6.3 Budget reporting and the Charter of Budget Honesty

Background

Budget transparency allows for a more informed public policy 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.

Improved budget reporting requirements would improve transparency and accountability and assist the government in achieving its medium‑term fiscal strategy.

Current structure

The Charter of Budget Honesty Act 1998 (the Charter) 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 federal elections; and
  • periodic release of the Intergenerational Report.

However, the Charter provides relatively little guidance on content for these reports.

Issues

There is scope for improvement in relation to longer-term reporting and transparency of reporting.

Longer-term reporting

Responsible economic management should not only consider the near term but also the medium to longer term. Policy decisions should be set in a sustainable medium-term setting.

Despite this, there is currently no requirement for budget updates to include any form of budget estimates any further than three years beyond the Budget year.

The requirement to only report for the Budget year and three following years, combined with Australia’s three year election cycle, can result in a relatively short-term focus by government.

Aggregate level medium‑term projections have, however, been published in budget updates for the past few years.

Transparency of reporting

Budget forecasts

Recent budget documents have reported large downward revisions to the economic and revenue forecasts. Against this backdrop, a number of concerns have been raised about the transparency of current forecasting arrangements.

The Review of Treasury Macroeconomic and Revenue Forecasting (Australian Government, 2012) found that ‘Treasury’s forecasts are comparable with, or better than, those of official agencies overseas’.

Budget forecasts are formally the product of the Joint Economic Forecasting Group (JEFG) Committee, which consists of Treasury, the Reserve Bank of Australia, the Department of the Prime Minister and Cabinet, the Department of Finance and the Australian Bureau of Statistics.

The Committee meets three times a year to discuss the domestic and global outlook. In addition, an informal update round is conducted in June. A JEFG Report is prepared by Treasury in consultation with the other partners and is provided to the Treasurer, the Prime Minister and the committee members. The report provides Treasury’s assessment of the domestic and global outlook, including its revised economic forecasts.

Reports of the JEFG Committee are publicly released by the Treasury after two and a half years.

The JEFG processes do not include a formal process for agreeing budget forecasts with external experts. This does occur for some jurisdictions overseas.

Sensitivity analysis

The Charter requires budget documents to include analysis of the sensitivity of fiscal estimates to changes in economic and other assumptions.

However, the Charter does not provide any further information on how this sensitivity analysis is to be incorporated.

Budget Process Operational Rules

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 budget processes and costing requirements and set out the process by which the government prioritises expense and revenue decisions

These Operational Rules are currently classified documents, and not available for broader circulation. This limits governments’ transparency, and public understanding of the Budget process.

Timing of reporting

The Charter provides significant leeway around the timing of budget updates.

No guidance is provided in the Charter on the timing of the annual Budget.

The Mid-Year Economic and Fiscal Outlook can be produced up until the end of January (almost 9 months after an early May budget).

Intergenerational Reports can be released any time within five years of the previous Intergenerational Report.

Improved certainty around the timing of these budget updates could improve transparency and public trust in the Budget process.

Potential areas for reform

Longer-term reporting

The current practices around publishing medium-term budget information are extremely valuable, and should be institutionalised to provide additional certainty and transparency.

The Charter could be changed to make it mandatory for each fiscal update to publish projections for the 10 years beyond the Budget year, for key budget aggregates. This would include aggregate spending as well as aggregate revenue receipts.

The projections should be based on current policy and decisions as far as practicable.

Moreover, for new policy decisions which are expected to have a substantial impact on the Budget beyond the forward estimates (or where the Budget impact is substantially different beyond the forward estimates), budget measures descriptions in fiscal updates should include financial information for the 10 years beyond the Budget year.

Intergenerational Report

The Charter currently requires the government to release an Intergenerational Report at least every five years, examining the long-term sustainability of current government policy over 40 years, including the financial implications of demographic change.

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

The Commission considers that in the future, the Intergenerational Report should extend to also cover the long-term sustainability of State and Territory budgets. Given the current level of vertical fiscal imbalance in Australia, there are ongoing linkages between the Commonwealth and State budgets. Identifying any weaknesses at State level is an important risk factor for future Commonwealth budgets. Incorporating State and Territory budgets would also provide a more comprehensive picture of the fiscal pressures facing Australia. This will require significant cooperation with the States.

Transparency of reporting

Budget forecasts

One option for Treasury to improve the transparency of budget forecasts would be to require a further formal consultation with a panel of experts before budget forecasts are finalised.

Another option which improves transparency about how the Budget forecasts compare with the views of other forecasters could be achieved by requiring comparisons to be published between key economic forecasts and relevant consensus forecasts.

Confidence intervals could also be published for key forecasts.

Sensitivity analysis

Each year, the Budget documentation includes a sensitivity analysis of budget estimates to economic developments. This analysis considers the effects on receipts and payments of altering some of the key economic assumptions.

This sensitivity analysis should use a range of different scenarios to evaluate the sensitivity of aggregate budget estimates to economic developments.

This should be supplemented by incorporating more analysis around the sensitivity of major programme costings to changes in programme parameters (particularly where programme funding is highly sensitive to parameter variations).

Budget Process Operational Rules

Consideration should be given to releasing the Budget Process Operational Rules publicly to enhance understanding of how the Budget is framed.

Timing of reporting

There would be benefit in increasing certainty around the timing of the Intergenerational Report.

The Chartercould be amended to ensure that an Intergenerational Report is released within a year of the ABS updating its labour force data for the latest National Census.

Budget documentation

In recent years, there has been significant growth in the size and complexity of budget documentation. However, the Commission is of the view that this has not contributed to an improvement in the quality of public debate on fiscal policy. In addition the size and complexity makes the Budget documents hard to navigate and less accessible to a wider audience.

The Commission considers that reducing the volume of budget documentation could assist the Government in better communicating its fiscal and budget objectives to the public.

References

Australian Government 1998, Charter of Budget Honest Act, Australian Government, Canberra.

Australian Government 2012, Review of Treasury Macroeconomic and Revenue Forecasting, Australian Government, Canberra.

Department of the Treasury 2010, Joint Economic Forecasting Group Committee Report – June 2010: Economic Outlook for 2009-10, 2010-11 and 2011-12,

Canberra, viewed January 2014, <http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/JEFG-June-2010>.