GALLIGAN, Professor Brian, Private capacity

CHAIR: It is good to see you here, Professor Galligan. We have received a submission from you, submission No. 46. Do you wish to make any amendments to that submission at this stage?

Prof. Galligan : No, thank you.

CHAIR: I now invite you to make an opening statement, after which the committee will ask you some questions.

Prof. Galligan : Thank you for inviting me to the committee. Apologies for getting the written pieces to you a little bit late. I sent a paper, which I understand that you got, which summarised in a sense many of the things that I would have said about Australian federalism had I had more time. You have that to look at. Then just a couple of days ago I prepared a shorter summary directed more towards the specific heads that this committee has been asked to examine. I will speak very briefly to that. I understand that that has been circulated as well.

The first point that I make regarding your point a, the issues and priorities for the reform of relations between the three levels of government, is a fairly obvious one: many of the significant major policy areas have multiple dimensions, international as well as national, state and local. The Australian Constitution, which captures essentially the national and the state part, is appropriate generally for handling the sorts of policy complexities that we are facing now and that we are likely to face.

The main aspect of Australian federal development over the last decade or so—although this has been corrected, as I make clear in both of the papers—is the propensity of the Commonwealth to get involved in ever more areas that would have been traditionally and formally are state constitutional matters, such as aspects of health, education, infrastructure and so on. Commonwealth leaders, and I cited Mr Howard's aspirational nationalism, either have little respect or little positive appreciation of Australian federalism. The Commonwealth, because of its excess fiscal powers, has the money to bankroll this. The point that I make, though, is that the particular balance in Commonwealth-state politics is one that is determined—although it has a constitutional base—very much from time to time by the balance of politics, intergovernmental relations and particularly the combinations of competition and cooperation that occur throughout many of the policy areas.

I have suggested that there are areas that could be reformed, but these are mainly within the sub constitutional and intergovernmental area. In particular, COAG and its operations could be strengthened. We should also have much more attention not just on each level of government managing its own policies in very specific programs but managing intergovernmental programs. It is surprising that we do not seem to have this public administration focus in the literature and certainly not in the practice in Australia. So there is a need to develop a whole approach to intergovernmental management.

On the distribution of constitutional powers between the Commonwealth and the states, I have argued very strongly that this should be left alone. There is no need to tamper with it. It is unlikely that any tampering would succeed by way of constitutional amendment anyway.

The powers in the Constitution for the Commonwealth are very broad. They have been interpreted ever more broadly by the High Court. If one combines that with the fiscal power of the Commonwealth, there is virtually nothing that the Commonwealth could not do. In fact, a federalist would probably be more interested in pegging the Commonwealth back, but there is not much prospect of doing that constitutionally because the Commonwealth controls the powers. And it is not necessary anyway. I think there are some issues with financial relations that need very serious attention. I have just signalled one of them. I have supported the rather comprehensive equalisation arrangements that we have but suggested they could be much more transparent. I remember in my days here at ANU organising seminars on the Grants Commission. You could hardly find anybody who was not an insider who knew really how to talk critically about what the Grants Commission was doing. There are issues. For example, a lot of money in the equalisation process goes to compensate particularly the Northern Territory for providing services to isolated Aboriginal communities but of course the Territory in respect for the principle of state and territory sovereignty does not have to spend that money in the areas for which it has a disability and gets it. It can spend it on a flash parliament house overlooking the Arafura Sea.

On constitutional amendments, I have suggested that it is not really the way to go. It is unnecessary and they would be unlikely to succeed. My view is that the Australian people are actually fairly smart, they are not stupid, and the main reason we have a bad constitutional record is that Commonwealth governments put up proposals that are bound to fail or they put proposals up that have been put before or that there is no general agreement on.

