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Chapter 2: The trend to centralisation in the Australian federation

• The open-ended nature of Commonwealth power
  • The role of the High Court
• Federal finances
• Federal financial institutions
  • The Financial Premiers Conference
  • The Commonwealth Grants Commission
  • The Australian Loan Council
• Endnotes

2.0 The long term trend in Australia has been towards an increased centralisation of power in the hands of the Commonwealth, at the expense of the States. The degree of centralisation in Australia’s federal system is principally a consequence of two features of the Constitutional structure: the open-ended nature of Commonwealth power, and the nature of the financial relations between the Commonwealth and the States.

The open-ended nature of Commonwealth power

2.2 To a certain extent, this is a natural consequence of the Commonwealth’s paramountcy in all areas of concurrent legislative activity:

The Colonies which in 1901 became States in the new Commonwealth . . . were self-governing colonies which, when the Commonwealth came into existence as a new Dominion of the Crown, lost some of their former powers and gained no new powers. They became components of a federation, the Commonwealth of Australia. It became a nation. Its nationhood was in the course of time to be consolidated in war, by economic and commercial integration, by the unifying influence of federal law, by the decline of dependence upon British naval and military power and by a recognition and acceptance of external interests and obligations. With these developments the position of the Commonwealth, the federal government, has waxed; and that of the States has waned. In law that is a result of the paramount position of the Commonwealth Parliament in matters of concurrent power.¹

The second observation I would make about [Australia’s] federal model is that [it] has proved with hindsight to be quite a centralising model. On the face of it, it doesn’t look all that centralising; you give the Commonwealth a few powers and the States have the rest. The fact of the matter is those Commonwealth powers are interpreted by the High Court and many of them have proved to be open-ended. To say that is not to criticise the Court, it is simply a fact. Take a power like the corporations power: a power to legislate with respect to corporations. How do you impose a natural limit on that power as long as there is a corporation somewhere in the wings? Is a law that says “no corporation shall pollute the environment” a law with respect to corporations? How do you say that it is not when it is dealing with corporations?

So what we have gradually seen is the expansion of Commonwealth power through the process of judicial interpretation without there being any natural break imposed by the Constitution which identifies the limit of State power and say[s] that there is no room for Commonwealth involvement. . .

The Court has developed a few federal implications that limit Commonwealth power. It says, for example, that the Commonwealth cannot exercise its power so as to discriminate against the States or between them. It also says that the Commonwealth cannot exercise its power so as to threaten the continued existence of the States or their capacities to function. But those are very extreme limits, and while there are one or two cases in which the court has invoked those limits, by and large our system places no limits or very few limits drawn from federalism on the scope of Commonwealth power.²

The role of the High Court

2.4 Early in the development of its jurisprudence, the High Court applied two rules to determine the limits of Commonwealth legislative power. First, the instrumentalities of one level of government were held to be immune from legislative interference by another level of government. These implied immunities prevented the States from taxing the salaries of Commonwealth employees,³ and excluded State employees from the Commonwealth system of industrial arbitration.⁴

2.5 Second, and perhaps more significantly, the Constitution was interpreted as containing implied prohibitions on Commonwealth legislative power. These implied prohibitions were understood to protect certain powers that the Constitution was held to reserve, by implication, to the States. The Court determined the extent of these prohibitions by reading the limits of the Commonwealth’s enumerated powers as restricting one another. For example, from the fact that section 51 (i) of the Constitution gives the Commonwealth power over inter-state but not intra-state trade, the Court inferred that the Constitution contains an implied prohibition on the Commonwealth using any of its legislative powers to regulate intra-state trade.⁵

2.6 These early doctrines, of immunities and implied prohibitions, were overturned in 1920 by the Court’s decision in the Engineers Case.⁶ In this case, the Court held that Commonwealth legislative powers are to be interpreted as they naturally read, in an unqualified way, with no limitations applied other than those inherent in the Constitution’s statement of the power. As an example, while section 51 (i) does not permit the Commonwealth to regulate intra-state trade, the Commonwealth may be able to regulate some aspects of intra-state trade using other powers which contain no such limitation (such as the powers over banking and corporations). Since 1920, the Engineers Case has been the dominant influence on the Court’s interpretation of the Commonwealth’s largely open-ended powers.

