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 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]
CHAPTER 2: How the System Grew: A History of Commonwealth Grants to the States 2.5 Whitlam’s centralism and Fraser’s New Federalism The biggest shifts in intergovernmental fiscal relations through the 1960s and 1970s were the centralisation that took place during the Whitlam Government, with its a huge increase in SPPs, and the Fraser Government’s attempts at partial reversal and reform through its New Federalism policy. New Federalism saw the CGC determine per capita relativities and become responsible for the distribution of general revenue grants among all States – a major expansion from its original role of dealing with claimant States. Under the Whitlam Government, the Commonwealth shifted to spending heavily in areas that were constitutionally the States’ responsibility. This was a major new development in intergovernmental fiscal relations (Hancock and Smith 2001). SPPs quadrupled between 1959–60 and the early 1970s, growing significantly faster than general revenue grants (Mathews and Jay 1997). Substantial SPPs were established in the areas of education, housing, health, urban and regional development, and transport. The Whitlam Government absorbed responsibility for the size and direction of new programs in local government and also sought to direct their implementation. It argued the case for its heavy involvement in areas of traditional State responsibility by attacking the States’ failure to provide services and maintain and extend infrastructure (Mathews and Grewal 1997). The States responded that the loss of their major tax source and lack of full compensation through general revenue grants had prevented them from providing adequate services. Between 1972–73 and 1975–76, grants to the States increased from 8.1 per cent to 11.2 per cent of gross domestic product (Federal–State Relations Committee 1998). The legislation governing the CGC was amended at this time to give it additional power to advise on local government funding and on special assistance to States. Following the formulation developed in the mid-1930s, the Grants Commission Act 1973 stated that grants would be allocated ‘for the purpose of making it possible for a State, by reasonable effort, to function at a standard not appreciably below the standards of other States’. When the Fraser Government replaced the Whitlam Government in 1975, there had been increasing tension between the Commonwealth and the States over grant conditions and natural resources. This encouraged the new Commonwealth Government to offer some compromise (Hodgins et al. 1989). Although the Fraser Government moved towards a system of tax sharing entitlements, increased funding to local government was broadly maintained. The CGC’s role in allocating grants to local government was abolished and funding was distributed among States on an equal per capita basis. SPPs decreased from 4.6 per cent to 3.5 per cent of gross domestic product between 1976–77 and 1982–83. This coincided with the commencement of the ‘inclusion approach’ where the CGC considered the distribution of school grants (1976) and then hospital grants (1977) when assessing untied grants (Mathews and Grewal 1997). FINAL REPORT [29]
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 6: Comparative Fiscal Posit
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CHAPTER 7: Other Federations 7.2 Ve
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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 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 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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