COAG I have suggested should be a major area for reform. Regionalism has been getting a run from some of my friends and colleagues, regionalism in the sense we have it in a fairly strong form with states. Some would say they are too large but nevertheless they are big regions. We have it in a micro sense, particularly with amalgamations of local governments. I think of my home town of Dalby. Probably not too many of you know Dalby, a country town. The amalgamation of local councils to create a larger Western Downs, or whatever it is called, means that there is a local government authority now in control of a much larger area which is much better equipped not only to handle floods but also gas and coal developments and so on. Then if you look at any major policy area you find that there is often a myriad of arrangements, some of them regional, between state and local governments, either formed by local governments or formed by states or formed by the Commonwealth for specific purposes in specific policy areas.

Finally, and I suppose this is the sort of optimistic one, if we are thinking about federalism a nice way to think about it is that the 20th century was nation-building and consolidation, and certainly we have had that in Australia. In the 21st century the larger structural pressures will be towards more globalisation and more localisation driven by democratic demands, so the propensity of Australian government to centralise things I think will be increasingly out of step and one might hope that in the future it might be wound back.

CHAIR: Thank you very much, Professor. I would like to begin with that last point you make because it is a point that has been made to us on other occasions when we have been taking evidence. It seems to amount to this, that federalism as a system of government is likely to be more relevant in the 21st century than a unitary system of government. In other words, the virtues of federalism better respond to the points you made here than any other system of government. Is that a fair proposition, do you think?

Prof. Galligan : That would be my view and I think it is very speculative and of course countries can go different ways and play things differently. The reflexivity of institutions means you can do things the same way with different institutions or differently with the same institution. But if you think of what is happening in Europe, clearly a complicated system of governments and subgovernments and a strengthening of non-national governments is really the standout factor, also if you think of Great Britain and Northern Ireland. I think the structural forces will be going in that direction. That is not to say that we will necessarily go that way but I think one could say that the atmosphere or the circumstances, the larger environment of the 21st century, is going to be much more congenial to federalism. You would not know that looking at the current Commonwealth leaders or National Press Club.

CHAIR: I think that is absolutely correct. In fact, some of the evidence we have received as a committee is at odds with the prevailing wisdom that exists in political circles about how the Commonwealth should evolve. The point that seems to come through most of your writings is that there is a need for reform of the Federation in various ways and you have just outlined some of those. The further point that seems to follow is that much of this can be done without necessarily undertaking constitutional reform. In other words we ought to be looking elsewhere for the means by which we can actually repair the Constitution or, if you do not like the word 'repair', at least make it more relevant to Australia's needs in the 21st century. Is that a fair proposition as well?

Prof. Galligan : It is very interesting. If you go to America they say, 'Our Constitution is 200 years old'—I was there during their bicentenary—'and so it must be good.' In Australia they say, 'It's 100 years old, so we must need a new one.' I suppose it is part of the political culture which is 'progressive' in a fairly superficial way. There is nothing that you would want to do that you cannot do without constitutional change. I actually think that the Constitution is pretty robust—it has been shown to be that through the 20th century. I think it can be adjusted virtually in any way you would like under existing arrangements. There are some exceptions like republicanising the head of state.

The other factor is that you do need to have a weighty reason for changing the Constitution, particularly the federal arrangements for the division of powers. It is very difficult for those amendments to get up. It is pie in the sky for the most part and it is really going down the wrong track. Constitutional lawyers professionally if there is a problem say, 'Let's fix the Constitution.' The problems are not constitutional problems. There is a tendency towards what I call 'coordinate federalism'. Some people think that a federal system should have separate and distinct governments with separate and distinct responsibilities—'You have that, we have that'. That is simply wrong. Yet so much of this talk about reform is in terms of sorting these things out. That is a very simplistic, mentally incorrect view.

CHAIR: Is that the force of your observation in your submission about the need not to 'fiddle'—a very elegant term I think—with the distribution of constitutional powers?

Prof. Galligan : Yes. I have developed that at any great length in the paper and in some of my other writings but I think it is (a) unnecessary and (b) it is unlikely. You could pretty much put your money on it; it will not work. There will be enough people who will take an opposite view. I have not seen any good proposals yet as to what you would do except some suggestions to facilitate the sort of sharing—I think you can do that already.

