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Keywords:

  • fiscal responsibility legislation;
  • fiscal rules
  • H61;
  • H62;
  • H63;
  • H68

Monetary and fiscal rules are complementary. Whereas monetary policy and monetary institutions have been reformed in line with developments in modern macroeconomics, fiscal policies and institutions have not kept pace with these developments. Murray’s (2008) review of Australia’s existing fiscal responsibility legislation, the Charter of Budget Honesty, has pointed out significant shortcomings. This paper outlines a proposal by Carling and Kirchner (2009) to reform Australia’s fiscal responsibility legislation. It proposes three fiscal policy rules that are designed primarily to tie-down expectations in relation to the long-run path of the Commonwealth government’s net debt. It also proposes the establishment of an independent Fiscal Commission to monitor and enforce compliance with the rules and to improve the transparency, independence and accountability of the federal budget process. The proposal aims to give politicians the commitment technology they need to address the fiscal challenges posed by an aging population and innovations in the terms of trade.