This is an extract of a speech delivered by Mr Terry Moran AO, Secretary, Department of the Prime Minister and Cabinet to the Eidos Institute, Brisbane, yesterday:

On the whole, the federation works well. Indeed, Australia is one of the world’s most successful federations. But it’s not always pretty, and its benefits are not always obvious. The feuds that erupt at times between the Commonwealth and the states must seem to many like a brawl in a fractious family. Imagine them squabbling over a game of backyard cricket. Who gets to bat? Who has to field by the chook shed? Sometimes there’s a ruckus over rules. Is it six-and-out if the ball is hit over the fence, or only if the ball can’t be found? And who decides?

I’d be the first to agree that our system of government has its weaknesses. But the federation we have built is more popular than many commentators would lead you to believe. And there are good reasons for the support it attracts. The challenge we face is to make it work better.

What if we didn’t have a federation?

In spite of its shortcomings, federalism remains highly relevant in a world vastly different from that of the 1890s in Australia, when our approach was designed. Since that time, federalism has grown in popularity around the world. There are now even unitary states that seek to draw on the benefits of federalism, by transferring powers to sub-national jurisdictions – recently, for example, in France and Italy.

Imagine if we didn’t have a federation – if the colonies had never agreed to form the Commonwealth of Australia. We’d have been worse off. Barriers and competition between the colonies would have made business more difficult, and made us all poorer. There would have been tariffs on trade across borders. And together with other barriers to intercolonial trade, this would have lowered economic growth. It would have been harder to pay for social infrastructure, and for protecting the environment. Advances in the provision of social welfare that began under Prime Minister Andrew Fisher in the 1910s would have been unlikely. Australia would have been weaker and more vulnerable in the face of security threats – whether from the feared menace of Russia and Germany in the 1890s, the threat from Japan in the 1940s, or the terrorist threats today.=

Thinking about the benefits of federalism, it is illuminating to revisit the arguments made in its favour during the campaign for federation. The South Australian politician Richard Baker, in an 1897 pamphlet advocating the federalist cause, commented that most supporters of union between the colonies cited its ‘patriotic and sentimental advantages’.[1] Aside from these, he enumerated no fewer than 17 other benefits. The first was that it would prevent war between the colonies; the second that it would allow for a common foreign policy. Not only that, it would prevent strife within the colonies. ‘A strong Central Government would ensure domestic tranquillity, and outrages, which have in some cases amounted to almost civil war, would be put down by a strong hand’.

Some of the advantages he cited now seem quaint. ‘Greater economy and efficiency would be insured in the management of the postal and telegraph departments, no doubt ultimately resulting in a penny postage and a sixpenny telegram’, he wrote.

But many of Baker’s arguments still resonate today. Baker cited the economic and financial benefits of federation. ‘The credit of Federated Australia should be as good as the credit of any other country in the world’, he said, and this would lead to savings in interest on public debt. ‘The benefits and advantages which will accrue from Inter colonial Free Trade are so generally recognised and admitted, that it is not necessary to dwell on this head’.

And along with the practical benefits of the sort listed by Baker, we would not have the bonds of Australian nationhood – the sense of a shared identity and purpose that comes from being Australian.

Had we not federated, we might have adopted a weaker alternative, a confederation – a loose association of states that agree to coordinate policies in some areas, but without a new state over the top of them with overarching powers. Five of the Australian colonies did flirt briefly with a confederation – in the shape of the Federal Council of Australasia, which was created by an Act of the British Parliament in 1885. The council’s purpose was to provide a vehicle for the colonies’ relations with the South Pacific islands, and it had the power to legislate directly on a few matters such as extradition and fisheries. Notably, NSW did not join the council, and, in 1899, by the last of its eight meetings, it had achieved nothing of practical value – except that it strengthened federalist sentiment.

The American experience highlights the weakness of confederation – which was the system that prevailed from American independence in 1776 until a new constitution was agreed in 1787. The original Articles of Confederation could only be amended by unanimous vote of the states, and gave the federal government no power to raise taxes. The federal government depended on states for its money, and could not force them to pay up. The confederation was too weak to regulate disputes between the states.

