When Australia came together as a nation in 1901 as a federation of six individual British colonies, it did so in an environment of extensive, and at times torrid, debate. And while there was widespread acceptance that in uniting under a national banner the colonies could achieve together what they could not achieve alone, there was also apprehension about the extent to which the power to govern would become centralised.
The enthusiasm and sense of expectation surrounding the birth of a nation was tempered by concerns about the future autonomy of individual colonies. The smaller colonies were also apprehensive about the power and influence the larger colonies might exercise in such a federation.
As a consequence, the process leading to the formation of the Australian Constitution, and the consequent establishment of Australia as a nation, was both painstaking and torturous.
During the first of the convention debates in 1891, Sir Samuel Griffith, who would later become the first Chief Justice of the High Court of Australia, captured the essence of concerns saying:
“We must not lose sight of the essential condition that this is to be a federation of states and not a single government of Australia. The separate states are to continue as autonomous bodies, surrendering only so much of their power as is necessary for the establishment of a general government to do for them collectively what they cannot do individually for themselves.”
In uniting as a nation each colony agreed to cede a portion of its powers so that the nation might be born as “one indissoluble Federal Commonwealth under the Crown.” It is clear from both the Constitution, and from the record of the Convention debates, that the Federal government was to have significant but defined powers and that the States would retain those powers and authorities required for governance of social, economic and political matters. These powers, known as the residual powers, were the province of the States. However, the ink was barely dry on the Constitution before a growing appetite for centralised power emerged.
Foundations of Power
The legislative powers granted to the Commonwealth were set out in Section 51 of the Australian Constitution and the scope of these powers is described in 39 subsections each containing a head of power. While States retained the right to legislate on these matters also, the Constitution provided that where any inconsistency existed between Federal legislation and State legislation then the Federal legislation prevailed.
The powers ceded to the Federal government under the Australian Constitution were very wide and included heads of power in connection with interstate trade and commerce, corporations, external affairs, taxation, defence, quarantine, currency, pensions, banking and many more.
Centralisation of Power
As one might expect, the first area where the boundaries of authority between State and Commonwealth were tested related to tax and the High Court became the arena for argument. The gloves came off, the lawyers were primed and the fight over money began.
The first tests came in the 1904 Peterwald V Bartley case where the High Court examined the Constitution’s prohibition on States imposing excise duty. This was followed in the same year in the case of D’Emden V Pedder in which the power of the States to impose taxes on Commonwealth activities was rejected. In 1908, in response to the Constitutional requirement that any surplus tax revenues in the first decade of Federation be returned to the States, the Commonwealth enacted legislation to pay these surpluses into a trust account thereby avoiding payment of the surpluses to the States. One can imagine how much this would have helped the fledgling Commonwealth-State relationship.
In 1910, the obligation under the Constitution that not less than 75 per cent of the Commonwealth’s customs and excise revenue be distributed to the States came to an end. While the arrangement was mandated for only the first decade of Federation, the Commonwealth terminated the arrangement as soon as it was legally able to do so, much to the ire of the States.
Commonwealth government activity and Commonwealth bureaucracy then began to grow rapidly fed by its growing tax harvest. The years leading up to World War 1 (1910-1914) saw increases in Commonwealth control of the economy and in social services and in 1915, following the entrance of Australia into the war, the Commonwealth introduced income tax which co-existed with income tax applied by the States.
Over the next few decades, both in the High Court and through legislation, the Commonwealth and States battled for territory in a number of areas including tax, defence and welfare services. So extreme was the discontent with the way the Federation was heading that some States, most notably Western Australia, South Australia and Tasmania, contemplated secession. In 1933 a referendum on whether or not to secede from the Commonwealth of Australia was held in Western Australia.
At the time the Great Depression was biting like a hungry dog on a raw bone and every State was struggling. Some believed that the problems were as a result of Federal government policies and actions, particularly in respect of tariffs imposed to protect the manufacturing and sugar industries.
The result of the WA referendum sent shock waves through the rest of Australia with 68% of West Australians voting in favour of secession. This is about the same number of West Australians as had voted to join the Federation only 33 years earlier. The desire of West Australians to separate from the Federation was of course not fulfilled, as the British Imperial Parliament refused to act on the grounds that such an action could only be taken with the consent of the Commonwealth Parliament of Australia.
It was during the Second World War that the most dramatic shift in the balance of tax power between the States and Commonwealth occurred.
In 1942, under the leadership of John Curtin as Prime Minister and Ben Chifley as Federal Treasurer, all income taxing authority was handed over to the Commonwealth by the States for the duration of the war under the defence power of the Constitution. This sole income taxing authority was intended to be temporary and to last for a period of one year after the end of the war. However, in 1945 the War ended but the role of the Commonwealth as the sole income taxing authority did not.
For those concerned at the erosion of State rights through judicial activism, even worse was to come when, following the end of the Second World War, the High Court ruled that income tax collections would remain an exclusive Commonwealth right under the normal powers of the Constitution.
During the 1950s, the State of Victoria mounted two legal challenges to the uniform tax legislation without success and in 1959 at a Special Premiers’ Conference discussion of a return of income tax power to the States was on the agenda but could not be agreed. While there has been no legal barrier to the States exercising their right to levy income tax there are practical (and political) reasons not to do so.
In the post war era, the centralisation of power continued to be affirmed through decisions of the High Court in actions including the Franklin Dam case in 1988, the Queensland Rainforest case in 1989, Mabo in 1992, and the Wik Peoples case in 1996.
