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Chapter 2 Nature of Government

Chapter 2 Nature of Government - Chapter2 Government G...

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Government  Government  in Practice in Practice Now, what I want is, Facts? Facts alone are wanted in Life.  Mr Gradgrind in  Hard Times , Charles Dickens  The   Legal   Basis   of   Government     Measures   of   Government   Size     Government   Regulation   Government   Expenditure   and   Revenue     Government   Budgets:   Deficits,   Debt   and   Assets   International Comparisons   Determinants of Government Expenditure ew economists would agree with Mr Gradgrind that all we need to know is facts. However, theory without facts is of little use. To understand how government works, we need to know the legal basis of government, how government regulates markets, and the size and composition of government expenditure and revenue. Central to understanding government is an understanding of the annual budget. F This chapter addresses these and related issues. We start by outlining the legal basis of government in Australia. We then discuss concepts of government size and control. The central part of the chapter describes government expenditure, revenue and debt in Australia. Some international comparisons of government expenditure are also provided. The last part of the chapter discusses economic determinants of government expenditure. The Legal Basis of Government 1 The Australian Constitution, as laid out in the Commonwealth of Australia Constitution Act 1900 , provides the legal basis for government in Australia. 2 The main purpose of the Constitution was to create a federation of the six Australian colonies. To achieve this, the Constitution created the Commonwealth government and established the rules governing relations between the Commonwealth and the states (as the colonies became). It also established the powers of the Commonwealth parliament, the executive and the judicature. Unlike many other constitutions, the Constitution does not provide a formal bill of rights for 1 This section draws on Saunders (1997). 2 The Act came into force on 1 January 1901. Chapter 2
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21       Part 1: Nature of Government individuals. It was assumed that common law and the exercise of democracy would protect individual rights. 3 Under the constitutional process, the states granted powers to the Commonwealth, but retained residual (un-granted) powers. For example, the states initially controlled income taxes. They also controlled economic activities and labour markets that took place entirely within their area. As nationhood became more important, particularly in wartime, the states ceded important powers to the Commonwealth, notably the income tax in 1941 following a national referendum. Commonwealth powers over the economy also increased as trade and labour markets crossed state borders. However, the federal nature of the country means that the states compete economically with each other and politically with the Commonwealth government. This competition limits the power of any one government in the federation. Box 2.1 describes some other important political features of
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