Federation balance of power – things have changed, part 1

By Stephen Bartos

Wednesday April 28, 2021

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The balance of power in Australia is shifting from the commonwealth back to the states and territories. (Image: Adobe/eelnosiva)

For the first time since 1942 the balance of power in the Australian federation is shifting from the commonwealth back to the states and territories. This series of articles looks at why it is happening now, why it will continue, and where the commonwealth has lost the moral high ground, writes Stephen Bartos.

A major driver of government power is finance. Taxing and spending – or fiscal policy – are two of the three key ways governments set directions and implement policy (the third is regulation). Before the Second World War the states were the drivers of Australian fiscal policy, collecting the bulk of taxes and doing most of the spending. The commonwealth was a relatively minor player.

In 1942, however, the states agreed to commonwealth taking over income tax powers. The states could still in theory collect income taxes as well, at the price of forfeiting payments from the commonwealth. It was a one-sided deal. It made sense at the time: the national level of government, constitutionally responsible for defence, needed money to fight the Second World War. But it made the states dependent on the commonwealth.

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While this was originally intended as a temporary measure it persisted. Not only did the commonwealth discover it still needed funds for post-war reconstruction, but it had become used to fiscal power and was determined to retain it.

Occasionally, Coalition governments – in theory champions of states’ rights – tried to reverse the trend: notably the ‘new federalism’ policy of the Fraser government, which included a never executed plan to hand back taxation powers to the states. Those attempts fizzled out in the face of voter pressure for the commonwealth government to take the lead, including in state domains such as health, education, housing and transport.

The commonwealth chose to intervene in these and other policy arenas because it had the financial capacity to fund programs of its own choosing. It was a rare commonwealth minister or departmental secretary who did not think she or he had a better understanding than their state counterparts about what Australia really needed, and just the right policy for the job.

Things have changed.

The COVID-19 pandemic has shown clearly the limitations of the commonwealth level of government.

Scott Morrison may convene the national cabinet, but he is not in the driver’s seat. The states have driven Australia’s approach to quarantine, lockdowns and movement restrictions. The prime minister, responding to the business lobby, wanted a more open approach. Australia briefly had a debate about whether we should pursue suppression or elimination. Elimination won. All the states and territories bar NSW have taken a hard line – and at times it appeared even NSW favoured tighter restrictions than the commonwealth preferred.

As a result, Australia has all but eliminated COVID-19 domestically, with new cases coming from overseas arrivals in hotel quarantine.

The commonwealth might have wrested back control of the COVID agenda if it had managed the vaccine rollout successfully. That did not happen. The states and territories have the upper hand: they will be the de-facto managers of the vaccination program, and the commonwealth will have little choice but to follow their lead.

Globally, COVID-19 will be around for at least another year or two, and likely many more. That means it will be the dominant policy concern for governments. Continuing attention, including through the national cabinet, will be required. This gives the states and territories opportunities to raise other issues and policy concerns, not only those directly related to the pandemic. They will take those opportunities. In a reverse of the trend of past decades, having been handed back power the states and territories will now be reluctant to give it up.

Both Coalition and Labor run states and territories governments are working together – a prospect that makes their collective voice much stronger. ‘Divide and rule’ was the standard tactic when the commonwealth negotiated with other levels of government through premiers’ conferences – but that is no longer how the deliberations occur.

The dynamics are different due not only to the nature of the pandemic challenge but also much more information sharing between states and territories. Where in past years the commonwealth ruthlessly applied the ‘knowledge is power’ rule, on many of today’s issues it is often lacking key data and is reliant on knowledge supplied by other governments.

The shift in power is observable right now, while national cabinet meets frequently, and the delays in vaccination continue to feature in media coverage.

It might be temporary – a small blip in the general trend of history – were it not for a broader trend in governance that will reinforce the shift in power: a growing need for delivery and execution to address society’s problems. If that’s true, then the states and territories will stay at the forefront: it is where they, for reasons that will be outlined in the next article, have a comparative advantage.


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