FISCAL FEDERALISM IN AUSTRALIA: WILL WILLIAMS V
COMMONWEALTH BE A PYRRHIC VICTORY?
SURI RATNAPALA*
I INTRODUCTION
Australia is a constitutional federation. In 2012, the country was ranked fifth in the
world by per capita nominal GDP1 and seventh by median household income among the
OECD nations.2 The 2013 Heritage Foundation-Wall Street Journal Index of Economic
Freedom ranks Australia third behind Hong Kong and Singapore and ahead of countries
such as New Zealand, Switzerland, Sweden, the US and the UK.3 Australia enjoys AAA
credit ratings. The Rule of Law Index of the World Justice Project conducted by the
American Bar Association ranks Australia above countries such as the US, Canada and
UK.4 Australia is a successful federation by most measurements.
Australia’s economic success has many causes including its abundance of land
and natural resources, strong global demand for its minerals and agricultural
commodities, a legal heritage firmly grounded in the rule of law tradition, a vibrant
representative democracy and a federal system of government. However, it is
reasonable to ask whether the country can do better with its advantages. Many nations
like Japan, Germany, New Zealand and Sweden with no natural resources, or very
little, have done equally well or better than Australia. Despite its overall economic
health Australia has structural weaknesses reflected in problems concerning its
international competitiveness and medium to long term fiscal sustainability. An
evaluation of fiscal federalism is a necessary part of any general assessment of the
institutional underpinnings of the Australian economy.
Two recent decisions of the High Court brought the state of fiscal federalism in
Australia into sharp focus. In the case Pape v Federal Commissioner of Taxation5 the
High Court ruled that ss 81 and 83 of the Constitution were not a source of power to
appropriate and spend money out of the consolidated revenue fund. The decision
quashed the long standing Commonwealth claim, encouraged by previous High Court
decisions,6 that it had a source of power beyond its constitutionally specified legislative
competencies to appropriate and spend money from the Consolidated Revenue Fund.
The second case, that of Williams v The Commonwealth7 directly raised the question
whether the Commonwealth has capacity to fund activities that are unsupported by its
legislative powers, its power to make conditional grants to States or its executive power.
*
1
2
3
4
5
6
7
Professor of Public Law, T.C Beirne School of Law, The University of Queensland.
International Monetary Fund, World Economic Outlook Database (6 November 2013)
<http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weorept.aspx,>.
Organisation for Economic Cooperation and Development, OECD Statistics,
<http://www.oecd-ilibrary.org/statistics>.
Heritage Foundation, 2013 Index of Economic Freedom, <http://www.heritage.org/index/
ranking>.
The World Justice Project, The Rule of Law Index 2012-2013 Report, <http://worldjustice
project.org/rule-of-law-index>.
(2009) 238 CLR 1, 55, 73, 102.
Victoria v The Commonwealth and Hayden (AAP Case) (1975) 134 CLR 338; AttorneyGeneral (Vic) ex rel Dale v Commonwealth (Pharmaceutical Benefits Case) (1945) 71 CLR
237.
[2012] HCA 23; (2012) 86 ALJR 713.
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The case arose from a challenge to a federal government scheme to provide
religious chaplaincy services in state schools by engaging private religious
organisations to deliver the service under contract. The scheme was not authorised by
Commonwealth legislation but was executively implemented with funds drawn from
the annual appropriation for ordinary services of government. The Scripture Union
Queensland (SUQ) received funds under the scheme to provide chaplaincy services at
the Darling Heights State School in southern Queensland. Williams, the plaintiff, is an
atheist whose four daughters attended Darling Heights. He claimed that the funding
arrangement was unlawful on two grounds. First, the scheme was said to be
unauthorised because the federal government in the absence of legislative authority
lacked power to spend money in this way to deliver chaplaincy services. Second, the
plaintiff claimed that the scheme violated s 116 by requiring a religious oath as a
qualification to hold an office or public trust under the Commonwealth. The High
Court unanimously rejected the second ground in holding that the chaplains were not
officers of the Commonwealth. The majority, with Heydon J dissenting, found merit in
the first ground of challenge and decided that the funding agreement was invalid by
reason of it being beyond the executive power of the Commonwealth under s 61 of the
Constitution. This article is focused on the implications of the majority decision on
fiscal federalism in Australia. It offers no comment on the High Court’s views on
matters of religion arising under s 116.
The decision is a small win for fiscal federalism in Australia. It poses a serious
obstacle to the Commonwealth practice of directly funding organisations, including
local government bodies, without the authority of valid legislation and the involvement
of state governments. However, Williams could prove to be a Pyrrhic victory. The
decision revived the long standing desire of successive Commonwealth governments to
amend the Australian Constitution to give them power directly to fund local
government bodies subject to federally determined conditions. A bill to amend s 96 of
the Constitution that would extend to local government the power of making
conditional grants was passed by the two houses of Parliament. The government
intended to present it to a referendum held to coincide with the general election of
2013 but postponed the attempt as the date fixed for the general election, 7 September
2013, was too early for the referendum to be held according to s 128 of the
Constitution.8 The proposed amendment has the support of the Australian Labour
Party, the National Party and the Greens Party. The parliamentary Liberal Party seems
divided on the issue although the party supported the passage of the amendment bill in
both houses of Parliament. The Australian Local Government Association (ALGA)
strongly supports the amendment.9
In the meantime, the federal government sought to legalise its constitutionally
unauthorised spending projects by hastily amending the Financial Management and
Accountability Act 1997. The government, with cross party support, inserted the new
32B that reads:
(1) If:
(a) apart from this subsection, the Commonwealth does not have power to make,
vary or administer:
8
9
Section 128 of the Constitution provides that ‘The proposed law for the alteration thereof
must be passed by an absolute majority of each House of the Parliament, and not less than
two nor more than six months after its passage through both Houses the proposed law shall
be submitted in each State and Territory to the electors qualified to vote for the election of
members of the House of Representatives’.
Australian Local Government Association, ‘Council Referendum’ <http://www.council
referendum.com.au/>.
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Fiscal Federalism in Australia
65
(i)
an arrangement under which public money is, or may become,
payable by the Commonwealth; or
(ii)
a grant of financial assistance to a State or Territory; or
(iii)
a grant of financial assistance to a person other than a State or
Territory; and
(b) the arrangement or grant, as the case may be:
(i)
is specified in the regulations; or
(ii)
is included in a class of arrangements or grants, as the case may
be, specified in the regulations; or
(iii)
is for the purposes of a program specified in the regulations;
the Commonwealth has power to make, vary or administer the arrangement
or grant, as the case may be, subject to compliance with this Act, the
regulations, Finance Minister’s Orders, Special Instructions and any other
law.
(2) A power conferred on the Commonwealth by subsection (1) may be exercised on
behalf of the Commonwealth by a Minister or a Chief Executive.
