Bills Digest 85 1996-97
Charter of Budget Honesty Bill 1996
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have any
official legal status. Other sources should be consulted to determine the
subsequent official status of the Bill.
CONTENTS
Charter of Budget Honesty Bill 1996
Date Introduced: 11 December 1996
House: House of Representatives
Portfolio: Treasury
Commencement: On the date it receives Royal Assent
Charter of Budget Honesty
Economic and Fiscal outlook reports as well as intergenerational reports
The main purpose of the Charter of Budget Honesty Bill 1996 (the Bill)
is to provide for a Charter of Budget Honesty (the Charter) to improve
fiscal policy outcomes by providing a framework for the conduct of Government
fiscal policy. It seeks to achieve this objective by requiring the Government's
fiscal strategy to be based on sound fiscal management and for the publication
of regular reports setting out such fiscal strategy. The Bill also provides
for the publication of an intergenerational report, at lease once every
5 years, which will assess the long term sustainability of current Government
policies over the 40 years following the release of the report.
Pre-election reports and policy costings
The Bill also requires the publication of a pre-election report setting
out the fiscal and economic outlook once a general election is called.
The Bill also provides that the Government, or the Opposition, may request
the Secretaries of the Departments of the Treasury and Finance to prepare
a costing of any of its publicly announced policies once a general election
has been called and for the publication of such costings. The request
from the Opposition must be made through the Prime Minister and is subject
to the agreement of the Prime Minister.
Enforceable rights and duties not created by the Charter of Budget Honesty
The Bill provides that nothing in the Charter of Budget Honesty creates
rights and duties that are enforceable in judicial or other proceedings.
To this extent the Charter of Budget Honesty is treated in the same manner
as parliamentary machinery provisions which are generally not justiciable.
The Charter of Budget Honesty will for the first time set out in a formal
manner what Parliament and the public could expect of the Government in
managing and reporting on the economy. This will facilitate informed decisions
being made by the public based on the state and projected progress of
the economy. Further, informed judgments could be made by the electorate
on the performance of the Government and whether the economy could sustain
the promises made by the Government and the Opposition before each Federal
election. However, there is scope for arguing that the Bill has not gone
far enough in creating enforceable rights and duties as in the case of
New Zealand where the Fiscal Responsibility Act 1994 (1)is binding
on the Crown.
Commitment to a Charter of Budget Honesty
In his first Headland Speech(2), The Prime Minister, then Leader of
the Opposition, spelt out the commitment of a future Coalition Government
to a Charter of Budget Honesty with a view to 'Rebuilding Trust In Government'.
The Headland Speech prefaced this commitment by a reference to what is
now called the L-A-Wlaw tax cuts which were not delivered in the form
legislated before the 1993 Federal Elections but subsequently amended
to defer an instalment of these tax cuts with the promise that it would
be delivered in the form of a co-payment for superannuation contributions.
Apart from the commitment to a Charter of Budget Honesty there were measures
promised in the Headland Speech to enhance the position of the Auditor-General
and the Role of Parliament. The independence of the Auditor-General was
to be enhanced by elevating the position to that of an officer of the
Parliament who could act without intimidation by the Executive and achieve
a fearless and authoritative surveillance of government departments. The
independence of the Auditor-General would be further strengthened by funding
from the Appropriation for the Parliament.(3) The Auditor-General Bill
1996, which was introduced into Parliament on 12 December 1996 will
enhance the independence of the Auditor-General, draws heavily on the
recommendations in the report of the Joint Committee of Public Accounts
(JCPA) titled Guarding the Independence of the Auditor-General (4)and
its previous reports(5). The Headland Speech also promised the appointment
of a Commission of Audit to report on measures to rebuild confidence in
the annual accounting process with the goal of Rebuilding Trust in Government.
However, as will be seen from the comments under the main provisions of
the Bill, there is no role for the Auditor-General in the Charter of Budget
Honesty. There is a case for the Auditor-General, who will have a unique
position under the Auditor-General Bill 1996 to withstand inappropriate
influence either from the Executive or the Parliament, playing a key role
in the Charter of Budget Honesty. Instances where a role for the Auditor-General
who can fearlessly and independently give assurances to the Australian
people that information supplied to them under the Charter of Budget Honesty
have his or her approval or not, are indicated in this Digest.
The Report of the National Commission of Audit (NCOA Report)
The National Commission of Audit was established in March 1996
and reported 3 months later. The key recommendations of the National Commission
of Audit in relation to a Charter of Budget Honesty(6) were based on the
finding that requiring governments to state objectives and assessing fiscal
policy outcomes against established benchmarks will contribute towards
enhancing fiscal policy transparency and accountability. There was a clear
intention that legislation should make it mandatory for the Executive
Government to comply with fiscal reporting standards.