2.7 The far reaching consequences of the Engineers decision are well stated by Justice Murphy in his decision in the Tasmanian Dam case, under the heading “The fallacy of reserved state powers”:

The grants of legislative power in the Constitution, s.51, are plenary. There is no reservation from any such grant unless the reservation is explicitly stated in the grant; Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd (the Engineers’ Case). Despite the fact that the doctrine of implied reserved State powers was discredited in the Engineers’ Case, it is advanced, not openly but indirectly, in almost every case in which an Act is challenged as having no head of legislative power. Dixon J. explained that it is a fundamental error to regard a State Act as if it were an exercise of an express grant, contained in the Constitution, to the States of a power to make laws with respect to the specific subject of the State Act: it is an exercise of a general residuary legislative power. He said:

“The content and strength of this power are diminished and controlled by the Commonwealth Constitution. It is of course a fallacy, in considering what a State may or may not do under this undefined residuary power, to reason from some general conception of the subjects which fall within it as if they were granted or reserved to the States as specific heads of power. But no fallacy in constitutional reasoning is so persistent or recurs in so many and such varied applications” (In Re Foreman & Sons Pty Ltd; Uther v. Federal Commissioner of Taxation).

It follows that the question under s.51 “is always whether a particular enactment is within Commonwealth power. It is never whether it invades a State’s domain”; Windeyer J., Victoria v. The Commonwealth⁷

Closely allied to the fallacy of reserved State powers is the doctrine of federal balance. Novel uses of federal legislative power challenged by the States are said to upset “the federal balance”. According to this proposition, when a challenged law is supported as an exercise of the power to make laws with respect to any subject enumerated in s.51, the Court should disregard the federal power sought to be relied upon, and conceive a federal balance between the other enumerated federal powers and State powers. Then it is claimed that the exercise of the federal power sought to be relied upon would upset the federal balance. This has occurred in relation to external affairs (see R.. v. Burgess; Ex parte Henry; Koowarta v. Bjelke Petersen and this case) and corporations (see Actors and Announcers Equity v. Fontana Films Pty. Ltd.) and marriage (see Russell v. Russell and Gazzo v. Comptroller of Stamps (Vict.)) and even bankruptcy (see Storey v Lane).

In this case, it was contended that the use of the external affairs or the corporations power to support the Acts would upset “the federal balance’. There are two serious objections to this doctrine. One is that the State powers brought into the balance can only mean “reserved State powers”. The other is that no rational argument is advanced for disregarding the particular federal power relied upon when achieving the balance. It builds upon the doctrine of reserved State powers by a fallacious method of “balancing” those notional State powers with some only of the undoubted federal powers. As advanced in this and recent constitutional cases the doctrine of federal balance presents only a balance between fallacies.

Counsel for Tasmania relied on Melbourne Corporation v. The Commonwealth; Victoria v. The Commonwealth and Koowarta, to argue that the Acts would prevent the continued existence of the State or its capacity to function. The Acts manifestly do not have such an operation; the argument is frivolous. The mere fact that the Acts impair, undermine, make ineffective or supersede various State functions or State laws is an ordinary consequence of the operation of federal Acts and does not affect their validity.

Any “extravagant” use of the granted powers in the actual working of the Constitution is a matter to be guarded against by the constituency and not by the Courts: Engineers’ Case.⁸

[T]he court needs to jettison the legalistic methodology of Engineers, which is antithetical to Australia’s federal Constitution. It is quite inappropriate to interpret the Commonwealth’s enumerated heads of power in a literal way irrespective of the broader federal architecture of the Constitution and regardless of the centralising effect that such a method produces. . . Having served the purposes of nation-building for three-quarters of a century, the Engineers methodology is now obsolete. The High Court needs to develop an interpretive method appropriate for a federal constitution for the next century of federation.⁹

[T]he High Court’s enthusiasm for concentrating power in the federal government’s hands has ‘often’ exceeded the federal minister’s own wishes! [Professor Geoffrey] Sawer has argued that if the Court had not rejected the obvious federal implications of the Constitution in Engineers’ and subsequently, it would have developed a more coherent constitutional jurisprudence. Moreover, the Court would not have subverted the effect as well as the intention of section 128 of the Constitution, which provides that the latter ‘shall not be altered’ without a referendum.¹⁰

The majority report implies that the doctrine applied in the Engineers case and maintained and developed thereafter is wrong. . . it . . . ignores the total dominance of the doctrine developed in Engineers ever since that time.

In my view the Engineers decision was not only well made but was inevitable.¹¹

2.12 This Committee considered the question of the external affairs power in its First Report, and concluded that,

Given the powers of treaty making and treaty implementation granted to the Commonwealth by the Constitution, these aims [of State participation in the treaty process, where the outcome of that process will have an impact upon traditional State activities] will not be achieved through formal, legal means. The Constitution on its own will not necessarily preserve Australia’s federal balance.¹³

it remains for decision in the case of each treaty obligation whether a law to perform the obligation should be enacted by the federal Parliament or by the Parliaments of the States or whether no law be enacted; but that decision would be taken having regard to political, administrative and financial considerations, and not according to constitutional constraints.¹⁴

Finding 4:
The Constitution states the Commonwealth’s legislative powers in an open-ended way. The High Court is likely to continue to apply the doctrine of the Engineers case, that the Commonwealth’s legislative powers are to be interpreted in an unqualified way. Therefore, the problems raised by the centralisation of power as a result of judicial interpretation are unlikely to be resolved in the courts.