In Australia, once the passion for a stronger federation was lit by Henry Parkes in Tenterfield in 1889, it was a full federation rather than a weaker confederation that dominated debate. So we skipped quickly past the unsatisfactory confederation stage that caused such problems in the United States. The Commonwealth of Australia that was established in 1901 drew heavily on the (improved) American model, with a careful distribution of powers between national and state governments. Each level retained autonomy within its sphere of authority. Constitutional safeguards balanced the disparate goals of democratic majority rule and the protection of states’ powers.

Federation has made us better off

The purpose of this excursion into history has been to make the point that, for all its problems, Australia is better off with federation than without it. Without a federation, we would have had a very different history, and we’d be worse off today. There are many reasons for this.

The federation serves a useful contemporary purpose. I want to state that judgement clearly, as an antidote to the persistent idea that our federation is over-governed and that it costs us more than if we were a unitary state.

This attitude is sometimes seen in comments by sections of the business community. There are business leaders who hold the view that Australia can’t work well unless states cede regulatory authority to the Commonwealth, and that as much as possible affairs should be run from the centre. Proponents of this view often see government as a giant corporation, where everything is subject to the power of the CEO. This is not an arrangement for stable and effective democratic government. It is a recipe for authoritarianism, and would be a long way from the liberal democratic ethos we now enjoy.

The same state diversity that CEOs embrace in the United States they would eliminate in Australia. The business-centric views of some in corporate Australia, taken to their logical conclusion, would mean radical change to Australia’s constitutional arrangements, and not for the better.

Federalism allows a balance to be struck between those policies and programs best undertaken at the national level, and those best performed by states. Defence is a quintessentially national function – one of the original drivers of federation. One of the key functions of government is collecting revenue, which allows it to perform all its other tasks. Collection of many taxes is more efficient when undertaken by a central government. But many services are better delivered and managed at a regional or local level.

One of the key arguments for federalism is that it promotes contestability of ideas and dispersion of power, which strengthen democracy. In a democracy, power and authority are vested in the people. But a democracy always faces the risk that some group or institution will accrue so much power that it undermines the democratic ideal. Federalism helps mitigate that risk, by dispersing power between states and the Commonwealth, and between the House of Representatives and the Senate.

One benefit of the dispersion of power is that it encourages diversity in design and implementation of policies and programs. The Commonwealth and the states may take different approaches to similar issues. Australians often vote for different parties at different levels of government. The dispersion of power promotes competition and creativity among state and Commonwealth governments. It creates an incentive for each government to improve its performance, and an incentive to innovate.

Perhaps the greatest practical benefit of federalism is economic. Research by Anne Twomey and Glenn Withers suggests that federal systems show stronger economic growth than unitary systems.[2] Their research shows that over the past 50 years, federations have consistently out-performed unitary states in economic performance. Professor Withers calculated that, in 2006:

  • Each Australian was better off by around $4500 because of Australia’s federal structure; and
  • They could each be more than $4000 better off still if the federation were more fiscally balanced and the states were stronger.

Of course, there are tradeoffs in a federation. In Australia we have nine governments where we would have one with a unitary system of government, and that leads to some duplication of government functions. But it is not only in the economic sphere that the benefits outweigh the costs; other less tangible benefits reinforce my view that a federation is the best system for Australia.

The federation has helped drive policy reform

Our federal system has yielded far-reaching policy reforms across many areas, and all levels, of government.

The Hawke-Keating years delivered a national competition policy, forged through the collaborative efforts of the Commonwealth and the states. The Howard-Costello years brought reform of taxation and workplace relations, the start of the debate on reducing carbon emissions, and the quest for new ways to improve productivity and pursue increased workforce participation. Many of these reforms came to be focussed through the Council of Australian Governments, or COAG.

COAG drove the next wave of change, and took reform in a new direction. In 2007 and 2008 COAG agreed on a new Intergovernmental Agreement on Federal Financial Relations, which took effect in January 2009. It was a landmark agreement. The Commonwealth, states and territories agreed on strategic outcomes – not just platitudes, but outcomes which are measurable. For example, one agreed outcome in the National Healthcare Agreement is that Australians receive high quality hospital care that is appropriate and timely. That will be measured by reference to, among other things, waiting times for services. Another outcome, drawn from the National Education Agreement, is that all children are engaged in and benefitting from schooling. This will be measured by reference to a number of factors, one of which is the proportion of children enrolled in and attending school.

