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 2.3 Creation of the Commonwealth Grants Commission At the end of 1931 the Federal Labor Party under Scullin was defeated by Joseph Lyons’ United Australia Party. A former Premier of Tasmania, Lyons was more sympathetic to the problems experienced by the less financially robust States, which were being discussed in Cabinet in conjunction with the proposal to establish an independent institution (May 1971). Lyons referred to these discussions when introducing the 1932–33 Budget in September, but no action was taken that year, increasing strains in Commonwealth–State financial relations (Hodgins et al. 1989). By this stage, the weaker States were actively campaigning for the establishment of an institution to inquire into the financial status of the less populous States, and were frustrated by the inactivity in this area. At the January 1932 Premiers’ Conference, Tasmania asked the States to support the creation of an institution to conduct inquiries into special grants (CGC 1995). The three claimant States then presented a combined submission to the Commonwealth in January 1933. The problems experienced by both claimant and donor States greatly worsened during the Great Depression. Export prices fell substantially, disproportionately affecting exporting States such as Western Australia, with the effects exacerbated by the Scullin Government’s large increase in tariff protection. This encouraged a growing secessionist movement in Western Australia (Hodgins et al. 1989), which led to majority support in a secession referendum in 1933. (The submission to secede was rejected by the British House of Commons Joint Select Committee in 1935.) Secessionist sentiments from the west reinforced the pressure on the Commonwealth Government coming from Tasmania and South Australia to establish an institution to advise on the distribution of special grants (May 1971). The proposed Commonwealth Grants Commission (CGC) would assess and make recommendations on the applications of claimant States for Commonwealth funding. There was much debate about the need for such an entity, how much power it should have, and the issues it should cover. The Commonwealth Grants Commission Bill of 1933 initially provided for a five-member Commission, with member terms of five years. Debate centred on issues of power, with the less populous States concerned that the CGC would obstruct what needed to be done. Several members of the Federal Parliament believed a specialised body was unnecessary and suggested that a Parliamentary inquiry, even a long-running one, would perform more efficiently (Brigden, cited in Prest and Mathews 1980). The supporters of the creation of the institution ultimately won the political contest, with the larger States apparently regarding the CGC as irrelevant. The claimant States were its main advocates, with the other States not attaching great importance to its work until they recognised the potential for adverse effects late in the 20th century. FINAL REPORT [24]
CHAPTER 2: How the System Grew: A History of Commonwealth Grants to the States Devising initial CGC principles (1933–36) The CGC grappled with formulating principles to guide the allocation of funds to claimant States, concluding after its first three years that distinct differences among States would require an ongoing and carefully calculated system of compensation. It decided that there was no point in trying to equalise all States completely, and that calculating relativities based on the costs of Federation to the States would see even donor States labelled with an ostensible disability in terms of intergovernmental funding (CGC 1980). After its first year, the CGC established that it should not calculate grants according to Federal disabilities but assess claimant States according to the ‘needs’ principle (i.e. their budgetary needs relative to a ‘normal’ State’s standard expenditures and revenues [May 1971]). The principle of financial need, derived from the work of L.F. Giblin in the mid- to late- 1920s, came to guide the CGC when it assessed special grant requirements of claimant States. Financial need was defined in the CGC’s Third Report as follows: Special grants are justified when a State through financial stress from any cause is unable to efficiently discharge its functions as a member of the Federation and should be determined by the amount of help found necessary to make it possible for that State by reasonable effort to function at a standard not appreciably below that of other States (p. 75). It is unclear how wide the CGC intended the reach of ‘standards not appreciably below that of other States’ to be, but its analysis and recommendations demonstrate that it was mostly concerned with helping distressed States, rather than equalising all States to a similar standard. At that stage, the CGC was concerned with claimant States only, seeking to alleviate their fiscal difficulties and not to achieve equal standards over a range of services. Even so, the Commonwealth Treasury opposed the CGC on this, believing the grants were larger than necessary due to the chosen methodology (May 1971). The Commonwealth was ‘not entirely satisfied with the “needs” basis’ (Maxwell 1980). The ‘needs’ basis, originally designed to assist smaller States in financial distress, has evolved over time. In recent decades it has metamorphosed into the doctrine for comprehensive equalisation encompassing all States. At first, the CGC did little to ease the tensions in intergovernmental financial relations, with Western Australia continuing to threaten secession and pressure continuing from Tasmania and South Australia. The CGC confirmed that Western Australia, South Australia and Tasmania required special consideration as claimant States (Hodgins et al. 1989). The Commonwealth expressed dissatisfaction with the CGC in several arenas. In 1935 the Treasury disagreed with the approach and conclusions of the CGC, with then Commonwealth Treasurer R.G. Casey criticising the CGC methodology and performance (CGC 1995). Prime Minister Lyons attempted to hand the role performed by the CGC over to the Interstate Commission, for which provisions had been made in the Constitution. Western Australia and South Australia pressured Lyons to push the changes through, but there was no progress until April 1936 when Lyons decided to extend the CGC for another twelve months while legislation to resurrect the Interstate Commission was drawn up (CGC 1995). FINAL REPORT [25]
Page 1 and 2: Review of Commonwealth-State Fundin
Page 3: Review of Commonwealth-State Fundin
Page 8 and 9: TABLE OF CONTENTS CHAPTER 9: Equity
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 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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