Ditch the Charter of Budget Honesty

The Charter of Budget Honesty allows a whopping deficit and a tiny surplus to equate to the same thing... until it matters.

The Charter of Budget Honesty, brought in by the Howard/Costello government 15 years ago, seemed like a good idea at the time but it’s time to declare it a failure.

The Charter requires that budgets must be in balance over the course of the economic cycle, which means the government can run a deficit in bad times as long as there’s a surplus in good times. The problem was it didn’t say how big these should be. The result has been big hairy deficits and small, fragile surpluses that get blown away by Treasury getting the start of the downturn wrong.

As Stephen Anthony of Macroeconomics wrote in the report on the budget he did for the Minerals Council of Australia last week: “Essentially, the fiscal strategy objective (of the Charter) provided the wrong diagnostic tool as a benchmark for success over the business and commodity cycle. As a result, governments spent up big in the boom and got caught on the down side of the cycle. Windfall tax receipts were frittered away.”

In order to work properly the Charter of Budget Honesty requires Treasury to forecast the cycle accurately and for the politicians to act accordingly, but it never does and they never do. Treasury got the size of the boom wrong and has now got the end of the boom wrong (it’s not alone there, of course) and politicians, having spent to the max, have now got caught. 

According to Macroeconomics, commodity boom windfall revenues contributed around $160 billion to the Commonwealth budget bottom-line up to 2011-12. Yet all that the fiscal strategy required was for the government to run a surplus – of any size.

The last five budgets of the Howard government contained net discretionary spending of $133 billion and net tax cuts of $117 billion. The five budgets of the Rudd/Gillard government have produced net discretionary spending of $153 billion, of which $70 billion is due to the GFC and $83 billion is not.

Today the prime minister is apparently going to soften us up for a shocker of a federal budget in two weeks by revealing that this year’s revenue forecast would be short by $12 billion rather than the $7.5 billion they thought it would be, but that spending will continue on “necessary investments” – mainly education and disability funding, as announced.

And so the deficits will continue to be big and go on for a long time. The structural deficit was set up by John Howard and Peter Costello and not corrected by Kevin Rudd, Julia Gillard and Wayne Swan. Small fragile surpluses have turned into big, hairy, endless deficits.

As a result, the government will be sacked in September and replaced by another version of the mob that stuffed it up in 2001-2006.

The first thing Tony Abbott and Joe Hockey should do is rewrite or repeal the Charter of Budget Honesty. It didn’t work.