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Understanding the Evolution of Constitutional Federalism: The Case of Australia

PFM, Vol. 4 No. 4, (2004)

The interest in, and the appeal of, fiscal federalism and fiscal decentralization have
been increasing in recent years. At the same time many mature federations continue
to evolve towards greater centralization. The reasons for the evolution of fiscal
federalism towards greater centralization remain unclear, and the traditional
theories of fiscal federalism shed little light on the reasons for such evolution. This
paper explores the evolution of federalism in the case of Australia, in an overall
framework provided by the new institutional economics -- that the motivations and
incentives of economic agents, and the options available to them, are influenced by
the incompleteness of contracts. The paper shows how, within the context of an
incomplete contract, certain key agreements about taxing powers, the attitudes of the
High Court and the political strength of the Commonwealth relative to the States
have driven a continuing process of centralization in Australia.

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