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Federal system needs new deal

By George Williams - posted Monday, 6 March 2006

Australia needs a summit on federalism. It should be charged with proposing a new deal for how the Commonwealth and the States divide power and money and govern the nation. Reform of our dysfunctional federal system is long overdue. Rather than promoting good government and enabling change, it is often a blockage to getting things done. The signs have been there for years in areas such as health and education and in the parlous financial position of the States.

Instead of each tier exercising the powers most appropriate to it, we have government prone to administrative duplication and buck passing. We also have a system in which the States cannot raise the money they need to provide the most basic services. Instead, they rely upon the largess of the Commonwealth, an economic and political dependency that is neither healthy nor consistent with the best delivery of services to the community.

The last time Australian federalism was examined from the bottom up was when it was designed in the 1890s. The framers of our Constitution decided to confer power upon the Commonwealth over a limited number of areas, with the States left with everything else. Hence, the Commonwealth has, for example, the power to make laws for defence, quarantine and marriage, but not over the environment or other more recent concerns. It was thought that this division would leave the States with the greater responsibilities and in the dominant position.


It has not turned out that way. The framers did not foresee just how wide some of the topics they granted to the Commonwealth might be, especially as interpreted by a High Court appointed by the Commonwealth and willing, at least since 1920, to take a generous approach to the scope of the powers. The framers never imagined, for example, that the Commonwealth would use its power over corporations to enact a national scheme of industrial relations, nor did they foresee that the external affairs power would assume such importance due to the proliferation of treaty making after World War II.

The Constitution was also meant to secure the States' financial position and independence. At Federation in 1901, it was the States and the not the Commonwealth that levied income tax. However, the demands of two world wars and changes to economy, as well as some canny manoeuvring by the Commonwealth, left the States with no income taxation. Combined with High Court decisions that States cannot levy their own GST, the States now cannot raise the income they need. They have instead turned new sources of taxation, such as on gambling, and to grants from the Commonwealth.

Today, the financial position of the States is dire. NSW, for example, depends on the Commonwealth for around 40 per cent of its revenue. This was predicted by Alfred Deakin, Australia’s second Prime Minister, who said soon after Federation that the States would find themselves “legally free, but financially bound to the chariot wheels of the Central Government”.

These issues are not susceptible to a short term fix working around the problem. Such fixes have a habit of unravelling with changes in government or, even worse, becoming entrenched in a way that magnifies the underlying difficulties. An example of the latter is the distribution of grant money from the Commonwealth based upon formulas that skew the benefits to some States such as Queensland and Western Australia. The burden upon the “donor States”, NSW and Victoria, is considerable. Over the 2005-2006 financial year, NSW and Victoria will subsidise the other States by $3.4 billion. It has been estimated that NSW alone will raise $13.2 billion in GST revenue and receive only $10.4 billion back, amounting to a subsidy to other States of $2.8 billion.

We need to revisit whether such subsidies can still be justified and, even if they can, whether the transfer of wealth should continue at the same level. This should be part of a process that also looks at the other problems of the federal system such as who should have the power, and equally the responsibility, for what.

While Australia has achieved important reforms in other areas, it has a poor record of remedying the structural weaknesses in our system of government. This is especially a concern given that Australia now has one of the oldest systems of government in the world. To get this process off the ground we should, like the conventions of the 1890s, hold a summit that will focus national attention and create space for new thinking. We need to fix our federal problems and in doing so ask ourselves, what should be the role of the States in the second century of our Federation.

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A version of this article was first published in The Courier-Mail on February 24, 2006.

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About the Author

George Williams is the Anthony Mason Professor of law and Foundation Director of the Gilbert + Tobin Centre of Public Law at the University of New South Wales.

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