The Australian Commons

If you couldn’t be bothered reading the first five Commonwealth Papers, this one’s for you.

By Jason Gay

I have now written five fairly long essays about government budgets, debt, national savings, independent fiscal institutions and state borrowing.

I realise that sentence alone has probably convinced some people that reorganising the garage would be a more enjoyable use of their afternoon.

So this article is an attempt to explain the whole idea in plain English.

I am not an economist. I am not a constitutional lawyer. I have never been Treasurer, worked in Treasury or sat on the Reserve Bank Board. I am simply an Australian taxpayer who looks at the way our governments manage money and wonders whether there might be a better way to organise the system.

The first five Commonwealth Papers have really been exploring one central idea:

What if Australia had some basic financial rules that applied to every government, regardless of who was in power?

Not rules about whether we should spend more on hospitals or defence. Not rules about tax rates, pensions, childcare or roads. Australians can continue arguing about all of those things.

I am talking about the rules that come before those decisions.

How much can government responsibly spend?

When can it borrow?

When should debt be repaid?

How much should we save?

And should the politicians who want to spend the money be the only people responsible for deciding those limits?

That is basically it.

Everything else in the first five papers flows from those questions.

Start with what you’ve actually got

Imagine you earn $100,000 a year.

You sit down with your family to work out the household budget and decide that next year you would quite like to spend $115,000.

You could respond to this discovery in several ways. You could earn more money. You could cut $15,000 from your plans. You could borrow the difference. Or you could do some combination of the three.

What you probably shouldn’t do is act surprised twelve months later when you owe someone $15,000.

Government finances are obviously much more complicated than household finances. Governments can raise taxes, issue bonds, influence the economy, build assets that last generations and operate across economic cycles. The household analogy eventually breaks down.

But one part of it remains useful.

Resources are limited.

My first proposal is therefore fairly simple: ordinary government spending should generally be based on the amount of revenue government can sustainably raise.

The important word there is sustainably.

I am not suggesting that Canberra should look at tax receipts on 30 June each year and panic if everything doesn’t perfectly balance. Revenue moves around. Commodity prices change. Recessions happen. Natural disasters happen. Occasionally the world shuts down because of a pandemic.

Instead, an independent process could calculate what might be called Australia’s sustainable revenue, essentially a reasonable estimate of what government can expect to collect under normal economic conditions.

That becomes the starting point.

Instead of beginning with, “Here is everything we would like to spend money on, now how do we pay for it?”, government starts with, “Here is what we can responsibly spend, now what are our priorities?”

It sounds like a small change.

I think it could be a very big one.

The credit card still exists

The next objection is usually obvious.

What happens when something goes badly wrong?

Fair question.

If Australia finds itself in a serious war, recession, pandemic or natural disaster, I don’t want the Prime Minister announcing that unfortunately the national emergency will have to wait until next financial year because we have reached our spending cap.

Government needs the ability to borrow.

The argument in these papers is not debt is always bad.

It is debt should have a reason.

Borrowing during an extraordinary event can be completely sensible. Borrowing for infrastructure that will serve Australians for generations can also raise legitimate arguments about sharing the cost across those generations.

What I question is the idea that borrowing should simply become the normal solution whenever the numbers don’t add up.

Think of it this way. Keeping a credit card for an emergency is one thing. Building your normal household budget around the assumption that the credit card will cover the gap every month is something else.

So under this model, the Commonwealth could still borrow, but borrowing outside the normal fiscal rules would require a clearly defined justification.

The default changes from:

Why shouldn’t we borrow?

to:

Why should future taxpayers pay for this?

That is a question worth asking.

And then comes the really unfashionable part: paying it back

If we accept that governments sometimes need to borrow, the next part shouldn’t be terribly controversial.

At some point, we should deliberately repay some of it.

Yet public debt has an unusual ability to become permanent. Governments can refinance it, roll it over and focus on whether debt is sustainable relative to the size of the economy.

