The federal government will rip $80 billion from schools and public hospitals in the next decade, as Commonwealth spending earmarked for the states and territories is slashed due to the rejigging of indexation arrangements and the abandonment of guarantees for public hospital funding.
Likely to enrage state and territory leaders, the massive hit on funding to the second tier of government runs counter to the Coalition’s pre-election promise that health and education would be quarantined from cuts, although the new indexation measures won’t begin to take effect until 2017, after the next federal election.
It also sets the scene for a potentially radical realignment of federal-state financial relations, with the states and territories under immense pressure to make up for the funding shortfall by increasing their own taxes and levies, or introducing new ones.
If they don’t, they may be forced to close schools and hospitals to make up the difference.
Treasurer Joe Hockey said the changes were necessary because the previous Labor government had ”built in massive growth in structural spending” that was simply unsustainable.
Moreover, the government believes that federal spending on schools and hospitals – which it does not manage – is not only unaffordable but ”blurs accountabilities”.
Up until 2024-2025, the cuts will amount to a cumulative $80 billion.
Based on population size, NSW schools and hospitals can expect to suffer a cumulative $25.5 billion reduction in funding over the next decade.
In Victoria, the cut will be $19.9 billion over the same period.
By 2024-25, the federal government will spend $25 billion a year on schools, as opposed to $30 billion if the existing arrangements had remained in place.
For hospitals, the difference is even larger – $25 billion versus $40 billion.
Underpinning the cuts is the change to indexation, which will see funding rise only to reflect the growth in population and inflation, rather than the previous formula which based federal funding on the growth in ”activity” in the health and education systems.
The government promised to maintain health and education funding before the election, although it reserved the right to re-allocate money within the overall funding ”envelope”.
But Treasury officials in the budget lock-up said none of the cuts to schools were being re-allocated elsewhere in the education portfolio.
For hospitals, savings will be redirected to the $20 billion Medical Research Future Fund that will finance investment in new medical technologies and techniques, but only until 2019/2020.
Moreover, the states and territories will lose another $569 million in health funding from the states in the next four years, with the federal government to pull out of national partnership agreements on improving hospital services and preventative health.
In a terse statement, the federal government said: ”The states will be expected to continue contributing to these arrangements at their expense.”
One final hit to state and territory finances came with the termination of the agreement where the federal government financed some of the benefits received by seniors card holders, such as cheaper public transport fares.
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