Finding a Budget Balance Will Restore Community Confidence and Help Take Pressure off Interest Rates

This year’s federal Budget needs to combine short-term spending discipline with a long-term strategy to lift productivity and restore community confidence in government, says Business Council of Australia President Graham Bradley.

Releasing the BCA’s 2011–12 Budget Submission, Mr Bradley said: “Uneven growth in our economy, uncertainty in the global economy and the need to respond to the recent natural disasters all have major implications for the Budget and require a greater than usual degree of judgement on the part of the Treasurer.”

Mr Bradley said the BCA believed the need for fiscal policy to stimulate the economy had passed and the main objective should be to move the Budget back into surplus in 2012–13. He said tight fiscal policy combined with measures to boost workforce participation and productivity will complement the monetary policy task and take pressure off interest rates.

“Our submission also emphasises the need for governments to focus on sound long-term financial management. And we make a number of suggestions to improve institutional arrangements around the Budget that will increase transparency and accountability.”

Mr Bradley said the submission recognised the prominent role the federal government will need to play in rebuilding efforts in response to the recent floods and cyclone.

“We must do what it takes to restore the livelihoods of people and communities so badly affected by the floods and the cyclone, however, a carefully measured response is needed so as to avoid possible price spikes on materials and on labour costs.

“We consider that the best approach to the funding task is for the government to first focus on reductions in spending and a re-sequencing of programs which deliver the least value to economic and community development. Options to increase taxes, even through temporary levies, should only be considered after an exhaustive examination of potential savings. 

The BCA’s 2011–12 Budget Submission is built around the themes of fiscal sustainability, enhancing productivity and improving government – goals the BCA believes that Australians are looking for from government at this time. The submission makes six recommendations that are consistent with these themes. 

1. A recommitment to a disciplined long-term fiscal strategy, and the maintenance of tight fiscal policy which returns the Budget to surplus in the short term through expenditure restraint.

2. A carefully staged response to disaster-related rebuilding to avoid the risk of price surges on materials and labour costs, as well as consideration of a new Natural Disaster Fund to assist in the budgeting of future catastrophes.

3. Renewed funding and a refreshed mandate for Infrastructure Australia accompanied by a long-term national infrastructure plan to promote productivity and growth in Australia’s economy.

4. A three-pronged strategy to meet Australia’s pressing skills needs, including ongoing education and training of Australian workers; a commitment to maintain the current level of permanent skilled migration; and greater use of temporary migration visas (including the 457 visa program and a new ‘Enterprise Migration Program’ for certain large investment projects).

5. A commitment to greater transparency in the budget documentation on the sensitivity of tax revenue to movements in commodity prices to support better fiscal management.

6. The establishment of a new independent fiscal authority – the Commission of Budget Integrity – to provide additional independent advice on fiscal sustainability.

“The goals align with community expectations that the government should be on the front foot in managing risks around skills shortages, fluctuating commodity prices and natural disasters.

“The time is right also for government to offer greater transparency around its spending decisions to reassure the broader community, including business, that taxpayers are getting value for money.”

Mr Bradley said that while the government had already committed to establish a Parliamentary Budget Office, the BCA's submission outlines a strong case for going much further.  

Based on an options paper prepared for the BCA by the respected former Department of Finance official Stephen Bartos, the submission recommends that a new independent fiscal authority – the Commission of Budget Integrity – be established.

“As well as providing greater external scrutiny and a more critical focus on getting value for money out of spending programs, the commission would independently highlight fiscal sustainability over the long term with a view to improving the community’s understanding of economic and budgetary issues,” said Mr Bradley.

He said the BCA’s submission also highlighted how dependent the Budget has become on revenues from high commodity prices.  According to analysis commissioned from Access Economics, the Budget is more vulnerable now than ever before.

“Prudent management suggests we should take greater account of potential fluctuations in the terms of trade,” said Mr Bradley. “Greater sensitivity analysis around those risks should be included in the budget papers each year as a matter of course.

A BCA fact sheet on the Commission of Budget Integrity is included below. 

FACT SHEET
A COMMISSION OF BUDGET INTEGRITY

The strength and independence of economic institutions plays an important role in underpinning national wellbeing. As well as being a necessary part of good policy governance, it reinforces public trust and confidence.

Independent institutions such as the Reserve Bank of Australia, Productivity Commission and Australian National Audit Office have contributed to Australia’s economic performance through enhanced scrutiny, oversight and advice, both inside and outside government.

Although Australia has a good reputation for the transparency of budget documentation, there is no independent, external institution with a mandate to scrutinise the Budget and government finances.

The proposed establishment of a new Parliamentary Budget Office is a positive development, but there is a strong case to go much further by setting up a permanent, independent fiscal authority.

A new fiscal agency should provide a fresh and independent perspective, although critically avoid duplication and overlap with the Treasury, Department of Finance, Australian National Audit Office, Productivity Commission and other government bodies.

The Business Council of Australia commissioned Mr Stephen Bartos from the Sapere Research Group to explore options, including the type of work such an authority might undertake and the governance arrangements that will allow it to be effective in delivering on its mandate.

As part of its 2011–12 Budget Submission, the BCA has drawn on the Sapere research to recommend an approach that would involve the establishment of an independent Commission of Budget Integrity. This recommendation is based on a number of arguments, including that:

  • Overseas experience with independent fiscal authorities suggests that to be successful, an independent fiscal office needs to have a clear, explicit and unambiguous mandate and a structure that matches its mandate.
  • A Commission of Budget Integrity can provide its most valuable contribution if it is set up in a way that allows it to engage in controversial or previously unscrutinised areas of policy and open up an informed public debate on ‘value for money’ of existing expenditures and the long-term sustainability of finances.
  • A new authority involving a Commonwealth-owned entity outside of government would place the agency in the most independent and arm’s-length position to deliver a fresh perspective on government finances. It should have three core functions:
    – preparing long-run fiscal sustainability reports
    – evaluating programs to assess their value for money
    – assessing tax expenditures.

Based on the functions envisaged and governance model, ongoing annual funding of around $10 million would be necessary for the commission to fulfil its role effectively. This funding would support around 30 to 40 staff, two senior executives and a board.

Respecting the government’s practice of offsetting all new spending, the Business Council of Australia proposes that the costs of the Commission of Budget Integrity be offset by an equivalent reduction in tax expenditures relating to business income.

The BCA’s 2011–12 Budget Submission, including the Sapere Research Group’s report, ‘Enhancing Budget Integrity in Australia’, can be downloaded using the link below.

BCA Budget Submission 2011–12 (PDF, 1.5 MB)