Table of Contents
‘Federation is a ‘compromise between nationality and democracy’.
It was the Great Depression that brought the four to Canberra. It was a budget crisis that they grappled with. But they were soon engaged with a more enduring and more expressly political problem that had been made manifest by the slump: a general incapability of the federal Australian polity that had been created in 1901.
The new state had two weaknesses.
The first was that Australia was both a democracy and an agglomeration. Like any democratic agglomeration, it experienced a tension between the aspiration to unity, and the fact of inequality. Federation was intended to cope with this tension. But under the stress of the Depression, it became an open question as to whether the principle of Federation would contain the tension or succumb to it. In the pit of depression Federation was in crisis, as Australia experienced attempts to proclaim new states and more lawful attempts by existing states to secede from the Commonwealth. The sole doctrinal counterforce to these pressures for disintegration was ‘unification’, the terminology of the day for the abolition of the states – which would only have made succession inevitable.
A second weakness lay in the machinery of state. In 1901 the machinery of central government did not exist. It had to be created or improvised. This challenge became more critical in the 1920s as the federal state acquired an ever-expanding range of functions, and resolved to exercise them in a make-believe capital on the Molonglo. A critical element of this machinery – an effective public administration – was painfully lacking.
The four were significant – sometimes decisive – in treating these infirmities of the body politic. Giblin, assisted by Brigden, was crucial in heading off the crisis in Australian Federation. All four were closely involved in the attempt to improve the quality of public administration.
But their involvement in public administration also afforded them a painful lesson: that while good public service is necessary for good government, it is also quite insufficient for good government. The ship of state requires efficient machinery, but to steer a course a pilot is also required. In the late 1930s Brigden and Wilson threw themselves into launching inaugural national legislation on banking and social security, only to see both sink ignominiously. Their projects for economic and social reform were wrecked by the absence of strong political leadership.
Giblin’s Tasmanian background might have predisposed him to some degree of zeal for the new federal polity. Giblin’s father had, as Premier of Tasmania in 1884, taken a leading role in the Sydney convention that established the Federal Council of Australasia.[2] His father’s friend and ally Inglis Clarke had a very substantial influence on the constitution of the new Commonwealth of Australia. In both referendums (1898 and 1899) Tasmania had been the most enthusiastic ‘Yes’ colony. In 1899, 95 per cent of Tasmania had voted in favour of Federation.
Yet Giblin did not share the enthusiasm of his fellow Tasmanians. A few weeks after Federation he told his sister that Federation ‘is only a piece of machinery: efficient (if it is efficient) equally for good and evil’ (RBA LFG 10 February 1901). This cool, equipoised attitude towards Federation stayed with him.
But for the first 10 years there was no call for anyone’s opinions on the Federation to be staked and defended. The financial relations of the states and Commonwealth seem to have been satisfactorily arranged by the Constitution. These arrangements were highly specific in the short run, and perfectly vague in the longer run. For 10 years the custom duties that were to be collected by the new Commonwealth would be distributed to the states, by way of compensation for what was formerly their revenue. And after 10 years? Section 96 provided in a completely general way for the possibility of Commonwealth financial assistance to the states from 1911. These constitutional directives were an expedient that reflected an impatience for federation, combined with a confidence that things would somehow sort themselves out in the end. This confidence was underpinned by a faith that the states would eventually ‘converge’ economically.
By 1910, a smooth passage to permanent arrangements seemed to have been secured. Each state was to receive the same grant, in per capita terms, a policy that seemed sensible in the light of optimism about convergence. Western Australia was, in addition, given a so-called ‘special grant’ of a continuing nature in 1910, and Tasmania followed two years later.
It was only amidst the travails of the 1920s that, in the minds of smaller states, Federation was transforming from a panacea to a Pandora’s box. In 1925 the Tasmanian Rights League appeared, supported by the Hobart Chamber of Commerce and the Mercury, to press Tasmania’s new sense of grievance. A League of Small States materialised to link the disaffections of Tasmania, South Australia, and Western Australia. In 1930 the Women’s Non-Party League of Tasmania was established to voice Tasmanian grievances (May 1971, p. 27), and Eilean Giblin was its deputy.
During the 1920s ‘the Commonwealth was subjected to a continuous barrage of demands from Tasmania’ (May 1971, p. 9). These demands would be met with a request by the Commonwealth to submit a case, which was then referred to an ad hoc committee for consideration. Inevitably, this committee’s subsequent recommendation was not entirely deferential towards the claimant state. This procedure of specific claim and specific adjudication was one that encouraged ambit claims, and the suspicion of ambit claims.
