Those Who Spend the Money Should Raise the Money

When Australia federated in 1901, Sir Samuel Griffith, inaugural Chief Justice of the High Court, defined the vision clearly:

“We must not lose sight of the essential condition that this is to be a federation of states and not a single government of Australia.

“The separate states are to continue as autonomous bodies, surrendering only so much of their power as is necessary for the establishment of a general government to do for them collectively what they cannot do individually for themselves.”

The powers the states ceded to the Commonwealth were specific: trade and commerce, corporations, currency, banking, pensions, taxation, foreign affairs, communications, copyright, marriage and family law, quarantine, and defence.

There was no mention of hospitals, schools, disability services, home insulation programs, carbon emissions policy, or the host of other fields that the federal government now dominates.

Yet 125 years later, the original compact has eroded.

The Commonwealth captures most revenue—personal and company income tax, plus the GST—while states shoulder the bulk of visible services: schools, hospitals, roads, policing.

This is known as vertical fiscal imbalance and it is stark: Canberra raises the money; the states spend it.

When spenders never answer to voters for raising funds, accountability collapses.

The GST carve-up illustrates the problem vividly. Introduced by John Howard in 2000, the tax was presented as a state revenue source, with every dollar to be returned to the states and territories via the Commonwealth Grants Commission.

The Commission aims to ensure each jurisdiction can provide an ‘average’ level of services.

In reality, it has evolved into a mechanism that penalises strong performance and rewards fiscal laxity.

The 2026-27 figures, released last week, expose the inequity.

The national GST pool is $103 billion. NSW, with 31 per cent of the population, receives only 25.5 per cent of the pool—its lowest share ever. Despite 1.5 million more residents than Victoria, NSW gets $1.7 billion less.

Premier Chris Minns branded the system ‘past its use-by date.’

Western Australia, economically robust due to resources and sound management, saw its share climb from 8.3 per cent to 9.1 per cent. Queensland secures the biggest dollar gain—$1.7 billion more.

Victoria’s share dipped slightly yet still rises by $1.5 billion year-on-year.

My home State of South Australia and perennial wooden-spooner, Tasmania, routinely receive far more than they generate domestically, insulated from the consequences of their spending decisions.

This is horizontal fiscal equalisation in action: equalising fiscal capacity so every state can deliver comparable services at comparable tax levels.

Admirable in principle, it proves destructive in practice. It signals to high-spending states that others will cover the shortfall. It tells prudent states their discipline will be redistributed away. State treasurers face little incentive to curb expenditure when the GST formula acts as a safety net.

The 1901 settlement never intended such dependence. States retained taxing powers—land tax, stamp duties, payroll tax—to fund their own responsibilities independently.

Over decades, however, the Commonwealth leveraged its revenue dominance and Section 96 grants power to intrude into state domains. Tied grants, special-purpose payments, and the current GST distribution have reduced states to administrative arms of federal policy.

The fallout is clear. States blame Canberra for shortfalls while expanding unaffordable programs. Federal leaders pledge services they do not deliver.

Voters struggle to assign responsibility. Waste proliferates: pink batts, school halls, and climate initiatives never contemplated in the founding agreement.

There are core, straightforward principles that ought to apply: those who spend the money should raise the money.

True accountability requires it. If a state wishes to fund lavish projects or swollen bureaucracies, its government should justify the cost directly to its electors. Hiding behind complex equalisation formulas fosters inefficiency and breeds interstate resentment.

Restoring federalism does not demand its destruction—only its renewal.

Options include returning meaningful taxing authority to the states, perhaps a state-collected portion of income tax with the Commonwealth withdrawing from that field.

Alternatively, replace the current GST model with per-capita or origin-based distribution that rewards prudent management.

Or the Commonwealth could exit areas outside its original remit, transferring both functions and revenue back to the states.

Opponents warn of a ‘postcode lottery.’ Yet Australians already experience wide variations in service quality, living costs, and outcomes across states.

What is missing is transparent accountability. A system where states raise what they spend would encourage competition in efficiency, innovation, and value.

High-performing jurisdictions would prosper; under-performers would face pressure to improve or explain their record to voters.

The GST began as a state tax collected federally for simplicity. It has morphed into a federal lever for control. Until we enforce the rule that spenders must also be raisers, Australia remains a federation in form only – centralised in substance, divided in effect.

The founders knew dispersing power safeguards liberty. We have spent a century concentrating it.

It is time to heed Griffith’s insight and revive the principle that once made the federation function: those who spend the money should raise the money.