FEDERALIST PAPER 1 AUSTRALIA’S Federal Future

A Report for the Council FOR the Australian Federation PREPARED BY Anne Twomey & Glenn Withers APRIL 2007

FEDERALIST PAPER 1 AUSTRALIA’S FEDERAL FUTURE: DELIVERING GROWTH AND PROSPERITY

A REPORT FOR THE COUNCIL FOR THE AUSTRALIAN FEDERATION PREPARED BY ANNE TWOMEY & GLENN WITHERS APRIL 2007

Anne Twomey Associate Professor in Law University of Sydney

Glenn Withers Professor of Public Policy Australian National University and Australia and New Zealand School of Government

This report presents the views of its authors. It does not necessarily represent the views of the Council for the Australian Federation or its members.

Thanks to Marion Powall, of Applied Economics Pty Ltd, for project management, Ben Methakullawat for research assistance, Neil Warren, Ian McAllister and Rory Robertson for the provision of data, and Trevor Breusch, Frank Castles and Steve Dowrick for advice on statistical analysis. Responsibility for the use made of this assistance rests with the authors. Responsibility for economic and statistical analysis rests with Glenn Withers. ISBN 1920921990

0070305_caf_federalist_paper_fa.i170305_caf_federalist_paper_fa.i1 1 227/3/077/3/07 1:19:511:19:51 PMPM THE HON STEVE BRACKS MP PREMIER OF VICTORIA

Dear Premier, AUSTRALIA’S FEDERAL FUTURE

On behalf of the Council for the Australian Federation, you asked us to prepare a report on what federalism has to offer Australia today. We are delighted to present our report entitled Australia’s Federal Future.

It became apparent to us in writing this report that Australian attitudes towards federalism are out of step with those in the rest of the world. In Australia, it is often asserted that federalism is an old-fashioned, cumbersome and ineffi cient system. Yet internationally, federalism is regarded as a modern, fl exible and effi cient structure that is ideal for meeting the needs of local communities while responding to the pressures of globalisation. The difference between these two views is stark.

In this report we have used political, legal and economic analysis and international comparisons to highlight that, far from being a burden, Australia’s federal system provides us with many economic and social benefi ts. For example, federalism:

■ divides and limits power, protecting the individual;

■ gives Australians a wider range of choices and allows policies and services to be tailored to meet the needs of communities; and

■ spurs all Australian governments to be more innovative and responsive.

Compared to centralised, unitary governments, federal nations such as Australia have:

■ more effi cient governments; and

■ higher rates of economic growth and higher per capita GDP.

These benefi ts deliver signifi cant economic and social advantages to all Australians. However, increasing centralisation in Australia threatens these benefi ts.

Where there are problems, they are often with the way our federal system operates, rather than with federalism itself. Rather than criticising our federal system, we should be working to make better use of its advantages in order to improve our prosperity. In particular, the reform of the allocation of powers and responsibilities between the Commonwealth and the States, and reform of fi scal federalism, are desperately needed.

Together, the Commonwealth and the States and Territories have achieved a great deal, such as national competition policy and economic reform. This has laid the economic foundations for our current prosperity. It is important that we maintain the health of our federal system and inter-governmental relations in order to support the next wave of reform, the National Reform Agenda, and beyond.

It is our hope that this report sparks a more sophisticated and informed public debate in Australia about federalism. Federalism is a signifi cant part of Australia’s identity and an important source of our prosperity. We have much to gain, as a nation, from reforming our federal system to increase the advantages it offers us. The time for that reform is now.

Anne Twomey Glenn Withers Associate Professor in Law Professor of Public Policy University of Sydney Australian National University and Australia and New Zealand School of Government

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TABLE OF CONTENTS

EXECUTIVE SUMMARY 4 1 FEDERALISM IN THE WORLD TODAY 6

2 THE BENEFITS OF FEDERALISM FOR AUSTRALIA 8

2.1 Checking concentrated power 8

2.2 Choice and diversity 9

2.3 Customisation of policies 10

2.4 Competition 12

2.5 Creativity and innovation 13

2.6 Co-operation 15

3 MYTHS ABOUT FEDERALISM 18

3.1 Federalism – why we would choose it now 18

3.2 Globalisation, competition and federalism 19

3.3 Federalism and the number of tiers of government 20

3.4 Federalism and duplication 21

3.5 Unitary systems – simplicity and effi ciency 22

3.6 Federalism – confl ict and co-operation 24

3.7 Federalism and the GST 26

4 THE STATE OF PLAY IN AUSTRALIA 28

4.1 COAG trends and history 28

4.2 Council for the Australian Federation 30

4.3 The long term impact of NSW v Commonwealth 31

4.4 Opportunistic federalism 33

4.5 Fiscal federalism 34

5 ASSESSING OVERALL ECONOMIC BENEFIT AND COST 40

6 OPTIONS FOR THE FUTURE 44

6.1 Abolish the States and establish regional government 44

6.2 Continue the centralist drift 45

6.3 Make federalism work better 46

7 CONCLUSION 50

APPENDIX 1: TECHNICAL ANALYSIS 52

APPENDIX TABLE A.1: TECHNICAL ANALYSIS 56

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Within Australia, federalism has been under attack. The Commonwealth has been using its fi nancial powers and increased legislative power to intervene in areas of State responsibility. Centralism appears to be the order of the day.

In the rest of the world, the prevailing trend is towards decentralisation and federalism. Indeed, federalism is regarded as one of the best governmental systems for dealing with the twin pressures produced by globalisation – the upward pressure to deal with some matters at the supra-national level and the downwards pressure to bring government closer to the people. The latter pressure is refl ected in the principle of subsidiarity, which states that matters should be dealt with by the lowest level of government practicable.

In Australia, by focusing too much on problems in the operation of our federal system we forget about the benefi ts of federalism, which include:

■ Checks on power – Federalism divides and limits power, protecting the individual from an overly powerful government. It ensures that there is greater scrutiny of government action and helps to reduce the incidence of corruption.

■ Choice and diversity – Federalism gives citizens a greater range of choices. People can vote for one party at the national level and another at the State level. They can move from one State to another if they prefer the latter’s policies or they can seek to have another government’s policies implemented by their home State. If one level of government lets them down, they can seek redress from the other.

■ Customisation of policies – Federalism allows policies and services to be tailored to meet the needs of people and communities they directly affect. Differences in climate, geography, demography, culture, resources and industry across our nation mean that different approaches are needed to meet local needs. Federalism accommodates these differences and brings democracy closer to the people, allowing them to infl uence the decisions that affect them most.

■ Competition – States and Territories are constantly compared with each other and must compete with each other. This gives States the incentive to improve their performance. It increases effi ciency and prevents complacency. Comparisons show that federations have proportionately fewer public servants and lower public spending than unitary states.

■ Creativity – States and Territories need to be innovative and to experiment in order to compete with other jurisdictions. The successful innovations of one State will often be picked up by other States and sometimes implemented nationally. At times, States and Territories lead the Commonwealth in proposing reform.

■ Co-operation – The need to co-operate to achieve some types of reform means that proposals tend to be more measured and better scrutinised. The agreement of all jurisdictions to implement a diffi cult reform brings together all parts of the nation in a common endeavour and gives the reform greater insight, legitimacy and support.

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5 i . a f _ r e p a p Reallocation of roles between the Commonwealth and State and Territory Governments to reduce Governments Territory and State and the Commonwealth Reallocation of roles between duplication and clarify responsibilities. co-operation. inter-governmental in the mechanisms for Improvement c purpose and in the payments both in the operation of specifi nancial relations, Reform of federal–State fi scal imbalance. of verticallevel fi _ t s i l a Complaints are often made that federalism is an old-fashioned system that is not competitive in the modern in the Complaints are often made that federalism is an old-fashioned system that is not competitive International comparisons suggest tiers duplication. too many and too much world of government and involves four Of the G8 nations (the countries with the eight largestin the world), economies that this is not the case. on the all still manage to compete powerfully and at least three tiers of government, have seven are federations, world stage. In the last 50 years, federations have consistently out-performed unitary states in economicmore terms. decentralised The the federation, the better the performance. Research suggests that federalismincreased may Australia’s have prosperity by $4,507 per head in 2006 and that this amount could be increasedanother by $4,188 or even more if Australia’s federalnancially system decentralised. were more fi While federalism does give rise to duplication, much of this could be avoided through a better allocation of responsibilitiesnancial resources and between fi the Commonwealth and the States, with each managing and funding its own responsibilities. Much is made by the Commonwealthnancial ‘windfall’ of the great fi to the States generatedgures show by the that GST; in 2006 however, the fi Commonwealth funding to the States (as a proportion of GDP) was approximately the same as it was before the implementation of the GST1996, in while the pressures on State expenditure continue to increase. In fact, it is the Commonwealthhas that increased its share of tax revenue,gaining a $20 billion annual ‘windfall’ of its own. The implementationof the GST has not changed the fact that the Commonwealth still controls the level of funding to the States. In some cases, as the GST increases, the Commonwealth has simply reducedc purpose the amount of specifi payments to the States. Australian and co-operative federalism a shift from competitive to a system federalism show Recent trends in powers to nancial and legislative uses its array‘opportunistic where the Commonwealth of fi federalism’, of In doing so, intervene in areas of traditional ideological or political points. State responsibility to make selectively such as duplication and ts of federalism and exacerbates problems underminesthe Commonwealth the benefi administrative burdens. excessive Harnessing the advantages of the federal system work share a responsibility to make Governments better. substantial in its operationfederalism deliver or eliminate the problems and taking action to reduce would There are three main areas in which reform is needed: ts to the nation. economic and social benefi the referral and where necessary. of power through co-operation, of these reformsMany could be achieved be a useful means of reaching consensus on these reforms and may a constitutional convention However, Australian federation. amendments that could enhance the future operation constitutional proposing any of the with the successful deliveryAustralia to gain from adopting best practice of these reforms has much federalism, to the nation of up to $86 billion or more. ‘bonus’ estimated to generate an annual 1 2 3 r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i5 5 FEDERALISM IN 1 THE WORLD TODAY

In Australia, the prevailing trend has been away from federalism towards the centralisation of power. This centralisation has occurred across a range of areas, including industrial relations, water resources and education. This is in contrast to the strong international trend towards federalism and the decentralisation of power.1

Beyond Australia, federalism is growing in popularity.2 Federal systems are recognised for cultivating unity through accommodating diversity, bringing government closer to the people, providing more fl exible and responsive government, and promoting innovation and greater effi ciency through competition. Federalism is also supported because it strengthens the democratic process by increasing access to and participation in the political system, and checks the potential abuse of power.

Governments around the world have responded to the pressures of globalisation by joining supra-national bodies, such as trading blocs, to obtain the economic advantages of globalisation, while at the same time decentralising power and conferring greater functions and responsibilities on sub-national states and regions.3

This is most evident in Europe, where the abiding principle of the European Union is subsidiarity – which states that responsibility for a particular function should, where practicable, reside with the lowest level of government.4 Recent reforms in Europe have strengthened the powers and functions of sub-national jurisdictions in both federal and unitary countries.

1 T Hueglin and A Fenna, Comparative Federalism – A Systematic Inquiry (Broadview Press, Canada, 2006), p 11.

2 R Watts, Comparing Federal Systems in the 1990s (Institute of Intergovernmental Relations, Queen’s University, 1996), p 5.

3 G Arachi and A Zanardi, ‘Designing Intergovernmental Fiscal Relations: Some Insights from the Recent Italian Reform’ (2004) 25(3) Fiscal Studies 325.

4 J Pincus, ‘Productive Reform in a Federal System’, in Productivity Commission, Productive Reform in a Federal System (Roundtable Proceedings, Canberra, 2006), p 25, at p 27.

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7 (Imprint European 0 / 1213. 3 Productive / 25. 329. 7 23; and T Milic, T Milic, and 23; 227/3/07 1:19:58 PM Fiscal Studies Fiscal Studies European (OUP, 5th ed, 5th ed, (OUP, Federations Federations Federations Federations 15. 3, at 4. 3, Benchmarking Australia’s Benchmarking Australia’s horizontal and vertical collaboration within the Swiss federal State from the perspective of the Cantons’ (2006) 5(2) (2005) 44(7–8) ‘Switzerland’ Research Journal of Political Kingdom and the English and Welsh Welsh Kingdom and the English and and D Oliver, in J Jowell Questions’ Changing Constitution ‘Reshaping Tomaney, and J p 237; 2004), (ed). Trench A in the English Regions’ The State of the Nations 2001 p 107. 2001), Academic, Productivity Commission, System Reform in a Federal Canberra, Proceedings, (Roundtable p 325. 2006), and the 2006 Referendum: Food and the 2006 Referendum: (2006) 2 Thought’ for Constitutional Law Review Arrangements Intergovernmental Fiscal and G p 11; 2006), May (Final Report, more for ‘Catalonia votes Anderson, (2006) 5(3) within Spain’ autonomy Federations Intergovernmental Fiscal Relations: Intergovernmental Fiscal Relations: Some Insights from the Recent Italian (2004) 25(3) Reform’ at 328–30 and 360-1. 325, (2002) state?’ Intergovernmental Fiscal Relations: Intergovernmental Fiscal Relations: Some Insights from the Recent Italian (2004) 25(3) Reform’ at 336. 325, (2006) 5(3) standoff on federalism’ Federations 11 ‘The importance of C Braun, 12 in the United ‘Devolution B Hadfield, 13 in Discussion’, ‘Panel J Roskam, 9 ‘The 1948 Italian Constitution C Pinelli, Warren, 10 N 7 ‘Designing A Zanardi, Arachi and G 8 a federal toward ‘Italy: B Caravita, 5 ‘Designing A Zanardi, Arachi and G 6 ‘German compromise ends M Heckel, In 2001, 2001, In 7

5 12

10 In Australia, federalism battles against cynicism, 13

6 11 9 However, in June 2006, further federal reformgranting greater 8 federation, health care and social services spending has been devolved upon

7

7 i . a f _ In Germany, a federation, major constitutional reforms, described the by Bavarian Premier as the ‘mother of all reforms’, took effect on 1 September 2006.The Bundesrat (the upper house of the federal parliament), which is comprised of representatives of the States (Länder), hasits had veto over legislation reduced in exchange for sole responsibility for certain matters, such as education, being transferred to the Länder. In Switzerland, a federation, the distribution ofed powers by constitutional was clarifi amendment in 2000 and further reformsed by the Swiss were people ratifi and Cantons in a referendum in November 2004. These reforms included the reallocation of some powers (such as responsibility for people with disabilities being transferred to the Cantons)scal and equalisation a new formula of fi between the Cantons. In France, a unitary state,elds functions of higher education, in the fi industrial policy and regional infrastructure were transferred to the regions in 2003. This was accompanied by theassignment of new taxing powers to sub-national governments. Autonomous Communities, along with increased taxpowers. Negotiations continue around giving greater powers to the Autonomous Communities. in 1999, Wales upon Scotland and devolved cant powers were signifi In the United Kingdom, and consideration of associated legislatures in Edinburgh and Cardiff, including the establishment further to establishing has been given elected regional assemblies. In Italy, a unitaryscal reforms state, in the last fi two decades have given the Italian regions greater powerxed to impose share taxes of national and access taxes. a fi These reforms also ended the use of tied grants and gave the regions incentivesciency. for greater effi In Spain, a de facto a new division of legislative powers between the regions and the central government was approved in a referendum. responsibilities to the regions wasrejected in a referendum that also would have granted the Prime Minister greater powers. r e p a p ■ ■ ■ ■ ■ Decentralisation in Europe ■ _ t s i l a The international experience should give us pause to think. Why does Australia treat federalism so dismissively when the rest of the world sees the many advantages of federalism and the decentralisation of power? Is it a case of familiarity breeding contempt? neglect and the illusory attractions of centralism. often, Too the public debate about federalismon the focuses perceived disadvantages of the system without taking intots accountcant the far benefi more signifi Australians have derived from our federal system. r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i7 7 THE BENEFITS OF 2 FEDERALISM FOR AUSTRALIA

Federalism offers Australia signifi cant benefi ts:

■ Protection for the individual by checking the concentration of power

■ Choice and diversity

■ The customisation of policies to meet local needs

■ Incentives to reform and improve, in order to compete with other jurisdictions

■ Incentives to innovate and experiment

■ Greater scrutiny of policies as a result of the need to achieve co-operation.

2.1 CHECKING CONCENTRATED POWER Federalism is a system that divides power, ensures scrutiny of the exercise of power and protects the individual. While those who hold power usually have an aversion to sharing it, federalism requires that they do so, making it the ‘least undemocratic’ of all forms of government.14 Without the federal limitations in the Constitution, the Commonwealth would have plenary legislative power over all matters.

14 NSW v Commonwealth (2006) 81 ALJR 15 34, per Callinan J at [775] and [777]. In Australia, federalism is the ‘major mechanism’ for the formal dispersal of power. The continuing importance of federalism as a check on power is reinforced by the gradual decline in the informal checks and balances on 15 This is particularly so in the absence of a Bill of Rights or a formal separation concentrated power, which some have seen as producing a ‘democracy defi cit’.16 of powers between the legislature and the executive. See T Hueglin Sir Robert Menzies made the point in 1966 that, as a federalist, he believed: and A Fenna, Comparative Federalism – A Systematic Inquiry (Broadview that in the division of power, in the demarcation of powers between a Central Government and Press, Canada, 2006), p 41; and also P Coleman, ‘No wonder state Liberals the State Governments, there resides one of the true protections of individual freedom.17 are confused’, The Australian Financial Review, 7 March 2007, p 63. Forty years later, his remarks were echoed by Justice Kirby, who saw federalism as liberty-enhancing18 and went 16 M Sawer, The Democratic Audit of Australia: Populism vs. Citizen Rights on to state: (Democratic Audit of Australia Project, ANU, Audit Paper 6/2006); and H This Court and the Australian Commonwealth need to rediscover the federal character of the Evans, Democracy: the Wrong Message, Constitution. It is a feature that tends to protect liberty and to restrain the over-concentration (Democratic Audit of Australia Project, ANU, Audit Paper 8/2006). of power which modern government, global forces, technology, and now the modern

17 Sir Robert Menzies, Central Power in corporation, tend to encourage. In this sense, the federal balance has the potential to be an the Australian Commonwealth (Cassell, important restraint on the deployment of power…19 London, 1967), p 24. 18 NSW v Commonwealth (2006) 81 ALJR Business groups have also regarded federalism as imposing checks and balances upon government power. 34, per Kirby J (dissenting) at [558]. The Business Council of Australia has argued that the exercise of power becomes more contestable when more 19 NSW v Commonwealth (2006) 81 ALJR than one government is involved. As a consequence, governments are under greater pressure to defend their 34, per Kirby J (dissenting) at [612]. decisions publicly, leading to more moderate and considered outcomes.20 20 Business Council of Australia, Reshaping Australia’s Federation – A There is also evidence that federations fare better in terms of governmental integrity than do unitary states. New Contract for Federal-State Relations (2006), p 5. Transparency International survey data supports this view, with OECD federations having a 5.4 per cent higher 21 21 Transparency International, Corruption integrity rating on average than OECD unitary states. Under federalism, power is more dispersed and is more Perception Index (Berlin, 2006). open to scrutiny and to comparison by other jurisdictions.

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7 0 / 3 / 7 Comparative Comparative 227/3/07 1:20:00 PM (Centre for (Centre for 11 October 2006. 941, at 944. 941, Ten Advantages Advantages of Ten Internal in Migration The Age, The Age, Exploring Federalism The Australian Financial Review, Financial Review, Australian The a Federal Constitution a Federal 2001), Sydney, Independent Studies, and M Bell, p 7; Overview Report 1986-1991: Australia p 57. 1995), Canberra, (AGPS, way’, Watts, and R 2006; 17 November and Länder, Provinces, ‘States, among Variety International Cantons: (2000) Subnational Constitutions’ Rutgers Law Journal (University of Alabama Press, USA, USA, Alabama Press, (University of pp 251–3. 1987), the answer’, the answer’, Federalism – A Systematic Inquiry – Federalism p 52. 2006), Canada, (Broadview Press, 24 ‘Federalism is a safer J Roskam, 23 Walker, G de Q Elazar, 25 D 26 A Fenna, T Hueglin and 22 ‘A single curriculum is not J Roskam,

25

23 Over the years, Australia hascant witnessed inter- signifi 22 Similarly, in Australia, Canberra does not dominate the nation as the single city 26 24 9

9 i . a f _ r e p a p _ t s i l a of importance. Federalism helps to ensure that State and Territory capitals continue to thrivecapitals, and that these in turn, support and promote regions that might otherwise be neglected by a central government. Hueglin and Fenna have compared France, a unitary state, and Germany, a federation. They pointed outthat France ‘has only one dominant cultural, economic and political centre: Paris’. A successful educationand career in France almost inevitably requires relocation to Paris. In contrast, they arguedhas no dominant that Germany centre. Careers are ‘not dependent upon whether they begin in Hamburg, Frankfurt,Munich, Bonn or Berlin’. Federalism also ensures that there is diversity in our institutions, as they are not concentratedcapital in a single city. Federalism requires the development of a number of capital cities, with all the institutionsservices of a capital, and such as State Parliaments, libraries, museums, archives and galleries. 2.2 CHOICE AND DIVERSITY AND 2.2 CHOICE Federalism gives people greater choices. People can, and often do, choose to support a government of onepolitical party at the State level and another at the Commonwealth level, because they prefer differentapproaches to different policy issues. For example, people might vote in favour of one party at the national level because of its policies regarding defence or the management of the national economy, and for another party at the State level because of its policies concerning the provision of services such as educationhealth, and or its approach to law and order. If thereis only one central government, all issues are ‘bundled’the into one election and the choices of the electorate become limited. Federalism also allows choice and diversity between jurisdictions. For example, if a countryeducation has only one system, which sets inadequate standards or imposes ideological views, there is no escapethat system. from However, when each State has its own education system, families can ‘vote with their feet’ and move to another jurisdiction if the system in theirState is performing badly or failing to offer the opportunities or resources they desire or need. Similarly, businesses can set themselves up or adjust their activitiest from the jurisdiction to benefi with the best economic performance or which best accommodates their particular needs in relation to resources,regulationsed employees. orqualifi Having governments at both the State and Commonwealth level gives citizens more than one point of access to the system of government. If one level of government ignores them, they can raise their concerns withthe other level of government. Even where a level of government is not directly responsible for redressingthose concerns, federalism allows them to be raised and debated in the public domain. The existence of more than one Parliament in Australia is important to ensure that matters of public concern areand can not ignored be exposed and debated in a public and privileged forum. Further, where one level of government fails to address policy issues, there is an opportunity for the other level of government to address failure. that and remedy state migration – due, in part, to the different policies pursued by governments. r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i9 9 2.3 CUSTOMISATION OF POLICIES Federalism is more responsive to the preferences of voters. McConnell has given this example: THE BENEFITS OF FEDERALISM FOR AUSTRALIA

[A]ssume that there are only two states, with equal populations of 100 each. Assume further that 70 per cent of State A and only 40 per cent of State B wish to outlaw smoking in public buildings. The others are opposed. If the decision is made on a national basis by a majority rule, 110 people will be pleased and 90 displeased. If a separate decision is made by majorities in each 2 state, 130 will be pleased and only 70 displeased. The level of satisfaction will be still greater if some smokers in State A decide to move to State B, and some anti-smokers in State B decide to move to State A.27

Federalism brings democracy closer to people, allowing them to infl uence the decisions that affect them most. It also ‘discourage[s] the alienation that people might feel from a more distant and seemingly less controllable central government’.28

Federalism accommodates the vast differences across Australia by allowing policies that affect local communities to be tailored to meet the needs of those communities, by people who live there and understand those needs. Different policies may be appropriate in different States or Territories because of differences in climate, geography, demographics, culture, resources and industry. For example, the educational and transport needs in Western Australia during a minerals boom are likely to be quite different to those of Tasmania.

