A roadmap for fiscal sustainability

Executive summary

The conduct of fiscal policy as part of overall macroeconomic management is essential to underpinning growth and stability in the Australian economy.

The sustainability of fiscal settings and the efficiency of individual budget measures help to support consumer and investor confidence, to ensure governments do their job cost-effectively and, ultimately, to assist rising living standards.

A central theme of this Monograph is that effective fiscal rules can guide budget behaviours around a sustainable benchmark, provided that benchmark is properly specified and clearly identified. The combination of transparency and high-quality information can assist political acceptance of the need for budget discipline, without removing necessary fiscal flexibility.

The experience of Australian economic reform over the last
three decades supports this insight. Australia had seen its relative economic performance decline
by the 1980s and arresting this trend required an effective mix of microeconomic and macroeconomic
reforms pursued by successive Australian Governments, at least up to 2000. On the fiscal policy front, this meant tackling the accumulation of historically-high levels of Commonwealth (and state and territory) net debt.

Policy reformers argued that improving the long-term credibility of policy settings would underpin strong and stable economic growth.
The idea was that fiscal polic was felt most strongly through stabilising debt and national savings, via related confidence effects attached to the risk premia on interest rates and allocative efficiency improvements. In 1998, the Howard Government enacted the Charter of Budget Honesty reforms which required the explicit outlining of a “medium-term” fiscal strategy. The practicalities of this involved a fiscal strategy statement being included from the 1997-98 Budget onwards, nominating a target objective for the strategy.