CHAIR: But you do say, do you not—I just cannot find the reference to it—in relation to heads of power like health and education that perhaps the Commonwealth has intruded too far into those areas and they ought to be retrieved for the states' responsibility.

Prof. Galligan : You can do that without constitutional change just as you have done it as it has developed this way without constitutional change. The High Court has been complicit in developing very expansive Commonwealth powers although not completely unlimited as the Pape case showed. It seems to me that the drivers for this will not be constitutional proposals but they will really be—and I think we are witnessing some of it at present—the cycles of Australian politics. Give the Commonwealth enough policy rope and it will sort of hang itself. It will stuff up on enough policy areas and you can see it. It did not work for the Howard government, they lost office despite saying, 'We'll take over this, we'll take over that and we'll send the army to the Northern Territory,' and so on. It did not work for Kevin Rudd who was going to take over the hospitals—I do not know why you would ever want to do that. They are difficult to run and it is not because of the federal problem it is because of hospitals, they are difficult to run all over the world. We have this easy tendency in Australia to think 'We have a problem with health, we have a problem with water in the Murray or a problem somewhere; therefore it is a federal problem.' It is not. I think that the political cycle and political leadership will have to address these things otherwise there is not much chance of them being developed. If you went back five years, one would have been rather pessimistic, because all of the forces seemed to be towards concentration of Commonwealth powers—Mr Howard riding high on his aspirational nationalism. At this point in time one would have to say that it is not likely that we are going to have this same thrust, with the Commonwealth taking over this, that and the other thing. Rather, in the states we increasingly have new governments that are going to be more assertive.

If Commonwealth public servants and advisers actually thought seriously about roles and responsibilities, they would want to get the Commonwealth out of a lot of the silly things that it is getting into, like paying teachers bonuses and things like that. How does it know which teachers to pay bonuses to; it does not know.

CHAIR: You made the point, on that theme, that politics has delivered us into that position, but so too has the High Court.

Prof. Galligan : Exactly, yes.

CHAIR: Whilst we might have a change in the cyclical nature of politics, we have all been waiting for 100 years for a change in the attitudes of the High Court, and it essentially has not come. Do you anticipate that that might change as well? And the important thing is, can the rebalancing of the Constitution be achieved without the High Court accepting that that is part of its responsibility?

Prof. Galligan : I think it can. I think what the High Court has essentially done is deal itself out of the federal adjudication balance of the roles of government for the most part and essentially left it to politics. Just because the High Court gives a very expansive definition of external affairs power or the corporations power does not mean that a Commonwealth government is going to take that up. It really depends on the political opportunity, the political drivers, the political leadership, the mood of the nation at the time and the strength of the states.

A committed federalist might think it is a good idea—and if Senator Ryan were here he might think it is a good idea—to have a constitutional amendment to peg back the powers of the Commonwealth and to, in a sense, perhaps instruct the High Court to get rid of Engineers methodology, which is an inappropriate way to interpret a federal constitution, and come up with something a bit more sensible. That is unlikely. But, because of my confidence that you can do it through politics, it is probably unnecessary.

CHAIR: We had evidence before the committee at our Perth hearing, I think it was, from some academic colleagues of yours along the lines of there needing to be some kind of constitutional amendment that reminded the High Court that the document they were interpreting was in fact a federal document.

Prof. Galligan : They know that.

CHAIR: The point seems to be that they may well know it but they are not paying much attention to it.

Prof. Galligan : Some of them are. If you look at the Work Choices cases on the corporations power, the strange combination of Callinan and Kirby giving very strong and eloquent articulations of a federal constitution. If you go back to the Tasmanian dam case earlier you will find the same from the then Chief Justice Gibbs and so on. It is not that they do not know about this; it is that they do not accept it. A lot of them come from Sydney or they come from a background where they do not have a sympathetic understanding or acceptance of federalism. They stick with this Engineers methodology.

