Turnbull offers states $3bn for hospitals but plans to end public schools support

Prime Minister Malcolm Turnbull speaking
Malcolm Turnbull believes his plans to allow states to raise their own taxes will eventually mean the commonwealth will not need to fund schools at all. Photograph: Dean Lewins/AAP

Malcolm Turnbull is offering state premiers more than $3bn in extra funding for hospitals over the next three years but wants to hand over responsibility for public school funding as part of his radical plan to give the states their own income taxes.

A leaked draft heads of agreement for Friday’s Council of Australian Governments (Coag) meeting reveals the commonwealth is offering to pay 45% of the growth in hospital costs over the next three years – up to a cap of 6% growth. In most states hospital costs have been growing at less than 6% in recent years, but the 45% federal share represents a saving of almost $1bn compared with the funding that had been promised by the former Labor government.

The document also shows that the Turnbull government’s trial of new arrangements for caring for patients suffering chronic disease will be paid for by taking $70m per year from hospital funding over the next three years.

At the same time Turnbull has confirmed he will be offering no new money to pay for the final two years of the “Gonski” school funding agreement in 2018 and 2019, and that he thinks the plan to hand over a slice of federal income taxing powers to the states could allow them to fund schools by themselves in time.

“You could make a very strong argument that if there was revenue sharing … the states would have the responsibility for state schools, and the resources as well, for the schools that they manage,” he told ABC radio.

“We believe that the future of that funding of post-2017 should be bound up with these discussions about revenue sharing … if the states had access to a portion of income tax that they … would then have the responsibility for state schools which are the schools that they manage.”

He said giving states the responsibility to fund public schools would help reduce the problem of “overlapping engagement” and establish “clear lines of responsibility”.

“Ultimately you’ve got to decide. Do you want to continue to have the federal government and the states arm-wrestling about how your local primary school, your local high school, should be run?” Turnbull asked. “Are we really saying that Mike Baird and Daniel Andrews and Jay Weatherill are not capable of running their own schools? Or Colin Barnett is not capable of running his own schools?”

Some states had previously sought a share of income tax to fix their revenue problem in the longer term, because income tax grows faster and more reliably than the GST, but premiers have reacted sceptically to the idea that they could be responsible for raising or lowering a proportion of income taxing powers ceded by the commonwealth.

The leaked heads of agreement also reveals that after the initial three years of extra funding, hospitals funding would be reviewed as part of the tax changes, suggesting the states would be expected to fund future hospitals costs from their share of income tax revenue.

And it says state agreement to the federal government’s new chronic care plan was a quid pro quo for the extra three years of federal funds.

The opposition leader, Bill Shorten, on Wednesday claimed Turnbull was preparing to “abandon school education in this country”.

“He said to the kids, to the teachers, to the parents, school education is not on his to-do list,” Shorten said.

— Kate Ellis (@KateEllisMP) March 30, 2016

PM has now confirmed his Government’s proposal to entirely walk away from Australia’s schools- but only the public ones.

The shadow treasurer, Chris Bowen, said withdrawing from school funding was part of the prime minister’s “Tea Party agenda” and indicated that Labor would not comply with the plan.

“They will have the fight of their lives on their hands from us,” he said.

The commonwealth faces a fight from state governments unconvinced of its income tax sharing plan, too.

Turnbull said the income tax sharing proposal would not mean an overall increase in taxes, as the commonwealth would initially offset income tax money by removing grants to states of the same value as the revenue raised.

But he also confirmed that states would, over time, have the power to increase income tax if they wanted to raise additional revenue, creating different tax rates in different jurisdictions.

“You could in the future have a different rate of income tax,” the prime minister said.

“The difference would be very slight I imagine, between one state and another, but that is federalism,” he said, arguing that the states already levied taxes like land tax at different rates.

He argued that state governments would be more prudent with their spending if they were forced to raise revenue themselves.

“If the states had to raise all of the money they spend themselves, they would spend that money much more wisely,” he said.

Turnbull said the tax plan could only proceed with the backing of the states.

“This is a reform which could only be effected with the support of the states. I mean it’s a collaborative exercise,” he said. “Now if the states were to say we don’t want to have any responsibility, any more responsibility for raising money, we’re not responsible enough to do that. We don’t trust ourselves to raise more money. If they were to say that, I don’t think they will, by the way, but if they were, that, in itself, is a very, very significant political admission … This is really a test for the states and territories.”

State premiers have reacted sceptically to the plan but Turnbull suggested they had been more supportive during private conversations with him.

“Obviously a bit of politics will come into that and sometimes the public remarks are not entirely consistent with the private conversations,” he said.

And he insisted that if the states ended up with slightly different tax rates it would not amount to “double taxation”.

Shorten said the prime minister had “determined that the issue of fixing up our school system is too hard for him and now he’s just dumping it in the lap of the states and he’s abandoning the kids and the students”.