Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 12: Overall Assessment
and the Need for Reform
Australia’s grants history
The founders of the Australian Constitution appear to have envisaged that its grants
power would enable the Commonwealth (which initially had very limited capacity to
deliver services of any kind itself) to provide funds to a State:
• for development projects of national significance
• for other common objectives (e.g. major development projects)
or
• to enter into an agency-type arrangement with a State whereby it performs some
function for the Commonwealth.
Since World War II, and particularly since the Whitlam Government, SPPs have
increased in number, scale and complexity (see Chapter 5). General purpose payments
are also now at historically high levels as a proportion of State revenues, although they
have grown less rapidly than SPPs over the last several decades.
The Commonwealth’s taking over of exclusive powers over income tax during World
War II (see Chapter 2) was the biggest contributor to this increase in vertical fiscal
imbalance. More recently, vertical fiscal imbalance has been further increased by the
High Court invalidation of State franchise fees and the States’ voluntary withdrawal from
certain other taxes (e.g. financial transactions taxes) as part of national tax reform.
Emergence of major areas of shared responsibility
Over the last half-century, with the increase in vertical fiscal imbalance and, in particular,
the growth in SPPs, the Commonwealth has taken on more responsibility in areas that
are assigned by the Constitution to the States, including education and health. These
sectors are important for national economic development and equality of opportunity,
and the reasons for an increased Commonwealth role in relation to them still seem
compelling.
• The Commonwealth Government took on responsibility for public funding to
non-government schools in response to political contention over public funding for
private (church-related) schools, which was difficult to resolve completely at State
level. The States continue to dominate the funding and operation of government
schools.
• In response to shared national aspiration, the Menzies Government effectively
established the Commonwealth as the main provider of higher education funding.
This role is now entrenched at Commonwealth level, with wide State support.
• The Commonwealth has enlarged its role in vocational education and training over
the past twenty years, although less so recently. This area is an example of a new
type of federalism, where the two levels of government develop a shared national
framework within which each State can apply its specific approaches. The Australian
National Training Authority coordinates the national framework and reports to a
Commonwealth–State Ministerial Council. Advantages of a national approach
include national recognition of skills acquired within any State.
FINAL REPORT [175]