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The Economic Consequences of the Constitutions and of the GST

By Lance Endersbee - posted Wednesday, 15 March 2000

The Constitution imposes a great burden of costs on the Australian community. The repeated duplication of activities from state to state, and between the states and the national government, leads to excess costs throughout the nation amounting to tens of billions of dollars each year. It is only in wartime that we recognise the national interest.

Prior to Federation, the states were virtually independent countries. They raised their own taxes, and controlled all their own expenditure. The states built their own infrastructure. Almost the entire physical structure of the present Australian economy reflects patient planning and investment by state governments, and local governments, in water supply, sewerage systems, drains, irrigation systems, electricity generation and distribution, roads, railways, ports and airports. The states constructed public works to advance their state economies.

The concept of separate and competing state economies is locked into the Constitution, but it is now a relic of our history. From now on, the nation as a whole faces the challenges of competing in a global economy. In the meantime, the states are abandoning responsibility for state infrastructure, and are liquidating public utilities and public asseits. The activities of the states are now largely focussed on services, but the states are finding increasing difficulty in funding all the government services that are wanted by politicians, and which the people have grown to expect.


The national government has now promised that the revenues from the proposed GST will be disbursed to the states. That has enormous implications for the future development of the nation. If it means even more services to be funded by the states, and more duplication of activities by all states, and more federalism and less national responsibility, then we should all be quite alarmed. It is certainly a prospect for the nation and an aspect of GST that has not been discussed by politicians, or by the people. Possibly the reason for the political silence on the issue is that many people would certainly disapprove.

The growth in the services sector in the Australian economy relative to production has continued for fifty years. It has been exacerbated by the duplication of activities by national and all state governments, for example separate laws and regulations for a wide range of industrial, commercial and social affairs. The cost of such duplication finds its way into taxes, which are then a burden on every enterprise. The overall effect in Australia has been continued pressure on the production sectors of our national economy, a decline in infrastructure development, sale of public assets, an increase in services and various forms of social welfare, and increased national indebtedness. The cost of our imports consistently exceeds the value of our exports. As a result, Australia is living off savings - our own and that of other people.

Our national output from agriculture, manufacturing and mining is recognised as our physical production, and is the basis of our mercantile trade. The total value of our physical production, when measured in terms of the currencies of our major trading partners, has been declining for 15 years. The devaluation of our own currency over a long time, together with rising debt, has obscured this decline in the total value of our physical production. It is only evident when we look at ourselves as others see us, for example, in the currencies of Japan, Germany, UK and USA, and when we travel.

The services sector comprises all those other matters that are supposed to improve our total national effectiveness, such as education, health, financial services, transport, the media, entertainment, and welfare. But services have now become an end purpose, rather than an aid to the production of wealth. It is often proclaimed that we have become a service economy, and that we are now a post- industrial society. The great change over the past 50 years is shown in the chart.

Click to enlarge

The reasons for the introduction of a GST can be seen clearly in this chart. The services sector has grown enormously. It is mostly not exposed to the global economy. Services groups have a strong influence at political levels, and they have a strong dependence on government funding.


On the other hand, our producers in farming, mining and manufacturing are competing in a global economy. They are struggling to survive. They have little influence at political levels.

The present tax system tends to focus greater pressure on the production sector of the economy, and to shield services. The new GST will tax both goods and services, and is certainly more equitable. But any benefits to producers will be lost if the national government simply disburses the GST revenue to the states to enable them to increase state services yet again. The straight line on the chart may continue in the same direction.

When the Constitution was written 100 years ago, a national economy did not exist. Today it does. It is now quite wrong for the national government to walk away from responsibilities for management of the national economy simply because the founding fathers could not imagine the way that Australia and the world would change over the past 100 years.

I recognise that the resolution of this issue presents political difficulties. However, the fear of difficulties has paralysed any thinking about what can and should be done. It is a situation that would be quite intolerable in the private sector, as it would be a certain path to bankruptcy.

There is a serious national need to review the Constitution and to re-define the relative powers of the federal and state governments. In intellectual terms, it is readily achievable. In the end, it may be forced upon us by economic reality.

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About the Author

Emeritus Professor Endersbee AO FTSE is a civil engineer of long experience in water resources development. His early professional career included service with the Snowy Mountains Hydro-Electric Authority, the Hydro-Electric Commission of Tasmania and the United Nations in South-East Asia as an expert on dam design and hydro power development. In 1976 he was appointed Dean of the Faculty of Engineering at Monash University. In 1988-89 he was Pro-Vice Chancellor of the University.

His fields of specialisation include the management of planning and design of major economic development projects, water resources, energy engineering and transport engineering. He has been associated with the design and construction of several large dams and underground power station projects and other major works in civil engineering and mining in Australia, Canada, Asia and Africa. He was President of the Institution of Engineers, Australia in 1980-81.

In 2005 he published, A Voyage of Discovery, a history of ideas about the earth, with a new understanding of the global resources of water and petroleum, and the problems of climate change.

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