Fiscal balance must prevail

The problems of our Federation are not going to be solved by ending the “blame game”, “co-operative federalism”, “inspirational nationalism”, or any other glib formula. Nor will they be solved by any proposal to abolish the States. Not only is this undesirable, it is completely unachievable and would be overwhelmingly rejected in any referendum.

As Justice Michael Kirby said in the WorkChoices Case, the answer lies in our rediscovering “the federal character of the Constitution”. I would argue, although His Honour might not, that the proper working of the Federation will only be achieved by returning to the original intention of the founders of this nation. After all, they succeeded in writing one of the world’s most successful constitutions.

The intention of the founders, and, most importantly, the people, was very clear. Had a succession of centralist federal and acquiescent state politicians, as well as the too many centralist judges, kept more to that intention, many if not most of the problems of overlap, of centralisation and of financial irresponsibility would have been avoided. And as has been demonstrated to the premiers recently, the nation would be wealthier and better governed.

The founders were as well aware as the Founding Fathers of the United States had been that the component parts of the federation must be principally dependent on taxes they raised themselves. To put that in eye-glazing technical terms, the Founding Fathers who designed the modern federation knew that vertical fiscal balance must prevail. This was not just a matter of arcane theory; common sense told them it should be so, a point which apparently eludes our rulers and a point to which to which I shall return.

The original intention was not that the federal powers, the latest being the corporations power, should be interpreted without limit, and without any regard to the powers reserved to the states. The intention was certainly not the present unhappy result, that the states be reduced to their present mendicant status. The founders and the people intended the states should continue as they were, self governing communities, with the only change being that they would be united “in one indissoluble Federal Commonwealth under the Crown ... and under the Constitution”.

And the compact to which the states agreed, and the people approved, specifically provided the Federal Parliament and government would have strictly limited powers.

The problems of federalism today are not so much in the Constitution, but in the fact that it has been effectively changed not only without the approval of the people, but in the knowledge that when the people were asked, they almost always indicated their disapproval to any increase in federal powers. This is a point made cogently by Justice Callinan in WorkChoices.

The answer to these problems is certainly not in the dissolution of the states and the substitution of regions even more dependent on the Commonwealth; in the transfer of even more powers to the Commonwealth; in a vast increase in the power of the judges to govern us through a bill of rights; or in the grafting of some unspecified republic onto our Constitution.

The states are doomed to continue to function poorly as long as they remain the equivalent of healthy young adults who are welfare dependent. Common sense predicts and experience demonstrates that such dependants become dysfunctional and without hope, and that they lose self respect.

Similarly, by being reduced to being mere mendicants (in the Australian argot, “bludgers”) on the Commonwealth, the states remain unable to perform their core functions to any reasonable standard of competence. The American Founding Fathers, intelligent men imbued with good sense, knew of and identified this very danger: that of a government not being directly accountable to the electors for the money they spend.

And just as the healthy welfare dependent only regain their capabilities, effectiveness and their honour when they return to the workforce, the same is true of our states. You only have to look at the way the states perform to see this. The New South Wales Government has long been among the worst. The Northern Territory Government would come close with its ostrich like attitude to the degradation which had befallen its Aboriginal population.

How did this happen?

To the question how did this happen, we need to recall that only two institutions straddle the Commonwealth-State divide. One is the Australian Crown; the other is the High Court. Both are intended to be above politics. With the exception of some unwise vice-regal incursions, the Crown remains above politics, but the High Court has too often wandered beyond its role, no more so than in some of their more controversial decisions during the 1990s.

One policy which has dominated the court since 1920, and for which there was no constitutional authority, is centralism, once disguised as an objective exercise in literalist interpretation. This began as long ago as 1920 in the decision of the High Court in the Engineer’s Case.

The Court has continued this trend over the years, and most recently in the majority decision in the WorkChoices Case. Whether or not we agree with the changes made in the Howard Government's industrial legislation, it is difficult not to be concerned as to claimed bases of constitutional authority upon which the legislation is based and the consequences of this decision on the future of the federation.

In this case, three decades after it had decided that there were no real limits to the appropriations power, and two decades after it effectively decided there were no limits to the external affairs power, the court came to a similar conclusion about the corporations power. Only Justices Kirby and Callinan dissented, but there is a good argument made by Julian Leeser that had the states and territories argued that crucial earlier cases were wrongly decided, the decision could have been different. (Only a High Court at its most adventurist would come to a conclusion which had not been argued before it.)

No one could seriously say that this vast expansion of federal power was the intention of the founders, or that it reflects the wishes of the Australian people. But the majority of court found that the wishes of the people, evidenced by failed referenda, were irrelevant in interpreting the Constitution. So much for the proposition that sovereignty under our Constitution is vested in the people.

Professor Greg Craven observed that as a result of WorkChoices, "the states should be in absolutely no doubt" that this decision "is a shipwreck of Titanic proportions. Not since the 1920s has the court struck such a devastating blow against Australian federalism …"

That this should worry conservative constitutionalists is well explained in the dissent of Justice Callinan. That this should also worry conservative politicians and their supporters was demonstrated when P.P. McGuiness warned that this decision could and probably would work both ways. Perhaps Julian Leeser is right with his argument that the states and territories did not want to win the constitutional case in Work Choices.

