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Last updated: 4 July 2003

The Australian experience of public sector reform

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Chapter 1 - The Constitutional and Government framework

The Commonwealth of Australia was established on 1 January 1901. The Constitution of the new Commonwealth had been drawn up by various contemporaries of colonial parliamentarians during the 1890s. It was endorsed by the people at referendums and embodied in a Act of the British Parliament in 1900, which authorised Queen Victoria to proclaim the establishment at federation.

Prior to 1901, the system of government in Australia had evolved progressively, from the time when the country had been proclaimed as a British possession in 1788, to the point where it comprised a collection of six self-governing British colonies, effectively under the control of the United Kingdom.

Upon Federation, the Constitution made provision for a national level of government referred to as the Commonwealth, with legislative power exercised through a federal Parliament comprised of a Senate and a House of Representatives. The former six colonies became six states. Each retained its own Parliament, able to exercise legislative powers, except as limited by the new federal Constitution.

Figure 1: Map of Australia, showing states and mainland territories.

Australian map

A range of government functions and services is also delivered at the local or community level. Local government as such is not recognised specifically in the Constitution and is established under legislation of the individual states. The functions and funding of local government are discussed further below.

In 1901, Australia's population was 3 773 800. As at 30 September 2002, the estimated population of the states and mainland territories of Australia was some 19 724 900, distributed as follows:

Table 1: Estimated state and territory populations September 2002
New South Wales	6 657 400
Victoria	4 888 200
Queensland	3 729 000
Western Australia	1 934 500
South Australia	1 522 500
Tasmania	473 400
Australian Capital Territory	322 200
Northern Territory	197 700

Source: Australian Bureau of Statistics 2002, Australian demographics statistics, (catalogue no. 3101.0).
(NB. Figures are rounded and exclude non-mainland territories.)

The structure of government

The Constitution provides for the powers of the Commonwealth to be exercised at three levels:

power is conferred on the Parliament
executive power, to assent to and administer laws, and to carry out the business of government, is conferred on the Governor-General, Ministers of State, departments, other government agencies, and the defence forces
judicial power is vested in the High Court of Australia and other courts established by the Parliament.

Each of these levels is discussed further below.

Origins

The national system of government in Australia draws both from the United Kingdom and the United States, as well as having its own unique characteristics.

It is a parliamentary system, where the majority in the House of Representatives determines the executive arm, and where Ministers are Members of Parliament.

It is a bicameral system with an elected upper house, the Senate, which is elected under a proportional representational voting system based upon equal numbers of representatives from each state, plus a smaller number of representatives of the mainland territories.

The House of Representatives consists of members elected in single-member electorates by compulsory voting of all those aged 18 and over, with a unique form of preferential voting system (as distinct from first-past-the-post voting).

Federal Parliament

Broadly speaking, the Commonwealth Parliament (comprising the Senate and the House of Representatives) is able to make laws only in relation to a range of specific subjects listed in the Constitution. Major areas include taxation, defence, external affairs, trade, and immigration.

Over the years, the power of the Commonwealth has also broadened, through its increasing capacity to raise revenue through taxation (including customs and excise duties) (see further below) as well as growing trade and commerce across state and national boundaries.

Today, the Commonwealth has extensive capacity to influence business and community affairs notwithstanding the apparent limitations in the Constitution in many areas. It does so in close cooperation with the states, often drawing on its financial capacity. For example, although the Commonwealth has no specific constitutional power in relation to education, it has been able to influence significantly the operations of universities and other tertiary institutions in the states, by maintaining 'tied' grants as discussed below.

Beyond the clearly defined areas, Commonwealth legislation may be enacted under the Constitution's external affairs power, if the Commonwealth government considers it to be necessary to give effect to an international agreement to which it is a signatory. Elsewhere, the Commonwealth has legislated by agreement with the states, in areas with Australia-wide application, such as broadcasting, navigation, and food standards.

The Executive

As well as being a federation, Australia is a constitutional monarchy with the Queen as the formal Head of State. The Governor-General, appointed by the Queen on the advice of the Prime Minister, is the Queen's representative in Australia, and fulfils the traditional role of 'advising, encouraging and warning' in relation to the government of the day.

The Governor-General exercises formal executive powers subject to the principles of responsible government and on the advice of Ministers. The Governor-General also performs a range of ceremonial and other functions.

Commonwealth Ministers must sit in Parliament, as Senators or members of the House of Representatives, and are appointed by the Governor-General on the recommendation of the Prime Minister. They have responsibility for administering the various

Commonwealth Portfolios assigned to each Cabinet Minister. Each portfolio may contain one or more agencies. An example is the Foreign Affairs and Trade portfolio. The agencies that constitute this portfolio are the Department of Foreign Affairs and Trade, the Australian Trade Commission, the Australian Agency for International Development, the Australian Secret Intelligence Service and the Australian Centre for International Agricultural Research. The makeup of portfolios may change over time as governments review their policy priorities, with agencies moving between portfolios or new agencies being created.

