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NSW PARLIAMENTARY LIBRARY RESEARCH SERVICE Sovereign States and National Power: Transition in Federal - State Finance by John Wilkinson Briefing Paper No 14/06 RELATED PUBLICATIONS • State Revenue and New South Wales: Past Prominence and Present Realities, by John Wilkinson. NSW Parliamentary Library Research Service Briefing Paper 33/95. • Federal-State Financial Relations: After the GST, by John Wilkinson. NSW Parliamentary Library Research Service Briefing Paper 14/2000. • Horizontal Fiscal Equalisation, by John Wilkinson. NSW Parliamentary Library Research Service Briefing Paper 21/03. ISSN 1325-4456 ISBN 0 7313 1809 9 October 2006 © 2006 Except to the extent of the uses permitted under the Copyright Act 1968, no part of this document may be reproduced or transmitted in any form or by any means including information storage and retrieval systems, without the prior written consent from the Librarian, New South Wales Parliamentary Library, other than by Members of the New South Wales Parliament in the course of their official duties. Sovereign States and National Power: Transition in Federal - State Finance by John Wilkinson NSW PARLIAMENTARY LIBRARY RESEARCH SERVICE David Clune (MA, PhD, Dip Lib), Manager..............................................(02) 9230 2484 Gareth Griffith (BSc (Econ) (Hons), LLB (Hons), PhD), Senior Research Officer, Politics and Government / Law .........................(02) 9230 2356 Talina Drabsch (BA, LLB (Hons)), Research Officer, Law ......................(02) 9230 2768 Lenny Roth (BCom, LLB), Research Officer, Law ...................................(02) 9230 3085 Stewart Smith (BSc (Hons), MELGL), Research Officer, Environment ...(02) 9230 2798 John Wilkinson (MA, PhD), Research Officer, Economics.......................(02) 9230 2006 Should Members or their staff require further information about this publication please contact the author. Information about Research Publications can be found on the Internet at: www.parliament.nsw.gov.au/WEB_FEED/PHWebContent.nsf/PHPages/LibraryPublications Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. CONTENTS EXECUTIVE SUMMARY 1.INTRODUCTION 1 2.INITIAL TRANSITION FROM INDIVIDUAL COLONIES TO NATION 1 (a)Origins of the States as Individual British Colonies.................................................... 1 (b)Beginning the Transformation towards a Nation......................................................... 2 3.THE ALP AND COMMONWEALTH POWER FOR SOCIAL OBJECTIVES 3 (a)The Australian Labor Party and the Accumulation of Commonwealth Power ........... 3 (b)The ALP and the Extension of National Power: 1940s-1970s .................................... 5 4.SHIFT IN FINANCIAL CONTROL FROM THE STATES TO THE COMMONWEALTH 8 (a)Contests over Federal-State Finance............................................................................ 8 (b)Disparities Between the States................................................................................... 10 (c)War in the Pacific and the Shift in Federal Financial Power..................................... 11 (d)Further Consolidation of Federal Financial Control: 1940s-1970s ........................... 12 5.THE ALP, THE LIBERAL AND NATIONAL PARTIES AND THE CONSOLIDATION OF COMMONWEALTH POWER 14 (a)The Trade Crisis of the late 1970s and early 1980s................................................... 14 (b)The Hawke and Keating Governments: The Reduction of Government Control of Production and Commerce ............................................................................................. 16 6.COMMONWEALTH’S CONSOLIDATION OF FEDERAL STATE FINANCE 20 (a)The Extension of the Commonwealth Grants Commission’s Role in Federal-State Funding: the Hawke and Keating Governments During the 1980s and 1990s .............. 20 (b)Impact of the Commonwealth Grants Commission................................................... 22 (c)The Howard Government and the New Course of Financial Relations between the Commonwealth and the States ....................................................................................... 23 7.CONTESTS OVER SHARING OF THE GST REVENUE: COMMONWEALTH FUNDING AND NSW’ OWN REVENUE 26 (a)Outcry from NSW Political Leaders.......................................................................... 26 (b)Continuing Shortfall on a Per Capita Basis ............................................................... 27 (c)New South Wales Government Revenue: Sources, and Usefulness, of Principal Taxes ........................................................................................................................................ 28 (d)Specific Purpose Payments to New South Wales...................................................... 