Garnaut Fitzgerald Review of Commonwealth-State Funding

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]