Senator MOORE: You said that Australian federalism is currently being tackled by COAG, and that is where the effort and attention should be and that is the current model we have got. What kind of effort and attention should we put into COAG?

Prof. Galligan : If COAG is going to be a first order federal institution it has to have a much more robust and self-sustaining institutional base. Look at the institutions in Australia that are strong: the ACCC, the Productivity Commission and the Grants Commission are all strong. If you look at those institutions you can see that they all have substantial and good staff, whereas I think this is run out of Prime Minister and Cabinet or somewhere there. If you could establish it as a genuine collaboration between the governments, staff the office properly and give it some really significant research and policy development functions, that would be one thing. But it really does depend on political leaders acknowledging that that would be a good thing to do. One of the obstacles, particularly from the Commonwealth's point of view, is that, if you strengthen that, you would tend to lose some of the Commonwealth's dominance in talking it up or talking it down from time to time. So I think it would only work if it were part of a more robust federal consensus among political leaders that you do need a substantial intergovernmental institution to support genuine intergovernmental discussion and policy development and management.

Senator MOORE: So, basically, it is resourcing?

Prof. Galligan : Resourcing is a pre-requisite, but I think it does require political consensus among political leaders that, in a federal system, you do need some sort of intergovernmental institution or body that is sufficiently strong and has the capabilities to support intergovernmental decision making.

CHAIR: Do you mean that in the sense of being a separate agency—such as the ACCC, for example?

Prof. Galligan : Not necessarily an agency, because it is probably too highly political for that, but at least having coordinated state as well as federal input and not just something that is done by the way, in a sense, by PM&C or a branch in PM&C.

Senator MOORE: You said that you need that political commitment and engagement at the state and federal levels. How do you think the current state and federal leaderships view COAG?

Prof. Galligan : If you take it a little further to the more immediate time span, I think it is very interesting. Take Mr Howard, for example: he started off with the GST, I think, and his dealings with the state premiers in the earlier part of his prime ministership were very positive. But, then, as his electoral and political needs and perceptions changed, he changed in his view and approach. So, instead of working with this whole wall of state Labor premiers, as he did in the earlier time, he decided that the political advantage was to work against them, to blame them, to criticise them and take over areas and so on.

Similarly, you can see fluctuations in Labor prime ministers. Rudd came in very much with this cooperative federalism notion but, then, increasingly it was, 'We're going to dominate.' Currently I think we have a very weak national government because it is a minority government; it does not control the Senate and all those sorts of things, as everybody knows, and it is not likely to be able to do much, or want to do much, at all on the federal front. Until this new cycle of elections, we have had rather longstanding and tired Labor governments that were battling just to stay on track. So I think we are coming out of a period of the Commonwealth calling the tune and into a period where the Commonwealth will not be able to and cannot.

There will be much more political competition and whether that will lead to a more consensual view—I think we are still waiting for the Commonwealth and Commonwealth advisers to say, 'There are certain things the Commonwealth shouldn't do.' If you go to Canada and look at education, you will find that their national government does not get involved with schools at all, basically; yet, their school system is better than ours. I do not know why Australian political leaders and bureaucrats and advisers do not twig to this more, that there are certain things we do not want the Commonwealth involved in, that we want them to get out of.

Senator BACK: Can I start with the High Court. I think I shock the chairman every now and again when I make the observation that I think the High Court would be eminently enriched by having one or possibly two nonlawyers on it.

CHAIR: A veterinary scientist, perhaps!

Senator BACK: No, I do not think a veterinary scientist at all; just people of eminence and with the wisdom and experience of a variety of life. But I will not ask you to comment on that. What I will ask you to comment on is that you mentioned globalism, localism and, to use your term, 'glocalism'. Can you tell me, in the way the High Court is currently structured, whether it will assist, have no affect or in fact adversely affect what you believe is the way of the future?

