Report

Specific purpose payments and the Australian federal system

15 Jan 2008
Description

A feature of Australia’s federal system is that power over spending and policy-making is becoming increasingly concentrated in the Commonwealth. One major way this power is exercised through specific purpose payments by the Commonwealth to the states in areas such as health and education.Specific purpose payments (SPPs) are grants the Commonwealth makes to the states, usually subject to conditions as to how the money is spent, in areas such as health and education, which the states administer.

A feature of Australia’s federal system is that power over spending and policy-making is becoming increasingly concentrated in the Commonwealth.

SPPs are a major mechanism for centralisation because they allow Commonwealth involvement in areas beyond those stipulated in the Constitution. Consequently, the Commonwealth now shares with the states many functions which were formerly the preserve of the states.

Whilst there are valid reasons for the Commonwealth to provide SPPs, some see the Commonwealth’s use of SPPs, especially the trends towards using SPPs for short-term political purposes and as a means of imposing the Commonwealth’s priorities on the states, as undermining the federal system of government.

Problems associated with SPPs include a lack of accountability, duplication of administration, and blame-sharing. One estimate has the fiscal cost of these problems at $9 billion annually.

Numerous proposals have been advanced to improve the operation of SPPs but few have been implemented. The proposals include focusing on outcomes, the pooling of Commonwealth and state funds, and expanding the states’ tax base. The Commonwealth’s extensive use of its SPP powers will continue while the states lack own-source revenue. But no moves are afoot to give the states greater taxation powers because this would entail fundamental change.

Publication Details
Published year only: 
2008
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