In breaking news this morning, prime minister Julia Gillard has announced that the government intends to hold a referendum, in conjunction with the September federal election, to, as she puts it, “ask Australians to financially recognise local government in our nation’s Constitution.” This is no surprise; it was part of the government’s deal with the independents back in 2010 and the announcement has been foreshadowed several times in the media in recent weeks.

I normally stay away from specifically Australian stories, but there’s an important general principle involved here about the nature of federalism and what needs to be done to fix it – if we decide it’s worth fixing.

The government has not yet released the proposed wording of the referendum, but we can guess what it’ll be. The purpose of the change is to entrench the commonwealth’s power to directly fund local government, so the simplest way to do it would be to add the words “or local government” after “State” in section 96 of the constitution.

The case in favor of change was put by psephologist Dean Jaensch (among others) a fortnight ago. The case against was put last Sunday by my friend Chris Berg in the Fairfax papers.

Let me start by saying that my view of local government is much closer to Jaensch’s than to Berg’s. While it is fashionable in certain circles to dismiss local councils as wasteful irrelevances full of grandstanding busybodies, I think they perform a vital function as part of our democratic landscape. Berg’s view that they “are more like state government departments” is not a bad description of what they have become, but not at all like what they are supposed to be.

Jaensch, it seems to me, is closer to the mark when he says “It is the closest of the three governments to the people, the most aware of what problems exist, and offers the best chance for people to relate with their representatives.”

Nonetheless, I am totally opposed to the proposed constitutional change. I regard it as a further step down the road of dismembering our federal system – at just the time when other countries are discovering the virtues of federalism and trying to revitalise or reinvent it.

To see why, look at section 96 again. It gives the federal parliament power to give financial assistance to the states “on such terms and conditions as the Parliament thinks fit.” There is nothing to limit the grants to purposes that would otherwise fall within the heads of federal power, or to limit the kind of conditions that can be imposed.

The section has therefore been used to fund what in theory remain state programs – in schools, roads, hospitals, universities, and so on – provided they are run precisely according to federal specifications. For practical purposes they have become federal programs, despite the absence of any constitutional power for the federal government to legislate on those subjects. States rarely say no to these schemes, because they involve being given money that they don’t have to wear the unpopularity of raising.

And this is the big problem with our federal system: the federal government raises the funds, the states spend them, and both try to get control over details and claim the credit. Instead of a clear division of responsibilities we have a nightmare of confused and overlapping areas of activity, with voters unable to work out who to punish when things go wrong.

Now the government wants to extend this mess to cover local government as well. Or rather entrench its power to do so – it already gives money to local government, but the legal basis for doing it is dubious, especially since the 2009 decision in Pape v. Commissioner of Taxation.

Sensible constitutional revision would start by restricting the scope of section 96, not by expanding it. If you think the commonwealth should run universities, for example, by all means give it that power, but not by this weird blurring of responsibility. If federalism is going to work properly, then those that spend the money should as far as possible be responsible for raising it.

If the federal government wants to enlist the help of local government on matters that are within federal power (such as social welfare programs), that’s fine; there’s nothing in the constitution to prevent such partnerships. But what Canberra wants is to extend its powers – not by asking the voters to amend section 51 to add extra subject matter, but by further screwing up the lines of fiscal accountability.

The government’s advertising for the referendum is evidently going to be based on the promise of money for all the great things that local government does. But there’s no “extra” money: regardless of which level of government it’s going to, the money all comes from the same taxpayers. Funding a local government service doesn’t magically become costless when the federal government does it, any more than it does with state programs.

Yet the government and its supporters just don’t see the problem. Jaensch points out very clearly how state governments currently tie the hands of local government in the same way that the federal government does to the states, but he seems to think that mixing up the levels even further will somehow sort it out. And he treats the historical failure of constitutional amendment as a reflection on the voters who keep rejecting stupid proposals, rather than the governments that keep putting them up.

As I said way back when it was the Howard government wanting to tinker with the constitution, “Australia’s history of failed constitutional amendment can be summed up in one sentence: politicians always want more power, but voters don’t want to give it to them.”

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