By Stephen Loosely

The global response to the collapse of the financial banking system has reinvigorated local debate around Australian federalism and how the system should evolve in a changing global environment.

If Australia is to remain an effective player in shaping international policy legislation it must be seen, globally, as a robust and unified entity. This results from having a clear blueprint for Commonwealth and state relations and an understanding of the role each tier of government plays at both a policy and delivery level.

In recent years, there has been a trend towards issues being resolved nationally. These issues have included measures to prevent terrorism and changes to our industrial laws. The expansion of federal powers into areas once regarded as solely the province of state and territory governments reflects the changing political and economic landscape not just locally but globally.

But at the time of Federation the balance of power was remarkably different. The states were the dominant political players, and largely controlled both the purse strings and policy debate. However, over time this balance of power has altered as the country has grown and as the demands upon government have also altered and grown.

History illustrates that in a time of crisis the Commonwealth has increased its powers dramatically by using the constitutional approach. This was evident under Curtin and Chifley’s Prime Ministerships. Throughout the Whitlam era, Commonwealth policy and legislation was repeatedly challenged in the High Court, with the court consistently ruling in the Commonwealth’s favour.

The gradual shift of power does not mean the states will become obsolete. On the contrary, the states play a critical service delivery role in managing the day to day affairs of the community. It would be inconceivable for the Commonwealth to ever absorb all these responsibilities.

But over time, the states will continue to become more the vehicles of service delivery in key areas such as health, education, transport and police. The Commonwealth’s role, on the other hand, will be to set policy objectives more broadly, and tackle the bigger issues such as restructuring our fragmented national frameworks. This evolution of federalism will be further supported through key vehicles like COAG – where all levels of government should work together to achieve national policy objectives.

Although the Commonwealth has the power to withhold certain funds if policy objectives are not met, it would be reluctant to rely repeatedly on this device as it results in a policy impasse, given the states can still exercise considerable political clout if they wish to do so. In some circumstances, the states have the capacity to appeal to the electorate, which means the Commonwealth needs to tread warily. From time to time in politics, there is always a possibility of imperial overreach. All governments, state or federal, therefore tend to be cautious about power and persuasion.

Fundamentally, the federal and state governments are heading in the same direction. That means when the Prime Minister or Treasurer are seated at the G20 table, not only do they bring a better policy tool kit than most of their counterparts, but equally can point to a general political consensus on issues such as infrastructure building.

Looking ahead, the structure of Australia’s federal system and how it will likely evolve in the context of the pressures of global environment are issues that are only likely to gain increased momentum. As a middle power, Australia must get the balance right – so that we may influence the direction of international policy but also meet our obligations domestically – and that is to best serve Australians.

Stephen Loosely is a special counsel in Minster Ellison's Government Group and a former Senator for New South Wales and ALP National President. He is currently Chairman of the Committee for Sydney and of the Australian Strategic Policy Institute in Canberra.