This is an extraordinary legislative device whereby the Commonwealth attempts
to give itself power that it lacks but for the amendment. The universal support the
amendment received was partly to avoid the economic impact of a large and sudden
reduction in public spending. It also reflects the traditional cross-party desire for
greater federal spending power. However, there are serious doubts whether s 32B is
supported by any of the legislative powers of the Commonwealth. Section 32B ex
facie seems incapable of characterisation in terms of the subjects of power enumerated
in s 51. The fact that the scope of the spending authorisation is left open to be fixed by
regulation tests the limits of constitutionally permissible delegation of legislative
power to the executive. It is worth noting Justice Dixon’s remark in Victorian
Stevedoring and General Contracting Co and Meakes v Dignan:
This does not mean that a law confiding authority to the Executive will be valid,
however extensive or vague the subject matter may be, if it does not fall outside the
boundaries of Federal power. There may be such a width or such an uncertainty of the
subject matter to be handed over that the enactment attempting it is not a law with
10
respect to any particular head or heads of legislative power.
Ron Williams, the plaintiff in Williams v Commonwealth has unsurprisingly
challenged the legislation and the matter is pending in the High Court at the time of
writing.
The cross party support for expanding the Commonwealth’s spending power
beyond current limits suggests the strong likelihood that the constitutional amendment
proposal will be revived in the future. The proposal, if enacted, will negate the decision
in Williams in relation to local government and further weaken fiscal federalism in
Australia. The aims of this paper are to examine the concept of fiscal federalism,
explain its value as a general principle of constitutional government and evaluate the
state of fiscal federalism in Australia before and after Williams v Commonwealth. I
give reasons why this decision must not become a Pyrrhic victory.
The first part of this article discusses the concept of fiscal federalism and its
importance for federalism generally. In the second part, I assess the state of fiscal
federalism under the Australian Constitution as judicially interpreted. In the third
part, I evaluate the importance of Williams v The Commonwealth for fiscal
federalism in Australia.
10
(1931) 46 CLR 73, 101.
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2014
II FEDERALISM AND FISCAL FEDERALISM
A federation is a political association of regions under which the regions enjoy an
assured measure of autonomy. Most federations are constitutionally established in the
sense that regional autonomy is part of the national constitutional structure. These may
be called de jure federations. There are also de facto federations that maintain stable
political and fiscal decentralisation under formally unitary constitutions. Italy’s regioni
enjoy more power than many units of formally federal states although most of them are
empowered by ordinary statute. So do Spain’s autonomous communities (comunidad
autónoma), Japan’s prefectures, Sweden’s counties, Netherlands’ provinces and the
United Kingdom’s Scottish, Northern Irish and Welsh governments. This shows that in
certain conditions de facto federations can be more robust than some constitutionally
mandated federations.
How is this explained? A de jure federation may be weakened by defects of the
constitution. The Indian central government is able to impose direct presidential rule in
a state ‘in case of failure of constitutional machinery’.11 This power was the subject of
grave abuse until curbed by judicial review in the 1994.12 This kind of direct central
assumption of regional powers is not possible under the US, Australian, Canadian or
German constitutions. A formal change in the powers of an Australian state cannot be
made except by constitutional alteration approved at a referendum as provided by s 128
of the Constitution. The powers of the Canadian provinces cannot be formally
diminished without a constitutional amendment enacted according to the procedure
stated in s 38 of the Constitution which requires the approval of two-thirds of the
provinces. The powers of the American states are similarly protected. Article 5
requires the consent of three-fourths of American states to alter the Constitution. The
so-called ‘eternity clause’ prevents the change of the federal structure of the German
constitution by legislative amendment.13
Formal constitutional guarantees of regional autonomy can also be undermined by
other institutional factors. The original design of the federation may be judicially altered
by interpretation of constitutional documents as many argue has happened in the United
States and Australia. The prolonged domination of one political party at all levels of
government may dilute the federal division of powers as shown during the rule of the
Indian National Congress from 1947 to 1977 and of the Institutional Revolutionary Party
of Mexico from 1929 to 1988. The Union of Soviet Socialist Republics (USSR) was in
theory a federation of socialist republics. In reality it was a highly centralised imperial
dictatorship in which the Communist Party ruled every republic. The federal features of
present day Russia have suffered to a lesser degree by the virtual one-party dominance of
President Vladimir Putin and his political organisation.
A Fiscal Federalism
Fiscal federalism is an economic concept that looks at federal arrangements not
from the technical view of the constitutional lawyer but from the wider practical
perspective of the economist. The ‘economic constitution’ is the system of government
that is shaped not only by legal instruments but also by other political and cultural
constraints. Fiscal federalism means the decentralisation of the power to regulate
economic activity. Fiscal federalism invites contrast with centralised command
11
12
13
The Constitution of India, Art 356(1).
S. R. Bommai v Union of India [1994] 2 SCR 644; AIR 1994 SC 1918; (1994) 3 SCC1.
The Basic Law of the Federal Republic of Germany, Art 99 read with Art 20.
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Fiscal Federalism in Australia
67
economies. The devolution of taxation and spending powers to regions is one of the
central features of fiscal federalism.
It is a compelling fact that apart from a few resource rich oligarchies and city
states, the nations that have achieved the highest personal incomes and living standards
over the past two centuries happen to be de jure or de facto federations. This
coincidence does not prove a causal link but there are persuasive studies that suggest
the superior economic performance of fiscally federal states over states with
centralised economic systems.14 A cross-country study by Twomey and Withers
estimates that in 2006, Australians were better off by AUD 4,507 per capita owing to
the federal system and that further fiscal decentralisation would lead to an additional
gain per capita of AUD 4,188.15 There are other studies though which question the
positive relation between fiscal decentralisation and economic growth.16 Some
federations, mainly in the developing part of the world have not done so well
economically, notable among them, Mexico, Argentina, the Philippines, Nigeria,
Pakistan, Micronesia, Venezuela, and until recently, Brazil and India. How is this
difference explained?
The first point to notice is that the de facto constitution or the ‘living constitution’
can differ markedly from the de jure constitution or the ‘paper constitution’. As
previously observed certain de jure unitary states in fact operate on de facto federal
arrangements. Conversely de jure federations sometimes may be compromised by
political and cultural forces. Rampant corruption, entrenched bureaucratic culture,
ethnic and religious rivalry between regions and overbearing party loyalty can negate
the advantages of a federation. These factors may explain to a large extent the
negative correlation between decentralisation and economic performance of
developing countries revealed by the empirical work of Davoodi and Zou and of
Woller and Phillips.17 Second, institutional structures of federations differ in important
ways. Some federal settings tend to promote economic success better than others.
Weingast correctly identifies five features of what he terms ‘market preserving’
federalism.
1.
14
15
16
17
Hierarchy. A hierarchy of governments exists with each level having a delineated
scope of authority.
Charles Tiebout, ‘A pure theory of local expenditures’ (1956) 64 Journal of Political
Economy, 416–24; Wallace E Oates, ‘An essay on Fiscal Federalism’ (1999) 37 (3) Journal
of Economic Literature, 1120–49; Barry R Weingast, ‘The economic role of political
institutions: market-preserving federalism and economic development’ (1995) 11 (1) Journal
of Law, Economics, and Organization, 1–31; Barry R Weingast, ‘Second generation fiscal
federalism: The implications of fiscal incentives’, (2009) 65 Journal of Urban Economics,
279-293; Friedrich A Hayek, ‘The economic conditions of interstate Federalism’,
Individualism and the Economic Order (University of Chicago Press, 1949) ch 12; Geoffrey
Brennan and James M Buchanan, The Power to Tax: Analytical Foundations of a Fiscal
Constitution (Cambridge University Press, 1980); Jason Sorens, ‘The institutions of fiscal
federalism’ (2011) 41 (2) Publius, 207-231.
