Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 2: How the System Grew:
A History of Commonwealth Grants to the States
States continued to protest vigorously against the uniform tax legislation, with New
South Wales and Victoria deeply dissatisfied with the Commonwealth’s monopolisation
of income tax. Victoria challenged the uniform legislation, but the High Court decreed
that the Commonwealth was within its rights to implement the legislation under wartime
powers, and it could use its grants power to dominate the income tax field under
peacetime conditions (Economic and Budget Review Committee 1986). In the second
Uniform Tax Case in the High Court, in August 1957, the judiciary once again supported
the Commonwealth (Reid, cited in Prest and Mathews 1980). The Premiers’ Conference
in March 1959 focused on the return of income taxation powers to the States and,
although agreement was not reached, another Premiers’ Conference later that year saw
the Commonwealth concede that intergovernmental grants should be changed to
recognise that grants had become more than simply financial compensation for State
income tax revenues forgone (Prest 1959).
While South Australia, Tasmania and Western Australia continued to receive special
grants according to CGC criteria, the need for review was also apparent when Victoria
and Queensland applied for special grants in 1957. Income tax reimbursement grants
had grown to become the largest part of Commonwealth grants in 1958–59, and were
determined according to a formula that accounted for increases in population and the
Australian average wage rate (Prest 1959).
The CGC initiated a new scheme that increased grants in consideration of States’ more
difficult fiscal circumstances. It calculated the gross financial assistance grant in
1959–60 according to the old formula but incorporated further payments from the
Commonwealth (Reid, cited in Prest and Mathews 1980). At this stage the CGC
assessed only special grants for the claimant States (now fewer) that were essentially
supplementary to the tax reimbursement grants (CGC 1995). The new plan was
implemented on the understanding that Queensland and South Australia would only
apply for claimant status in dire circumstances. Although the CGC’s role was ostensibly
reduced it maintained that the amount of required investigation work would remain much
the same in each of these two States, irrespective of the size of the grant, and that the
CGC would need to maintain its continuous review of the budgets of the non-claimant
States, particularly South Australia and Queensland (Reid, cited in Prest and Mathews
1980).
FINAL REPORT [28]