Federalism in Australia - Development of Australian Federalism

Development of Australian Federalism

Since federation the balance of power between levels of government has shifted from the founding fathers' vision. The shift has transferred power from State governments to the Commonwealth government. Phases in the development of Australian federalism can be identified.

The first phase may be described as co-ordinate federalism. In co-ordinate federalism the Commonwealth and the States were both financially and politically independent within their own spheres of responsibility.

A factor in the expansion of Commonwealth powers was the growth of defence expenditures which culminated in Australia's involvement in World War I. After the war, Conservative Commonwealth governments attempted to return to a system of co-ordinate federalism.

However, a system of co-operative federalism developed in the 1920s and 1930s in response to both internal and external pressures. Elements of cooperative federalism included: the establishment of the Australian Loan Council in response to intergovernmental competition in the loan markets; the co-ordination of economic management and budgetary policies during the Great Depression; and the establishment of joint consultative bodies, usually in the form of ministerial councils.

Tax competition after the start of World War II ended this period of intergovernment co-operation. The constitutional framework on tax allowed both the Commonwealth and states to levy taxes. However, in 1942 the Commonwealth introduced legislation to give it a monopoly on income taxes. It did this by providing financial grants to states (using the section 96 grants power), on the condition that they did not collect their own income taxes. The validity of this scheme was upheld twice in the High Court. Uniform income taxation levied by the Commonwealth became the principal instrument of Commonwealth financial domination and vertical imbalance in the Australian federal system (vertical fiscal imbalance). The system allowed the Commonwealth to intrude into traditional fields of State responsibility by means of specific purpose grants or loans to the States for purposes such as education, health and transport. Commonwealth-State relations were at an all-time low as in 1975, when the States sought to resist the growing Commonwealth involvement in local and regional affairs.

Following the defeat of the Whitlam government in 1975, Prime Minister Malcolm Fraser put into effect a new policy of co-ordinative federalism. The outcome was an agreement between the Commonwealth and the States in which both levels of government agreed to a system of co-operative planning and decision making.

Despite the centralisation of legislative and financial power, there are many areas where federal Parliament lacks the power to regulate comprehensively, even where such regulation might be seen to be in the national interest. This has led State and federal governments to co-operate to create regulatory regimes in fields such as the marketing of agricultural products and competition policy.