While a unitary system may have the advantage of being able to apply consistent standards across the nation, consistency can lead to unfair results where it does not take account of relevant differences and preferences. With the best will in the world, those who administer government programs in Canberra are not fully equipped to understand how those programs operate in practice in distant parts of the country and how they could be better adapted to achieve common outcomes. Local knowledge and experience make all the difference.

Royal Darwin Hospital

■ When construction commenced on the Royal Darwin Hospital in the 1970s, the Commonwealth Government chose to use the same plans as for Woden Hospital in Canberra. Accordingly, the Royal Darwin Hospital was built to deal with extreme cold, frost and even 27 M McConnell, ‘Federalism: Evaluating the Founders’ Design’ (1987) 54 snow, with snow caps installed on the Darwin building and a moat for snow drainage. The plans University of Chicago Law Review 1484, were not adapted to a tropical climate.29 at 1494; as quoted in: G de Q Walker, Ten Advantages of a Federal Constitution ■ The hospital was also culturally inappropriate in style for its Aboriginal users. The report of (Centre for Independent Studies, Sydney, 2001), p 14. the Royal Commission into Aboriginal Deaths in Custody noted that the hospital’s ‘multi-

28 M Filippov, P Ordeshook and O storey structure limits patients' access to the outside and does not lend itself to the presence Shvetsova, Designing Federalism of family members; an aspect likely to be important for the morale and recovery of at least (CUP, 2004), p 2. some Aboriginal patients. It is not surprising that such an alien environment contributes to the 29 J Aagaard, Northern Territory, reluctance of some Aboriginal people to be admitted to, and stay in, hospital’.30 Parliamentary Debates, 13 August 2003, p 4670. ■ Later extensions to Royal Darwin Hospital, planned by the Northern Territory Government, 30 Royal Commission into Aboriginal used a modern tropical design more suited to Darwin’s climate. Deaths in Custody, National Report, Volume 4, para 31-3-28.

31 Access Economics, ‘The Cost of Federalism’ in Business Council of Australia, Reshaping Australia’s Although Australia has a relatively homogenous society, there are still distinct differences in the wants or Federation – A New Contract for Federal-State Relations (2006), needs of communities. ‘Some States or Territories may opt to spend more or less on education, or health, Appendix 2, para 1.4. or to set particular taxes higher or lower. In a federal system, such diversity is possible’.31 For example, the 32 Western Australia, Department of people of one State might prefer lower taxes at the expense of services, while those in another might place Treasury and Finance, Discussion Paper a higher priority on the quality of government services. Western Australians might have different views on Commonwealth–State Relations (April 2006), p 10. about poker machines and retail hours than people in New South Wales.32

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7 0 / 3 / 7 227/3/07 1:20:02 PM Australian Election Australian Benchmarking Australia’s Benchmarking Australia’s , Canberra: Social Science Canberra: , Conference, Perth, 21 February Perth, 2007. Conference, Study 2001 Question 2001, ANU, Data Archives, G9P1. Arrangements Intergovernmental Fiscal p xxvi. 2006), May (Final Report, A – Federation Australia’s Reshaping Relations Federal-State for Contract New p 4. (2006),

33 Press Prime Minister’s J Howard, 34 I McAllister et al., Warren, 35 N Australia, of Council 36 Business

NT ACT Not at all Confident

36

Tasmania WA

Not Very Confident

SA Queensland Confident

the response to confi dence in the Commonwealth Government (as indicated Government dence in the Commonwealth the response to confi 34 Victoria

35 33 NSW 1 1

1 Very Confident 1 CONFIDENCE IN THE FEDERAL GOVERNMENT, BY STATE/TERRITORY, 2001 BY STATE/TERRITORY, THE FEDERAL GOVERNMENT, CONFIDENCE IN i . a f _ r It’s great for Cabinets to move around the country and it’s a wonderful opportunity to be a wonderful the country around it’s and Cabinets to move for great It’s triangle Australia is not the of of gravity that the centre are constantly again as we reminded and nuances Australia has its own Western And and Canberra. Melbourne Sydney, constituted by a very long over both familiar and fond been particularits own characteristics of which I have period of time. 0 e 70 60 50 40 30 20 10 p a p

_ t Percentage s i l a There is a role for the Commonwealth Government in ensuring that all Australian citizens have access to Australian have citizens in ensuring Government that all the Commonwealth There is a role for choice. there should be room for that, Beyond of basic services. levels minimum Central governments are usually constrained by political, and sometimes legal, imperatives to tax equally and sometimes legal, Central constrained political, are usually governments by that the provides Constitution expressly The Commonwealth of services. common levels and provide cannot discriminate States or partsCommonwealth between not give tax and may of States when imposing part to one State or any commerce or revenue. preference or regulation of trade, law of a State through any exist can lead and circumstances preferences the application of uniform policies where different However, and ‘underprovision of services prefer, would in some areas compared with what those communities to the in others’.overprovision FIGURE 1 > Certainly, there are wide discrepancies by region in the level of trust in the Commonwealth Government. In the of trust region in the level Government. are wide discrepancies by there in the Commonwealth Certainly, Australian Election Study 2001 As Prime Minister John Howard put it after a recent Cabinet meeting in Perth: As Prime meeting in Perth: put it after a recent Cabinet Minister John Howard in Figure 1) varied signifi cantly by jurisdiction. by cantly in Figure 1) varied signifi r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i11 11 2.4 COMPETITION Another benefi t of federalism is that it leads to competition. The mobility of people across State and THE BENEFITS OF FEDERALISM FOR AUSTRALIA Territory borders means that the States and Territories compete with each other to attract business and residents. This competition is largely productive.

As the Productivity Commission has pointed out:

[I]f some States charge excessive prices for essential services, or allow the reliability of their 2 electricity and transport networks to deteriorate, or levy excessive payroll taxes or allow access to important health and community services to worsen, then better performing jurisdictions are likely to fi nd some fi rms and households migrating their way. This in turn provides an incentive for governments to improve their performance – to attain a better balance between the burden of taxation and the benefi ts of public spending; and similarly for regulation. Hence, competition between States on the ‘economic fundamentals’ is an important benefi t of a federal system.37

State and Territory policies are constantly compared against each other.38 These comparisons are more meaningful than those between different countries, because they are made from a common base.39 The States and Territories are periodically placed under real political pressure to improve their performance, through innovation or through learning from the successes and failures of other jurisdictions.

Without this interaction, comparison and competition, there would be little incentive for a centralised government to reform or take the risk of implementing new ideas, especially when the consequences of failure are more widespread for national reforms. The likely result would be a bloated, complacent and sedentary central bureaucracy.

FIGURE 2 > PUBLIC EMPLOYMENT LABOUR FORCE SHARE: FEDERAL AND UNITARY COUNTRIES, 1999–2001

18 On average, federations are much more economical than unitary states 16.2 16 14.6 because of the benefi ts of competition over monopoly. Monopolies such as 14 the Australian Wheat Board remind us that the centralisation of power can come at a considerable price. Without internal competition, government is more 12 likely to become ineffi cient, over-staffed and expensive to run. Figure 2 shows 10 that if federal and unitary states are compared, the average share of public 8 employment in the total workforce increases by almost 11 per cent for unitary 6 states.40 These fi gures suggest that if Australia abandoned federalism and

37 J Pincus, ‘Productive Reform in a share of labour force Percentage Federal System’, in Productivity 4 became a unitary state – and these averages applied to Australia – the number Commission, Productive Reform of public servants might rise by as much as 181,800 persons. in a Federal System (Roundtable 2 Proceedings, Canberra, 2006), p 25, at 35. See also: G Banks, ‘Inter-State 0 bidding wars: calling a truce’, Speech to CEDA, Brisbane, 6 November 2002, pp 3–4. Federal Unitary

38 C Shiel (ed)., The State of the States 2006 (Evatt Foundation, Sydney, 2006); Productivity Commission, Report on Government Services 2007 (Productivity Commission, Canberra, January 2007).

39 J Pincus, ‘Productive Reform in a Federal System’, in Productivity Commission, Productive Reform in a Federal System (Roundtable Proceedings, Canberra, 2006), p 25, at p 36.

40 OECD, Public Management Service, 2002.

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7 0 / 3 / , Volume Volume , 7 (2006) 81 ALJR (2006) 81 227/3/07 1:20:03 PM (2006), Exhibit 1, p 5. p 5. Exhibit 1, (2006), Economic Outlook 2006/1, Number 79, June 2006, Annex June 2006, Number 79, 2006/1, 25. Table G Banks, See also: 2003. Agreement, calling a bidding wars: ‘Inter-State 6 Brisbane, Speech to CEDA, truce’, 2002. November Reshaping Australia’s Federation Federal–State for Contract A New – Relations NSW v Commonwealth J (dissenting) at 534. per Kirby 34, 41 OECD, 41 OECD, 42 Interstate Co-operation Investment Australia, of Council 43 Business 44

44 42

43 Based on these fi gures, if Australia a unitarywere if state, gures, Based on these fi 41

Federal need to strike systems the right co-operation balance between and ts of both. competition to harness the benefi Figure 3 shows how the relative size of public expenditures also varies of public with the size the relative how Figure 3 shows of GDP 13 per cent higher on spending as a share with public form of government, in unitaryaverage states. our 2006 public spending may have been $44 billion greater (in 2006 terms). billion greater (in 2006 terms). been $44 have spending may our 2006 public Competition can also be destructive: for example, where States and Territories bid against each other in giving special concessions to attract companies to set up their headquarters in particular locations or to win sporting events. In such cases, the bidding may reach a point where no t is achieved. Thisbenefi problem can be avoided through better policy and co-operation. Most Australian jurisdictions have entered into an agreement to restrict the use of selective assistance to attract investment. .4 Unitary 8 4 3 1

Federal 3 1 GENERAL GOVERNMENT SPENDING SHARE: FEDERAL AND UNITARY COUNTRIES, 1988–2000 COUNTRIES, AND UNITARY FEDERAL SPENDING SHARE: GENERAL GOVERNMENT i . 42.7 a f _ r occasional diversity of approach, inventiveness in standards and entitlements, and appropriate and appropriate and entitlements, in standards inventiveness of approach, occasional diversity determined in one jurisdiction of which industrial standards by Such innovation, innovation. illustration of an constitutes a good tested and sometimes copied in another, Australia are enshrined in the Constitution. of government important form of the federal advantage 0 e 60 50 40 30 20 10 p a p

_ t Percentage share of GDP of share Percentage s i l a Justice Kirby has arguedJustice Kirby – was intended to that s 51(xxxv) of the Constitution – the industrial relations power He observedprotect diversity that this resulted in: in the legal regulation of industrial relations. Where there is only one central industrial relations law, the entire country and the is subject to that law one centralWhere there is only industrial relations law, There are no competing regimes against which comparisons can be made and no ects. particular ideology it refl The pressure to opportunities up and implemented. to be picked in other regimes successful innovations for and there is no opportunity other jurisdictions by is removed and meet the outcomes achieved improve to test introducing them nationally. new ideas on a small scale before 2.5 CREATIVITY AND INNOVATION AND 2.5 CREATIVITY to and to be innovative and often the pressure, Another important advantage of federalism is the opportunity, Federalism a laboratory provides experiment order to compete with other jurisdictions. in in which ideas can be country. being implemented across the tested on a smaller scale before eld of industrial relations was in the fi innovation Prior centralisation to the recent of industrial relations laws, As the Business Council the need to compete with other jurisdictions. by but generated ideology, just by not Australia, Western ‘industrial States such as begun by relations reforms were Australia has pointed out, of initiatives’. ahead of national Wales, Queensland and New South FIGURE 3 > r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i13 13 FIGURE 4 > STANDARDISED UNEMPLOYMENT RATES: FEDERAL AND UNITARY COUNTRIES, 2004

THE BENEFITS OF FEDERALISM FOR AUSTRALIA 7.00 In the labour market area, industrialised countries that are federations have a 6.78 better performance record than unitary states. As seen in Figure 4, using 6.75 standardised OECD unemployment rates and using the most recent year for 6.41 6.50 which such data are available, unemployment in unitary states is on average 6.25 5.8 per cent higher than in federal states.45 2 6.00 In Australia, the States have been the main innovating forces in reforming 5.75 political processes, such as changes to electoral laws. Past examples include

Percentage share of labour force Percentage the secret ballot, votes for women, compulsory voting, proportional voting 5.50 and lowering the voting age to 18. More recent innovations include four- 5.25 year terms, fi xed terms and measures to avoid the manipulation of ‘above 5.00 the line’ voting in upper houses. Such measures were only adopted by other Australian jurisdictions after they had an opportunity to see how these measures operated in practice. Federal Unitary

One current area of State and Territory innovation is the development of Bills of Rights. The Australian Capital Territory commenced the process with the enactment of its Human Rights Act 2004. This has been followed by the Victorian Charter of Human Rights and Responsibilities Act 2006. Again, other Australian jurisdictions will have the chance to see from the experience of Victoria and the Australian Capital Territory whether the experiment is successful and to improve upon any weaknesses in the way those Acts operate if they choose to implement their own Bills of Rights.

Where experiments fail, federalism ‘cushions the nation as a whole from the full impact of government blunders’.46 Bryce compared a federation with a ship that has watertight compartments: ‘When a leak is sprung in one compartment, the cargo stowed there may be damaged, but the other compartments remain dry and keep the ship afl oat.’47 In other words, policy mistakes made in one State do not spread throughout the entire country and can be corrected by adopting successful policies from other States.

45 OECD, OECD Factbook 2006 (Paris 2006).

46 G de Q Walker, Ten Advantages of a Federal Constitution (Centre for Independent Studies, Sydney, 2001), p 33.

47 J Bryce, The American Commonwealth, (Macmillan and Co, London, 3rd ed,. 1893), p 353.

48 J Conybeare, ‘Evaluation of Automobile Safety Regulations: The Case of Compulsory Seat Belt Legislation in Australia’, Policy Sciences, 12, 1980, pp 27–39.

49 A Unglik, ‘Between a rock and a hard place: the story of the development of the EPA’ (EPA, Melbourne, 1996).

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(2000). 7 0 / 3 / (Adelaide, (Adelaide, 7 227/3/07 1:20:04 PM Discussion Paper Discussion Paper Victoria’s Subordinate Prohibition of , (Canberra: (Canberra: , Community 1966 (SA). Institutions on the Edge? 1994 (Vic.). Private Infrastructure (2006). (2006). (CEDA, Melbourne, 2002). 2002). Melbourne, (CEDA, Medical Journal of Australia Medical Journal of (August 2006). Users’ Guide to the Users’ (Department of Premier and Taskforce: Final Report Taskforce: 1995). AGPS, Agreement and Mutual Recognition Mutual Recognition Trans-Tasman Arrangement p 135. 2000), (Allen & Unwin, of National Reform Wave Third A National Reform A New Initiative for – COAG, Victoria, August Cabinet, 2005). Acute Hospital Inpatient Services in Australia’, S17–S21. (161) 1998, and Finance, Treasury on Commonwealth–State Relations pp 9-10. (April 2006), Commission, and Wanna J in M Keating, federalism?’ P Weller (eds), Discrimination Act Australian of the A Review Privatisation: Experience 2004–2007 Strategy, Skilled Migration 2004). November (Melbourne, biodiversity credits’, Biodiversity Network Newsletter a National Design for Possible Trading Greenhouse Gas Emissions Scheme Prosperity Through People of Understanding with Indonesia Co- on Economic Development 1992. Operation, Act Legislation March 2004). 57 COAG, 57 COAG, 59 Government, 60 Victorian 54 ‘Casemix Funding for S Duckett, 58 ‘Remaking Wanna, M Keating and J 55 DepartmentAustralia, of Western Advisory Planning 56 Economic 50 the example, for See, 51 Withers (eds), M Mead and G 61 a market‘Developing in S Salvin, 62 National Taskforce, Emissions Trading Government, Australian 63 South 52 the Memorandum example, for See, 53 the example, for See, 61

59

53

48

50 57 52

60 56 54 55 63 58 49 51 and 62 5 1

5 1 i . a f _ the development of regional migration schemes; the reform of fi nancial regulation;the reform of fi the development of the National Reform Agenda to enhance human capital; the establishmentrst Environmental of the fi Protection Authority in Australia and the second in the world after California; the development of markets for the trading of salinity credits and biodiversity credits; the creation of carbon rights and the development of a national carbon emissions trading scheme; the establishment of health care call centres; the developmentnancing initiatives; of private fi the development of the mutual recognition scheme; the development of trade relations with Indonesia; the creation of mechanisms for the review of business regulations; the enactment of various kinds of anti-discrimination laws; the development of population policies. the use of casemix funding of public hospitals; the use of commercialisation and corporatisation to improve the performance of government enterprises;business road safety campaigns and the compulsory use of seat-belts; r e p a p ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ State and Territory innovations States and Territories have led reform in Australia at both the State and national level by implementing or campaigning for reform in the following areas: _ t s i l a 2.6 CO-OPERATION Where competition is not appropriate Federal and co-operation. a mix of competition systems provide outcomes co-operation be needed to achieve may functions, because too great an overlap exists between cance. of national signifi The involvement of more than one government means that that a proposal will receive a great deal more scrutiny than if it were the work of one government alone. Problems with implementing the proposal in different parts of the country are moreed. likely ictWhere to be between identifi there governments is confl on the nature and detail of the proposal, there is more likely to be a public debate, as different governmentsare forced to put their positions and justify them in the public domain. While this has the disadvantage ofsometimes slowing down reform, the need for co-operation has the corresponding advantage of ensuringreform, that when implemented, is better considered and more moderate in its nature. r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i15 15 In contrast, New Zealand, with its highly centralist system of government, fi nds it much easier to implement major reforms quickly without dispute or delay. The consequence is that economic reforms in New Zealand

THE BENEFITS OF FEDERALISM FOR AUSTRALIA have tended to be more extreme and implemented much faster than reforms in Australia, where greater co-operation – and hence consideration – has been required. Both the Muldoon era of ‘Think Big’ industry support policies and the subsequent ‘Rogernomics’ era of liberalisation of the New Zealand economy are illustrations of reform in a centralist system. Each of these eras in New Zealand was more exaggerated, one in the direction of intervention and the other in deregulation, than corresponding Australian policies. This is one of the reasons why the Australian economy, with its more measured and considered reform, has 2 64 signifi cantly out-performed the New Zealand economy.

Figure 5 divides Australian per capita GDP by New Zealand per capita GDP to show the relative position of the two (as a ratio).65 Where the ratio exceeds 1, Australia is ahead of New Zealand (with both being measured in $US purchasing power parity). Over the thirty years since 1974, Australia moved ahead of New Zealand by almost one-third in average incomes, after starting from behind.

FIGURE 5 > RATIO OF REAL GDP PER CAPITA, AUSTRALIA AND NEW ZEALAND, 1974–2004

1.28 1.14 1.2 1.05 0.97 1.0

0.8

0.6

0.4

0.2

0.0 1974 1984 1994 2004 Ratio of GDP per Capita: Australia to New Zealand Ratio of GDP per Capita:

Co-operative schemes also have advantages over Commonwealth Government stand-alone actions because they bring together all parts of the nation in a common endeavour, rather than leaving parts of the nation disgruntled and alienated by reforms imposed by Canberra. A powerful political message is sent to the community by the mere fact that all governments in Australia recognise that a problem exists and agree how to tackle it.

64 P Dalziel and R Lattimore, The New Zealand Macro-economy: A Briefing on the Reforms and Their Legacy (Oxford University Press, 1999).

65 OECD, OECD Factbook (Paris, 2006).

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7 1 i . a f _ agreement with States and Territories can be reached quickly on importantbe reached quickly can Territories matters of national agreement with States and interest; its to make was forced debate and scrutiny enhanced because the Commonwealth public were Territories; agreement of States and the to achieve domain case in the public a moderating on the legislation force proved agreement inter-governmental the need for and concerned; supported domain because they were gained greater legitimacy in the public the resulting laws by political persuasions. jurisdictions of different different with governments r e p a p ■ ■ ■ ■ Terrorism laws – a case of co-operation and scrutiny – a case of co-operation laws Terrorism As it was not anti-terrorism sought to enact extensive Government In 2002 the Commonwealth laws. it powers to supportcient legislative its proposed laws, had suffi clear whether the Commonwealth The States agreed to refer requested referrals of the Constitution. from the States under s 51(xxxvii) to amend and the power the matters to enact its proposed law to the Commonwealth of the power and in the agreement This referral was subject to a condition in an inter-governmental it in the future. be amendment to the law that any to enact: was empowered the Commonwealth text of the law States. least four including at Territories, a majority by of the States and approved proposed to enact more controversial anti-terrorismIn 2005 the Commonwealth that included laws guillotine these It could not simply concerningprovisions control orders detention. and preventative to seek the and perhaps legally) through the Parliament (politically, laws because it was obliged debate about the cant public This led to signifi Territories. agreement of a majority of the States and meritsproposals. of the in September 2005, Australian (COAG) Governments The matter was addressed at the Council of made to the Bill, amendments were substantive Later, where in-principle agreement was reached. States and one ve fi Ultimately, Territories. inserting request of the States and at the new safeguards agreed to its enactment. Territory that: This case study shows _ t s i l a r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i17 17 MYTHS ABOUT 3 FEDERALISM

The current debate about the Australian federal system tends to focus upon arguments against federalism, which include the following:

■ Federalism was imposed upon us because of our history, but we would not choose it now.

