Articles – The Centre for Independent Studies

MEDIA RELEASE: Public money for public benefit, not political purposes

30 October 2014

The economic imbalance in Commonwealth-State financial relations highlighted in recent reports from the Committee for Economic Development of Australia (CEDA) and the National Commission of Audit was not an accident, it was a deliberate construct of Australia’s federation, says University of Sydney Professor of Constitutional Law, Anne Twomey.

“Those who wrote the Commonwealth Constitution knew they were handing nearly three-quarters of all tax revenue to the Commonwealth, while the States would remain responsible for the vast bulk of spending. They recognised the economic imbalance that this would cause,” writes Professor Twomey in a Centre for Independent Studies publication that provides essential context for the current discussions over reform of federalism.

Prof Twomey outlines how Australia arrived at the current position and what constitutional constraints and principles are relevant to future reforms.

“The framers of the Constitution wanted to keep a massive surplus out of the hands of the Federal Treasurer. They were concerned that the Commonwealth would waste the money on its own interests while starving the States of funds. So they introduced constitutional mechanisms to force the transfer of most of the Commonwealth’s revenue to the States.

“But those constitutional measures were thwarted in the first 10 years of federation. The States re-built their financial independence from the Commonwealth by developing new forms of taxation, such as income tax, whereupon the Commonwealth took over income tax and progressively diminished the States’ financial independence.

“The Commonwealth started spending on matters that were not within its powers in order to increase its influence over voters and expand its role in State affairs. It points to the use of ‘public money’ for political purposes rather than public benefit.

Prof Twomey says the High Court has played a role in the imbalance but in recent years started to impose limits on the Commonwealth’s executive power to spend public money.

“The Court has explicitly stated that the Commonwealth is a government of limited powers within a federation. It cannot maintain its pretensions to being an all-powerful central government. It cannot spend public money on anything it wishes. It has been financially neutered.”

Controversial and far-reaching proposals have been proposed by CEDA and the National Commission of Audit, which include the Commonwealth’s withdrawal from some areas of State responsibility and State involvement in the imposition of personal income tax. Further proposals will arise from the White Paper on the Reform of the Federation and a further White Paper on Taxation Reform.

Recognition that the High Court is now serious about enforcing limits on the Commonwealth’s expenditure powers may be the impetus that is needed to achieve genuine, long-lasting reform. In order to ensure that such reforms are effective, those developing them must take into account the principles that have recently been applied by the High Court:

  • respect for the operation of the federal system and the federal distribution of powers,
  • the accountability of the Executive to Parliament,
  • the need for parliamentary scrutiny of expenditure programs, and
  • recognition that it is ‘public money’ that is being spent, not the Commonwealth’s own money

Print Friendly, PDF & Email