The Australian Commons

On the proper role of an Independent Fiscal Commission

By Jason Gay

If Australia were to adopt firm rules around spending, debt and saving, somebody would need to apply them. The obvious temptation would be to give that responsibility to Treasury. Treasury already possesses enormous expertise and sits at the centre of Commonwealth fiscal policy.

There is, however, a difficulty. Treasury is part of the executive government. It advises the government of the day and participates directly in preparing its Budget. Asking it to provide advice and independently police the limits placed upon the government it serves creates an unavoidable tension.

Australia already has another model. The Parliamentary Budget Office was established to provide Parliament with independent and non-partisan analysis of fiscal policy and the financial implications of policy proposals. Its existence recognises that some fiscal analysis benefits from being institutionally separated from government.

Independent fiscal institutions are not unusual internationally. The OECD describes them as independent public bodies that scrutinise fiscal policy and help strengthen transparency and accountability. The IMF’s current dataset identifies dozens of fiscal councils around the world, although their powers differ considerably. Most assess, forecast and report rather than directly control government decisions.

An Australian Independent Fiscal Commission could draw from these models without simply copying them.

Its purpose should be narrow.

It should not decide tax policy. It should not allocate money between departments. It should not decide whether a railway is more important than a hospital or whether defence expenditure should rise. If it gained those powers, unelected officials would begin replacing elected government.

Instead, Parliament would establish the fiscal rules in legislation, and the Commission would independently apply them.

Suppose Parliament determined that normal Commonwealth expenditure must be based upon a measure of sustainable revenue calculated over several years. Parliament might also legislate a minimum annual debt repayment when certain economic conditions were met and a minimum contribution to the national savings fund.

The Commission’s role would be to calculate those numbers honestly.

Before the Budget, it would publish the sustainable revenue estimate. From that would follow the maximum ordinary expenditure available under the rules. It would certify the required debt payment and national savings contribution. It would also publish the assumptions behind its calculations so that government, opposition, economists, journalists and ordinary citizens could examine them.

The Budget process would therefore begin with a public set of numbers that neither the government nor the opposition could quietly alter.

The government would then govern within them.

This would also address one of the weaknesses common to fiscal rules: governments can sometimes meet the letter of a rule by changing forecasts, definitions or assumptions. The OECD and IMF both stress that the effectiveness of independent fiscal institutions depends upon credibility, genuine independence, transparent methods and sustained political commitment. The existence of a rule by itself does not guarantee fiscal discipline.

For that reason, the Commission itself would need protection from politics.

Its members could serve long, fixed terms that do not coincide neatly with electoral cycles. Appointments might require consultation across Parliament rather than belonging entirely to the government. Members should be removable only for defined reasons such as misconduct or incapacity, not because a government dislikes their conclusions.

Its methodology should be public. Its forecasts should eventually be compared with actual results. Its senior officers should appear regularly before parliamentary committees. Its performance should be independently reviewed.

Independence should never mean absence of accountability.

The Commission’s most difficult role would concern borrowing.

There are circumstances in which borrowing is clearly justified. A severe recession can cause government revenue to collapse precisely when support is most needed. A major war cannot be financed according to an ordinary annual spending limit. A catastrophic natural disaster may require immediate action.

The Commission therefore should not possess a simple veto over emergency government.

A better approach would be for Parliament to establish the circumstances in which the ordinary fiscal rules may be suspended. The Commission would then certify whether those conditions existed and estimate the fiscal consequences. Any extraordinary borrowing should be separately identified, with a proposed path back towards the normal rules.

Parliament could also retain an ultimate override.

That power should be difficult enough that it is not used casually, but not so difficult that the country becomes paralysed during a genuine emergency. One model might require a special vote of Parliament accompanied by a published statement explaining the amount to be borrowed, the reason normal rules are being suspended and the intended repayment plan.

The point is not to create an institution capable of telling democracy “no”.

It is to ensure that when democracy chooses to depart from its own financial rules, it does so openly.

This also protects the Commission. It should not carry responsibility for determining whether a war is necessary, whether a pandemic response is proportionate or whether a particular infrastructure project is politically desirable. Those judgments belong to government and Parliament.

The Commission is the referee, not a player.

Its job is to know where the boundaries are, apply them consistently and announce clearly when someone crosses them. The players still decide how the game is played.

There would be difficult design questions. How should sustainable revenue be calculated? How much flexibility should exist during an economic downturn? Should public investment be treated differently from recurrent expenditure? How should off-budget entities be treated? Could governments shift liabilities into public corporations in order to avoid the rules?

These questions are not reasons to abandon the idea. They are reasons to design the institution cautiously.

Any fiscal constitution worthy of the name must recognise two dangers at once. Too little restraint allows debt and expenditure to expand according to political convenience. Too much restraint can place legitimate democratic choices in the hands of unelected officials.

The task is to find the boundary between them.

Parliament should write the rules.

Government should make the choices.

An independent institution should keep the score.