DAVID SOLOMON. The triumph of federalism?

May 8, 2020

How good is federalism – Australian style? Until the coronavirus crisis struck, the verdict would have been: pretty ordinary, at best. But at the moment it is flourishing. Can this outbreak of good health last?

Federalism had been going rapidly downhill since World War II – more precisely since the Commonwealth removed the power of the States to impose their own income taxes, first as a wartime measure, then through uniform tax legislation that was upheld by the High Court.

The Commonwealth was able to use its taxing power not only to boost its own legitimate interests, but also to intrude into areas where the States were struggling to finance areas which fell within their own constitutional responsibilities – such as education, health, roads and housing. It did so mainly through the use of grants made using its power under section 96 of the Constitution to ‘grant financial assistance to any State on such terms and conditions as the Parliament thinks fit’.

The terms and conditions were such that the Commonwealth took over policy making in those areas where it made grants. Worse – so far as the States were concerned – the States were impoverished as well, because grants were normally conditional on the States having to push money into the Commonwealth-dictated programs as well – mostly on a dollar for dollar basis.

And this happened in areas where the Commonwealth did not have the constitutional power to take any action at all.

Through the second half of the 20th century the High Court was also expanding its interpretation of those powers the Constitution did directly give to the Commonwealth. The external affairs power was able to be used to give effect throughout Australia to any treaties that the Commonwealth entered into – for example in the areas of human rights and the environment, the latter helping to allow the Commonwealth to prevent Tasmania building the Franklin River dam.

To cap it all the High Court decided that state taxes on petrol and tobacco were ‘excise’ duties, and, under section 90 of the Constitution, could only be imposed by the Commonwealth, not the states.

From time to time a Liberal Prime Minister would suggest to the States that they could restore some of the power they once had to impose income taxes, and allow them to piggy-back on the Commonwealth tax. None of them was prepared to impose such a tax – they feared they would be voted out of office.

And then came the Goods and Services Tax, the sort of tax forbidden to the States but which the Commonwealth was prepared to raise and hand over to them. This seemed to provide a bonanza at first, but the takings from the tax did not increase as fast as the needs of the states.

In the past few years the High Court has been pulling a tighter rein on the way the Commonwealth may use its financial powers, but that hasn’t helped the states very much. Those states that conform to the Commonwealth’s policies – for example, privatising their electricity networks – are rewarded. If the policy is one that is embraced by the State, well and good. If not, tough, no money.

The overall result has been that meetings of COAG, the Council of Australian Governments, and of the numerous ministerial councils established under its umbrella, have been and are dominated by what the Commonwealth wants or will agree to.

Come the coronavirus crisis, COAG has been transformed into the National Cabinet – and not just in name. Now it is the states that predominately have the powers that are needed for Australia to meet the joint interwoven threats to the health of the people and the national economy.

The Commonwealth remains responsible for national finances – to provide financial assistance to businesses and to people affected by the collapse of the economy.

But the states have the nation’s constitutional powers over education, health, commercial regulation and law and order. In the current crisis, contrary to what happened during the World Wars when all power was taken into the hands of the Commonwealth, the states are insisting on exercising those powers themselves. For the first time since federation in 1901 it is the states that are in the driving seat – or rather, seats. There is national unity of purpose, but there is diversity in the implementation of the goals that are being set by the National Cabinet.

The National Cabinet agrees that schools should resume as soon as possible – but each state and territory decides for itself when and how. Restaurants and pubs will re-open – when each state decides. Border controls will be lifted – as the relevant state determines (and WA says it will be the last). All these decisions will influence the way the economy is restored – to meet the Prime Minister’s policy aim of getting people back to work. The economy, which the Commonwealth thought it controlled, turns out to be more than just what happens in the national budget. It depends on when schools, commerce and so on are freed up by the individual states.

This has not been easy for the Morrison government to accept, though as the Prime Minister acknowledged on Tuesday, ‘We’re a federation and at the end of the day states have sovereignty over decisions that fall specifically within their domain.’ And that local politics will help drive their decisions, ‘At the end of the day every premier, every chief minister, has to stand in front of their state and justify the decisions that they’re taking in terms of the extent of the restrictions that are in place… the trade-off that they are making between people having jobs and the impact of the containment of the coronavirus.’

And he added, ‘on these issues where the Commonwealth has no direct authority at all, our job is to try to make sure as much consistency across state and territory jurisdictions as possible, and it has been one of the more effective tools we have had, when we compare ourselves to other countries that exist in federations Australia really has operated as a federation remarkably well.’

Will the new version of Australian federalism survive the virus? Unlikely. Witness Commonwealth Education Minister, Dan Tehan’s outburst on Insiders on Sunday when he accused the Victorian Premier of taking a sledgehammer to the State’s education system and of a failure of leadership – comments he was forced to withdraw by the Prime Minister.

What was not withdrawn was the attempt by the Commonwealth to persuade/coerce non-government schools in Victoria to break away from the rules set by the Premier using the usually effective device long employed by the Commonwealth when intervening in state affairs – the promise of money.

But the States will be buoyed by their elevated role these past two months and may try to extend their influence over national policies into other areas – and particularly climate change, where the Commonwealth has tried to ignore the science and the threat.

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