Could Other Countries Learn from Australia’s Charter of Budget Honesty?

Could other countries adopt a Charter of Budget Honesty similar to the one long enshrined in Australia? In a recently published feature article in the Canadian Parliamentary Review (also in English), I examined whether Australia’s charter could be transposed onto contemporary budget processes of other countries, including Canada. The findings of the article suggested that an Australian-style charter could be useful if it were part of a broader commitment to fiscal transparency that included other reforms as well, but as a stand-alone document, a charter could only be of limited value.

To understand why an instrument such as the charter would be of interest to other countries, it is important to be mindful of international fiscal trends. In our time, most parliamentary democracies in the world are faced with the question of how to maintain budget discipline, particularly with respect to three concerns:

• a long-run reliance on deficits;
• the ability to manage unforeseen economic shocks; and
• the level of transparency and accountability in the budget process.

Following the 2008 economic crisis, more parliaments are finding themselves debating questions of fiscal discipline and fiscal transparency at ever more frequent intervals. The Australian charter therefore holds appeal for countries that want to signal a commitment to fiscal reform.

Although other countries such as New Zealand and the UK have passed budget acts encouraging fiscal discipline, the Australian charter has gained more prominence in its local legislative budgeting context. At the time that it was instituted, the charter represented the very best in fiscal policy legislation, both in terms of scope and rigour. The charter has initiated a set of rituals which are now considered core aspects of the annual budget, and which much of the Australian public has come to consider standard political and economic practice.

The purpose of the charter is “to improve fiscal policy outcomes,” and it provides for this “by requiring fiscal strategy to be based on principles of sound fiscal management and by facilitating public scrutiny of fiscal policy and performance.” In order to meet these outcomes, the charter is comprised of several important moving parts that together build a more cohesive fiscal discipline framework. Collectively, they help to increase transparency by creating a regular stream of government reports that apprise the public, the legislature, and other government branches, of movements in the national fiscal balance.

Is the definition of “sound fiscal management” used in the charter correct, comprehensive, or sufficient? Today, many Australian budget scholars seem to think that, in the broader scope of things, the charter’s definition is still insufficient because the document remains prone to “interpretive approaches”, with high levels of subjectivity about various aspects of the abstract notion of “budget honesty.”

Furthermore, several budget scholars would seem to assert that the charter could benefit from greater precision if it were to contain some form of concrete benchmarking against which to gauge government budgetary performance. Such benchmarks are sometimes referred to as “fiscal rules”, and are more prevalent in European countries.

Among the charter’s criticisms, one of the most poignant is that the document tends towards a logic of “less is more”, whereby the surfeit of data produced does not significantly increase transparency in the budget process. Rather, it results in an overproduction of fiscal data, which in fact restricts the ability of decision-makers to conduct oversight.

A second criticism has been that, because the charter operates within an existing budget ecosystem, it does not change existing legislative powers that are constitutionally enshrined. In other words, the charter does not override existing parameters for legislative engagement in budgeting.

A more general critique of fiscal rules is that when states are encouraged to adhere to fiscal prudence, rather than compelled to do so, there is an inherent trade-off between the flexibility of governments to act and the discipline they must exercise. For an effective mechanism that encourages but does not compel towards discipline, some additional elements are required, such as: clear and unambiguous fiscal targets; strong internal and external oversight of budgets to assess levels of compliance; and a strong coherence between the letter of the law and the spirit.

What makes these conditions very difficult to meet is that there is always a high degree of uncertainty about the future path of economic growth, particularly with respect to unforeseen economic shocks. Furthermore, there is scant consensus among economists on what an ideal fiscal target is, which means that the fiscal discipline goals set into laws are based on the arbitrary nature of what target should be followed. Political parties differ in their fiscal philosophy: some emphasize balanced budgets, while others view the flexibility to run planned deficits as good fiscal policy.

Given this criticism, would such a charter be suitable for parliaments in other countries? The answer would seem to depend on what the goal of the charter would be. If, on one hand, the objective is to ensure full and rigorous fiscal transparency and discipline, then such a charter, or any other budget honesty mechanism for that matter, would be an insufficient piece of legislation on its own. If, on the other hand, the objective is to incrementally enhance the Parliament’s fiscal engagement and budgeting rigour as part of a broader and more abstract commitment to “fiscal prudence”, then the charter of budget honesty could be one element within that broader commitment.