There seem to be few disadvantages associated with adopting comprehensive
fiscal reporting standards, even if the need to comply with such standards
is enshrined in legislation. Indeed, because compliance with such standards
is likely to enhance a government'sability to govern, compliance should
be legislated for so that it cannot be ignored by governments.(7)
The NCOA Report appropriately drew a distinction between fiscal reporting
in the sense of financial reporting which is a requirement under the Audit
Act 1901(8), and which is concerned with the internal management of
Commonwealth agencies, and fiscal reporting that is concerned with the
macroeconomic effects of government fiscal actions. Fiscal responsibility
legislation in the form of a Charter of Budget Honesty would deal with
the latter. It further pointed out that fiscal responsibility legislation
could set specific fiscal targets or establish certain reporting standards
or involve some combination of both approaches. In Recommendation11.2
the NCOA Report opted for the setting of clear fiscal strategy, which
would require the Government of the day to set its own specific targets
but not identifying such targets in legislation, in the interest of fiscal
policy flexibility required by a National Government..
Loss of fiscal policy flexibility, which is the main disadvantage
of setting a medium term fiscal target, can be overcome to a large extent
by not identifying the target in legislation and by giving governments
room to manoeuvre should economic circumstances change.
For these reasons, the Commission favours legislation to require governments
to state clearly their fiscal strategy. This would include the setting
of specific targets, but not legislating such targets. The Commission
also supports legislation to require governments to report on progress
in achieving their stated fiscal strategy.
Recommendation 11.2: Setting of and reporting on fiscal strategy
Governments should be required to set and report against a clear fiscal
strategy, which would include the setting of specific targets(9).
The NCOA expressed concerns that unless fiscal reporting requirements
were legislated governments may ignore them.
The Budget Speech of 20 August 1996
The background to the introduction of this Bill was summed up by the
Treasurer in his Budget Speech of 20 August 1996.
Charter of Budget Honesty
Before its election defeat on 2 March, the previous Government
maintained that the budget would now be in underlying balance. The truth
was nearly $10 billion to the contrary.
Financial dishonesty of that magnitude undermines public confidence
in our political system. We will ensure it never occurs again.
Our Government will enact a Charter of Budget Honesty that will require
the government of the day — ours or any other — to publish a budget
update signed off by the Secretaries to the Treasury and the Department
of Finance at the commencement of each Federal Election campaign. The
public will be given updated financial information before the election,
not after it. The public will know the state of the books before they
vote.
The Charter will require any future government to set out its fiscal
strategy and report against it — just as this Government is doing.
The Charter will entrench this Government's commitment to responsible
and accountable fiscal policy(10).
The Budget Papers 1996-97, also stated that Government has announced
that it will introduce legislation in the Budget Sittings to establish
a new fiscal framework which will implement the Government's Charter of
Budget Honesty election commitment.It also indicated that the proposed
legislation will incorporate many of the recommendations of the National
Commission of Audit.(11)
Report by the Joint Committee of Public Accounts on Fiscal Responsibility
Legislation
Discussion of the immediate background to the Bill will not be complete
without a reference to the report of the Joint Committee of Public Accounts
(JCPA) on Financial Reporting for the Commonwealth: Towards Greater
Transparency and Accountability which was issued in November 1995(12).
The JCPA examined whether it was necessary or appropriate to legislate
for fiscal responsibility at the Commonwealth level, with particular reference
to the success of attempts to legislate for fiscal responsibility in other
jurisdictions. It also examined the relevance to the Commonwealth of the
type of public reporting provisions contained in fiscal responsibility
legislation in other jurisdictions.
The JCPA did not support fiscal responsibility legislation for the Commonwealth
which attempts to define 'prudent' fiscal behaviour orwhich requires governments
to adopt fiscal strategies in conformity with pre-determined fiscal targets
or principles.(13) Nevertheless, the JCPA considered that there was a
strong argument for specifying in any fiscal reporting legislation the
key indicators against which governments must report and against which
the performance of government is best assessed.(14)
However, the JCPA considered that the case for fiscal reporting
legislation was compelling, as it provides a framework for governments
to be accountable to the public for their management of the nation's finances.
It envisaged that fiscal reporting legislation would be the vehicle in
which parliament sets down the form, content and frequency of reporting
that it considers necessary.
Recommendations 12 to 20 of the JCPA dealt with the framework, form,
content, periodicity of reports and provision for parliamentary scrutiny
of fiscal reports.(15) Anotable observation of the JCPA was that during
the period of its examination of these issues in 1995, very few people
or organisations in Australia had turned their minds to fiscal reporting.
It therefore recommended that the Bill which would introduce measures
for fiscal reporting should be referred to the JCPA prior to debate in
the House of Representatives, for inquiry and report.(16)
A recommendation of the Committee which might ensure that governments
comply with the fiscal reporting measures which the Bill proposes is that
it should provide for establishing a joint committee of Parliament to
examine and report on fiscal reports produced pursuant to the legislation.