Federal finances

2.15 Whatever the powers it is granted by a federation’s constitutional arrangements, a government’s practical exercise of its jurisdiction is heavily influenced by the fiscal resources at its disposal. In Australia, the Commonwealth has monopolised both income and sales taxes, the two most substantial revenue sources for government. This distribution of taxing powers in Australia is a consequence both of politics and of law.

2.16 The Constitution gives the Commonwealth exclusive power to levy duties of customs and excise. Section 86 of the Constitution provides that

On the establishment of the Commonwealth, the collection and control of duties of customs and excise . . . shall pass to the Executive Government of the Commonwealth,

Uniform duties of customs shall be imposed within two years after the establishment of the Commonwealth,

On the imposition of uniform duties of customs the power of the [Commonwealth] Parliament to impose duties of customs and of excise . . . shall become exclusive . . . all laws of the several States imposing duties of customs or of excise . . . shall cease to have effect.

2.17 The High Court has interpreted “duties of excise” to include all taxes on the manufacture, distribution and sale of goods.¹⁶ This has prevented the States levying sales taxes (it is possible for the States to tax consumption, but it is very difficult to levy a consumption tax, which is not also a sales tax¹⁷).

2.18 As duties of customs and excise were the main source of pre-federation colonial revenues, it was apparent at the time of federation that these constitutional arrangements would have a significant impact upon State finances. The Australian Constitution therefore contains five provisions intended to deal with the consequences for the States of uniform Commonwealth duties. However, all but one of these provisions has been inoperative for most of federation.¹⁸

2.19 The first of these five provisions is section 89, which is expressed to apply up to the introduction of uniform duties of customs. This provision requires the Commonwealth to return to each State all revenues collected in that State, after subtracting from that revenue a share of the costs of the Commonwealth Government.¹⁹

2.20 The second of the five provisions is section 93, which is expressed to apply during the first five years after the imposition of uniform duties of customs. This provision preserves the arrangements of section 89, but adds a rule for determining in which State the Commonwealth’s customs revenue is to be deemed to have been collected.

2.21 The third of the five provisions is section 87, which provides that:

During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, of the net revenue of the Commonwealth from duties of customs and of excise not more than one-fourth shall be applied annually by the Commonwealth towards its expenditure.

The balance shall, in accordance with this Constitution, be paid to the several States, or applied towards the payment of interest on debts of the several States taken over by the Commonwealth.

2.22 The combined effect of these three provisions was to guarantee the States a share of Commonwealth tax revenue. However, once section 87 expired at the end of 1910, this system of guarantees came to an end, and the States could rely only on the two remaining provisions, sections 94 and 96.

2.23 Section 94 reads:

After five years from the imposition of uniform duties of customs, the Parliament may provide, on such basis as it deems fair, for the monthly payment to the several States of all surplus revenue of the Commonwealth.

Now [section 94] is an important provision, short though it is.

One, it recognises that the Constitution systemically puts in place a system whereby the Commonwealth will have a surplus. That’s the significance of the reference to surplus. Two, it recognises that the States are entitled to the surplus, and that’s significant as well. It’s not just a question of the Commonwealth being nice to the States by giving them some of its money. The Commonwealth has a Constitutionally determined surplus to which the States are entitled.

However, section 94 has not been used, as I said a moment ago, since 1908 because in 1908 the Commonwealth worked out that if it were to appropriate its surplus to trust funds or use some other mechanism to get rid of it then there would be no surplus to be distributed under section 94. There was a challenge to that and the High Court said that’s right, once the money is appropriated by the Commonwealth Parliament there is no surplus. Of course, there hasn’t been a surplus ever since. There was nearly one one year when they forgot to appropriate it but remembered at the last moment and everything was all right.²²

2.25 The only operative Constitutional provision for returning Commonwealth revenue to the States has been the fifth, section 96, which provides that:

During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament sees fit.

2.26 While the Constitution leaves all taxes but duties of customs and excise open to both the Commonwealth and the States, since 1942 the High Court has upheld Commonwealth tax legislation which makes it politically impossible for the States to levy income tax.²³ The States’ own-source revenue is obtained through a variety of minor, economically inefficient and often regressive taxes:

The first slide shows the changes in the composition of State taxes over the period since 1970. We started with a very narrow range of taxes on three bases - motor vehicles, stamp duties on various transactions and taxes on property which included land tax and, at that time, probate duty. Since that time the States’ tax bases have expanded to encompass a number of other taxes. They include, firstly, payroll tax which was transferred from the Commonwealth in 1971. Subsequently financial institutions taxes were also transferred from the Commonwealth during the 1980s and 1990s. Gambling taxes have also grown somewhat over the period in Victoria with the introduction of electronic gaming machines and the new casino - and that would be most evident in recent years.

