Opinion article

Improved scrutiny of federal finances needed

Amid all the scrutiny of the Reserve Bank and calls for a review of the monetary policy framework, fiscal policy has been given a leave pass for nowThis is despite an unprecedented COVID-19 shock, necessitating an extreme policy response involving negative real interest rates and $337 billion of direct government spending required to do the heavy lifting to preserve jobs and economic activity, writes Jarrod Ball in The Australian.

Now policymakers are rightly focused on Australia reaching full employment without adding further fuel to inflationary pressures. Beyond this immediate focus, all the challenges are on the supply side, with stronger demand showing up persistent long-term weaknesses in human capital, lacklustre productivity and slow adoption of new technologies. 

Addressing these issues will become increasingly important to securing future living standards, with economic growth expected to dip lower next year and the once long-term challenges of an ageing population now on our doorstep. The economy and budget will also be increasingly exposed to the impacts of climate change.  

Over the last decade the Commonwealth has increasingly, and in greater amounts, provided natural disaster relief to the states. 

The NSW Intergenerational Report has estimated the future cost in NSW alone of up to $17.2 billion of economic costs from natural disasters on average each year by 2060. 

Current low interest rates have also changed the goalposts for budget sustainability. The Parliamentary Budget Office’s view after the 2021-22 budget is that the fiscal position remains sustainable even if the government continues to run modest deficits and interest rates rise from record lows 

In these circumstances, it would be a mistake to simply revert to the pre-pandemic budget foundations without fundamental reflection.  

An over-reliance on quick fixes such as efficiency dividendsindexation changes and levies does not deliver value for money or long-term budget sustainabilityAttempts to artificially constrain longer term expenditure pressures for the sake of a short-term lift in fiscal performance ultimately leads to a deferral of costs and unintended consequences. 

The community bears the burden of arbitrary caps and artificial constraints through inadequate services in the longer term. This has been seen all too painfully in areas such as the aged care system, hospital funding and higher education. 

Many of the arbitrary targets or supposed anchors that have long been fixtures of both parties’ fiscal strategies have not been achieved. Take budget balance on average over the cycle. Australia has now recorded 14 consecutive deficits and over the last 40 years, there are only six years in which Australia could claim to have been running a balanced budget on average over the preceding decade.  

It is unlikely that the upcoming early election budget will provide the time or political space to hit the reset button. But locking in permanent tax and spending changes without a long-term strategy for fiscal sustainability will significantly constrain future choices. 

It is critical that after the election whichever party forms government moves quickly to reset the foundations of fiscal policy in Australia, ahead of the 2023-24 Budget. To do this a review of the 25-year-old Charter of Budget Honesty Act is needed to improve the scrutiny of federal finances, reflecting on a plethora of new pressures and considerations for budget standards, processes and reporting. 

We also need a whole-of-nation Intergenerational Report conducted by the Parliamentary Budget Office to provide a full picture of long-term budget health. 

State government expenditure amounts to over 14 per cent of GDP, with almost half funded by transfers from the Commonwealth government. With state governments increasing their debt levels over the past two years, a long-term picture of budget sustainability will be incomplete unless we also understand the pressures faced by the states who are responsible for delivering fast growing services such as health and school education. 

We need to return to the regular evaluation of budget programs that was a standard requirement during the 1990s, to drive continuous improvement and innovation in programs. This made a substantial contribution to Cabinet debate and development of new policy options. 

The quality of the budget and the efficiency with which taxpayers’ dollars are invested in building productive capacity in the economy and delivering effective human services is now more important than ever.

This article originally appeared in The Australian.

About the authors

Jarrod Ball

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Jarrod Ball joined CEDA as Chief Economist in 2017 with over 15 years of experience as an economist across the public and private sectors. He has held senior roles at the Business Council of Australia, in EY’s advisory services practice and more recently at BHP. Jarrod also worked in the Federal Government and was a lead adviser on microeconomic reform for the Victorian Departments of Premier and Cabinet and Treasury and Finance. He is a member of CEDA’s Council on Economic Policy and the Melbourne Economic Forum. Jarrod holds a Masters degree in Economics from Monash University and undergraduate degrees in Business (Economics) and Arts from the University of Southern Queensland.

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