Federalism is a natural fit for Australia, but we need to make it work

Federalism infuses every aspect of the Australian system of government. Flickr/OzinOH, CC BY

The reform of Australia’s federation is under review. So far in our special series, leading Australian academics have discussed the future of the federation when it comes to taxation, education and health; today, we look at the broader issues of democracy.

The University of Melbourne’s Cheryl Saunders argues recalibrating federalism involves the creation of genuinely democratic institutions.


Talk about federalism reform is not new; it has been a perennial topic for decades. At different times, however, it means different things. Sometimes it is synonymous with greater integration of Commonwealth and state functions through complex mechanisms described as “co-operative” in character. Sometimes, as in this instance, it involves disentanglement of functions.

Neither complete integration nor complete disentanglement can or should be fully achieved. What is needed is a balance between the two. This should deliver the kind of government we want in a way that is responsive, accountable and transparent.

The matter of money

The entanglement of government functions has been driven largely, although not entirely, by money. On the face of the Constitution, both the Commonwealth and states can impose almost any form of tax, with the exception of taxes on goods, which are prohibited to the states. Since World War II, however, the Commonwealth has acquired a monopoly over the major tax sources, leaving the states with a range of minor taxes, which continues to shrink.

The Commonwealth thus has much more money than it needs for its own constitutional responsibilities to the public; the states have much less for theirs. Substantial transfers are needed from one to the other. Because the Constitution does not contemplate this degree of fiscal imbalance, it also does not clearly displace the assumption that the government that is responsible for raising money is also accountable for spending it (as occurs in some other federations, of which Germany is an example).

At least half the transfers from the Commonwealth to the states seek to control how state functions are exercised. Education, health and infrastructure are examples. The results include a massive duplication of bureaucracy, the emergence of what effectively is a third tier of government through the so-called “COAG Councils”; a concentration of power in executive government, sidelining parliaments; opaque and confused lines of accountability; and a growing homogeneity in policy that stifles innovation and difference.

In a more recent development, the Commonwealth has begun spending the money it raises directly in policy areas outside its constitutionally allocated functions, bypassing the states. Doubts about the constitutionality of this practice have caused further concentration of power in the executive, diminishing accountability through Parliament.

Money is not the only driver of integration: the other is an urge to secure uniformity in legislation and its implementation across a wide and increasing range of policy areas. The elaborate legislative schemes that result contribute to the complexity and blurred lines of accountability that characterise Australian federalism today.

Collaboration counters central control

The functions of the levels of government are interdependent in every federation. Co-operation is a necessary and valued practice. What differ in Australia are the extent of integration; the manner in which it occurs; and the absence of effective constitutional ground rules for it.

The potential benefits of federalism are wasted, including innovation, diversity and responsiveness. One of the relatively few checks and balances in the Australian system of government is weakened. And democracy itself is undermined, by erosion of the principal mechanism for democratic control of governments, through parliaments, by the people.

Recalibrating the way that federation works does not involve a return to 1901, claims to the contrary notwithstanding. It involves crafting a functional, federal democracy for 21st-century Australia, in a world in which multi-level government is the norm.

In the spirit of what sometimes is called subsidiarity it would accept that many decisions must be made nationally – indeed, internationally – but also values the possibility of decision-making at lower levels over which communities have more effective control. Ironically, the Australian federation is quite well designed for this purpose. The states are large enough for effective government, few enough for effective collaboration and their dispersal across a very large land mass positions them to respond to regional needs in a way that is not practicable for a single set of institutions based in Canberra.

Federalism’s triple challenge

Federalism reform must deal with at least three challenges. The first is the fallout of the fiscal imbalance. Two quite different approaches are possible here.

One is to restore state tax-raising capacity so as to limit transfers from the Commonwealth and maintain the nexus between responsibility for taxing and spending. The other is to accept that, for reasons of convenience, the Commonwealth imposes most taxes but that it does not “own” the proceeds. Instead, each level of government is entitled to a share in joint tax revenues commensurate with its expenditure responsibilities, and for the use of which it is directly accountable to the voters.

Each of these approaches is viable, but each also requires considerable working out, to resolve a problem that has dogged Australian federal democracy for decades.

A second challenge is to manage the urge to uniformity. Not all government action requires central co-ordination and not all co-ordination requires uniformity.

Decisions about whether and to what extent to co-ordinate government action need to be made more openly and justified on the basis of principles that also acknowledge the values of innovation and difference. And when co-ordination occurs, as undoubtedly it will continue to do, programs must be designed to maintain as much as possible of the democratic and legal accountability that we expect in other contexts.

The third challenge is to revive the state level of government as a capable and responsible player in an effective Australian federation. Decades of marginalisation have run down the states.

Revival of state politics has advantages for democracy too. State institutions are the most accessible democratic role models for most Australians. The states are responsible for the day-to-day public services on which most Australians depend and on which they are most likely to have a view: education, health, transport, roads and urban planning, among others.

State politics should be attractive to a diverse range of talented people seeking a career in public life who are unable or unwilling to commute to Canberra on a regular basis. In a sense, this is part of the project of revitalising democratic participation in Australia in the face of declining membership of political parties and growing cynicism about organised politics. Genuinely democratic institutions in the state sphere are critical to this end.

Tinkering at the edges won’t do

The danger is that we will do nothing except fiddle with reforming federalism at the edges. Substantial change must overcome entrenched preconceptions, vested interests and the pull of inertia.

Too often federalism reform has foundered on futile regrets over whether Australia should have a federal form of government at all. This calls for a reality check on at least two fronts.

The first is logistical. Federalism infuses every aspect of the Australian system of government. It would not be possible to abandon it without an upheaval involving a completely new constitution approved (ironically) by majorities in all states. This degree of consensus seems highly improbable.

Much more importantly, however, abandonment of federalism is not desirable either. It is impossible to imagine democracy without federalism in a country with Australia’s geographical size, history and characteristics. So-called regionalism is no alternative: it would maintain three levels of government in a country with even more boundaries in which all effective decisions are made centrally.

To make progress this time we need to avoid such diversions, so as to tackle the really hard questions in the interests of genuine, lasting, federal democratic reform.


Renewing Federalism is in partnership with the Australian National University’s Tax and Transfer Policy Institute at the Crawford School of Public Policy and with the University of Melbourne School of Government.

Our Renewing Federalism series will culminate in a symposium on October 2 at ANU. If you would like to attend the event, please see event details and RSVP here.


Read more in the series here.