In August 1926 Giblin proposed an alternative in his Presidential Address to Section G of the Australasian Association for the Advancement of Science[3] (Giblin 1926). The grant-giving procedure might be lifted from political controversy if the decision about a special grant at any point of time ‘could be made by Parliament only on the advice of an Economic Committee, with powers and duties corresponding roughly to those of the Tariff Board’ (Giblin 1926, p. 158). Two years later Giblin developed this idea before the Royal Commission on the Constitution of the Commonwealth to press the same proposal.
A special grant … depends to some extent on how loudly a State squeals … Would not it be better to have a board, somewhat in the nature of the tariff board, with a strong economic flavour to it, consisting as much as possible of professional people, who could look at the thing professionally, and arrive at an unbiased [sic] opinion with reference to the per capita payments. (Royal Commission on the Constitution of the Commonwealth, p. 903).
This ‘grants board’ would be expert, independent, and permanent; it would not be one of those ‘… temporary Commissions which investigate the affairs of one State once, and then go out of existence’. It would have a ‘strong economic flavour’. And, like the Tariff Board, it would be ‘extra-constitutional’: Giblin’s proposed reform did not involve constitutional change. This was no small point to Brigden, Giblin’s constant ally on this issue. It was imperative, Brigden believed, to avoid the mistaken ‘legalism’ of the Federation movement of the preceding generation. As Brigden put it: ‘The remedy is not to embroider words into the Constitution, even if the people would consent to it, but to use economic sense which (it may be hoped) will eventually become a common sense’ (1931b). This comment represents a marked change in a man who had pinned such hopes on constitutional amendments in 1910, and reflected the priority Brigden now afforded the economic over the legal, and his aspiration to educate the population about the futility of believing that the economic could be altered by legal fiat.
Giblin’s proposals were ignored until, under the strain of the Depression, the Federation structure began to creak.
The political chaos and economic distress of the early 1930s reinvigorated the movement to establish a new state in northern New South Wales: New England. In 1932, ‘separatists would now come as close as ever to achieving a new state’ (Farrell 1997, p. 147). The proposed means were, admittedly, unlawful. An assembly of persons would gather, and presume to pass an ‘act’ establishing the new state. The precedent of West Virginia in 1861 was cited. A constitution was prepared in readiness. The leader of the Country Party, Earl Page, gave it his blessing.
A more serious threat to the integrity of Federation arose from the campaign of Western Australia to secede. The Nationalist Premier of that state had converted to the cause of ‘Westralia’ in the face of an aggressive campaign for secession. A referendum was announced. On 8 April 1933 ‘Westralians’ were to be asked: ‘Are you in favour of the State of Western Australia withdrawing from the Federal Commonwealth?’. The federal government was not content to gaze. Every elector in Western Australia, South Australia and Tasmania received The case for union. Speakers in favour of Federation were dispatched to Perth. But to no avail: 138 653 votes were cast in favour of leaving the Commonwealth, with 70 706 votes against.
The time for action had evidently arrived. A few weeks after the Western Australian referendum in May 1933 a Bill establishing a Commonwealth Grants Commission was passed by the Commonwealth Parliament. Its design was very plainly inspired by Giblin.
This Commission would not be department of the executive, staffed by public servants. Neither was it to have a federal structure, such as the Loan Council. It amounted to the delegation of a power (of recommendation) by the Commonwealth government to an independent body, a ‘commission’. The Commission was to consist of three members – a Chairman and two others – who were to be appointed for a maximum of three years. While legislation permitted evidence to be given under oath, its process was to be expert not judicial.
The first appointments to the Commission were made in July 1933. The Chairman was F. W. Eggleston, a lawyer and liberal philosophe. Giblin was one of the two other members.
But if this new tribunal was to replace anarchy by order, then some guiding philosophical principles were requisite. Brigden had already stressed that there must be principles upon which to base judgements and recommendations of the Commission. In other words, an intellectual problem underlay the political problem. There were in Brigden’s mind three possible guiding principles: Relief for Deficits, Compensation for Disabilities under Federation, and what is now known as Fiscal Equalisation.
