PM Transcripts

Transcripts from the Prime Ministers of Australia

Transcript 218


Photo of Menzies, Robert

Menzies, Robert

Period of Service: 19/12/1949 to 26/01/1966

More information about Menzies, Robert on The National Archive website.

Release Date: 16/09/1960

Release Type: Speech

Transcript ID: 218

By this method, it was thought, the evil results of competitive borrowing
would be eliminated and the national credit backing would improve the
prospects of effective loan raising.

This system worked in strict accordance with its terms for a
considerable time, I can well remember, for example, that in the years
immediately preceding the second World War it was the practice for the
Commonwealth Bank, as it was then constituted, to underwrite the loan
programme. The Prime Minister and Federal Treasurer would meet the State
Treasurers; discussion would occur; there would be argument as to whether
the borrowing programme ( believe-it or not!) should be 120m. or œ E22m.;
constant reference wa's made to the Commonwealth Bank to see how much it was
prepared to underwrite. In the upshot a figure say of œ E21m, would be arrived
at; it became the borrowing programme; the success of the programme was
assured by the underwriting; the next business, and the important business
of the Loan Council, was to divide up, what Sir Thomas Playford nowadays
calls " the turkey"; whereupon each State Government representative would
go away to work this into his Budget proposals for the forthcoming financial
year. Though, after the war, underwriting ceased to be the rule, it
still remained true that the prime business of the Loan Council was to
discuss how much money could be borrowed on reasonable terms and conditions.
There was no question of the Commonwealth underwriting the programme, and
therefore programmes were fairly realistically arrived at. But by the
time I came back into office myself, at the end of 1949, it was becoming
increasingly clear that instead of the depressed circumstances which some
people had anticipated the country was on the verge of a great expansionist
movement. This involved not only very high demands on
for private capital expansion, but equally, and no less
growing demand for public works which would provide the
for private capital expansion. private capital
importantly, a
essential foundation
While this growing demand for capital works programmes on
behalf of governments was manifesting itself, it became at the same time
clear that the competing demands of enormous expansion in both the public
and the private sector limited the amount which could reasonably be
expected to be borrowed by Governments. The Commonwealth Government therefore,
without obligation, but in order to meet the realistic economic needs of the
country, adopted for the first time the practice of aiding the loanraisings
by adding to them, where they fell short of the programme, funds
from Commonwealth sources. On one or two occasions this was done by what
was a virtual underwriting of the programme by the Commonwealth. In more
recent times there has not been a formal underwriting but if and when the
State representatives have adopted a public works programme which, in the
view of the Commonwealth, is a reasonable one under all the circumstances,
the Commonwealth has made payments to the States on account of the programme
at equal monthly amounts for the first six months, with an indication
that the position will then be reviewed. In point of fact, however, the

monthly payments have been made throughout the financial year without
reduction, so that in substance the States, when the works programme
has been approved of as a financial total, have had some assurance
that the money will be available to them.
That this procedure alters the nature of the Financial Agreement
is, of course, quite clear. No longer is the question: ' How much money
can be borrowed on reasonable terms and conditions? but ' How much
money is reasonably needed for an attainable works programme?' In
consequence the Commonwealth has, year by year, accepted additional
liabilities out of Commonwealth funds, sometimes on a very great scale.
Though this practice has been of great advantage to State governments
and was intended to be so, it has, of course, led to a state of affairs
in which the States are increasingly dependent upon Commonwealth action
for the carrying out of their works programmes.
I confess that I regard this as another of the centralizing,
or centripetal, developments in our own Federal Constitution. But I equally
confess that I can see no way by which it could have been avoided, though
it has involved the Commonwealth in paying for its own Works programme
out of revenue. There are financial purists who take pleasure in saying that,
it is quite unsound to carry capital works on revenue account. That may,
in strict theory, be right. But ' needs must when the devil drives'. if
the Commonwealth had not been prepared, at some political inconvenience,
to carry its own works programmes on revenue account, there would have
been two conse~ quences: one, that the States would have received no
subvention for their own works programmes out of Commonwealth revenues; and
two, that the Commonwealth works programmes would have been considerably
reduced. What this could have meant in terms of the non-performance of
the Snowy Mountains Scheme and a considerable damping down of expansion in
the postal and telegraphic services, I leave to the imagination of those
who are familiar with these problems.
Another provision of the Commonwealth Constitution under which
the original Federal balance has been changed, is that contained in Section
96 of the Constitution. That Section provides that:
During a period of ten years after the establishment of the
Commonwealth and thereafter until the Parliament otherwise
provides, the Parliament may grant financial assistance to
any State on such terms and conditions as the Parliament
thinks fit." It may very well be the case, particularly having regard to
what I may call its initial character, that the draftsmen of the