■ Federalism is a nineteenth-century system of government that is incompatible with globalisation and international competition.

■ Federalism results in too many tiers of government.

■ Federalism is a costly system of government because of the duplication involved.

■ A unitary government would be more effi cient and better managed.

■ Federalism gives rise to confl ict and buck-passing rather than achievement.

■ Federalism is a failure because even with the GST windfall the States still cannot fulfi l their responsibilities.

These arguments are addressed below. In some cases, the arguments are misconceived or based upon assumptions that are not borne out in practice. In other cases, the arguments identify genuine problems with federalism in Australia. However, these problems generally could be eliminated or reduced by reforming the way the federal system operates.

Every system of government has its failings. A fair assessment balances these failings against the advantages of that system of government, rather than focusing solely on the disadvantages.

3.1 FEDERALISM – WHY WE WOULD CHOOSE IT NOW It is true that our federal system is the product of Australia’s colonial history. The Constitution was drafted in the 1890s by political leaders of the different Australian colonies who established a Commonwealth Government of limited powers, with most powers remaining in the hands of the States. But it was not simply parochialism or political convenience that caused these leaders to choose a federation. They were well aware of the reasons why six different colonies were established in Australia.

When Australia was fi rst settled, the single colony of New South Wales covered two-thirds of the continent. However, it proved impossible to govern people scattered across such vast distances from Sydney. Moreover, people objected to being governed by others who lived so far away from them and knew little if anything of their needs. The people of the Port Phillip District of New South Wales made this point in 1848 by electing (without his knowledge or consent) Earl Grey, the British Secretary of State for the Colonies, as their representative in the New South Wales Legislative Council. Their view was that Earl Grey, living in London, probably knew as much about their circumstances as a Sydney-sider.66 Earl Grey took the point and Victoria was separated from New South Wales in 1851 and given its own legislature.

66 A C V Melbourne, Early Constitutional Development in Australia (UQP, Brisbane, 1963), p 356.

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(CUP, (CUP,

7 0 / 3 / 7 (Hale & 227/3/07 1:20:06 PM (Institute of (Institute of Policy & Change Policy (Roundtable (Roundtable (Broadview Press, (Broadview Press, Institutions on the Edge? Productive Reform Designing Federalism Designing Federalism Comparative Federalism – A – Federalism Comparative Exploring Federalism Comparing Federal Comparing Federal Benchmarking Australia’s Benchmarking Australia’s (Allen & Unwin, 2000), p 152. 2000), (Allen & Unwin, Systems in the 1990s Queen’s Intergovernmental Relations, p 5. 1996), University, in Productivity Federal System’, Commission, System in a Federal p 25. 2006), Canberra, Proceedings, Systems in the 1990s Queen’s Intergovernmental Relations, Hueglin and T p 4; 1996), University, A Fenna, Systematic Inquiry ‘The B Galligan, p 11; 2006), Canada, in S Australian Federalism’ future of Prasser and G Starr, Mandate The Howard – and N at 86; 1997) 85, Iremonger, Warren, Arrangements Intergovernmental Fiscal p 5. 2006), May (Final Report, Shvetsova, Shvetsova, p 16. 2004), and Wanna J in M Keating, federalism?’ P Weller (eds), (University of Alabama Press, USA, USA, Alabama Press, (University of p 6. 1987), 69 R Watts, Watts, 69 R 70 Reform‘Productive in a J Pincus, Watts, 71 R Elazar, 72 D 67 P Ordeshook and O M Filippov, 68 ‘Remaking Wanna, M Keating and J The number of federalThe number countriesis 70 69 However, even China is now described as a ‘quasi- described China is now as a even However,

67 68

72 9 1

9 1 i As Daniel Elazar has noted, ‘federalism has emerged as a major means of accommodating the As Daniel Elazar has noted, . a 71 f _ r e p a p _ t s i l a federation’ or ‘nascent federation’, with its provinces and autonomous regions being given substantial economic substantial and autonomous regions being given with its provinces ‘nascent federation’, or federation’ and political authority. do not alter the in transportdiminishing the tyranny while of distance, Improvements and communications, with different fact that people who are dispersed across large circumstances, geographical in different areas live Australians still want and need a system and access to services. of wealth levels industries, resources, climates, It permits while difference ls this need. Federalism fulfi that accommodates these differences. of government federalism has For this reason, central by the alienation caused control. preventing maintaining national unity by of the Constitution. valve’ ‘escape been described as the increasing, not diminishing. Belgium, Ethiopia and South Africa adopted federal systems in the 1990s. Attempts Africa adopted federal systems in the 1990s. Ethiopia and South Belgium, not diminishing. increasing, the Democratic of Republic peace and stability in countriesare being made to achieve such as the Sudan, Afghanistan and Iraq through the implementation of forms of federalism. Congo, Australia is contraryThe centralist trend so evident in to the worldwide decentralisation trend towards and federalism. At least twenty-fi ve countries have federal systems. Forty by population is governed federal per cent of the world’s systems. countriesve have At least twenty-fi generatingcent of global gross domestic product. 50 per federal systems, 3.2 AND FEDERALISM COMPETITION GLOBALISATION, used across the It is increasingly Federalism anchored in the past. is not an old-fashioned system of government ‘federal the Indeed, world and is regarded as one of the best means of dealing with the pressures of globalisation. time in history’. more popular internationally than at any idea is now For these same reasons, if we were starting afresh, it is likely that Australians would choose a federal system. Australians choose a federal system. would that it is likely starting were if we afresh, For these same reasons, a geographicallycult to govern large country through diffi it is still extremely As international experience shows, Almost every geographically largea unitary including Russia, country system of government. is a federation, China is the Venezuela. Africa and South Mexico, Argentina, India, Australia, Brazil, United States, the Canada, countryonly Australia that is not a federation. larger than spreading desire of people to preserve necessity the advantages of small societies with the growing or revive arising from globalisation. largerfor combinations’ While Australia’s historyAustralia’s federalism was originally a good indication of why chosen as a system of gives While Australians today. still be chosen by its geography that such a system would suggests Australia, for government The process of globalisation is not itself new. At the time of Australia’s federation, unprecedented developments unprecedented developments federation, Australia’s At the time of The process of globalisation is not itself new. in transport countries up relations between had opened and increased international and communications trade globalisation is and a depression turnedWars nations inward, World While two in capital and people. ows and fl again on the rise. r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i19 19 3 0070305_caf_federalist_paper_fa.i20 20 7 0 3 9 See, for example, RHall, 79 Seethemoredetaileddiscussion 78 THueglinand A Fenna, 77 76 R Florida, Zanardi,and A ‘Designing GArachi 75 4 TheHonRG Atkinson, in ‘Federalism 74 THueglinand A Fenna, 73 0 5 _ c a Sydney, 1998), p22. the States! Appendix 1. of thispointinchapterbelow and (Broadview Press, Canada, 2006), p31. Federalism – A SystematicInquiry (NIEIR, Melbourne, 2003). 2003: Regional EconomicGovernance Economics, (NIEIR, Melbourne, 2002); National 2002:Regions Report Region Learning National Economics, Class Reform’ (2004)25(3) Some InsightsfromtheRecentItalian FiscalRelations:Intergovernmental Law Review a Post-Modern World’ (2004)16 (Broadview Press, Canada, 2006), p17. Federalism – A SystematicInquiry f _ f e

, (PlutoPress, Sydney, 2003); MYTHSMYTH ABOUT d e r a The RiseoftheCreative l (Pan Macmillan Australia,

i FEDERALISMFEDER State of the Regions Report State oftheRegions Report s 5, at25. t _ p a p e r State ofthe _ Fiscal Studies f a Comparative Comparative . Abolish i 2 0

2 0 Bond 325.

, institutional responsetothistransformation’. the bestmeansofaccommodatingglobalisation, localactivityandcitizen preferences. Itis ‘an obvious ‘supranational federalism’,‘supranational suchastheEuropeanUnion, devolution ofpower andfunctionsfromnationalgovernments tosub-nationalgovernments. TABLE 1> governance. tendtoregardtheirthree-tiered systemofgovernment asprovidingAustralians anunusually highlevel of FEDERALISM AND THE NUMBEROF TIERS OFGOVERNMENT 3.3 customised policiesfor localisedcentresofprogress, suchasSilicon Valley orBangalore. competinginglobalmarkets, ofcountries performance whilesmallerpoliticalunitsareneededtoprovide policiesneededtoimprove theliberalisation theeconomic units andgroupingsarerequiredtoharmonise andfragmentation. Globalisation imposespressuresofintegration decentralised the federal country, thefederal decentralised thebetteritsperformance. last 50years, economieshave federal economies–andthemore non-federal consistently out-performed tendtobemoreeffi countries that federal systems. cient andprosperousthan thosewithunitary Over the devolution hasnotimpairedtheeconomicpositionofUnitedKingdom. Onthecontrary, thereisevidence doesnotappeartohaveFederalism overly burdened theeffi ciency orproductivityoftheUnitedStates, and functions oftheirsub-nationalunitsinthelastdecade. Kingdom andJapan)have andincreasethe eitherproposedorimplementedplanstostrengthenthepowers (theUnitedStates,are federations Canada, andRussia)theotherfour Germany (France, Italy, theUnited effi cient economiesbelongtofederations. economiesintheworld), OftheG8nations(theeightlargest half systemsarenotimpededfromcompetinginternationally. withfederal Countries andmost Many ofthelargest of theG8have ofgovernment (see at leastthreetiers Table 1). ofgovernment,Kingdom (mostofwhichhasthreetiers but someofwhichhasonly two tiers), allmembers three orfour-tiered systems, states. orfederal fromtheUnited regardlessofwhethertheyareunitary Apart ntdSae 0Sae 87,849 2867 284 12,215 367 3100 8101 12,320 110provinces 3devolved governments 50States 26Cantons 3160 439districts 673 1 89regions regions 9 1 36,679 47Prefectures 1 20regions 1 1 LOCAL 1 96departments United Kingdom 1 16Länder United States Switzerland 10Provinces, 2 Territories 1 REGIONAL South Africa 6States, 2 Territories 22regions Russia 1 Japan 1 1 Italy Germany STATE France (metropolitan) NATIONAL Canada Australia COUNTRY TIERS OFGOVERNMENT 79 However, withothercountries, incomparison itisnotunusual orexcessive. Many nationshave 77

74 whileatthesametimebeingcatalyst for the 78 73 It has given rise tothedevelopment Ithasgiven of rise 76 Federalism provides Federalism 75 Larger political Larger 227/3/07 1:20:07 PM 7 / 3 / 0 7

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Report 7 0 / 3 / (Pan (Pan Governments 7 Australian Australian 227/3/07 1:20:08 PM (2006), (2006), 14 March 2005, p 5, p 5, 14 March 2005, 44, at 53, estimating at 53, 44, Public Administration Administration Public Reshaping Australia’s Reshaping Australia’s OECD Economic Outlook Abolish the States! Australian JournalAustralian of Public 8 at 9; and K Rudd, ‘The Case and K Rudd, 8 at 9; Macmillan Australia, Sydney, 1998), 1998), Sydney, Australia, Macmillan estimating Appendix 1, p 24 and ‘Costing M Drummond, $30 billion; Estimating Constitutional Change: on Variations the Costs of Five (2002) FederalAustralia’s System’ 61(4) Administration ‘Federal and M Davis, $20 billion; system wastes $2.4bn’, Financial Review, Financial Review, estimating $13.5 billion per year. in Business Council Federalism’ of Australia, for Contract A New – Federation Relations Federal–State Appendix 2, estimating $9 billion. para 3.4, Working Together? Assessing Together? Working Specific Arrangements, Purpose Payment Victoria (June of to the Government Appendix 1 for See p 57. 2006), further review of these studies. 2006/1 June (Paris, 2006) Annex Table Table Annex 2006) 2006/1 June (Paris, 26. Commonwealth–State Relations?’ (April 2006) Today Address Cooperativefor Federalism’, to the Don Dunstan Foundation, p 22. 2005, 15 July Queensland Chapter, 80 R Hall, Hall, 80 R 81 ‘The Cost of Access Economics, 82 Allen Consulting Group, 83 OECD, 83 OECD, 84 ‘A New Era in Wilkins, R

80 A further with problem 46.5 82 41.9

81 41 36.4 Australia Canada UK NZ is quite economical and less than that in most countries is quite economical and less than that in most with unitary systems of 83 8 32. 1 USA 2

As Figure 6 shows, for the Anglo-American countries with which Australia often compares itself, AustraliaAnglo-American often compares itself, countries with which the for As Figure 6 shows, 1 2 GENERAL GOVERNMENT REVENUE: ANGLO-AMERICAN COUNTRIES, 2005 ANGLO-AMERICAN COUNTRIES, REVENUE: GENERAL GOVERNMENT 84 i . a f _ r 5 0 e 50 45 40 35 30 25 20 15 10 p a p

_ t Percentage of GDP of Percentage s i l a The Access Economics estimates can be challenged because of the extensive arbitraryAccess Economics estimates can be challenged because of the extensive The made assumptions been gures have fi Drummond’s in the various activity. areas of government in relation to percentage savings in static terms an order of magnitude or more’. even – by ‘implausible criticised as being government. the largest costs of government apply to the two unitarythe largest to the two apply of government costs systems – not the federations. FIGURE 6 > 3.4 FEDERALISM AND DUPLICATION DUPLICATION AND 3.4 FEDERALISM Mark assertionsAustralia From time to time, billions of dollars are made that federalism costs in wasted taxes. Australia. Drummond has made various save estimates of the amount that the abolition of the States would Having three tiers of government can be effi cient and effective. It allows decisions to be made at the closest It allows cient and effective. tiers three Having effi can be of government local government Abolishing services to ensure that practical to the people affected level best meet their needs. library such as the local park, local out of the hands of decisions about local matters, take parking, and car would transport,of public place control hospitals with the schools and abolishing the States would Similarly, people. people who use these services. from the away Canberra bureaucracy, these tiers between relations of inter-governmental of the system depends upon how ciency of effi The level of improving Ways the tiers. powers and functions are allocated between are conducted and how government on these aspects of federalism are discussed in chapter 6. Access Economics has also attempted such an estimate.Access Economics has also attempted such an such calculations of the cost of federalism is that they usually do not balance costs against benefi ts or take into ts or take balance costs against benefi do not such calculations of the cost of federalism is that they usually to replace the States. government and maintaining a system of in establishing account the additional costs involved experienceAustralia’s with other federations is to compare this concern to address One way objectively Australia, in common with Anglo-American much tradition Countriesand with unitary have in the states. the cost of government comparisons, In making these making a comparison with their systems more relevant. ects the tax-price imposed by as this refl of GDP, share general the revenue is represented by government tax revenue Australia’s For the OECD as a whole, the services for on citizens government of government. as a percentage of GDP r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i21 21 3 0070305_caf_federalist_paper_fa.i22 22 7 0 3 8 BusinessCouncilof Australia, 88 JRoskam, ‘Panel Discussion’, in 87 R Watts, ‘States, Provinces, Länder, and 86 of Cost ‘The Economics, Access 85 0 5 _ c a Regulation of Benchmarking Australian Business Research Study, Submission, ProductivityCommission 2006), p327. (Roundtable Proceedings, Canberra, inaFederalReform System Productivity Commission, LawJournal Rutgers Subnational Constitutions’ (2000) Cantons: International Variety among pp 53–84. 2006), Canberra, Proceedings, (Roundtable System aFederal in Reform Productive Commission,in Productivity enhancing?’ welfare or – wasteful Walsh, ‘Competitive Federalism C and 1.5; para 2, Appendix Federal–State Relations for Contract –ANew Federation of Australia, Council Business in Federalism’ f _ f e MYTHSMYTH ABOUT d e r a , March2006. l

i FEDERALISMFEDER s t Reshaping Australia’s _ p Performance a p e 941, at944. r _ f (2006), (2006), a . i Productive 2 2

2 2 clearer benefi from ts accruing ‘horizontal’ borders. acrossgeographical inafederation competitionoperating failed.transparently These qualifi cations togainingbenefi competition, stronglyt fromvertical withthe contrast mechanismshavethe advantagesoflocalismnornationalscaledominateandco-operative incurred,costs ofduplicationarenecessarily andbenefi ts would only apply for sharedfunctionswhereneither However, such competition’ greatcareisneededinpursuing as ‘vertical andStateauthorities between central responsibility suchastelecommunications, includingcable roll-out. andgreaterchoice,in diversity sometimesadopted by theCommonwealth arationale withinareasofitsown to ‘simplicity’. record oftheCommonwealth Government asexamplesofthedoubtfultrack inrelation superannuation In Australia, RoskamhaspointedtoCommonwealth policiesandlaws on incometax, relationsand industrial overcentralisation canleadtoanaemiaattheextremitiesandapoplexycentre’. have asnation-builders government cometorecognize hasincreasingly ceasedtobethenorm that unitary trendsaremoving awayInternational governments. fromcentralised As Watts hasputit, ‘centralized and potentially complacentbureaucracy, whichislikely tobelessresponsive tolocalissuesandneeds. competition, systemareremoved, inherentinafederal andscrutiny comparison oneisleftwithan all-powerful requiredtoachieve federalism. co-operative incompetitive ortheeffort However, federalism arises oncethe totheconfl alternative attractive avery solutiontoallproblems appears The simplicityofacentral ict that EFFICIENCY AND –SIMPLICITY UNITARY SYSTEMS 3.5 betteroutcomesforthe costsofduplicationanddrive voters. Where duplicationistheconsequenceofcompetition, thevalueofthatcompetitioncould, inprinciple, offset thanprocessesandinputs. upon outcomesrather bodies, thanreplicatingthem. rather were judged couldbereducedifprograms The amountofadministration In caseswhereresponsibilityneedstobeshared, theCommonwealth couldmake betteruseofexistingState responsibilities (seechapter6). fi nancial resourcesbetween theCommonwealth andtheStates, witheachmanagingandfundingitsown here isnotinherenttofederalism. Itcouldbeavoided iftherewere abetterallocationofresponsibilitiesand injustifyingtheuseofCommonwealth funds. administration unnecessary The duplicationandwasteinvolved monitor theirimplementation, duplicatingStatebodies. Italsomeansthat theStatesarerequiredtoundertake specifi payments.c purpose This meansthattheCommonwealth createsitsown bodiestoset conditionsand through becausetheCommonwealth fundsandattemptstomicro-manageStateprograms arises Australia andwell managed,is well structured theamountofduplicationmay beminimised. Muchoftheduplicationin toduplicationandthiscanbecostly. gives thecasethatfederalism rise It iscertainly However, system ifafederal the complexityofconductingbusiness under Commonwealth law (Figure7). legislationandhasfound amassive increaseinthelasttwo decadesthathasaddedsubstantially to in primary The BusinessCouncilof hasdocumentedthegrowth ofpages ofCommonwealthAustralia legislationinterms Workplace Relations Act relationslegislationamountedto762pagesofcomplexdetailandtheconsolidated Commonwealth industrial concerned. complexandimposingexcessive being unnecessarily burdens onallparties The ‘simplifi cation’ of 87 To thislistcouldbeaddedCommonwealth native titlelaws, whichhave as beencriticised 1996isover 1200pageslong. 85 Duplicationmay bebenefi cial when itresults 88 86 227/3/07 1:20:09 PM 7 / 3 / 0 7

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Program Program 7 , June , , 16 , 0 / Report Audit 40, Audit 40, 3 / Quadrant 7 227/3/07 1:20:09 PM , 6 December , Audit 24, 2006–07. 24, Audit , (OECD, 2003). (OECD, , Australian Financial Australian The Weekend Australian The Weekend Communications Outlook The Edge Project, The Weekend Australian, The Weekend , 13 March 2007, p 1. 13 March 2007, , World Development Indicators Development World Circumstances of the Immigration Detention of Cornelia Rau, 17–18 February p 4. 2007, junkpile’, See 10–11 February pp 1-2. 2007, faces $10b ‘Defence also J Kerin, Project Delays’, Review July Australia, of (Commonwealth Ombudsman, Commonwealth 2005); in Parliament Tabled ReportsImmigration and Covering Statement 2005 – 7 February 2007. (ANAO), in a range of telecommunication infrastructure indicators central to For our global economic positioning. Australia ranks 23 out of 32 example, OECD countryfor broadband access and stands in stark contrast to like World See: countries such as Canada. Bank, OECD, 2004; ‘Broadband and R Haynes, 2005; 15 AAP, Murdoch’, a disgrace: 2006. November Financial Review Australian The 2004. on Molongolo’, Moscow Us In Charge’ Us In Charge’ November Number 11, LXIX, Volume and see 2005, www.australian-universities.com/ rankings 2 and between where only Australian universities rank6 in the depending upon the top 100, world’s Contrast the failures of measure used. higher education with the success of Australian school students in achieving averages OECD above results well literacy, in mathematical and scientific solving: reading and problem Assessment, Internationalfor Student First World: Tomorrow’s Learning for Results from PISA The Australian Financial Review Australian The p 82 March 2007, 2004–05 Performance Audit; ANAO, ANAO, Audit; 2004–05 Performance Cargo Management Re- Customs’ engineering Project, 91 Inquiry into the M J Palmer, 90 ‘Seasprite headed for Walters, P 92 Audit Office Australian National 93 Australia performs rather poorly 94 Seat’, in the Driver’s ‘Politics A Mitchell, 95 ‘Australian Universities: M Corden, 89 Wants ‘Public S Lewis and M Franklin, 96 of madness’, ACT an ‘Here’s G Craven, The 96 and the management of 92 95 90 Serious criticism has been levelled at management of the Commonwealth’s Serious criticism at management of the Commonwealth’s has been levelled 93 the Commonwealth’s track services record in providing the Commonwealth’s suggests that big is not 89 and higher education. 94 as has Commonwealth information technology provision as has Commonwealth 91 3 2