Prof. Galligan : The High Court is clearly very important, but then there is the question of whether it really leads or whether it follows. In very important ways it follows in that it decides only the cases that come to it, and it is a bit happenstance as to what comes to it. Many things can go on for a long period of time. For example, the offshore jurisdiction was not settled for a long time. With governments working together and working things out, it is only when they come to something that they cannot work out that it becomes a challenge.

The court also is self-interested. I do not think the court is going to go out on a limb and expose itself in a way that would lead to political reaction or much criticism. One way of interpreting the Constitution, and the way the court has interpreted it through the broad sweep of the 20th century, is that it is sometimes led but has pretty much consolidated the way Australia was going—the way Australian politics and so on was going—in a very different way from, say, Canada, where the moves have been, in a sense, decentralist.

So I think it is an open question. To interpret the Constitution in a more federal way, the court would have to develop a non-engineer's or a post-engineer's type of constitutional jurisprudence, but it is not beyond the wit of judges—Callinan and Kirby, an unlikely combination—to do that. In one sense, you could say that it does not matter what the court does, the political system will work it out, because there is so much flexibility in the political system. Just because the court opens up an area, it does mean that the Commonwealth has more potential weapons in its armoury. Whether it picks them up and to what extent will depend very much on the politics of the day—where it thinks its advantage is, what it can get away with, what the states will allow it to and so on.

Senator BACK: You made the observation about Sydney centred High Court judges. It has been put to us by other witnesses that there ought perhaps be some recognition of representation across the geography of Australia in the composition of the High Court. Would you comment on that?

Prof. Galligan : There is a Western Australian Chief Justice and there is a Queensland Justice and immediate past Chief Justice. In Canada, as you know, they have much more of a regional formula, including one for Quebec judges for civil law. We have consultation. The Commonwealth has to consult . I think that consultation legislation arrangement came out of a previous wave of discontent that all the judges seemed to be coming from Sydney and a few from Melbourne. Again, I think that can be done through legislation. I would not want to put something like that in the Constitution. Whether a Commonwealth government would want to tie its hands to that extent would depend very much on whether the political current was in favour of that. Presumably, if Western Australia and Queensland continue to be strong and get stronger, the ability of Commonwealth cabinets and prime ministers to ignore them—and they are not ignoring them currently—will become less and less. I think these things will happen through the political process.

Senator BACK: .. I just go to your comments on competitive federalism. It is competitive between who and whom? Do you mean between states, between states and territories, between the states and the Commonwealth government—

Prof. Galligan : Every which way—and I am sorry Senator Ryan is not here because I think he is keen on competitive federalism. In Australia, and again it is interesting, there is not much talk except by economists and a few others about competitive federalism. All the talk is about cooperative federalism, which is assumed to be a good thing, but, of course, cooperation can be good or bad. Thieves can cooperate, as can businessmen. Look at Adam Smith—you never get businessmen meeting together unless it is to defraud the public, and that sort of thing. Cooperation can be good or bad and competition can be good or bad. Usually, in many areas you have elements of both, and it changes from time to time. To try to get everything cooperative would be silly. We would not try and do that in sporting or most other arenas of life. Also, it is not as if it is going to work anyway. It is very healthy to have horizontal competition among the states, and you do not need people to change states, but it happens through benchmarking. If you are in Western Australia and you see that Victoria has a superior system of higher education, you are pretty quickly going to be putting pressure on the teacher administrators and so on. That will sort it out.

But also—and this is where the politics comes in—there is a good deal of political competition between the Commonwealth and the states. Again, some of that is good and some of that is not so good. That is why, in a sense, I favour a very flexible Constitution. If the states are not doing their job properly, then the Commonwealth can come in. The problem with that is that the Commonwealth, if it has too much money—more money than sense—will tend to come in more than it should. That competition between the two can be bad, but, as I say, if it is well managed it can be good and it can be very productive.

Senator BACK: And you think the COAG process in a perfect world is the process that would sort that balance out between cooperation and competition?