However, the biggest growth of all has been in our business franchise fees on liquor, tobacco and petroleum products. In 1971, franchise fees applied to liquor only and represented just 3 per cent of total taxation revenue. A decade later business franchise fees had also been imposed on tobacco and petroleum products and had grown to 9 per cent of our total revenue. This slide relates to Victoria but gives a picture that is common to all States. One decade later in 1991 franchise fees represented around 12 to 13 per cent.²⁴

2.27 State revenues were particularly hurt by the economic downturn of the late 1980s and early 1990s. Falling share and real estate prices led to a reduction revenue from stamp duty, while rising unemployment led to reduced revenue from payroll tax.²⁶

2.28 The States are thus acutely dependent on Commonwealth transfer payments. These payments take two basic forms: General Revenue Assistance, which is unconditional, and Specific Purpose Payments, which must be spent by the States according to conditions set by the Commonwealth.

2.29 The bulk of General Revenue Assistance is made up of Financial Assistance Grants. Other constituent payments include Special Revenue Assistance and National Competition Payments. Special Revenue Assistance is payed to the Australian Capital Territory to assist it in its transition to ‘state-like’ funding, following the introduction of self-government. National Competition Payments are intended to compensate States for revenue forgone as a result of National Competition Policy. Receipt of these payments is conditional on implementation of the Policy.²⁷

2.30 Specific Purpose Payments are classified as payments ‘to’, and payments ‘through’, the States. Payments ‘to’ the States are spent on State Government programs according to conditions set by the Commonwealth. Health Care Grants make up approximately half the payments ‘to’ the States. Payments ‘through’ the States are not spent by the States, but are passed on to other recipients. The principal payments ‘through’ the States are to Local Government and to non-government schools.

2.31 In addition to these conditional and unconditional transfers, in 1997 the Commonwealth commenced making Revenue Replacement Payments to the States. These are intended to replace the revenue lost to the States following the High Court’s decision in the Ha and Hammond cases, which declared a number of State taxes to be unconstitutional excises.²⁸ The Commonwealth Budget states that

The States have acknowledged that these arrangements would represent State taxes imposed and collected by the Commonwealth at the request and on behalf of the States.²⁹

2.33 Total Commonwealth payments to the States are indicated in the following table:

Payments ($ million)

NSW

Vic

Qld

WA

SA

Tas

ACT

NT

Total

Financial Assistance Grants

4757.0

3544.7

3205.7

1616.2

1678.4

736.3

281.8

1033.9

16584.1

Special Revenue Assistance

-

-

-

-

-

-

25

-

25

National Competition Payments

73.5

53.8

40.2

21.2

17.2

5.4

3.6

2.2

217.2

Total General Revenue Assistance

4830.5

3598.5

3246.0

1637.4

1695.6

741.8

310.4

1036.2

17096.3

Specific Purpose Payments ‘to’

3707.9

2500.1

2039.0

1292.8

1014.7

324.8

166.0

224.4

11309.5

Specific Purpose Payments ‘through’

1162.3

939.0

672.8

378.4

278.1

95.5

82.3

53.2

3661.7

Total Specific Purpose Payments

4880.7

3451.0

2719.9

1673.6

1296.3

422.7

248.8

278.2

14971.2

State Fiscal Contributions

101.5

74.4

55.6

29.3

23.7

15.6

10.2

3.1

313.4

Total net Commonwealth Payments

9599.2

6963.3

5902.1

3279.3

2964.7

1146.5

548.5

1310.7

31714.3

Source: Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, Tables 6, 10, 18, A3, pp 22, 27, 38, 102.³²

Finding 5:
The States’ role in shaping policy as equal participants in the federation is undermined by the Commonwealth’s fiscal dominance.

Federal financial institutions

The Financial Premiers Conference

2.36 The Financial Premiers Conference is an annual meeting of Australian Heads of Government and Treasurers. It is usually held in Canberra in late March. Issues dealt with in this forum include:

• the national fiscal outlook;
  

• the level of Financial Assistance Grants to be paid by the Commonwealth Government to the States;
  

• the interstate distribution of grants.

2.37 Prior to the Conference the States are sent an ‘Offer Document’ from the Commonwealth which sets out the total amount of Financial Assistance Grants which it proposes to pay to the States. The offer from the Commonwealth to the States is subject to debate and may be negotiated during the Premiers Conference.

2.38 While the Financial Premiers Conference does provide a forum for regular interaction of all governments, Premiers have been unsatisfied with the way the Conference operates. The fact that the Commonwealth has control of the funds being distributed gives it a dominant bargaining position. As the Chapter 3 will explain, this disaffection was a key impetus for change in the early 1990s.

