Australian federalism has been dysfunctional for a long time. Recent disputes over GST revenue, a national industrial relations law and state referrals of power are just the latest examples of deep-seated problems. These can be traced back to when the Constitution came into force in 1901 when Alfred Deakin, one of Australia's first Prime Ministers, predicted that the states would find themselves "legally free, but financially bound to the chariot wheels of the Central Government".
This is the position today due to High Court decisions and Commonwealth encroachment on what had been areas of state control. As a result, the states find themselves dependent upon federal revenue to run even their most basic services like hospitals and schools.
This makes the dispute over the distribution of GST revenue a high stakes game for the states. If they are unable to come to a new agreement with Peter Costello, such as by removing further state taxes, they risk losing some or all of the money upon which they depend. Unfortunately for the states, their bargaining position is weak. The GST is a federal tax and it is possible for the Commonwealth to withhold the money or to pass on the revenue under different conditions. The states could take the matter to the High Court, but its earlier decisions clearly state it is up to the Commonwealth to determine the terms and conditions upon which it makes the grant.
What must be of great concern to the states is that, at the same time the Commonwealth is discussing the GST revenue, there are also signs that it is thinking of expanding its involvement in some areas that have traditionally been their domain. These include the hospital system, education and even a national industrial relations law that would over-ride the existing state systems. It is possible that the Commonwealth might retain part of the GST revenue to fund its programs in these areas.
In the battle for revenue and control over important areas of policy, the states hold few cards. The best they may have is the political argument that depriving them of GST funding will affect the basic services upon which Australians depend. However, the Commonwealth might counter by arguing that services would not be affected as they would simply be provided by Commonwealth and not state agencies.
There is however one area in which the Commonwealth does rely upon the states. The states have referred power to the Commonwealth to ensure that the Commonwealth has the power to enact key national laws. Without such power, the coverage of these laws would be incomplete, leading to confusion and extra cost. Recent referrals include giving the Commonwealth power over de facto relationships and terrorism offences. The referral most likely to be contentious is that by the states over corporations law.
Over 1999 and 2000 High Court decisions led to instability, problems with enforcement and a lack of confidence in the previous corporations law, which covered the creation and regulation of companies across Australia. It is generally accepted that Australia needs a national law on this topic. The states recognised this and in 2001 referred power to the Commonwealth. However, they did so in a way that will cease after five years. After that time, unless the states renew the grant of power, the uncertainty that plagued corporations law in Australia will return and business will suffer. Unfortunately for the Commonwealth, it will be seeking a further referral of this power at the same time as a new deal on GST revenues and a national industrial relations law.
While federalism has its supporters, even they would now recognise that the system does not work as it should. It is a source of constant dispute about the provision of even the most basic services and enables buck passing and duplication that is neither efficient nor in the best interests of the community.
This is not to say that federalism could or should be abandoned. But, at the very least, we should take a step back and recognise some of the underlying problems rather than continuing to debate the issues in a piecemeal fashion. The Commonwealth, the states and the people they serve should come together to identify the problems in how we are governed and work out some longer-term solutions. We need to develop a new deal for Australian federalism.
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