Anne Twomey and Glenn Withers, ‘Federalist Paper 1: Australia’s Federal Future’, Report
for
the
Council
of
the
Australian
Federation,
2007,
<http://www.caf.gov.au/Documents/AustraliasFederalFuture.pdf>.
Hamid Davoodi and Heng-fu Zou, ‘Fiscal decentralisation and economic growth: A crosscountry study’ (1998) 43(2) Journal of Urban Economics, 244-257; G M Woller and K
Phillips, ‘Fiscal decentralisation and LDC economic growth: An empirical Investigation’
(1998) 34(4) Journal of Development Studies, 139-148; Phillip Bodman, ‘Fiscal federalism
and macroeconomic performance in Australia’ in Gabrielle Appleby, Nicholas Aroney and
Thomas John (eds.), The Future of Australian Federalism: Comparative and
Interdisciplinary Perspectives (Cambridge University Press, 2012) 339-361.
Above, n 11.
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University of Queensland Law Journal
2.
3.
4.
5.
2014
Subnational autonomy. Subnational governments have a primary role in both
local regulation of the economy and authority over public goods and service
provision.
Common market. The national government provides for and polices a common
market that allows factor and product mobility.
Hard budget constraints. All governments, especially subnational ones, face hard
budget constraints.
Institutionalized authority. The allocation of political authority is
18
institutionalized.
These are necessary conditions but they are not sufficient for a nation to realise
the full economic advantage of a federation. Much depends on the nature and extent of
decentralisation. The 2006 Report of Access Economics on ‘The costs of federalism’
estimated that the inefficiencies in the federal system cost Australia A$ 9 billion in
2004-2005.19 Factors such as federal-state and inter-state overlap and duplication of
functions, costs of complying with multiple regulatory layers, misallocation of
functions, vertical fiscal imbalance, federal domination, and confusion regarding
responsibilities may weaken the economic performance of federations.
B Why federalism?
As noticed, not all economists see a positive relation between fiscal
decentralisation and economic performance but many do, at least where the
constitutional distributions of power are not subverted by political and cultural
conditions. There is however a more powerful argument for fiscal federalism. It is that
a federation cannot be maintained without fiscal federalism. If a nation chooses a
federal form of government for historical, cultural, geographical or whatever reason,
fiscal decentralisation becomes necessary. Fiscal federalism is implicit in the idea of a
federation. A system where local units exist only as dependants of a central
government or as its service providing agents is a federation only in a trivial sense.
The factual existence of a regional unit is based on its economic existence. This is not
possible without a measure of fiscal autonomy. All this of course begs the question:
why is federation desirable? We cannot justify fiscal federalism without justifying
federalism. Then again, the economic advantages of fiscal decentralisation provide
some of the strongest justifications of federalism. There are though strong noneconomic reasons for nations to adopt a federal system of government.
Clearly federal arrangements are not necessary and will not be efficient in
territorially small states where national and local interests coincide as in Liechtenstein,
Monaco, Nauru or Singapore. There are though territorially small nations that have
prospered under de facto (Netherlands) or de jure (Belgium, Switzerland) federal
systems.
History and geography
It is evident that historical, demographical or geographical reasons may
predestine some nations to federal forms of government. This is particularly the case
where the nation is a union of regions distinguished by cultural factors such as
ethnicity, language and religion. India provides a classic illustration. The nation is a
federation of 28 States and 7 Union Territories, most of which have distinct ethnic and
18
19
Weingast, above n 10, 281; compare Sorens, above n 10, 208.
Access Economics, ‘The costs of federalism’, Appendix II of Reshaping Australia’s
Federation – A New Contract for Federal-State Relations (Business Council of Australia,
2006) vi.
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Fiscal Federalism in Australia
69
linguistic identities and political histories. This diversity could only be accommodated
within a federal system of administration as the British colonial rulers and later the
founders of the Indian Constitution recognised. The Malaysian federation also has a
similar history. Some federations are formed out of agreements among previously
separate states on terms that secure their regional autonomy. The former British
colonies in America and Australia federated by this process although in the latter case
imperial legislation gave effect to the compact. The Federal Republic of Germany and
the Republic of Austria are federations formed by the association of states (Länder)
which were independent principalities within the Holy Roman Empire.
Geographical differences may provide strong reasons for autonomy. There are
significant differences between the populous south-eastern Australian states of Victoria
and New South Wales, the less populated and territorially extensive states of Western
Australia, Queensland and South Australia and the island state of Tasmania.20 Similar
pronounced regional differences are found in the United States and Canada. Apart
from historical necessity there are well discussed pragmatic, moral and economic
reasons for a nation to choose a federal form of government.
Pragmatic reasons
A federal system is a device that tends to prevent the concentration of power in
the hands of one central government. Where power is dispersed among subnational
governments, the capacity of one political party or faction to promote its own causes at
the expense of the general interest is diminished. James Madison, the political
philosopher sometimes called the Father of the US Constitution, and that nation’s
fourth President explained the pragmatic reason as follows:
This policy of supplying, by opposite and rival interests, the defect of better motives
might be traced through the whole system of human affairs, private as well as public.
We see it particularly displayed in all the subordinate distributions of power, where the
constant aim is to divide and arrange the several offices in such a manner as that each
may be a check on the other - that private interest of every individual may be a sentinel
over the public rights. These inventions of prudence cannot be less requisite in the
21
distribution of the supreme powers of the State.
The practical value of the federal system of governance is heightened where a
nation is divided into ethnically or religiously identified regions as in Belgium,
Switzerland, India, Nigeria and Indonesia as I have argued elsewhere. Cultural and
economic autonomy and cross border trade and intercourse that a federal arrangement
provides can be a framework for national harmony and economic strength.22
Moral reasons
Federalism has been justified on the moral demand that political decisions must
be made by persons accountable to those who are most affected by the decisions. This
is the philosophical principle of subsidiarity, according to which, local matters should
be decided locally to the extent feasible and not by some remote central government.
Subsidiarity is a general principle of the constitutional law of the European Union (Art
20
21
22
Nicholas Aroney, Scott Prasser and Alison Taylor, ‘Federal diversity in Australia: a counternarrative’, in Appleby, Aroney and John, above n 16, 272-299.
James Madison, ‘The Federalist Paper No 51’ in The Federalist Papers by Alexander
Hamilton, James Madison and John Jay (Bantam Books, 1982) 263.
Suri Ratnapala, ‘Foedus Pacificum: A Response to Ethnic Regionalism within Nation States’
in Appleby, Aroney and John, above n 16, 250-271.