The Commonwealth Grants Commission

2.39 While the Commonwealth Government determines the total amount of Financial Assistance Grants offered to the States, the distribution of that amount among the States is determined on the basis of the recommendations of the Commonwealth Grants Commission. The Grants Commission’s recommendations ‘weight’ each State’s population according to the disabilities to which each State is subject. A ‘disability’ is a factor beyond the control of a State which requires it to expend more or less than a State Government on average must spend, in order to achieve a particular objective, or which reduces or increases its relative capacity to raise revenue from a given taxation effort.

2.40 The total Financial Assistance Grant received by a State is equal to its population-weighted share of the combined pool of Financial Assistance Grants and unquarantined Health Care Grants,³⁸ less its share of the unquarantined Health Care Grants. The result of this formula is to distribute Financial Assistance Grants away from those States with a large share of the unquarantined Health Care Grants, or with a low degree of weighting by the Commonwealth Grants Commission, towards those States with a high degree of weighting or with a low share of the unquarantined Health Care Grants.

2.41 The calculations of disabilities are made on an annual basis, according to a methodology which is reviewed every five years. The Grants Commission is currently nearing completion of its 1999 methodology review.³⁹

2.42 Mr Dick Rye, Chairman of the Commonwealth Grants Commission, gave the Committee an example of a disability on the expenditure side:

A simple example might suffice to illustrate the first of those points on the expenditure side. If a State has a higher proportion of its population of school age, it obviously needs to spend more per capita on education than another State with a lower proportion. That is an example of a very simple disability.⁴⁰

The recent increase in the ACT’s relativity primarily reflects a decline in its relative revenue raising capacity as a result of falling property values in 1996-97.⁴¹

2.44 Australia’s present system of Horizontal Fiscal Equalisation was put into place in the 1980s, arising out of a more ad hoc system of allocating ‘special grants’ to claimant States. It is the most extensive and elaborate system of Horizontal Fiscal Equalisation in the world.

2.45 The impact of Horizontal Fiscal Equalisation on State finances can be seen in the following table, which compares the distribution of Financial Assistance Grants and unquarantined Health Care Grants⁴³ according to the Grants Commission’s weightings, with distribution according to each State’s population, and according to the amount of personal income tax paid in each State.

(thousands)

(1)

(2)

(3)

(4)

(5)

$million

%

$million

%

$ million

$million

%

$million

NSW

6371

6546

29.7

7467

33.8

-920

8084

36.6

-1538

Vic

4670

4814

21.8

5474

24.8

-660

5518

25.0

-704

Qld

3489

4174

18.9

4089

18.5

85

3496

15.8

678

WA

1840

2117

9.6

2157

9.8

-40

2199

10.0

-82

SA

1490

2131

9.7

1746

7.9

385

1554

7.0

577

Tas

471

855

3.9

552

2.5

303

471

2.1

384

ACT

310

345

1.6

363

1.6

-18

545

2.5

-200

NT

193

1091

4.9

227

1.0

865

206

0.9

885

Total

18835

22074

100.0

22074

100.0

22074

100.0

* Based on each State’s contribution to personal income tax paid in 1995-96, sourced from Table 16 of Australian Taxation Office, Taxation Statistics 1995-96.

Source: Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, Tables 1, 3, pp 1, 18.

It had been generally assumed . . . that ultimately an equal per capita basis of distribution [of surplus Commonwealth revenue among the States] would be used, but proposals to require a per capita distribution after ten years had been defeated. New South Wales delegates, hoping to postpone the evil day when payments would be made on a per capita basis and thereby redistribute revenue from taxpayers of the richer States to those of the poorer, had voted against the proposal . . . Quick and Garran believed that the [Federal] Convention expected that “the basis chosen by the Parliament would be, if not the per capita basis, at least an approximation to it - a compromise, in fact, between the per capita basis and the contribution basis. Somewhere between these two principles it is likely that the ultimate solution will be found.”⁴⁴ However, this expectation was not to be borne out by subsequent events . . . the allocation of Commonwealth grants among the States in later years proved to be much less favourable to New South Wales and Victoria, and much more favourable to the financially weaker States, than would have resulted from a per capita basis of distribution.⁴⁵

Although the Commission is a Commonwealth body, it is perhaps better seen as part of Australia’s federal structure. That is reflected in a number of things, including: the fact that Commissioners are appointed or reappointed only with at least the broad approval of the States; the fact that the terms of reference for Commission inquiries, although finally determined by the Commonwealth, are negotiated in detail with the States - it is a process in which the Commission has no role of its own; the fact that the Commission conducts all its inquiries in full consultation with the States and gives each of them every reasonable opportunity to make its views known; and lastly, the fact that the Commission’s recommendations are considered at [Financial] Premiers Conferences and, although generally accepted, are subject to negotiation between all nine governments there.⁴⁶

