In a recent post, consumer health advocate Martyn Goddard argued for a federal takeover of the Tasmanian health system.
In the article below, he investigates the detail of the deal negotiated by Independent MP Andrew Wilkie between the federal and state governments over the Royal Hobart Hospital redevelopment, and concludes that Tasmania is the loser.
It’s not too late to fix the deal
Martyn Goddard writes:
After the 2010 federal election the Denison Independent, Mr Andrew Wilkie, negotiated a Commonwealth grant for the partial redevelopment of the Royal Hobart Hospital as a condition for his support of the Labor government.
The Commonwealth component of this money, $340 million, was widely assumed to be money the state would not subsequently lose for any reason. There was certainly no hint in any of the media releases or public statements by Mr Wilkie, the federal government or the state government that this was not the case.
It has now emerged that this money will be lost to the state through the horizontal fiscal equalisation process administered by the Commonwealth Grants Commission. This process is designed to iron out the different capacities of rich and poor states to provide services for their populations.
Mr Wilkie could have negotiated an exemption from the process for this deal but did not do so. The way this affects the state’s budget, and its capacity to fund its services, is best explained by looking first at the way the equalisation process works.
Money comes from Canberra to the states and territories in two main forms: the proceeds of the GST; and specific-purpose payments, which include national partnership agreement money, such as the National Partnership on Health Infrastructure from which the RHH money is drawn. SPPs together account for almost 40% of Commonwealth financial transfers to the states and territories.
Entitlement to the proceeds of the GST is calculated by the Commonwealth Grants Commission according to a policy of ironing out the differences between poor and rich states. Tasmania does well by this element of the process: we have about 2.3% of the population and this year will get 3.6% of GST.
The advantage of GST over SPP funding is that GST can be spent according to the state’s own needs and priorities; the SPP money is earmarked and can only be spent as the Commonwealth specifies.
SPPs are capable of upsetting the finely-calculated GST relativities between the states, so the Grants Commission has a process of dealing with this. When it calculates the actual amount of GST which is paid to each state or territory, it takes into account the impact of SPPs on these relativities.
Therefore, a state which has received something that other states have not received will have its GST money reduced by a commensurate dollar-for-dollar amount. This money is then put into a pool and redistributed among all the states and territories according to their population share (not their GST relativities).
The project will be funded with $340 from the Commonwealth and $225 million from the state, a total of $565 million to be spent over six years. The majority of the Commonwealth’s contribution – $270 million – was paid in the last financial year, with a further $20 million to be paid this year.
As a result of the Grants Commission’s policy of fiscal equalisation, Tasmania will have its GST payments reduced by a commensurate amount. This GST ‘clawback’ takes place over three years, with a full financial year elapsing between the receipt of the money and the adjustment to GST.
Thus, the $270 million received in 2010-11 will result in a redistribution of $89.99 million in each of the years 2012-13, 2013-14 and 2014-15. The $20 million received in 2011-12 will be taken back in the form of $6.67 million in each of the three years 2013-14 to 2015-16.
Each time a redistribution is made, Tasmania will receive an amount equal to its population share, which currently is 2.3%. The table above assumes Tasmania’s share of the national population will remain at its current level: if it falls further, as seems likely, this will not produce a significant effect on overall budget revenues within the time-frame of this paper.
Particular SPPs can be excluded from this redistribution process, and quite a number are. For instance, funding for the Mersey Hospital and for the Tasmanian forest industry deal are excluded; so too are facilitation and reward payments (but not project grants, unless specifically negotiated) under the National Partnership programs.
Each year the federal Treasurer issues new Terms of Reference to the Commission outlining the framework for its annual update of GST relativities. This process is governed by the Intergovernmental Agreement on Federal Financial Relations. In Schedule D of the agreement, Clause D66 defines the usual inclusions and exemptions of Commonwealth transfers for the purposes of fiscal redistribution. But Clause D67 provides that:
Notwithstanding Clause D66, and following consultation involving the Commonwealth and the states and territories:
(a) the Commonwealth Grants Commission may treat, on a case by case basis, any National Partnership payment differently if it considers that such treatment is more appropriate; and
(b) the Commonwealth Treasurer may issue Terms of Reference to the Commonwealth Grants Commission directing the Commission on the treatment of a National Partnership if he considers that such treatment is appropriate.1
In the 2011 Terms of Reference, Mr Swan ordered three new exclusions, on aged and community care programs, the Northern Territory intervention, and Western Australian iron ore royalties.