Prof. Galligan : I do not think it will sort the balance out, but I think it will better enable the Commonwealth and states to focus on areas they do have to work out—for example, a national electricity grid or a carbon trading scheme, or something like that, where you do need to work closely together even though there will still probably be quite a lot of competition, within limits, within that. But then outside of COAG there presumably will be other major areas of competition as well. I think to try to put everything in a cooperative or a COAG basket is really much too limiting. There will be certain things you would put there—things that, in a sense, you are in a position with sufficient agreement to work through and work out. Other things you will not be able to and they will remain out there.

Senator BACK: Relevant to this discussion, this morning the Australian Local Government Association was a witness before the committee pleading the case for constitutional recognition of local government. In the context of this globalism, localism, constitutional adequacy or otherwise, would you care to comment on what you believe would be the impacts, both positive and negative. The CEO of the association was at some pains to say that all they really want is recognition in the Constitution so that it can guarantee federal funding but not in any way interfere with the integrity of the relationship that local government has with the states under their constitutions.

Prof. Galligan : That is perhaps not a dishonest but an inadequate answer or position because, of course, if you get constitutional recognition in order to bolster your independence and your direct relationships with Canberra, that is going to impact—it is the other side of the coin—on the states being the primary or sovereign controllers of local governments. My own view is that local government is important and increasingly important. It is being required to cover a whole new spectrum of social policy issues.

Senator BACK: In the services areas, yes.

Prof. Galligan : Yes, and it is underfunded for the most part. But I think that ought to be handled within the state. I think they should be recognised in state constitutions, if that is where you want to recognise them. I do not see a good case for putting local government in the federal constitution. I think that, in a sense, they are trying to get in there to get some leverage and distance from the state governments, and so state governments would oppose it. The record for constitutional changes is that repeats do not get up—this has been tried before. If it were put again I am pretty sure it would not get up, but, as I say, I do not see a good reason for putting it up. It seems to me that the Commonwealth can give them money and all sorts of things currently—and it is—without changing the Constitution and giving them a guernsey there.

Senator BACK: There seems to be a lot of tension in relation to this allocation of funds from the Commonwealth, be it to the states or local government. You made the observation in relation to the Northern Territory that, once GST funds are passed over to them, they can do what they like with them. I was not aware until coming through this process that, once funds are allocated from the Commonwealth to whatever instrumentality or agency is going to expend them, the Auditor-General does not have the capacity or the right to follow the money trail through to its expenditure. Do you believe that is an appropriate process or do you think we would be better served in a process whereby the Auditor-General did have the capacity to be satisfied and ultimately satisfy the taxpayer that funds that are tied for an expenditure are used for that purpose and are used efficiently?

Prof. Galligan : I used to be an auditor. That is attractive in the sense that, if somebody is giving money, they want to know that it is used for the purpose for which they gave it. On the other hand, if you allowed the Commonwealth Auditor-General to audit the trail right through to the final expenditure point then really there is no point in having a grant; you may as well have it as a Commonwealth expenditure almost because the Commonwealth has the responsibility right through its instrumentality to make sure it is spent according to the Commonwealth's ways. That might make the Commonwealth happy, but I think that would be a pretty severe dint on federal independence that I do not think I would support.

Clearly, the Commonwealth can specify things if it is a tied grant—and increasingly it is doing this, but on the other hand it has broadbanded things because for other reasons it does not want to specify too narrowly and have myriad programs. They can specify basically what they want. There has always been a problem then of how you get a strong state government like Western Australia to do what you tell them to do with the education money or with some of the money. I think part of that is better intergovernmental agreements and management from the Commonwealth's side. The Commonwealth does have the stick. If it knows pretty well that the money is not being spent even if it is not audited then it can use other means to try to bring the states to heel, but the states have an interest in not being too closely tied to the Commonwealth. They certainly would not accept the Commonwealth Auditor-General going to their local schools or wherever the money is being spent. I guess the short of it is that I would not support the Auditor-General going that far.

CHAIR: On the point of constitutional recognition of local government: your proposition is that no compelling case has been made as to why it should occur. I guess the converse is: do you see risks and dangers were it to take place?