2.49 Not all Specific Purpose Payments affect the Commonwealth Grants Commission’s assessments of disabilities. There are two sorts of cases in which the Commission, in its determination of the revenue-raising capacity of a State, will not take into account the revenue a State receives from a particular Specific Purpose Payment. The first sort of case is where a Specific Purpose Payment finances spending which the State receiving the payment would otherwise not have undertaken. The second sort of case is where a Specific Purpose Payment is distributed in accordance with a Grants Commission assessment of State need. The result of this approach is to isolate the distribution of Financial Assistance Grants from the distribution of these sorts of Specific Purpose Payments. Similarly, Specific Purpose Payments directed to those areas in which the Commonwealth has largely accepted financial responsibility (including most such payments ‘through’ the States) are excluded from the Commission’s assessments.

2.50 The Commonwealth Budget makes the following observation on the interaction between Horizontal Fiscal Equalisation and Specific Purpose Payments:

The Commonwealth attempts to balance the objectives of SPPs [Specific Purpose Payments] with the objectives of fiscal equalisation. Accordingly, the Commonwealth has sometimes instructed the CGC [Grants Commission] to treat certain SPPs in a different way from how the CGC may otherwise have treated them. For example, the financial assistance provided under the South Australian Assistance Package has been excluded from the CGC’s assessments to ensure that the benefit of the assistance is not redistributed to the other States by a change in the distribution of FAGs [Financial Assistance Grants].

It is not necessarily the case that the Commonwealth’s policy objectives will be forgone where an SPP’s distribution may be overridden in time in a financial sense. The objectives of an SPP may be achieved by the fulfilment of the related conditions which the Commonwealth has agreed with the State receiving the payment.⁴⁸

The Australian Loan Council

2.51 Australian Heads of Government agreed to establish an informal Australian Loan Council in 1923. It first met in 1924, and was given formal standing by a binding Financial Agreement between the Commonwealth and the States in 1927. The Financial Agreement recognised that it was possibly unconstitutional, and the permanent existence of the Loan Council therefore dates from the passage by referendum of a Constitutional amendment in 1928.⁴⁹ The Loan Council is still in operation today, typically meeting at the same time as the Financial Premiers Conference.

2.52 The members of the Loan Council are the Commonwealth and State Heads of Government, or their delegates (usually the Treasurers). When voting is required each State has one vote, and the Commonwealth has two votes plus, as the Chair, the casting vote.

2.53 The original role of the Loan Council was to set the total level of, and to co-ordinate, all Commonwealth and State borrowing, and the Council evolved into an important instrument of Commonwealth macroeconomic policy. The voting arrangements enable the Commonwealth and any two States to constitute a majority, and under the original Financial Agreement the only important decision not made by majority vote was the allocation of aggregate loan funds among the States, for which a unanimous decision was required.⁵⁰ Furthermore, the total borrowing amounts approved by the Loan Council tended to exceed the loan funds available on the open market. The Commonwealth was therefore required to make up the difference in available loan funds by loaning to the States from its own revenue. This dependence of State borrowing on Commonwealth willingness to lend funds increased the Commonwealth’s effective control of the Loan Council.⁵¹

2.54 Local Government and semi-government authority borrowings were exempted from Loan Council considerations under the original Financial Agreement. However, State Governments began to use such borrowings to evade the limits set by the Loan Council. The so-called Gentlemen’s Agreement, reached in 1936, therefore brought such borrowings within the ambit of Loan Council authority.⁵² However, during the late 1970s and early 1980s Loan Council control of these borrowings was relaxed, and the States began to develop increasingly inventive schemes for financing infrastructure development by semi-government authority borrowing. This resulted in the Gentlemen’s Agreement being rescinded in 1984, and the Loan Council instead adopting an approach of setting global limits for each Government’s borrowings, including the borrowing of all government authorities with the exception of public financial institutions.⁵³

2.55 Continuing relaxation of Loan Council controls, including an end to Commonwealth borrowing for the States, coupled with continuing attempts by State Governments to avoid Loan Council strictures, resulted in a rewriting of the Financial Agreement in 1994. The new agreement took effect in July of 1995.⁵⁴

2.56 Under the new approach, each Government makes an annual submission to the Loan Council nominating the amount of borrowing it wishes to undertake, based on its projected deficit or surplus. The Loan Council considers these nominations, and decides the total amount of public sector borrowing that should take place, and the distribution of this borrowing across jurisdictions. In deciding on the Loan Council Allocations, the Council takes into account the amount nominated by, and the fiscal circumstances of, each State, each Government’s reasonable infrastructure requirements, a Heads of Treasuries report and current macroeconomic policy objectives. Adherence to Loan Council Allocations is voluntary, with the Loan Council playing a monitoring role.⁵⁵ The 1998 meeting of the Loan Council endorsed each Government’s nominated allocation without change.⁵⁶

2.57 Professor Saunders made the following comments on the Loan Council before the Committee:

Section 105A of the Constitution. . . provides the basis for the financial agreement between the Commonwealth and the States. The financial agreement for this purpose means the agreement that sets up the Loan Council and deals with intergovernmental borrowing. That is a newcomer in a way to the Constitution. It was put in there in 1928 as a basis for the first financial agreement, and it is an interesting model that might perhaps be adopted for other purposes. It is simply a facilitating provision.

