National Archives of Australia

Issue 3 July 2011

The Constitution and federalism

The Commonwealth of Australia Constitution Act 1900 (UK) was granted royal assent by Queen Victoria on 9 July 1900. Today the original Constitution is on display at the Archives in Canberra. Courtesy Parliament House Art Collection

Leading Constitutional lawyer Professor George Williams discusses our federal system of government and its impact on things as basic as the quality of education our children receive. He argues that the current federal system is inefficient and dysfunctional, and provides a solution to address this.

The problem: our flawed system of government

Australia should have a federal system of government. Although in some areas there is the need for centralised policies and programs, there are many services that are best delivered by a tier of government closer to the people. 

The problem is not that we have a federal system of government, but that the one we have is broken. This can be seen in the way the federal system distorts government priorities and policy outcomes. Things such as service delivery are often determined not by which tier of government can do the job best, but by which tier has managed to raise the funds to do so. In this respect, the financial dominance of the Commonwealth is all pervasive. The result is a system that can fail to deliver services in the most efficient way. 

This has a major financial impact. A recent Business Council of Australia study found that every Australian family pays an unnecessary $1100 in tax every year due to problems with our federal system. Overall, we are taxed a pointless $9 billion. This is the amount being used to prop up the Australian federal system, and does not include the money lost to businesses in having to comply with unnecessary red tape and regulation from multiple layers of government. 

The problem is not just a financial one. Our dysfunctional federal system also impacts on the quality of government services. It means, for example, that we all end up with lower standards in health and education services that we might otherwise be able to attain. 

This is not a problem arising from who is in government – it is a price that every government must pay until our flawed system is fixed. 

How we got here

When Australia became a nation on 1 January 1901, it also became a federation. This system of federalism was based on the idea that the greater body of power should lie with the states. This is reflected in how power is divided between the Commonwealth and the states in the Constitution. It grants the Commonwealth power over 40 areas and, significantly, the states were left with everything else. 

Over time, however, the Commonwealth powers have been interpreted so as to extend into matters not originally intended by the framers of the Constitution. In 1920 the High Court dictated an approach in the famous Engineers Case that favoured a broad reading of Commonwealth power with respect to industrial law. 

A Constitution convention in session, Parliament House, Adelaide, 1897. Several conventions were held prior to Federation to formulate the Constitution. The founders of the Constitution intended a system of federalism where the states held the majority of power. NAA: D4477, 352

The 1996 Work Choices Case confirmed the High Court’s long-standing approach to federalism. Upholding the validity of the Commonwealth’s industrial laws, based on a wide view of the corporations power in Section 51(20) of the Constitution, amounted to a further major centralisation of government power in Australia. 

This broad reading of the corporations power has enabled the Commonwealth to regulate not just matters of corporate law, but a wide range of activities in which corporations are engaged. As Justice Callinan warned: ‘The reach of the corporations power…has the capacity to obliterate powers of the State hitherto unquestioned.’ 

Corporations are a straightforward, well understood form of doing business. They affect almost every aspect of Australian life. This includes many areas currently under state control that might now be the subject of Commonwealth regulation. Examples include universities, private primary and secondary schools, and childcare centres. 

In these and many other areas, the Work Choices Case gave Prime Minister John Howard and his successors a tool with which to expand the reach of the federal government. It has no regard as to which tier of government would be best to deliver a service. 

States’ loss of revenue

Another equally significant loss for states has been in the area of tax. The Constitution was meant to secure the states’ financial position and independence. At Federation in 1901 it was the states, not the Commonwealth, that levied income tax. However, the demands of two world wars and changes to the economy, as well as some canny manoeuvring by the Commonwealth, have left the states with no revenue from income taxation. 

The High Court decisions in the Uniform Tax Cases of 1942 and 1957 upheld a Commonwealth takeover of the income tax system. The decisions also gave a wide interpretation of the ability of the Commonwealth to attach conditions to money granted to the states. 

In the 1997 Ha Case, the High Court struck down excise duties levied by the states over alcohol and tobacco, thereby stripping them of around $5 billion in annual revenue. As a result, the states have turned to new sources of taxation, such as gambling (although even this is now under threat as part of the proposed ‘pokies’ reforms). 

The Commonwealth can grant money to the states under certain conditions, for example, schools must use a specific type of report card or history syllabus.

The solution: rebuilding our federal system

Our system of federalism is dysfunctional because it is based on rules that no longer match the reality of how power is exercised in Australia. Based on a Constitution in which the states were to be the master, Australia now has one of the most centralised systems of government in the world. 

We therefore need to rebuild the federal system. We must bring about a modern division of power between the states and the Commonwealth, and develop a fairer and more efficient system of distributing money between governments. 

Federal reform in Australia has been put off for too long. While we have achieved profound changes in the economy and social policy, we have not applied the same energy and commitment to improving our system of government. 

We must approach this change not from the ‘top down’, but from the ‘people up’. Change must occur in a way that generates support across the community and which involves real popular ownership. The text of the Australian Constitution will also need to change. 

We should begin by holding a convention on the future of the federation, supported by all states. Conventions were the way that Australian federalism and the Constitution were drafted in the first place. A convention would be the way to revisit these same issues by bringing together a wide range of interests and perspectives from both within and outside of government. It is the right place to start. 

Professor George Williams AO is one of Australia’s leading Constitutional lawyers and public commentators. He is the Anthony Mason Professor, a Scientia Professor and the Foundation Director of the Gilbert + Tobin Centre of Public Law at the Faculty of Law, University of New South Wales. He has written and edited 26 books, and also writes a fortnightly column for the Sydney Morning Herald. As a barrister, he has appeared in a number of High Court cases. 

This article is an abridged version of a Speakers Corner presentation delivered by Professor Williams as part of the Archives’ Constitution Day celebrations. 

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