In this 2008 compact, the Commonwealth, the states and the territories agreed that there would be less control of inputs by the Commonwealth. They agreed that there would be more opportunities for states to innovate and more Commonwealth funds to facilitate that innovation. They agreed to streamline funding arrangements, and to reduce more than 90 Specified Purpose Payments to just five – which are covered by six National Agreements. They agreed on reward payments for the achievement of outcomes. They agreed on an independent umpire to determine that achievement – the COAG Reform Council. And they agreed on how to measure those outcomes. There have now been over 20 reports from the COAG Reform Council, giving updates on progress. It is still early days, but those reports give promising signs of the progress made in achieving the improvements agreed upon in 2008 and are a genuine base for accountability going forward.

There are further changes under way in one of the most important of the 2008 agreements, on hospital reform. All Australian governments have now agreed to very significant micro-economic reform in hospitals that will drive efficiencies and improve responsiveness to patients. In return for these reforms, the Commonwealth has offered an additional $16.4
billion over six years from 2014-15. There are seven elements to this reform. It will deliver:

  • greater sustainability of the hospital system – with the Commonwealth accepting partial responsibility for growth in costs.
  • greater efficiency – through activity-based funding of public hospitals;
  • greater transparency in contributions to hospital funding – through the creation of a national funds pool;
  • greater responsiveness to local communities – with the creation of local hospital networks and Medicare Locals;
  • greater accountability – through the establishment of a National Health Performance Authority that will report more regularly to the community on how well the health system is delivering services;
  • greater fairness and efficiency in the pricing of hospital services – through the establishment of an independent national pricing authority; and
  • greater certainty in the outcomes patients can expect, with new national standards for public hospital services, including a four-hour target for emergency responses and an elective surgery guarantee.

These reforms offer us the best chance to realise many of the ambitions of the 2008 National Healthcare Agreement. And they are necessary for citizens to receive the hospital services that they expect.

The Intergovernmental Agreement broadens the scope of policy reform and also puts much greater focus on the means for achieving our goals – the ways in which we deliver programs most effectively to meet the needs of citizens.

Citizens value the federation

Citizens appreciate that systems of government are means, not ends. It is citizens whose views should be the most important in assessing whether a political system is sound. The strongest indication of the strength and relevance of federalism for Australia is that most Australians like our current system. They value a significant role for government generally.  According to research by Quantum, around 85 per cent of Australians support the proposition that ‘government has an important role to play both in business, and in taking care of people who can’t help themselves’.

Australians’ understanding of who does what within our federation is more sophisticated than many people think. Research commissioned by the Council for the Australian Federation discovered that most Australians care deeply about the democratic protections that federalism secures. They value the contest between Commonwealth and state governments on important issues, although they are frustrated when this descends into bickering and blame shifting.

Australians also have clear views on how roles and responsibilities should be allocated. They feel that the Commonwealth should have the authority to act but that states should have the ability to challenge that action when it matters, building on their local expertise.

Popular views on the roles and responsibilities of the Commonwealth and states ebb and flow; views tend to shift with political cycles. At times when states have not provided the local support that their citizens expect, Australians have been more inclined to favour the Commonwealth when it asserts its authority. Australians recognise the Commonwealth has a legitimate role tackling national problems.

But the federation is weaker than it should be

I said earlier that in spite of the benefits, there were tradeoffs in the federation, and that we had to do better. I want to focus now on some of the reasons the federation has failed to live up to all the expectations held when it was formed.

Most of the advocates of federation were strong believers in the rights of states, and believed that the Senate would be effective in protecting those rights. But not every aspect of the 1901 compact has played out as the founders expected. The original agreement envisaged that states would be more powerful than they are today, with a high level of independence and significant financial powers, and that the rights of the states would be protected by the Senate.

The key weakness of the federation in its current form is that the intended distribution of power between the two levels of government has not been realised: the power of the states is less than the founders intended. Let me flesh out that point – not only are the powers of the states less than intended by the founders, the states are not making best use of the diminished powers they still hold.

In the 1930s, some argued that the most powerful politician in Australia was the Premier of New South Wales. This was not because of their charisma or brilliance – although some have used such terms to describe Jack Lang ­– but for the more fundamental reason that NSW was the most powerful state, and it was more powerful than the Commonwealth. Aside from their personalities, the power of Lang and his successors reflected the intention of Australia’s founders to form a robust federation, deriving strength from the careful distribution of power between the states and the Commonwealth.