It further recommended that all fiscal reports should stand referred to
the proposed committee for inquiry and report, with specific provision
for the proposed committee to call relevant Ministers of State to give
evidence(17). This measure may give the public a forum to express its
views on a government's fiscal performance, as the Bill does not create
rights and duties enforceable in judicial or other proceedings. Such a
measure may also enhance the credibility of the fiscal reporting measures
in the Charter of Budget Honesty. However, this forum may be of no avail
to the public in relation to non compliance with the pre-election economic
and fiscal outlook reports and costing of election commitments, as there
are doubts as to whether a Joint Committee of Parliament comprised of
Senators and Members can meet during the caretaker period after a dissolution
of the House of Representatives. Even were such a meeting to be convened,
there would be further concerns as to whether the committee can while
so meeting enjoy the powers, privileges and protections normally available(18).
In the circumstances, in relation to the pre-election reports and costings,
there may be a role for an independent Auditor-General to certify the
reports prepared by the Secretary to the Treasury and the Secretary to
the Department of Finance, in the absence of effective parliamentary scrutiny
in the caretaker period.
There are only three Clauses in the Bill and the Charter of Budget Honesty
is set out in Schedule 1. This Digest will deal with the main provisions
of the Bill and the more significant aspects of Items of Schedule 1 where
the Explanatory Memorandum to the Bill does not fully deal with the implications
of those Clauses.
Date of Commencement
Clauses 1 and 2 of the Bill provide for the Charter
of Budget Honesty Act 1996 to commence from the day it receives Royal
Assent.
No enforceable Rights and Duties created under the Charter of Budget
Honesty
The Bill provides that the Charter of Budget Honesty does not create
rights and duties which are enforceable in judicial or other proceedings.
Clause 3 of the Bill states:
- The Charter of Budget Honesty is set out in Schedule 1.
- Nothing in the Charter of Budget Honesty creates rights or duties
that are enforceable in judicial or other proceedings.
In consequence, there would be no redress in the courts of law or in
administrative appeals tribunals to a failure to publish the reports relating
to fiscal strategy required by the Charter. Although it appears that the
pre-election reports on fiscal and economic outlook and policy costings
are not strictly part of the Charter of Budget Honesty, the non-publication
of these reports and costings will also not be subject to judicial or
similar proceedings.
It may be noted that in a Treasury Submission to the JCPA inquiry into
the Whole of Government Reporting and Fiscal Responsibility Legislation,
the point was made that there is no legislative requirement for the tabling
of Budget Papers and that the content of Budget Papers is the prerogative
of the government of the day.(19)However, the JCPA observed that notwithstanding
the absence of legislative requirements in regard to the form and content
of Budget Papers which 'is the prerogative of the Government', conventions
as to budget presentation have been developed, and respected over time.(20)The
JCPA stopped short of expressing the view that this convention was one
that impacted on the powers conferred on the Executive Government under
the Constitution driven possibly by the requirement of accountability
of the Executive Government to Parliament and the electorate under a democracy.
The Explanatory Memorandum to the Bill offers no explanation as to why
no enforceable rights and duties are created by the Bill. In the Second
Reading Speech, the Treasurer after referring to the increase in Commonwealth
general government debt in the recent past, simply states that the effect
of the Bill will be to enhance accountability by the present as well as
future Commonwealth Governments.
This Bill will rectify this situation by implementing institutional
arrangements to improve the formulation and reporting of fiscal policy.
The need for such arrangements has already been supported by independent
bodies such as the National Commission of Audit and the Joint Committee
of Public Accounts, and the framework contained in this Bill incorporates
many of their recommendations.
The improvement of the fiscal position will only be achieved through
greater discipline, transparency and accountability in government fiscal
policy. The Charter of Budget Honesty will achieve all these outcomes.
Fiscal discipline will be enhanced by requiring government fiscal
policy to be formulated according to principles of sound fiscal management.
Transparency and the accountability of government will be substantially
increased through improved disclosure of fiscal policy intentions and
the regular reporting of information on fiscal developments.
Further, the Charter will prevent future governments going to an election
on the basis of outdated and misleading information on the fiscal and
economic outlook. In short, this Bill will ensure that at all times
this Government, and all future governments, can be held to account
for their fiscal and economic policies and thereby provide the basis
for a sounder economic performance for the economy as a whole, sustainable
job opportunities for our people and greater accountability of government
to the electors whom they serve.(21)
As Sub-clause 3(2) of the Bill does not create rights and duties
which are enforceable in judicial or other proceedings, thesanctions available
if a government ignores the need to comply with the provisions of the
Charter of Budget Honesty will rest with the Parliament and ultimately
with the electorate. Given that the Executive Government of the day will
normally have the numbers in the House of Representatives to withstand
a no-confidence motion to compel it to comply with the requirements of
the Charter of Budget Honesty, it will be left to the Senate, where the
Government of the day may not have the numbers, to have recourse to the
extreme sanction of denying supply.
In the Second Reading Speech, Treasurer Peter Costello, referring to
the pre-election reports added:
The Bill requires the Secretaries to the Treasury and the Department
of Finance to prepare a pre-election report providing an updated assessment
of the fiscal and economic outlook. Never again will a government go
to an election without the public being aware of the current economic
and fiscal situation. Never again will the deception attempted by the
Labor Party in the last election be allowed if this legislation is enacted.