The 17 portfolios in place at June 2003 are:

The government is constituted of the core departments of state, staffed by the federal public service.

Exercise of executive powers occurs in a similar manner in the Australian states, whose Parliaments generally comprise two legislative chambers (commonly titled Legislative, or House of, Assembly and Legislative Council). The Queen's representatives in the states are the state Governors with roles similar to those of the Governor-General.

In practical terms, the principal decision-making bodies at both Commonwealth and state government levels are the respective federal and state Cabinets, comprising senior Ministers of the governments in office at any given time.

The Judiciary

The federal Constitution provides for the establishment of the High Court of Australia. It is the final court of appeal in Australia on federal matters, and matters dealt with by state Supreme courts. One of the Court's principal functions however, is to decide disputes about the meaning of the Constitution. In that context, it exercises ultimate authority in determining whether an Act of the federal Parliament is within the legislative powers of the Commonwealth.

The Commonwealth government is also empowered by the Constitution to create other federal courts, and to vest judicial power in such courts, and in courts of the states.

State constitutions and legislation provide for their own judicial systems, headed by the state Supreme Courts.

The States

Subject to a few exceptions, the Constitution does not limit the subjects on which the states may make laws. The most important exceptions are that the states are precluded from imposing duties of customs and excise, and they cannot raise defence forces without the consent of the Commonwealth Parliament. Otherwise, state parliaments may pass laws on a wider range of subjects than the Commonwealth Parliament, on any subject of relevance to the particular state. Hence, primarily state laws regulate important areas such as education, health, roads, and criminal law.

There remain some significant constraints on state legislative powers. A state law is invalid to the extent of any inconsistency with a valid Commonwealth law on the same subject. As a result, a number of matters affecting all Australian citizens, on which the Commonwealth Parliament is able to legislate under the Constitution, are regulated almost entirely by Commonwealth law, for example immigration.

Australian territories

The Commonwealth Parliament is empowered by the Constitution to make laws for the government of any Australian territory. Law-making powers extend to any subject, and are not shared with state Parliaments.

A large measure of self-government has been conferred on three territories, namely the Australian Capital Territory (location of the federal capital city, Canberra), Australia's largest mainland territory, the Northern Territory, and Norfolk Island. The remaining territories, which include the Australian Antarctic Territory, are offshore and sparsely populated.

Local government

In June 2002 Australia had around 700 local governing bodies, and some 147 500 local government employees. Functions vary, but typically include local public works and services, town planning, licensing and inspection of community and business activities, and the delivery of certain community health and welfare services. State governments retain control of all major public works, and of policies of wider significance for all communities in areas such as education and health.

Funding of local government derives substantially from charges imposed on communities for the delivery of basic services, and revenue (rates) from varying forms of property taxes. Commonwealth and state governments provided additional funding in excess of A$2 billion in 2002.

The Australian Local Government Association is the federation of local government associations representing each of the Australian states and territories. It represents local government interests when dealing with the Commonwealth on national level issues, thus promoting the status of local government whilst maintaining effective working relationships at the local level.

The wider public sector

At both Commonwealth and state levels, large numbers of government organisations have been established outside the core public services to perform a range of functions and provide a variety of services to the community.

Typically, organisations of this nature have been public utilities providing transport, electricity and water supply services. Increasingly, however, these types of organisations have been sold by governments, under arrangements providing for varying levels of private ownership.

Other public sector organisations include organisations operating outside the public service framework include public non-commercial broadcasting organisations, government-supported education and research institutions, authorities oversighting the marketing of primary production, and licensing and regulatory arrangements for those requiring professional or skilled trades qualifications.

Public sector staffing

In June 2002 some 1.5 million staff were employed across the four sectors described above, with the smallest proportion (7.9 per cent) in the core Australian Public Service. Other Commonwealth employers accounted for 10 per cent, and local government, 9.8 per cent. State governments constituted the largest proportion, at 72.3 per cent. As indicated below, however, these staffing proportions are not reflected in the revenue and expenditure patterns for the different sectors.

Government revenue and expenditure

Financial considerations have a significant impact on the exercise of government powers and patterns of expenditure at Commonwealth, state and local levels.

Raising of revenue

The Constitution precludes the states from imposing taxes, customs and excise duties. During the Second World War, income tax powers, previously exercised by the states, were transferred to the Commonwealth to provide the necessary expanded revenue base to meet wartime and post-war recovery needs. Those taxation arrangements have been maintained to the present time, for economic and political reasons.