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 3 2 GROWTH IN COMMONWEALTH PRIMARY LEGISLATION (PAGES) LEGISLATION PRIMARY IN COMMONWEALTH GROWTH i . a 0 f _ Collins Class Submarines: $1 billion cost over-run including new combat systems and repairs. including new combat systems $1 billion cost over-run Collins Class Submarines: to has escalated contract $170m 370 vehicles in 1999 for Transport: Project Bushmaster Infantry 299 vehicles. $329m for budget. the Horizon Radar: Four yearsJindalee Over late and $500m over Manoora and Kanimbla. and cost overrun ships, delay two of $200m for Four year Amphibious Ships: in the 1990s and scrapped. Prototypes costing $100m built Inshore Minehunter Project: Australian-designed trainer project costing $70m scrapped. 1980s Trainer: RAAF Wamira years Cost increase of $300m and two late.FFG Frigate Upgrade: 1997 contract 11 helicopters for $667m Seasprite for Helicopters: has run six years late to date with 10 helicopters grounded in 2006 despite $300m cost escalation. r e p 60,000 50,000 40,000 30,000 20,000 10,000 a p ■ Defence equipment management Defence ■ ■ ■ ■ ■ ■ ■

_ t Number of Pages of Number s i l a always better and that a centralised system does not necessarily result in competence or effi ciency. In areas such In areas ciency. better and that a centralised system does not necessarilyalways in competence or effi result are prominent, and quality under-runs cost over-runs where there is no competition from the States, as defence, extending to billion-dollar losses on single projects. telecommunications and broadband. telecommunications funding of regional programs alternative is to make better use of our federal system and the advantages that fl ow from it. ow alternative better use of our federal system and the advantages that fl is to make There is the danger that centralism can become a device for accruing power in federal bureaucracies, and the There is the danger that centralism accruing in federal can become a device for bureaucracies, power superior a recipe for that this is not automatically management and policy development. evidence shows The Commonwealth’s administration of immigration detention has also been subjected to mismanagement The Commonwealth’s and incompetence, While Commonwealth Ministers sometimes claim that people want the Commonwealth involved in areas MinistersWhile Commonwealth involved want the Commonwealth sometimes claim that people because it is more competent, FIGURE 7 > r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i23 23 3 0070305_caf_federalist_paper_fa.i24 24 7 0 3 9 MKeating, ‘Performance and 99 Victoria, Relations Federal–State 98 TheCouncilfor the Australian 97 0 5 _ c a 2000), Chapter2. Governance M KeatingandGDavis Independence: economicpolicy’, in October 1998), 3.19. para andDuplication, intoOverlap Inquiry Role oftheStates Committee, 2007. meeting on9February qualifications atits recognised trade agreedtoexpandthe Federation f _ f e MYTHSMYTH ABOUT d e r a l i

(AllenandUnwin, Sydney, FEDERALISMFEDER s Australian Federalism: The t _ p a (2nd Report onthe (2nd Report p e r _ , The Futureof f a . i 2 4

2 4 economy decisions ortheuseofCommonwealth fi nancial power. throughCOAGnegotiation andco-operation andtheSpecialPremiers’ Conferences, notby HighCourt to Major reforms Australia’s economy inthelasttwo decadeshave beenachieved by inter-governmental ofpayroll tax. and theadministration arrangements. regimesfor teacherregistration ofregulatory They alsocommittedtothefutureharmonisation compensationandoccupationalhealthsafety ofkey areasofworkers‘ agreement ontheharmonisation Commonwealth involvement. Forexample, on13October2006, theStatesand Territories enteredintoan may alsooccuramongstStatesand Co-operation Territories themselves wherethereisnoneedfor withouttheimpositionofuniformity.of nationalmarkets development andimplementationoftheNationalCompetition Policy (NCP), amongstotherreforms. Government alone, but theconsequenceofState, Territory inthe andCommonwealth co-operation qualifi arebeingrecognisedintheotherjurisdictions. cations inonejurisdiction in Queenslandwithouthaving tomeetany different Queenslandstandards. Similarly, professional ortrade oftheirorigin.the jurisdiction Ifaproductismadein andmeets Victoria standards,Victorian itmay besold in scheme, recognisesandacceptstheapplicationofstandardsfor goodsandservices eachjurisdiction of action. isthemutualA goodexampleofadifferent recognitionscheme. typeofco-operation Underthis roll. control schemes suchasthejointelectoral orcentral requireuniformity doesnotnecessarily Co-operation orenforcementcreation ofjointadministrative bodies, Councils, theuseofMinisterial andotherco-operative schemes, inter-governmental agreements, by theStatestoCommonwealth, ofmatters thereferral the onadaily basis. systemoccurs inthefederal Co-operation legislative Ittakes placethroughco-operative these problemseliminated. couldbelargely systemitself.a federal moreeffectively systemwere sothatitoperated Ifthefederal reformed (seechapter6), in tends tobetheconsequenceofpoorimplementationfederalism Australia, thantheexistenceof rather some confl thanconstructive,ict isnegative rather andfocussed uponpassingblame oravoiding responsibility, it ensures thatproposalsaremeasuredandwell considered, sothattheycanbepublicly defended. Thirdly, while is apublic debateandthatpoliciesaresubjecttogreaterscrutiny. Confl ict, oreven thepossibilityofconfl ict, above, thatthere by ensuring onmajorpolicyissuescanbeconstructive disagreementbetween jurisdictions newsworthy. Secondly, whereconfl ict doesoccurbetween jurisdictions, bad. itisnotnecessarily As discussed day systemisimmense: inthefederal First, achieved every theamount ofco-operation itisjustnotsuffi ciently nothing isever achieved. This isnotthecase. The public impressionoffederalism, fromthemedia, derived isthatitallaboutconfl ict andbuck-passing but FEDERALISM–CONFLICT AND CO 3.6 99 and the consequent prosperity achieved in andtheconsequentprosperity oftheCommonwealth wasnotthework Australia - 98 OPERATION The fundamentalreshapingofthe Australian 97 The consequenceisthecreation 227/3/07 1:20:10 PM 7 / 3 / 0 7

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7 paper 0 / Canberra 3 Review of Review / 7 227/3/07 1:20:10 PM 33, at 38. 33, 33, at 44. 33, Regulation for Australia’s Australia’s for Regulation Australian JournalAustralian of Public Australian JournalAustralian of Public , 6 March 2007. 6 March 2007. , Policy, Regulatory Reform & Policy, (June 2006) Australian Federalism’ 65(2) Administration Policy, Regulatory Reform & Policy, (June 2006) Australian Federalism’ 65(2) Administration Assessment of governments’ progress in Assessment of governments’ implementing the National Competition 2003, and related reforms: Policy August Canberra, 1 (AusInfo, Volume para 4.15. 2003), Progress in Assessment of Governments’ Implementing the National Competition 2005 and Related Reforms: Policy xxxiv. xxvii, xxii, Reforms National Competition Policy InquiryReportApril Report, No 33, 2005. in the 21st Century, Federation presented to the 2006 Melbourne Australian Social and Institute/The 2–3 Economic Outlook Conference, 2006. November research in partisan times’, Times 100 ‘National Competition R Hollander, 101 ‘National Competition R Hollander, 102 National Competition Council, Council, Competition 102 National 103 National Competition Commission, Commission, Competition 103 National Commission, 104 Productivity Banks, 105 G 106 policy ‘Independent public L McIntosh, 104 outcomes. outcomes. In 2005, In 2005, 102

103 een the Commonwealth een the Commonwealth achieve the best achieve 106 Had the NCP been the subject 100 ederal system, cannot always cannot always ederal system, better allocation of functions betw This capacity has been run down. However, it was not a case of the Commonwealth pulling the States of the Commonwealth it was not a case However, 105 101 the fi nancial benefi ts of reform did not just fl ow back to the ow ts of reform did not just fl nancial benefi the fi it was a co-operative venture, with all governments agreeing on the aims and the with all governments it was a co-operative venture, an independent body, the National Competition Council (NCC), was established to was established the National Competition Council (NCC), an independent body, 5 2

5 2 i . a f _ Commonwealth through income tax, but were shared with the States through NCP payments, States through NCP payments, shared with the were but income tax, through Commonwealth with reform. to continue giving them the incentive means of achieving them from the start;means of achieving them – structure assess and report and on reforms; monitor, ts – sharing the benefi agreement – agreement r e p a p into line, but rather one of mutual agreement about what needed to be achieved and the best way of and the best way rather but to be achieved agreement about what needed one of mutual into line, doing it. most reluctant to meet its NCP that proved rather than the States, the Commonwealth, it was In fact, the States for ‘poor example’ of setting a the NCC accused the Commonwealth In 2003, commitments. to it had failed For example, and reform in its progress in the review of its legislation. Territories and ndings that it was not in fi despite on wheat exports, monopoly Wheat Board’s Australian reassess the the Commonwealth’s jurisdictions, ‘compared to other The NCC concluded that interest. the public and not commensurate average with its leadership below performance was well role…’. Despite the diffi culties, the NCP achieved a great deal of necessary the NCP achieved reform and is a good example culties, Despite the diffi According to the Productivity rather or opportunistic, than coercive federalism. of co-operative, transportts from NCP reforms the utilities, for and Commission the actual realised benefi sectors 2000. telecommunications the year alone represented 2.5 per cent of GDP ($20 billion) by The political pain of implementing the NCP, particularly for the States, was great. Some even attributed Some even particularly was great. the States, for The political pain of implementing the NCP, Australia to the NCP. Western in loss of government the Coalition’s 1 2 3 National Competition Policy National Competition was based on three factors:The success of the NCP of coercion, rather than agreement, or had there been no independent body to impose rigour, or no or had there been no independent body to impose rigour, rather than agreement, of coercion, failed. have likely most the process would sharingrewards, in the to pull the states into line in the commonwealth ‘enabled Hollander has argued that the NCP approach which tied grantsa way did not’. only 64 per cent of the Commonwealth’s priority legislation complied with NCP, compared with 88 per priority legislation complied with NCP, 64 per cent of the Commonwealth’s only Tasmania. Victoria and Queensland and 84 per cent for 85 per cent for NSW, cent for _ t s i l a and the States to maximise competition and avoid unnecessaryand the States to maximise competition and avoid overlap of functions. Clearly, co-operation, while a signifi cant element of our f while a signifi co-operation, Clearly, as does a remains important, competition That is why Co-operative federalism is not always effective. Better institutional mechanisms are needed to enhance Better institutional mechanisms are needed to enhance effective. Co-operative federalism is not always Regular meetings of inter- and neglect. delay co-operation by and ensure that it is not bogged down ensure would one jurisdiction, that are not within the control of any such as COAG, bodies, governmental It is also important that there be a that co-operative work proceeds regardless of the politics of the day. increased policy review capacity is essential for Indeed, and independent assessor of progress. professional Australia. ongoing reform in effective r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i25 25 3 0070305_caf_federalist_paper_fa.i26 26 7 0 3 108 R Roberston, 0 JHoward, ‘Reflections on Australian 107 0 5 _ c a immediately precedingtheGST.) leanyears compared tothevery Commonwealth withGSTintroduction share ofGDPreceived fromthe however anincreaseintheState Bulletin, 4July 2006. (Therewas Relations Debate onFederal/State Financial Review, of federalism’, statesover‘Costello berates failure 2005, 6at7and12; andMDavis, the conservative, Santoro, ‘In Defence ofFederalism’ in Issue 1, September2005, 4, at4–5; S Case for Centralism’, at 190–1; T Abbott, ‘A Conservative Press,(Federation Sydney, 2004)183 A JBrown, Federalism’ in W Hudsonand 2005, pp3–4; T Abbott, ‘Responsible Research Centre, Melbourne, 11 April Federalism’, Address totheMenzies f _ f e MYTHSMYTH ABOUT d e 28 June2006, p1. , BankResearch Macquarie r a l i

Restructuring Australia Restructuring FEDERALISMFEDER s t The Facts Missingfrom _ The Australian Financial The Australian p Issue 1, September a p e r the conservative, _ f a . i 2 6

2 6 take over Statepolicyfunctions, whenthisisthesystemthatCommonwealth created. deliberately their responsibilitiesbecausetheyrequireCommonwealth funding andthattheCommonwealth shouldtherefore States remaineddependentuponCommonwealth funding. Itisdisingenuous tosuggestthattheStatesarefailingin taxes plusthecombinationofFinancial andtheSPPs.Assistance Grants Itdidnotdoso. Instead, itensuredthatthe would have ensuredthattheStateshadaccesstorevenue thatcovered, andeventually exceeded, thelossofState funding fromGSTrevenue. aboutgivingtheStatesfi IftheCommonwealth hadbeenserious scal autonomy, it Therefore, itcannotsensiblythattheStatesarenow beargued ‘fi nancially independent’ becausetheyreceive absolutely andproportionately. cent ofGDP. This isa$20billionwindfallfor theCommonwealth well aheadofStateand Territory gainsboth assume or oversee Stateresponsibilitiesintheinterestsof assume oroversee people. Australian from theGST, have failedtofulfi l theirresponsibilities, and sotheCommonwealth isobliged tointervene isoftenmadethattheStates,The argument despitehaving beengiven fi throughtherevenuenancial security 3.7 FEDERALISM AND THE GST and 1990s. remainatlevels belowperiod thepre-GSTaverage ofthe1980s of6percentGDPfor thewholeperiod – exactly thesamepercentageasin1996. Indeed, the(net)payments totheStatesover theentirepost-GST agreement, received by thegrants theStatesfromCommonwealth in2006amountto5.5percentofGDP Moreover, ifonetakes intoaccounttheabolitionofStatetaxes requiredby theGSTinter-governmental States, grow. becauseitcanreducetheamountofnewSPPsatitsdiscretionasGSTtransfers State taxes. The Commonwealth remainsinfullandeffective controloftheamountfundingreceived by the typesof theirown revenueStates toraise hasbeenreducedby therequirementthatStatesabolishcertain Commonwealth for substantialcontinuing fundingthroughSpecifi Paymentsc Purpose (SPPs). The abilityofthe Financial general fromtheCommonwealth.the former Assistance Grants The Statesremainreliantonthe the Stateswithagreatwindfall. Infact, ofexistingStatetaxes plus theGSTwasdesignedtoreplacearange The impressionisoftengiven inadditiontoexistingStatefunding, thattheGSTfundswere granted providing 108 During thesameperiod, During theCommonwealth’s 2percentto20 revenue roseby afurther 107

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7 0 / 3 / 7 227/3/07 1:20:11 PM Murray–Darling 1993 (Cth). 1993 (as amended in 2002), in 1993 (as amended in 2002), Schedules 1 and 2 of Basin Act 109 Murray–Darling Basin Agreement Agreement Basin 109 Murray–Darling Commonwealth Ministers Commonwealth chair the Ministerial Council on the Murray–Darling Basin 109 7 2

7 2 i . a f _ r e p a p _ t s i l a Too often, Commonwealth arguments for taking over State responsibilities boil down to the fact that the to the fact that the down State responsibilities boil arguments taking over Commonwealth for often, Too has the money to fund necessary ratherCommonwealth questions than reforms States do not, while the l those has the greater expertise government of about which level or skills or is most appropriate to fulfi claim to manage the Murray–Darling the Commonwealth’s Basin seems to be For example, responsibilities. of existing water rights superior to fund the buy-back based more on its ability than on any management in the management of the Murray–Darling has been involved The Commonwealth Basin since the capacity. and remains a partyrst Murray–Darling Agreement in 1914, to the more recent Basin negotiation of the fi 1993 Agreement. and the Commonwealth and the participatingand the Commonwealth to the Murray–Darling States each appoint representatives inadequacy in the any Responsibility for which manages the Basin and water allocations. Basin Commission, management of the Murray–Darling as the as well be borne the Commonwealth Basin in the past must by participating States. be to ensure that the States either have nancial relations would A better approach to federal–State fi them to allow tax revenue, cient share of overall a suffi or receive the capacity to raise funds, their own ought a question arise whether the as to if they failed to do so, then, Only l their responsibilities. to fulfi do better. could Commonwealth r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i27 27 THE STATE OF 4 PLAY IN AUSTRALIA

The Productivity Commission has noted that the most distinctive features of Australia’s federal system include:

■ a relatively high degree of shared functions;

■ a strong centralising trend over time;

■ a relatively high degree of vertical fi scal imbalance; and

■ innovative initiatives in co-operative federalism.110

The recent history of federalism in Australia brings all these elements into play. On the one hand, there have been signifi cant advances in co-operative federalism through the Special Premiers’ Conferences, COAG and the Council for the Australian Federation. This has been possible because of the high degree of shared functions between the Commonwealth and the States. At the same time, the cause of centralism has been advanced by High Court decisions and the effects of vertical fi scal imbalance. This has resulted in a recent move away from co-operative federalism to the current state of ‘opportunistic federalism’, where the Commonwealth picks and chooses State issues upon which to intervene for political purposes, undermining the federal system as a whole.

4.1 COAG TRENDS AND HISTORY In 1990 the Prime Minister, Bob Hawke, launched a ‘new federalism’ initiative aimed at achieving microeconomic reform through national co-operation. The initiative commenced with a Special Premiers’ Conference in Brisbane in October 1990. The intention was to avoid the acrimony of fi nancial Premiers’ Conferences and concentrate on substantial reforms in a co-operative manner.

In November 1991, Premiers and Chief Ministers adopted four principles to guide a review of Commonwealth, State and Territory roles and responsibilities. The fi rst recognised Australia’s nationhood and the importance of working co-operatively to ensure that national interests are resolved in the interests of Australia as a whole. The second was the subsidiarity principle, that ‘responsibilities for regulation and for allocation of public goods and services should be devolved to the maximum extent possible consistent with the national interest, so that government is accessible and accountable to those affected by its decisions’. The third principle concerned structural effi ciency and the need for increased fl exibility and competitiveness in the Australian economy, and the fourth concerned the accountability of government to the electorate.111

After two special Premiers’ Conferences, the process was formalised by the establishment of the Council of Australian Governments (COAG) in May 1992.

110 J Pincus, ‘Productive Reform in a Federal System’, in Productivity Commission, Productive Reform in a Federal System (Roundtable Proceedings, Canberra, 2006), p 25, at 30.

111 M Keating and J Wanna, ‘Remaking federalism?’ in M Keating, J Wanna and P Weller (eds), Institutions on the Edge? (Allen & Unwin, 2000), p 136.

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7 0 / 3 / 7 227/3/07 1:20:12 PM Public Public Public Public 4. at 6. 4, (Roundtable (Roundtable Microeconomic Reform Institutions on the Edge? (Federalism Research Productive Reform (Department of Premier and in a Federal System in a Federal p 25, 2006), Canberra, Proceedings, at 41. Getting More from the Competition (April 2006) of Ideas’ Today Administration of National Reform Wave Third A National Reform Initiative for A New – COAG pp August 2005), Victoria, Cabinet, 30-9. Getting More from the Competition (April 2006) of Ideas’, Today Administration and Wanna J in M Keating, federalism?’ P Weller (eds), pp 152–3. 2000), (Allen & Unwin, of Australian Governments – A Australian – Governments of in P Carroll and Reform’ for Vehicle (eds) M Painter and Federalism p 27. 1995), ANU, Centre, in Productivity Federal System’, Commission, 115 117 ‘Remaking Wanna, M Keating and J 114 ‘Collaborative Federalism: R Glover, 116 ‘Collaborative Federalism: R Glover, 112 ‘Council A Henderson, M Edwards and 113 Reform‘Productive in a J Pincus,

117 cant players whose cant players The second wave, in the 1990s, the 1990s, in The second wave, 114 115 In February 2006, COAG agreed to the new National Reform Agenda (NRA), Agenda (NRA), agreed to the new National Reform In February COAG 2006, 116 However, COAG has not always proved an effective co-operative forum. In 2003 the co-operative forum. an effective proved has not always COAG However,

112 113 9 2

9 2 i . a f _ r Under the COAG process, there was recognition of the need to facilitate agreement on policy of the need to facilitate agreement was recognition there process, Under the COAG as signifi the states recognised were Not only of joint interest. frameworks policy input was crucial, but the Commonwealth also accepted that policy by unilateral decree unilateral decree also accepted that policy by but the Commonwealth policy input was crucial, of its policy goals. many the states to achieve through and that it had to work was ineffective e p a p _ t s i l a A decade after the NCP agreement, the Victorian Premier, Steve Bracks, argued that ‘a third wave of reform’ of reform’ ‘a third wave argued that Bracks, Steve Victorian Premier, the A decade after the NCP agreement, dollar was in the 1980s when the rst of reform of the economy was the opening up wave The fi was needed. marketsnancial deregulated and tariff were barriers ended. effectively fi oated, fl Premiers walked out of COAG, claiming that the Commonwealth was dictating to, rather than negotiating and was dictating to, claiming that the Commonwealth Premiers out of COAG, walked in relation to health funding. acting in partnership the States, with, COAG The most notable has been largely successful. COAG of maintaining co-operation, culties Despite the diffi 3.6). which commenced in 1995 (see section Policy, success was implementing the National Competition ‘landmark coordinated in nationally achievement (NCP) has been described as a National Competition Policy economic reform’. The Victorian Premier also proposed a renewal of ‘collaborative federalism’, with an independent body with ‘collaborative federalism’, Victorian Premier also proposed a renewal of The was to create a culture The aim the reforms reward nancially achieved. report on and fi to assess, established improvement. of continuous COAG achieved a signifi cant number of inter-governmental agreements relatively quickly on subjects such as quickly relatively agreements of inter-governmental cant number a signifi achieved COAG standards and food policy, environmental nancial institutions, non-bank fi ‘road transport, competition policy, recognition’. mutual was National Competition Policy, which focussed on competition and improving the effi ciency of infrastructureciency the effi improving on competition and which focussed was National Competition Policy, services and labour markets. of reform was needed to respond to internationalThe Premier argued competition from that a third wave The primary focus emerging such as India and China and to the consequences of an ageing population. nations the better use of human capital capabilities through competitive the nation’s of the reforms be improving would barriers(including reforming health and education to remove to participation in the workforce) and reforms to regulation and infrastructurebusiness provision. including the creation of an independent COAG Reform funding Council and the linking of new Commonwealth including the creation of an independent COAG to reform. a more co-operative institutional relationship process as developing the COAG viewed have Wanna Keating and They observed: alone. the Commonwealth proposed by ‘new federalism’ versionthan any of r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i29 29 4 0070305_caf_federalist_paper_fa.i30 30 7 0 3 2 CBraun, of ‘The importance 122 2 Councilfor the Federation,Australian 123 2 MLudlow andSScott, ‘States’ council 121 2 DHughesandSScott, ‘States snub PM 120 Councilfor the Federation,Australian 119 Councilfor the Federation,Australian 118 0 5 _ c a 5(2) oftheCantons’perspective (2006) State fromthe within theSwissfederal collaboration andvertical horizontal Communiqué, 13October2006. Financial Review, idea awasteofmoney’, Financial Review, forum’,with federation Communiqué, 13October2006. Communiqué, 13October2006. f _ f e

