New CIS paper calls for fiscal rules to restore Budget discipline 

Australia’s economic management has drifted into the risky terrain of sustained deficits, rising debt, and record levels of government spending and taxation — all without the guidance of quantified fiscal rules, a new Centre for Independent Studies paper outlines. 

Australia has a long history of fiscal rules in various forms that helped keep governments committed to fiscal discipline, even if actual policies and results did not always match the rhetoric. But since the pandemic in 2020, budgets have become untethered from rules and principles. 

In Keeping Budgets on the Rails: Rules for Fiscal Responsibility, economist Robert Carling warns that the absence of firm fiscal anchors is undermining the foundations of economic stability and rising prosperity. 

Carling argues that while fiscal rules are no substitute for political resolve, they can provide essential guardrails to prevent governments from overspending and overborrowing. 

“Fiscal rules don’t work magic, but they can help restore discipline and credibility — provided the political will exists to follow them,” he says. 

Carling proposes a two-stage framework to guide Australia back to sustainable fiscal balance: 

• A short-term consolidation phase, lasting around three to four years, in which a structural balanced budget is achieved. 

• A long-term stability phase, in which the key rule would be keeping the budget balanced on average over the economic cycle while running surpluses in times of above-trend revenue. This restores in essence a rule that was in place from 1996 to 2020. 

Recognising the key role of expenditure restraint, he proposes that nominal expenditure growth in the consolidation phase be capped at the mid-point of the Reserve Bank’s 2.5% inflation target range — and in the long-term phase, at this rate plus trend population and productivity growth.  

“This would allow real per capita spending to grow in line with productivity instead of exceeding productivity growth as has become the norm,” Carling says. 

A complementary rule is proposed for tax revenue growth, ensuring that any revenue windfalls are used to accelerate deficit reduction rather than fund new spending. The framework would also discourage reliance on so-called ‘financial investments’ that obscure the true size of deficits. 

To embed the rules and enhance transparency, the paper recommends legislating them through amendments to the Charter of Budget Honesty, accompanied by stronger independent oversight. The Parliamentary Budget Office (PBO) should be given a broader mandate to monitor compliance, report publicly on breaches, and recommend corrective action when governments stray from the rules. 

“The absence of independent scrutiny has allowed fiscal drift to continue unchecked,” Carling argues. “A reformed PBO could provide the credible, apolitical monitoring essential to sustaining fiscal discipline.” 

He says international experience demonstrates that countries with clear, enforceable fiscal rules and independent watchdogs tend to achieve stronger budget outcomes and lower borrowing costs.  

“More than 120 countries now operate with formal fiscal rules, and around 50 have independent fiscal councils,” he says. “However, rules only work when governments truly commit to them. 

“The real value of fiscal rules lies in changing the culture of policymaking — creating a system that rewards long-term prudence over short-term politics.”  

The paper warns that Australia’s current fiscal position leaves little room for complacency. Without clear limits on spending and borrowing, macroeconomic instability and stagnant productivity loom as serious risks.  

By contrast, a credible rules-based framework could help entrench sound budgeting, reduce debt, and strengthen the economic foundations for rising living standards. 

“Compliance with these fiscal rules is the best contribution fiscal policy can make to stability, the investment essential for productivity growth, and higher real incomes,” Carling says. 

Robert Carling is a Senior Fellow at the Centre for Independent Studies. He is an economist with extensive experience in public finance, having served with the New South Wales Treasury, the Commonwealth Treasury, the World Bank, and the International Monetary Fund. His research focuses on fiscal policy, taxation, and government spending.