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Crown Solicitor's Office

A new federalism?

Paolo Buchberger, CSO Special Counsel

Extracted summary of a seminar dated 22 October 2015

The financial imbalance inherent in the Constitution between the Commonwealth and States, or at least which has developed since federation, is a major, if not the major, difficulty which confronts State governments in effectively undertaking their responsibilities.  The growth, through interpretation by the High Court of Commonwealth legislative powers since federation has greatly affected the effective power of the Commonwealth and State parliaments.  That shifting power, together with the Commonwealth's extensive use of grants pursuant to s. 96 of the Constitution to provide funding in areas of policy outside of its areas of legislative responsibility, coupled with the financial imbalance, has greatly enhanced the influence of the Commonwealth Government to the detriment of State governments. 

I've headed my talk with a question, because in my view the outcome and the reasoning of the High Court in the two Williams decisions poses some significant questions as to the future of Commonwealth and State relations, both because of the outcomes of those cases in terms of new limits on the powers of the Commonwealth Executive, and perhaps because of what the present Federal Government asserts is its intention to redraw or create a greater balance of responsibility for services between the Commonwealth and States.

So how did the High Court come to this position?

The beginning of the story can be traced back at least to the decision in Pape v The Commonwealth (2009) 238 CLR 1 ("Pape").  That was the case challenging the validity of financial incentives provided by the Commonwealth Government in relation to the Global Financial Crisis ("GFC").  One of the Commonwealth's arguments in that case to support the payments through Executive action was that an appropriation of funds under the Appropriations Acts, made pursuant to ss. 81 and 83 of the Constitution, was sufficient to authorise the Executive to expend the monies.  The High Court ultimately upheld the spending based on the Executive Power in s. 61 and the implied nationhood power, which can authorise legislation or spending in the case of a true national or international emergency, which the GFC clearly was.  However, the Court rejected the Commonwealth's argument that the appropriation of funds alone constituted legislative authority for the Executive to engage in spending without further Parliamentary authority.  So after Pape, the question that arose was what was the extent of the Commonwealth Executive's power to engage in spending, without express legislative authority?  That's where Mr Williams comes into the story.

Williams No. 1

Mr Williams is the father of children who attend the Darling Heights State School in Queensland.  The school applied for and was granted federal funding for a School Chaplaincy Service, run by the Scripture Union of Queensland.  The Commonwealth spending seemed to rely on the bare appropriation of the funds, the Executive Power in s. 61, and possibly the incidental power in s. 51(xxxix) of the Constitution.  There was no express statutory authority for the spending on the Chaplaincy Scheme.  Mr Williams challenged the validity of the funding, primarily on the basis that it contravened s. 116 of the Constitution, which relevantly provides that the Commonwealth cannot make a law for establishing a religion or for imposing any religious observance, an argument ultimately rejected by the Court.  But he also argued, ultimately with support by the States, that there was no legislative support for the Scheme and that accordingly the Executive had no authority to spend the funds.

The High Court held that the Commonwealth Executive's power to spend was restricted to areas in which the Commonwealth had legislative power and, in addition, where legislation had actually been enacted to authorise such expenditure.  The Chaplaincy Scheme had no legislative support and was accordingly invalid.  Justices Crennan and Hayne also held that ss. 51(xx) (corporations) and 51(xxiiiA) (benefits to students) would not in any case have supported any such legislation.

The Court also rejected an argument that, following the appropriations of funds, the Commonwealth Executive had the same power to spend as a natural person.

The majority judges were also critical of the way the direct funding models effectively bypassed s. 96 of the Constitution, pursuant to which the Federal Government has power to provide financial assistance to the States subject to conditions.  Section 96 enables the Federal Government to enter into areas of policy traditionally the responsibility of the States, via the provision of funding usually coupled with strict conditions.  However, s. 96 requires the consent of the States.  If they accept the financial assistance, they must comply with conditions, which often, in effect impose a Commonwealth policy which would otherwise be beyond Commonwealth power.  However, the States can refuse to enter into the agreement. 

The majority judges emphasised the position of the Senate as the "State House" in the Parliament.  Spending by the Executive Government, which was not supported by legislation it was said, bypassed the Senate and therefore bypassed the House in the Parliament in which the States were most represented.  It was said that it was through their elected representatives in the Lower House and through the Senate that the States could exercise at least some degree of control over the Commonwealth Executive's expenditure of funds.  On the Commonwealth's view of Executive spending, parliament's role in scrutinizing and contributing to policy and spending beyond bare appropriation was bypassed.

The Commonwealth's response

Within a week of the decision in Williams No. 1, the Commonwealth Parliament enacted the Financial Framework Legislation Amendment Act (No. 3) 2012.  I will not go through the amendments in any detail, however, the amending Act inserted a new Div. 3B which contained s. 32B.  Section 32B provides, in effect, that where apart from that section the Commonwealth Executive did not have power to enter into an arrangement to expend public funds, the Commonwealth has power to enter into such an arrangement.