I call on the Labor Opposition, recognising all of that episode for
what it was, to support the Bill.
In addition, the Bill provides for more equal access to Treasury and
Finance costings of election commitments by the Government and the Opposition
during the caretaker period. This will allow the electorate to be better
informed of the financial implications of election commitments.(22)
Part 8 of Schedule 1 of the Bill deals with the costing of election
commitments. Whilst Item 29(1)(a) provides that the Prime Minister
may request the responsible Secretaries to prepare costings of the publicly
announced Government policies, Item 29(1)(b) states that a request
by the Leader of the Opposition to have costings of publicly announced
Opposition costings is subject to the agreement of the Prime Minister.
Further the responsible Secretaries are under Item 29(4) not obliged
or authorised to take any action unless the Prime Minister has referred
the request to them.
There is thus no obligation on the part of the Prime Minister of the
day to have Government policies costed by the responsible Secretaries
nor is there any obligation on the Part of the Prime Minister to request
the responsible Secretaries to cost publicly announced Opposition policies.
The provisions of Part 8 of Schedule 1 would not come into operation at
all should the Prime Minister of the day not request the Secretaries to
cost Government policies nor agree to refer the request of the Leader
of the Opposition for a costing of Opposition policies.As the Bill creates
no enforceable rights or duties, the ultimate sanction for failure to
bring Part 8 into operation will rest with the electorate.
'More equal access' to Treasury and Finance would be achieved if the
Prime Minister of the day is obliged to refer the request of the Leader
of the Opposition for costing, as the Government of the day has access
to Treasury and Finance at all times leading up to and including the caretaker
period.
Constitutional concerns for not creating rights and duties enforceable
in judicial or other proceedings
The reasons for not creating rights and duties enforceable in judicial
or other proceedings in the Bill may centre around the constitutionality
of a legislative measure which restricts the executive power of the Commonwealth
to follow whatever fiscal strategy it deems necessary in an ever changing
economic environment without being fettered in any way by the legislature
or the judiciary. However, the Bill avoids this as it does not legislate
for targets which governments must meet but only requires the government
of the day to set its own targets which would be benchmarks against which
its performance is to be measured. Hence the provisions in Sub-clause
3(2) of Bill may be considered to be overly protective of the Executive
Government at the expense of Parliament and the public, particularly as
it extends to all aspects of the Charter of Budget Honesty including its
fiscal reporting requirements and pre-election costings which do not impact
on the discretion of the Executive Government in caretaker mode to run
the national economy.
Basically, the constitutional concerns which Sub-clause 3(2) attempts
to allay, stem from the doctrine of the separation of powers with the
lines separating the legislature, the executive and the judiciary being
blurred by the provisions of the Constitution itself, the conventions
as well as by judicial interpretation. However, as will be observed from
the following paragraph any constitutional concerns, would not extend
to legislation which makes it mandatory for the Executive Government to
report to Parliament the outcomes of fiscal strategy pursued by the Executive
Government. Nor would there be any constitutional concerns in regard to
legislation requiring the publication of pre- election policy costings.
Executive power of the Commonwealth under the Constitution
The main source of the Commonwealth's executive power is section 61
of the Constitution which provides:
The executive power of the Commonwealth is vested in the Queen and
is exercisable by the Governor-General as the Queen's representative,
and extends to the maintenance of this Constitution, and of the laws
of the Commonwealth.
Dr Max Spry has in a recent Research Paper titled The Executive Power
of the Commonwealth: its scope and limits(23) considered the scope
and limits of the executive power of the Commonwealth. The uncertainties
in the demarcation between the legislative and executive powers is well
summed up in the concluding paragraph of that Research Paper as follows.
The acknowledged scope of section 61 has been widened by the High
Court since Federation. The earlyview in the Wooltops case considered
that the executive power in section 61 was limited to the execution
and maintenance of the Constitution and of the laws of the Commonwealth.
Over time it has become accepted that section 61 also incorporates the
Crown prerogatives that vest in the right of the Commonwealth. These
include, for example, the prerogative powers to enter into treaties
and to declare war. Recent cases have extended the scope of section
61 even further to include consideration of the character of the Commonwealth
as a national government.
It is arguable that the scope of section 61 remains uncertain - some
might say flexible. The debate over whether Parliament could limit the
executive power to enter into treaties is an example of that uncertainty.
However, both judicial authority and the weight of academic opinion
tends to indicate that the Parliament can limit the Executive's power
to enter into treaties.
The issue of the Executive's treaty-making power is part of the debate
concerning the powers of the Executive and Parliament Should there be
a move to amend the Constitution, it might be argued that attention
should also be given to spelling out the scope of the Executive's power.(24)
As the inclusion of matters relating to the national government of Australia
would appear to come within the executive powers under section 61 of the
Constitution, it is doubtful whether legislation could be introduced to
require the government of the day to set a clear fiscal strategy, which
would include setting targets and benchmarks. However, as mentioned earlier,
the Bill does not set targets and hence this constitutional pitfall has
been avoided.
