Australian Federalism Reforms and Global Integration

SCID Working Paper 148





This paper examines how well suited Australian fiscal federalism is to handling economic shocks in a more globally integrated world, how facilitative it is of economic reforms, and how adaptable the fiscal federalism system itself is to change.

The paper first sets out the institutional features of Australian federalism, briefly outlining the nation’s political and economic structure. While there has been virtually no change in Australian federalism via constitutional amendment, High Court constitutional interpretations and certain key events are shown to have markedly shifted fiscal control of the federation towards the federal government. The federal government has acquired almost exclusive access to the key tax bases, resulting in a particularly high level of vertical fiscal imbalance. In the consequent disbursement of grants to sub-national governments, Australia employs the most detailed fiscal equalization system of any federation.

The next sections of the study discuss three major periods of “new federalism” reforms that were attempted, with varying degrees of success, over recent decades: regionalism, fiscal decentralization and cooperative federalism. The first two reform periods, neither of which led to successfully implemented reforms, are discussed briefly and their implications for later reforms foreshadowed. Concentration is on the last reform period that saw an upsurge in cooperative federalism that brought with it a raft of reforms aimed at increasing Australia’s competitiveness. The macroeconomic environment in which the cooperative federalism reforms came about is delineated. A rapid deterioration in the nation’s current account deficit is seen as a catalyst for reform. It is argued that there was a coincidence in motivation for reform of both the federal and state governments. The former wished to remove structural weakness in the economy that the external crisis had exposed.