Pulling the public purse strings

Taxation Australia

IT IS PROBABLY fair to assume that most people eligible for the federal government’s stimulus tax bonus in the last financial year received such payments happily (if not with slight confusion about what the payments were actually for). One such recipient, however – law professor at the University of New England, Mr Bryan Pape – was not so happy.

The Tax Bonus for Working Australians Act (No 2) 2009 (Cth) was passed in February 2009 as part of the Rudd government’s fiscal stimulus package to counteract the adverse effects of the global economic crisis on the national economy. It provided for one-off payments ranging between $900 and $250 to taxpayers earning between nil and $100,000 per annum. Individual entitlements were assessed according to the person’s tax liability for the year ending in June 2008, provided that a tax return for that year had been lodged.

Under the Act, Mr Pape was entitled to receive $250. But, as a tax law professor unhappy with the lack of clarity from the High Court as to what the federal government can legitimately spend public dollars on, Pape promptly told the government that they could take the money back. In fact, he issued a writ of summons and statement of claim against the Commissioner for Taxation seeking, firstly, a declaration from the High Court that the Tax Bonus Act was constitutionally invalid and, secondly, an injunction to restrain the government from depositing the money into his account.

The Commissioner of Taxation was joined by the Commonwealth as defendants, and the New South Wales, Western Australian and South Australian governments all intervened when the case went before the High Court in March this year.

The issue that gave Pape the most concern was whether sections 81 and 83 of the Constitution, which set out the way parliament is to appropriate money from the consolidated revenue fund, gave the federal government free rein to spend public money on any purpose it thinks fit. The Constitution makes it quite clear that the federal government only has a limited range of subject areas it can make laws about, but is it the case that when it comes to spending money it has a kind of constitutional carte blanche?

All members of the High Court, with the exception of Justice Heydon, found the Tax Bonus Act to be valid under the Constitution, and a majority of 4:3 found that the power to spend money in this case was to be found in a combination of the executive power in section 61 and the power to make laws on matters “incidental” to that power found in section 51(xxxix). Still, many of the arguments put forward by the Commonwealth in support of the Act were as ambitious as Pape’s attempt to challenge it in the first place. Thus, the case saw a number of fundamental questions about what the Commonwealth can and cannot do raised for the Court’s consideration.

What is an “appropriation”?

Section 81 of the Constitution requires that all money raised or received by the executive government be put into a single pool of money (the consolidated revenue fund, or CRF), portions of which can then be “appropriated for the purposes of the Commonwealth.” Section 83 then provides that “no money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law.” These sections combine to require that if the federal executive wishes to spend public money for a particular purpose, it must first get parliamentary approval in the form of enacting a bill that authorises the segregation of funds from the CRF to be put towards that purpose.

This process of “appropriation” is to be distinguished from the act of actually spending public money. An appropriation effectively achieves two things: it “earmarks” funds in the CRF to be spent at a later time; and, it identifies the purpose for which that money is to be spent.

The Commonwealth submitted that the Tax Bonus Act could be supported by any or all of five bases: the appropriations power in section 81, combined with the incidental power in section 51(xxxix); the executive power in section 61; the external affairs power; the trade and commerce power; and/or the taxation power.

Amongst this myriad of defences, most weight was placed on perhaps its boldest argument before the court: that section 81 provides a broad source of power, essentially allowing parliament to appropriate moneys from the CRF for any purpose it sees fit, irrespective of whether the purpose relates to any of the legislative subjects listed in sections 51 and 52. This argument was helped along by the Commonwealth’s invocation of section 51(xxxix), which gives parliament the authority to pass any law with respect to “matters incidental to the execution of any power” vested by the Constitution in any of the three branches of government. It effectively broadens the express powers in the Constitution to include a power to make laws in aid of their execution. In the Pape Case, the Commonwealth suggested that once money has been appropriated to a particular purpose (under section 81), a law that specified how the money should be applied to that purpose was necessarily incidental to the appropriation and therefore valid.

As its second-line of defence, the Commonwealth sought to rely on the “executive power” in section 61, which vests the executive, technically through the Queen and Governor-General, with the power to do things necessary for the “execution and maintenance of this Constitution, and of the laws of the Commonwealth.” The executive power has been said to entail an implied “nationhood power.” This is owing largely to the reasoning of Justice Mason in the AAP Case (1975) 134 CLR 338, where his Honour argued that section 61 confers on the executive government the power “to engage in enterprises and activities peculiarly adapted to the government of a nation and which cannot otherwise be carried on for the benefit of a nation.” Because the executive is in a peculiar position to both initiate and finance expenditures, the power to actually make those expenditures should not be limited to the subjects set out for the legislature, but only by the requirement that parliament first make the necessary appropriation from the CRF. This argument relies on the scope of the executive power in section 61 and ultimately came to be one of the central points of dispute in the case.

