The Australian Commons

On why fiscal rules may make governing easier, not harder

By Jason Gay

There is an obvious objection to imposing firm limits upon government expenditure. Governments are elected to govern. Why should their decisions be restricted by a formula, a commission or a financial rule established years earlier?

It is a legitimate concern. Yet it assumes that limits only remove freedom. In politics, a limit can sometimes create freedom as well.

Every government faces an almost endless stream of requests for money. Industries seek assistance. Community organisations seek grants. departments seek larger budgets. States seek Commonwealth contributions. Local communities want new infrastructure. Ministers have priorities of their own, and governments have election commitments they want to fulfil. Many of these requests are worthwhile.

But worthwhile does not mean affordable.

The political difficulty is that saying yes to a spending request normally has identifiable beneficiaries, while saying no produces little visible reward. A minister who approves a new project may be photographed beside it. A Treasurer who prevents another billion dollars from being added to public debt has nothing to open, no ribbon to cut and perhaps no individual citizen who even notices.

The pressure therefore tends to operate in one direction.

Consider a government being asked to establish a new $2 billion program. Under the present system, the central political question is whether the government wishes to provide the money. Even when revenue is insufficient, borrowing may allow the government to avoid choosing between the new proposal and existing commitments.

Under a rules-based system, the conversation would be different. The government might still conclude that the program was worth $2 billion, but if it had already reached its spending limit, the money would need to be found somewhere else. Another program might need to be reduced, additional revenue proposed or the new program redesigned.

The answer could no longer simply be: add it to the deficit.

This could provide elected governments with an unusual political advantage: the ability to say that the limit does not belong to them.

A Treasurer could say that the same spending rules apply regardless of which party occupies government. A minister resisting additional expenditure would not have to argue that the cause itself was unworthy. The answer might simply be that the national spending limit had been reached and another priority would need to give way.

“The rules are the rules” can sound restrictive. For a government facing thousands of requests, it may also provide useful political cover.

This has implications for lobbying. Lobbying itself is a normal part of democracy. Farmers, businesses, charities, unions, professional bodies, community organisations and individual citizens should be able to make their case to government. The problem is not that people advocate for their interests. The problem arises when every interest group has reason to believe the total pool of available money can simply be expanded.

A fixed expenditure envelope changes that calculation. A group seeking $500 million would not merely need to establish that its proposal was worthwhile. It would be asking government to give its proposal priority over another possible use of $500 million.

That is a much more demanding argument.

The same principle may provide some protection against poor governance. Fiscal rules cannot prevent corruption, favouritism or waste, and it would be dangerous to claim that they could. Strong integrity institutions, disclosure requirements, procurement rules, auditing and public scrutiny remain essential.

But scarcity can make decisions more visible. If expenditure is operating within a known ceiling, a large new commitment naturally raises questions. What was reduced to make room for it? Was additional revenue raised? Was an emergency borrowing provision invoked? Why was this project given priority?

Transparency does not guarantee integrity, but it makes unexplained departures from normal practice easier to identify.

There is also an uncomfortable truth about democratic government: politicians are human beings. They respond to elections, polling, media pressure, party rooms, organised interests and public expectations. It is unreasonable to construct institutions that work well only when everyone involved displays exceptional self-restraint.

Good institutions should make responsible behaviour easier.

An election provides a good example. If one party promises substantial new expenditure, another may face pressure to match it. A promise that might not otherwise have been considered can quickly become politically difficult to resist. Each party may privately understand the long-term cost while publicly fearing the short-term cost of restraint.

A common fiscal framework could change the nature of that competition. Parties could still propose different priorities, but large new promises would have to identify where the money came from. A party proposing more spending might propose more revenue. Another might reduce expenditure elsewhere. Another might argue for a smaller government and lower taxes.

The disagreement would remain political, as it should. What would change is the assumption that the Budget can expand whenever political competition demands it.

Australia already accepts the principle of independent fiscal scrutiny. The Parliamentary Budget Office provides independent and non-partisan analysis of budgets and policy proposals. Internationally, independent fiscal institutions have become common tools for improving transparency and accountability in public finance.

The proposal considered here would go further than most existing fiscal councils because the fiscal boundaries would have legal force. That makes safeguards especially important. Parliament, not the Commission, should determine the underlying rules. The Commission should operate transparently, publish its calculations and remain accountable to Parliament. Emergency provisions should exist, and Parliament should retain an exceptional ability to override the framework openly.

The purpose is not to transfer ordinary government from elected representatives to economists.

It is to separate two questions.

The first is: how much can the country responsibly spend?

The second is: what should the country spend it on?

There is a reasonable argument that those questions do not need to be answered in exactly the same way.

Limits undoubtedly remove some freedom from politicians. But they may simultaneously create another kind of freedom: freedom from the expectation that every worthy request must be funded, freedom from some of the pressure created by lobbying, and freedom to make responsible decisions without carrying the entire political cost of saying no.

Sometimes restraint becomes easier when it is no longer personal.

A government may then be able to say something both honest and politically defensible:

We cannot fund everything. The rules apply to all of us. We must choose.