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2014
5(3) of the Treaty of Lisbon). The principle is rooted in moral philosophy and has an
important place in religious thought. The 1931 Papal Encyclical states:
And since what an individual can accomplish through his own initiative must not be
taken away from him and accorded as a collective task to the state, so similarly it
violates the principle of justice that the bigger and higher authority claim a task that
smaller communities can accomplish well. This would be extremely disadvantageous
and confusing for the entire social order. Every social activity, to be sure, is subsidiary
by its own nature and on its own terms. It is supposed to support the different organs
of the bigger social body, which however may not absorb or destroy the smaller
23
entities.
Economic reasons
There are many economic reasons to adopt a federal system of government.
Federalism increases fiscal responsibility of government and promotes more informed
economic laws and policy. The capacity of a state to spend beyond its means is limited
by its capacity to raise revenue. Hence governments tend to be smaller and more
efficient where the states are responsible for both revenue raising and public
spending.24 People of the state become more empowered to demand either better public
goods or lesser tax burdens or both of these. It makes sense therefore to repose the
powers of taxing and spending in the same hands. Decentralisation helps reduce the
problem of fiscal illusion that was first exposed by the Italian economist Amilcare
Puviani.25 When a higher level of government collects revenue and passes it down to a
lower level which spends the money in the provision of public goods and services, the
illusion is created that recipients are not paying the bill for the benefits. Democratic
accountability is enhanced when it is clear who bears the cost of benefits and
conversely is diminished when there is confusion of the payers and receivers.26 Thus,
fiscal federalism is not only a necessary condition for federalism but is also an
important justification for a federal form of government.
A further justification of fiscal federalism is that it promotes more informed and
responsive governance. Economic policy must be informed by relevant local
knowledge. As the Austrian School of economics has argued, no central planner is
capable of commanding all knowledge specific to time and place.27 This is true of
central as well as regional governments. Hence the idea of central planning has been
largely abandoned since the twentieth century experiments in socialist countries.
However, as between a central government and a state government, the local economy
is likely to be served better by a state government that is elected by and responsible to
the people of the state.
Fiscal federalism promotes jurisdictional competition by encouraging arbitrage.
Individuals and capital are drawn to states with less regulatory burdens, lower taxes,
and open, incorrupt and efficient administration. This competition tends to improve the
23
24
25
26
27
Quoted from Jürgen G Backhaus, ‘Subsidiarity’ in J G Backhaus (ed), The Elgar Companion
to Law and Economics (Edward Elgar, 1999) 280-286.
Tiebout, above n 20.
Amilcare Puviani, Teoria della illusione finanziaria, ISEDI, Milan, Istituto Editoriale
Internazionale (1903/1973).
James M Buchanan and Richard E Wagner, ‘Democracy in Deficit: The Political Legacy of
Lord Keynes’ in The Collected Works of James M Buchanan, volume 8 (Liberty Fund,
1999).
Ludwig von Mises, Human action: A treatise on economics (W Hodge, 1949); Friedrich A
Hayek, Use of Knowledge in Society (1945) XXXV: 4, American Economic Review, 519–30;
Israel M Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and Discovery
(Institute of Economic Affairs, 1997).
Vol 33(1)
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overall performance of the national economy. It is not surprising that the most
prosperous of the larger industrialised nations are federations or else unitary systems
that have substantially decentralised fiscal and revenue powers.
III FISCAL FEDERALISM IN THE COMMONWEALTH OF AUSTRALIA
In what follows I will offer my analysis of the state of the law in Australia in
relation to the five criteria of market preserving federalism identified by Weingast and
others. It is convenient to consider the first and the fifth condition together.
A Institutionalised hierarchy of governments
The Australian Constitution established a federal hierarchy between the
Commonwealth or national government and the governments of the States. The
Constitution guaranteed the continued existence of the federating colonies as the states
of the new Commonwealth.28 The distribution of powers extends across legislative,
executive and judicial spheres. However, there is common law unity across the
Commonwealth received as part of the colonial heritage and maintained by the
Constitution. The highest appellate court of each colony was the Judicial Committee of
the Privy Council which ensured one Australian common law. The unity is now
maintained by the High Court, the apex of all state judicial hierarchies. This is not a
major contradiction of the federal ideal as the common law is susceptible to local
adaptation by the state legislatures.
The Constitution protects the territorial integrity of the states. Federal legislation
that changes the boundaries of a state requires the consent of the relevant state
parliament as well the approval of the people of that state expressed at a referendum.29
The proportionate representation of a state in either house of the federal parliament
cannot be diminished without the approval of the people of the state.30 The
Constitution assures the juristic existence of the states in various other ways. Section
118 of the Constitution requires ‘full faith and credit’ to be given throughout the
Commonwealth to the laws, the public Acts and records, and the judicial proceedings
of every State. Section 117 prohibits discrimination of persons on the grounds of
residence in another state. The Constitution guarantees equal representation to the
states in the Senate and they have representation in the House of Representatives in
proportion to their populations with the exception of the guaranteed five seats for the
state of Tasmania.31
B Subnational autonomy in regulation of the local economy and the provision of
goods and services
This condition refers to the capacity of the subnational governments to regulate
the local economy and their authority over public goods and service provision. The
capacity to manage a regional economy has two dimensions. The first is the power to
make laws regulating (or deregulating) economic activity. Laws concerning wages and
prices, corporate governance, trade practices, trade licensing, urban planning,
environmental standards, agricultural land use, mineral extraction are illustrative of
28
29
30
31
Australian Constitution, ss 106-108.
Ibid ss 123 and 128.
Ibid s 128.
Ibid ss 7 and 24.
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this power. The second is the power of the subnational government to manage public
finance. This is the power to raise and spend revenue for public purposes.
The Constitution leaves to the states an extensive sphere of legislative power by
limiting federal legislative competence to subjects that are expressly or impliedly
assigned to the Commonwealth either exclusively or concurrently with the states. In
areas of concurrent power, state law yields to inconsistent federal law by the force of s
109. In all other areas, the states have legislative supremacy although, as discussed
presently, the boundaries of federal and state powers have been redrawn in places by
the High Court’s interpretations of the text and structure of the Constitution.
The province of state legislative power has contracted since federation owing to
the High Court’s policy of reading the constitutional grants of federal powers
expansively. In the landmark decision in Amalgamated Society of Engineers v Adelaide
Steamship Co Ltd (Engineers Case)32 the High Court adopted the policy of reading the
provisions of s 51 (the principal source of federal legislative power) literally, qualified
only by limitations that are expressly stated in the Constitution. It meant that there
could be no limitations on Commonwealth powers derived as implications of the
federal design of the Constitution.