Prof. Galligan : It is a bit of a fudge I think. It is not that I do not see a good case; I am not in favour of it. Senator Back mentioned the spokesman saying they wanted that in order to be able to get more readily Commonwealth money but in a sense they do not say that and that would not be what would be put up. It would be simply: 'We want to be recognised in a sense for what we are. We are significant, so mention us in the Constitution, like recognising Indigenous people.' I think that would be the way if it were going to be proposed it would be done—'Local government is an important part of Australian government' or something like that. That on the face of it would be pretty innocuous. The purpose of local government is really more than that. It is to try to get out from underneath the state governments, act more independently and get more money directly from the Commonwealth. Depending on the Commonwealth, it might from time to time see that that is a good way to go, particularly if it has these problems in dealing with the states.

CHAIR: I think Senator Ryan put this point quite eloquently this morning in relation to the local government witness. His proposition was: 'We want something like a section 96 power in the Constitution in relation to local government.'

Prof. Galligan : Yes, so that is fairly specific.

CHAIR: Something of that order; we did not discuss the text or anything like that. But Senator Ryan's proposition was that, once you do that, you invite the Commonwealth to provide funds to local government which could actually be subversive of local government in ways which they had not anticipated. In other words, yes, they can provide grants constitutionally, and the problem of Pape would be overcome—if indeed there is one—but the risk that local government is exposed to is that an expansive Commonwealth could start making demands on local government, and perhaps indeed states, which would be inconsistent with the expectations that local government had when they asked for this constitutional change in the first place. In other words, they think it is a bounty and a good; in fact it turns out to be anything but that. Is that a constitutional risk, do you think?

Prof. Galligan : It is similar to the section 96 scenario with the states. On the one hand, the states want this money for the most part, because there are very few programs that they do not want, except that then, through the equalisation system—this is in a sense the qualifier—they get the money anyway. If they do not get it by a special grant, they get it through equalisations, so they are pretty relaxed. Then you say, 'What's the point of this?' It is a sort of political game. For local government, I think, it would be a similar sort of thing. Very few local governments would not want Commonwealth grants to do this, that and 101 other things, particularly in the broader social policy area, but then they would be required to do what the Commonwealth wanted them to do. I think that is part and parcel of it. The point I would make is not so much that they might be asked to do things that they would not want to do. I would not be in favour of freeing local government up to be playing this third-party game between the Commonwealth and the states. I think there is enough of that in the federal system between the states and the Commonwealth, where, although the Commonwealth has the whip hand, the states are relatively strong. In this other scenario, the local governments compared with the Commonwealth are totally weak, so in a sense they would be very much the tentacles, almost—the doers of the Commonwealth's bidding.

CHAIR: In your brief paper on page 2 you make a point about the case for reducing excessive VFI.

Prof. Galligan : Yes.

CHAIR: You further make the point that states and territories would be more financially responsible if they had to raise more of the money they spend, which I have to say is a proposition that appeals to me; it is the idea of being responsible for the money you raise, obviously, rather than spending someone else's largesse. The question then is: what opportunities do you see for states to have that capacity to be able to raise the significant amounts of money that they are going to need to address the kinds of demands and responsibilities that they have?

Prof. Galligan : This is a key area. This really is the elephant; it is a huge area that overshadows most of Australian federalism and most of the politics of Australian federalism—the acute vertical fiscal imbalance. The states, although they complain about this, of course have been complicit in it. The most notable example was Joh Bjelke-Petersen, Queensland Premier, who used to say, 'The only good tax is a Commonwealth tax.' There are the pluses and minuses. Joh preferred to play grantsmanship in getting grants from Canberra rather than levying the taxes himself, with the opprobrium or political distaste that that might entail. For any sort of realignment to come about, the Commonwealth essentially has to lead, so it would be a self-denying ordinance to extend from the Commonwealth, but that is not impossible. Malcolm Fraser, you remember, introduced an arrangement whereby, within limits, the states could vary tax by way of a rebate or an extra certain amount of a few per cent. None of the states moved on it, for the Bjelke-Petersen sort of reason, and Paul Keating took that out. It would require the Commonwealth, in a hardheaded way, to work-out—and it is not hard to do—the proportion of money they need for all of their purposes, plus all of the equalisation. It would be much less, of course, than what they have currently, and they would have to agree to pass some of that back to the states.