As noted later, the effect is that the Commonwealth raises most of the revenue-around 80 percent-however, most spending is done by the states.

Various arrangements have been adopted to address this imbalance between the Commonwealth and the states. The Commonwealth Grants Commission, an independent statutory authority, established in 1933 has the principal function of assisting the Commonwealth to determine an allocation of general revenue assistance among the states and territories. The Commission's recommendations are based on the 'equalisation' principle that each state and territory should have the financial capacity to provide a comparable range and standard of government services as the other states and territories, provided that it undertakes a comparable revenue effort and conducts its affairs with an average level of operational efficiency.

The Grants Commission now advises on the allocation of a substantial component of revenues to the states and territories based on this principle. Such moneys are general purpose 'untied' grants. In addition, the Commonwealth makes 'special purpose grants' or 'tied' funds to the states for hospital care, schools, housing, disability services and so on, subject to conditions and performance reporting. These latter grants are authorised under section 96 of the Constitution, which provides that 'the Parliament may grant financial assistance on such terms and conditions as the Parliament thinks fit'.

Table 2 below summarises, in an accrual accounting framework, the general government operating statement for all Australian governments in 1998-99. The importance of inter-government transfers is made clear in the table:

while Commonwealth taxation revenue amounted to A$140 billion, A$33 billion of this was transferred to the states in current and capital grants;
while states' taxation revenues amounted to some A$35 billion, they relied upon almost as much in grants from the Commonwealth.

The majority of the funds transferred (around A$24 billion) was allocated without condition on the basis of Grants Commission advice. The remainder (around A$9 billion) was for specific purpose grants.

Also clear from this table is the importance of transfers more generally in Commonwealth expenditure, not only to the states but also to individuals primarily through social security and medical benefits. The Commonwealth's gross operating expenses, at A$41 billion, are substantially below those of the states (at A$64 billion).

The arrangements for transferring revenues from the Commonwealth to the states has been a source of continuing debate in the Australian federal system.

Revenue
Table 2: All Australian governments: general government, operating statement — 1998–99
	Commonwealth A$billion	Multi jurisdictional A$billion	States and territories A$billion	Local A$billion	All Austn govts A$billion
Taxation	140	-	35	6	181
Current grants and subsidies	-	4	32	2	1
Sale of goods and services	4	3	9	4	19
Other	9	1	15	2	24
Total	152	9	91	15	225
Expenses
Gross operating expenses	41	8	64	13	127
Current transfers
to states	31	-	-	-	-
to universities	4	-	-	-	-
to individuals	49	-	1	-	50
to other	-	-	2	-	3
Capital transfers
to states	2	-	-	-	-
to local government	-	-	1	-	-
to other
Total	147	8	87	14	215
Net operating balance	5	-	4	1	10
Less net acquisition of non-financial assets	1	-	4	1	10
Net lending(+) & borrowing(-)	4	-	2	1	5

(a) Multi-jurisdictional includes in particular, universities, supported by Commonwealth and state governments.
Note: Sums of individual levels of government may not agree with totals for all Australian governments due to transfers between levels of government, and rounding to the billion. (Derived from ABS 2001, 2001 Yearbook Australia, p. 925. ABS catalogue no. 1301.0.)

The Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, signed in April 1999, radically changed the nature of inter-governmental financial relations. Under the Agreement, the Commonwealth passed legislation to provide that all of the revenue from a new Goods and Services Tax (GST) would go to the states and territories. The GST replaced a regime consisting of a wide range of differential taxation rates on items for retail sale. Providing all the revenue to the states removed the need for the Commonwealth and the states to haggle over the amount of general purpose funds to be provided to the states. The GST revenue is still allocated according to Grants Commission formula, and the Commonwealth continues to provide special purpose payments to the states for health, education and public housing etc.

The Intergovernmental Agreement established a Ministerial Council comprising Commonwealth and state Treasurers to oversee implementation and operation of the Agreement and to ensure compliance with its terms.

Thus, while not resolving all state revenue concerns, introduction of the GST represented a significant adjustment of the fiscal balance between the Commonwealth and the states, reducing some major tensions over levels of Commonwealth funding to the states.

The final provision of GST revenue (amounting to A$26.6 billion) to the states in 2001-02 is illustrated in Figure 2.

Figure 2: GST revenue provision to the states and territories, 2001–02 (in A$ millions).

Chart

Source: Department of the Treasury, Federal Financial Relations 2003-04, (Budget paper no.3).