Section 81 is not a substantive source of power

While all members of the High Court held that the Tax Bonus Act had validly appropriated money from the CRF to be put towards the stimulus package, none believed that either section 81 or section 83, by themselves, empowered the Parliament to make a law requiring the actual payment of the money. Justice Heydon reminds us of why this point is so important in the following passage:

“If appropriation can be for any purpose thought fit by the legislature, which rarely has a will different from that of the Executive, if an appropriation confers power of the Executive to spend on those purposes, and if s51(xxxix) confers power to control that expenditure by legislation,  the legislative restrictions on the Commonwealth to be found in s51 and s52 are not merely outflanked but destroyed.”

The Court was of the view that if the enumerated powers of the legislature found in the Constitution are to mean anything, the correct reading of sections 81 and 83 is that they merely place conditions on the way in which public money is to be “earmarked” for expenditure. The relevant power to actually spend the money must be found elsewhere in the Constitution.

This finding was, in itself, a landmark. Two previous cases considered by the High Court – the Pharmaceutical Benefits Case (1945) 71 CLR 237 and the AAP Case (1975) 134 CLR 338 – had resulted in several contradictory judgments as to the proper nature of the appropriations provisions. This is partly because confusion arose as to the distinction between the “appropriation,” the “expenditure” and then the “activities” which provide the purpose and context for the expenditure.

Broad interpretations of section 81 were separately put forward by Chief Justice Latham, Justice McTiernan and Justice Dixon in the Pharmaceutical Benefits Case, all of whom seized on the phrase “for the purposes of the Commonwealth” at the end of that provision.

Chief Justice Latham and Justice McTiernan, for example, both argued that parliament has a “general, and not limited, power of appropriation of public moneys” and that it was ultimately for parliament to determine whether a particular purpose was a “purpose of the Commonwealth.” Neither Justice accepted the proposition that “purposes of the Commonwealth” were limited to the legislative powers, but both were ready to invalidate any Act that used the “appropriations” power to disguise an attempt to act outside the constitutional mandate. The distinction is a subtle one, but essentially their Honours were arguing that Parliament can use the “appropriations power” to spend money on matters in respect of which there is no other grant of legislative power, but they cannot use it to take control of such matters. The impugned Act must reasonably be seen as incidental to the expenditure of public money, not as a back-handed way of expanding legislative control.

 Justice Dixon joined Chief Justice Latham and Justice McTiernnan in treating section 81 as a substantive spending power, and agreed that “purposes of the Commonwealth” were not necessarily limited to the enumerated legislative powers in the Constitution. His Honour also insisted that any legislative plan that confers substantial rights and obligations upon people must be consequential or incidental to the appropriation of money, not the other way around. Justice Dixon, however, placed greater emphasis on the federal distribution of powers, arguing that determining the validity of an appropriation law requires us to “remember what position a national government occupies” and to take a broad view in doing so, all the while being careful not to overstep the division of power between the federal government and the states.

In the AAP Case, thirty years later, Justice Mason largely endorsed the views of Chief Justice Latham. Using an argument closely resembling those put forward in the Pharmaceutical Benefits Case, his Honour argued that section 81 provides a parliamentary sanction for both the withdrawal of money and for its expenditure, but does not “supply legal authority for the Commonwealth’s engagement in the activities in connexion with which the moneys are to be spent.” How section 81 can authorise the actual spending on a particular purpose without simultaneously authorising the Commonwealth’s “engagement” in that purpose was not entirely clear.

Giving special consideration of the federal balance of power, Chief Justice Barwick in the AAP Case held that the words “purposes of the Commonwealth” were strictly words of limitation, not words conferring power. While these “purposes” may not be confined to the heads of legislative power in sections 51 and 52, they were nevertheless not a matter that should be left to the whim of parliament. The overriding imperative for Chief Justice Barwick was to maintain the federal distribution of power, irrespective of how desirable it might be to give the Commonwealth power in “affairs truly national in nature.”

All this confusion makes it marginally easier to sympathise with Pape’s motivation for bringing the present case (although, perhaps only from an academic perspective, rather than one of personal finances). Despite ultimately losing the case, Pape won on the essential core of his challenge in having the High Court unanimously reject the proposition that section 81 provides a substantive source of power simply to spend. It follows that the real power to actually spend the money appropriated needs to be found elsewhere in the Constitution. But, having agreed on this much, the High Court split on exactly where that might be.

The “executive” power (s 61)

Having settled the proper operation of sections 81 and 83 of the Constitution, the High Court then turned to determine whether the stimulus package could be justified as an exercise of the executive power (s61) in combination with the incidental power (s51(xxxix)).

A bare majority of the court (Chief Justice French, and Justices Gummow, Crennan and Bell in a joint judgment) believed that it could. These judgements borrowed heavily from the reasoning of Justice Mason in the AAP Case that the executive power allows the government to engage in activities “peculiarly adapted to the government of a nation and which cannot otherwise be carried on for the benefit of the nation.”

