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5.3 Budget reporting and the Charter of Budget Honesty

Budget transparency allows for a more informed debate, fosters credibility and helps the community better understand fiscal policy. Improved fiscal transparency can assist in highlighting current and emerging fiscal risks and in driving the necessary change in the community’s expectations of government.

The Charter of Budget Honesty Act 1998 mandates certain budget reporting – the Budget, Mid-Year Economic and Fiscal Outlook and Final Budget Outlook documents for each financial year, the Pre-Election Economic and Fiscal Outlook ahead of elections and periodic release of the Intergenerational Report. However, the Charter provides relatively little guidance on the required content of these reports.

The Commission considers there is scope for improving the transparency of budget reporting.

Responsible economic management should not only consider the near-term but also the medium to longer term.

There is no requirement for budget updates to include aggregate budget estimates any further than three years beyond the Budget year. However, at an aggregate level, medium‑term projections have been published in budget updates for the past few years.

The Commission considers current practices around publishing medium-term budget information should be further developed.

The Charter of Budget Honestyshould be changed to make it mandatory for each fiscal update to include projections for the 10 years beyond the Budget year for key budget aggregates. This would include aggregate spending as well as revenue receipts. The projections should be based on current policy settings as far as practicable.

Moreover, individual budget measures relating to new policy decisions that will have a substantial impact beyond the forward estimates should include financial information for the decade beyond the Budget year.

The Commission considers this approach will hold governments more accountable for their fiscal strategy.

The Charter of Budget Honesty also currently requires the government to release an Intergenerational Report at least every five years. This report examines the long-term sustainability of current policy over 40 years and includes the financial implications of demographic change.

The Commission considers the preparation and publication of regular Intergenerational Reports has been a positive development for Australia, particularly in raising awareness of the budgetary challenges of the ageing population.

It should be retained as a key document to increase budget transparency. There should be a requirement that it be produced within a specified period after the release of the National Census. In addition, the Commission considers that future reports should also cover the long-term sustainability of State and Territory budgets. This will require significant cooperation with the States as well as requiring Commonwealth bodies to provide relevant information to assist in the preparation of the whole of nation Intergenerational Report.

Recent budget documents have reported large downward revisions to the economic and revenue forecasts creating concerns about forecasting.

The Commission notes that compared with some jurisdictions overseas, Australia’s formal official forecasting processes do not include formal discussions with independent experts.

However, the Commission considers additional transparency can be achieved by publishing comparisons between key economic forecasts used in the fiscal update and relevant consensus forecasts. Confidence intervals should also be published for key forecasts.

Each year’s budget documentation includes a discussion of the possible impact of economic developments on estimates. This analysis considers the effects on receipts and payments of altering some of the key economic assumptions. This sensitivity analysis should be improved by using different scenarios and incorporating more analysis of the way variations to programme parameters change costs.

At a bureaucratic level, the requirements of the government’s fiscal strategy are operationalised through the Budget Process Operational Rules, which provide guidance to departments and agencies on processes and costing requirements.

These operational rules are classified documents and not available for broader circulation. This limits transparency and public understanding of the budget process. While operational rules require identification of the longer-term costs of budget proposals, these are often not reflected in public budget documentation. This lack of long-term fiscal reporting can reinforce governments’ focus on a three-year electoral or a four-year budget cycle.

The Commission considers Budget Process Operational Rules should be released publicly to enhance understanding of how budgets are framed.

In recent years the size and complexity of budget documentation has grown significantly without contributing to improved fiscal policy debate. The size and complexity makes the budget documents hard to navigate for a wider audience.

The Commission considers reducing budget documentation could assist in communicating budget narratives.

In terms of the presentation of key budget aggregates in the Budget documentation, the Commission considers that emphasis should be on three measures:

  • the underlying cash balance;

  • the net debt position; and

  • the net financial worth of the Commonwealth.

This would assist in giving greater prominence to and raising public awareness of the broader financial position including the state of the Commonwealth’s balance sheet.

Recommendation 6: Budget reporting and the Charter of Budget Honesty

Budget transparency allows for a more informed debate about the state of the Budget and fosters accountability. The Commission recommends improvements to the transparency of fiscal processes and budget reporting by requiring that:

  1. fiscal updates set out projections for key budget aggregates for 10 years beyond the Budget year;
  2. the Intergenerational Report be prepared within a specified period after the release of the National Census and that it be extended to also include analysis of the long‑term sustainability of State and Territory budgets;
  3. fiscal updates should compare key economic forecasts and relevant consensus forecasts;
  4. sensitivity analysis in budget documents be improved;
  5. the Budget Process Operational Rules be released to enhance public understanding of how budgets are framed; and
  6. the Budget documentation give particular prominence to:
    • the underlying cash balance;
    • the Commonwealth’s net debt position; and
    • the net financial worth of the Commonwealth.