The Engineers doctrine as a general rule was untenable. A consistent application
of it would severely undermine the existence of the states. In the words of one leading
constitutional scholar, the effect of the decision was ‘unbelievable, having regard to the
attention given to the States in the Constitution, that they were (with their parliaments,
vice-regal representatives and express limitations on their powers) to be left as
impotent government ornaments with plenty of glory and no power’.33 The High Court
was compelled to revise the doctrine and did so in Melbourne Corporation v
Commonwealth.34 The legislation challenged in that case, s 48 of the Banking Act 1945
(Cth) was a direct assault on the power of the states to manage their own finances and
therefore an undisguised attempt to subvert fiscal federalism. The legislation sought to
compel states and their instrumentalities to bank their revenue exclusively with the
federally owned Commonwealth Bank, and to prohibit all other banks from conducting
any business with the states.The decision restored a degree of constitutional protection
for the states by prohibiting the Commonwealth from legislating in a manner that
impairs the capacity of the states to exist as constitutionally mandated subnational
entities. The Melbourne Corporation rule has since been applied in a series of cases
and serves as an important constitutional shield for the states. The High Court, in
several cases, frustrated federal attempts to regulate labour relations between state
governments and their officers and employees.35
The Engineers doctrine, however, has not been discarded. It is unsheathed by the
High Court from time to time in defence of federal legislation. The doctrine continues
to be the philosophical default position of the High Court. The Commonwealth has
relied on the doctrine to extend its regulatory power over intra-state economic activity.
Judicial interpretations of federal legislative power with respect to trade, labour
markets, taxation and grants to states provide sharp illustrations of the doctrine’s
influence in resetting the constitutional bearings of fiscal federalism.
32
33
34
35
(1920) 28 CLR 129.
Leslie Zines, The High Court and the Constitution (Butterworths, 3rd ed, 1997) 12.
(1947) 74 CLR 31.
Queensland Electricity Commission v Commonwealth (QEC Case) (1985) 159 CLR 192; Re
Australian Education Union; Ex parte Victoria (AEU Case) (1995) 184 CLR 188; Re State
Public Services Federation; Ex parte Attorney-General (WA) (SPSF Case) (1993) 178 CLR
249; Clarke v Federal Commissioner of Taxation (2009) 240 CLR 272. See in particular the
useful summary of the multifactorial test of unconstitutional impairment of state capacity
given by French CJ in Clarke (2009) 240 CLR 272, 299.
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Federal regulation of intra-state trade
The Constitution grants the Commonwealth legislative power with respect to
‘trade and commerce with other countries, and among the States’.36 The regulation of
local trade is left to the state parliaments. However, the High Court has given the
Commonwealth a degree of control over intra-state trading by developing the doctrines
of vertical and horizontal integration of trade. According to the vertical integration
theory, the Commonwealth has power over intrastate activity if the activity forms a
stage in the chain of transactions that result in the manufacture and export of products.
In O’Sullivan v Noarlunga Meat Ltd, the High Court upheld federal regulations that
comprehensively regulated the operations of abattoirs that produced meat for export.
According to Fullagar J, the power under s 51(i) ‘extended to the supervision and
control of all acts or processes which can be identified as being done or carried out for
export’ including grading, packaging, labelling and handling.37 Fullagar J stated that
‘it is undeniable that the power with respect to trade and commerce with other
countries includes a power to make provision for the condition and quality of meat or
of any other commodity to be exported’ and asserted that the power allows the
Commonwealth ‘to go further back to enter the factory, or the field or the mine’.38 The
Court’s interpretation is perfectly deniable as it could have reasonably given a more
restricted meaning to the words ‘trade and commerce with other countries, and among
the States’. The Court’s expansive interpretation is consistent with the Engineers
doctrine but is unsympathetic to the idea of competitive fiscal federalism. Under the
doctrine of horizontal integration, where an enterprise produces goods for sale within
and outside the state and it is impractical physically to separate goods by destination,
the Commonwealth may regulate the whole operation.39
The trade and commerce power has also been used to regulate employment in the
inter-state and overseas transportation of goods, including the hiring of workers.40
Whether the power extends to other categories of workers engaged in interstate trade
remains an open question.
Federal use of the corporations power
The most powerful potential source of federal power over state economic activity
is found in s 51(xx) under which the Commonwealth Parliament may legislate with
respect to ‘foreign corporations and trading or financial corporations formed within the
limits of the Commonwealth’. The power exists only in relation to the three specified
types of corporations. Yet, collectively, this sector of the economy accounts for 85 per
cent of the Australian work force.41 It encompasses forty nine per cent of small
businesses.42 Section 51(xx), as interpreted by the High Court allows the
Commonwealth Parliament to legislate on matters touching corporations almost
without limit. In New South Wales v Commonwealth (Work Choices Case), the
majority joint judgment of the High Court adopted Justice Gaudron’s understanding of
36
37
38
39
40
41
42
Australian Constitution, s 51(i).
(1954) 92 CLR 565, 598.
Ibid.
Redfern v Dunlop Rubber (1964) 110 CLR 194.
Huddart Parker v Commonwealth (1931) 44 CLR 492; R v Foster; Ex parte Eastern &
Australian Steamship Co (I959) 103 CLR 256; R v Wright; Ex parte Waterside Workers
Federation of Australia (1955) 93 CLR 528.
Parliament of the Commonwealth of Australia, Workplace Relations Amendment (Work
Choices) Bill: Explanatory Memorandum,
<http://www.comlaw.gov.au/Details/C2005B00181/Explanatory%20Memorandum/Text>.
Ibid.
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the scope of corporations power as extending ‘to the regulation of the activities,
functions, relationships and the business of a corporation … the creation of rights, and
privileges belonging to such a corporation, the imposition of obligations on it and, in
respect of those matters, to the regulation of the conduct of those through whom it acts,
its employees and shareholders and, also, the regulation of those whose conduct is or is
capable of affecting its activities, functions, relationships or business’.43 The power
enables the Commonwealth to regulate purely intra-state activities of corporations.44
The Commonwealth has already assumed to the exclusion of the states the regulation
of the private sector labour market. Section 51(xx) has displaced s 51(xxxv) as the
principal source of nationwide power over industrial relations. The corporations power,
potentially, allows comprehensive micro management of the state economies by
regulating corporate behaviour.
Other sources of legislative power over state economic management
The Commonwealth has, with judicial assistance, developed legislative
stratagems to enter fields beyond constitutional power. Federal intervention to stop the
Tasmanian government’s construction of the Franklin River Dam is perhaps the most
dramatic direct intervention in state economic affairs. The dam was intended to
produce large economic benefits to the state by the generation of hydro-electricity. The
project had no negative impact on the national economy. It was stopped on
environmental and world heritage grounds by the World Heritage Properties
Conservation Act 1983 enacted under the external affairs power. The High Court
sustained the validity of the legislation with the majority (Murphy J, Mason J, Brennan
J and Deane J) forming the view that the power arose in relation to any treaty
obligation assumed bona fide under international law.45 The external affairs power has
also been used to regulate intra-state air navigation46 and to prevent racially
discriminatory land management policies.47
The Commonwealth also uses its taxation power as a tool of economic
management, for example to direct investments.48 It uses its constitutional powers to
control matters lying outside its powers. As Stephen J stated in Actors and Announcers
Equity Association v Fontana Films Pty Ltd, ‘If a law enacted by the federal legislature
can be fairly described both as a law with respect to grant of power to it and a law with
respect to a matter or matters left to the States, that will suffice to support its validity as
a law of the Commonwealth’.49 Or, as Dixon J once put it, the fact that the law
‘discloses another purpose and that that purpose lies outside the area of federal power
are considerations which will not in such a case suffice to invalidate the law’.50
C The Australian common market
A common national market is essential to a successful federation. The economic
survival of subnational units depends on it. A major challenge for the founders of the
Constitution was the elimination of historical tariff and non-tariff barriers that plagued
43
44
45
46
47
48
49
50
(2006) 229 CLR 1, 115, quoting Gaudron J in Re Pacific Coal Pty Ltd; Ex parte
Construction, Forestry, Mining and Energy Union (2000) 203 CLR 346, 375.