In the Canadian system, for example—and you can still have a coordinated national tax-gathering system, although Quebec is separate in Canada—you have a Commonwealth tax of perhaps 60 per cent. The income tax is Commonwealth and the states bear the 40 per cent. You could have all sorts of rules about how much and whatever, but for that to come about there has to be a political change of mind, particularly at the Commonwealth level but also at the state level. They have to want this.

CHAIR: We are talking about a significant amount of revenue, which you cannot raise from conveyancing fees, land taxes, payroll taxes and things of that kind. The revenue raising that is left to states is inadequate for the purposes we are talking about.

Prof. Galligan : It is the bits and pieces. Originally, the states levied income tax and then the Commonwealth came in, in part, in the First World War to finance that and then took a monopoly in the Second World War, and it has kept it. In most other federations—in fact, I think there are no other federations like this—the Commonwealth raises all of the income tax and all of the indirect goods and services tax. Howard allocated all of the GST back to the states, but you can see that that is a bit fraught, because Kevin Rudd, despite his cooperative federalism boasts, was going to take a third of it back for another share of public hospitals, which I thought was unconscionable. Somehow it did not seem to raise any feathers in the Canberra establishment—senior politicians, bureaucrats, journalists and whatever. They just thought it was fine. So it would be essentially that—dealing the states back. It is in the act that it cannot be changed without total agreement, and Western Australia did not agree. The GST is allocated back, in a distributional way, to the states. It would be a matter of allocating a proportion of the income tax in that way as well.

CHAIR: Part of your submission seems to make the point that the management of the Federation is under-institutionalised in a way—that, compared to Canada, for example, we do not have enough intergovernmental contacts. They exist through COAG and they have existed through other mechanisms in the past. The kind of structure that you need to manage a sophisticated 21st century federation is, essentially, not in place. We do this in a very incomplete way, but we also do it in an ad hoc way. The proposition was put to us in an earlier hearing that the Commonwealth is managed in, essentially, a crisis management way. Every so often we realise that there is a problem and we try to solve that problem rather than having a kind of continual review of the Federation in some fashion. Is that a view that you share?

Prof. Galligan : It is not just crisis management; there is an enormous amount of public attention, media attention, intergovernmental management and so on below the surface. There are officers throughout the major departments in the states, including in the premier's department, who spend much of their time liaising with colleagues almost on a daily basis—even more than that—in Canberra and the states. So there are a whole lot of ongoing things that are not crises and can be managed, in a sense, in that way, but it is in a rather informal way. It is like this: 'I'm the director of some aspect of education and I know you as the Commonwealth one. I can call you at any time and we can work things out.' A lot of things are solved in that way. When things become crises, political leaders get involved and you often have stand-offs and so on. Broadly, I agree with the way you were putting it—that it is rather ad hoc, whether it is this ongoing administrative issue or a crisis, and COAG is cranked up or cranked down according to the propensities and political interests of the current Prime Minister particularly. The states do have their own meeting, but that is pretty ad hoc again and informal. So I would think broadly, yes, we do need, and you would expect we would have, a more sophisticated institutional platform for intergovernmental relations. In other areas, like equalisation, we have a very elaborate institutional organisation to support this, but in mainstream intergovernmental relations we do not.

Senator BACK: It has been most interesting. Thank you.

CHAIR: Professor Galligan, thank you very much for giving us a submission and thank you for your time today. We very much appreciate you coming before the committee. It has been most helpful.

Prof. Galligan : Thank you for listening and inviting me in the first place. Good luck with your recommendations.