Deficit rules 'not tight enough'
ANZ chief economist Warren Hogan suggested overhauling the Charter of Budget Honesty - which loosely requires the government to balance its budget "over an economic cycle" - because it was not strict enough to encourage serious fiscal discipline.
Mr Hogan said the Coalition would face some tough budgetary decisions in coming months, but questioned if the new government would be disciplined enough to rein in spending.
Incoming prime minister Tony Abbott is preparing his front bench for government, including Joe Hockey as treasurer and Mathias Cormann as finance minister.
The Coalition's finance team has heavily criticised the Gillard and Rudd governments for their fiscal profligacy and ill-discipline.
Mr Hogan said the Charter of Budget Honesty was drawn up in different economic times when government revenue was more predictable. The overriding principle of the charter suggests that governments can run deficits in bad times as long as they generate surpluses in good times.
"We set up the charter in the mid-1990s on the back of independent monetary policy ... [and] it was a good progression," Mr Hogan said.
"[But] the concept ... that you keep the budget balanced over the course of the economic cycle, is just too loose for politicians ... and no one's really holding them to account."
Mr Hogan, who was speaking at a Business Economists lunch in Sydney, said Australia needed to define more strictly what the government could do with its budget.
"That is, they have to stick between 1 per cent of GDP either side every year on their operating position," he said.
"We've got to keep that operating position tight ... [in] the next seven months there's going to be a lot of talk about this because we're going to find that we've got a bit of a problem with our budget."
Mr Hogan said the next six months would be crucial for the new finance team.
The Deutsche Bank head of fixed income and credit research, David Plank, questioned the Coalition's spending promises and criticised its plan to cut the corporate tax rate. "One of the last things I would want to do is cut company tax," Mr Plank said.
"A company tax cut is effectively a tax cut to foreigners, given the way we allow our tax imputation system to work, and our franking credits," he said.
Colonial First State chief economist Stephen Halmarick backed suggestions that the government ought to face stricter spending protocols.
But he said, as a nation, we should "not be afraid to borrow money" to invest in infrastructure.
Frequently Asked Questions about this Article…
Warren Hogan suggested the federal government should cap its annual deficit at 1% of GDP (except during declared emergencies). He argued this stricter limit would force more serious fiscal discipline than the current framework.
The Charter of Budget Honesty loosely requires governments to balance the budget “over an economic cycle.” Hogan and others say it was drawn up in the mid‑1990s when revenue was more predictable, so the rule is too loose for today’s politics and isn’t compelling enough to hold governments to account.
A formal 1% GDP deficit cap would likely constrain government spending and require tougher budget choices. For investors, that means watching for policy changes, spending cuts or reprioritisations that could influence economic growth, infrastructure programs and sectors reliant on government funding.
Economists in the article said the next six to seven months will be crucial for the new finance team. Investors should monitor budget announcements and how disciplined the team is in reining in spending, since those decisions will shape fiscal policy and economic outlook.
David Plank questioned the corporate tax cut, saying a company tax reduction is effectively a tax cut to foreigners because of Australia’s tax imputation system and franking credits. Investors should note that tax changes can have complex effects on who benefits from corporate tax cuts.
Yes. Colonial First State chief economist Stephen Halmarick supported stricter spending protocols but also said Australia should not be afraid to borrow to invest in infrastructure, signalling a distinction between routine spending discipline and productive investment.
Economists noted the charter was created when government revenue was more predictable and monetary policy was more independent. Because economic conditions and revenue volatility have changed, they argue the rules may no longer provide clear, enforceable discipline.
The article says the coming six to seven months will be critical as the new government confronts tough budgetary decisions and a likely budget problem. Everyday investors should follow budget updates closely and consider how potential spending cuts, tax changes or infrastructure plans could affect their portfolios.
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