Maintaining a disciplined approach to fiscal policy
The challenges Australia faces in sustaining its economic performance will shape the direction of fiscal policy in the years ahead. The challenges will translate into additional pressures on public finances and will influence future decisions about the content of government expenditure programmes and the structure of the tax system.
As with households, governments must manage budgets so they can meet their financial commitments, including regular expenses and debt repayments, from current and expected future income. In many other developed countries, this will mean cutting spending or raising taxes to reduce government debt to levels that can be serviced through future tax and other government revenues.
Fortunately Australia does not face such stark choices. Responsible management of revenue and expenditure has resulted in a succession of budget surpluses. Those surpluses have been used to repay debt. Government debt is now at levels that are among the lowest in the OECD (OECD 2004b).
The task going forward is to ensure that policies safeguard the sound fiscal position and that budgetary decisions are consistent with promoting productivity and participation. This means maintaining a responsible approach to government expenditures and securing a tax base that can fund those expenditures in an efficient and equitable manner. It also means managing pressures and risks to revenue or expenditure so future governments can continue to provide essential goods and services in a manner that promotes fairness in distributing public resources between generations of Australians. Maintaining a responsible fiscal position is important to maintaining low inflation and low interest rates today, thereby providing a more stable environment for households and firms to make investment decisions.
The ageing population, technological advancement in health care and rising community expectations about access to the latest medical treatments are likely to place significant pressure on government finances. In addition, pressure on public finances is likely to come from increasing community expectations around maintenance of our natural and man-made environment.
Maintaining a sound fiscal position will require governments to design programmes with a view to promoting productivity and participation, thus securing the viability of their revenue base. It will also require improved allocation of functions and coordination of programme delivery across the three levels of government so that publicly provided goods and services are delivered as efficiently and effectively as possible. A particular challenge in this regard will be to coordinate an approach to the delivery of infrastructure that pays regard to the appropriate balance between public and private provision, and develops the regulatory environment needed to support the latter.
Governments at all levels also will need to take a broader view of their balance sheets, taking greater account of the need to meet contingent liabilities and future pressures on the tax base and expenditures. As discussed in more detail in Statement 2, the Australian Government is taking steps to help offset the liability associated with unfunded public sector superannuation by establishing the Future Fund, comprising financial assets built up using current and future budget surpluses.
A key outcome of funding the superannuation liability will be to improve the Australian Government’s net worth and financial sustainability. It will also change the measurement of financial performance — giving more attention to the evolution of the Australian Government’s assets and liabilities over time, rather than simply current receipts and payments.
An approach to fiscal policy that focuses more clearly on improvements in the balance sheet recognises that many of the fiscal pressures governments face will arise decades into the future. The production of the 2002 Intergenerational Report, which assessed expenditure pressures, was an important first step in this direction. Ensuring fiscal sustainability will require longer term planning horizons than have been employed in the past. This requires a view of the likely path of the budget aggregates and a more detailed understanding of how individual programmes may contribute to fiscal pressures over the medium to longer term.
The sustainability of fiscal policy depends not only on decisions made in the budget, but on the range of economic and social policies needed to provide higher income levels into the future. Critically, Australia needs to take advantage of opportunities to secure higher national income through trade, including with growing economies such as China and India. Australia’s current fiscal position in part reflects the dividends of a positive international engagement strategy.
This budget has responsibly banked some of the additional revenue generated by higher export prices to help meet the fiscal challenges ahead.