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Executive summary

Chapter 1: Australian federalism and intergovernmental relations

0.1 Australia was created on January 1st 1901 as a federal nation. The Constitution establishing the federation resulted from a series of Federal Conventions, and was adopted by referendum in every Australian colony. In choosing to become States in a new federal nation, the colonies recognised that there were certain matters that could be dealt with effectively only by a national government. At the same time they wished to preserve regional autonomy in all those areas of government in which national uniformity was not required.

0.2 A federal system of government has a number of distinct virtues. Regional autonomy, ensured by mechanisms of decentralised decision-making, allows for government which is closer and more responsive to the demands of its citizens. At the same time, the national government is able to achieve common purposes where national uniformity is desirable. These virtues of federalism are upheld by the structure of federal government, in which the Commonwealth and the State Governments share their sovereignty over the common territory of Australia.

Finding 1:
Australia is a country of significant regional diversity. Federalism as a system of government serves Australia well and the virtues of federalism - a responsiveness to regional diversity through decentralised decision-making - must be enhanced and preserved. The States and the Commonwealth must co-operate to uphold the virtues of federalism.

0.3 The way in which power is shared is determined by the Constitution, which enumerates the powers of the Commonwealth, and leaves the remainder to the States. Very few Commonwealth powers are held exclusively by it. The rest may be exercised concurrently by the Commonwealth and the States. In the event of an inconsistency, it is the Commonwealth law which prevails.

0.4 By world standards, Australian federalism exhibits a very high degree of concurrence. This necessitates effective intergovernmental relations, in order for governments to determine the distribution of roles and responsibilities appropriate to the needs of the federation, and to permit co-operation where it is necessary or desirable to pursue joint policies.

Finding 2:
In a federation as concurrent in structure as Australia's, effective intergovernmental relations are essential to the successful management of the inevitable overlap between the activities of governments.

0.5 The Constitution establishes two powerful federal institutions: the Inter-State Commission and the Senate.

0.6 The Inter-State Commission, which was intended to be a quasi-judicial body with powers to adjudicate questions arising in relation to interstate trade and commerce, has been inoperative for most of federation.

0.7 The Senate is the Upper House of the Commonwealth Parliament. It has near-equal power to the House of Representatives, and each State is guaranteed equal representation. However, the Senate does not operate as a States' House, representing the interests of the States and of their Governments. Senators, who are elected directly by the people at national elections, are national politicians who, to the extent that they involve themselves in Commonwealth-State relations, do so from the point of view of the Commonwealth.

Finding 3:
The Constitution establishes two powerful federal institutions: the Inter-State Commission and the Senate. Neither of these has provided a forum for mediating between Commonwealth and State Governments. The Constitution mandates the Inter-State Commission as a body to be established and administered by the Commonwealth, without State participation; the Commission is no longer in operation. The Senate has its foundation in the States, but is not an institution for the resolution of concerns arising between levels of government. It is the Committee's view that effective intergovernmental institutions must involve the Executive Governments of both the Commonwealth and the States.

Chapter 2: The trend to centralisation in the Australian federation

0.8 Over the period of federation, there has been a steady increase in the power of the Commonwealth Government, at the expense of the States. This centralisation has two principal causes: the open-ended nature of the powers given to the Commonwealth by the Constitution, and the nature of the financial relations between the Commonwealth and the States.

0.9 The Constitution does not set any natural limits on its statement of Commonwealth powers. Early in the development of its jurisprudence, the High Court applied two rules to limit Commonwealth power, implied from the federal nature of the Constitution. The first of these was an implied immunity of the instrumentalities of one level of government from legislative interference by the other level of government. The second was a series of implied prohibitions on Commonwealth legislative power, which resulted in certain powers, such as power over intra-state trade, being reserved to the States.

0.10 In 1920, the Engineers decision¹ overturned these two rules, and held that Commonwealth legislative powers are to be interpreted in a full and unqualified way. While this doctrine has been subject to criticism, it continues to be applied by the Court.