Patterns of expenditure

For 2002-03, total projected Commonwealth expenditure is A$170.2 billion, with about two thirds of that amount budgeted for spending on social security, health and education, as illustrated in Figure 3. As shown in Table 2, much of this spending is by way of transfers-comprising social security and medical benefits paid to individuals and specific purpose payments to the states.

Figure 3: Commonwealth general government expenses by function, 2001–02.

Chart

Source: Figures taken from Australian Budget homepage, Department of the Treasury.

The major expenditure areas for the states and territories are related to provision of primary and high school education, public health and welfare services, and public safety. By way of example, spending by the three most populous states (New South Wales, Victoria and Queensland) by major function is shown in Figure 4. These expenditures include some funds provided by the Commonwealth.

Figure 4: State government expenses by function, 2001–02.

charts

Source: Figures taken from the respective state budget papers, 2001-02

Notwithstanding the funds provided by Commonwealth and state governments, local government frequently claims to have an inadequate revenue base to meet demands for an increasing range of services to their communities, such as health centres, aged care facilities and employment programs. A House of Representatives parliamentary committee is now inquiring into local government roles, responsibilities and funding in Australia. The committee is expected to report in mid-2003.

Inter-governmental relations

The federal system in Australia involves continuing interaction between the three tiers of government-Commonwealth, state and local. Differing priorities and resources at each level underline the importance of maintaining effective arrangements for consultation and cooperation.

From the early years of federation the Prime Minister and the heads of each state government (state Premiers) held annual official meetings, called Premiers' Conferences. These came to be directed mainly to settling the detail of Commonwealth-state financial relations, with occasional consideration of other business.

In 1992, the Council of Australian Governments (COAG) was established. It has now effectively replaced the Premiers' Conferences, and operates, under the chairmanship of the Prime Minister, as the peak inter-governmental forum in Australia. It has representation from each level of government and addresses agendas beyond Commonwealth-state finances. The latter are now considered mainly at annual meetings of Commonwealth and state government Treasurers.

The role of COAG is to initiate, develop and monitor the implementation of policy reforms which are of national significance, and which require cooperative action by Australian governments. These have included reforms of electricity, gas and water supply utilities, consistent with national competition policy, as well as environmental regulation. With the introduction of the GST the main financial relations focus of the previous Premiers' Conferences became redundant, allowing COAG to evolve even further as a forum for addressing structural policy priorities.

Meetings of COAG are arranged when a sufficient number of significant issues arise, but occur at least once a year. Particular issues may also be settled by correspondence.

In addition to COAG there are more than 40 Commonwealth-State Ministerial Councils currently facilitating consultation and cooperation between governments in specific policy areas. They initiate, develop and monitor policy reform, and solve problems where possible in areas such as energy, regional development, workplace relations, housing, consumer and environmental issues, Aboriginal and Torres Strait Islander affairs, and the operation of gambling facilities.

Councils usually comprise relevant Commonwealth, state and territory ministers. Ministerial Councils may choose to admit members from other countries. For example, New Zealand and Papua New Guinea are members of some Councils, and individual Ministerial Councils may choose to invite the Australian Local Government Association to be a member or attend particular meetings if appropriate. Ministerial Councils typically meet once or twice a year to discuss various issues and agreements, and have supporting forums of relevant departments.

There are long-standing arrangements for consultation and co-operation between Commonwealth and state Public Service authorities. Conferences of Public Service Commissioners, generally annual, have occurred since 1937. From an initial focus primarily on conditions of service matters, the conferences in recent years have turned their attention to broader policy issues of common interest. Matters addressed in 2002 included public service principles and values, leadership development, labour market shortages and an aging workforce, governance of information technology, and integration of services delivered by government.

The annual conference is supported by six-monthly progress and information reports from each public service jurisdiction, with either a mid-year teleconference, or a second meeting of the Commissioners.

Australian government arrangements at all levels continue to evolve, as a consequence of changes in international affairs, relationships with overseas governments, and the challenges of globalisation.

Further information:

Council of Australian Governments http://www.dpmc.gov.au/docs/Coag_framework.cfm

Australian Bureau of Statistics web site at http://www.abs.gov.au/ for the Centenary yearbook Australia 2001 and other Australian statistics.

The Constitution is at http://www.aph.gov.au/senate/general/constitution/index.htm and http://www.aph.gov.au/senate/general/constitution/index.htm

Federal Budgets are at http://www.budget.gov.au/

State government Budgets:

New South Wales http://www.treasury.nsw.gov.au/indexes/bpapers.htm
Victoria http://www.budget.vic.gov.au/
Queensland http://www.budget.qld.gov.au/

Australian Local Government Association http://www.alga.asn.au

Parliamentary inquiry into local government www.aph.gov.au/house/committee/efpa/localgovt/index.html