Ideas@TheCentre
Legislate for Fiscal Responsibility
The federal government’s taxing and spending powers have far-reaching consequences for the economic prosperity and welfare of the Australian people. An essential requirement of a well-functioning democracy is that these powers be subject to the rule of law.
Present arrangements, including the Charter of Budget Honesty (CBH), leave much to the discretion of politicians, who have not always used it wisely. We propose a new federal Fiscal Responsibility Act (FRA) to replace the flawed CBH. The aim of the proposed Act is to provide a de-politicised framework for fiscal policy in which the budget balance, the level of Commonwealth net debt, and the revenue and expenditure shares of GDP are subject to legislated and enforceable rules designed to ensure the long-term sustainability of fiscal policy and to restrain growth in the size of government.
The budget balance would be allowed to vary with the business cycle between a surplus of 2% of GDP and a deficit of 2% of GDP; net debt would be limited to 10% of GDP; and Commonwealth revenue and expenditure would be capped at 25% of GDP.
We also propose the creation of a new body, the Fiscal Commission, to enhance the independence, transparency and accountability of the federal budget process. In particular, it is proposed that the Fiscal Commission enforce compliance with the fiscal policy rules included in the FRA and have powers to impose pecuniary penalties on members of federal parliament for non-compliance.
The Fiscal Commission would be charged with preparing the parameters for the regular fiscal policy statements according to a fixed timetable specified in the FRA.
Demographic trends render current fiscal policy settings unsustainable. This unsustainability can only resolve itself through some combination of higher taxes and reduced government spending, but only the latter option is consistent with maximising long-run growth prospects. A new fiscal policy framework built around fiscal policy rules will help rather than hinder politicians in meeting these long-run fiscal challenges.
Robert Carling is a Senior Fellow at CIS. Dr Stephen Kirchner is a Research Fellow at CIS. Their paper Fiscal Rules for Limited Government: Reforming Australia’s Fiscal Responsibility Legislation was released by CIS this week.