The question is, why has this changed? One common answer is to point to the enormous challenge faced by the Commonwealth to raise revenue to fight World War II. Once the Commonwealth had the High Court’s blessing to raise its own income tax, the states lost control over their most important source of revenue.

But there is much more to it than that. The weakness of the federation is a symptom of deeper change over the course of our federal history.

The High Court’s approach to questions of state and Commonwealth power is the first of three factors that have shifted the federal balance. Until 1920, the High Court was careful to reserve certain powers to the states and to protect the states from Commonwealth action. This changed when the court decided in 1920 that Commonwealth powers should be interpreted as broadly as their language allowed, leaving the states with the residue. From this point, it has become quirky and eccentric to draw on concepts such as federal balance and states’ powers when interpreting our federal compact – it has become the rather embarrassing last resort for a struggling barrister facing a hostile bench. While there are some who find comfort in the court’s recent decision on the validity of stimulus tax bonuses as proof of a new approach, there is little concrete evidence as yet to support that view.

The second cause of the weakness of our federation has been the failure of the Senate to function as a house to protect states’ interests. The Senate was an innovative creation, a popularly-elected upper house with a mandate that included the protection and advancement of the interests of the states, by reviewing and by creating legislation. It was with that mandate in mind that each state, regardless of its size, was given the same number of senators.

It is difficult to pinpoint exactly when senators shifted their primary allegiance from their state to their politics. Certainly when Andrew Fisher formed the Commonwealth’s first majority government in 1910, senators were expected to put their party first to aid the passage of an ambitious legislative program. The modern Senate has a vital legislative role, but it is no particular champion for the states.

There is a third cause. In 1942, the Commonwealth chose to take responsibility for the conduct of Australia’s foreign policy from the United Kingdom.[3] In the same year as the Commonwealth successfully asserted its ability to tax income, this decision concentrated responsibility for international affairs in the Commonwealth. Since then, as the world has become more globally connected, the Commonwealth’s responsibility for international affairs has brought with it control over a growing number of policy concerns, such as labour policy, environmental protection and the treatment of women. This expansion of Commonwealth power has been enhanced by the High Court’s willingness to take an expansive view of the Commonwealth’s constitutional power to make laws relating to external affairs.

To stay relevant, the federation must keep evolving

Our federal system is valuable and we must preserve it. But to stay relevant, the federation must keep evolving.

The centralisation of power in the Commonwealth Government means the federation is out of balance – both because of the way revenue is collected and because of the way responsibilities are assigned. As a result, accountability for critical areas of government is blurred. Instead of striving to deliver the best results, there are incentives for state governments to pass the buck – or to chase more bucks from the Commonwealth. At times, instead of fixing a problem, they have blamed the Commonwealth.

This imbalance also weakens the ability of the federation to maximise the welfare of its citizens. It is agreed by many that the procedure for reallocating GST revenue from wealthier to less-wealthy states, called Horizontal Fiscal Equalisation, dulls the incentive for the states to pursue important economic reforms. Somewhat perversely, it may also compensate major errors in economic management leading to sustained slow growth that hurts a state’s ongoing ability to raise revenue.

There is no one fix for the imbalance. But the first step is to maintain our efforts in achieving the goals of cooperative federalism set out in the 2008 Intergovernmental Agreement. The states and territories have started to deliver. Perhaps inevitably, some of the state line departments are taking time to adapt to this radical, yet poorly understood, reform. They have willingly accepted the increase in funding – but they are yet to fully achieve the benefits that can flow from the new system, or to achieve the transparency about performance which it entails. Some Commonwealth line departments too have been slow to adapt to the spirit of the agreement. Overall, the arrangements are yet to work as well as they should, and constant improvement in the underlying agreements is possible, should that be needed. So we must keep the current arrangements under constant scrutiny – which is the task in particular of the COAG Reform Council.

So, where to from here?

As a servant of the federal government, I think there are three ways the states can demonstrate they are serious about making the federation work.

  • First, the states should continue to work with the Commonwealth to ensure the Intergovernmental Agreement achieves its goal of focused, incentive-based program delivery.

o   This is especially important in health, education, skills and workforce development, disability services, affordable housing and indigenous reform.

  • Second, the states should engage seriously with the review of Horizontal Fiscal Equalisation, and ensure the incentives in the arrangements are consistent with good governance and continuing reform.
  • And, third, the states should deliver on the promise they made when the GST was introduced, to reform their own tax bases in return for the stability of funding it provides.