Those are legitimate economic considerations. Government debt is not identical to a home loan that needs to reach zero by someone’s retirement party.

But I think there is still room for a simple principle:

When we borrow heavily because times are bad, we should repay deliberately when times are good.

That means debt repayment shouldn’t merely be something governments promise to think about once every other priority has been funded.

It should become part of the rules.

When economic conditions are normal, a predetermined amount could be directed towards reducing debt before all the remaining money is divided between new spending priorities.

The Parliamentary Budget Office’s latest national outlook is actually more nuanced than the usual political argument around debt. It says Australia’s aggregate fiscal position is forecast to improve across the forward estimates, even while public debt remains significant. That is important because the argument here does not require Australia to be facing some imminent financial catastrophe.

You can believe Australia is capable of carrying its debt and still ask whether continually carrying more debt is the best system we can design.

Maybe we should have a piggy bank as well

This is the part of the idea I find particularly interesting.

Australia should not only think about owing less.

We should think about owning more.

We are a wealthy nation. We know that expensive things will happen in the future. We know we will need major infrastructure. We know there will be natural disasters. We know there will eventually be another economic crisis of some kind, even though we don’t know when or what will cause it.

Yet our usual approach is to wait until we need the money and then work out how to raise or borrow it.

What if we deliberately built a very large national investment fund instead?

Australia already does versions of this. The Future Fund was established in 2006 to strengthen the Commonwealth’s long-term financial position by providing for future superannuation liabilities, and the Australian Government now has several investment funds with specific purposes.

The proposal I have been exploring is broader.

Call it a National Resilience Fund.

During good years, money goes in. It is invested professionally. Governments cannot simply raid it because an election is six months away and somebody has discovered a marginal seat that desperately needs a shiny new something.

Over decades, the fund grows.

Then, when Australia faces genuinely large national costs, we have another option besides borrowing.

Major infrastructure could potentially be partly funded from accumulated national wealth. Major emergencies could be met without starting from zero. And if the fund eventually became sufficiently large, part of its investment earnings could conceivably reduce the amount of taxation required from Australians.

In very simple terms, rather than always saying:

We need something, where can we borrow the money?

we might occasionally be able to say:

We knew we would eventually need something, so we saved for it.

Revolutionary stuff, I know.

So who decides the limits?

This is where the proposal becomes more interesting, and probably more controversial.

Governments currently play two roles.

They decide what they want to spend money on, but they also have enormous influence over the overall Budget settings within which those decisions occur.

My suggestion is that those two jobs should be separated slightly.

Australia already has an independent Parliamentary Budget Office, which provides independent, non-partisan analysis of the Budget and proposed policies. What I am proposing would be different and considerably stronger.

I have called it an Independent Fiscal Commission.

The name isn’t particularly important. The function is.

Parliament would create the rules. The Commission would apply them.

That distinction matters.

I am not suggesting that a group of unelected economists should sit in Canberra deciding whether your local hospital gets an upgrade.

Elected governments should still make those decisions.

Instead, Parliament might establish a formula for calculating sustainable revenue, debt repayment and national saving. The independent body would then apply that formula and announce the broad parameters before the Budget.

For example:

You have this much sustainable revenue.

Under the rules, this much must go towards debt.

This much must go into national savings.

That leaves this much available for ordinary government.

Good luck, Treasurer.

The government then decides what matters most.

Health. Defence. Education. Welfare. Roads. Tax relief. Regional development. Whatever priorities it was elected to pursue.

The Commission controls the boundary.

The government chooses what happens inside it.

Strangely enough, this might actually help politicians

This became the subject of the second paper because I think it is one of the less obvious consequences of the idea.

Politicians spend a lot of time being asked for money.

Businesses want assistance. Industries want subsidies. Community organisations want grants. Departments want larger budgets. States want infrastructure funding. Local communities want projects. Interest groups want programs.

Many of those requests are perfectly reasonable.

The problem is that individually reasonable ideas can collectively become a very unreasonable Budget.

