Review of The Public Sector in Jeopardy: Australian Fiscal Federalism from Whitlam to Keating', Economic and Labour Relations Review 9(2),310-4

This page created:19 April 1999

Last modified: 19 April 1999

Maintained by:

The Public Sector in Jeopardy: Australian Fiscal Federalism from Whitlam to Keating

Russell Mathews and Bhajan Grewal

Centre for Strategic Economic Studies, Victoria University, Melbourne

xxi + 856pp RRP $49.95

In form, this book is a chronicle of Australian fiscal policy, and of the fiscal relationship between the Commonwealth and the States, over the period from 1972-73 to 1994-95. In part, therefore, it is a sequel to the work of Mathews and Jay (1972) which covered the period before 1969. A brief introduction, covering the period from 1969 to 1972, is included to fill the gap. The main body of the book is organised in a form suitable for a chronicle. It is divided, like Gaul, into three parts, covering the Whitlam, Fraser and Hawke-Keating governments. Each of these parts is organised in the same way, containing chapters on

(i) The Economy and Government Budgets;

(ii) Parliaments, the Constitution and the Judicature;

(iii) Intergovernmental Fiscal Arrangements; and

(iv) Executive Government and Intergovernmental Administrative Arrangements

Viewed simply as a reference work, the book is admirable. Its 800 pages include summaries of all the Commonwealth Budgets from 1969-70 to 1994-95, of all national and state elections, and, of course, of intergovernmental financial institutions including the Grants Commission and the Loan Council.

As their title indicates, however, Mathews and Grewal have set themselves a more ambitious goal than that of providing a narrative of events. Their central thesis is that Australia's poor economic performance over the period since 1972 can be attributed, in large measure, to the combination of free-market economic policies and vertical fiscal imbalance between the Commonwealth and the States.

On the first of these points, the authors' summary (p. 737) captures the flavour of the argument very well:

'Although the Whitlam government did not explicitly abandon the Keynesian demand management policies which had guided Australian governments so successfully during the 1950s and 1960s, its own high expenditure and wage policies, the oil crisis and the breakdown of the international monetary system required adaptations to the Keynesian approach which neither the Australian nor other governments were interested in making. Instead the Fraser Government committed itself to economic policies based on the monetarist theories of Milton Friedman, which had then come into vogue in Anglo-Saxon countries. When these failed, the Hawke and Keating governments adopted a laissez-faire appraoch to economic policy based on the supremacy of the market, which conspicuously failed to achieve full employment, economic stability and growth when it was applied.'

This thesis is not developed separately from the narrative. Rather, it constitutes a background assumption that informs the description of events. This approach has both advantages and disadvantages. On the positive side, it makes for a more interesting work than would have been likely if it were either a studious neutral piece of economic history or yet another denunciation of economic rationalism. On the other hand, it is more difficult to come to grips with an argument presented as a series of comments scattered through an 800-page narrative.

Readers will have to make their own judgements as to how far Matthews and Grewal succeed in making out their case. There is no doubt, however, that they supply a historical perspective that is sorely lacking in much current policy discussion, particularly from supporters of the dominant policy orthodoxy. Listening to contemporary statements about the benefits of say, competition policy or labour market reform, it often seems as if the speakers have forgotten that equally optimistic claims were made, in similarly dogmatic tones, for monetary growth rules, floating exchange rates, foreign banks, privatisation and so on.

The argument on vertical fiscal imbalance seems more clear-cut. There is no doubt that Australia's vertical fiscal imbalance is extreme, compared to other countries with federal systems of government. The most commonly heard complaint about vertical fiscal imbalance is that it leads to fiscal irresponsibility on the part of the States, who spend money that they do not raise. This complaint has only a limited basis in reality, since expenditure by State governments is ultimately constrained by the power of the Federal purse. Mathews and Grewal present a more sophisticated critique, in which the main blame falls on the Commonwealth, which has used vertical fiscal imbalance to enhance its powers over the States. The States are blamed primarily for their willingness to adopt the subordinate role allotted to them in the system, and their failure to play a constructive role on the rare occasions when the Commonwealth has shown a willingness to reform the system. The argument is summarised as follows (p. 767):

The Commonwealth has used its dominating fiscal power to move into functional areas for which the States have constitutional responsibility, by making specific purpose payments by means of which they have determined what, how much and where services are to be delivered, without having either the information needed to make informed decisions or the need to account for its actions. It has built up large duplicate bureaucracies which are more concerned with controlling State decisions than with ensuring that services are provided in adequate quantities and in appropriate ways. During recent years, it has progressively reduced the level of its taxes and its payments to the States, requiring them both to increase thier own inefficient taxes from inadequate tax bases and to reduce the level and quality of their services: while it has been loudly proclaiming for the benefit of financial markets, its fiscal rectitude and denying any responsibility for the deteriorating services. ..Financial weakness has left [the States] unable to finance their perceived expenditure needs even if democratic processes indicate support from their citizens for doing so.