However, legislation may require accountability reports from the executive
to state what strategy it proposes to follow generally over the short,
medium or long term and the outcomes of those strategies. Such legislative
measures would not infringe on the executive power and will be in keeping
with the ascendancy of Parliament over time and the recognition that the
executive is accountable to Parliament.
It would appear that the scheme of the Bill is to leave it to the electorate
to make a judgment on the questionwhetherthe performance of a government
has been matched by the strategies in the formulation of budgets in accordance
with the guidelines set out in the Charter of Budget Honesty. While this
is the ultimate redress in the democratic political process, the insistence
onfiscal responsibility by Governments at all times, which this Bill seeks
to achieve, may be better served by building into the Bill the duty and
right enforceable in judicial or other proceedings, for the publication
of the reports, includingpre-election reports and policy costings, listed
in the Charter of Budget Honesty.
Protection of Crown immunities and prerogatives
The provisions of Sub-clause 3(2) of the Bill appear to replicate
the doctrine of the Shield of the Crown with its immunity from suit and
its claim on public interest grounds to prevent the disclosure of information.
Over time and with the ascendancy of Parliament and the accountability
of the executive to Parliament, this doctrine has been whittled away by
the Courts which have subjected claims for immunity from disclosure of
information to judicial scrutiny. The 1992 report of the Senate Standing
Committee on Legal and Constitutional Affairs on The Doctrine of the
Shield of the Crown , citing the 1978 decision of the High Court in
Sankey v Whitlam (25)stated this succinctly :
In other areas, the courts have also moved to restrictively apply
Crown immunities and prerogatives. The operation of the Crown privilege
in relation to disclosure of information, for example, is now subject
to judicial scrutiny[8]. Once the Crown's claim of privilege was readily
enforced by the courts whenever the claim of public interest was used
to prevent the disclosure of information. Modern courts have held, however,
that no document or class of documents is automatically exempt from
disclosure on the basis of Crown immunity. Rather, the courts will examine
the documents, and balance the alleged harm to the public interest with
the possible harm to the administration of justice.(26)
Since the 1978 decision in Sankey v Whitlam, the Freedom of
Information Act 1982(Cth) (FOI Act) has contributed to more open governmentwith
access to information subject to certain exemptions. Section 36 exempts
documents thatwould disclose matter in the nature of advice, opinion or
recommendation prepared for the purposes of the deliberative process of
an agency or Minister if disclosure would be contrary to the public interest.
Clause 3 of the Bill would appear to reinforce the exemption in
section 36 of the FOI Actby excluding any form of judicial or other proceedings
for obtaining information relating to the reports and costings thatmust
be prepared under the Charter of Budget Honesty.
Section 36 has been criticised as being a catch-all provision with the
Administrative Appeals Tribunal holding that it covers all the 'thinking
process' of an agency involved in its functions. The title of the section
36 exemption is 'Internal working documents' and a Review of the FOI Act
in 1994 recommended that section 36 should be retitled 'Documents revealing
deliberative processes' but the Review did not recommend any legislative
narrowing down of this exemption.(27)
Sub-clause 3(2) of the Bill may also be similarly criticised
as being a retrograde step and not being in line with trends in other
jurisdictions. For example, section 3 of the New Zealand Fiscal Responsibility
Act 1994 provides that the Act shall bind the Crown(28).
Schedule 1 - Charter of Budget Honesty
The Explanatory Memorandum to the Bill explains succinctly the measures
introduced by various Items in Schedule 1 and it is suggested that the
reader should make reference to it for further information on the reporting
requirements under the Charter of Budget Honesty. In the following paragraph
this Digest gives a brief comparison of the new reports which will be
issued under the Charter of Budget Honesty with those already issued.
New and Existing Reports
Some of the reports covered in the Charter are already currently published
by the Commonwealth Government. These are the Budget Economic and Fiscal
Outlook Report, the Mid-Year Economic and Fiscal Outlook Report, and the
Final Budget Outcome Report. However, it seems to be intended that the
information provided in these reports will now be more extensive and useful,
as a result of the implementation of the Charter.
Costings of policy proposals have also been regularly undertaken in
the recent past, but it is now proposed that this process be formalised
through the Charter, so that it becomesa standard, and very valuable,
part of the political and policy process at the national level.
Three reports/ statements are proposed in the Charter which have not
been published before. These are the Fiscal Strategy Statement, the Pre-Election
Economic and Fiscal Outlook Report and the Intergenerational Report.
The Fiscal Strategy Statement will outline the fiscal plans of the Government,
for both the short term and the longer term. In the past, such plans have
regularly been discussed in the Budget Papers and the Budget Speech, but
it now seems to be intended that such discussion will be more extensive
and more rigorous in its analysis.
The Pre-Election Report will have contents very similar to that of the
Budget and Mid-Year Reports, but will be based upon information available,
and assessments made, right up to the time of its writing. This will provide
the electorate with extremely valuable and timely information and analysis
and will probably much help with their voting deliberations.
