Fiscal rules are numerical limits to one or more of government spending, revenue, deficits and debt. Their purpose is to reinforce fiscal discipline against the political temptation for governments to spend, tax and borrow to excess. Australian federal governments have a long but patchy record of both adopting such rules and adhering to them.

The purpose of this paper is to contribute to the debate on fiscal rules by discussing their nature and purpose, reviewing the history of their use in Australia and internationally, and proposing a set of rules suitable to the fiscal challenges of the times.

There are currently no numerical fiscal rules and the government’s fiscal strategy consists of qualitative statements of intent. At a time of historically high levels of spending, tax revenue and debt, and significant deficits being projected well into the future, the absence of quantitative rules has been criticised by fiscal experts. 

The paper proposes a two-stage framework to guide Australia back to sustainable fiscal balance:

1. a short-term consolidation phase, lasting around three to four years, in which a structural balanced budget is achieved​​​​​​​
2. a long-term stability phase, in which the key rule would be keeping the budget balanced on average over the economic cycle while running surpluses in times of above-trend revenue. 

Key points

• Economic management in Australia currently lacks the guardrails provided by quantified fiscal rules.
• Australia needs a set of fiscal rules, first to help bring about consolidation of the fiscal position to sustainable settings, and second to maintain a stable longer-term equilibrium characterised by balanced budgets with lower spending, tax restraint and a shrinking debt burden.
• The rules should be enshrined in legislation through amendment of the Charter of Budget Honesty and institutional changes made to enable effective independent monitoring and reporting of performance relative to the rules.