A particularly egregious misuse of the Commonwealth's fiscal power was the Keating government's decision, in 1995, to tie Financial Assistance Grants to the adoption and implementation of National Competition Policy. As Grewal and Mathews observe (p. 729) the States were forced by their financial penury into adopting a policy that would 'place money values above people values and require essential utilities to work for private profit rather than public benefit and social responsibility'.

It may be helpful to follow the historical approach of Matthews and Grewal, and examine their assessment of the three governments they study. As their subtitles indicate, none is given a very favourable rating. The Whitlam government is characterised as having 'a vision that failed'. As Matthews and Grewal point out, the Whitlam government's economic performance looks rather better in retrospect than it did at the time. The unemployment rateof 4 per cent, uneprecedented since the Depression, which led to the government's downfall, was better than anything that has been achieved since. Moreover, it is now clear that the economic chaos of the period was part of a worldwide deterioration in economic performance, rather than the result of domestic incompetence.

Nonetheless, the Whitlam government made a significant contribution to its own downfall. The biggest problem was the fact that the government relied primarily on fiscal drag or 'bracket creep' to fund large real increases in public expenditure, without realsing, or at least without making it clear to electors and unions that this entailed a corresponding reduction in real disposable incomes.

Mathews and Grewal are similarly balanced in their assessment of the Whitlam government's attempts to extend the involement of the Commonwealth in areas of traditional state responsibility. They observe the unsatisfactoriness of a situation where, for financial reasons alone, the Commonwealth could impose its will on the states. however, as they say

By 1973, the interdependence of governments in the modern economy had transformed the basis of federalism, so that it was no longer appropriate for each level of government to make decisions independently of other governments and to regard intergovernmental co-operation as a matter for the policy fringes. Both autonomous federalism in this sense, with its implied inviolability of States' rights, and coercive federalism, based on notions of centrailism and a dominating Federal hegemony, needed to give way to a system of co-operative federalism in which decision-making responsibility was shared and the policies of different governments were co-ordinated.

The Fraser government is described in terms of 'unsuccessful attempts to reform monetary, fiscal and federalism policies'. These unsuccessful attempts include the adoption of a monetarist 'fight inflation first' policy, attempts to cut back the growth in public expenditure that had occurred under the Whitlam government and the New Federalism policy which is described as a 'bold attempt to restore vertical and horizontal fiscal balance in the Australian federation'.

The failure of New Federalism is blamed primarily on the reluctance of the States to abandon the traditional suppliant position by imposing their own income tax surcharges as the policy allowed. It is argued that the States should have been forced to stand on their own feet by simultaneous reductions in Commonwealth taxes and general revenue grants, which would have made the imposition of State income taxes unavoidable.

Although the characterisation of the Fraser government as reformist, rather than radical, is appropriate, Mathews and Grewal understate the extent to which Fraser paved the way for radical free-market reforms. In doing this, they tend to perpetuate the myth, which proved convenient to both Paul Keating and John Howard, that the Fraser government represented a missed opportunity for the Liberal party to undertake such reforms.

In their assessment of the Hawke-Keating government, Mathews and Grewal align themselves with the critics who have argued that the dogmatic pursuit of free-market reform has distracted attention from more fundamental problems including unemployment, inadequate community services, declining infrastructure and so on.Although the argument is not new, it is useful to have it presented in the context of a wealth of detailed information on the fiscal actions of the government.

Against criticisms like those of Mathews and Grewal, it is possible to argue that the Hawke-Keating government did as well as could be expected in adverse circumstances. It is difficult, however, to disagree with the view that the situation in 1994-95 was one of 'economy in decline, federalism in retreat', or with their prefatory observation that things have only got worse since then.

Mathews, R. and Jay, W. (1972), Federal Finance, Nelson, Melbourne.

Go back to John Quiggin's home page

Read more book reviews by John Quiggin