Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 2: How the System Grew:
A History of Commonwealth Grants to the States
Although this report did not contain any concrete declaration of principle, the CGC later
reported that it followed a modified principle of financial need, calculating grants to
enable claimant States ‘with reasonable effort, to put their finances in about as good a
position as that of the other States’ (CGC 1934). Following publication of the First
Report, Commonwealth Grants Commissioner L.F. Giblin stated in a letter to leading
economist (later Chairman of the CGC) Sir Leslie Melville: ‘there was in fact a difficulty
in finding a generally acceptable form of words for the general principle’ (CGC 1995).
The Second Report (1935) contained a chapter setting out the CGC’s principles:
the fundamental law for all Government is self-preservation. It is on this basic
principle that we put special grants. The Federation must preserve itself (and)
cannot allow any of its constituent members to fail. Some States are certainly
in serious financial difficulties. It must be made possible for them to function as
States of the Commonwealth at some minimum standard of efficiency (CGC
1935, p. 37).
The Third Report (1936) defined the principles more explicitly, stating that:
in our second report we developed the tentative principles of the first, and
concluded that the relative financial position of the States, when analysed with
sufficient care and understanding, was the only basis on which grants should
be made. Further consideration and another year’s experience have led us to
the following conclusion:
Special grants are justified when a State through financial stress from any
cause is unable efficiently to discharge its function 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 (CGC 1936, p. 75).
Yearly CGC reports from the 1930s to the early 1970s show that this definition remained
the basis for allocating grants to claimant States throughout that period, notwithstanding
the concurrent increase in grants. The Grants Commission Act 1973 enshrined the
definition in legislation by defining a grant of special assistance to a State as one made
‘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’.
The 1977 Special Assistance for States Report, while quoting the principle from the
Third Report, stated:
this principle has remained unaltered as the basis on which the CGC’s
recommendations have been made but, from time to time, methods of applying
the principle have been adapted to changing circumstances (CGC 1977,
p. 35).
While the CGC claims, in this and other comments, that its concept of HFE principles
has not changed (even though the wording has evolved), it concedes that application of
HFE varies according to circumstances: ‘fiscal equalisation is not a definitive concept
and different results will ensue according to the basis upon which comparisons are
made for equalisation purposes’ (CGC 1979).
FINAL REPORT [33]