This speaks for itself, and had been the prevailing touchstone before the Commission had been created. ‘If there has been any principle at all, it is a requirement that the recipient state shall be in a chronic condition of revenue deficit’ (Brigden 1931b, p. 296).
This principle stated that Commonwealth should provide financial assistance to compensate a state for any costs suffered as a consequence of Federation. This was a widespread notion and rooted in a popular precept of justice.
The influence of this idea prompted the Tasmanian Government in 1925 to appoint a committee to report on Tasmanian disabilities under Federation. Giblin and Brigden were two of the committee’s six members, and Roland Wilson was its secretary. The committee’s report, written by Giblin and Brigden,[4] contained a detailed discussion of some specific handicaps which federation had imposed on the Tasmanian economy. However, the overall consideration of the advantages and disadvantages did not result in a powerful case for federal assistance for Tasmania. Indeed, there seemed to be no case at all. ‘Tasmania received, on the most conservative reckoning, at least some substantial benefit from the relations with the Commonwealth’ (UMA JBB 13 May 1929). As Brigden was to try explain to readers of the Mercury in 1929: ‘the Commonwealth spends less per head in Tasmania than in other States, but it collects still less per head because we have a lower level of income and expenditure’.
Perhaps not surprisingly, therefore, Giblin and Brigden advanced the contention that the criterion, ‘Disabilities Under Federation’, was too narrow a means for determining the size of the special grant which a state should receive from the Commonwealth. Giblin makes his case by asserting that:
Federation implies responsibility as well as privileges; and if a state is in financial difficulties not of its own making, consideration and help by the Commonwealth as a whole is just as necessary and proper if the cause of them was, e.g., the unexpected working out of her mineral resources, as if they came from entering a form of Federation which was better suited to her neighbours’ conditions than her own. (Giblin and Brigden et al. 1925, p. 9).
The case for assistance was now broadened from costs to a state resulting from Federation to any costs to the state ‘not of its own making’.
Giblin was to return to this idea and develop it further, some five years later in The case for Tasmania, 1930. This document was a response to the newly elected Scullin Government’s decision to investigate Tasmania’s financial disabilities through a parliamentary joint committee. The committee of 10 authors was constituted by Tasmanian worthies, with Giblin and Hytten appended – who, of course, wrote it. In Appendix J, specifically written by Giblin, ‘State Disabilities – with special reference to Tasmania’, Giblin pressed a stage further his belief that ‘Disabilities Under Federation’ was not a satisfactory principle for determining assistance to the states. Giblin gave a second reason for opposing this concept as a guiding principle. Even if compensation for disabilities was desirable, it could not be implemented: ‘… it is not practically possible to estimate directly the economic cost of tariff policy to Tasmania, and still less possible to translate the cost into the terms of a loss to the State Treasury’. He went on to claim that ‘… the same is true of other disabilities due to Federation – a direct measure is not possible’ (Giblin 1930c, p. 64).
Fiscal Equalisation is the principle that was to win the day, and may be understood as an adaptation to federalism of Louis Blanc’s exhortation: ‘from each according to his abilities, to each according to his needs’.
In the context of a conglomeration of communities of differing incomes, Blanc’s ideal would disallow any principle requiring equal per capita contributions to the costs of government. And, as Giblin observed, equal per capita contributions was never in fact required of a conglomerations of communities.
No such basis would ever be assumed for contributions to international organizations, such as the League of Nations. When Ireland received Home Rule, not even the bitterest opponent of Irish-Self Government proposed that she be asked to carry any but a very small fraction of her per capita liability for the public debt of the United Kingdom. No agricultural portion of England or any other highly civilized country could possibly pay its share of the expenses of government on a population basis. (Giblin 1926).
In a completely unified fiscal system, Blanc’s ideal could be simply achieved by a uniform tax rate of incomes across member communities, combined with a flat level of government outlays across member communities. But in a system with both state taxation as well as central taxation, a uniform federal tax rate across member communities, combined with a flat level of federal outlays across member communities may not secure this. It would not, for example, if some states had higher tax rates than others. This was, Giblin argued, the case in Australia. He had argued this as early as 1924, when Lyons, the then Tasmanian Premier, had asked Giblin, as Government Statistician, ‘… to make an impartial examination into the severity of taxation in different States of Australia’ (Lyons in Giblin 1924). Giblin responded with a careful and highly detailed estimate, which concluded that Tasmania was the second most severely taxed of the Australian states.