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.

0.11 The Commonwealth has a Constitutional monopoly on the levying of duties of customs and excise. Since 1942 it has monopolised income tax. This leaves the States dependent on transfers of funds from the Commonwealth.

0.12 Section 94 of the Constitution guarantees the return of surplus Commonwealth revenue to the States. However, since 1908 the Commonwealth, by appropriation to trust funds, has ensured that there is no surplus. Since then, all redistribution of revenue from the Commonwealth to the States has taken place under section 96, which permits the Commonwealth to give grants to the States on such terms and conditions as it sees fit.

0.13 A number of bodies have been created to enable intergovernmental management of federal fiscal issues. However, the underlying difficulty, of Commonwealth fiscal dominance, has not been resolved.

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

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

Chapter 3: New Federalism and new intergovernmental bodies

0.14 The phrase 'New Federalism' has been used to describe three generations of Prime Ministerial initiatives in Commonwealth-State relations.

0.15 The Whitlam Government significantly increased grants to the States, but these increases took the form of Specific Purpose Payments, representing an enhanced role for the Commonwealth in areas of traditional State activity. Most State Governments of the time opposed this centralist intrusion into their policy autonomy.

0.16 The Fraser Government adopted a less centralising approach, guaranteeing the States a fixed share of Commonwealth income tax (and later, all tax) revenue, and permitting each State to impose an income tax surcharge or return an income tax rebate within its jurisdiction. However, the Commonwealth did not vary its own rates of income tax, and no State implemented such an income tax regime.

0.17 The Hawke Government's New Federalism was a response to external economic pressures on Australia. Its aims were to bring about microeconomic liberalisation, as well as reform of Commonwealth and State roles and responsibilities, including federal fiscal relations. These changes were to be achieved by developing new intergovernmental bodies. The first such body to meet was the Special Premiers Conference, which achieved a great deal of change.

0.18 When Keating replaced Hawke as Prime Minister, the issue of federal fiscal relations was dropped from the Heads of Government agenda, but the meetings continued, and were formalised as the Council of Australian Governments. A large amount of microeconomic liberalisation continued to be achieved, but little progress was made in the area of Commonwealth and State roles and responsibilities.

0.19 Under Prime Minister Howard, there has been a reduction in the number of intergovernmental meetings. Microeconomic liberalisation has continued, and the issues of tax reform and federal fiscal relations have been returned to the Council of Australian Governments agenda.

0.20 Other intergovernmental bodies developed since 1990 include the Leaders' Forum and the Treaties Council.

0.21 The Leaders' Forum is a regular meeting of State and Territory Heads of Government, which enables the States to discuss matters of Commonwealth-State relations, and to deal with national issues which can be resolved at the State level without Commonwealth participation.

0.22 The Treaties Council is a meeting of the Prime Minister and the Premiers, to discuss treaties and other international instruments which are of concern to the States.

0.23 The 1990s New Federalism has also seen an evolution in the role played by some Ministerial Councils. In a number of cases, Ministerial Councils now play a formal decision-making role in determining uniform national standards.

Chapter 4: Microeconomic liberalisation under 1990s New Federalism

0.24 A major aim of Hawke's New Federalism was microeconomic liberalisation: the reduction or elimination of specific barriers to the free movement of, and competition in, goods, services, labour and capital. Such liberalisation is intended by its advocates to increase efficiency within the national market, and to enhance the size of the national market as a base for doing business abroad.

0.25 This push to increase the international competitiveness of the Australian economy has arisen in response to a number of economic trends, in particular Australia's growing current account deficit.

0.26 The Hawke Government undertook microeconomic liberalisation within its own jurisdiction, but State regulations, and State monopolies on the provision of various utilities and other services, continued to restrict the free operation of the national market. Further microeconomic liberalisation therefore required intergovernmental co-operation.

