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Expensive way to run a country

By George Williams - posted Friday, 15 December 2006

Kevin Rudd's plan to reform federalism exposes a deep-seated problem that successive governments have failed to address. It is a problem that undermines the quality of our health and education services and, according to the Business Council of Australia, means that Australians pay a wasted $9 billion in tax every year.

Even this figure understates the true cost, with other estimates putting the full impact of our dysfunctional federal system on the economy at about $20 billion a year. This shows why we must repair our federation or accept second-rate government services and limitations on our future prosperity.

Federalism lies in tatters because it is based on rules that no longer match the reality. Our 1901 Constitution was drafted so that power and money would be shared between the state and federal governments. The vision of the conservative politicians of the time was to disperse power to protect people from any one government exercising complete control.


If there was a master, it was to be the states. They were vested with the greater authority, with the commonwealth restricted to specific areas. The states were also to control the purse strings through the levying of income and other taxes.

How times have changed. High Court decisions combined with canny use of the Constitution by prime ministers from Gough Whitlam to John Howard have transformed the system in practice. Australia now has one of the most centralised federal systems of government in the world.

The states are shadows of their former selves and are rarely able to act as a check on commonwealth power. Money is the key to any federation, and in this the states no longer raise enough in taxes to run even their essential services.

They rely on commonwealth grants and in desperation have turned to encouraging activities such as gambling to create new sources of revenue. Even their control of a core area such as secondary education, for instance, in setting the curriculum, the testing of students and the form of report cards, is slipping.

Today, the power and money lie in Canberra, with the states in a position of unhealthy dependence. Their position is dire, with New South Wales, for example, relying on federal handouts for 40 per cent of its revenue.

The WorkChoices case has made the situation even worse, with the commonwealth able to pass laws in any field in which corporations operate. Given that corporations are the normal way of doing business, the potential reach of the commonwealth extends to almost everywhere that goods or services are supplied.


This power lies at the disposal of whoever controls the federal parliament. Used to its maximum, it will leave room for the states where activities are carried on by non-corporate bodies. In the hands of a federal Labor government the power may even reawaken calls by conservative leaders for a return to states' rights.

Even though the commonwealth will have the upper hand, many fields, including industrial relations, will still see regulation by both the commonwealth and the states. Buck-passing and administrative duplication will continue, as will the need to pay higher taxes as a result.

The system makes it hard to know who is responsible for what. Should the federal or the state governments answer to voters on water and the environment, housing affordability, nuclear power and our ageing population? Instead of clear lines of responsibility, leaders at both levels can seek credit for successes but run a mile or blame someone else when faced with failure.

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First published in The Australian on December 8, 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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