The Commonwealth Government’s proposal to hold a referendum on Constitutional recognition of local government is a welcome step towards securing certainty around the financial future of local government. This reform is much needed, and long overdue.

Earlier this month, Prime Minister Julia Gillard announced the Commonwealth intends to hold a referendum on 14 September 2013, the date of the Federal Election, on financial recognition of local government in the Australian Constitution.

The referendum will seek to amend section 96 of the Constitution to expressly enable the Commonwealth to financially assist local government bodies.

Section 96 currently allows the Commonwealth to “grant financial assistance to any State on such terms and conditions as the Parliament sees fit.”

The referendum would amend section 96 so as to permit the Commonwealth to allow the Commonwealth to “grant financial assistance to any State, or to any local government body formed by a law of a State”.

Although, at first glance, such a change may appear to be trivial or purely technical, it’s in fact vital for providing certainty around the future funding of local government.

Similar referenda have been defeated before, in 1974 and 1988.  However, two recent High Court decisions – Pape v Commissioner of Taxation[1] and Williams v Commonwealth[2] – have elevated the issue.

Although neither case directly related to local government, the reasoning in those decisions has raised doubts about the Commonwealth’s ability to financially assist local government, absent an express Constitutional power to do so.

These doubts cast a fog of uncertainty around the legality of Commonwealth funding for important local projects, such as the Roads to Recovery Program and the Regional and Local Community Infrastructure Program.

Indeed, in its March 2013 report on financial recognition of local government, the Commonwealth’s House of Representatives Joint Select Committee on Constitutional Recognition of Local Government (House Committee) noted that “there is a palpable fear in local government” that without Commonwealth funding for local governments “communities will not have the resources for the essential infrastructure services on which they rely”.

If such Commonwealth spending were to be challenged in a Court, and held to be invalid, the Commonwealth would likely be forced to negotiate all such funding with the States and Territories.  Plainly, this is less efficient than the Commonwealth funding local government directly.

Moreover, it creates a real risk that local government funding will simply become hostage to the notoriously intractable process of Commonwealth-State/Territory negotiations.

The main case against financial recognition of local government rests on the notion that the Commonwealth has no place funding local government.  On this view, the proposed change would simply serve to tip the Federal balance further in favour of the Commonwealth, at the expense of the States and Territories.  This is seen, by some, as undesirable and anathema to Australia’s Federal structure, on the basis that local government matters should remain under the exclusive oversight of State and Territory governments.

However, the response to such arguments is that the proposed referendum would simply seek to “update” the Constitution, drafted over a century ago, to reflect the reality of modern Australia.  Whatever may have been the case back in 1901, when the Commonwealth played a much narrower role in governing Australia, it would be disastrous for the stability, and efficiency, of Australia’s contemporary system of government if the Commonwealth was unable to directly fund local government.

Unfortunately, prospects for the referendum are mixed.  The Australian public has a strong tendency to reject referenda, with only 8 of 44 referendums having passed since Federation.  Moreover, the Coalition appears to be divided on the proposed change, despite offering “in-principle” support.

With just under four months until the 2013 Federal Election and the referendum, and other political issues dominating public debate, there is a real risk the Commonwealth will fail to explain to the public the case for the Constitutional change.

Nonetheless, the change is important, and will provide local governments with certainty as to their own funding, and the financial viability of important public programs.

For more information about the Constitutional recognition of local government, please see the Expert Panel’s final report here and the House Committee’s final report here.