The advantages of federation

Professor Walker has enumerated ten advantages of federation: the right in the citizen of choice and exit, the possibility of experiment, the accommodation of regional preferences and diversity, participation in government and the countering of elitism, the better protection of liberty, the closer supervision of government, stability, fail-safe design, competition and efficiency, and the resulting competitive edge for the nation.

Some of those advantages were also noted in the recent Business Council of Australia report on federalism. They were stressed in the recent report by Dr Anne Twomey and Professor Glenn Withers to the newly formed Council for the Australian Federation, which brings together all state and territory governments. They say that by focusing too much on the problems in the operation of the federal system, we may forget about the benefits of federation, including checks on power, choice and diversity, customisation of policies, competition, creativity and co-operation.

The media had unfortunately concentrated on only one aspect of the BCA report, the cost of inefficiencies in the federal system. These were estimated at $9 billion in 2004-2005, or $450 per Australian, but the fact that this was highly qualified in the report was either played down or just ignored. So the deformed and simplistic message the public received was that if the states were abolished, a vast amount of money would be saved.

This is not at all so. The authors of the CFAF report point to an OECD study which found that federations had a 15.1 per cent advantage in increased income over unitary states. They also measured the benefit on incomes of fiscal decentralisation. This averages at 6.79 per cent, but in the most fiscally decentralised federations, Canada, Germany and Switzerland, this rises to 9.72 per cent. The report found what we all suspected: Australia is the most fiscally centralised of the OECD federations, its states and territories raising only 19 per cent of taxes but being responsible for 40 per cent of public spending. This, of course, is appalling, and is at the explanation for the poor performance of our state and territory governments.

The CFAF report found that the benefit in increased income to Australia from being a federation is already 10 per cent; and that this could be raised significantly by further decentralising our taxation system. The result, they believe, would be to raise average incomes by $4,188 per annum.

Now that would be a considerable gain. It can only be achieved if we restore the federation, and not if we abolish it. Abolition would result in the costly inefficiencies centralised states experience, magnified by the physical size of our vast nation.

What can be done?

Both reports support the premiers’ call for a constitutional convention. This should not be distracted by issues not directly related to federalism, for example, a republic or a bill of rights. It should be about the far more relevant issue: how to restore the federation.

Ideally, this convention could aim to propose constitutional amendments to:

• ensure "vertical fiscal balance", so that the states would be responsible for collecting most of their income and answering to their electors as to how they spend it;
• list those powers exclusively reserved to the states, or if shared, where state laws are to prevail. The absence of such a list allowed the High Court, under the camouflage of literalism, to launch and maintain its long adventure in forcing centralism on a reluctant nation;
• cap the extent of the appropriations, external affairs and corporations powers, all of which now seem virtually unlimited;
• ensure that minimum bureaucratic overlap occurs in relation to powers the exercise of which are effectively shared; and
• ensure the states are directly involved (and not just consulted) in determining the membership of the High Court. Why not, for example, allow each state chief justice or a nominee to join the bench as “ad hoc” justices in disputes between the states and the Commonwealth?

Apart from the high quality of the delegates, the success of the constitutional conventions after 1893 was at least in part because they were mainly elected. Only one half of the 1998 Constitutional Convention was elected and that was by a postal system too open to abuse. Many of the nominated members in 1998 were effectively ex officio members, including the prime minister, the opposition leader, the premiers, and leading ministers. For this Convention, there should be a small number of ex officio members with most elected under a secure voting system. We should have faith in the good sense of the Australian people.

A wholly or significantly nominated convention would lack authority and would be open to manipulation and bias. It would have as much authority as the endless succession of “summits” which are called to settle some issue and too often to diffuse some debate. If not elected, or unwilling to stand, prominent constitutional lawyers, political scientists and finance and business experts could be appointed as advisers.

The only way to ensure this convention has a chance of achieving a result is to follow the Corowa Plan. Proposed by Sir John Quick in 1893, this ensured that the movement to federation was not bogged down in endless disagreement between the six parliaments. To apply this to the 21st century convention on the federation, a similar procedure should be agreed in advance. This would mean that when the convention finalises its draft recommendations, these should be made public and sent to all the parliaments for comment.

The convention would hear and consider comments before making its final recommendations for constitutional change. These would then be included without further debate in a bill for a referendum. There should of course be time limits for each stage in the process, but the time between the opening of the convention and the date of the referendum should be no more than 18 months to two years.

Adopting the Corowa Plan principles would ensure that the conclusions of the convention are put to the people for their decision, and not just ignored or pigeonholed.

Conclusion

There is a clear need to restore the principles and essence of this our Federal Commonwealth which the Australian people approved and have regularly affirmed. Whether the states are to be restored, or are to be even more emasculated, that decision should only be made by the people in a referendum, and not by circumventing our Constitution, which remains a vision splendid.