Budgetary federalism: balance of interests and contradictions

Under their constitutions, the various States of Australia have plenary power to make laws for the peace, order(or welfare) and good government of the State. The States are therefore able to raise tax revenue and to spend it in any manner they choose. Since federation in 1901, State constitutions have been subject to the Commonwealth Constitution. Except in relation to the imposition of duties of custom or excise (s 90), the Commonwealth Constitution does not expressly divide fiscal responsibilities between the Commonwealth and the States. However, as this report will demonstrate, the financial relationship between the Commonwealth and the States has changed considerably since federation, with the Commonwealth assuming progressively more responsibility for revenue raising. The result has been an acute vertical fiscal imbalance in the Australian federation. High Court interpretations of financial provisions of the Commonwealth Constitution have provided the Commonwealth government with the capacity to generate this imbalance, and with the ability to use the imbalance to influence and control State government expenditure. Creating this imbalance and managing it have dominated the federal financial relationship in Australia. The relationship has been a reasonably prominent political issue in Australia because the two major political parties, the Australian Labor Party and the Liberal/National Coalition, have traditionally adopted different attitudes to the relationship. The Australian Labor Party favours a vertical fiscal imbalance as a means to implement national legislative policies through offering tied grants to the States. The Coalition has been more concerned to preserve the financial position of the States.