The Australian Commons

On whether a fiscal constitution can survive political inconvenience

By Jason Gay

Every institutional proposal eventually encounters the same question.

What happens when the people bound by the rules gain the power to change them?

This problem is especially serious for a fiscal constitution. Imagine that Australia establishes an Independent Fiscal Commission, creates a National Resilience Fund, imposes rules around ordinary expenditure and borrowing, and requires governments to deliberately reduce debt during stronger economic periods.

Then, some years later, a government concludes that the rules prevent it from pursuing a policy it regards as important.

Parliament changes the law.

If that can happen whenever the framework becomes inconvenient, the fiscal constitution may prove little more than a temporary political preference.

This is not a problem that can be solved completely through ordinary legislation. One Parliament cannot permanently prevent a future Parliament from changing an ordinary Act. A government with sufficient parliamentary support may amend the formulas, narrow the Commission’s powers, widen the definition of emergency borrowing or abolish the institution altogether.

That reality forces an uncomfortable choice between flexibility and permanence.

One response would be to place the entire fiscal framework into the Australian Constitution. This would give the rules far greater protection because constitutional change requires a referendum and the support of a national majority together with majorities in a majority of States.

But constitutionalising detailed fiscal rules would create serious risks of its own.

Economic conditions change. Accounting standards develop. Future governments may confront circumstances that cannot be anticipated today. A spending formula that appears sensible in 2026 may be entirely inappropriate in 2076.

The Constitution should not become a spreadsheet.

A better approach may be to protect the architecture rather than every calculation.

The Constitution could, for example, require the existence of an independent fiscal institution and establish broad principles around fiscal transparency, borrowing and public debt. Parliament could then determine the operational formulas through legislation.

Such a structure would allow the system to evolve while making it more difficult for a government simply to eliminate independent oversight when it became inconvenient.

Even this approach would require great care. Constitutional entrenchment is a significant step and should not be pursued merely because supporters of a particular policy wish to make their preference harder to reverse.

There is a legitimate democratic argument that future Australians must remain free to govern themselves differently.

No generation should attempt to rule every generation that follows.

The purpose of entrenchment should therefore be limited to protecting the integrity of the process, not preserving every policy choice.

There are also weaker forms of restraint that may still be valuable. A government seeking to change the fiscal framework could be required to publish the proposed alteration well before the Budget. The Independent Fiscal Commission could be required to report publicly on its effect. Parliament might require a dedicated vote rather than allowing significant changes to disappear inside unrelated legislation.

None of these mechanisms would make reform impossible.

They would make weakening the rules visible.

That matters because much institutional restraint works through political cost rather than absolute legal prohibition. Governments can often exercise powers that convention tells them not to exercise casually. The restraint comes partly from knowing that departure from established practice must be publicly explained.

Fiscal rules could develop a similar character.

There is another form of rule-breaking that may be more subtle.

Governments do not necessarily need to repeal a fiscal rule if they can move around it.

Public corporations can borrow. Governments can provide guarantees. Transactions can be structured as equity injections, loans or off-budget arrangements. A financial obligation can sometimes remain economically real while becoming less visible in the headline measure upon which the fiscal rule is based.

This is why any serious framework must focus on economic substance rather than labels.

If taxpayers ultimately carry the risk, an accounting change should not make the obligation disappear.

The Fiscal Commission would need the authority and expertise to examine these arrangements and report on whether government was complying with the spirit as well as the technical wording of the framework.

The National Resilience Fund would require similar protection.

If Australia succeeded in building a very large pool of national wealth, political pressure to access it would inevitably grow. Every government could produce worthwhile reasons to spend the money. Health, defence, housing, energy and infrastructure would all make legitimate claims.

The point of the fund, however, would be lost if every worthy claim became sufficient reason to draw down the capital.

Savings only exist if there are things we choose not to spend them on.

Withdrawals would therefore need clear rules, independent scrutiny and a higher threshold than ordinary Budget expenditure.

Again, the purpose is not to make the fund untouchable. A national reserve that can never be used serves little purpose. The aim is to ensure that using it feels significant.

The same principle should govern emergency borrowing.

A true emergency must always allow flexibility, but breaking the normal fiscal rules should be obvious. Parliament should vote. The reason should be published. The cost should be estimated. The path back to ordinary arrangements should be explained.

Breaking the emergency glass should make a noise.

In the end, however, no institution can entirely protect a country from its own political choices.

A determined Parliament can do great harm to sound institutions. Voters can reward irresponsibility. Governments can prioritise short-term advantage over long-term strength.

Rules help, but political culture still matters.

This is not an argument against institutional restraint. It is the reason institutional restraint exists.

Good institutions cannot make bad decisions impossible. They can make them harder, more visible and more costly.

That may be the proper ambition of a fiscal constitution.

The rules should not be permanent in every detail, because future Australians must retain the freedom to improve them.

But neither should they disappear the first time they prevent a government from doing something politically convenient.

The challenge is not to create rules that can never change.

It is to create rules that cannot be changed casually.

That may ultimately be the difference between a fiscal policy and a fiscal constitution.