Federalism—an overview of changes

Budget Review 2014–15 Index

Brenton Holmes

Federalism and the practice of inter-governmental relations are central elements of Australian public administration—generally characterised by consultation and flexibility.[1] In pursuit of a smaller national government, the 2014–15 Budget reveals a shift in the way Commonwealth-State relations have typically been conducted. The Prime Minister wants ‘to ensure that, as far as possible, the states are sovereign in their own sphere’.[2] A White Paper to that end will be settled by the end of 2015.[3] Guided in part by the National Commission of Audit, the Government seeks to re-establish the Federation on a more decentralised basis, rekindling interstate competition—a notion designated ‘competitive federalism’. The states could, for example, compete with each other on taxes as well as services and citizens could in theory relocate to states whose arrangements suited them.

There is an existing COAG Intergovernmental Agreement on Federal Financial Relations (IGAFFR) which implements a framework for financial relations, collaboration on policy, service delivery and economic and social reforms. State treasuries are responsible for distributing the Commonwealth funding. The Agreement is meant to operate indefinitely unless COAG agrees to revoke it.[4]

Critics of competitive federalism say it ‘runs directly counter to decisions by successive Commonwealth governments … to centralise in Canberra decisions about tax, health, schools, roads and industrial relations’.[5] The Prime Minister has said the Government would be looking to how things could be made better, but ‘we’re not going to turn the world on its head here’; it is a matter of ‘sensible incremental change, where it can ensure that services are delivered better in an accountable and transparent way’.[6]

2014–15 Budget: impacts on COAG relations

State premiers insist that budget savings measures and changes to the dynamics of federalism will have significant repercussions.[7] For example, the Commonwealth’s $80bn savings over ten years to 2024–25 in healthcare and education will be keenly felt (see School education and Health funding agreements) especially as many National Agreements currently in place will soon expire.[8] The Government will save $1.2 million in 2013–14 by withdrawing uncommitted Local Government Reform funds and freezing future grants, costing councils $925 million by 2018.[9]

The range of savings measures has angered State premiers, setting the scene for renewed debate about raising the GST.[10] There are claims that the states are being bullied into raising the GST.[11] But the Prime Minister will not re-convene COAG, and makes ‘no apologies for wanting the states to be grown-up, adult governments that take responsibility for the programs that are theirs’.[12] NSW Premier Mike Baird arranged a premiers-only meeting to consider the implications of the Budget for the states and the future of federalism.[13]

The independent, jointly-funded COAG Reform Council ceases on 1 July 2014, notwithstanding its robust annual reports and comparative analytical work that resulted in ‘significant progress’.[14] The Council critically assessed and reported on the achievements, outcomes and benchmarks specified in National Agreements, and made relevant reward payments to the states under National Partnerships.[15]

Asset sales, privatisation and fiscal decentralisation

The Government has budgeted $5 million over five years to encourage the states to recycle assets (see Infrastructure growth package).[16] Investors are pleased, but the states have been warned to monitor carefully the risks of ‘suboptimal privatisation decisions’.[17] One public administration expert has accused the Government of making ‘simplistic propositions’ about public and private sector management and of failing to recognise ‘the impact that changes to the regulatory regime [have] on market behaviour and [the] eventual success’ of the privatised entity.[18] While the Productivity Commission has tended to endorse privatisation—for example in the energy sector—other economists have ventured criticisms.[19] In short, results are mixed, and parliaments have ‘failed to demand a full analysis of the pros and cons of privatisation’.[20]

One of the common arguments advanced in favour of fiscal decentralisation is that ‘the preferences and the needs of citizens … are better known to the local government officials than …the central government… This argument is assumed to be strong enough to neutralize the advantages [of] economies of scale’.[21] But the relationship between decentralisation and the assignment of taxes and expenditure is crucial. It means being very clear about what are the responsibilities of the national and of state governments:

Like contracts, these decisions are never, and can never be, precise and final. …  The problem is that it is difficult to assign precise expenditure responsibilities... [The] experience gained in a large number of countries … suggests caution.[22]

What happens if each state pursues its own objectives, not just through taxes and public spending, but also through regulations? Some will be ‘necessary and useful; many will be much less so or even damaging’.[23] It has been suggested that ‘Business loves competitive federalism—up to a point … But they don’t love the multiplicity of regulatory environments that competitive federalism creates’.[24]


[1].          E Windholz, ‘Federalism in Australia: a concept in search of understanding’, Journal of Contemporary Issues in Business and Government, 17 (2), 2011, accessed 13 May 2014.