Constitution felt that such grants by the Commonwealth of financial
assistance might become necessary having regard to some purely temporary
causes during the period of Federal transition. But the Section has
continued to operate, and nobody supposes that it will be changed.
There was in some minds a feeling that Section 96 provided
for the making of a grant but did not enable the Commonwealth to attach
to the grant conditions which amounted to the exercise by the Commonwealth
of a legislative authority not otherwise accorded to it.
In the case of Victoria v. the Commonwealth in 38 C. L. R.,
p. 399, I myself, as Counsel, made a valiant but quite futile attempt to
persuade the High Court that this was the position. The case concerned
the Federal Aid Roads Act of 1926. My argument-in that case, on behalf
of the State of Victoria, was that the Federal Aid Roads Act was " invalid
because it was a law relating to road-making and not a law for granting
financial aid to the States." I therefore argued that it wasn't warranted
by either Section 96 or by the legislative powers granted by Section 51
of the Constitution. I argued that one must look at the substance of the
Act, and that, so regarding it, it was one to provide for the construction
of roads, a matter over which the Commonwealth had no general jurisdiction.
This somewhat engaging argument was dismissed by the High
Court quite unanimously, in the following emphatic words:
it The Court is of opinion that the Federal Aid Roads Act
is a valid enactment. It is plainly warranted by the provisions of
Section 96 of the Constitution, and not affected by those of Section
99 or any other provisions of the Constitution, so that exposition is
unnecessary. i
This made it clear that, provided that a law is one providing
for a grant to a State, the terms which may surround that grant are matters
entirely within the jurisdiction of the Commonwealth Parliament. This
view has subsequently been judicially confirmed.
This broad interpretation of the power has, beyond question,
been of considerable practical value to the-States. A very recent example
is the system of State grants for Universities made by the Commonwealth
Parliament. This is a development which probably was not foreseen in
1901: it is one which has affected what was then thought to be the
Federal distribution of powers between the national Parliament and the
Parliaments of the States. But it undoubtedly has had the effect of
saving the State Universities from financial disaster. The whole matter
is a very good illustration of how something which was not'anticipated in
the Constitution when it was first enacted can come into existence by
judgicial interpretation and the inexorable demands of new circumstances.

The institution and subsequent maintenance of what is called
Uniform Taxation ( though it applies to Income Tax ( individual and company)
only) also deserves special though necessarily inadequate mention. That
it has profoundly affected Australian federalism is beyond question, though
it turns upon no formal constitutional amendment whatever.
The scheme, which involved an Income Tax Assessment Act, an
Income Tax Act, an Income Tax ( War-time Arrangements) Act, and a State
Grants ( Income Tax Reimbursement) Act, was introduced in 1942 as a wartime
measure, though in the nature of things it was bound to continue
while high war-caused rates of tax continued. Its validity was challenged
in the High Court, but was upheld ( 65 C. L. R. 373) under the taxation power,
the defence power, and Section 96. That decision has more recently
been upheld on the points of substance.
The judicial arguments made it clear that the Commonwealth's
taxation power, with or without the Grants power under Section 96, is
legally capable of being used " so as to make the States almost completely
dependent, financially and therefore generally, upon the Commonwealth"
( see per Latham C. J. 65 C. L. R. at p. 429). This means that to preserve
the true nature of Australian federalism certain questions became vitally
important. As the high war-time level of income taxes subsided, would it
become practicable to restore to the States the use of their own income
taxing powers? Could the growing Commonwealth financial power be kept
in check by a public political consciousness of the need for maintaining
a high degree of State autonomy for State purposes? At the same time,
could we avoid carrying State-consciousness to a point at which the true
essence of the necessary national spirit became weakened?
The restoration of State taxing powers has been debated several
Limes in Premiers' Conferences, and many more times in other political
circles. There has been no positive evidence that most of the State
Governments really want a return of taxing powers on terms which would be
reasonably acceptable to the Commonwealth and still permit it to discharge
its admittedly major responsibilities. Yet a return of taxing powers by
unilateral Commonwealth action would be pregnant with disaster if a
genuine agreement between Commonwealth and States were not arrived at.
At a Premiers' Conference on this great matter, which I specially convened
in 1953, there was a close discussion, which left it, if I may speak
quite frankly, most unlikely that Uniform Tax would end unless there
arose a revolutionary change in the opinions of governments.
Yet, of the Premiers, two, from Western Australia and Tasmania,
declared unequivocally that they did not want their income taxing powers
restored; one, New South Wales, requested that the Commonwealth should