Finding 7:
The principal motivation for the New Federalism of the 1990s was the perceived need for microeconomic liberalisation, in order to enhance the functioning of the national market.

0.27 A great deal of the microeconomic liberalisation pursued by intergovernmental means has involved regulatory harmonisation brought about by schemes of uniform legislation. In a number of policy areas, this has resulted in the adoption of national uniform regulations. In other areas, particularly those of trade in goods and provision of professional services, a regime of mutual recognition has been adopted.

0.28 The adoption of national uniform regulations has not in all cases meant Commonwealth domination. A number of joint decision-making bodies have been created, which are responsible for national standard setting, and in which both the Commonwealth and the States participate. However, national uniform standards do prevent a State pursuing its own policy in an area, and joint Commonwealth-State decision-making bodies are often not subject to state parliamentary oversight. Furthermore, in many cases it is possible for uniform standards to be made part of the law of a state without that state's Parliament taking part in the law-making process.

0.29 Microeconomic liberalisation, particularly in the area of utilities and other Government Business Enterprises, has also seen a significant transfer of power from state governments to the market. This, too, has reduced the policy choices available to the States.

Finding 8:
On balance, microeconomic liberalisation has increased the jurisdiction and authority of the Commonwealth while reducing the policy choices of the States. In some cases, this trend has been mitigated by ensuring a State role in national uniform policy making, through a variety of joint Commonwealth-State instruments.

Chapter 5: Reform of Commonwealth and State roles and responsibilities and federal fiscal relations

0.30 The Australian federation exhibits a high degree of vertical fiscal imbalance; that is, the allocation of revenue between the two levels of government does not match those governments' expenditure responsibilities. The consequent dependence of the States on transfers from the Commonwealth reduces their ability to provide government which is responsive to the demands of their citizens: the States are constrained in their ability to raise their own revenue, and must spend according to priorities set by the Commonwealth.

0.31 Conditional transfers also bring about overlap and duplication between the Commonwealth and the States, due to the additional layers of bureaucracy required to supervise expenditure of the grants. The 1990s saw a desire to eliminate wasteful expenditure, as part of a desire to extend microeconomic liberalisation to the public sector. However, little progress has been made in realigning Commonwealth and State roles and responsibilities.

0.32 While some commentators argue that duplication of activity between governments is not wasteful, as it permits the pursuit of competitive efficiencies, such competition is not possible while the Commonwealth continues to dominate both policy and expenditure at all levels of government.

Finding 9:
A significant reason for State Governments entering the 1990s New Federalism negotiations was the possibility of achieving fiscal security and policy autonomy, through reform of vertical fiscal imbalance, and reduction of overlap and duplication.

Finding 10:
In the 1990s, there have been minor realignments of roles and responsibilities in those expenditure policy areas in which Commonwealth and State activity overlaps. However, the promise of a comprehensive realignment in these areas - particularly health and housing - remains unfulfilled.

0.33 The Special Premiers Conferences resulted in a number of proposals for the reform of federal financial relations. However, once Keating became Prime Minister, these proposals were not pursued.

0.34 The High Court decision in the Ha and Hammond cases,² handed down in August of 1997, declared a significant number of State taxes unconstitutional, thus worsening vertical fiscal imbalance. However, 1997 also saw the Howard Government place taxation reform, including reform of federal fiscal relations, back on the national agenda. The Prime Minister's taxation reform proposals are currently the object of parliamentary scrutiny and debate.

Finding 11:
The States have not obtained the fiscal security which they sought at the beginning of the 1990s New Federalism negotiations. This lack of progress is in strong contrast to the pace of microeconomic liberalisation at both the Commonwealth and the State level.

Finding 12:
There is a need to reform federal fiscal relations, in order to secure an appropriate policy role for the States.