Justices Hayne and Kiefel together conceded that the executive power is broad enough to encompass concern with “national issues,” but rejected the argument that the stimulus package could be justified on this basis. Their Honours still held the Tax Bonus Act be valid, but only to the extent that the provisions of the Act could be read down to redefine the payments as a refund on tax liability (rather than as a bonus), such that the law could be seen as one with respect to taxation under s51(ii). Only Justice Heydon, in dissent, held that the payments were wholly invalid.

Yet, even for the four Justices who upheld the Act as being supported by section 61, there was disagreement as to the true scope of the executive power and how the Tax Bonus Act might be a law with respect to it.

While wary of attempts to define the full extent of the powers of the Executive too concretely, Chief Justice French favoured a conservative interpretation of section 61. His Honour held that the executive power was not limited to the legislative powers listed in section 51 and 52. Nevertheless, the power has to be capable of serving the proper purposes of a national government – that is, it must allow for a capacity to engage in enterprises and activities peculiarly adapted to the Commonwealth as a national polity. The executive power extends to “short-term fiscal measures to meet the adverse economic conditions affecting the nation as a whole, where such measures are on their face peculiarly within the capacity and resources of the Commonwealth Government” (such was His Honour’s description of the Tax Bonus Act). Still, Chief Justice French insisted, as did Justices Hayne and Kiefel in their judgment, that no matter how broadly interpreted, the executive power could not be used to disturb the federal balance of power.

“National emergency”

The majority’s joint judgment (authored by Justices Gummow, Hayne and Bell) similarly refrained from defining the outer-limits of the executive power, but broadly accepted the proposition that section 61 confers on the executive the power to engage in activities “peculiarly adapted to the government of a nation.” The most remarkable aspect of the majority reasoning is that their Honours determined whether the need for an immediate fiscal stimulus package falls within the executive power by drawing an analogy to “a state of emergency in circumstances of a natural disaster.” Since the executive is the arm of government most capable and equipped to respond to such a crisis, it follows that it must have a constitutional mandate to do so.

In defence of this claim, the majority noted that “the world is experiencing a global recession triggered by a global financial and economic crisis which is the most severe deterioration in the global economy since the Great Depression and the most significant economic crisis since the Second World War.”

Reference was made to, amongst other things, the G20 Meeting in November 2008, reports issued by the International Monetary Fund, and the government’s own forecasts as evidence that the economic downturn could indeed be categorised as a “crisis” in the constitutionally relevant sense of the word.

The other Justices were quick to reject the “national crisis” analogy relied on by the majority, but Justice Heydon was particularly critical:

“Modern linguistic usage suggests that the present age is one of ‘emergencies’, ‘crises’, ‘dangers’ and ‘intense difficulties’, of ‘scourges’ and other problems… Even if only a very narrow power to deal with an emergency on the scale of the global financial crisis were recognised, it would not take long before constitutional lawyers and politicians between them managed to convert that power into something capable of almost daily use. The great maxim of governments seeking wider constitutional powers would be: ‘Never allow a crisis to go to waste.’”

Having the benefit of hindsight, and given that the panic surrounding the financial crisis has somewhat abated, we might legitimately ask whether the majority was too quick to call upon the notion of a “national crisis” in this case.

Looking forward, it may also be that the majority’s reading of the executive power is so broad as to make the unanimous finding as to the scope of section 81 redundant. If you reject the proposition that section 81 provides parliament with free rein to spend public money on any purpose it sees fit, but replace it with the proposition that anything vaguely resembling a “crisis” or “emergency” might justify an expansive use of the executive power in support of such spending anyway, is the practical effect on the parliamentary power to spend not essentially the same? Indeed, on one reading, it seems as though the confusion over the meaning of the phrase “purposes of the Commonwealth” found in section 81 has merely been replaced with confusion over the meaning of “peculiarly adapted to the government of a nation.”

As Justice Heydon pointed out, there are clearly good practical and political reasons to prevent appropriations from being abused as a means of creating de facto legislative powers. But there is an equally legitimate concern that the capacity of the federal government to spend public money is not too tightly constrained. The practical implications of rendering Acts of appropriation invalid after they have been passed – or even after the money has already been spent – are vast.

Still, given the substitution of focus from section 81 to section 61, it may be something of an over-statement to claim that all parliamentary appropriations made over the last century thought to be supported by a “power” in section 81 are now at risk of being declared constitutionally invalid. It is far from clear that the Pape Case has compromised the spending power of the Commonwealth. The phrase “purposes of the Commonwealth” in section 81 was, at its widest, basically unlimited. While it is unlikely that the scope of the executive power will ever be quite that expansive, notions of being “peculiarly suited to national government” and of “national crisis” might be sufficiently broad to allow the Commonwealth to largely do what it wants anyway. On the other hand, neither of these concepts have been adequately defined in the present case and the ambiguity inherent in both might ultimately make life for the Commonwealth more difficult than it has been in the past when it comes to spending from the public purse.

Tessa Meyrick is researcher with the Gilbert + Tobin Centre of Public Law at the University of New South Wales


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