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March 25, 2005
Since 1901 Australian federalism has undergone a sustained process of centralisation. By the end of the century centralist dynamic had reached a point where it had become financially unbalanced.
That unbalance is usually called Australia's extreme 'vertical fiscal imbalance'. This refers to a situation whereby the Commonwealth raises the lion's share of revenue. This fiscal dominance in Australian federalism is due mainly to the Commonwealth's monopoly over income tax and excise duties.
As a research paper from the Australian parliamentary library outlines this monopoly:
"The ...[monopoly over income tax]...was established as a wartime measure in 1942 and upheld by the High Court on grounds other than the defence power in the first Uniform Tax case.(45) The latter is constitutionally grounded in one of the few exclusive powers given to the Commonwealth, but has been interpreted broadly by the Court to include any tax on the production or sale of goods."
The Commonwealth income tax monopoly was imposed by the centralist Chifley Labor Government and a supporting Parliament in time of war, and extended to the subsequent period of postwar reconstruction.The Commonwealth's income tax monopoly was achieved and has persisted because of a combination of political will on the Commonwealth's part, complicity by the States and selective sanctioning by the High Court.
There you have a key to the centralizing dynamic in Australian federalism:---the Commonwealth's fiscal dominance. This dominance is then reinforced by the commonwealth's monopoly over excise duties. As the research paper notes:
"The second revenue pillar of the Commonwealth's fiscal dominance is the preclusion of the States from levying taxes on the sale of goods that are a standard and significant source of revenue for sub-national governments in most other federations. This exclusion is based on the High Court's exaggerated interpretation of its power over 'excise duties' that is one of the few exclusive powers allocated to the Commonwealth by the Constitution (s. 90). Levying customs and excise duties was made an exclusive Commonwealth power in order to ensure a national economic market free of State border taxes and equivalent internal impositions on trade. This constitutional structure and broad interpretation by the High Court explain why the Howard Government's GST was imposed by Commonwealth legislation even though the entire amount collected is to be handed over to the States."
Fiscal centralism that crippled the states was backed and legitimated by the High Court in response to state challenges in the 1940s and 1950s. It was deemed right and proper that the Commonwealth's broad powers that could be used to achieve a fiscal dominance.
However, fiscal centralism had gone too far. Even though fiscal centralism did not spell the end of the States, as they learnt to manipulate the system to retain aspects of State power, the states were financially crippled.
A federal system consists of two spheres of government each pursuing their interests and purposes within the established framework of institutions and powers. It is held that the common good is served and is in effect the product of their actions and interactions.
Usually this interpreted in terms of the Commonwealth Parliament's exercising its powers in ways that give it dominance over, and are at the expense of, the States. The historical justifications have been national defence, national economic management and welfare policies required such dominance.
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