Chapter 6: Continuing roles for intergovernmental bodies

0.35 Two of the possible roles for intergovernmental bodies in a concurrent federal system are to determine questions of demarcation between levels of government, and to jointly determine national policy in those cases where national uniformity is desirable and requires the participation of both levels of government. The bodies which have developed under 1990s New Federalism have played both these roles.

0.36 Joint decision-making is not always compatible with the virtues of federalism. If strong federalism is to be preserved in Australia, it is important that joint decision-making be adopted only where national uniformity is imperative. Wherever possible, the opportunity must be provided for the States to determine policy autonomously.

0.37 Achieving policy autonomy for the States in Australia requires fundamental reform of federal financial relations.

Finding 13:
The intergovernmental bodies developed in the 1990s have brought about a wide range of important changes in the Australian federation. While some elements of competitive federalism have been retained, there has been a significant increase in national approaches to common problems, and the creation of joint decision-making bodies. The fact that it is not the Commonwealth alone that makes national decisions shows that, in a federal system, national decision-making need not be centralised. It also reflects a recognition of the greater interdependence of governments.

Finding 14:
The Committee believes that for Australia to function as an effective federal system, the system of intergovernmental relations must uphold the following virtues of federalism:

• Decentralised decision-making which permits diverse responses to regional needs;
• A competitive environment for public policy solutions;
• Multiple points of access to government for citizens;
• Unity where necessary, without central domination.

0.38 If reform of Australian federalism is to take place, the ongoing participation of Heads of Government is necessary. Only Heads of Government are in the position to make the agreements and compromises necessary to achieve fundamental change. The current Commonwealth Government has not systematically pursued a whole-of-government approach.

Finding 15:
From October 1990 until the end of 1995 there were eight meetings of Australian Heads of Government (two Special Premiers Conferences, one Heads of Government meeting and five meetings of the Council of Australian Governments). Since the beginning of 1996 there have been only two meetings (both of the Council of Australian Governments). This represents a halving of the frequency of meetings, from eight in six years to two in three years. This decline in the frequency of Heads of Government meetings suggests that since 1996 the Commonwealth Government has not been committed to the pursuit of a linked and comprehensive agenda for change to the Australian federation, to be achieved by way of intergovernmental decision-making.

Without the ongoing commitment of Commonwealth and State Heads of Government, intergovernmental decision-making will be unable to bring about comprehensive change to the Australian federal system.

0.39 If the intergovernmental bodies developed as part of 1990s New Federalism are allowed to go unused, the States will lose an important forum at which to meet and negotiate with the Commonwealth. Indeed, the States would benefit if meetings of the Council of Australian Governments were legally mandated, as this would make it impossible for the Commonwealth to avoid pressure from the States by simply failing to convene meetings.

Finding 16:
The existing framework for intergovernmental relations in Australia must be further developed, if the virtues of federalism are to be upheld. Legally mandated meetings of the Council of Australian Governments would be one way to enhance Australian intergovernmental relations.

0.40 The States also benefit from the effective operation of the Leaders' Forum. The Leaders' Forum permits the States to develop a united position in dealing with the Commonwealth, and to develop national uniform standards, where they are necessary, in those cases where Commonwealth participation is not forthcoming or not desirable.

Finding 17:
The Leaders' Forum provides an opportunity for concerted action by the States in furtherance of the virtues of federalism, and enhances the operation of the Council of Australian Governments as a forum for co-operation between the Commonwealth and the States. Where the national interest demands national uniformity in a particular policy area, the Leaders' Forum in many cases will be able to pursue a States-based scheme of mutual recognition or uniform legislation, which enhances national integration without Commonwealth domination.

0.41 The establishment of a permanent intergovernmental secretariat is one way in which the institutional character of the intergovernmental bodies which have developed as part of 1990s New Federalism might be enhanced. Such a secretariat would be able to provide administrative and policy support. Such a secretariat which provided support to the Leaders' Forum would also be able to play a significant co-ordination and communications role.