Illustration: Pat Campbell.
Australia suffers from the paradox of being a young and vibrant democracy governed by an outdated constitution frozen in time. The effects on government have been so crippling that two giants at opposite ends of the political spectrum, John Howard and Gough Whitlam, came to the same conclusion: Australia would be better off if states were scrapped and we had one central and many strong regional governments.
The problem, as Howard conceded in 2005, is that it would be ''unrealistic'' to pursue such a big change. How could anyone overcome states' inevitable opposition to win the required public support in a referendum?
No referendum has succeeded since 1977. While Whitlam proposed radical change in the 1970s, Howard merely mused: ''If we were starting Australia all over again, I wouldn't support having the existing state structure. I would actually support having a national government and perhaps a series of regional governments.'' Most agreed with Howard's view that ''there's a lot of dysfunctionality about the federal system'', but his remarks excited little public interest.
What does get public attention are the chronic problems in policy areas where Commonwealth and state roles now overlap - especially hospitals and schools. The way the Federation works is completely different from the ideal of a partnership among the Commonwealth and ''independent and self-reliant states'' enshrined in 1901. Ironically, two other opposing political titans, John Curtin and Robert Menzies, who deprived the states of taxing powers, paved the way for the huge income disparities that build dysfunctionality into federal-state relations.
A century ago, the Commonwealth budget was only about a 20th of state and local governments' combined spending. By World War II, Canberra's spending had risen to half that total and the states received 14 per cent of their income from the Commonwealth. Last financial year, 47 per cent of their income was from federal sources and combined state and territory budgets are just over half as big as the Commonwealth's. The constitution was not designed for such an imbalance.
The High Court, in addition to upholding the Curtin and Menzies governments' moves on income taxes, increased Canberra's domination in other ways. A far-reaching 1926 decision enabled the Commonwealth to use its power under Section 96 of the constitution to make grants to the states ''on such terms and conditions as Parliament thinks fit''. This covers the use of funds even in areas for which it has no direct constitutional responsibility. In more recent decades, the court extended the Commonwealth ability to get its way using its external affairs and corporations powers.
The upshot of all this is that the Federation today would be unrecognisable to its founders in 1901, despite a barely altered constitution. As early as 1902, future prime minister Alfred Deakin identified funding as the constitution's Achilles heel.
In a letter to The Age, he 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. Their need will be its opportunity. The less populous will first succumb, those smitten by drought or similar misfortune will follow and finally even the greatest and most populous will, however reluctantly, be brought to heel.''
By the 1990s, then Queensland premier Wayne Goss argued that the funding-driven shift of power might lead to ''the de facto abolition of the states''. GST revenue slowed but did not halt the trend, nor did it end the states' unhealthy reliance on regressive and economically damaging revenue sources such as payroll, gaming and property taxes.
In 2010, the Senate established the select committee on the reform of the Australian federation. It concluded in 2012 and reported that much of the dysfunctionality flowed from one of the most severe vertical fiscal imbalances (disparities in revenue between central and state governments) of any federation. ''The result of this vertical fiscal imbalance is a 'breakdown in accountability for cost-effective service delivery as different levels of government seek to attribute poor service delivery to each other's failings'.''
This is not news to the public. Research has found ''a substantial majority of Australian adults (up to 86 per cent) believe that the current system does not work well''. States cannot fund their constitutional responsibilities for schools and hospitals, let alone all the other areas. Canberra now holds sway over industrial relations, universities, the environment, primary health and aged care. Federal judicial authority has grown. The states have been obliged to accept national water, infrastructure, transport, aged-care, health and education policies.
Periodic offers out of Canberra, from both sides of politics, to take over all hospital funding have been refused, if only because what would be left to justify states' existence? As the Business Council of Australia submitted, the states have become ''increasingly the service deliverers of the Commonwealth's policy agenda''.
It may be all very well to talk of ''co-operative federalism'', as politicians do from time to time, but Canberra flexes its financial muscle to pull premiers into line. That does not mean the premiers freely and wholly subscribe to such policy - they can still frustrate the Commonwealth and do.
''Canberra bashing'' is also a great way for states to shift blame. The same goes for Canberra's ''state bashing''.
While most of its work fell squarely in the ''too hard'' basket, the Senate committee's findings on the neglect of local government have had a response. A referendum on the constitutional recognition of local government is on the cards, especially since recent High Court decisions constrain the Commonwealth in ways that do not apply to its funding of the states. Canberra can direct funding through the states, but would love to bypass them, if only to ensure it gets public credit for local services and projects. If that were to happen, the states would be further diminished.
So, why not scrap the states when estimates of potential savings on the cost of governing Australia are as high as $50 billion a year?
John Watson is a senior Fairfax writer.
