of COAG and clarify the agenda of COAG.

COAG has no constitutional or legislative standing – and its Secretariat is an appendix of the Department of Prime Minister and Cabinet.

And the COAG Reform Council operates based on an intergovernmental agreement that sets out broad objectives and functions, but with no clear powers or independence.

The current status and structure of COAG is outmoded. Just as we are modernising federal finances, we need to modernise what is, in effect, federation’s Cabinet of first Ministers.

With that in mind, I believe: COAG should be underpinned by a new Intergovernmental Agreement – with the role and governance of the COAG Secretariat formalised. This Agreement should require:

• Regular meetings of COAG;
• An effective and independent secretariat;
• The right for States to place items on the agenda; and.
• Better opportunities for stakeholder participation.

I also believe COAG must have a comprehensive forward plan for action – tackling key economic, social and environmental challenges with short, medium and long-term targets.

CONCLUSION

This meeting of the Council of Australian Governments must rise to the challenges of our times.

The global financial crisis should not put on hold the encouraging progress the States, Territories and the Commonwealth have made in this new era of Cooperative Federalism.

But we now have a once-in-a-generation opportunity to chart the course for reform to significantly improve the quality of life for Australians – and we must take it.

We have an opportunity to turn “encouraging progress” into “great strides forward”.

But we will only achieve this if the States, the Territories and the Commonwealth take bold action.

• Real reform – Major medium and long term economic reform focused on reducing red tape, as well as reforms to Special Purpose Payments that encourage accountability and better performance;
• New performance arrangements – New arrangements that hold the States to performance benchmarks; provide incentives for measurable improvements; and encourage all States to strive for best practice;
• A big lift in capital works – Action from the Commonwealth to significantly lift its commitment to infrastructure;
• Real action on human capital – Action on the next wave of the Human Capital Agenda; and
• Better hospitals and healthcare – an Australian Health Care Agreement that drives better health outcomes for patients.

Leadership is tested in tough times. Strong leadership stands the test of time.

We will not emerge stronger from these tougher global times by shelving reform.

Only by taking action now – can we deliver jobs today and a new era of economic prosperity for the future.