reduce its taxes by twice the amount of the tax reimbursement an obviously
fantastic proposal which was only another way of saying that Uniform Tax
should continue; another South Australia, was prepared to accept a
reduction of over œ. 60m. more than the Tax Reimbursement!. Queensland
pointed out, which was obvious enougjh, that as its taxing capacity was
low and its pre-war State income taxc had been very high, it was better
off under Uniform Tax, and would, ihould State tax be restored, either
need to impose State tax at a much higher rate than New South Wales or
Victoria, or would need a special annual grant from the Commonwealth under
Section 967-which would cut across the principle of matching power and
responsibility. There was another grave question that of Company Tax. At
a time when the rapid development of Australian industry is extending the
operation of companies and is producing inter-state operations on the
pIa rt of more and more of them, there is much to be said for a Uniform
Company Tax imposed by one authority. The position would be both
chaotic and discouraging if the one company found itself taxed twice on
the same earnings once by the State of its residence, and once by the
State of the source of revenue.
This great controversy does appear to have been put to rest,
for six years at any rate, by the conference of Commonwealth and State
Ministers of June 1959, where a new Tax Reimbursement formula was worked
out, accepted on all sides, and by agreement made to apply for six years.
You may well think that the end result of this examination is
untidy, inconclusive, and unsatisfyi ng and perhaps self contradictory.
Federation in Australia is a good thing, and should be
preserved; but
The centralising forces acquire strength every year.
Constitutional problems attract little public attention except
during the actual currency of a campaign; and even then there tends to be
rather more heat than light. This is not surprising. Federalism is
in its very nature legalistic. A proper understanding of it involves a
considerable intellectual exercise in both synthesis and analysis. The
very notion of Federal and State Governments elected by and dealing with the
same people, but with sovereign powers divided between them according to the
terms of a legal instrument as interpreted from time to time by the judiciary,
is complex. Many try to understand it, and confess failure. Many,
perhaps wisely, do not even try. This is basically, the reason why
Constitutional Amendment by popular vote has proved so difficult.

The electors have voted fairly consistently against any
formal addition to the powers of the Commonwealth Parliament, but to an
overwhelming extent they accept those changes in financial power which
have substantially the same effect.
There is a marked and growing tendency to look to the
Commonwealth Government to accept financial responsibility for the performance
of State powers by the State Governments and even for the
functions of local governing bodies created by the States for local purposes.
Yet at the same time there are inadequate signs of a united national spirit.
I venture to doubt whether Uniform Tax will ever be changed.
Except in one State, Victoria, I have seen no evidence of a real desire
to re-create two independent direct taxing authorities. Most people,
I think, feel that we have learned to live with " Uniform Tax", and that
to put the constitutional clock back to a time before the second World
War is not feasible. If this is true, as I fear it is, Australian federalism has
already sustained a great change which affects the originally designed
balance or distribution of powers. Centripetal movements are not likely
suddenly to halt themselves. Except in the unlikely event that there
is a wide public demand for confining financial demands upon the
Commonwealth to those matters which fall within Commonwealth legislative
power, and for re-establishing the independent taxing power and responsibility
of State Governments, the centripetal movement must be accepted. If this
be the position, we are confronted by two tasks of great practical
importance. One is to see that the growing financial power of the Commonwealth
is exercised in such a way as to permit the States to discharge
their own constitutional duties. The other is to abandon, not the
principles of federalism, but that excessive emphasis upon purely local
rights which is proving such an impediment to the creation of a truly
national sentiment and pride.

Transcript 218