Strickland v Rocla Concrete Pipes (1971) 124 CLR 468.
Commonwealth v Tasmania (1983) 158 CLR 1, 122, 219, 259.
R v Burgess; Ex parte Henry (1936) 55 CLR608.
Koowarta v Bjelke-Petersen (1992) 153 CLR 168.
Fairfax v Federal Commissioner of Taxation (1965) 114 CLR 1.
(1982) 150 CLR 169, 192.
Melbourne Corporation v Commonwealth (Melbourne Corporation Case) (1947) 74 CLR
31, 79.
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commerce in the Australian colonies. They sought to achieve this aim through a
number of devices.
•
•
•
•
•
•
•
Adoption of a modified version of the US commerce clause – s 51(i) grants
Parliament power to make law with respect to ‘trade and commerce with other
countries, and among the States’.
Substitution of uniform customs and excise duties in place of the different
state duties, and the grant to the Commonwealth of exclusive power to impose
such duties (s 90 read with s 89). These provisions established one of the
important conditions of a common market, a common tariff structure for the
entire country.
Express guarantee of free trade and intercourse in s 92. The material part of
this section reads: ‘On the imposition of uniform duties of customs, trade,
commerce, and intercourse among the States, whether by means of internal
carriage or ocean navigation, shall be absolutely free’.
Express prohibition that prevents the Commonwealth from giving preference
to one State over another by ‘any law or regulation of trade, commerce, or
revenue’. (s 99)
Express prohibition that the Commonwealth shall not, by any law or
regulation of trade or commerce, abridge the right of a State or of the
residents therein to the reasonable use of the waters of rivers for conservation
or irrigation. (s 100)
Grant of power to the Commonwealth to regulate navigation, shipping and
State railways (s 98) and to forbid discriminatory or preferential railway
tariffs (s 102).
Establishment of an Inter-State Commission, with such powers of
adjudication and administration as the Parliament deems necessary for the
execution and maintenance, within the Commonwealth, of the provisions of
this Constitution relating to trade and commerce, and of all laws made
thereunder. (s 103)
The free trade guarantee in s 92 is the key ongoing safeguard of the common
market. The High Court’s jurisprudence on free trade has fluctuated between two
theories known as the ‘individual rights theory’ and the ‘free trade theory’. The latter
holds sway at present. The individual rights theory understood the ‘absolute freedom’
of trade guaranteed in s 92 as securing the liberty of every citizen to trade across state
borders free of discriminatory burdens. Under the so-called free trade theory, a law will
be an unconstitutional restriction of trade only if it imposes a discriminatory burden of
a protectionist kind.51 A state may limit an individual’s freedom to trade or even
monopolise the trade in a commodity without infringing this test.
It is fair to say that despite uncertainties in the jurisprudence, the Australian
common market is in a healthy state, particularly after the progressive dismantling of
historic state trade monopolies, the privatisation of major federal trading corporations
and the enactment of pro-competition federal and state legislation. Importantly, the
High Court has struck down fiscal equalisation measures52 and closely scrutinises
‘well-being’ measures for hidden protection.53 Disappointingly though, the High Court
has not disapproved of state marketing monopolies. In Barley Marketing Board (NSW)
v Norman (Barley Board Case),54 the Court upheld a marketing scheme under which
51
52
53
54
Cole v Whitfield (1988) 165 CLR 360, 399.
Bath v Alston (1988) 165 CLR 411.
Castlemaine Tooheys v South Australia (1990) 169 CLR 436.
(1990) 171 CLR 182.
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all barley grown in New South Wales vested compulsorily in the Barley Marketing
Board on the ground that the individual rights theory had been rejected in Cole v
Whitfield. However, the High Court has recognised that the existence of a national
market for a service or goods places extra limits on a state’s competence to regulate the
trade. In Betfair v Western v Western Australia,55 the Court ruled that a state must not
restrict within its geographical reach the operation of competition in a national market.
The effect of the decision has been diluted somewhat by the High Court’s decision in
Betfair v Racing New South Wales which allowed the NSW state racing authorities to
impose higher fees on an out of state betting exchange to access information on races
held within the state.56 Overall though, the Australian common market satisfies an
important condition of fiscal federalism.
D Hard budget constraints
The most serious departure from the ideal fiscal federalist model in Australia
occurs on the revenue and spending side. The capacity of a government, whether
central or provincial, depends on its power to raise revenue (mainly by taxation) and
the power to spend. Empirical studies previously mentioned show that government
tends to be smaller and more efficient where the states are responsible for both
revenue raising and public spending. The capacity to raise revenue constrains the
propensity of governments to spend beyond their means. People of the state become
more empowered to demand either better public goods or lesser tax burdens or both
of these. Hence the ideal system of fiscal federalism is one where the powers of
taxing and spending are in the same hands. Constitutional developments since
federation has deepened the federal-state fiscal imbalance and worsened the problem
of fiscal illusion.
The connection between revenue and spending responsibilities has been fractured
by judicially approved federal legislation and the s 96 conditional grant mechanism.
Consequently, state governments have to plead for a share of federal tax revenue. In
Australia, taxation power is more centralised than in other federations. Even formally
non-federal countries such as Sweden and Japan have greater decentralisation of
taxation power.57 The initial constitutional settings were fiscally biased towards the
Commonwealth. A degree of vertical fiscal imbalance was built into the Constitution.58
The Commonwealth was given a monopoly of customs and excise duties under s 90
and concurrent power of general taxation under s 51(ii). The states mitigated the
imbalance by levying their own income tax until 1942 when the Chifley Labor
government made that a federal monopoly.
There were historical reasons to grant the Commonwealth exclusive power to levy
customs duties. Tariff barriers were a feature of damaging inter-colonial rivalry before
federation and their removal was a major factor in the ultimate design of the federation.
The mischief could have been addressed by the abolition of inter-state customs duties and
the grant to the Commonwealth of exclusive power to levy customs duties at the national
border. Discriminatory state excise could have been eliminated by the enforcement of the
free trade mandate of section 92. The addition of excise duties to the federal monopoly
was therefore unnecessary except as a device to give the newly formed federal
government a lucrative revenue source. The states consequently had to resort to the
subterfuge of exacting excise duties in the guise of licence fees calculated on past
55
56
57
58
(2008) 234 CLR 418.
Betfair Pty Ltd v Racing New South Wales (2012) 86 ALJR 418.
Sorens, above note 10, 213.
Brian Galligan, ‘Fiscal federalism: then and now’ in Appleby, Aroney and John, above n 16,
327.