In other words, despite the High Court's concerns at the lack of parliamentary control of the Executive's spending, the Parliament rushed through legislation which was obviously intended to give a blanket legislative backing to both past and future expenditure by the Executive. In addition, the Amending Act inserted Sch. 1AA to the relevant regulations which, in effect, purported to provide that any of the arrangements listed in the Schedule for payment of public monies, was authorised by parliament.  The Schedule contained over 400 such grants, referred to only by title or a short description of the purpose.  The Chaplaincy Scheme was one of those arrangements.  Other Schemes referred to were "drought assistance", "animal welfare", "food in the national curriculum", "crime stoppers", "community legal services" and "creative young stars". 

It is virtually impossible for the most part to determine what heads of Commonwealth legislative power they might be intended to rely on and indeed it is very likely that many of them cannot be supported by any head of legislative power at all.  The present Government indeed questioned the constitutional validity of the response when it was in opposition.

Williams No. 2

Mr Williams immediately announced that he planned to bring a new challenge to the validity of the Commonwealth's response.  Although a number of grounds for the challenge were run in relation to the validity of the whole Commonwealth legislative response, ultimately the High Court only considered the validity of the Chaplaincy Scheme and whether, in respect to that Scheme, the Commonwealth legislative response was supported by a head of legislative power, in particular the corporations power in s. 51(xx) and the student benefits power in s. 51(xxiiiA).

The Commonwealth mounted a very robust challenge to the decision in Williams No. 1, seeking to re-open that decision and argue that it was wrong, notwithstanding that it was a very recent decision of the High Court and that five of the majority in Williams No. 1 were still sitting on Williams No. 2 (2014) 88 ALJR 701.  The Commonwealth argued that the reasoning of the majority judges in Williams No. 1 was unclear.  They also argued for what they contended was a limited construction of the Executive power under s. 61 which appeared to be (and was found to be by the High Court) even broader than the scope which the Commonwealth tried to argue for in Williams No. 1.    Ultimately, the High Court held that, to the extent that the Commonwealth legislative response to Williams No. 1 purported to authorise payments in relation to the School Chaplaincy Scheme, it was invalid.  The decision was constituted by a joint judgment of Chief Justice French and Justices Hayne, Kiefel, Bell and Keene, with a separate judgment by Crennan J agreeing on the result.  Gageler J did not sit.  The High Court unanimously held that the Chaplaincy Scheme could not be supported by s. 51(xxiiiA) or s. 51(xx).

The High Court read down s. 32B of the Commonwealth Act so that it would not be taken to apply to a programme which was not capable of being supported by a head of Commonwealth legislative power.  That means that potentially a significant number of schemes which were set out in the challenged Sch. 1AA and which may have been entered into since may not be supported by legislation and may accordingly also be invalid. Accordingly, the payments made by the Commonwealth in respect of the Chaplaincy Scheme were not authorised by the legislation, and indeed could not be authorised except perhaps pursuant to a s. 96 grant to the State, which appears to be how the Chaplaincy Scheme is being funded at the moment. 

Accordingly, s. 32B and the various schemes set out in the Schedule to which it relates remain to be potentially challenged on a case by case basis. 


So to go back to my original question, where does all this leave the new federalism?

Over the course of some decades the Commonwealth Government, much to the disillusionment of the States, had been directly funding programmes outside of their sphere of legislative responsibility.  Given that the Commonwealth has most of the money, there is little that the States could do about this apart from complain and perhaps get increasingly frustrated.

The result of the decisions in Pape and in Williams No. 1 and Williams No. 2 is to place the ability of the Commonwealth to directly fund any scheme which it cannot relate to a head of legislative power in jeopardy. 

The result in the case of many schemes may be that, if the Commonwealth wishes to continue funding, it will have to do so through the mechanism of s. 96 of the Constitution.

If that is what occurs however, in practice, State involvement in substance with the Commonwealth policies the subject to the s. 96 grants, may be less than what a casual reading of Williams might suggest. The State essentially just acts as a conduit for the Commonwealth funds.

If we are headed for a new form of federalism, to the extent that this may be in the form of a greater use of s. 96 grants, there may be little real State involvement in the policy areas to which the grant relates if the education model is anything to go by.  And nothing in Williams No. 1 or No. 2 suggests that the use of s. 96 in this way by the Commonwealth is inappropriate.

As I said at the outset, my understanding is that the present Government has indicated that it wants to consider a new form of federalism, with greater responsibility and independence to the States in relation for the provision of services to which they are responsible.  It remains to be seen whether the Federal Government proposes to hand over any funding so that the States are capable of actually funding the increased areas of responsibility.  I am somewhat sceptical about the likelihood of the Commonwealth doing so. 


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