The Commonwealth may make agreements with the States with respect to the public debts of the States and then the section goes on to specify what the constitutional effects of the agreements will be. They will override other provisions of the Constitution and so on. I don’t think the section does that very well but nevertheless a latter day section 105A could provide a very useful way of providing a constitutional framework for intergovernmental agreements about power and money.⁵⁷

Now, if the revenue imbalance was built into the Constitution by giving the Commonwealth exclusive control over customs and excise, you might ask yourself what did the framers of the Constitution do to provide for equalisation of that imbalance. The answer to that is not much. They tried, they couldn’t agree and they left it to the politicians of the future. They thought once federation had settled down the future leaders of Australia would find some way of resolving this problem.⁵⁸

Finding 6:
Australia’s intergovernmental institutions have so far failed to yield federal fiscal arrangements which adequately meet the needs of the States.

Endnotes

1Victoria v The Commonwealth (1971) 122 CLR 353 at 395-6 (per Windeyer J).

2Minutes of Evidence, FSRC, April 15th 1997, p 361 (per Professor C Saunders).

3D’Emden v Pedder (1904) 1 CLR 91.

4Federated Amalgamated Government Railway and Tramway Service Association v New South Wales Railway Traffic Employees Association (Railway and Tramway Case) (1906) 4 CLR 488.

5Attorney-General for New South Wales v Brewery Employees Union of New South Wales (Union Label Case) (1908) 6 CLR 469.

6Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (Engineers Case) (1920) 28 CLR 129.

7The Commonwealth v Tasmania (Tasmanian Dam Case) (1983) 158 CLR 1 at 504-5 (per Murphy J).

8Ibid at 505 (per Murphy J).

9Brian Galligan, A Federal Republic, Cambridge University Press, Cambridge, 1995, p 188.

10South Australian Constitutional Advisory Council, Final Report, Adelaide, 1996, p 47.

11“Dissenting Report from Mr Conlon”, ibid, pp 83-4.

12Above n 7.

13Federal-State Relations Committee, International Treaty Making and the Role of the States, First Report on The Inquiry into Overlap and Duplication, Parliament of Victoria, Melbourne, 1997, p 23.

14Koowarta v Bjelke-Peterson (1982) 153 CLR 168 at 255, cited ibid, p 34.

15R L Mathews and W R C Jay, Federal Finance: Australian Fiscal Federalism from Federation to McMahon, Thomas Nelson, Sydney, 1972, reprinted Centre for Strategic Economic Studies, Victoria University, Melbourne, 1997, p 51.

16See most recently Ha v New South Wales; Hammond & Associates Pty Ltd v New South Wales (1997) 71 ALJR 1080; 146 ALR 355, in which the High Court struck down New South Wales’ tobacco licence franchise fees as an unconstitutional levying of excise. By implication similar schemes in both New South Wales and other States are unconstitutional.

17Minutes of Evidence, FSRC, August 12th 1997, p 763 (per Mr J Waugh) but cf ibid, p 771; Capital Duplicators [No 2] (1993) 178 CLR 561 at 590. A non-sales consumption tax was upheld by the High Court in Dickinson’s Arcade Pty Ltd v Tasmania (1974) 130 CLR 177.

18A sixth provision, section 95, staggered the elimination of Western Australian customs duties on goods manufactured in other States. This was to give Western Australia, which was reluctant to join the Commonwealth, an additional incentive for federation.

19Under section 89, each States’ share of these costs equals the cost of maintaining any government departments transferred from that State to the Commonwealth, plus a proportion of the Commonwealth’s other expenditure, equal to the ratio of that State’s population to the population of Australia.

20Mathews and Jay, above n 15, p 53.

21Cheryl Saunders (ed), The Australian Constitution (Annotated), Constitutional Centenary Foundation, Melbourne, 1997.

22Minutes of Evidence, FSRC, April 15th 1998, p 363 (per Professor C Saunders).

23South Australia v Commonwealth (Uniform Tax Case) 65 CLR 373; The State of Victoria v The Commonwealth (Second Uniform Tax Case) (1957) 99 CLR 575. The Commonwealth legislation levied income tax at a rate leaving no effective tax room for the States, and provided States with significant grants of financial assistance on condition that they levy no income tax.