The Intergenerational Report will be the most novel of all since it
will attempt to assess the viability and sustainability of current Government
policies in the 40 years following its publication. Essentially, it seems
that such analysis will project the effects of current policy decisions/
stances on spending, revenue and budget deficit patterns over 40 years,
on the basis of "reasonable" assumptions about demographic change and
growth in output, employment, productivity, wages and prices, etc. If
large increases in aggregate spending or substantial deficits are projected
to result then current policies will presumably be pronounced to be "unsustainable".
General
The measures in the Bill go a long way on the yet uncharted waters of
accountability of the Executive Government to Parliament and the public.
Some might argue that the expectations of a Charter of Budget Honesty
which will be binding on all governments, present and future, may have
been better served by measures which create more than a 'moral obligation'
to comply. Sub-clause 3(2) of the Bill appears to have been designed
to remove any doubts that the measures in the Bill might result in the
erosion of the power of the Executive Government under the Constitution
and its conventions to pursue a flexible course in handling the national
economy. However, it may be argued that as the measures in the Bill do
not set out fiscal targets to be met by governments, the catch-all provisions
of Sub-clause 3(2) is an overreaction to any lingering constitutional
doubts on this aspect of the Charter of Budget Honesty. The fiscal reporting
requirements proposed in the Bill are measures for greater accountability
of the Executive Governmentto Parliament as well as the public and there
are no constitutional or administrative constraints to making them legally
binding. The reports on the costing of election promises envisaged in
the Bill certainly fall outside the scope of discretionary matters of
the Executive Government of the day in dealing with the national economy.
It is merely an administrative arrangement for using the resources of
Treasury and Finance and there is no barrier to making it obligatory,
if the Government so decides, in the interest of enhancing the credibility
of the Charter of Budget Honesty and the benefit of the electorate, which
must make an informed decision on the choices placed before them.
Specific suggestions for improving the Charter of Budget Honesty
The following suggestions are made with a view to improving the transparency
and accountability of fiscal policy as well as enhancing the credibility
of the Charter of Budget Honesty.
1. Disclosure of Methods of Calculation
The Budget Papers currently do not reveal much about the methods by
which both economic forecasts and estimates/ projections for spending
and revenue are calculated.
It may therefore be useful to require, as part of the Charter, that
detailed methods of calculation be published along with the already-envisaged
final results, for all forecasts/ estimates/ projections/ policy costings
contained in the reports mentioned in the Charter. This could greater
facilitate policy transparency and accountability in fiscal policy.
The Explanatory Memorandum states that it is the intention of the Charter
that the methodology for policy costings be published, along with the
final results. However, this requirement might be explicitly included
in the Charter, and also extended to all reports covered by the latter.
The key issue is that final results can be 'right for the wrong reasons'
and 'wrong for the right reasons'. A method may have several mistakes
which largely cancel each other out so that the final result is approximately
correct. Similarly, a method may be largely correct but may contain just
one significant factual error which makes the final result quite wrong
and inaccurate. In both cases, exposing methods to public scrutiny can
help correct these problems and ensure that calculations are "right for
the right reasons".
A comparison with academic work is apt. In academic work a scholar must
make available not just his/her final results but also the methods of
calculation and all data used. This facilitates scrutiny by one's peers
as they examine the entire intellectual construct. The same considerations
apply, with probably greater force, to official presentations on, and
discussions of, fiscal policy.
Scrutiny of methods can also reveal important information about how
the Government's official advisors view the workings of the economy and
its linkages with the world economy. It can reveal the economic relationships
where official advisors have precise and confident views and those where
they are less certain and more reliant upon hunches, intuitive judgements
and the views of other analysts.
2. Calculation and Disclosure of Estimates of Indirect Budgetary Effects
In regard to policy costings, it may be useful to calculate and publish
estimates of both direct and indirect effects on the Budget. For example,
a proposed tax concession or expenditure item will entail a direct cost
to the Budget but may have a strong effect on general revenue and social
security spending through its effects upon the growth of output and employment.
These indirect effects can either magnify or nullify the direct effects.
Indeed, it is possible that policies entailing a direct cost to the
Budget could generate sufficient extra revenue or reduced social security
spending to produce a net move towards surplus in the Budget. The converse
case of indirect effects increasing the overall cost to the Budget is
equally important. There have been several recent discussions of policies
where these indirect effects seem to have been significant (29).
In these cases of significant indirect effects, the publication of just
the direct costs would be most misleading, and would actually hamper policy
transparency and accountability rather than enhance them. When presenting
both direct and indirect costings, as noted above, it will be important
to publish detailed methods of calculation as well, in order to enhance
public scrutiny.
Of course, it would need to be acknowledged that the calculation of
indirect budgetary effects would often entail more uncertainty than calculation
of the direct effects. This is because the former involves estimating
the effects of the policy in question on output and employment growth,
wage and price developments and the like.