Unless the states can rise to these challenges, there is a risk that the public will expect the Commonwealth to be more assertive in dealing with them – and that poses the risks of weakening the connection between government and citizens at the local level.

The Commonwealth also bears some onus to demonstrate its commitment to restoring balance to the federation. There are a number of ways that it can do this.

  • First, the Commonwealth must continue to restrain its tendency to control an excessive number of inputs on national Specific Purpose Payments.
  • Second, the Commonwealth should allow for and support localised approaches to reform, and rely less on all-embracing boilerplate policies and programs once the basic system architecture is agreed.
  • And, third, the Commonwealth should move towards strategic partnerships with the states and territories where it makes sense to share accountability for outcomes.

The reality is that if the Commonwealth and the states cannot make the present Intergovernmental Agreement work, and if they cannot respond to these other challenges, the Commonwealth will be expected to find other ways to meet the needs and expectations of citizens.

Inevitably, those interested in federalism in Australia yearn for a definitive allocation of roles to the Commonwealth and the states. The public acknowledge that the states have a role to play in many areas, such as health and education. Despite the potential of the 2008 Intergovernmental Agreement, many observers are speculating about further reform. I have heard some musings that it is time to consider a new grand bargain between the Commonwealth and the states, to think afresh about which level of government should lead in particular areas of policy and what other levels of government will do to support it, to think again about equipping the states with the revenue they need to do the things they want to do.

The concept of a grand bargain has an interesting history. In 1976, Malcolm Fraser sought to counter what he saw as the excesses of the Whitlam years with a proposal to share the income tax base, providing the states with a more reliable source of revenue. Bob Hawke tried again in 1990 and 1991 with a different proposal: taxation powers would be reallocated in return for the states taking clear responsibility for particular areas of policy, including some areas within the Commonwealth’s authority.[4] That proposal was fateful – or should I say fatal, at least for Bob Hawke, after Paul Keating used it as a weapon in his fight with Hawke for the prime ministership.

Grand bargains are difficult by nature. But on this occasion we start with the advantage of the GST reforms of 2000 and the 2008 Intergovernmental Agreement, which provides a solid foundation for future reform to improve the ability of the states to enhance services and take greater accountability for them. But the promise of the Intergovernmental Agreement has so far not been fully realised. We need to be patient, as the agreement holds enormous potential for reshaping the delivery of critical services.

Conclusion

I’ve talked about the benefits of the federation, and those benefits are great. We should cherish our federal system. Our system is demonstrably better than those of many other nations.

  • It is comparatively efficient.
  • It protects citizens’ rights.
  • It provides a healthy mix of competition and cooperation.
  • It encourages creativity and diversity in the design and implementation of policies.
  • It is adaptable as circumstances and expectations of government have changed.
  • And Australians care deeply about the sense of identity that their nation provides.

But we need to make the federation better, and build on its strengths to address the weaknesses. Australians deserve a stronger federation. A stronger federation requires a genuine balance in roles, responsibilities between the Commonwealth and states, based on a culture of cooperation and collaboration. This will be a challenge for all – in return for more assured funding the states need to demonstrate clear accountability and responsibility for their programs, and the Commonwealth has to show some self-discipline and stick to its knitting, focusing on the jobs it does best.

It’s a challenge that’s well worth the effort – a stronger federation of this sort would drive a reform agenda as fruitful as any Australia has ever had.


[1] RC Baker, Federation, Adelaide, 1897, available at http://digital.library.adelaide.edu.au/dspace/bitstream/2440/15094/1/Baker.pdf.

[2] Anne Twomey and Glenn Withers, Australia’s federal future, Federalist Paper 1, Council for the Australian Federation, 2007, available at http://www.caf.gov.au/Documents/AustraliasFederalFuture.pdf.

[3] The British Parliament enacted the Statute of Westminster in 1931 but Australia did not ratify it until 1942.

[4] Though the Hawke Government ended tax sharing in the mid 1980s, Hawke initiated his own new federalism process in 1990. It involved a review of roles and responsibilities conducted through an examination of specific purpose payments and the allocation of taxation powers. The process foundered on leadership tensions in the then-government and effectively ended with the change in prime minister in December 1991 without any major change in roles and responsibilities or tax powers being agreed upon.

Peter Fray

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