Federations THE STATE OF d e r a l

i PLAY IN AUSTRALIAAUSTRALI s t _ p 22 July 2006, p5. 12 October2006, p4. 23. a p e r _ f The Australian a The Australian . i 3 0

3 0 addressed and for reform to be pursued outsideCOAG, tobepursued addressed andfor reform ifnecessary. tobe The establishment oftheCouncilfor thefor thosematters provides aforum Federation Australian ontheCOAGmatters agendathattheStatesand areasfor co-operation.Territories consideredimportant COAG between theStates’. co-operation agendaandundermining However, theStatesand Territories thattheCommonwealth hadbeen hadalsobecomeconcerned ‘dictating the isintendedtocomplementthatofCOAGwork thegroundwithjointState–Territory by agreement. preparing The Councilstatesthatitdoesnotintendtocompetewith, orsubstitutefor, COAG. Onthecontrary, much ofits The Councilisintendedtoactasa bodythatcanhelpshapeandsetthenationalpolicyagenda’. ‘strategic amongst theStatesand Territories andtogive themaunitedvoice intheirdealingswiththeCommonwealth. The Councilfor on13October2006toensurebetterco-operation the wasformed Federation Australian COUNCILFOR THE AUSTRALIAN FEDERATION 4.2 lost their co-operative spirit and had become tools for unilateral Commonwealth andhadbecometoolsfor action. unilateral spirit lost theirco-operative exercises, suchastheNational Water Initiative andtheestablishment oftheNational Water Commission, had developed andcoordinatedmanner. inaco-operative thatsomeco-operative The Councilwasalsoconcerned intheareasofskillsandvocationalapproach toinitiatives, educationandtraining, thatneedtobe particularly action toimplementtheNationalReform attheCommonwealth’sAgenda andexpressedconcern unilateral fromChinaandIndia. ofcollaborative face ofincreasingglobalcompetition, Itnotedtheimportance particularly At itsfi inthe meeting, ofco-operation rst theCouncilfor the stressedtheimportance Federation Australian (the Conference ofCantonalGovernments) ■ ■ ■ ■ ■ regularly. The Founding Agreement oftheCouncilrecitesthatobjectives oftheCouncilare: ofallStatesand andChiefMinisters thePremiers The Councilcomprises Territories andwillmeet Council for the Australian Federation the Commonwealth, on andidentifyshareinformation ‘best practice’ innovations. ofStateand harmonisation Territory laws andpractices, take measurestoimprove coordinationwith To achieve theseobjectives, for greaterconsistencyand theCouncilintendstoseekopportunities Commonwealth imprimatur is unnecessary orhasnotbeenforthcoming. isunnecessary Commonwealth imprimatur to reach, issueswherea whereappropriate, agreementsoncross-jurisdictional collaborative and and Territories; agreements withtheCommonwealth towards by acommonposition amongtheStates working oftheCouncil of to complementthework Governments andfacilitateCOAG-basedAustralian ofpolicyoptions; providing adiversity to promoteandcommunicate tothe peoplethebenefiAustralian ts of Australia’s system in federal ofnationalinterest; matters engagementwiththeCommonwealth on Governmentto promoteconstructive andParliament to Australians; important onandpromoteinnovativeto provide solutionstomatters leadership 122 andCanada(theCounciloftheFederation). 120 The Commonwealth hadrefusedtoinclude 121 Similar bodies exist in Switzerland SimilarbodiesexistinSwitzerland 123 119

118

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7 0 / 3 / 7 227/3/07 1:20:13 PM Communiqué, 9 FebruaryCommuniqué, 2007. 124 Australian Federation, the Council for NSW v

124 in November 2006 expanded the application 2006 expanded in November NSW V COMMONWEALTH was whether this head of power could be interpreted that it so widely was whether this head of power New South Wales v Commonwealth Wales South New concerning the validity of the Work Choices legislation. Work concerning validity of the the 1 3

1 3 i . a f _ r e p a p addressed important issues such as water reform and drought; of national principlesagreed upon the development best-practice and urban water planning; guidelines for signed a declaration on climate change; earlier did not take agreed to implement an emissions trading 2010 if the Commonwealth action system by to do so; endorsed new principles health care reform; to guide continuing an equal partnershipAgenda and called for rmed Reform its commitment to the National between reaffi the fair sharing for of costs and provide would that governments Territory State and Commonwealth, and ts; benefi response to the High Court’sconsidered the implementation of measures in judgment in Commonwealth _ t New South Wales v The Commonwealth v Wales South New s i l a included a power to make laws with respect to the relationship between constitutional corporations relationship between with respect to the laws to make and their included a power regardless of the constraints in s 51(xxxv). including industrial relations, employees, with the result that the A majority of the High Court took this broad view of the corporations power, concerning Parliament the activities of constitutional legislate to enact laws not only Commonwealth can now sub-contractors or those who be they employees, also their relationships with others, but corporations, purchase their goods or services. of the Commonwealth’s power to make laws with respect to certain types of corporations into the fi eld of with respect to certain laws to make power types of corporationsof the Commonwealth’s into the fi industrial and beyond. relations granting Parliament the Commonwealth deals with industrialThe Constitution expressly relations in s 51(xxxv), and settlement of industrial with respect to conciliation and arbitration the prevention to enact laws for power a century over This meant that for laws Commonwealth State. one the limits of any disputes extending beyond would ‘paper dispute’ though a element (even ‘inter-state’ to industrial an apply could only disputes if there were to deal with such problems. ‘conciliation and arbitration’ ned to using was confi and that the Commonwealth ce), suffi with respect to enact laws Parliament the Commonwealth power Section 51(xx) of the Constitution also gives ‘constitutional corporations’) formed as (known corporations’ nancial corporations‘foreign and trading or fi to The question a limited application. had been given this power In the past, within the limits of the Commonwealth. in 4.3 THE LONG TERM IMPACT OF The Australian federation has been the High CourtOne of the main sources of centralismAustralia. in the of ended the notion of State reservedCourt’s have judgments from Commonwealth powers and State immunity and expanded nancial dominance in the areas of income tax and excise, fi Commonwealth increased action, through a broad interpretation of the external power legislative affairs and the Commonwealth power corporations power. The High Court’s decision in ■ At its second meeting on 9 February 2007, the Council: 9 FebruaryAt its second meeting on the Council: 2007, ■ ■ ■ ■ ■ ■ r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i31 31 4 0070305_caf_federalist_paper_fa.i32 32 7 0 3 3 (2006)81 ALJR 34, perCallinanJ 133 132 131 T Abbott, ‘Responsible Federalism’ (2006)81 ALJR 34, perKirby J 130 Seethereferenda of1911, 1912, 1926 129 (2006)81 ALJR 34, perCallinanJ 128 (2006)81 ALJR 34, at[392]. 127 (2006)81 ALJR 34, at[183]and[196]. 126 (2006)81 ALJR 34, perGleeson 125 0 5 _ c a at [676]. 109 FCR243. Quickenden vO’Connor Press, Sydney, 2004), 183, at191. Australia Restructuring in W Hudsonand A JBrown, at [539]. 34, perCallinanJat[709]–[733]. and 1946discussedin(2006)81 ALJR at [619]. Crennan JJat[191]–[194]. CJ, Gummow, Hayne, Heydonand f _ f e THE STATE OF d e r a l

i PLAY IN AUSTRALIAAUSTRALI s t _ p a p e r _ (Federation (Federation (2001) f a . i 3 2

3 2 ‘future integrity of the federation as a federation and the existence and powers oftheStates’. andtheexistencepowers asafederation ofthefederation ‘future integrity ofitsexistence’. inalloftheyears aboutthefar-reaching Hewasconcerned the Court consequencesfor the caseswithrespecttotherelationshipbetween theCommonwealth andtheStatestocomebefore important In hisdissentingjudgment, JusticeCallinandescribed corrective services,corrective amongstothers. town planning, energy, localtransport, environmental protection, landandwaterconservation, agriculture, and intheareasof andmedicalpractices), bodies thatprovidepathology providers services andothercorporate universities, schools), collegesandprivate hospitals, healthcare(regardingcorporatised clinics, hospices, Stateareassuchaseducation(regardingcorporatised Commonwealth tolegislatewithrespecttraditional In hisdissentingjudgment, JusticeKirby ofthispower notedthatthemajority’s interpretation would allow the By theConstitution’, ‘strip-mining publications thanitsroleinproviding andservices, education. rather becauseofitsactivitiesinthebuying,corporation sellingandrentingofproperty, investment andthesaleof might.of suchbodies-corporate Forexample, of theUniversity Western hasbeenheldtobeatrading Australia may notbeenoughtoconstitute substantialtrading,education orhealthservices althoughtheotheractivities ofitsactivities. asubstantialpart Mereprovision forms of will dependuponananalysis ofwhethertrading only appliestotrading, fi nancial orforeign corporations. isa Whether ornotacorporation ‘trading’ corporation However, theCommonwealth willstillnothave completepower withrespecttocorporations. Section51(xx) the peoplehavingAustralian rejectedsuchanexpansionatfour previousreferenda. Secondly, thisjudgmentsignifi cantly expands thelegislative power oftheCommonwealth Parliament, despite only inthemostextremeofcases. continue tofunctionasindependentgovernments andexercise islikely theirconstitutionalpowers tobeapplied againstCommonwealth laws affectingpreviously thecapacityofStatesto afforded by theHighCourt andtextoftheConstitution. fromthestructure implicationsdrawn the Constitutionorfederal The protection to give fullbreadthtoCommonwealth of legislative powers, intentoftheframers regardlessoftheoriginal The signifi cance ofthiscasefor systemistwofold. thefederal hasmadeclearits intent First, the HighCourt structure. itcreatedandtheintendedroleofStateswithinthat structure thanthefederal the Constitutionrather shouldbethewords pointfor of In doingso, constitutionalinterpretation heldthatthestarting themajority to co-operate. continued duplicationwhileremovingrequiring theincentive for eithertheCommonwealth orthe States ‘improve’ by federalism reallocatingpowers. Rather, itislikely toexacerbatetheproblems by offederalism legislative coverage thatcannotcompletely cover anareawithout Stateco-operation. This doesnotnecessarily relations laws areexpectedtocover upto85percentofworkers. The resultisthecontinuation ofpatchwork businesses ororganisations.will stillnotapply tounincorporated Forexample, theCommonwealth’s industrial balance, federal occupational healthandsafety arrangements’ amongstotherthings. governmentthat thefederal power toregulateworkers’‘could usethe corporations compensationand functioning of the State as to affect its capacity to operate asagovernmentfunctioning oftheStateastoaffect orexercise itscapacitytooperate constitutionalfunctions. 125 inthecontextof power beconstrued thatthecorporations rejectedanargument The majority 126 concluding that the power of a State body to determine industrial matters isnotsovitaltothe matters concludingthatthepower industrial ofaStatebodytodetermine 133 Commonwealth laws cannow cover most, but notall, corporations: they 130 Ministerfor Healthand The Federal Ageing, Tony Abbott, hassuggested New South Wales v The Commonwealth 131 132 129

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7 0 / 663, at 663, 663 3 / 7 227/3/07 1:20:14 PM , 15, Autumn 15, , the conservative, the conservative, 11. Vol 18, (2006) p 369. 18, Vol Griffith Review Upholding the Australian Australian Upholding the Federations Federations Federalism’, Address to the Menzies Federalism’, April 11 Melbourne, Research Centre, ‘In Defence and S Santoro, p 2; 2005, in of Federalism’ 6 at 8. September 2005, 1, Address to the Menzies Federalism’, April 11 Melbourne, Research Centre, p 2. 2005, in Party’ Constitution, choices’, pp 153–166. 2007, [549]. See also per Callinan J at [779]. [549]. Opportunistic (2006) Federalism’ Administration Public Review 671. Opportunistic (2006) Federalism’ Administration Public Review did ‘How Wright, and D at 674; intergovernmental relations fail in the (2005) USA after Hurricane Katrina?’ 5(1) 138 Australian ‘Reflections on J Howard, 139 Australian ‘Reflections on J Howard, 140 ‘Federalism and the Liberal J Roskam, 141 work‘The gap between and D Peetz, 134 J at [543]. per Kirby ALJR 34, (2006) 81 135 J at per Kirby ALJR 34, (2006) 81 136 ‘From Cooperative to T Conlan, 137 ‘From Cooperative to T Conlan, 139 As in the UnitedAs The Prime Minister, John The Prime Minister, 138 as creating a form of ‘optional or as creating a form of 135 el to opportunistic federalism.

137 This is a classic case of ‘opportunistic’ federalism, where the very federalism, ‘opportunistic’ This is a classic case of 140 New South Wales v Commonwealth Wales South New

141 136 He saw it as contrary structure He saw the Constitution for and design of the to the text, 134 3 3

3 3 i . a f _ r The desire to have a more national system of industrial relations is driven by our wish that as by is driven national system of industrial relations a more to have The desire exibility and the individual the fl the freedom, as possible have businesses and employees many of workplace area in the philosophy choice which is characteristic of the Government’s and not to trample on the States. the individual, is to free the goal In this area relations.… Behind the occasional shroud of states rights rhetoric, both libertarian and social conservatives of states rights rhetoric, Behind the occasional shroud for preference ce the traditional conservative’s willing to sacrifi increasingly proved have of the view their own of promoting in favor role and limited federal institutional deference mandating of or the preemption, privatisation, on a national scale – through public good conservative social values. e p a p _ t s i l a opportunistic federalism’. States, it can be seen in funding for core State functions becoming dependent upon politically symbolic matters, symbolic matters, upon politically core State functions becoming dependent be seen in funding for it can States, The Commonwealth agpoles. the existence of functioning fl such as making schools funding dependent upon agpoles nor Neither fl school chaplains in competition with school counsellorsfunding for is another example. Under the principle of a national government. matterschaplains are self-evidently that require the involvement the people. closer to of government such issues should be allocated to a level of subsidiarity, checks traditionally supported with its division of powers, who have Some conservatives, the federal system, supported have to centralism arguing by that Commonwealth the move and balances and smaller governments, liberty greater in State functions gives interference and freedom of choice to citizens. Under ‘opportunistic’ federalism, the long-term structural federalism, ‘opportunistic’ damage to choice and diversity to far exceed is likely Under a system that divides Freedom is better protected by short-termany in a particular for choices provided policy. to be exercised rather power than a centralised diversity allow and gives system that would and choice, power manner in the future. in an oppressive Howard, has argued that: has argued that: Howard, Opportunistic federalism has come at a cost in the United States. The degrading of co-operative relations and Opportunistic federalism has come at a cost in the United States. in large Conlan as being the deinstitutionalisation of intergovernmental management was regarded by part the to Hurricane Katrina.‘miserable response’ the cause for However, other conservatives one central argued establishing industrial that by have relations system that covers However, a choice of systems is removed. competing systems, removes and effectively the vast majority of the population, those elements that cant risk Parliaments remove that future Commonwealth may there is a signifi Moreover, ‘choice’. the Prime Minister regards as giving A similar argument has been made by Conlan about federalism in the United States. He described ‘opportunistic He described A similar argument Conlan about federalism in the United States. has been made by as arising where policy-makers their political and policy goals regardless of the traditional seek to achieve federalism’ He pointed to federal intervention during the Clinton era and institutional responsibility. boundariesbehaviour of of the Bush administration and regarded more dismissive as even such as school uniforms, on symbolic issues, Conlan concluded: co-operation traditional and responsibilities in the federal system. 4.4 OPPORTUNISTIC FEDERALISM 4.4 OPPORTUNISTIC has describedJustice Kirby the outcome of In Australia lev there has been a distinct shift at the Commonwealth In structures of federalism that were designed to give choice are destroyed to achieve a particular ideological end, a particular to achieve structures choice are destroyed designed to give of federalism ideological end, that were sustained. to be which is itself unlikely States to be reduced, in effect, to service of the Commonwealth. agencies in effect, States to be reduced, r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i33 33 4 0070305_caf_federalist_paper_fa.i34 34 7 0 3 147 146 145 144 143 of ofthehistory Forasummary 142 0 5 _ c a CLR 465. Ha vNew South Wales Commonwealth (1942) 65CLR373; and South Australia vCommonwealth CLR 399. vCommonwealth Victoria (1975) 134CLR338. vCommonwealthandHayden Victoria Commonwealth (Vic);Attorney-General ExrelDalev (1908) 7CLR179. New South Wales v The Commonwealth (Final Report, May 2006), p150. Fiscal Intergovernmental Arrangements Warren, 2006), Appendix 1, p53; andN State FinancialRelations Discussion Paper onCommonwealth– of Department Treasury andFinance, relations, see: Western Australia, Commonwealth–State financial f _ f e THE STATE OF d e r Benchmarking Australia’sBenchmarking a l

i PLAY IN AUSTRALIAAUSTRALI s t _ (1945)71CLR237; and p (1957) 99CLR575. a p e r _ (1997)189 f (April (April a (1926) 38 Victoria v Victoria . i 3 4

3 4

$5 billionperyear inown-source revenue. declined to surrender itsdominanceofincome tax.declined tosurrender Again, uphelditspower todoso. theHighCourt exciseasthedominantsourceofrevenue-raising.Income taxovertook After the War, theCommonwealth During World War II, theCommonwealth obtainedeffective controlover measure. incometaxasanemergency conditions arenotrequiredtorelateCommonwealth legislative powers. the High Court seemstohave accepted the HighCourt would have leftasignifi for theStatestoreceive.cant surplus However, theCommonwealth hasargued, and Commonwealth’. As theCommonwealth’s powers, andhenceitsexpenditureresponsibilities, were limited, this Commonwealth moneyfromitsConsolidatedRevenue only appropriate Fundfor ofthe ‘the purposes The effectiveness ofs94wasalsopredicatedupontherequirementin81Constitutionthat therefore withintheexclusive legislative power oftheCommonwealth. ofcasesfrom1960onwards, heldin1997thattheyamountedtoexcisesandwere in aseries theHighCourt with respecttotobacco, liquorandpetroleum. Although thevalidityofsuchfees wasupheldby theHighCourt One ofthefew effective fees sourcesofrevenue-raising lefttotheStateswasbusiness itimposed franchise spending responsibilities. suffiof theCommonwealth andthereductionincapacityofStatestoraise cient revenue tofundtheir in byFiscal federalism offi theprogressive hasbeenmarked concentration Australia nancial power inthehands 4.5 FISCAL FEDERALISM 1908 thatthisavoidance mechanismwasvalid. fundstoensurethattherewasneverrevenue any totrust ‘surplus’ tobedistributed. heldin The HighCourt monthly totheStates. This obligation wasswiftly avoided by allitssurplus theCommonwealth appropriating remedy thisimbalance, s94oftheConstitutionprovided for theCommonwealth’s revenue surplus tobepaid federation, theCommonwealth hadgreaterrevenue thantheStates, but fewer spendingresponsibilities. To power tolevyexcises–asignifi cant sourceoftaxrevenue atthetime. This meantthat, fromthebeginningof The fi oftheConstitutiongavenancial systemestablished theCommonwealth by (ins90)exclusive theframers grants totheStatesthataretiedwhatever conditionstheCommonwealthgrants seekstoimpose. widely thepower alsointerpreted ins96oftheConstitutionfor theCommonwealth tomake The HighCourt comes withinCommonwealth legislative power ornot. moneyfromtheConsolidatedRevenueappropriate Fundforitseesfi any purpose t, regardlessofwhetherit 142

144 (although the authority isequivocal), (althoughtheauthority thattheCommonwealth can 143 Itcontinues tobeexercised today. 147 This costtheStatesapproximately 145 Again,those 146 227/3/07 1:20:14 PM 7 / 3 / 0 7

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Report 7 0 / 3 / Governments 7 227/3/07 1:20:15 PM 1999, as enacted in 1999, Intergovernmental Agreement on the Intergovernmental Reform of Commonwealth–State Financial Relations, Territory State and Commonwealth, legislation. Working Together? Assessing Together? Working Specific Arrangements, Purpose Payment Victoria (June of to the Government p 20. 2006), 148 149 Allen Consulting Group, Group, Consulting 149 Allen 148 149 5 3