24Minutes of Evidence, FSRC, November 5th 1997, pp 866-7 (per Ms C Thomas).

25State of Victoria, Budget Statement 1998-99, 1998-99 Budget Paper No 2, Chart 5.3, p 100.

26Minutes of Evidence, FSRC, November 5th 1997, p 871 (per Mr N Economou); D J Walmsley and H C Weinand, “Fiscal Federalism and Social Well-Being in Australia”, Australian Geographical Studies, Vol 35, November 1997, p 262.

27See the detailed discussion below, Chapter 4.

28See above, n 16.

29Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 32.

30State of Victoria, Budget Statement 1998-99, 1998-99 Budget Paper No 3, p 471.

31Ibid.

32The figures for Specific Purpose Payments ‘to’ the States given in Table 6 differ from those given in Tables 18 and A3; this table gives the latter set of figures, which are slightly higher. Figures for Revenue Replacement Payments have not been given, because of the particular nature of these payments, and the way in which the States are expected to deal with this revenue: see below, Chapter 5, para 5.56, p 126.

33Minutes of Evidence, FSRC, August 6th 1996, p 9 (per Mr J Sullivan).

34Commonwealth of Australia, Payments to or for the States, the Northern Territory and Local Government Authorities, Budget Paper No 7, 1986-87, Tables 125, 136; Commonwealth Financial Relations with Other Levels of Government, Budget Paper No 4, 1987-88, Tables 120, 137; 1988-89, Tables 54, 63; 1989-90, Table 62; 1990-91, Table 65; 1991-92, Table 39; 1992-93, Table 29; Commonwealth Financial Relations with Other Levels of Government, Budget Paper No 3, 1993-94, Table 28; 1994-95, Table 17; 1995-96, Table 20; extracted in Russell Matthews and Bhajan Grewal, The Public Sector in Jeopardy: Australian Fiscal Federalism from Whitlam to Keating, Centre for Strategic Economic Studies, Victoria University, 1997, Table 12.1, p 531.

35Australian Bureau of Statistics, Government Finance Statistics, Cat No 5512.0; extracted in Russell Mathews and Bhajan Grewal, The Public Sector in Jeopardy: Australian Fiscal Federalism from Whitlam to Keating, Centre for Strategic Economic Studies, Victoria University, 1997, Table 10.4, p 410.

36State of Victoria, Budget Statement 1998-99, 1997-98 Budget Paper No 2, p 108.

37Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 22; percentage is calculated as the ratio of the sum of Specific Purpose Payments ‘to’ the States and General Revenue Assistance, less State Fiscal Contributions, to Specific Purpose Payments ‘to’ the States.

38Unquarantined Health Care Grants are a set of Medicare-related Specific Purpose Payments totalling $5.2 billion: Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, Table 11, p 27.

39Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 17.

40Minutes of Evidence, FSRC, November 5th 1997, p 890 (per Mr C R Rye).

41Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 18.

42Minutes of Evidence, FSRC, November 5th 1997, p 890 (per Mr C R Rye).

43Unquarantined Health Care Grants are added to the total of Financial Assistance Grants before each State’s share is arrived at by the Grants Commission.

44J Quick and R R Garran, The Annotated Constitution of the Australian Commonwealth, Angus and Robertson, Sydney, 1901, p 865.

45Mathews and Jay, above n 15, p 52.

46Ibid, p 889.

47Paragraph 2.40, p 41.

48Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 20.

49Mathews and Jay, above n 15, pp 106, 108. The Constitutional amendment involved the insertion of s 105A, which gives the Commonwealth the power to enter into binding agreements with the States concerning the public debt of the States, and gives the Commonwealth Parliament power to legislate for the carrying out of such agreements.

50Ibid, pp 112-3. The agreement contained a formula, to apply if unanimity could not be achieved, allocating loan funds according to the proportion obtained by averaging the allocations of the previous five years. The formula was never used, although in some years the unanimous agreement was for the formula amount: ibid, p 113; Peter Groenewegen, Public Finance in Australia (3rd ed), Prentice Hall, Sydney, 1990, p 292.

51Mathews and Jay, above n 15, p 111; Groenewegen, above n 50, p 292; Galligan, above n 9, p 232.

52Mathews and Jay, above n 15, p 151.

53Mathews and Grewal, above n 35, p 761; Groenewegen, above n 50, p 293.

54Mathews and Grewal, above n 35, pp 761-2; Galligan, above n 9, p 233-4.

55Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 41; Galligan, above n 9, p 234.

56Commonwealth of Australia, Federal Financial Relations 1998-99, 1998-99 Budget Paper No 3, p 7.

57Minutes of Evidence, FSRC, April 15th 1997, pp 365-6 (per Professor C Saunders).

58Ibid, pp 362-3.