It is not as if there is a lack of precedent in this area.
Table 2 shows the total amounts now required to be transferred from the state budget to the building project or foregone in reduced GST receipts and which are, therefore, lost to discretionary expenditure on such items as elective surgery and the salaries of doctors and nurses.
The Premier, Ms Lara Giddings, confirmed in Parliament on 23 November that this money was not excluded from Grants Commission redistribution.
• The $340 million Commonwealth contribution will, in effect, have to be paid back in the form of lower GST payments than we would otherwise have received;
• All but about $7.8 million of this $340 million will therefore, after redistribution, have to come out of the state budget;
• The state will have to find an additional $225 million from its own budget as its contribution to fund the construction of new wards and operating theatres at the very time we are closing down the ones we already have.
• If this agreement had not been struck at all, the state would still have got the $7.8 million it will end up with as its eventual share of the Commonwealth contribution.
All the money in the Health and Hospitals Fund (part of the National Partnership in Health Infrastructure) would have been distributed among the states and territories as the Commonwealth originally intended. This money would still have been subject to Grants Commission redistribution, no matter who got it originally, and Tasmania would have ended with the amount it is entitled to under Grants Commission formulae – this year, 2.3%.
• If the agreement had not been struck, Tasmania would not now have to spend $565 million on buildings.
The Royal Hobart Hospital is desperately in need of updating. But this should not come at the cost of immediate frontline services.
Mr Wilkie has defended his negotiation by saying the eventual outcome of all SPPs across all states and territories, will not be known for some time and are complex:
But the facts are that GST calculations are complex and special purpose grants to any state forany project have a lesser impact on the GST carve-up and it is spread over years. No wonder the Tasmanian government welcomed the $340 million for the Royal Hobart Hospital at every opportunity and has never suggested handing it back. So, no, this $340 million will not cut $340 million from future GST allocations and, no, I am not responsible for Tasmania’s budget debacle.
This seems to me in part irrelevant and in part disingenuous. The fact that both the payments and GST redistribution take place over several years is obvious but immaterial.
Despite Mr Wilkie’s claims, the state will be worse off by some $332 million than it would have been if he had negotiated an exemption for these payments. As the existence of the federal government depended on him at that time, it is not believable that he could not have obtained one.
Claims made to journalists by Mr Wilkie that the state would be left with more than 2.3% of the Commonwealth contribution are simply untrue.
It is also difficult to understand why the Tasmanian government agreed to this deal without trying to secure an exemption, or encouraging Mr Wilkie to obtain one.
In Parliament on Wednesday 23 November, and again in a media release on the same day, the Premier defended the government’s action by saying the state could ‘not have its cake and eat it’:
While I would share some sympathy and on the one hand want to argue very strongly that it should be exempt, that does not bode well in terms of the bigger picture debate that we are having right now around the nation, around the horizontal fiscal equalisation scheme and the danger to Tasmania if that scheme is undermined. We cannot have our cake and eat it in that respect. We have to understand the equity and fairness principles that underpin (HFE) and abide by those and that is exactly what we are doing.
There is no such requirement for state governments to agree to every funding offer made by the Commonwealth. Nor is it plausible that a political deal negotiated by a crucial Independent would endanger the whole system of fiscal equalisation.
It is the job of any state government to scrutinise every funding deal to see whether it is in the best interests of Tasmanians. If it is not, the government should either reject it or seek to amend it. It is extraordinary that in this case it did neither.
It would still be possible for the Royal Hobart Hospital project to be exempted from Grants Commission redistribution. The federal Treasurer’s next Terms of Reference, for the Commission’s 2012 update, will come out early in the new year. Mr Wilkie and the Tasmanian government should seek to obtain such an exemption.
The result would be that the current cuts to hospital budgets could be overturned and services reinstated. The cuts now in place will result in avoidable clinical complications, pain and misery, and probably a number of deaths. It is likely that the further cuts likely in future years will make the situation even worse. It is not an exaggeration to say that the incompetent way this redevelopment deal was negotiated will cost lives.
Remedying this deal would not alter the longer-term need for the Commonwealth to take on sole funding responsibility for state health services. But it would solve the immediate and immensely significant problem currently facing our hospitals.