The Role of State Constitutions in Protecting ... - International IDEA

dependent than ever on revenue redistribution, for which the Constitution makes
no clear provision, other than allowing grants of financial assistance to be made.
As a result, the States rely on the Commonwealth government and Parliament to
decide the amount that will be made available to them each year and the basis on
which that amount will be determined. Systems that have been used for this
purpose over the years include formula based arrangements, tax sharing of various
kinds and commitments to match the previous year's grant levels. Under current
arrangements, the Commonwealth makes available to the States the proceeds of
the federal Goods and Services Tax. Some grants are also made on condition, that
they will be spent in a particular way. Through the use of these grants, the
Commonwealth influences policy in a range of areas of State responsibility that
require significant expenditure including education, housing, health and
transport.
Revenue redistribution from the centre to the States in a federation typically has
two aspects. The first aspect concerns the total amount to be distributed to the
States. The second concerns the manner in which the total will be allocated
between the States. Australia and many other federations divide such funds
between States with the assistance of “fiscal equalisation” principles. In Australia,
the goal is to put each State in a position in which it can offer broadly comparable
services to the other States, without unduly raising its own taxes and charges. To
this end, an independent body, the Commonwealth Grants Commission,
recommends “factors” by which the population of each State should be weighted,
in distributing federal funds. The factors are calculated by reference to State
revenue disabilities and expenditure needs. The Grants Commission's
recommendations are almost always accepted. The system is complex, however,
and the principle of fiscal equalisation itself is intermittently under attack from
the richer States, which receive less per capita than the others.
It is important to note that the general revenue funds that are distributed between
the States in accordance with fiscal equalisation principles are not subject to any
conditions. In particular, a State is not required to spend the funds on the
“expenditure needs” by which its State factor was calculated. This feature of the
system is also criticised from time to time. On the other hand, there is a sense in
which it provides a good illustration of how the combined principles of unity and
diversity can work in a federal system. The principle of unity suggests that it is fair
for States that are poorer to receive more than the richer States and, in effect, for
the latter to assist the former. The principle of diversity, however, suggests that
neither the centre nor the richer States should tell the others how to spend the
funds that they have received. In a federal system, they should be able to
determine expenditure priorities for their own communities, by democratic
means, through democratic institutions.
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