Australia’s federation is failing

The Australian’s Judith Sloan has taken direct aim at Australia’s federation, arguing that states and territories have become increasingly reliant on the federal government for funds, while the federal government in turn is getting involved in areas that have been traditionally been the domain of the states and territories. Researchers have suggested that Australia’s GDP could be $4,500 higher per person (in 2006 figures) if its federation could operate in accordance with OECD best practice. However, the odds of that happening are slim at best:

This dilemma of our federal system was recognised as early as 1902 when future prime minister Alfred Deakin wrote: “The rights of the states have been fondly supposed to be safeguarded by the Constitution. It left them ­legally free, but financ­ially bound to the chariot wheels of the central government”…

Deakin’s point about the financial dependence of the states was well made, with a high proportion of state and territory revenue coming from the commonwealth. This proportion is now about 45 per cent. While this vertical fiscal imbalance is common in other federations, Australia has one of the highest rates of funding from the national government to the sub-national governments, with only Austria recording a higher proportion. In Germany the figure is 16 per cent; in Canada, 19 per cent; in the US, 24 per cent; and in Switzerland, 29 per cent.

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