3.2 The operation of the Federation

Australia’s federal model has a number of distinctive characteristics including the relatively high degree of shared functions between governments. Over time, there has also been a trend towards greater Commonwealth involvement in the nation’s affairs.

Throughout our history debate has persisted on the efficacy of the Federation recognising that many practical difficulties arise through its operations. Overall, however, the Commission believes that the Federation has served us well.

One of our leading historians, Geoffrey Blainey, has explained why a federal system is best for Australia:

It is highly democratic. It is a guardian of civil liberties, because it offers a balance of powers rather than one supreme power. It is close to the people but also Olympian at times. It enables specialisation, and it respects the regional differences in a big continent. But it is not a neat package of powers. Tidiness is not amongst the visible strengths of a federal system. There will always be ragged edges and compromises, there will always be tensions in a federal system. There will periodically be formal or guerrilla raids across the federal-State boundaries, usually led by national leaders. The raids now and then are led by Justices of the High Court.

It is fair to suggest that it is not an easy system for politicians to operate in... If three spheres or levels of government carry out the same activity, say in health or social services or education, then the bureaucratic and administrative expenses may well be too high. And if things go wrong, whom do we blame? Praise and blame form the gearbox of democracy. It is vital that a government responsible for creating chaos, or letting chaos reign, should be pinned down.

Address to the Samuel Griffith Society, 2007

A feature of the Australian Federation is the extent of the imbalance in the revenue raising capacities and spending responsibilities of the different tiers of government.

The vertical fiscal imbalance that exists reflects the fact that the Commonwealth Government raises revenues in excess of its spending responsibilities, while State governments have insufficient revenue from their own sources to finance spending responsibilities.

The amount of money provided by the Commonwealth to meet this revenue shortfall by the States is currently around $96 billion per year.

Of this, $51 billion comes from untied funds - passing over the $50 billion proceeds of the GST which the Commonwealth collects, plus another $1 billion in general revenue assistance. A further $45 billion is in the form of direct grants, which can be tied to a general area of spending, or to meeting specific criteria, or to provide a very specific outcome.

Total Commonwealth funding to the States represents around one quarter of the Commonwealth Budget and 40 per cent of State revenue.

As well as having to deal with vertical fiscal imbalance, the States have different capacities to raise revenue and deliver services. A form of fiscal equalisation occurs through separate arrangements which determine how the GST revenue pool is shared between them.

The Commonwealth Grants Commission decides how the GST should be allocated under a complicated formula. It determines adjustment to the shares that would otherwise prevail if an equal per capita formula for sharing was used.

Horizontal fiscal equalisation is intended to provide budget support to the less wealthy States so they can provide services that are comparable to the larger States.

As shown in Table 3.1, the extent of horizontal fiscal equalisation currently represents around 9 per cent of the GST pool or around $4.7 billion from a total GST collection of $50 billion.

Source: 2013-14 Budget Paper No. 3 and 2000-01 Budget Paper No. 3. Does not take into account distribution of unquarantined health care grants.