Garnaut Fitzgerald Review of Commonwealth-State Funding

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CHAPTER 2: How the System Grew: A History of Commonwealth Grants to the States At Federation, it was envisaged that sharing the Commonwealth’s ostensible surplus revenue through grants would not be a permanent feature. It was expected that assistance to States with fiscal difficulties would be exceptional rather than ongoing. Yet, particularly in recent decades, a high degree of HFE has evolved as an ongoing feature of Australia’s intergovernmental financial relations. This Review questions the current practice of HFE, not the ultimate aim of achieving equitable outcomes for all Australians. This chapter examines the development of intergovernmental fiscal arrangements in Australia since Federation. It focuses on changes in the application of HFE in the distribution of general purpose grants and the increasing role played by specific purpose payments (SPPs). 2.2 Federation, distribution of surplus revenue, and specific purpose payments Vertical fiscal imbalance has been a feature of Commonwealth–State relations in Australia since Federation. When the States (then colonies) agreed to join the Federation, they ceded control over customs and excise duties to the Commonwealth. Before Federation, these duties comprised 76 per cent of the colonies’ taxation. In recognition of this, the basis for an intergovernmental revenue sharing arrangement was included in the Constitution drafted in the 1890s and implemented from 1 January 1901. Section 87 provided that the Commonwealth return three-quarters of these duties to the States, without any controls on the way money was spent for ten years. The Constitution also provided that surplus revenue of the Commonwealth be paid to the States. The Commonwealth initially had far greater capacity to raise revenue than the States. However, the States maintained their expenditure responsibilities in areas such as law and order, commerce and industry, transport, water supply and sewerage, and education and health. The States’ problems were exacerbated when the Surplus Revenue Act 1908 ended delivery of surplus revenue to the States to prepare for the Commonwealth’s introduction of pensions. Talks betweens the States and Commonwealth took place from 1906 to 1909 in an effort to find a compromise over this loss of revenue, and in 1909 it was finally decided that the Commonwealth would provide grants to the States on an equal per capita basis. This system endured until 1927 despite opposition from some States, in particular Tasmania, Western Australia and South Australia. Some States demanded additional assistance in the form of special grants. Section 96 of the Constitution enabled the Commonwealth to grant financial assistance to States in the form of general revenue, SPPs and equalisation grants. Special grants were made to States with consistently weak financial positions, beginning with Western Australia in 1910–11, extending to Tasmania in 1912–13 and to South Australia in 1929–30. These States became regular recipients of these grants, which were to a considerable extent made on an ad hoc basis. Consequently a degree of horizontal fiscal imbalance emerged, seemingly as more than a transitional feature. Fiscal dependence on the Commonwealth, combined with political debate on the economic side effects of Federation (notably the impact of a uniform external tariff), saw special grants to the States become an increasingly important feature of Commonwealth–State funding from 1910 to the 1920s (CGC 1995). FINAL REPORT [22]
CHAPTER 2: How the System Grew: A History of Commonwealth Grants to the States Western Australia was particularly disadvantaged by some effects of Federation, with the Commonwealth granting it a special exception to the application of the national tariff, to phase out by 1906. When the special tariff expired, Western Australia’s problems had not significantly eased, and it applied for and relied on the Commonwealth’s special grants for support well into the 1920s (Mathews and Jay 1997). The concept of equalising grants became a feature of the intergovernmental system more generally, mainly in recognition of Tasmania’s situation (Matthews and Jay 1997). After experiencing fiscal trouble both before and after the Federation, Tasmania first applied for special financial assistance in 1911. The State became increasingly vocal in expressing grievances regarding the fiscal impact of the Federal system. While Western Australia was most affected by the uniform national tariff, Tasmania and South Australia also felt the effects. All three States expressed concern about the impact of the Navigation Act 1912, which artificially inflated the freight costs for manufactured goods, and the Commonwealth Conciliation and Arbitration Act 1904 (CGC 1995). Requests by Western Australia, South Australia and Tasmania for special assistance increased throughout the 1920s and early 1930s. These requests were subjected to, at best, haphazard assessment by a variety of bodies and institutions (Prest 1964). Several Royal Commissions examined the impact of Federation on States. The first of these was the 1925 Royal Commission on the Finances of Western Australia as Affected by Federation. Support for a new method of assisting the States emerged from a 1925 Royal Commission on the problems of Tasmania, with Hobart statistician L.F. Giblin convincing the Royal Commission to suggest a shift away from the equal per capita distribution system. In 1926, Giblin advocated a system of differential per capita payments, arguing for the establishment of an independent institution to distance grant allocation from the political process (Prest 1964). He believed the per capita system of payment, in place since World War I, could be made to function more efficiently (CGC 1980). Further support was presented before the 1928 Royal Commission on the Constitution, most notably from Giblin, J.B. Brigden and L.G. Melville. In 1929 the Labor Party, which had refused representation on an independent institution in opposition, was elected. As the report’s recommendations faded into obscurity (CGC 1995), grant allocations continued to be dealt with at the political level. FINAL REPORT [23]
Page 1 and 2: Review of Commonwealth-State Fundin
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Page 10 and 11: THE REVIEW COMMITTEE FINAL REPORT [
Page 12 and 13: EXECUTIVE SUMMARY Overall assessmen
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Chapter 5: Specific Purpose Payment
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CHAPTER 6: Comparative Fiscal Posit
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CHAPTER 7: Other Federations 7.2 Ve
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CHAPTER 7: Other Federations Sales
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CHAPTER 7: Other Federations The Un
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CHAPTER 7: Other Federations Popula
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CHAPTER 7: Other Federations 7.4 Co
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CHAPTER 7: Other Federations In 200
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CHAPTER 7: Other Federations In add
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CHAPTER 7: Other Federations Compar
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CHAPTER 7: Other Federations FINAL
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CHAPTER 8: Federal Policy Effects o
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CHAPTER 9: Equity Chapter 1 notes t
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CHAPTER 9: Equity Both SPPs and gen
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CHAPTER 9: Equity Table 9.3 shows t
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CHAPTER 9: Equity 9.3 Horizontal di
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CHAPTER 9: Equity Many ways to rais
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CHAPTER 10: Efficiency and Economic
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CHAPTER 11: Simplicity, Transparenc
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CHAPTER 12: Overall Assessment and
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CHAPTER 13: Commonwealth-State Fina
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APPENDIX A: National Health and Age
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APPENDIX A: National Health and Age
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APPENDIX B: National Education and
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APPENDIX C: National Indigenous Com
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APPENDIX C: National Indigenous Com
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APPENDIX D: Minimum Cost of Governm
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APPENDIX E: Consultation • Local
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APPENDIX E: Consultation • VICRoa
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GLOSSARY Efficiency: allocative eff
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GLOSSARY merit goods (health, educa
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FINAL REPORT [234] GLOSSARY
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BIBLIOGRAPHY Buchanan, JM 2001, Fis
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BIBLIOGRAPHY Government of Victoria
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BIBLIOGRAPHY Watts, RL 1999, Compar
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INDEX E economic activity / growth
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INDEX O other Federations Canada ·
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Garnaut Fitzgerald Review of Commonwealth-State Funding

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