Federalism: Where is it headed?

Clashes of wills over the distribution of power and responsibility between the federal government and the states are as old as the nation itself and are common to all comparable federations. And the reasons are not hard to find. They have always had at their core the competing ambitions and priorities of governments at different levels; evolving judicial interpretations of constitutional provisions; fiscal imbalances and conflicting political agendas.

In recent years these root causes have been reinforced by globalisation and technological change. Issues that were once local are now national and often international. Global competitiveness often requires co-ordinated, if not uniform, national responses. The current high profile conflict concerning industrial relations is just the most recent example.

The absurd proposition to drop a small set of Commonwealth funded technical colleges into the centre of a very large state managed and jointly funded vocational education and training sector merely represents an extreme indication of the inefficiency, waste and duplication which can arise when electoral agendas are free to roam untrammelled over previously understood boundaries.

As outlined in a recent the Centre for Policy Development article by Lindsay Tanner, the ongoing efforts to resolve the absurd and inefficient allocation of responsibilities for health highlight the failure of the current unstructured process in trying to resolve these complex conflicts.

The failure of joint efforts to deal with the national water crisis in general and the problems of the Murray-Darling system in particular are the other extreme as they illustrate the slow, cumbersome processes involved in having all governments involved in the development of policies, their implementation and the subsequent issues of scrutiny and accountability.

But none of this is new or unique to Australia. A major analysis of this issue in the New England Economic Review found a similar history of ad hoc arrangements, inefficiency and conflict. And it is certainly true that in Australia successive federal governments have managed the relationship in different ways depending on the issues and political context of the time. What has been notable is that the situation is much more complex than Labor = Centralist and Liberal = States Rights, or vice versa.

After all, many of John Gorton’s political problems inside the Liberal Party flowed from clashes with powerful Liberal premiers. And, of course, innovative use of the constitution to extend the reach of federal policy was a hallmark of the Whitlam era. Gough was seen as a zealous centralist but he was much more than that as he had major commitments to regionalism and local government.

The Fraser government’s reaction to the Whitlam era sounded radical, e.g. income tax powers for the states, but in fact changed very little of a positive nature. In the Hawke years the decisive shift in the balance of power within the federation arose from the Franklin Dam’s case judgement by the High Court which confirmed the Commonwealth’s capacity to use the external affairs power to pursue its policy goals. Under Keating, the highlight was the evolution of the incentive and agreement based model to implement National Competition Policy. Howard has changed the financial equation with the flow of GST funds to the states (effectively as untied grants) but has been extremely centralist in areas such as education and now industrial relations.

So, what is to be done?

The most realistic prospect of progress lies with agreeing a set of ‘framework principles’ which could be applied across a range of policy areas and over a lengthy period even when the political complexion of governments changes. No set of principles will remove argument over specific controversial examples, but such an agreement would provide a basis for going forward on most occasions.

I have seen recently two sets of proposals aimed at rationalising the distribution of functions within a federation. One set was contained in the excellent recent the Centre for Policy Development article by Lindsay Tanner to which I referred earlier. The other arose from a forum conducted in the USA by the New England Economic Review (NEER) which was held during the time of the Clinton Administration but which still seems relevant today.

Arising from the NEER forum were six proposed principles which could be summarised as follows: Efficient production of public services; Alignment of costs and benefits; Response to spatial differentiation; Innovation in the public sector; Responsiveness to citizen preferences; and Accountability.

These constitute a useful starting point but, particularly in the Australian context, other issues need to be considered. Prominent among these is the risk of a race to the bottom in welfare programs and environmental protection in the event of devolution. There is also general agreement that redistribution and issues of spatial inequality require national rather than local solutions and a real concern that the nature of state revenues and budget constraints might combine to lead to pressure on the states to cut services during economic downturns, which is when they are most needed.

On this basis, a seven-point plan for a proposed framework of principles might look something like this: firstly, the primary responsibility for economic management must remain with the Commonwealth; secondly, the national government must retain the capacity to implement its international obligations and respond to global challenges; thirdly, the central government must have the resources and responsibility to redistribute resources to meet socio-economic and spatial inequalities within and between states; fourthly, beyond these areas as far as possible we should establish national goals and accountability mechanisms and allow flexibility in their implementation between different state and territory jurisdictions; fifthly, the best mechanism for delivering these principles might be some form of ‘Performance Partnership’ by which the goals and accountability mechanisms are negotiated and states carry the responsibility for delivering the agreed outcomes; sixthly, there must be enhanced recognition of local governments as delivery agencies for programs; and finally, there would probably be a need to agree on enhanced cross-jurisdictional assessment of outcomes whether by the Productivity Commission or a revived Inter-State Commission, probably incorporating the role of the Grants Commission.

Such a framework of principles might allow us to advance down the road towards a scheme based on the principle of ‘fund nationally, act locally’.


Lindsay Tanner, Abolish the States, The Centre for Policy Development, 23 November 2005. 

New England Economic Review: http://www.bos.frb.org/economic/neer/neer1998/neer98.htm

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