§ 369. “Of the Net Revenue.”

NET REVENUE.—The “net revenue” from duties of customs and excise is the total receipts from those sources after deducting the cost of collection. No attempt is made in the constitution to define the deductions which may be made in order to arrive at the net revenue; this is a matter of book-keeping, which is left wholly to the Executive Government. The Federal Parliament, under its incidental legislative power (sec. 51 —xxxix; sec. 52—ii.) will presumably have power to regulate the matter; but it is hard to see how the High Court could be invoked by any person or State that might happen to be dissatisfied. It seems to be one of those political matters with which the judiciary have no power to interfere.

EFFECT OF THE SECTION.—The object of this section is to secure a constitutional guarantee that, during the period named, at least three-fourths of the net customs and excise revenue raised by the Commonwealth shall be devoted to State purposes; and its explanation is found in the fact that whilst the transfer of customs and excise duties deprives the federating colonies of a large revenue, the estimated expenditure of which the colonies are relieved, or with which the Commonwealth is saddled, are not more than one-fourth of that amount. (See Historical Introduction and Historical Note.)

The probable effect of the clause on the finances of the Commonwealth and of the States has several aspects, which may be dealt with separately. The chief questions are:—How will it affect (1) the amount of federal revenue, (2) the amount of federal expenditure, (3) the mode of federal taxation, (4) the finances of the States?

(1) The Amount of Federal Revenue.—One of the most effective arguments against the Constitution in New South Wales, in the campaigns of 1898 and 1899, was that the Braddon clause would necessitate an immense burden of taxation—the stock phrases being that it required “four times as much taxation as was necessary,” or that the Federal Treasurer “for every £1 he wanted, would have to raise £4.” The fallacy of this ingenious perversion of the clause was that it utterly ignored the requirements

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of the States. The Convention found, from the figures before them, that the Commonwealth, without Queensland, if it raised the very moderate revenue of £6,000,000, would not need, for federal expenditure, more than one-fourth of that sum, whilst the States would need the rest. The representatives of all the colonies except New South Wales asked for some guarantee—first, that the Commonwealth would not raise too little; next, that the Commonwealth would not spend too much. Looked at apart from the circumstances, it seems that this section operates in both these ways, but a few figures will show that it is practically no guarantee at all of the amount to be raised through the customs, because the amount which, owing to other circumstances, will inevitably be raised through the customs, is more than four times the ordinary expenditure of the Commonwealth.

The net customs and excise revenue raised in the six federating colonies for the year 1899 was £7,402,333 (Coghlan's Statistics of the Seven Colonies, 1900, p. 23). It may be taken for granted—without any guarantee—that the federal tariff will be framed to bring in not less than this amount. Of this the Commonwealth would be able under this section to spend, for federal purposes, one-fourth, or £1,850,000; an amount which exceeds the most lavish estimates of what will be required.

The Braddon clause, therefore, will not, under ordinary circumstances, increase the revenue which the Commonwealth will require to raise; even assuming—what will doubtless be the case for many years—that practically the whole of the federal taxation will be raised through customs and excise. Any great emergency, such as an increase of defence expenditure in time of war, might greatly increase the necessities of the Commonwealth; but these necessities, should they arise, would probably be met by temporary direct taxation. It should be noticed that the Constitution does not explicitly require that a single penny should be raised by customs and excise, but only that three-fourths of whatever is so raised should be devoted to State purposes.

(2) The Amount of Federal Expenditure.—The chief influence of the section will undoubtedly be in the direction of ensuring economy of federal expenditure. The Federal Parliament will be subject to two opposite forces: the national impulse, which will tend towards enlarging the scope of federal operations, and therefore of federal expenditure; and the restraining influence of the States, and of their representatives in the Federal Parliament, which will make for limiting federal expenditure so as to ensure an adequate subsidy to the States. The chief merit of the Braddon clause is that it fixes the maximum ratio of federal to provincial expenditure, and thus checks, during the early years of Federation, any attempt at an undue encroachment of the federal power. If the vast revenues of the Commonwealth were entirely at its disposal, subject only to such political pressure as the States could bring to bear, there might be a serious temptation to federal extravagance, and a serious risk of the diminution of the State revenues. But when extra expenditure by the Commonwealth means extra taxation by the Commonwealth, all the checks of representative and responsible government will be strengthened, and the temptations of the Federal Treasurer will be correspondingly reduced.

(3) The Mode of Federal Taxation.—It has been argued (see for instance Mr. Reid's speech, Conv Deb., Melb., p. 2424) that this section would be a strong temptation to the Federal Treasurer to resort to direct instead of indirect taxation, in order that he might spend on federal purposes the whole of what he raised. If it were not for the fact that the Federal Treasurer will have ample revenue under the section, and the further fact that the fiscal circumstances of the States will make it politically necessary for the Treasurer to raise through the customs at least as much as the aggregate raised in all the colonies before Federation, this argument would have much weight. If the section were permanent, a time might come when it would have even greater weight. But during the first ten years of Federation it is most unlikely that any resort will be made to federal direct taxation. The real problem will not be the finances of the Commonwealth, but the finances of the States. Taxation difficulties will arise, not

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in respect of federal expenditure, but in respect of State expenditure; and if any increase of direct taxation is required to meet the varying needs of the States, local taxation proportioned to the needs of each State will be a much easier policy than uniform federal taxation which would fall equally on the States which required more revenue and on those which did not. The federal tariff will be framed to meet the wants of the Australian people; and if, when the desirable level of customs and excise taxation has been reached, any States require more revenue for provincial purposes, which it is thought fit to raise by direct taxation, provincial direct taxation and not federal direct taxation is the obvious resource.

(4) The Finances of the States.—To the States, the section will doubtless be some guarantee of a substantial return of revenue, but it is by no means a guarantee that each State will be fully compensated, through its share of customs and excise duties, for the difference between the revenue which it has surrendered and the expenditure of which it has been relieved. In framing the federal tariff, the interests of each State will be considered; but when the tariff is framed, each State will have to cut its coat according to the cloth. Some States may have to resort to a reduction of their local expenditure, or an increase of their local taxation, or both. The different financial requirements of six States cannot be met solely by uniform taxation; and it can hardly be doubted that one result of Federation will, sooner or later, be that provincial taxation will be increasingly resorted to for provincial purposes.