33 8.SURVEYING THE CONSIDERATIONS IN NSW’ CLAIMS 34 (a)Wealth of the State..................................................................................................... 34 (b)Expenditure Difficulties of Other States and Territories........................................... 37 (c)The Capacity of the States and Territories to Raise Revenue.................................... 37 (d)Expenditure on Services and Revenue Raising Capacity .......................................... 38 CONCLUSION 40 Sovereign States and National Power: Transition in Federal - State Finance EXECUTIVE SUMMARY • Originally the federation, of the former British colonies on the continent of Australia, was based on the assumption both that the newly formed states would be financially stronger than the central government and that the major share of decisions on important matters would remain with state administrations (pp.2,8) • Certain key areas of decision-making, conducive to the consolidation of the states into a nation, were allocated to the newly established federal government (p.2) • From the inauguration of federation onwards, the federal government sought to direct to itself the greater part of revenue raised in the country (pp.8,11) • It was the Australian Labor Party that first sought to extend the control of the national government into significant realms of decision making – principally for social objectives (pp.3-8). The Australian Labor Party was also initially inclined to utilise tariffs to stimulate the establishment and expansion of production in Australia (pp.4,15). The ALP was particularly concerned with not only drawing financial control towards the central government, but in having the central government direct expenditure (pp.13-14) • Since the beginning of federation, there have always been disparities between the states as far as their respective capacities to raise revenue are concerned (pp.10,38) • To address the differences in revenue raising capacities, amongst the states, the federal government established a Commonwealth Grants Commission (pp.10- 11,21-23) • After the federal government gained control over the levying of income tax, the states and territories have become increasingly dependent on revenue from the federal government (pp.11-14,20-34) • During the 1980s and 1990s the Australian Labor Party not only forsook the policy of government control over production and commerce (favouring policy based on markets), but actively embarked on facilitating the functioning of state-based enterprises on a national level. The Howard Government has pursued similar policies (pp.14-20) • Currently the Commonwealth Grants Commission continues to determine the shares in the newly established system of federal funding – prompting remonstrations from states which consider they are dealt with unfairly (pp.26-39) Sovereign States and National Power: Transition in Federal-State Finance 1 1.INTRODUCTION In April 2005 the prime minister, John Howard, delivered a speech in which he reflected on the past nature of the states in Australia, in contrast to the federal government, and on what form the relationship might take in the future. In particular he said that, I’m here. .to make some remarks on Australian federalism. .We know that if Australia is to grow and prosper in the 21st century we must embrace continuous reform. .I believe that part of that change is a greater focus by the Australian people on ties to nation and to local community, and less on traditional state loyalties. .When I was a young solicitor in Sydney in the early 1960s, our legal firms were confined exclusively to state capitals. .Today, of course, that is no longer the case. .In the vital area of education, the increased mobility of our population means that no fewer than 80,000 Australian students move from one state or territory to another each year. .A single set of national laws on industrial relations is [also] an idea whose time has come. .1 This paper looks at the changes that have taken place in Australian federalism: particularly changes in financial relations between the national government and the states and territories. It examines the early period in the federation, when the financial resources of the central government were relatively less substantial compared to the states, and proceeds to look at how the central government achieved financial predominance and the situation of the states in the present era. 2.INITIAL TRANSITION FROM INDIVIDUAL COLONIES TO NATION (a)Origins of the States as Individual British Colonies Australia does not operate like a unitary state (unlike Britain) because, between the arrival of British people in Australia and the beginning
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