Giblin began by working out state taxation per head for each state, for the fiscal year 1922/23.
Table 8.1. Giblin’s taxation comparisons
|
State taxation per head, shillings |
Taxable capacity |
Taxation severity |
|
|
New South Wales |
71.10 |
1.006 |
71.5 |
|
Victoria |
51.2 |
1.158 |
44.2 |
|
Queensland |
84.0 |
0.789 |
106.6 |
|
South Australia |
71.0 |
1.075 |
66.1 |
|
Western Australia |
57.6 |
0.867 |
66.4 |
|
Tasmania |
49.8 |
0.588 |
84.5 |
The first column is not favourable to the suggestion that Tasmania is severely taxed. New South Wales had the largest per capita state taxation, and Tasmania the lowest. But might it not be that the higher-than-average figure for New South Wales reflected a greater-than-average capacity to tax? Should not taxation be measured relative to the capacity to tax? The obvious measure of capacity to tax would be income. The ‘severity’ of state taxation would then be measured by state taxes as a proportion of state income. But Giblin maintained that the capacity to tax varied with the square of income, on the grounds that taxation did typically vary with the square of income. Thus a measure of taxable capacity equals the square of per capita state income, relative to per capita Australian income, factored up by 1000. This produces the middle column. The severity of taxation is then defined as taxation relative to ‘capacity to tax’ (so defined). This is shown in the third column where Tasmania now has the second most severe taxation.
As an attempt to establish a particular point of fact – that Tasmania had more severe state taxation – Giblin’s case is questionable. The critical ingredient in the exercise is the assumption of ‘taxable capacity’ varying with the square of income.[5] If taxable capacity was supposed to vary simply with income, then New South Wales would remain more ‘severely’ taxed than Tasmania.
But Giblin’s principle that, in a federal system, differences in the severity of state taxation would justify differences in federal assistance to states stands or falls independently of any points of fact about Tasmania.
The idea that differences in severity of state taxation would justify differences in the federal system received a louder articulation in Giblin’s appendix to The case for Tasmania, 1930. There he provided an (admittedly somewhat shadowy) test for determining whether a State was deserving of assistance.
(1) It should be taxing its people with considerably greater severity than the Australian average.
(2) It should not be attempting social provision on a more generous scale than the average.
(3) Its costs of administration should be below the average.
(4) It should for some years at least have shown moderation and caution in loan expenditure.
If these conditions are satisfied, I submit that the responsibility is on the Commonwealth to make up what is required to enable revenue to balance expenditure. It is not a question of making a contribution towards it. If the above conditions are fairly satisfied, the obligation is on the Commonwealth to make up the deficiency in full as a vital condition for the effective working of Federation.
The thread running through Giblin’s precepts is the notion that it is fitting to have the same level of basic government services across communities, and the same rate of total taxation across communities to fund them. Giblin’s proposal merely mandated a uniform level of basic government services across the states. It did not mandate a uniform level of total government services across the states: states could provide more than basic services if they chose. Even less did his principle mandate a uniform level of all goods and services (both public and private) across the states. As Giblin said in The case for Tasmania: ‘There is, of course, no question of bringing Tasmania up to an Australian level of prosperity by direct help from the Commonwealth’ (quoted in May 1971, p. 21). Indeed, Giblin’s advocacy of ‘fiscal equalisation’ was in part underpinned by his pessimism about Tasmania’s economic performance.[6] Sunny hopes of convergence were illusory. Tasmania could never afford the level of basic services which, as a member of Federation, it was entitled to.
The new Commonwealth Grants Commission did not immediately embrace the principle of ‘fiscal equalisation’: Giblin pressed it against Eggleston’s own instincts. Giblin records this conflict in letters to Eilean.
Eggleston’s fertile pen is turning out reams of draft report – which is good but won’t do – and the only effective way to criticize it is to rewrite it in one third of the space. (RBA LFG 23 May 1935).
A lot of fight and delay over principles. But Eggleston has been very tolerant and prepared to give way even when he is deeply committed. We have an unfortunate difference in mental make up which makes it impossible to harmonise or compromise differences. (RBA LFG 10 July 1935).
Eggleston has been distraught. Pressure of time has rather forced him to accept stuff I have written which he does not agree with, or rather which does not adequately express his views. It is very unfair to him, and most unfortunate. He has been very forbearing, and [at] a meeting today we arrived at a fair working compromise, but I shall have to go hard to live up to it. (RBA LFG 31 July 1935).