[2].          J Brumby, ‘Revive federalism by giving states more power’, Australian Financial Review, 24 September 2013, accessed 12 May 2014.

[3].          Council of Australian Governments (COAG), Communiqué, 37th meeting, 2 May 2014, accessed 13 May 2014.

[4].          Council on Federal Financial Relations, Intergovernmental Agreement on Federal Financial Relations, accessed 12 May 2014.

[5].         P Martin, ‘Taxing times under return to ‘competitive federalism’’ Sydney Morning Herald, 2 May 2014, p. 6, accessed 12 May 2014.

[6].          M Grattan, ‘Government grapples with Audit Commission ripples’, The Conversation, 2 May 2014, accessed 13 May 2014.

[7].          AAP, ‘States pushing ahead with emergency meeting on budget cuts despite efforts from Tony Abbott to calm anger’, Sydney Morning Herald, 16 May 2014, accessed 19 May 2014.

[8].          F Tomazin, ‘Denis Napthine warns Prime Minister against funding cuts’, The Age, 30 March 2014, accessed 15 May 2014. See also Australian Government, Budget 2014–15 Overview, 2014, accessed 15 May 2014.

[9].          J Saulwick, ‘Councils left out in the cold with funding freeze’, Sydney Morning Herald, 14 May 2014, accessed 14 May 2014. See  Australian Government, Budget measures: budget paper no. 2: 2014–15, Part 1: Revenue measures, 2014, p. 178.

[10].       Urgent meeting call as GST rise debate looms‘, news.com.au, 15 May 2014, accessed 19 May. 2014.

[11].       L Taylor, ‘Tony Abbott’s ‘crash through’ budget may force states to raise GST’, The Guardian, 14 May 2014, accessed 15 May 2014.

[12].       L Taylor, ‘Tony Abbott unmoved by fury of premiers over cuts to states’ funding’, The Guardian, 14 May 2014, accessed 15 May 2014.

[13].       K Shorten and L Wilson, ‘Premiers demand Budget summit’, Herald Sun, 19 May 2014, p. 6, accessed 19 May 2014.

[14].       Budget paper no. 2: Budget measures, op. cit., p. 187. See also ‘Lessons for federal reform: COAG reform agenda 2008–2013‘, COAG Reform Council, 6 November 2013, accessed 19 May 2014.

[15].       M A O’Loughlin, ‘Accountability and reforms to Australia’s federal financial relations’, Australian Journal of Public Administration, 72(3), pp. 376–381, accessed 14 May 2014.

[16].       ‘Budget 2014: What we know and what to expect’, ABC News website, accessed 13 May 2014. See also Australian Government, ‘Asset Recycling Initiative’, Federal financial relations, Budget paper no. 3, 2014–15, 2014, p. 66.

[17].       J Wiggins, ‘Caution urged on privatisation’, Australian Financial Review, 15 May 2014, p. 15, accessed 19 May 2014.

[18].       C Aulich, ‘Asset recycling scheme looks more like policy recycling’, The Conversation, 9 May 2014, accessed 12 May 2014.

[19].       Productivity Commission, ‘Electricity Network Regulatory Frameworks’, Inquiry Report 1 (62), 9 April 2013, accessed 19 May 2014; P Soos, ‘Why we should pull the plug on privatising electricity’, The Conversation, 26 November 2012, accessed 19 May 2014.

[20].       B Walker and BC Walker, Privatisation: Sell off or sell out, ABC Books, 2000, p. 6.

[21].      V Tanzi, ‘On fiscal federalism: issues to worry about’, seminar paper, International Monetary Fund, 2000, accessed 12 May 2014.

[22].       Ibid.

[23].       Ibid.

[24].       B Keane and G Dyer, ‘The Commission of Audit: a lazy trip through the mind of Tony Shepherd’, Crikey, 2 May 2014, accessed 12 May 2014.


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