Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 12: Overall Assessment
and the Need for Reform
Another important consideration is the potential benefits of a less adversarial
environment for Commonwealth–State and State–State relations. The existing
arrangements promote conflict. In the past, transfers to fiscally weak States have
contributed to easier interstate and intergovernmental relations. However the same
cannot be said of the system of transfers today. As a non-elected and apolitical
independent body assigned by the Commonwealth to implement HFE, the CGC has
become increasingly caught in conflicts between sovereign elected Governments. The
application of an extreme version of HFE has institutionalised conflict among the States.
The high importance and uncertainty over levels of SPPs, and dysfunctional conditions
applied to them, has institutionalised conflict between the Commonwealth and the
States.
The States are forced to play a game over distribution of GST revenues, with expensive
consequences, tightly refereed by the CGC on behalf of the Commonwealth. State
dissatisfaction with the process will inevitably filter through to other Commonwealth–
State and interstate dealings, and the time and effort spent on game playing is costly
and inefficient. Commonwealth–State relations will be tested even further in coming
years if the level of funds transferred across States grows rapidly, as is expected if
current arrangements continue (see Chapter 4).
12.8 Lessons from past attempts at reform
Major attempts to reform Commonwealth–State financial relations over the past several
decades illuminate the difficulties of change and also shape the contemporary
possibilities (see Chapter 2).
In the 1950s the larger States continued efforts to remove the vertical fiscal imbalance at
the heart of Australia's problems of Commonwealth–State funding, by seeking
revocation of the Commonwealth's wartime assumption of exclusive control over income
taxation. The High Court's surprising constitutional interpretation in favour of the
Commonwealth in 1959 made it clear that any major reform would require
Commonwealth support. There were no longer ‘States’ rights’ in arrangements that, at
the time the Constitution was accepted, were seen as providing a reasonable balance
between expenditure responsibilities and revenue raising capacities at each level of
Government. Alongside these developments in constitutional interpretation, during the
Menzies Government the Commonwealth, with the support of the States, assumed
responsibility for the funding of large areas of education.
The Whitlam Government sought to reduce the impact of vertical fiscal imbalance by
expanding Commonwealth and contracting State expenditure responsibilities. The
States’ resistance turned out to be politically effective: when called to adjudicate through
electoral processes, Australians seemed to value the decentralisation of service delivery
responsibility that is embodied in the Constitution. The permanent legacy of the Whitlam
reforms was a major Commonwealth role in funding local government and in funding
and shaping national standards in relation to the main merit services of health and
education. The implications of this expansion of the Commonwealth’s role are not
reflected fully in reforms to the funding arrangements, resulting in the unsatisfactory
features of SPPs since the 1970s. Gough Whitlam, consistent with positions taken by
Governments that he led, argued in a submission to the Review that vertical fiscal
imbalance and the associated problems of SPPs should be reduced by the States giving
responsibility for funding hospitals to the Commonwealth (2002).
FINAL REPORT [184]