Wanted: best practice federalism

Anne Twomey & Glenn Withers.

Within Australia, federalism has been under attack. The Commonwealth has been using its financial powers and increased legislative power to intervene in areas of State responsibility. Centralism appears to be the order of the day.

In the rest of the world, the prevailing trend is towards decentralisation and federalism. Indeed, federalism is regarded as one of the best governmental systems for dealing with the twin pressures produced by globalisation - the upward pressure to deal with some matters at the supra-national level and the downwards pressure to bring government closer to the people. The latter pressure is reflected in the principle of subsidiarity, which states that matters should be dealt with by the lowest level of government practicable.

In Australia, by focusing too much on problems in the operation of our federal system we forget about the benefits of federalism, which include:

Checks on power - Federalism divides and limits power, protecting the individual from an overly powerful government. It ensures that there is greater scrutiny of government action and helps to reduce the incidence of corruption.

Choice and diversity - Federalism gives citizens a greater range of choices. People can vote for one party at the national level and another at the State level. They can move from one State to another if they prefer the latter's policies or they can seek to have another government's policies implemented by their home State. If one level of government lets them down, they can seek redress from the other.

Customisation of policies - Federalism allows policies and services to be tailored to meet the needs of people and communities they directly affect. Differences in climate, geography, demography, culture, resources and industry across our nation mean that different approaches are needed to meet local needs. Federalism accommodates these differences and brings democracy closer to the people, allowing them to influence the decisions that affect them most.

Competition - States and Territories are constantly compared with each other and must compete with each other. This gives States the incentive to improve their performance. It increases efficiency and prevents complacency. Comparisons show that federations have proportionately fewer public servants and lower public spending than unitary states.

Creativity - States and Territories need to be innovative and to experiment in order to compete with other jurisdictions. The successful innovations of one State will often be picked up by other States and sometimes implemented nationally. At times, States and Territories lead the Commonwealth in proposing reform.

Co-operation - The need to co-operate to achieve some types of reform means that proposals tend to be more measured and better scrutinised. The agreement of all jurisdictions to implement a difficult reform brings together all parts of the nation in a common endeavour and gives the reform greater insight, legitimacy and support.

"Recent trends in Australian federalism show a shift from competitive and co-operative federalism to a system of 'opportunistic federalism', where the Commonwealth uses its array of powers to intervene selectively to make ideological or political points."

Complaints are often made that federalism is an old-fashioned system that is not competitive in the modern world and involves too many tiers of government and too much duplication. International comparisons suggest that this is not the case. Of the G8 nations (the countries with the eight largest economies in the world), four are federations, seven have at least three tiers of government, and all still manage to compete powerfully on the world stage.

In the last 50 years, federations have consistently out-performed unitary states in economic terms. The more decentralised the federation, the better the performance. Research suggests that federalism may have increased Australia's prosperity by $4,507 per head in 2006 and that this amount could be increased by another $4,188 or even more if Australia's federal system were more financially decentralised.

While federalism does give rise to duplication, much of this could be avoided through a better allocation of responsibilities and financial resources between the Commonwealth and the States, with each managing and funding its own responsibilities. Much is made by the Commonwealth of the great financial 'windfall' to the States generated by the GST; however, the figures show that in 2006 Commonwealth funding to the States (as a proportion of GDP) was approximately the same as it was before the implementation of the GST in 1996, while the pressures on State expenditure continue to increase. In fact, it is the Commonwealth that has increased its share of tax revenue, gaining a $20 billion annual 'windfall' of its own. The implementation of the GST has not changed the fact that the Commonwealth still controls the level of funding to the States. In some cases, as the GST increases, the Commonwealth has simply reduced the amount of specific purpose payments to the States.

Recent trends in Australian federalism show a shift from competitive and co-operative federalism to a system of 'opportunistic federalism', where the Commonwealth uses its array of financial and legislative powers to intervene selectively in areas of traditional State responsibility to make ideological or political points. In doing so, the Commonwealth undermines the benefits of federalism and exacerbates problems such as duplication and excessive administrative burdens.

Governments share a responsibility to make the federal system work better. Harnessing the advantages of federalism and taking action to reduce or eliminate the problems in its operation would deliver substantial economic and social benefits to the nation. There are three main areas in which reform is needed:

1. Reallocation of roles between the Commonwealth and State and Territory Governments to reduce duplication and clarify responsibilities.

2. Improvement in the mechanisms for inter-governmental co-operation.

3. Reform of federal-State financial relations, both in the operation of specific purpose payments and in the level of vertical fiscal imbalance.

Many of these reforms could be achieved through co-operation, and the referral of power where necessary. However, a constitutional convention may be a useful means of reaching consensus on these reforms and proposing any constitutional amendments that could enhance the future operation of the Australian federation.

Australia has much to gain from adopting best practice federalism, with the successful delivery of these reforms estimated to generate an annual 'bonus' to the nation of up to $86 billion or more.


Anne Twomey is Associate Professor of Law at the University of Sydney, and Glenn Withers is Professor of Public Policy at the Australian National University and the Australia and New Zealand School of Government. This is the executive summary of their report to the Council of Australian Federation, April 2007.