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turnover. The strategy became known as the ‘Dennis Hotels’ model after the ruling in its
favour in Dennis Hotels Pty Ltd v Victoria.59 The Dennis Hotels model has withstood
numerous challenges, albeit with substantial reservations. A key reason for its survival is
that it has become a fait accompli as an integral part of the fiscal arrangements upon
which State governments function. In their joint judgments in Capital Duplicators Pty
Ltd v Australian Capital Territory (No 2), Mason CJ, Brennan J, Deane J and McHugh J
pointed to the fact that ‘financial arrangements of great importance to the government of
the States have been made for a long time on the faith of these decisions’ and that
‘considerations of certainty and the ability of governments to make arrangements on the
faith of the Court’s interpretation of the Constitution are formidable arguments against a
reconsideration of Dennis Hotels and Dickenson’s Arcade’.60
The revenue capacity of this device though is limited. The High Court does not
approve of such schemes where their object seems primarily fiscal rather than
regulatory. In Ngo Ngo Ha v New South Wales, the High Court found the State tobacco
licence fee to be an excise duty, on the ground that the fee of 100 per cent of the value
of the tobacco could not conceivably be regarded as a mere fee for a licence in a
regulatory scheme, particularly in view of the minimal regulatory content of the licence
conditions.61 The drastic effect on State revenues of Ngo Ngo Ha could not be ignored
by the Commonwealth, which quickly increased its own excise duties and channelled
the revenue back to the States and Territories. The High Court has allowed states to
impose consumption taxes as opposed to excise duties. These are taxes imposed on the
consumer rather than the producers or sellers. The seller may act as a collecting agent
for the tax but the consumer may or may not elect to pay the tax at the point of sale. If
the consumer pays the tax at the point of sale and does not in fact consume the product
the amount paid may be recovered. The States have successfully used this type of
scheme to raise some revenue. A Tasmanian tax on tobacco at the point of
consumption survived a challenge in Dickenson Arcade v Tasmania.62
The main sources of independent state revenue are limited to employers’ payroll
taxes, property tax, stamp duty, taxes on goods and services that do not fall within
excise duty, taxes on other activities, and, in the case of the resource rich states,
royalties for the extraction of minerals. This contrasts with the position of American
states which are able to impose state income tax and sales taxes. The following
statistics from the US Bureau of Statistics for 2007 summarises the tax income of the
American states.
59
60
61
62
(1960) 104 CLR 529.
(1974) 130 CLR 171, 224.
(1997) 189 CLR 465, 502.
(1974) 130 CLR 177.
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Canadian provinces have exclusive legislative power under s 92 of the
Constitution Act 1867 to raise revenue by ‘direct taxation within the Province in order
to the raising of a revenue for provincial purposes’. This power allows the provinces to
impose most kinds of taxes including taxes on income, sales and excise, payroll and
natural resources. 63
Section 96 and fiscal illusion
Section 96 as it stands today reads:
During a period of ten years after the establishment of the Commonwealth and
thereafter until the Parliament otherwise provides, the Parliament may grant financial
assistance to any State on such terms and conditions as the Parliament thinks fit.
This section, on the face of it, was an innocuous provision. It enabled the
Commonwealth to grant financial assistance to the states on conditions that Parliament
determines. The states had the power to reject these grants if the proposed conditions
were unacceptable. Although the conditions must be determined by Parliament, the High
Court has allowed Parliament to delegate that power to a minister.64 Therefore, it is not
always Parliament that determines conditions in practice but the federal executive.
Given the federal nature of the Constitution and the limits of the
Commonwealth’s legislative powers, it was inconceivable that the authors of the
Constitution intended by s 96 to create a new source of federal power that is virtually
unlimited. The conditions that the founders intended to attach to grants under s 96 were
financial conditions that enable the Commonwealth to use State agencies to achieve
objects that fall within Commonwealth power. This is essentially the position in
Canadian constitutional law.65 However, as the eminent constitutional lawyer P H Lane
has said, the High Court has interpreted s 96 in ways that allow the Commonwealth to
‘invade traditional State domains and dictate State policy’.66
This expansion of federal fiscal power was engineered in two stages. First, in
1926, the High Court ruled in Victoria v Commonwealth67that the power in section 96
63
64
65
66
67
Robin Boadway, ‘Fiscal federalism in Canada: principles, practices, problems’ in Appleby,
Aroney and John, above n 16, 306.
Deputy Commissioner of Taxation (NSW) v Moran (1939) 61 CLR 735.
Boadway, above n 63, 305.
P H Lane, Lanes Commentary on the Australian Constitution (Law Book Company, 1986)
548.
(1926) 38 CLR 339.
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79
was not limited to the achievement of objects within the enumerated areas of federal
power. It meant that the Commonwealth could make grants to States on conditions that
allowed it to regulate public policy in fields from which it was excluded by the
Constitution. This ruling by itself was not catastrophic as the States could still refuse
to surrender their authority by not agreeing to conditions that the Commonwealth
proposed. The Commonwealth has no legal power to compel the states to accept the
grants or agree to its conditions. However, the High Court’s interpretation of s 96 and
taxation power has allowed the Commonwealth to gain a virtual power to compel the
States to accept its terms.
In the second stage, following the end of World War II, the Commonwealth
succeeded in gaining a monopoly of the power to impose income tax to the exclusion
of the states. This was done by legislation that provided for grants to be made to states
on the condition that the states do not exercise their undeniable legislative power to
impose state income tax. In 1957, the High Court approved this arrangement and
thereby further widened the federal power under s 96.68 The Commonwealth already
had the constitutional monopoly of customs and excise duties under s 90, which meant
that the States have no capacity to impose sales taxes other than on the ultimate
consumer. The combined monopoly of sales, customs and income taxes makes the
Commonwealth of Australia one of the most fiscally imbalanced federations in the
democratic world. The High Court by its interpretation of s 96 has reduced the States
to financial dependency.
Good and Services Tax – an attempt to rebalance
At a special Premiers’ Conference held on 13 November 1998 the governments of
the Commonwealth, the States and the Territories signed the ‘Intergovernmental
Agreement on the Reform of Commonwealth–State Financial Relations’. The
agreement was given effect by A New Tax System (Commonwealth–State Financial
Arrangements) Act 1999 (Cth). The Act was part of the legislative package that
introduced a 10 per cent goods and services tax (GST) in Australia. The
Intergovernmental Agreement sought to address the problem of vertical and horizontal
imbalance through a commitment to distribute the entire GST revenue (after cost
deduction) to the States and Territories according to principles relating to horizontal
fiscal equalisation. Under its terms, GST revenue is distributed among the States and
the Territories according to the following formula set out in s 13 of the Act:
Adjusted State Population x [GST Revenue + Total Hospital Grants] – State Hospital Grant
Adjusted Total Population
The formula seeks to generate horizontal fiscal equalisation by employing
‘adjusted State populations’ calculated by multiplying the estimated population of the
State on 31 December in the GST year by the relativities factor determined for the
State for that year by the Treasurer acting under s 9. The Treasurer is required by s 9 to
consult each State before making the determination. Section 11 states that the GST rate
and the GST base ‘are not to be changed unless each State agrees to the change’. In
exchange for this guaranteed share of the potentially growing GST revenue, the
Commonwealth secured the agreement of the States to abolish a number of existing
taxes and grants to the States with the overall objective of making the States less
financially dependent on the Commonwealth than they were prior to the legislation.
