National cabinet's zero-sum game is hurting Australia

Whatever the name, these gatherings of premiers and chief ministers with the Prime Minister usually devolve to arguments about increasing Commonwealth funding of the states (and territories).

Last week's national cabinet meeting was true to form, perhaps inevitably in a federal structure where the states are so heavily dependent on transfers from Canberra.

Often the states go away feigning disappointment; sometimes they are even genuinely outraged.

But this time they knew they had the Commonwealth over a barrel labelled 'NDIS', as the Albanese government is now desperate to reduce the impact of the disability scheme on its budget.

In this zero-sum game, the Commonwealth made concessions that will - other things being equal - increase its budget deficit at least in the second half of this decade through to 2030.

The concessions included a three-year extension beyond 2026-27 of the special top-up arrangement for Western Australia's GST share and the related 'no worse-off' guarantee for other states. This is estimated to cost the Commonwealth $10.5 billion over three years, although this can only be a guesstimate at this stage.

The other concessions included increased Commonwealth funding of public hospitals from 2025-26, increased Medicare funding of urgent care clinics to take pressure off hospital emergency departments, and 50-50 sharing of the cost of a son-of-NDIS scheme - an important concession further explored below.

In return, the states agreed to raise the cap on the annual growth of their contributions to NDIS funding from 4 per cent to 8 per cent by 2028-29.

Currently, the Commonwealth is bearing the bulk of the increase in NDIS funding themselves. Now, if they achieve their goal of cutting NDIS cost growth to 8 per cent or less, the annual huge increases in federal funding will slow.

Taking these changes together, states will be well ahead until 2030, and less ahead after 2030 - assuming of course they can't renegotiate before then.

This is hardly surprising: historically where the Commonwealth monopoly of income tax collides with the states' constitutional responsibility for services such as health and education, it is the Commonwealth that gives ground.

However, the agreements that come out of the national cabinet and its predecessors are not merely about who pays and who receives.

Agreements in the past have made major contributions to reform - such as the National Competition Policy in the 1990s and the introduction of the GST and associated state tax reforms in 2000.

Unfortunately, last week's agreements fall seriously short of anything that could be called reform.

The special top-up arrangement for Western Australia is widely criticised as an unfortunate legacy of the Turnbull and Morrison governments that all successor governments will find politically difficult to reverse.

It is costing the Commonwealth budget about $34 billion up to 2026-27 - that is, before the three-year extension now agreed - and this is in addition to the Commonwealth's transfer of all GST revenue to the states under the horizontal fiscal equalisation system.

That system needs reform, but the WA top-up and 'no worse-off' guarantee are a distortion, not a reform. The best reform would be to abolish it, but the national cabinet has just kicked the can down the road for three years.

For sure, in another three years from now, the squabble will be on again, and the can will most likely be booted down the road again.

Commonwealth funding for public hospitals is a national cabinet perennial. No amount is ever enough for the states.

The system has been tweaked many times through funding shares and growth caps. This time the Commonwealth has agreed to increase its share to 42.5 per cent from 2025 to 2030 and to 45 per cent by 2035.

However, this does not address the fundamental issues in public hospital funding; such as efficiency, performance and patient outcomes.

There may be genuine reform in the renegotiated National Health Reform Agreement to take effect from 2025. If not, what the national cabinet agreed to last week is not reform; it is just shoveling more money into a bottomless pit.

Potentially the most important reform outcome of the national cabinet meeting is the agreement on the jointly-funded NDIS. All governments agreed to "restore the original intent of the scheme to support people with permanent and significant disability".

This is an admission the many thousands of people with mild behavioural disorders, such as children with mild autism, were not intended to be in the NDIS.

But the national cabinet announcement leaves many unanswered questions; such as when the new assessment criteria for entry to the NDIS will start and whether the current participants who would not be eligible under the new criteria will be moved out.

Furthermore, it's not even clear that removing this cohort from the NDIS will translate to savings.

The national cabinet decided to set up a system of "foundational supports for children with learning difficulties, developmental concerns or disabilities" to be delivered through schools, childcare and so on.

This is essentially a new 'son of NDIS' scheme, which just goes to illustrate the point that once a benefit has been granted by government it is very difficult to take it away.

At this stage nobody has any idea how much 'son of NDIS' will cost, but the potential is illustrated by the agreement that the cost to the states is to be capped at $10 billion over the first five years.

A national cabinet that spends most of its time playing the zero-sum game is not doing the nation a service. There will always be a zero-sum dimension to federal-state relations, but a reformist national cabinet can also achieve positive sum outcomes.

However, there is a real question as to whether the current national cabinet membership has what it takes to be reformist. They are not Hawke, Keating or Howard on the Commonwealth side, or Greiner, Kennett or Goss on the state side.