Commonwealth expenditure: legality and scrutiny

Daniel Weight, Economics

Key issue
The next Parliament will have to grapple with a changing legal landscape surrounding Commonwealth expenditure. Recent High Court decisions have seemingly narrowed the areas in which the Commonwealth may expend monies, and a substantial rewrite of the Commonwealth’s financial framework in the last days of the 43rd Parliament has left extensive unfinished work for the 44th. These events may result in questions about the Parliament’s capacity to scrutinise the Executive, and debates about the role of the Commonwealth and the states in Australia’s federal system.

Commonwealth expenditure

The Commonwealth is budgeted to spend almost $400 billion in 2013–14. Much of this expenditure is readily identified as programs and activities that are associated directly with the Commonwealth, such as funding for defence or Medicare.

The Commonwealth also has other significant expenditures each year which are less readily identified, such as grants to the states for education and healthcare, or payments to local governments for road upgrades. In 2013–14, grants to the states and local governments will amount to over $95 billion. Through the ability to attach conditions to grants, the Commonwealth has increasingly been able to gain greater influence in certain areas of policy that are heavily reliant upon funding.

While the annual Appropriation Bills that authorise the various areas of Commonwealth expenditure are subject to parliamentary debate, there is little scrutiny of many areas of expenditure.

Sources of uncertainty

In its 2012 decision Williams v Commonwealth (the School Chaplains Case), the High Court had to consider the limits of the Commonwealth’s power to spend money.

Ron Williams, a Toowoomba father of six, objected to the Commonwealth’s funding of school chaplains in his local state school. He challenged the school chaplains program in the High Court on the grounds that section 116 of the Constitution, which prohibits religious tests for Commonwealth office holders, meant that the Commonwealth’s scheme was unconstitutional. That argument failed; but Williams’s other argument—that the Commonwealth did not have the power to spend money on matters outside its constitutionally prescribed responsibilities, like school chaplains and potentially numerous other things—was accepted.

A result of this case, and the earlier 2009 Pape v Commissioner of Taxation (Tax Bonus Case), was that the Commonwealth no longer had the power to fund all the things that it had previously funded without a clear legislative underpinning to support the programs, which was based on a clear head of power in the Constitution. Areas of doubtful expenditure included the money that the Commonwealth currently provides directly to local governments, funding for roads and transport, assistance to industry and numerous other discretionary payments.

Legislation is still unsettled

The first response by the Commonwealth to the Williams decision was to make amendments to the existing Financial Management and Accountability Act 1997, aimed at ensuring the validity of numerous Commonwealth expenditure programs. Those amendments sought to revive the school chaplains program, and legally validate over 400 other Commonwealth programs set out in the regulations.

However, that legislation will be replaced by the Public Governance, Performance and Accountability Act 2013 (PGPA Act), which is to commence by 1 July 2014. This major rewrite of the entire financial framework of the Commonwealth was enacted in the last sitting week of the 43rd Parliament after a truncated parliamentary debate. Much work still needs to be done by 1 July 2014 to ‘bed down’ the new framework—including clarifying how the Parliament will scrutinise the Executive’s use of monies and other resources.

In particular, extensive legislative ‘Rules’ will need to be developed covering most aspects of the expenditure of, and accounting for, Commonwealth monies. The Rules will be disallowable legislative instruments. Numerous other pieces of legislation will also need to be repealed or amended in order to make the new Act work, which will require at least one more Bill.

In the interim, the continuing uncertainty surrounding aspects of Commonwealth funding potentially exposes many individual programs to ongoing legal challenges. Ron Williams has indicated that he will return to the High Court at a later date to challenge the resurrected school chaplains program, for example.

What’s next?

Uncertainty continues to surround many areas of Commonwealth expenditure, and even with new legislation in place, more constitutional challenges are likely.

There remains, however, an alternative mechanism for the Commonwealth to achieve many of the outcomes it wishes. By making grants to state governments – which are explicitly allowed under section 96 of the Constitution – the Commonwealth could continue to fund many existing programs and activities. Aside from whether this would be an efficient arrangement (there may be extensive duplication of effort between the Commonwealth and the states), it may give state governments more influence in areas of policy that the Commonwealth has increasingly dominated since federation, such as health, education and infrastructure.

Alternatively, some may argue that the realisation that the Commonwealth enjoys a more limited power to hand out money in support or furtherance of things that it considers desirable – and that it must now work more closely with the states – is not a problem. The Coalition has intimated that, in government, it would seek to devolve many functions back to the states anyway. The High Court might have, indirectly, highlighted those areas of governmental activity that would no longer be directly undertaken at the Commonwealth level. Whether the Commonwealth would be willing, however, to continue to fund significant areas of service delivery through grants to the states, albeit with much less capacity to influence the policy design or outcomes, is uncertain.

Aside from the constitutional issues around Commonwealth spending, there will be significant work for the 44th Parliament to do before 1 July 2014 in developing and scrutinising the proposed Rules and other requirements that are required to be implemented under the PGPA Act. And without effective Rules under the PGPA Act, the Parliament may find it difficult to scrutinise the Executive’s spending commitments.

Further reading

N Horne and D Weight, Public Governance, Performance and Accountability Bill 2013, Bills digest, 162, 2012–13, Parliamentary Library, Canberra, 2013.

A Twomey, ‘Public governance and Parliamentary scrutiny of expenditure’, Constitutional Critique Blog, 25 June 2013.

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