68
Victoria v Commonwealth (Second Uniform Tax Case) (1957) 99 CLR 399.
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The whole scheme is overseen by a Ministerial Council comprising Treasurers of the
Commonwealth, States and Territories.
The constitutional importance of the GST scheme lies in the fact that the grants
from the GST are unconditional, allowing the States to determine spending priorities.
The Act is not a constitutional guarantee of GST revenues to the States. A future
parliament may repeal the Act and nullify the agreement. However, it may prove
politically difficult for a federal government to retract the concessions to the States, in
much the same way that it is economically and politically difficult to dismantle the
Commonwealth’s de facto monopoly on income tax. The tax reform package of 1999
has changed the fiscal settings of the Australian constitutional system, though not the
formal provisions of the constitutional text.
The system of federal grants from centralised tax collection was further solidified
by the GST legislation. The Australian Constitution by its initial settings deprived the
states of important sources of revenue. The deprivation of income tax power and the
expansive interpretation the grants power increase the fiscal dependence of the states on
federal funding. This added to the distortions already introduced to the state economy by
the hidden revenue schemes designed to evade the excise prohibition in s 90.
Section 96 of the Constitution only authorises grants to be made to the states.
Commonwealth governments, however, have been progressively extending the reach
of its executive power by making grants directly to elected local authorities and other
persons. The problem of fiscal illusion is further aggravated by grants to local
authorities. They erode the constitutional responsibilities of state governments and
increase federal control of state affairs. The Commonwealth had a spectacular success
when the High Court by a bare majority endorsed the Whitlam government’s plan to
establish and directly fund a national social welfare program with no authorising
legislation or participation by the states.69 Successive federal governments on both
sides of politics were emboldened by this authority to extend Commonwealth spending
power beyond constitutional bounds. Williams v Commonwealth appears to have
arrested this trend at least for the time being.
IV ENTER WILLIAMS
The chaplaincy scheme was funded by the Howard government out of annual
appropriations without the authority of valid legislation. The Commonwealth relied on
its general executive power that ‘extends to the execution and maintenance of this
Constitution, and of the laws of the Commonwealth’. In particular it drew support
from judicial dicta indicating the existence of the federal executive’s inherent power as
a national government. It argued that the Commonwealth’s executive power extended
to the power to carry out activities by contractually engaging others within the areas of
its legislative power provided the expenditure was authorised by a parliamentary
appropriation. In the earlier case of Pape v Federal Commissioner of Taxation70the
High Court had accepted that s 61 supports executive action without legislative
authorisation in national emergencies. However the Court there unanimously rejected
the Commonwealth’s claim that sections 81 and 83 provided a sufficient source of
power to appropriate and spend money out of the consolidated revenue fund.
The High Court in Williams, with Justice Heydon dissenting, ruled that the
spending scheme was beyond the executive power of the Commonwealth. In the words
of Chief Justice French, the decision rejected ‘the unqualified proposition that, subject
to parliamentary appropriation, the executive power of the Commonwealth extends
69
70
Victoria v Commonwealth (AAP Case) (1975) 134 CLR 338.
(2009) 238 CLR 1.
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81
generally to enable it to enter into contracts and undertake expenditure of public
moneys relating to any subject matter falling within a head of Commonwealth
legislative power’.71 The implications of the Commonwealth claim on fiscal federalism
were noted by the majority judges.
French CJ:
The character of the Commonwealth Government as a national government does not
entitle it, as a general proposition, to enter into any such field of activity by executive
action alone. Such an extension of Commonwealth executive powers would, in a
practical sense, as Deakin predicted, correspondingly reduce those of the States and
compromise what Inglis Clark described as the essential and distinctive feature of “a
72
truly federal government”.
Gummow and Bell JJ in their joint judgment said that the practice ‘not only alters
what may be called the financial federalism of the Constitution but it permits the
Commonwealth effectively to interfere, without the consent of the State, in matters
covered by the residue of governmental power assigned by the Constitution to the
State’.73 Hayne J reiterated the position in Pape that ‘federal considerations limit the
scope of the executive power’.74 Kiefel J, following Mason J75, said that the claimed
spending power would ‘effect a radical transformation of the Commonwealth’s area of
responsibility under the Constitution’ and would ‘enable the Commonwealth to carry
out programs outside the acknowledged heads of legislative power merely because it
was convenient for the national government to formulate and administer them’.76
V AFTERMATH OF WILLIAMS
The decision in Williams v Commonwealth plunged into doubt the
Commonwealth’s grown practice of directly funding local government bodies out of
appropriations without legislative authorisation. As previously observed, the
government was forced to revive its long standing project to elevate local government
to constitutional status so as to enable direct federal funding of local government
bypassing the states. An amendment to s 96 of the Constitution was passed by the
federal Parliament without resistance. Although abandoned when it was overtaken by
the scheduling of the September general election, the proposal is likely to be revived at
a future moment of political opportunity.
If enacted, the amendment will worsen the problem of fiscal imbalance and fiscal
illusion. It will create a new source of spending and regulatory power that will allow the
Commonwealth to undertake new activities within state jurisdiction without state
government agreement. It would be a constitutional game changer. The new spending
power is likely to lead to higher federal spending, and higher local spending, to larger
budget deficits and therefore to higher taxes and debt. This at least is what history
suggests. It will further widen the gap in accountability between local government and
local communities. The principal way in which this responsibility is maintained is by the
financial dependence of local government bodies on the revenue raised from the local
community by way of rates and charges for services. Local government bodies could
become service providers for the federal government to the neglect of local priorities.
71
72
73
74
75
76
(2012) 86 AJLR 713, 720.
(2012) 86 AJLR 713, 741.
(2012) 86 AJLR 713, 752.
(2012) 86 AJLR 713, 761.
Victoria v Commonwealth (AAP Case) (1975) 134 CLR 338, 398.
(2012) 86 AJLR 713, 829.
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At present the elected state governments have, in theory and law if not in practice,
the capacity to reject the demands of the Commonwealth by refusing to accept s 96
grants. If the proposed amendment becomes law, the elected government will have no
capacity to reject conditions attached to federal grants to local bodies. The decision of
a local authority to accept conditions under s 96 will be binding on the state
parliament. These conditions will override all State laws that are in conflict with them.
The state parliament will not be able to make any laws that conflict with the conditions
accepted by the local council. The will of the people of the state may then be defeated
by a local council acting in concert with the federal government. The populations,
resources, agriculture, industry and commerce of local government regions are integral
to the state’s economy. Fiscal federalism requires the capacity of states to prioritise
their economic objectives and choose economic strategies. To the extent that the
federal government gains control of the economies of regional units, the State loses
control of the state economy. At present, and in the past, the Commonwealth has been
inhibited from exerting too much direct control of local government because of
constitutional uncertainties. If the proposed amendment becomes law, the
Commonwealth’s temptation to impose its will on state policy by controlling local
bodies will naturally grow.
Williams v Commonwealth is a positive development for fiscal federalism in
Australia. However, if it becomes the inspiration for the eventual constitutional
entrenchment of local government directly funded by the Commonwealth, it may seem
a Pyrrhic victory in historical hindsight.