Reform of the Federation and housing

Fun Federation fact! The 'Father of Federation', Henry Parkes, was a tenant.

In his final years, Parkes rented 'Kenilworth', one of the 'Witches' Houses' on Johnston Street Annandale.

Now, almost 120 years after Parkes' death, and 115 years after the federation of the colonies as States in a new Commonwealth of Australia, the Federal Government is preparing a White Paper on the Reform of the Federation. As part of the process, an issues paper on 'Roles and Responsibilities in Housing and Homelessness' has been produced – it is well worth a read.

The stated objective of the White Paper is to make the Federation more efficient and effective, simpler and clearer, supportive of increased productivity and economic growth.... and 'to ensure that, as far as possible, the States and Territories are sovereign in their own sphere.'

And that, the Government explains, means 'limiting Commonwealth policies and funding to core national interest matters, as typified by the matters in section 51 of the Constitution.'

Which really is begging the question. Should we assume that making States 'sovereign in their sphere', and limiting the Federal policies and funding to section 51 matters, will actually lead to more efficient, effective government and economic growth?

It strains common sense to treat section 51 as a timeless touchstone of good federalism. There's some very important matters on the section 51 list – for example, taxation (s 51(1)(ii), defence (s 51(1)(vi)), currency (s 51(1)(xii)), banking (s 51(1)(xiii) – and some arguably less important ones too (lighthouses (s 51(1)(vii); astronomical observations (s 51(1)(viii)). And some very important matters are not specifically named on the list: in particular, housing.

Parkes's fellow founding fathers drafted section 51 without the benefit of any special insights into housing policies for the 21st century, or even the 20th century. For what it's worth, Parkes's own ideas about housing policy were indicated in the 1860 report of the Select Committee of Inquiry into the Conditions of Working Classes of the Metropolis, where he recommended that the construction of model dwellings by private capital should be encouraged, by awards of 'medals or diplomas of distinction' – not subsidies.

When section 51 was first drafted, there was no social housing anywhere in Australia, and very little anywhere in the world. What there was a lot of was truly awful housing.

For the first half of the 20th century, State and local governments in Australia made a few stabs at housing reform, but enduring, systemic improvements in the design, construction and provision of housing to households on low-moderate incomes, were achieved only after 1945, when the Federal Government committed funds to State housing authorities through the Commonwealth-State Housing Agreement.

Of course, funding for social housing isn't the only thing the Federal Government does that affects our housing system. As we've often discussed – and the issues paper makes this point too – the Federal Government's tax settings impact hugely on the housing system. In particular, the exemption of owner-occupied housing from capital gains tax, the discounted rate of capital gains tax on other assets (including rental housing), and generous treatment of negative gearing, all operate to direct a lot of private money into the housing system, where it has pushed up prices and distorted the composition of the rental market, to the benefit of those who have already paid for their housing, and to the disadvantage of those who have not.

Now, this is something that the Federal Government does not propose to change, and in terms of the Reform of the Federation process, it passes the section 51 test (being taxation – subsection (1)(ii)).

So one's left with the impression that 'reform' on these terms would really mean the Federal Government continuing policies that benefit people who are wealthy in housing, and pulling out of programs that deliver some assistance to the housing poor.

Could States 'sovereign in their sphere' step up to funding these programs themselves? What if, as the reform process contemplates, there was also a move to address what it calls the 'vertical fiscal imbalance' between the Federal Government and State Governments?

That's a false hope. The difference in the fiscal powers of the Federal Government and State Governments is not one of mere degree (as 'vertical fiscal imbalance' implies), but a difference in kind.

As the issuer of the Australian currency (section 51(1)(xii)), the Federal Government is not fiscally constrained: it can buy anything that is for sale in the currency, can pay any liability that is due in the currency, and never run out of money. Its power to tax is vital to ensuring the acceptance and use of the currency, and the way it taxes is very important to the economic decisions of citizens, but Federal tax revenues don't actually fund Federal spending.

State Governments are categorically different: they are currency users, and as such face financial constraints that really do not apply to the Federal Government.

In our Federation, the Federal Government has, through its position as issuer of the Australian currency, a unique ability to mobilise labour and other economic resources and put them to work for the purposes of public policy. Those purposes should include the provision of housing, homeless services, and other support services and community activities that improve people's lives – and not merely defence forces, lighthouses, astronomical observances and those other matters about which legislative power was allocated to the Federal Government all those years ago.