And saying no is politically difficult.

Imagine a group approaches the government asking for $500 million for something genuinely worthwhile. At present, the argument can easily become:

“Why won’t the government fund this?”

Under a fixed fiscal envelope, the question changes:

“If we spend $500 million on this, which other $500 million are we willing to give up?”

Suddenly priorities become much clearer.

It also gives politicians some political cover.

A minister can say, “I agree this is worthwhile, but we have reached the spending limit. If we fund it, something else must move.”

That is quite different from personally saying, “No, I don’t think your cause matters.”

Clear limits may therefore reduce some of the pressure created by lobbying as well. They certainly won’t eliminate lobbying, and lobbying is not inherently a bad thing. People should be able to argue their case to government.

But there is a difference between lobbying for priority within a limited pool and lobbying government to make the pool bigger.

The first requires trade-offs.

The second can simply create more spending.

This is why I called the second paper The Freedom of Limits.

Sometimes being told you cannot do everything actually makes it easier to decide what you should do.

Then we reach the States

And this is probably where I lose a few people.

Australia effectively has multiple governments capable of borrowing significant amounts of money.

The Commonwealth borrows.

The States borrow.

And whichever government borrowed it, Australian taxpayers ultimately fund the public sector from which the debt must be serviced.

The fifth paper therefore asks whether state borrowing should also sit within some form of national framework.

This is not a completely foreign concept in Australia’s constitutional history. Section 105A of the Constitution specifically allows agreements between the Commonwealth and States concerning public debts and borrowing arrangements.

The stronger version of my proposal would prevent states from independently taking on new debt and instead require borrowing to occur through an agreed national process.

That would be a major change.

It also raises very legitimate concerns.

States have constitutional responsibilities of their own. A system that allowed the Commonwealth Government to decide whether Queensland or Victoria could finance a hospital or railway could badly distort Australian federalism.

That is exactly why, if such a system ever existed, I think it would need independent administration rather than political control from Canberra.

You could also distinguish between borrowing for recurrent expenditure and borrowing for long-lived infrastructure.

A government borrowing money every year simply to meet normal operating costs is not necessarily in the same position as a government financing a railway that may operate for the next century.

The rules would need to recognise that.

The point of raising state borrowing is not that every state debt is bad.

It is that national debt should probably be considered nationally.

Different logos appear at the top of government Budgets, but ultimately there is only one Australian economy supporting them.

So, what is the whole idea?

If you’ve made it this far, congratulations. You have now effectively read five papers while avoiding reading five papers.

The proposal can be reduced to five ideas.

First, spend according to sustainable revenue.
Work out roughly what Australia can afford before deciding how to divide it.

Second, borrowing should require a reason.
Keep debt available for genuine need, but stop treating it as an automatic balancing tool.

Third, deliberately repay debt.
If bad years require borrowing, good years should involve rebuilding the balance sheet.

Fourth, deliberately build national wealth.
Create a substantial national fund so future governments inherit assets as well as obligations.

Fifth, separate the spending decisions from the spending limits.
Let Parliament establish the rules, let an independent institution apply them, then let elected governments decide how to govern within them.

There are plenty of legitimate questions about whether this would work.

How do you calculate sustainable revenue?

How much debt should Australia actually repay?

What stops an independent commission becoming too powerful?

When should infrastructure borrowing be allowed?

What qualifies as an emergency?

Could a future Parliament simply change the rules?

Would restricting state borrowing give Canberra too much power?

Those are not small questions. In fact, they are probably the next set of papers.

But the broader idea is fairly simple.

We spend enormous amounts of time debating what government should spend money on.

Perhaps we should spend a little more time discussing the rules governing how much money it has available in the first place.

I am not suggesting I have designed the perfect system. I haven’t.

I am simply asking whether the system we currently have is the only reasonable way to do things.

Because maybe responsible government should not depend entirely upon responsible politicians.

Maybe some responsibility should be built into the rules themselves.