In speaking of the influence of the High Court, and the threat to federalism arising from its decisions, Sir Harry Gibbs, former Chief Justice of the High Court of Australia said:
“It is a basic rule in the interpretation of any written document and indeed a matter of common sense that the whole document must be looked at in order to ascertain the meaning of any particular part. It might therefore have been supposed that in deciding on the meaning of the paragraphs of the Constitution which confer power on the Commonwealth Parliament, the Courts would have resolved any ambiguity by interpreting the provisions in a way that would maintain the federal distribution of power which the Constitution so obviously appears to guarantee ….. However, since 1920 the High Court has consistently rejected an approach of that kind.”
The struggle for power continued in the High Court in 2006 with the States challenging the Commonwealth over the validity of the federal WorkChoices legislation which was enacted under the Corporations power within the Australian Constitution. The High Court overwhelmingly came down in favour of the Commonwealth. While workplace relations laws, as they stood prior to the WorkChoices legislation, are a relic of a bygone era and are desperately in need of reform, the rights of States in the area of industrial relations is now all but gone. For example, the 1999 decision of the High Court to allow SA State government public servants to be covered by a Federal Award undermined that State’s competitiveness.
The ability of a small, low-cost-of-living State, to use its industrial relations system to create a competitive edge over the larger States is an important matter. South Australia for example, under Premier Sir Thomas Playford used this strategy (in conjunction with tariffs) to build a manufacturing base in Adelaide in the 1950s and 60s. Tasmania likewise, may wish to trade-off high salaries for quality of life and a pristine, green and clean environment.
Undermining the rights of States is also evident in the actions of a burgeoning, and at times arrogant, Federal bureaucracy where the controlling hand of the Commonwealth is exercised through the terms and conditions embedded in funding arrangements with State government agencies.
Over the first hundred years of federation the tax revenue balance has moved dramatically from the States to the Commonwealth. The imbalance that now exists, known as Vertical Fiscal Imbalance, has put the Commonwealth in an all-powerful position to dictate to the States how and where funds will be spent.
Australia has the highest level of vertical fiscal imbalance of any federal country in the world. The Federal government raises over 70% of all general government revenues whereas the States’ share of total general government revenue raised was just 20%. The Commonwealth raises much more than is required to fund its own operations while the States raise just over half of what they require to fund theirs. The balance of the States’ financial requirements are met through Commonwealth grants. This fiscal imbalance which gives the Commonwealth enormous economic power and influence, is inefficient and inequitable. This has the effect of keeping States like South Australia and Tasmania in a position of mendicancy in that they receive more funding than they generate.
Ideally, the States and the Commonwealth should only collect taxes for their own purposes and taxpayers and consumers should be fully informed as to what is a State tax and what is a Commonwealth tax. Those who spend the money should have the responsibility of raising it. It is about accountability and governments of all persuasions should be specifically accountable for the money they raise and spend.
The use of Section 96 of the Australian Constitution, which empowers the Commonwealth Parliament to make grants to any State “on such terms and conditions as the Parliament thinks fit”, has been used by Federal governments to wield power over the States and in so doing, the spirit of federalism has been abused.
The control of the Commonwealth over State borrowings has only further served to erode the power of States and their capacity to be self-reliant and self-determining. In a speech entitled, Rebuilding the Federation, Richard Court, then Premier of Western Australia, described this tide of centralism as follows:
“All the things that the States do best are under attack from the empire builders in Canberra. The bureaucracy running the Federal education system, as you know, is large but it doesn’t teach any students. There is an equally large health bureaucracy which doesn’t treat any patients.”
Court went on to make the point that the Constitution recognised that State governments were better placed to respond to local priorities.
Consequently, the States were left with constitutional responsibility for education, health, housing, law and order, commerce and industry, transport, natural resources including land and essential services. Richard Court noted also that, with the help of the High Court, the Commonwealth now has almost complete control in some of these areas.
Benefits of Federalism
Those who live in the major population centres on Australia’s eastern seaboard may not understand the importance of local decision making in the same way that those who live in the smaller States and regions of Australia do. In a country as large and diverse as Australia it is very difficult for a political administration and bureaucracy based in a distant national Capital to take full account of, and understand the interests and needs of local communities.
As a principle not only of government, but also of life, the best decisions are taken when all the parties to the decision know and understand the issues intimately. A federalist approach that seeks to allow States to exercise power in making decisions on local matters is infinitely better than centralised decision at a distance. Those who framed the constitution understood this and sought to embed it in both the spirit and letter of the document.
The Productivity Commission has outlined the competitive benefits of federalism in improving performance in the Australian economy saying:
“The competitive dimension of federalism, which provides in-built incentives for governments to perform better across a variety of areas, is operating well.”
There is an inherent competitiveness between the States that should be encouraged not discouraged. State governments have a vital role to play in creating the right environment to attract and retain capital. We live in a global market environment and competition between States will only serve to make each of them more efficient.
By competitiveness, however I mean real low cost, light regulation efficiency competiveness, not tax-payer funded inducements to lure business from one State to another.
Perhaps the most valuable attribute of successful federations is the way in which they lead to a disbursement of power that fosters democracy and restrains corruption and abuse. While the division of powers among the stakeholders may cause frustration for those who desire an unfettered capacity to determine the course of events, it does introduce important checks and balances to the political process.
There is a creative tension that comes from the consensus building required to make a federation work and in the longer term this serves both the individual and common interest.
Many of the most stable, productive and influential nations on earth are federations. The reason I am such a committed federalist is because it is by far the best way to govern a large and diverse country like Australia. Far better than its alternative, centralism – power and law making centralized in one place. Whilst it may seem counter-intuitive that six (or even eight), separate State service providers could be more efficient and cost effective than one big centralized service provider, it is true nonetheless.