5 3 i . a f _ r e p a p _ t s i l a The product of these changes is a fi scal system characterised collection substantial imbalance in revenue by The product of these changes is a fi and the the Commonwealth between plus substantial imbalance and the States, the Commonwealth between a substantial however, There is, Vertical Fiscal Imbalance (VFI). which together are termed States in spending, termed Horizontaldegree of equalisation across the jurisdictions grants, in the distribution of Commonwealth instead, the GST has not diminished these characteristics; As explained in section 3.7, Fiscal Equalisation (HFE). it has accentuated them. This further reduced the capacity of the States to raise taxes. their own is paid to the States GST revenue main sources. funding from two Commonwealth receive The States now scal ‘horizontal fi Grants the Commonwealth aimed at producing Commission applied by according to a formula services States can provide intention is to ensure that the less-well-off The at an the jurisdictions. across equity’ c Purpose Payments is Specifi revenue The other main source of to the more populous States. equivalent level the Commonwealth In this way, the Commonwealth. are tied to conditions imposed by payments These (SPPs). of the total payments 42 per cent SPPs amounted to approximately In 2006, can dictate aspects of State policy. to the States. the Commonwealth made by The revenue from the GST was intended to substitute for the lost franchise fees as well as replace as replace the lost franchise as well to substitute for from the GST was intended fees The revenue the 1999 GST inter-governmental However, Assistance Grants to the States. Financial Commonwealth certainagreement required that and that others also be abolished taxes State in the future. be reviewed r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i35 35 4 0070305_caf_federalist_paper_fa.i36 36 7 0 3 150 Australian BureauofStatistics, Australian 150 152 Commonwealth Treasury, Thereareclassification problems 151 0 5 _ c a or private schools). or private directtolocalgovernment as grants expenditureisclassifiedfederal (such spending isincludedandhow ‘bypass’ Grants),Owners whethercapital Home are classified (suchasFirst depending uponhow ‘untied grants’ atthisprecisefigure in arriving Revenue, 2004–05 (Treasury, Canberra, 2006). Economic FiscalOutlook2006–07 f _ f e THE STATE OF d e r a l

i PLAY IN AUSTRALIAAUSTRALI s t _ p a p , 5506.0. e r _ f a . i Mid Year 3 6

Taxation

3 6 , receipts provided for theStatesand Territories. and projectedgrowth incompany taxreceipts for theCommonwealth asopposedtothegrowth oftheGST be abenefactorfor theStates. The benefi t totheCommonwealth isapparentinFigure9, whichshows past down, taxrates statutory whilestillgrowing itsown revenue receiptsfasterthantheStatesandclaimingto to deliver awindfallgainfor theCommonwealth inrecentyears. This hasallowed theCommonwealth toadjust Strong sustainedeconomicgrowth andCommonwealth taxhave controlover combined incomeandcorporate economy.now trillion-dollar own-taxes spendingisthemeasureof andown-purpose VFI, whichrepresentssome5percentof Australia’s government taxes themselves, 40percentofpublic spendingin but undertake Australia. The difference between Commonwealth. Another way ofexpressingthisistosay thattheStatesand Territories 19percentof raise to Statesand Territories. Ofthis, $1,813isGSTand$1,247are SPPs. The remaining$8,275isretainedby the 11 percentagepointsbeingSPPs. of itscollectedtaxes totheStatesand Territories, beingGSTand with16percentagepointsofthistransfer directly collects82percentoftaxes in Australia. 27percentagepoints The Commonwealth thentransfers The outcomein2005, thelastyear for whichoffi cial ABS datahasbeenpublished, isthattheCommonwealth FIGURE 8> by 41percentoverrisen theperiod, asopposedtoa7percentincreasefor theStates. calculation ofStateandCommonwealth taxationonapercapitabasis. Commonwealth taxationpercapitahas The positionover thelastfi issetout inFigure8,ve years whichshows the BureauofStatistics’Australian years whiletheGSThasgrown byyears 48 percent. $ Taxation Per Capita 10,000 12,000 2,000 4,000 6,000 8,000 0 2,305 TAXATION PERCAPITA: COMMONWEALTH AND STATES, 2000–05 1999–00 State Average 8 ,043 2,025 000 010 020 030 2004–05 2003–04 2002–03 2001–02 2000–01 ,0 9,106 9,106 151 So, oftheCommonwealth taxtake of$11,336percapita, $3,060goes Commonwealth 2,053 152 Total company taxes have grown by 109percentover fi ve 2,207 9, 8 60 2,404 10,4 8 6 2,462 150 11,336 227/3/07 1:20:15 PM 7 / 3 / 0 7

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0 / 3 Report / , various: IMF, IMF, various: , 7 227/3/07 1:20:16 PM Economic Dynamics Australia’s position would look position would Australia’s Revenue Statistics Revenue . Tariffs and Economic Growth Tariffs (Macmillan, London, 1970), Chapter 18. 1970), London, (Macmillan, on Government Services 2007 Canberra, (Productivity Commission, January 2007) and earlier years. to emerge be slow can continue but N across several decades or more. Ferry, 1996). Canberra, (EPAC, Government Finance Statistics Yearbook, Government Finance Statistics various worse not included as a were if GST as it is here in data provided State tax, the Commonwealth to the OECD by not endorsed but the by Government, Australian Bureau of Statistics. 154 Productivity Commission, Commission, 154 Productivity 155 of structural The benefits reform can 156 OECD, 153 W Baumol, Baumol, 153 W When this pressure on State unit costs is When this pressure on State unit costs 153 2004–05 2005–06 GST Payments to States GST Payments 2002–03 including co-operative reforms undertaken by the States, recent Chinese economic growth, recent Chinese economic growth, including co-operative reforms undertaken the States, by Australia had the lowest share of State and local own-purpose spending, the lowest share the lowest share of State and local own-purposeAustralia spending, had the lowest 155 156 7 3

Company Tax Company 7 COMPANY TAX AND GST GROWTH, AUSTRALIA, 2002–07 ($M) 3 i . 2001–02 2003–04 2006–07 a f _ r

e p a 154 p

_ 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 t $ Million $ s i l a combined with growth in the scale of activity required in these service areas, the cost pressure on States and the cost pressure on in the scale of activity required in these servicecombined with growth areas, acute-care at 4 per cent per annum, been growing prison populations have For example: is dramatic. Territories recent over cations at 15 per cent per annum and children in care notifi hospital activity at 8 per cent per annum years. of State and local own-revenue, and the largest relative gap between these two. Vertical fi scal imbalance is Vertical fi these two. and the largest between gap relative of State and local own-revenue, and own-purpose each spending for own-revenue the columns for between in the height difference shown scal column) further the own-revenue height of the columns (especially The indicates the degree of fi country. all else being equal. The higher the column the more decentralised the system, decentralisation. A problem with this situation is that the particular with this mean A problem Territories service delivery functions of the States and beyond basic economic reasons to rise for that their costs are likely faster than those of the Commonwealth issues of good management. which involve in serviceThis is because it is harder to enhance productivity the States, by functions provided such as tax collection and social service functions, than it is in Commonwealth direct personal delivery, rather than labour intensive. which are IT-intensive disbursement, FIGURE 9 > and Reserve and good judgement in interest rate Bank independence determination. Australia federation is the most extreme of any its extent in However, in a federation. VFI is not unusual Some comparable major federations which for ve VFI across the 1990s in fi Figure 10 shows in the industrial world. data are available. Therefore, the States need a greater share of revenue over time to support their functions, but it is the it but time to support over the States need a greater share of revenue their functions, Therefore, debt retirement and tax rate – allowing cuts, share of GDP that has been growing revenue Commonwealth’s claims This allows while still supporting and new spending initiatives. expenditure obligations Commonwealth to the legacy of earlier much bold although these claims owe of good economic management to be made, economic reform, r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i37 37 4 0070305_caf_federalist_paper_fa.i38 38 7 0 3 157 N Warren, 158 N Warren, 0 5 _ c a per cent. donottotalto100 these countries and Canada, sothecomponentsfor taxes’ cannotbeclassified for Austria (Final Report, May 2006), p67. ‘Other Fiscal Intergovernmental Arrangements (Final Report, May 2006), p65. Fiscal Intergovernmental Arrangements f _ f e THE STATE OF d e r a l i Benchmarking Australia’sBenchmarking Benchmarking Australia’sBenchmarking PLAY IN AUSTRALIAAUSTRALI s t _ p a p e r _ f a . i 3 8

3 8 detrimental toeconomicactivitythanare broader-baseddetrimental taxstructures. andmorediverse FIGURE 11> mobility, activityandfl exibility andareclassifi ed by economistsasrelatively ineffi cient taxes). taxesrespect, (whichcanbeseenastaxes andtransaction on andhasanespecially highrelianceuponproperty countries.base thanotherfederal Figure11indicateshow elsewhereinthis isoutofstepwithpractice Australia have symptomsofcentralisation emerged.Particular OneisStaterelianceuponanarrower own-source tax nations–anditalsohappenstohave federal the majorcomparable thehighestlevel offi scal equalisation. Essentially, fi hasthegreatestamountofvertical Australia of federation scal imbalanceandisthemostcentralised FIGURE 10> Australian States do not have access. Figure 12 shows the situation in relation to income taxes. income to relation in situation 12 the shows Figure access. have not do States Australian which to taxes the at looking in clearly more even seen is This society. of parts other than involvement government more much experience areas certain means –this activities afew on heavily concentrated and restricted more are Australia in government local and State to available taxes of types actual the that but 10, Figure in seen as own-taxes, of level asmaller have States Australian the do only not that is result The the only one of the major federations where States do not have access to income taxes for own-revenue. for taxes income to access have not do States where federations major the of one only the Percentage of Revenue from Taxes Percentage of Total Public Outlays or Revenue 100 10 20 30 40 50 60 70 10 20 30 40 50 60 70 80 90 0 0 utai Austria Australia State andLocalShareof Total Public Spending Efficient STATE TAX BASES AND EFFICIENCY: SELECTEDFEDERATIONS, 2004 VERTICAL IMBALANCE: FISCAL SELECTEDFEDERATIONS, 1990s Australia 54.2 39.7 45. 8 17.2 Less Efficient/Inefficient 8 11.5 2.9 5 aaaGraySizradUSA Switzerland Germany Canada 8 .7 44.1 aaaGraySizradUSA Switzerland Germany Canada 30. 62.9 8 66.4 29.3 State andLocalOwn-Shareof Total Public Revenue 11.3 88 .7 66.3 40.4 76.7 23.3 54.2 27. 72.2 31.7 8 157 They aremore 158 Australia is is Australia 227/3/07 1:20:16 PM 7 / 3 / 0 7

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Figure 13 > nations. Australia’s levels Figure 12 > Australia of – ASSESSING OVERALL 5 ECONOMIC BENEFIT AND COST

A key task in any discussion about federalism is to assess how Australia’s federal system works overall for the people of Australia. Does its existence and distinctive operation benefi t Australians or not?

While it is helpful to point to advantages and problems of federalism in general descriptive terms, it is important also to seek to judge the total benefi ts and costs of those considerations. It is necessary to understand how infl uences, such as innovation through federalism, balance out against other infl uences, such as duplication from multiple jurisdictions.

To be convincing, any attempt at such assessment should look at the following:

■ all costs and benefi ts, and not just a partial cost analysis or anecdotal benefi t lists;

■ a longer-term perspective so that conclusions do not just refl ect variable current circumstances;

■ direct estimation based on relationships observed and measured in the real world rather than simulations or hypotheticals; and

■ international insights, not just the Australian experience, which is necessarily restricted in providing information about impacts and options outside that experience.

Analysis embodying all of these features was undertaken for this report. Technical details are provided in Appendix 1.

Growth in income per capita was adopted in this analysis as the overall measure of performance. It is the standard measure of material wellbeing that is widely used in international comparisons and is readily available from offi cial statistical compilations. Movements in GDP per capita over time will refl ect the outcome of all economically measured benefi ts and costs of federalism. If the effect of federalism is detrimental, then – all else being equal – unitary countries should do better by this measure over time.

For this report, the entire period since 1950 is covered. This provides a full half-century of experience to examine the differences in income growth performance between unitary states and federal states for the 21 OECD countries for which such long-term data reliably exists. These performance data allow a direct estimation to be made of the economic impact of the type of political system chosen.

When the impact of the simple fact of federation on average income growth is estimated, statistical regression analysis indicates that for the last half-century federations grew on average by 15.1 per cent more than unitary states, after controlling for different GDP starting points. However, this net economic benefi t of federation can be said to be exaggerated because this classifi cation of countries simply differentiates federal and unitary states. In fact, while federations on average are more decentralised than unitary states, some unitary countries have substantial delegation to regional and local authorities (for example Italy), and some federations have substantial centralisation of power despite formal state legislative autonomy (for example Austria and Australia).

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1 4 i . a f _ r e p a p _ t s i l a To capture the nuances of fi scal decentralisation alternative estimates may be provided of the benefi ts of such of the benefi scal decentralisation be provided alternative estimates may of fi capture the nuances To this is the share of own-tax for The measure available decentralisation countries. individual for and overall subtle for This measure allows tax revenue. public in total regional and local governments state, for revenue it to compare can use measure we Because it is a continuous practical overlaps across the federal divide. the particular and compared to unitary states, experienced federations difference overall, by both the average position of an individual federal countryAustralia. such as scal advantage of federal countries calculate that the average of fi we from their levels Using this measure, es federations contributing therefore with the decentralisation typifi that decentralisation is 7.8 per cent, the best performing unitary states (the Interestingly, growth. to per capita GDP cantly and signifi positively scal decentralisation. a high degree of fi ed by countries) are also typifi Scandinavian A third and conceptually superior approach to estimating the impact of federal arrangements is to useeach of these two measures jointly, that is, the fact of federationscal decentralisation, and the degree of fi allowing for their interplay. This allows for both political decentralisationnancial decentralisation. and fi This analysis shows that Australia has gained a 10.46 pert from cent being average a federation. benefi It also achievest from a 5.63scal its per decentralisation cent precise benefi level of fi relativescal to the average fi decentralisation of unitary states. The sum of these two effects when estimated together per cent)less (16 is than the sum of the two effects when estimated separatelyecting (23 per the cent), partial refl overlap between them as allowed for in joint estimation. Of the two effects,ects the the former institutional refl autonomy of sub-national governments,scal positionects and theon own-tax latter the fi refl revenue as a proportion revenue. public overall of Australia through the federal structure in itself is a sum of $4,507 per capita by c advantage achieved The specifi ects Australians and refl t for and benefi This is a major achievement household. 2006 – or $11,402 per average fathers. founding Australians of the nation’s today legacy to the continuing it is importantAustralian very federalism is now centralised to also recognise that much because of its However, from the form of federationThis is different in the earliest that applied period of scal position (see section 4.5). fi federalism the dividend could Australia today, the limited actual degree of decentralisation Given in federation. scal decentralisation. to greater fi be larger moving still by r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i41 41 5 ASSESSING OVERALL AND COST ECONOMIC BENEFIT

At present our level of fi scal decentralisation does deliver a benefi t of $2,426 per capita, relative to the average fi scal stance of unitary states. But were Australia to reform its federal fi scal decentralisation arrangements even to only the average degree of such decentralisation for all OECD federations, Australian average incomes would be likely to increase by another $2,925 per capita annually. The increase would be $4,188 compared to the present if we moved to the best federal practice as defi ned by Canada, Germany, and Switzerland. Figure 14 summarises these calculations.

The fi gure affi rms that Australia benefi ts by a little over 10 per cent by being a federation. This is the economic pay-off from political decentralisation. However, the fi scal position within our federation could be improved further and this and the associated practices and behaviours could provide a future 6.75–9.72 per cent further benefi t over the present. The 7 per cent improvement comes from reaching average OECD federal practice and the 10 per cent future improvement would come from matching OECD best-three federal practice. This would be the pay-off from better fi scal decentralisation.

Naturally, average income growth does not capture all dimensions of wellbeing. For example, it does not take into account wider social or environmental outcomes. But on the social front at least, Castles’160 earlier work found either neutral or superior results for federation.

FIGURE 14 > AUSTRALIAN GDP PER CAPITA UNDER ALTERNATIVE SYSTEMS

47,279 50,000 43,091 45,000

$ Australian 38,584 40,000

35,000

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0 160 F Castles, ‘Decentralisation and Without Federation With Present Federation Best Practice Decentralisation the Post-War Political Economy’, European Journal of Political Research 35(5), 1999. Castles has also found a superior performance of federations on inflation – presumably reflecting local policies reducing natural rates of unemployment which allows the monetary authority to run lower inflation outcomes (see Figure 4 above).

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3 4 i . a f _ r e p a p _ t s i l a r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i43 43 OPTIONS FOR 6 THE FUTURE

Although many of the arguments against federalism are misconceived, others point to real defi ciencies in the operation of our federal system. If we are dissatisfi ed with the operation of federalism in Australia, what are the options?

6.1 ABOLISH THE STATES AND ESTABLISH REGIONAL GOVERNMENT Some have suggested that the States no longer have a worthwhile role to fulfi l and that substantial economic savings could be made by abolishing them.161 If the States were abolished, some form of decentralisation of power and functions to regions would still be needed.162 The Business Council of Australia has noted that with its dispersed population and large geographic distances, ‘some form of regional government seems inevitable in Australia, whether it is through semi-autonomous state governments or through Commonwealth controlled regional governments’.163 As noted above, unitary countries such as the United Kingdom, Italy and France have 161 R Hall, Abolish the States! (Pan Macmillan Australia, Sydney, 1998), recently taken substantial steps to devolve both functions and fi scal powers to sub-national units. p 24; S Bennett, ‘The politics of the 164 165 166 Australian federal system’, Research The number of regions suggested for Australia range from 25, to 30–50, to 51 . Instead of six States, Brief (Cth Dept of the Parliamentary there would be multiple regions seeking representation, power and funding, making co-operation more diffi cult Library, 1 December 2006), p 27; J Soorley, ‘Do we need a federal and potentially exacerbating the problems already identifi ed with the federal system. For example, regional system? The case for abolishing State governments would still need funding, but it is unlikely that setting up 30 to 50 different tax systems would governments’ in W Hudson and A J Brown (eds), Restructuring Australia be effi cient or acceptable, so the amount of vertical fi scal imbalance would be likely to increase, as would the (Federation Press, Sydney, 2004), 38 resulting problems of blurred responsibility, cost-shifting and buck-passing. Even if the regions had their own tax and 40–1; and J Pearlman, ‘Vote 1 – abolish Parliament: Democrat push systems, only those encompassing large cities would be likely to raise adequate amounts, with the rest relying to shed tier’, The Sydney Morning upon even greater levels of horizontal fi scal equalisation to survive. Herald, 9 March 2007, p 6.

162 A J Brown, ‘Federalism in Australia If State and local governments were to be abolished in favour of a two-tiered system of central and regional – new life or old tricks?’, ABC Online governments, the result would be a shift in power and control further away from the people. For example, the News Opinion, 9 February 2007. people of Tamworth and Narrabri could fi nd that decisions about their local libraries, parks and sporting facilities 163 Business Council of Australia, Reshaping Australia’s Federation would be made by a regional body in Armidale, rather than by people who are part of their local community. – A New Contract for Federal–State Decisions about schools and hospitals would be made by the central government in Canberra, as it would not Relations (2006), p 17. be feasible to run 30 to 50 education or health systems. 164 L Tanner, Open Australia (Pluto Press, 1999), p 210. The benefi ts of federalism, such as competition and innovation, would be harder to achieve because of the

165 R Hall, Abolish the States! (Pan smaller population bases of most regions. Transaction costs would be higher in servicing a small population Macmillan Australia, Sydney, 1998), and it is unlikely that there would be a bureaucracy of suffi cient size and depth to produce innovative policy. p 36; and J Soorley, ‘Do we need a federal system? The case for abolishing The ability of a region to infl uence the Commonwealth Government, or obtain representation in the Cabinet or in State governments’ in W Hudson and A J Brown (eds), Restructuring Australia any national institution, would be limited.167 The composition of the Senate would be skewed, with presumably no (Federation Press, Sydney, 2004), more than one or two Senators being elected for each region, effectively removing the representation of small parties. 38 at 45.

166 C Hurford, ‘A republican federation of regions: Re-forming a wastefully governed Australia’ in W Hudson and A J Brown, Restructuring Australia (Federation Press, Sydney, 2004), 47 at 50.

167 C Saunders, ‘The constitutional framework for a regional Australia’ in W Hudson and A J Brown (eds), Restructuring Australia (Federation Press, Sydney, 2004), 63 at 75–6.