Only in the third annual report of the Commission was fiscal equalisation unambiguously recommended.[7] That report contained an illuminating passage in which the slow adoption of the principle was described.
In our first report … [fiscal equalisation was] adopted tentatively, and with some reluctance, for immediate practical purposes. The general discussion on the principles of grants was not summed up into final conclusions, but left with loose and somewhat contradictory ends.
In our second report we developed the tentative principles of the first, and concluded that the relative financial position of the States, when analyzed with sufficient care and understanding, was the only basis on which special grants should be made.
Further consideration and another year’s experience have led us to the following conclusions: Special grants are justified when a State through financial stress from any cause is unable efficiently to discharge its functions as a member of the federation and should be determined by the amount of help found necessary to make it possible for that State by reasonable effort to function at a standard not appreciably below that of other States.
The recommendations of the third report were accepted by the Lyons Government. The Opposition Leader, John Curtin, reported himself to be ‘astonished’ that a ‘responsible government should, at the behest of an external commission, abandon its own policy’. But the task was accomplished. The third report set the principle. Any of the Commissions following the first Commission[8] could have replaced fiscal equalisation had they wished, but none have. The Commission and its use of the fiscal equalisation principle remains a monument to Giblin to the present day.[9]
The present day impact of this principle is illustrated by a comparison of the grants recommended by the Grants Commission with what a per capita distribution would yield.
Table 8.2. Comparison of grants recommended by the Commonwealth Grants Commission with grants implied by a per capita schema, $m, 2005-06
|
Commonwealth Grants Commission |
Per capita |
Difference |
Per Capita Redistribution, $ |
|
|
New South Wales |
13090 |
15069 |
-1979 |
-290 |
|
Victoria |
9783 |
11170 |
-1388 |
-274 |
|
Queensland |
9240 |
8849 |
390 |
97 |
|
Western Australia |
4603 |
4490 |
113 |
55 |
|
South Australia |
4107 |
3412 |
694 |
449 |
|
Tasmania |
1672 |
1076 |
595 |
1222 |
|
ACT |
822 |
712 |
103 |
316 |
|
NT |
1921 |
450 |
1470 |
7217 |
|
Australia |
45238 |
45238 |
0 |
Western Australia is now barely a beneficiary of the principle; but the Northern Territory overwhelmingly is. Something near two billion dollars is currently transferred from New South Wales to the Northern Territory and Tasmania, and something considerably more than billion is transferred from Victoria and bestowed on South Australia and the remaining states. The ‘loss’ of Victoria and News South Wales through fiscal equalisation has remained, and has provoked personal attacks on the Commissioners, a mythologisation of its history, and a complete misidentification of fiscal equalisation with the principle of disabilities under federation.[10]
The success of the Commonwealth Grants Commission and its principle of fiscal equalisation calls for some explanation. On the face of it, Giblin’s suggestion that an ‘independent’ Commission of ‘experts’ would resolve the financial wrestling of the states and Commonwealth seems almost naïve. But some factors behind its success may be hypothesised.
First, the Commission served diplomacy. The states were no longer petitioners seeking charity, or wards seeking the clemency of their guardian. They were equal members of a community.
Second, the Commission reduced wasteful tactics. When property rights are indistinct and contract difficult, the process of negotiation diverts energies from trading possessions towards defending possessions – or coercing them from others.[11] A rule-based system – which amounts to a system of property rights – saves on these activities.
Third, the principle of fiscal equalisation served to reconcile the aspiration to unity and the fact of inequality. It seemed equitable that a state in which state taxation was light received a smaller grant – other things being equal – than one in which state taxation was severe. A Fiscal Commonwealth, like the Lord, ‘helped those who helped themselves’.[12] At the same time, it permitted the expression of different preferences. It allowed non-basic services to be provided and funded by state taxation if the state so chose.[13]
In 1934, the first year of the Commonwealth Grants Commission, the survival of federalism was doubtful. In that year Brigden sensed that federation as it was conceived in 1901 was ‘incompatible with the permanent and characteristic policy of the Australian people’. As federalism restricts the power of state, it belonged to ‘a different age’, and he foresaw ‘unwilling progress towards unification’ (Brigden 1934). This was not an entirely inaccurate prediction. It is a moot point whether its degree of inaccuracy – or its accuracy – might in significant measure be traced to Giblin and Brigden.[14]