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The Commonwealth and WAConstitutionThe Carve UpCommonwealth Power and the States

The carve up

The Commonwealth and the States have always argued with each other over the distribution of resources. As the Commonwealth has assumed more and more of the revenue raising, the way in which the cake has been carved up has changed.

Federal politicians, 1902Since Federation there has been a strong trend towards centralisation of financial power. In 1901 the Commonwealth raised nearly 60% of all revenue through tariffs and excise while spending less than 15% of money raised. The remainder was transferred directly to the States. In 2001 the Commonwealth will raise more than 75% of the revenue and account for nearly 60% of the spending.

The transfer of responsibility for income taxation to the Commonwealth in 1942, a measure necessitated by the Second World War, was a major reason for this alteration in financial power. It has resulted in what is known as 'vertical fiscal imbalance' - the difference between the amount of money collected by each level of government and the amount it spends. With State governments raising less than 25% of revenue but accounting for more than 40% of spending, they have become increasingly dependent on Commonwealth funding. More than half of State revenues are tied grants given by the Commonwealth with conditions and restrictions attached.

Bulletin cartoonThe difference in the capacity of the States and Territories to raise revenue to meet their spending needs is known as 'horizontal fiscal imbalance'. Less well-off States have trouble maintaining the same level of government services as other States and require extra funding from the Commonwealth. Prior to the mineral boom of the 1960s Western Australia was one State which required extra funding from the Commonwealth.

State governments negotiate with the Commonwealth every year over the allocation of government money. The Premiers' Conference is the main forum for financial policy, while a whole range of Ministerial and departmental meetings address practical issues involving the allocation of funding.

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