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Fiscal Rules for Limited Government: Reforming Australia’s Fiscal Responsibility Legislation

Robert Carling | PM98 | 28 July 2009

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- Australia needs new fiscal responsibility legislation to ensure that fiscal policy is subject to the rule of law and conducted within a framework that requires long-term fiscal sustainability and high levels of transparency and accountability.

- The Howard government’s 1998 Charter of Budget Honesty (CBH) has proven inadequate to these tasks. This paper proposes a new federal Fiscal Responsibility Act (FRA) to replace the Howard government’s flawed CBH.

- The aim of the proposed FRA 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 paper outlines the rationale for fiscal responsibility legislation and a rules-based approach to fiscal policy.

- It examines the shortcomings of the existing CBH, showing how it has failed to prevent growth in the size of government and fiscal policy outcomes that harm the prosperity of the Australian people.

- The fiscal principles contained in the CBH should be re-written.

- Three fiscal policy rules are proposed to give operational substance to these revised fiscal principles: a budget balance rule, a ceiling on Commonwealth net debt, and a rule limiting the federal revenue and expenditure shares of GDP.

- A new body, the Fiscal Commission, should be established to enhance the independence, transparency and accountability of the federal budget process.

- The Fiscal Commission would enforce compliance with the fiscal policy rules included in the FRA and have powers to impose pecuniary penalties on members of the federal parliament for non-compliance.

- A one percentage point breach of the budget balance, net debt, or expenditure and revenue shares of GDP would be penalised on each count by a 1% reduction in politicians’ remuneration relative to a baseline determination from the Remuneration Tribunal.

- The very public process of cutting politicians’ pay would add to the reputational penalties arising from adverse findings in commission reports.

Robert Carling is a Senior Fellow at CIS. He was a senior official with the New South Wales Treasury until 2006 and prior to that with the Commonwealth Treasury, the World Bank and the International Monetary Fund. He holds academic qualifications in economics and finance from the London School of Economics and Political Science, Georgetown University, and the University of Queensland.

Dr Stephen Kirchner is a Research Fellow at CIS. He was an economist with Action Economics, LLC and Director of Economic Research with Standard & Poor’s Institutional Market Services in Sydney and Singapore. He has lectured in economics at the University of New South Wales, Macquarie University, and the University of Technology, Sydney. He has a BA (Hons) from the Australian National University, a Master of Economics (Hons) from Macquarie University, and a PhD in economics from the University of New South Wales.

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