Reimagining Fiscal Federalism: Section 96 as a Transitional Provision

Section 96 of the Australian Constitution plays a pivotal role in fiscal arrangements between the Commonwealth and the states. The provision is entitled ‘Financial Assistance to States’. It reads as follows:

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.

Section 96, as traditionally interpreted, allows the Commonwealth to grant financial assistance to the states on whatever terms it desires. The states are under no obligation to accept aid offered under this provision, but financial and other incentives may induce them to do so. The Australian states now rely significantly on tied grants under s 96 to finance their ordinary expenditures.

The High Court has adopted a flexible interpretation of s 96 in a series of significant cases. It has ruled that there is no constitutional impediment to the Commonwealth attaching conditions to grants under s 96 requiring the states to enact particular legislation or adopt specified policies.1 The High Court approved this practice on the basis that the states could decide voluntarily whether to accept the grant and its conditions, notwithstanding that the Commonwealth enjoys significant leverage in inducing the states to accept its terms.