Thus, some 'sensitivity analysis' would probably need to be undertaken
in which a plausible range of indirect budgetary effects would need to
be calculated, based upon a plausible range of assumed policy effects
upon the economy.
All of these requirements on estimates of indirect budgetary effects
could be explicitly included in the Charter.
3. A role for an independent Auditor-General in the Charter of Budget
Honesty
This sectionsets out briefly the contribution that may be expected of
the Auditor-General in aspects of the Charter of Budget Honesty where
an independent referee is required. The referee should be functionally
independent of both the Treasury and the Department of Finance whose Ministers
and Secretaries have key roles in the Charter of Budget Honesty. Under
the Auditor-General Bill 1996 the independence of the office of
Auditor-General and its special relationship to Parliament is emphasised
by declaring the Auditor-General to be an 'Independent Officer of the
Parliament' whilst preserving the functional independence of the Office.
The proposed Joint Committee of Public Accounts and Audit (JCPAA) will
have a role which includes advising the Auditor-General of audit priorities,
if any, of the Parliament to which the Auditor-General must have regard.
Any proposal for recommending a person to be Auditor-General by the Prime
Minister must be approved by the Parliament through the JCPAA and a person
so approved is appointed by the Governor-General for a single term of
10 years: a term which could straddle at least three federal elections.
The Auditor-General cannot be removed from Office unless the Governor-General
is requested by both Houses of Parliament to do so on the ground of misbehaviour
or physical or mental incapacity. This enhanced independence should assist
the Auditor-General to have a role in the Charter of Budget Honesty in
the situations indicated in this Digest.
It is arguable that the Auditor-General might be drawn into
the political arena if he certifies or qualifies the pre-election reports
prepared by the Department of the Treasury and the Department of Finance.
This argument applies equally to the Secretaries of the two department
who will prepare these pre-election reports and the overriding consideration
is the public interest of supplying credible information on the basis
of which the electorate could make informed decisions. However, with the
enhanced independence the Auditor-General will achieve under the measures
in the Auditor-General Bill 1996, as an independent officer of
the Parliament, he or she will be better equipped to hold the scales evenly
in certifying or qualifying the pre-election reports without fear of the
outcome of an election.
Reporting on compliance with external reporting standards in the Fiscal
Strategy Statement
A feature of the proposed fiscal framework is that governments will
have to comply with external reporting standards such as those for ABS
government finance reporting and standards set by the accounting profession.
Where there is a departure from these reporting standards, the proposed
approach and the reasons for such departure should be explained in the
Fiscal Strategy Statement. An independent Auditor-General responsible
directly to Parliament, could be required to report whether the external
reporting standards have been complied with and if not complied with,
the extent of the departure and the consequences of departure to the projections
in the Fiscal Strategy Statement.
Tax Expenditure Statements
The NCOA report recommended that tax expenditure should be treated as
far as possible like program expenditure in all published fiscal reports
and statements and in all budgetary processes(30). This will result in
estimates of the revenue cost of tax concessionsbeing included in budget
statements and the scrutiny of tax concessions and their effectiveness.
The Auditor-General could be involved in an independent examination of
statements of tax expenditures prepared by the Treasury and the relevant
departments.
Reporting on pre-election estimates of revenue expected from ant-tax
avoidance measures
Recent experience is that there is a tendency to bring up the question
of additional revenue available from new measures to curb tax avoidance
or tax minimisation schemes in the run up to an election. This occurred
in the pre-election 1992 Budget and in the caretaker period preceding
the 1996 federal election. These instances are covered in the section
of theParliamentary Research Service Budget Review 1996-97 dealing with
anti-avoidance measures(31).
The question of relevance to the Charter of Budget Honesty is that when
a statement of significant future revenue impact, arising from potential
Australian Taxation Office (ATO) compliance activities, is made in the
Budget preceding an election or in the course of an election campaign
by a Treasurer or Prime Minister in their caretaker roles, should the
Secretary to the Treasury and the Secretary to the Department of Finance
be required to certify to the general public by way of a Confirmatory
Statement that there is a reasonable basis for such additional revenue
collection?
Such a Confirmatory Statement may not only bolster the credibility of
the assertions made by the Government but might also assist the Opposition
in that such additional achievable revenue could be factored into the
pool from whichOpposition election promises could be funded. Most importantly,
it will contribute towards accountability of public officials and act
as a safeguard against public officials being drawn into positions driven
by political expediency. Ministerial responsibility and accountability
of public servants to Parliament and the general public merge in a grey
area at normal times, but when the Government is in caretaker mode the
accountability of public servants to the public must assume a new dimension
in the context of a Charter of Budget Honesty.
In addition, the Auditor-General could be required to express an opinion
on the Confirmatory Statements of the revenue potential from the new anti-avoidance
measures. This particular role of the Auditor-General may be facilitated
if the Treasury and the Department of Finance periodically estimate the
'Tax Gap', which is the difference between the tax due under the taxation
laws of the Commonwealth administered by the ATO and the tax actually
collected by the ATO. Estimates of the revenue potential from pre-election
new anti-avoidance initiatives can then be measured against the most recent
segmental estimate of the 'tax gap' which the new measures are intended
to narrow.
