Deficit rules 'not tight enough'

One of Australia's top economists says the federal government deficit should be capped at 1 per cent of gross domestic product in any year, except during emergencies.

One of Australia's top economists says the federal government deficit should be capped at 1 per cent of gross domestic product in any year, except during emergencies.

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.

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