Hospital funding fight the latest illustration of the big problem with vertical fiscal imbalance in our federation

There is a deep structural problem underlying the current hospital funding fight between the Queensland Premier and the PM, the vertical fiscal imbalance (VFI) between the state’s spending responsibilities and the Commonwealth’s revenue raising powers. The states receive around half of their revenues from the Commonwealth (see the chart below based on Queensland Budget data) and naturally will blame the Commonwealth for their own failings in service delivery and planning. There is a blurring of accountability. Economists have been saying this for decades. 

While he was PM, Malcolm Turnbull tried to revive an idea from the Fraser Government which would have gone some way to resolving the VFI, handing part of the income tax power back to the states, a power which the Commonwealth seized during WWII and never relinquished. Unfortunately, PM Turnbull gave up on this proposal when faced with resistance from the states, a resistance which was led by Queensland Premier Palaszczuk (see Premier’s 2016 Lodge dinner remark to Turnbull highlighted Vertical Fiscal Imbalance problem).

The Queensland Premier should remember her own role in failing to resolve the VFI. She could have reduced the state’s dependence on the Commonwealth, which would have enhanced her flexibility to increase hospital funding if she chose to, but, of course, with more power comes more responsibility. The current VFI allows her to conveniently blame the Commonwealth for any problem which occurs on her watch. In her view, it’s the Commonwealth’s fault for not providing enough funding, rather than her Government’s failure to plan for COVID cases or its failure to redirect funding from other parts of the budget to Queensland Health.   

Other posts of mine on VFI include:

EV taxes, property taxes, and the need to reset federal financial relations in Australia

Qld-Commonwealth argy bargy over dam funding & vertical fiscal imbalance

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. I also post from time-to-time on my business website adepteconomics.com.au, so please consider subscribing to updates there (Get in touch). Also please check out my Economics Explored podcast, which has a new episode each week.

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4 Responses to Hospital funding fight the latest illustration of the big problem with vertical fiscal imbalance in our federation

  1. Glen says:

    Gene the Qld Govt must think we are all stupid, at a time when Qld is receiving record coal and LNG prices and royalties, what are they wasting it on, and secondly the other states have much higher stamp duty which help fund their expenditure. It is the Qld Government’s responsibility to fix the budget shortfall, either cut expenditure or raise taxes, this constant begging for money is quite embarrassing.

  2. Gene Tunny says:

    Very good point Glen. Thanks for the comment!

  3. Katrina Drake says:

    Adding to the issue of vertical fiscal imbalance.

    Health care has had to impose the highest level of infection control to all medical interactions, even the most minor procedures require increased infection control protocols and PPE this has greatly increased the costs of providing health care. The states have had to pick up this increased costs across all regions.

    The commonwealth wasted billions in the heavily rorted jobkeeper, and continue to allow systemic company tax avoidance to flourish.

    They both need to sort there houses out !

  4. Gene Tunny says:

    Thanks Katrina. Good points. I agree both need to sort their houses out. Stop the rorts, as you say!

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