Estimation and Publication of the Tax Gap
The Internal Revenue Service (IRS) in the United States takes the view
that publication of tax gap details is warranted by the need to maintain
public confidence in the integrity, efficiency andfairness of the Internal
Revenue Service.
The mission of the Internal Revenue Service (IRS) is "to collect the
proper amount of tax at the least cost ... in a manner warranting the
highest degree of public confidence in our integrity, efficiency and
fairness."(See Document 6987.) To achieve this purpose, the IRS must
determine the extent of non-compliance with the tax law and regulations.
IRS tax gap estimates are comprehensive measures of non-compliance that
convey significant information about the challenges faced in collecting
taxes that are not voluntarily paid. A proper understanding of the nature
of the tax gap is important for the development of future IRS programs
and revenue initiatives. (32)
It is arguable that a Charter of Budget Honesty might not be complete
if the majority of taxpayers who pay their taxes honestly are not taken
into confidence by the Government in the same way that the US Government
does, by requiring the IRS to publish periodic estimates of the tax gap.
More details on the approach of the IRS to estimating the tax gap will
be found in the Parliamentary Research Service Budget Review 1996-97(33)
- New Zealand Statutes (1994); Vol 1; p. 177
- The Role of Government : A Modern Liberal Approach; 6 June 1995; pp
5 & 6; The Menzie
- Research Centre - The 1995 National Lecture Series
- Ibid., p. 23
- Report 346 of the Joint Committee of Public Accounts (JCPA) Guarding
the Independenc
- o
- the Auditor-General (October 1996) (AGPS)
- JCPA Reports 296 and 331
- National Commission of Audit - Report to the Commonwealth Government
(June 1996
- AGPS; pp 273 to 300
- p. 277
- The Audit Act 1901 is to be replaced by a package of Bills comprising
the Auditor-Genera
- Bill 1996, the Financial Management and Accountability Bill 1996,
the Financia
- Management Bill 1996 and the Commonwealth Authorities and Companies
Bill 1996 as wel
- as the Audit (Transitional and Miscellaneous) Amendment Bill 1996.
- Opcit., p. 279
- Budget Speech 1996-97; p. 3
- Budget Statements 1996-97; Budget Paper No. 1; p. 1-15 and pp 1-26
to 1-28
- Report 341 of the Joint Committee of Public Accounts (November 1995);
Financia
- Reportin
- for the Commonwealth: Towards Greater Transparency and Accountability
- Ibid., para. 3.252; p. 126
- Ibid., para. 3.263; p. 129
- Ibid., paras. 3.306 to 3.314; pp. 136 to 141.
- Ibid., Recommendation 19; para. 3.313; p. 141
- Ibid., Recommendation 18; para. 3.312; p. 140
- Odgers' Australian Senate Practice (7th edition); p. 52 & 522. House
of Representative
- Practice (Second Edition); p. 268
- Opcit., para. 3.23; p. 64
- Ibid., para. 3.189; p. 110
- Current House Hansard; 11 December 1996 [Proof]; p. 7805
- Ibid., p. 7806
- Research Paper No. 28 1995-96; Parliamentary Research Service - Published
by th
- Department of the Parliamentary Library, 1996
- Ibid., p. 21 [ Wooltops Case - Commonwealth v Colonial Combing, Spinning
& Weavin
- Co(1921-1922) 31 CLR 421]
- (1978) 142 CLR 1
- Report of the Senate Standing Committee on Legal and Constitutional
Affairs (Decembe
- 1992) - The Doctrine of the Shield of the Crown - para. 3.6; p. 24;
([8] - Sankey v Whitlam)
- Open Government: a joint review of the Federal Freedom of Information
Act 1982 by th
- Australian Law Reform Commission (Report No 77) and the Administrative
Review Counci
- (Report No 40) (AGPS) 1995; para. 9.15; p. 114
- New Zealand Statutes (1994); Vol 1; p. 177
- For an example see: Piggott, John and Chapman, Bruce. "Costing and
Job Compact"
- Economic Record, no. 215, December 1995., pp. 313-328
- Ibid., p. 297
- Research Paper No. 28 1995-96; Parliamentary Research Service - Published
by th
- Department of the Parliamentary Library, 1996; p. 21
- Net Tax Gap and Remittance Gap Estimates; IRS Publication 1415, 19
April 1990: Supplement to Publication 7285: p. iii
- Opcit., p 21 to 22
Bernard Pulle / Phil Hanratty
4 February 1997
Bills Digest Service
Information and Research Services
This Digest does not have any official legal status. Other sources should
be consulted to determine whether the Bill has been enacted and, if so,
whether the subsequent Act reflects further amendments.
IRS staff are available to discuss the paper's contents with Senators
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ISSN 1323-9031
© Commonwealth of Australia 1997
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