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22 7 0 / 3 / 7 227/3/07 1:20:21 PM Report to the Economic and (AGPS, Canberra, Canberra, (AGPS, Restructuring Australia 4 July 2006, p 12. 2006, 4 July Public Administration Administration Public (CEDA, February p 32. 2005), (CEDA, Australian Journal of Politics and JournalAustralian of Politics Economic and Political Review Review Economic and Political The Australian Financial Review, Financial Review, Australian The The Australian Financial Review, Financial Review, Australian The The Australian, The Australian, 96, at 201; K Wiltshire, Wiltshire, K at 201; 96, 8, at 11. 8, (2004) 50(1) History federalism’, federalism’, p 1. June 2006, Commonwealth Government p 52. June 1996), Federalism’, Address to the Menzies Research Federalism’, and p 6; April 2005, 11 Melbourne, Centre, Audit, National Commission of Relations?’ (April 2006) Relations?’ Today (CEDA, February p 32. 2005), (CEDA, Hudson and A J Brown, A J Brown, Hudson and duplicity’, goodbye’, p 59. 206, November (Federation Press, Sydney, 2004), 183 at 192. 183 2004), Sydney, (Federation Press, Political Review Review Political 172 Distance and Devolution’ ‘Federalism: Wilkins, R 171 failure of ‘Costello berates states over M Davis, 170 Australian ‘Reflections on J Howard, 169 ‘A New Era in Commonwealth–State Wilkins, R 173 W in Federalism’ ‘Responsible Abbott, T 174 cutting federalism by ‘Improve M Nahan, 175 ‘Act together or kiss the federation M Chaney, 168 K Wiltshire, Wiltshire, 168 K 174

175 This policy is aimed not at the abolition of the States, but rather but the This policy is aimed not at the abolition of the States,

172 173

They have realised that this would involve huge expenditure and political risk, and and huge expenditure and political risk, involve would realised that this They have 168 Instead, the Commonwealth appears Commonwealth the States to be seeking policy control so that Instead, 169 170 5 The Commonwealth may also choose to fund competing service providers directly, effectively effectively also choose to fund competing service may The Commonwealth providers directly, 4

171 5 4 i . a f _ r e p a p _ t s i l a This path has been criticised on the grounds that it loses the benefi ts of federalism while exacerbating its This path has been criticised on the grounds that it loses the benefi Affairs has Nahan from the Institute of Public Mike creating the worst worlds. of all possible weaknesses, less ‘even them make would dependent upon the Commonwealth pointed out that making the States entirely He has criticised the centralist thrust, and lack of accountability. resulting in greater blame-shifting responsible’, is in the national interest doesn’t mean it should be run‘just because something from Canberra’.arguing that marginalising the States and Territories. marginalising the States and As Wilkins has pointed out, successive Commonwealth Governments have not shown any great desire to to great desire any not shown have Governments Commonwealth successive pointed out, Wilkins has As service over take delivery. Michael Chaney, the President of the Business Council of Australia, has also been critical of allowing the ‘gradual, ‘gradual, has also been critical the of allowing Australia, the President of the Business Council of Michael Chaney, pointed to the He has concentratedarbitrary in Canberra’. with power of the federal system to continue, decay increased duplication and responsibilities, government confusion over ‘growing consequences of this choice being Chaney governments’. between nger-pointing and fi and endless buck-passing a sluggish reform program, overlap, in importance decline the States would argued to reform and that unless action was taken the federal system, from a federal system. ow ts that fl Australia lose the benefi would 6.2 DRIFT THE CENTRALIST CONTINUE control of various is to assume The current Government aspects of State of the Commonwealth approach and reduce States to the powers, of its legislative either through tied grants exercise or the expansive policy, function of service provision. It is unlikely that any formal move to abolish the States would succeed. It would face an even higher constitutional face an even It would succeed. to abolish the States would formalmove that any It is unlikely all States in the representation of affect hurdle than ordinary would because such a change reform, constitutional Parliament triggerthe Commonwealth and therefore paragraph in the penultimate the requirement of s 128 of the majority. a majority as an overall by in each individual State as well be approved Constitution that the referendum ‘one There is also an argument the dissolution of the that formal could not achieve constitutional amendment would Constitution and that a constitutional revolution the by established Federalindissoluble Commonwealth’ Neither outcome is likely. a new one. establish be required to repudiate the Constitution and eventual ‘withering away of the States’. ‘withering away eventual it is doubtful that the Commonwealth would be able to manage many services, such as hospitals, any more more any such as hospitals, services, to manage many be able would it is doubtful that the Commonwealth than the States. ciently effi and Territories provide services bidding. provide at the Commonwealth’s Territories and division branches like ‘more the States becoming has envisaged Costello, Peter Treasurer, The Commonwealth ce’. of head offi r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i45 45 6 0070305_caf_federalist_paper_fa.i46 46 7 0 3 183 OECD, COAG Communiqué, 3June2005. 182 8 SBurrell, ‘It’s timetorethinkthe 181 KRudd, ‘The Casefor Cooperative 180 RCarr, ‘Productivity Growth andMicro- 179 JHewson, federalism?’‘What price 178 177 Commonwealth, JHoward, ‘Reflections on Australian 176 0 5 _ c a Sydney Morning Herald,Sydney Morning much government, solittledone’, Australian, a country’,‘Expensive way torun 15 November 2006, p13; G Williams, federalism’, and itistimetoreshape Australian 2006, p27; A Lynch, ‘The dieiscast Herald,Sydney Morning 34; SEvans, intatters’,‘Federation for Federal–State Relations Australia’s Federation – A New Contract Business Councilof Australia, Relations’, MediaRelease, 1June2005; “Hilmer-Style” State intoFederal Inquiry Group,Industry ‘Ai Groupcalls for Canberra, 2006)p25at48; Australian Federal System Commission, System’,in aFederal inProductivity 2006), p15; JPincus, ‘Productive Reform Morning Herald,Morning economics offederation’, Chapter, 15July 2005, p27. Dunstan Foundation, Queensland Federalism’, Address totheDon 2004, pp5–6. 27 February economic Reform’, SpeechtoCEDA, 2005, p86. The Australian FinancialReview, 10 May 2005, p4–18. 2005, p1. Research Centre, Melbourne, 11 April Federalism’, Address totheMenzies Outlook 2005–06 f _ f e OPTIONSOPTIO FOR d e Economic Surveys: Australia, r a 8 December2006, and ‘So l The Sydney Morning Herald,The SydneyMorning i THE FUTUREFU s Productive Reform in a ina Productive Reform t _ (Roundtable Proceedings, p 27 February 2007. 27 February a Budget Strategy and , BudgetPaper No1 p e r _ 13 March2007. 18 November f a (2006), p The Sydney The Sydney . i 4 6 Reshaping Reshaping

4 March 4 March

4 The The The The The The 6 (July (July , achieved and whether the harmonisation ofpolicyisneededtoincreaseeffiachieved andwhethertheharmonisation ciency. signifi areinvolved, intootherjurisdictions cant spillovers whethersignifi cant economiesofscalecouldbe are requiredasameasureofequity, includewhether factors support. Otherimportant suchassocialsecurity the Statesincludewhetheritisamatterofnationalinterest, suchasdefence, orwhethernationalstandards unless thisisnotpracticable. thatwillinfl Factors uence the allocationofamattertoCommonwealth or by theStatesand Under thisprinciple, functions shouldbeundertaken Territories ortheirlocalgovernments, The most commonly used principle for today makingsuch anassessmentinfederations The mostcommonly issubsidiarity. usedprinciple technologyandcommunication,information economies. ofmodern aswell asglobalisationandtheoperation reconsidered today. Itneedstotake intoaccountchangesintheworld, suchasnewdevelopments in The allocationoflegislative power intheConstitution, inthe1890s, whichwasundertaken needsto be andavoids theproblems ofcost-shiftingandbuck-passing.services entirety toonelevel ofgovernment, thisenhancesresponsibility, tothosewhouseparticular provides clarity system.of rolesinourfederal areaofpolicy,Where itispossible toisolateaparticular andallocateitinits There isagrowing consensusacrosspolitics, business andthecommunity thatthereneedstobeareallocation Thereallocation ofroles between federal andStategovernments A the betterfor allthe ‘responsibility ofallus…istomake systemwork thefederal people’. Australian Minister,As thePrime JohnHoward, hasstated, ofthe nationwillremain, structure thefederal Australian and MAKEFEDERALISM WORK BETTER 6.3 chapter 5. Someoptionstoachieve thatoutcomeareconsideredbelow. the disadvantages. were infederalism The potentialeconomicgainsfrommoving presentedin tobestpractice toremove itsoperation orreduce need tomake whilereforming themostofadvantagesfederalism respected, but notexceeded. ofpowers. government functionsandshould guidethedistribution for central core rationale They shouldbe ■ ■ ■ ■ ■ ■ ■ Consensus ontheneedtoreallocate roles Business Councilof andacademicshaveAustralia allcalledfor suchareallocation. The OECD, theProductivityCommission(inareaofhealth), Group, the Industry Australian the to whom’ andestablish ‘clear responsibilities’ for theStatesandCommonwealth. Nick Greinerhascalledfor a compact’ out reviewofthe…federal ‘serious tosort ‘who doeswhat restored. universities, totheCommonwealth, whilehaving undilutedStateresponsibilityfor other areas Commonwealth, includingthepossibilityofStateshandingsomeresponsibilities, suchas hascalledfor there-allocationofspendingresponsibilitiesStates andthe Bob Carr reduce duplicationandgapsinservices. COAG rolesandresponsibilitiesinthehealth systemand recognisedin2005theneedtoclarify States is needed’. ‘desperately oftherolesandresponsibilitiesCommonwealthKevin Ruddhasstatedthatreform and and responsibilitiesinordertoimprove productivity. haveCommonwealth BudgetPapers calledfor theclarifi cation ofCommonwealth andStateroles responsibilities, givingtotalcontrolof hospitalsandschoolstotheStates. allocated–for example,are clearly theCommonwealth mighttake theindustrial-relations that John Hewsonhasargued needsanew desperately ‘Australia “deal”, whereresponsibilities 179

180

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178 185

arethe These factors 183 181 184 176

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8, at 11. 8, (Hale & Report Report 7 0 Reshaping Public / 96 at 99. Reshaping 3 / (AGPS, (AGPS, Australian Australian (2006), p (2006), 7 227/3/07 1:20:22 PM (2006), p 23 (2006), Restructuring Report to the 8 at 10. Benchmarking Australia’s Institutions on the Edge? Benchmarking Australia’s Benchmarking Australia’s Benchmarking Australia’s Benchmarking Australia’s (Federation Press, Sydney, 2004), 2004), Sydney, (Federation Press, Public Administration Today Today Administration Public System’, in Productivity Commission, in Productivity Commission, System’, SystemProductive Reform in a Federal Canberra, Proceedings, (Roundtable Wilkins, and R at 28 and 44; p 25, 2006), ‘A New Era in Commonwealth- (April 2006) State Relations?’ Today Administration Australia’s Federation – A New Contract Contract A New – Federation Australia’s Relations Federal–State for Warren, N 23; Arrangements Intergovernmental Fiscal pp 32-3; 2006), May (Final Report, Audit, National Commission of to the Commonwealth Government p 45. June 1996), Canberra, (AGPS, Arrangements Intergovernmental Fiscal pp xxx–i. 2006), May (Final Report, (April Relations?’ Commonwealth–State 2006) to the Commonwealth Government pp 58–9. June 1996), Canberra, (AGPS, and Wanna J in M Keating, federalism?’ P Weller (eds), 141. pp 134 and 2000), (Allen & Unwin, in S Prasser and G Starr, Federalism’ Mandate The Howard & Change – 85 at 93. 1997), Iremonger, (2004) 50(1) Devolution’ and HistoryJournal of Politics Australia’s Federation – A New ContractA New – Federation Australia’s Relations Federal–State for and Appendix 2 Access by Economics, Warren, N p 14; ArrangementsIntergovernmental Fiscal National p xxix; 2006), (Final Report, May Audit, Commission of Commonwealth Government T and pp 44–5; June 1996), Canberra, W in Federalism’ ‘Responsible Abbott, A J Brown, Hudson and Australia 183 at 185. 192 Reform‘Productive in a Federal J Pincus, 186 N Warren, Warren, 186 N 187 ‘A New Era in Wilkins, R Audit, of Commission 188 National 189 ‘Remaking Wanna, M Keating and J 190 Australian‘The future of B Galligan, 191 Distance and ‘Federalism: Wilkins, R 184 Business Council of Australia, Australia, of Council 184 Business 185 Australia, Business Council of 187 Better mechanisms 191 There will always be a need for areas of be a need for There will always 189 While much workWhile much been done in sorting has already out 186

The requirements in many SPPs that States match funding and The requirements in many 188

194 193

195

192 This means that a second approach needs to be taken to reallocation – not in relation to approach needs to be taken This means that a second 190 7 4

7 4 i . a f _ r e p a p _ t s i l a the roles and responsibilities of the States and the Commonwealth in the areas of utility servicesthe Commonwealth the roles and responsibilities of the States and and economic which are most in need of assessment. such as health and education, is human services, it regulation, shared responsibility. responsibilities, but in relation to allocating roles in managing those shared responsibilities. but responsibilities, Such an approach could be achieved through formal constitutional reform, although this would be unnecessary. be unnecessary. although this would through formal constitutional reform, Such an approach could be achieved a reallocation of powers greater symbolic value to and responsibilities, give While constitutional reform would did not already Where the Commonwealth measures. other the same practical by outcome could be achieved the States under s 51(xxxvii) of the by it could be referred to the Commonwealth formal power, legislative have eld and vacating the fi the Commonwealth and responsibility could be enhanced by State power Constitution. scal capacity to meet their responsibilities. the fi ensuringthe States have that divisions. ‘clean lines’ to are susceptible Not all areas of government for co-operation are also needed to avoid ‘border issues’, to ensure the coordination of government services ensure the coordination of government to ‘border issues’, co-operationfor to avoid are also needed cost-shifting. and to avoid maintain existing efforts mean that up to 33 per cent of State budget outlays can be effectively controlled by maintain existing efforts controlled by can be effectively outlays mean that up to 33 per cent of State budget exibility. fl reducing State budget SPPs, C The reform of federal–State financial relations excessive buck-passing, Most complaints about the operation of the federal system concerning duplication, c lack of accountability and lack of coordination can be traced back to the use of specifi administrative burdens, SPPs are grants made to the States subject to Government. the Commonwealth purpose (SPPs) by payments to control aspects of State policy. the Commonwealth which allow strict conditions on their use, nancial In the year 2006–7 there are fi at least 90 distinct SPP programs providing $28 billion to the States 42 per cent of total payments SPPs account for and local governments. schools or to non-government directly to the States. the Commonwealth made by COAG has proved an important mechanism for achieving co-operative reforms, but its effectiveness has waxed has waxed an important its effectiveness but has proved achieving co-operative reforms, mechanism for COAG and waned depending upon personalities and political events. to ensure its continuing Australia has recommended the institutionalisation of COAG The Business Council of held at least meetings, The Council has suggested regular COAG uences. regardless of these infl effectiveness the proper consideration time for and scheduled to run to give of a full rangetwice a year a full day for of policy as a creature of the It has also recommended that efforts the perception of COAG be made to remove issues. hosting and agendas of meetings are determined jointly, chairing, ensuring by that the timing, Commonwealth alone.rather the Commonwealth than by B co-operation inter-governmental of mechanisms for The improvement There are two ways of dealing with a reallocation of functions. The fi rst is the higher level ‘clean lines’ ‘clean lines’ rst is the higher level The fi of dealing with a reallocation of functions. ways There are two For example, ned subjects of jurisdiction of government. level are allocated to each which defi in approach, for Audit suggested that States be responsible Commission of National Government’s the Commonwealth primary funding of secondarypreschool, with Commonwealth and secondary education being education, vocational full responsibility for take The Commission suggested that the Commonwealth through untied grants. education and training and higher education. The common use of the principleThe common use of the subsidiarity of federations in means that the allocation of expenditure consistent in federations across the world. is relatively of government levels different responsibilities between state governments and social protection; central has noted that tend to deal with defence Warren governments to be amenities tend housing and community affairs, Economic order. and public tend to deal with education primary protection tend to be the Health and environmental responsibility of one level shared responsibilities. the overlap of federal expenditure on and State In contrast, rathera shared responsibility. than or the other, Australia high. is unusually education and health in r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i47 47 6 0070305_caf_federalist_paper_fa.i48 48 7 0 3 9 BusinessCouncilof Australia, 193 195 N Warren, AllenConsultingGroup, 194 0 Formoredetailedcriticism, see: Access 201 AllenConsultingGroup, 200 COAG 1994. Communiqué, 25February 199 RGarnaut, DiscussantComments, 198 AMorris, ‘Australia: Equity, Imbalance 197 AccessEconomics, ‘The Costof 196 0 5 _ c a 2006), pp6and20. to theGovernment of (June Victoria Purpose Payment Arrangements, Specific Working Together?Assessing 56. Independent Studies, Sydney, 2001), p of aFederal Constitution See also: GdeQ Walker, for Federal–State Relations Australia’s Federation – A New Contract 2006) pp48–9. to theGovernment of Victoria, (June Purpose Payment Arrangements, Specific Working Together?Assessing Allen ConsultingGroup, Relations – A New Contract for Federal–State Federation Reshaping Australia’s in BusinessCouncilof Australia, Economics, ‘The CostofFederalism’ 2006), p6. to theGovernment of (June Victoria Purpose Payment Arrangements, Specific Working Together?Assessing 2006), 85at93. (Roundtable Proceedings, Canberra, inaFederalProductive Reform System in ProductivityCommission, Federations, 2006), p4. Comparative Perspectives on thePractice ofFiscalFederalism: and A OstienKaros (eds), and Egalitarianism’ inRBlindenbacher Appendix 2, p18. Federal–State Relations Federation – A New Contract for of Australia, Federalism’ inBusinessCouncil (AGPS, Canberra, June1996), p43. to theCommonwealthGovernment National Commissionof Audit, (Final Report, May 2006), pxxxix; and Fiscal Intergovernmental Arrangements f _ f e OPTIONSOPTIO FOR d e r (2006), Appendix 2, p33; and a l i

Benchmarking Australia’sBenchmarking THE FUTUREFU s Reshaping Australia’s t _ p a p e r _ (2006), f (2006), p35. a (Centre for Ten Advantages Governments Governments Governments Governments Governments Governments (Forum of (Forum . i Dialogues 4 Reshaping Reshaping 8

Report Report Report Report Report Report Report 4 8 to provide incentives for improving thequality oftraining. outcomes,which imposeshighly requirementsnotrelatedtotraining prescriptive rewardsineffi ciency, andfails ■ ■ ■ ■ ■ shouldapply tofundingarrangements: principles The NationalCommissionof Audit advisedtheCommonwealth Government in1996thatthefollowing There aremany examplesoffailingsinSPPprograms. These includethe Options to improve the operation of SPPs include reforming their operation sothatthey: theiroperation Options toimprove ofSPPs includereforming theoperation above, andtheneedfor abetterallocationofroleswhereresponsibilitiesareshared. and avoiding cost-shifting. areclosely relatedtotheallocationofresponsibilities,These principles asdiscussed Such anapproachhasthebenefi ts ofallowing fl exibility, costs, reducingadministrative enhancingcoordination funding conditional on matters unrelatedtoeducation. funding conditionalonmatters tothefundingreceived,out ofproportion thanoutcomes, isfocused oninputsandprocessesrather andmakes Quadrennial Funding Agreement isinfl exible, andburdensome requirements imposesprescriptive administrative freedom in designing program delivery.freedom indesigningprogram specifying policyobjectives andestablishing andgive improved theStatesgreater accountabilityframeworks Where specifi payments (SPPs)areconsiderednecessary,c purpose the Commonwealth shouldfocus on States someallocative discretionwithinfundingpools. tospecifiextend toallrelatedprograms, than beingearmarked rather c programs. Again, thisallows the wherethereisjointCommonwealth/State responsibility,For programs fundingshouldgotopoolsthat grants, allowing theStatesallocative discretionbetween specifi c programs. entirely theresponsibilityofStates,For programs purpose ofgeneral fundingshouldbeintheform compartmentalising funding into narrow subjects; fundingintonarrow compartmentalising flpermit exibility bythanoninputs orprocesses, focussing onthoseoutcomesrather andby not theachievement ofoutcomesagreedby theStatesandCommonwealth; support ■ ■ ■ ■ ■ Criticisms oftheuseSPPs other ineffi ciencies’. intoStatefunctionsandresponsibilities,can becostly intrusions resultinginoverlap, duplicationand on how theStatesexercise even their(constitutionally) exclusive functions. As aresult, tiedgrants Access EconomicshasstatedthatSPPs conditions ‘often imposeexcessively detailedanddistorting into a concurrent function.’into aconcurrent grants, withconditionsapplied, fromthe Government.Australian Statefunction every This turns of aStateGovernment, one, thatdoesnotreceive somespecifi orhardly animportant c purpose ofgovernance in character thefederal undermined Australia. There ishardly asinglefunctionnow hasobserved:Professor RossGarnaut ‘There isasenseinwhich[SPPs]have completely of government becomingblurred, toduplication, givingrise andcost-shifting.’ overlapping stateareashasledtotherolesandresponsibilitiesofdifferentinterference spheres intraditional Commission,Alan Morris, oftheCommonwealth Grants Chairman hasargued: ‘Commonwealth frameworks for pursuing improvement’. for pursuing frameworks andtheylackincentives or orpartnership; thanpromotingcollaboration governments rather they aretypically burdensome andimpedeeffi ciency; theyhave tendedtocreatetensionbetween agreed outcomes, inmany processesandcontrols; casestheycentreoninputsandbureaucratic SPPsonthe groundthat Allen Consultinghascriticised ‘instead ofbeingfocused onachieving of rolesandresponsibilitiesbetween theStates, Territories andtheCommonwealth’. COAG hasnotedthat hassometimesledtoduplicationandconfusion oftiedgrants ‘the practice 196 198

203

200 202 201 Similar criticisms have Similarcriticisms beenmadethattheSchools Skilling Australia’s Workforce 199

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The (AGPS, (AGPS, 7 Report to Report 0 / Reshaping (Treasury, (Treasury, 3 International / 7 The Sydney (2006), p 24; p 24; (2006), The Australian Governments The Australian, The Australian, 227/3/07 1:20:23 PM 15 November 15 November The Sydney Morning 22 November 206, p 59. 206, 22 November 22 February and 2007; 8 December 2006. (2006), pp 32–3. 10–11 March 2007, p 36. 10–11 March 2007, Working Together? Assessing Together? Working Specific Arrangements, Purpose Payment Victoria (June of to the Government 2006) pp 44–5. the Commonwealth Government p 48. June 1996), Canberra, Taxes Australian Comparison of 2006). Canberra, Australiato mean OECD moving from practice decentralisation, federal for fiscal by multiplied in Figure 14, as shown to better than A move total population. performance produce aaverage would higher estimated benefit. Contract A New – Federation Australia’s Relations Federal–State for ‘Act together or kiss and M Chaney, the federation goodbye’, Financial Review, compromise the IR laws ‘Beattie says p 1. constitutional powers’, fresh look at federalism’, 2006. 30 November Newsto sort out Fed/State relations’, 2006. 15 November Release, Australian federalism’ to reshape Sydney Morning Herald, Williams, and Prof G p 13; 2006, run to way ‘Expensive a country’, Australian, economics of federation’, Morning Herald, time to it’s ‘States of disarray: Editorial, the federation’, fix Herald, Communiqué, 9 FebruaryCommuniqué, 2007. ‘Councils Support Call Queensland, News Constitutional Convention’, for 2006. Release, Federation Australia’s Reshaping – A New ContractFederal–State for Relations 202 Allen Consulting Group, Group, Consulting 202 Allen 207 2006, 4 May Transcript, Lateline ABC, 211 time to rethink the ‘It’s S Burrell, 203 National Commission of Audit, Audit, of Commission 203 National 204 Warburton and P Hendy, R 205 reflects the per capita gain figure This Australia, of Council 206 Business 208 a take must ‘Commonwealth P Beattie, 209 need ‘Constitutional convention M Rann, 210 ‘The die is cast and it is time A Lynch, Dr 212 Australian Federation, the Council for 213 Association of Local Government 214 Business Council of Australia,

209 . the

211 214 The 206

He has been 213 208

204 commentators, 210 New South Wales v Commonwealth Wales South New

205 and the Local Government Association of Queensland. and the Local Government 212 as well as the role of the Senate in representing the States. as well 207 9 4

9 4 i . a f _ r e p a p include incentives to fi nd more effi cient ways to achieve the desired outcomes; to achieve cient ways nd more effi to fi include incentives overlap and confusion amongst with other existing State policies to avoid complement and coordinate services;government those who seek to use reportingthe imposition of costly micromanagement and and avoid and administration requirements; contributions risk-sharing. and balance obligations, _ t s i l a Others who have supportedOthers include academics, who have a constitutional convention the call for Consideration might also be given to making the process for the appointment of High CourtConsideration to making the process for might also be given judges more role in adjudicating on matters their vital given of federalism. transparent and independent of government, and the scal powers of the Commonwealth Constitutional reform could also assist in a rebalancing of the fi scal imbalance. associated with vertical the problems States to avoid fi The reform of fi scal federalism need not stop with reform of Specifi c Purpose Payments. SPP reform could c Purpose Payments. scal federalism need not stop with reform Specifi of The reform of fi reformed have governments Both Labor and Coalition holistic reform. more for a stimulus and should provide largely ended up as these have However, tax structure elements of the many in recent decades. and tax levels Council for the Australian Federation the Council for joined by the South Australian Premier, Mike Rann, who sees a convention and any subsequent referendum, as a subsequent referendum, and any who sees a convention Rann, Mike Australian Premier, the South joined by the High Court denied by Australians they were the say in means of giving D reform and constitutional Constitutional convention also have and the States the Commonwealth of responsibilities between a reallocation of those advocating Many constitutional convention, a decade after the republic to be held in 2008, a constitutional convention called for federal system. Australia’s to consider the pressing need of reform of ‘agree a framework to be used to clarify to Australia a convention has called for The Business Council of the Council wants the In particular, and the States’. the roles and responsibilities of the Commonwealth education and water. the framework areas of health, to debate how to the key apply convention would piecemeal reforms. piecemeal reforms. Australia overtaxesSerious incomes and undertaxes tax reform recognise that would spending compared to end of industrial economies as a share of GDP is at the lower tax take Our overall other OECD economies. Both personal and corporate taxes income taxes income income tax sourcing. biased toward is strongly but Australia than in most comparable countries. in revenue represent higher shares of public ■ ■ ■ Major constitutional reform is not necessary to achieve a reallocation of powers and responsibilities, because Major constitutional reform is not necessary of powers a reallocation and responsibilities, to achieve matters the States to refer of concurrency for of the existing high level to the of powers and the power be useful to insert it would to support in the Constitution a mechanism federal– However, Commonwealth. including the referral powers to the States (the reverse of Commonwealth of s 51(xxxvii)), State co-operation, (so that federal courts of judicial power the cross-vesting can hear matters concerning both State and federal cers co-operative schemes. to enforce and the conferral of functions on federal or State offi jurisdictions), Reform could extend further to revisiting horizontal fi scal equalisation as well as vertical fi scal imbalance scal imbalance as verticalscal equalisation as well fi Reform could extend further to revisiting horizontal fi AustraliaThe pursuit exceeds the pattern in all other of such equalisation in and the structure of taxation. to sub-national governments for greater disincentives it provides As a consequence, comparable federations. more transparent and less complex At a minimum, deliverycient services. of government effi seek and provide ciency could be developed. effi for incentives equalisation processes with improved Certainly, precedent from practice. or by either constitutionally Australia, ned in review is undefi for The vehicle the proposed constitutional This could be an issue for Australia such a review. automatic mechanisms for has no If such a review leads to reform in the right help to reap the $86 billion reform would direction it convention. Australians. dividend from better federalism that awaits Queensland Premier, Peter Beattie, has called for an ‘open’ constitutional convention to redefi ne the roles of the to redefi constitutional convention ‘open’ an has called for Beattie, Peter Queensland Premier, and the States, Commonwealth r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i49 49 7 CONCLUSION There are many popular myths in Australia concerning federalism that are not borne out by the evidence. We need a more sophisticated debate in Australia about our federal system – one that is less insular and takes into account international experience of federal and unitary systems, and one that fairly balances the economic and social advantages against the disadvantages of federal systems. If we can achieve such a debate, we will be better placed to reform our federal system to take full advantage of the substantial benefi ts it could deliver, while eliminating or reducing the problems about which all Australians are only too aware.

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1 5 i . a f _ r e p a p _ t s i l a r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i51 51 APPENDIX 1: a TECHNICAL ANALYSIS

Many qualitative arguments may be advanced about the relative benefi ts and costs of federal and unitary political structures. Such arguments are common overseas, but in Australia the conventional wisdom among commentators is that centralism and unitary political structures are preferred.

This appendix reports analysis which uses international evidence to examine the performance of federal systems and to position Australia within that experience. The analysis achieves this by examining a long period so that the fundamental effects of structures can be isolated, rather than generalising from the short term. The analysis directly estimates effects, rather than using simulation or hypothetical or assumed relationships. This approach differs from some recent welcome quantitative analyses introduced into Australian debates on federalism in recent years.

One much-cited study is by Drummond,215 which used statistical regression analysis to look at the relationship between population and public expenditure for Australia’s States and Territories for the years 1999 to 2001. Drummond used the relationship to estimate how much public spending varies with the population and what expenditures are fi xed costs for each jurisdiction. From this, he concluded that government duplication in Australia’s federal arrangements may cost more than $20 billion, relative to a more decentralised system of governance, because the present system harbours ‘excessive numbers of public offi cials … in extravagantly duplicated roles’.

The regression work in the Drummond study is based on direct estimation, which is valuable. However, it has other problems. In particular, it looks at costs only, and over a very short period. It also draws only on Australian evidence. Thus, it runs the risk of massively increasing the likelihood of error in its calculations when it extrapolates outside the experience refl ected in the Australian data used.

The other major recent study much cited in public discussion of federalism is the Access Economics study conducted for the Business Council of Australia.216 This analysis is also helpful in contributing to debate, but its contribution needs to be substantially discounted by the fact that in its numerical assessment it chose to focus only on costs, with no similar quantifi cation allowed for benefi ts – despite it being standard procedure in examining public legislation, regulation, spending and taxes to examine both benefi ts and costs, preferably by estimation of the magnitudes of both.217

The Business Council of Australia’s analysis must be further qualifi ed to the extent that the driving forces in generating its numerical conclusion are a key set of arbitrary assumptions made about how large the percentage ineffi ciency effects are. These percentages are then applied to actual public spending magnitudes at a given time, but the actual ineffi ciency parameters (the percentages used) are quite hypothetical. They 215 M Drummond ‘Costing Constitutional Change: Estimating the Costs of Five are seemingly plucked from the air without documentation or derivation – so we must rely upon the Variations on Australia’s Federal analyst’s intuition, wisdom, experience or even prejudices. System’ (2002) 61(4) Australian Journal of Public Administration 44.

216 Business Council of Australia, Reshaping Australia’s Federation – A New Contract for Federal–State Relations (2006), Appendix 2.

217 Office of Best Practice Regulation (2006), Best Practice Regulation Handbook, Canberra: Productivity Commission.

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7 European 0 / American Volume Volume 36 3 / 7 Journal of 227/3/07 1:20:26 PM No 2477, No 2477, , Volume 2 number 2, 2, 2 number Volume , , Volume 41 Number Volume , , Volume 7 Number 5, 7 Number 5, Volume , (2006), Appendix 2, p 45. Appendix 2, (2006), Reshaping Australia’s Reshaping Australia’s Federation Federal–State for Contract A New – Relations Reshaping Australia’s Federation – A – Federation Australia’s Reshaping Relations Federal-State for Contract New p 50. Appendix 2, (2006), in Comparative Economic Growth from Evidence Period: the Post-War a Model of Convergence’, Economic Review pp 1010-30. 1989, on Spending Levels of Government Economic Growth Medium-Term 1960-85’, in the OECD, Theoretical Politics pp 173-204. 1990, Economy’, Political Post-War Research, Journal of Political pp 27-53. August 1999, Number 5, Europe and Selected Western Centralised or Other Countries: What is Better for Decentralised?’ DIW Berlin, Economic Growth? ‘Fiscal Theissen, U manuscript 2003; Decentralisation and Economic OECD Countries: “Rich” in Growth Centralisation or Decentralisation?’, Economic Bulletin pp 175-182. 2004, May 5, ‘Decentralisation and the Productive Institute of Government’ Efficiency Germany, the Study of Labor, for IZA Discussion Paper December 2006. 218 Business Council of Australia, Australia, of Council 218 Business 219 Business Council of Australia, Australia, of Council 219 Business 220 ‘OECD T Nguyen, S Dowrick and 221 ‘The Impact F Castles and S Dowrick, 222 ‘Decentralisation and the F Castles, 223 ‘Fiscal Federalism in Theissen, U 224 T Doring, H Zimmerman and L Feld,

219 does not use data 224 222 218 and this has been applied to political institutions by Castles 220 This is different from results for developing countries, a situation countries, developing from results for This is different 223 3 5 The analysis in these earlier works, and a successor study by Castles,

221 3 5 i . a f _ r If the amount of SPPs paid by the Commonwealth and spent by the States in these functional the States and spent by the Commonwealth If the amount of SPPs paid by on account of inadequacies in Commonwealth cient levels effi is 10 per cent above areas in to the States the Commonwealth then SPPs paid by mechanisms, and accountability oversight be $2.3 billion higher than necessary. could these functional areas e p a p _ t s i l a This assertion of ‘zero benefi t’ is contrary discussion elsewhere in the same BCAt’ to qualitative document of benefi ‘zero This assertion of t constant in t or hold benefi work benefi estimate But the quantitative itself does not actually ts. benefi possible and not one based on approach It is also a hypothetical It is a partial study (of cost) only. meaningful way. any the report’s in the media and in policy $9 billion conclusion has been much-cited Despite this, direct estimation. cations of this kind. attention to qualifi without discussion, The analysis for this present report is based upon regression estimation using data OECD for 21 countriesincluding Australia, with the performance variable and the governance explanatory variablesover the whole data half-century averaged explain since To 1950. the growth of these countries, 21 a basic model is provided in work by Dowrick and Nguyen A typical assumption in the BCAfollows: is as analysis common in growth analysis generally. For federal benefi ts to be reaped, relatively non-corrupt, socially stable stable socially non-corrupt, relatively ts to be reaped, For federal benefi generally. analysis common in growth Zimmerman and Doring. Feld, as noted by and democratic conditions should be in place, and Dowrick. and beyond 1990. In this present report, the period of analysis is extended to the year 2000, the latest yearwhich for all data needed are available. The analysis is restricted older to the 21 OECD states as the long-rundata needed is available for them, and not newer members, and has been compiled by the OECD on a consistent basis. This is also consistent with the data treatment in Castles and Dowrick and the estimationresults obtained are very similar. century, relationship in this literature the whole of the second half of the twentieth If the basic growth for is used using a identifying them statistically can be estimated by the impact of federal political institutions themselves had a 15.1 per federations have the last half-century, for that, is found Under this approach it variable’. ‘dummy opportunities. catch-up their differential controlling for income growth, cent advantage in average developed at least for other single country in the few Similar recent results are also found this area, studies in Thiessen. such as the work of countries, The ‘if’ is the key characteristic of this form of analysis and drives the conclusions. Eight such ‘if’of percentage assumptions savings are made and applied to each of the current public activity levels in major areas of shared Commonwealth–State responsibility. This generates a so-called total ‘higher thangovernment’ necessary of $8,919 costsmillion of for 2004–05 or $450 per Australian. these the estimates are arbitrary Moreover, terms in In other words, percentages which drive of the them. t’. ‘from which ordinaryAustralians benefi are getting zero are then characterised of spending as estimates r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i53 53 a 0070305_caf_federalist_paper_fa.i54 54 7 0 3 2 PRomer, and ‘Increasing Returns 226 GBanks, ‘Regulation for Australia’s 225 0 5 _ c a Sydney, 2003). Rise oftheCreativeClass (June 1991), pp483-489; RFlorida, ofPoliticalJournal Economy andEconomicGeography,’Returns pp 1002-1037; PKrugman, ‘Increasing Economy Long-Run Growth,’ November 2006, p3. and SocialOutlookConference, Institute/ presented tothe2006Melbourne inthe21stCentury’, PaperFederation f _ f e APPENDIX 1: d e r , Vol 94, No5(Oct1986), The Australian a l

i TECHNICAL ANALYSIS s t _ p a p e Journal ofPoliticalJournal r _ Economic f a , (PlutoPress, . i , Vol 99No3, 5 4

5 4 The innovation as the sources of growth. of sources the as and innovation infrastructure formation, skill local of importance the to point which geography, economic new and growth endogenous of ideas bynewer supplemented become have policies liberalisation border national and policies Monetarist and Keynesian of notions national-oriented Older ideas. economic of world the in globalised world, national centralisation is better protection. better is centralisation national world, globalised a in that, expectations some contradict to seem may this governments and benefiand fi sub-national from for ts autonomy decentralisation, scal institutional from contributions important indicate results These countries. other of those and rates growth own their to compared be then can these of impact The own their and fi of level status decentralisation. scal unitary or federal their byidentifying obtained be can countries particular for Results estimation. joint the for fi and decentralisation scal institutions of effects respective the gauge to applied are fi the for as equations two techniques rst calculation same The forces. overlapping, though different, represent do they that recognition in measures, governance the of both incorporates equation third The federal countries. the of rate growth average the to difference the relating and countries unitary for calculation same the deducting then countries, federal the for fi of level average bythe decentralisation scal decentralisation coeffi the fi for cient bymultiplying calculated scal is federations for overall effect fi decentralisation scal The level. sub-national at raised is that revenue to relation in fi the of adopted but stance scal federalism, of measure alternative an not is which fi of degree the of decentralisation, scal effects the for checks This federalism. of fact the for fi of measure the decentralisation scal substitutes equation second The countries. federal the for rate growth average the of coeffi the apercentage as bytaking federalism cient calculated is effect federalism The governments. sub-national autonomous constitutionally of effect the for checks latter This not. or afederation is country that whether and country each for starting position economic the things: two to terms) parity power purchasing (in growth capita per GDP real links Table A1. fi The Appendix in equation rst reported are results these supporting equations estimating The advantage. competitive of source important an is capital but institutional culture, of and distance and scale of issues remain still There States. United the as such countries with gap productivity and income the bridging Australia to way some go would This Switzerland). Germany, (Canada, practice federal best or decentralisation on practice federal average to moved we whether upon depending cent, per by6.79–9.72 upon improved be could position growth income our case Australia’s In fi federations. scally centralised policiesandcanbelessbenefi revenue-raising states thatdoadoptdecentralised cial thantheaverage for more benefi t appliesonly toconstitutionalfederations, benefi but thedecentralisation t canapply tothoseunitary benefidecentralisation states).t is5.63percent(relative totheaverage for thefederation unitary Naturally Under thisthirdapproachtheaverage benefi federation t isfound tobe10.46percent, andtheaverage fi scal useofthemeasuresinfiimpacts areconsistentwithexpectationsfromtheseparate two approaches.rst doesreducestatisticalprecisionsomewhat,interplay theresultsareconceptually preferable andtheestimated the oneestimatingrelationship. This allows toberefl theiroverlap ected intheestimationandwhiletheir boththeautonomy measureandthefiA thirdapproachistoincorporate measurein scal decentralisation states. tothatfor unitary decentralisation offiin theirpractice isfound tobe8percent,scal decentralisation theeffect oftheaverage comparing federal post-war,countries thismeasuretooisasignifi cant explanatorofgrowth. The average advantageoffederations growth inaverage incomesitisfound that, pointsofthe various onaverage andcontrollingfor different starting states. thansomeunitary are morecentralised When fi isusedinthisway toexplain scal decentralisation states, thanunitary andsomefederations onaverage butfederations thisisnotuniform aremoredecentralised fi (own-tax shareofstate,scal decentralisation regionalandlocalgovernments) over thewholeperiod. Naturally, todirectassessmentofsub-nationalautonomyAn alternative itselfistouseameasureoftheaverage degreeof 226 225 In fact, this is something of an outdated view view outdated an of something is this fact, In 227/3/07 1:20:27 PM 7 / 3 / 0 7

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7 European 0 / Volume Volume 36 3 Potential Potential / 7 227/3/07 1:20:28 PM Post-War Political Economy’, Economy’, Political Post-War Research, Journal of Political pp 27-53. August 1999, Number 5, Agenda ReformBenefits of the New February 2007. 227 ‘Decentralisation and the F Castles, 228 Productivity Commission, Commission, 228 Productivity These estimates estimates These 227 The Commission does not provide an overall fi gure for GDP gain, but but GDP gain, gure for fi an overall The Commission does not provide 228 5 5

5 5 i . a f _ r e p a p _ t s i l a therefore accept catch-up, deem excluded investment variables (education, physical investment)uncorrelated, as and incorporate key political variables. hence the importancescal decentralisation, of the joint The clearest correlated variable with federalism is fi despite some preferred in this report, the regression results equation for estimation model as the conceptually This loss is expected and inherent in dealing cance on the individual measures. loss of formal statistical signifi in this circumstance It is safer nancial decentralisation. collinear variables such as political and fi with potentially the same But as broad indicatorsto treat the estimates obtained in the joint estimation of magnitude. of order 10 per cance tests at the 5 per cent and variables in the separategovernance signifi equations meet statistical for after due allowance dence that these joint estimates are quite reasonable confi and so give cent levels choosing to This is also a conservative approach, scal decentralisation. federalism and fi the overlap between understate the decentralisation contributions. It is also noteworthy in the present report that the calculation provided of a federalism dividend from improved ts possible the Productivity Commission on the benefi is quite consistent with the recent calculations by practice, Agenda. National Reform from COAG’s In reporting be observedit may these statistical results growth that the relationship used explained economic the starting (1950 real GDP stakes set of variablesperformance point in the growth viz. with a minimum scal structuresper capita) and the governmental this report of interest for and processes (federation and fi business in education, example investment determinants other (for are many There of growth decentralisation). cross-country numerous found studies in economics have However, social capital etc.). innovation, investment, for especially justifying its inclusion here, important, variable to be consistently ‘catch-up’ or ‘starting point’ the long-run rather analysis than short-term rates. in growth movements if the omitted variables a problem The omission of other variables which are not of direct interest here is only if all For example, scal decentralisation. federation or fi are correlated with the variables viz. of direct interest explained the outcome not federalism. it might be geography that really geographicallyfederations large, were Anglo- Alternatively if all federations or decentralised polities were so this factor is not included. They are not, Yet language or cultural factorsAmerican parliamentary, then be the root causes of growth. might be said to as does the variety of Austria preclude this concern, Switzerland and other federations such as Germany, The countries diverse included are quite in characteristics example federations range (for from unitary states. Switzerland to Canada and unitary from Japan to France). states cult to discernIt is diffi other excluded variables that are systematicallyscal decentralisation related to fi and uence growth.likely to The infl overall explanatory power of the statistical estimation obtained is already high, being consistent with predicting per 81 cent of the growth variation. Tests for any bias from excluded variablescation (for in example this specifi investmentnd problems. rates), did not fi it does say that the possible gains are 2 per cent of GDP from competition and regulatory gains are 2 6 per cent of that the possible it does say reform, GDP from workforce participation and 3 per cent of GDP and from human capital productivity reform. reform, reform is coverage program costs are not examined, straightforward, aggregation is not apply: caveats Various the range of potential achievement However, t. estimates of benefi ‘outer envelope’ and these are incomplete, not address study does the Commission’s Of course, similar. from better federal-State action seems compellingly politically. these results are to be achieved how Both statistically and theoretically, the outcomes reported here seem to hold up well. Australia’sfederation present is estimated t over to produce the average a net benefi unitary state of $4,507 per capita, plus scal decentralisationan existingt of $2,925. ts fi can be These contrasted benefi benefi with the Business Council of Australia/Access Economics cost-only estimate of the disadvantages of federalism of $450 percapita. Further, the move to reform federal-State relations in the directionscal decentralisation of greater fi could provide a decentralisation reform dividend of up to an additional $86 billion This a year. means that a greater pay-offscal from decentralisation further fi could be added to thets existing of Australia’s benefi decentralisation. political r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i55 55 APPENDIX TABLE A.1

APPENDIX 1: APPENDIX 1: TECHNICAL ANALYSIS Estimated equation for Federal Governance Impact on Growth

Equation 1: Federal Institutions

Dependent Variable: GROWTH a Method: Least Squares Sample: 1 21

Variable Coeffi cient Std. Error t-Statistic Prob.

C 4.696755 0.222464 21.11244 0.0000 GDP_1950 -0.001686 0.000207 -8.143026 0.0000 FEDERALISM 0.388835 0.211277 1.840408 0.0823

R-squared 0.804273 Mean dependent var 2.930378 Adjusted R-squared 0.782525 S.D. dependent var 0.837821 S.E. of regression 0.390711 Akaike info criterion 1.089868 Sum squared resid 2.747795 Schwarz criterion 1.239085 Log likelihood -8.443610 F-statistic 36.98232 Durbin-Watson stat 2.313394 Prob(F-statistic) 0.000000

Equation 2: Fiscal Decentralisation

Dependent Variable: GROWTH Method: Least Squares Sample: 1 21

Variable Coeffi cient Std. Error t-Statistic Prob.

C 4.488289 0.218370 20.55364 0.0000 GDP_1950 -0.001675 0.000194 -8.645641 0.0000 FISCAL DEC 0.016939 0.007982 2.122056 0.0480

R-squared 0.813979 Mean dependent var 2.930378 Adjusted R-squared 0.793311 S.D. dependent var 0.837821 S.E. of regression 0.380900 Akaike info criterion 1.039002 Sum squared resid 2.611521 Schwarz criterion 1.188219 Log likelihood -7.909518 F-statistic 39.38175 Durbin-Watson stat 2.098674 Prob(F-statistic) 0.000000

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7 5 i . a f _ r e p a p _ t s i l Dependent Variable: Dependent Variable: GROWTH Least Squares Method: 1 21 Sample: VariableCGDP_1950FEDERALISMFISCAL DECcient Coeffi R-squared Error Std. Adjusted R-squared -0.001796 0.268868 of regressionS.E. t-Statistic 0.000209 4.607212 0.013054Sum squared resid 0.214304Log likelihood 0.801770 0.219155 0.007875 Prob. -8.613122 statDurbin-Watson 0.831504 dependent var 1.254614 S.D. 0.373023 2.365490 21.02261 1.657558 Mean dependent var 0.0000 criterion info Akaike Schwarz criterion 0.2266 2.081296 -6.870568 0.0000 0.1157 0.837821 Prob(F-statistic) F-statistic 2.930378 1.035292 1.234249 0.000001 27.96429 a Equation 3: Federal Institutions and Fiscal Decentralisation Federal Equation 3: r e d e f _ f a c _ 5 0 3 0 7 0070305_caf_federalist_paper_fa.i57 57 0070305_caf_federalist_paper_fa.i5870305_caf_federalist_paper_fa.i58 5858 227/3/077/3/07 1:20:291:20:29 PMPM FEDERALIST PAPER 1 AUSTRALIA’S FEDERAL FUTURE

A REPORT FOR THE COUNCIL FOR THE AUSTRALIAN FEDERATION PREPARED BY ANNE TWOMEY & GLENN WITHERS APRIL 2007

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