5 June 2016

Africa: What Africa Can Learn From Australia About a Charter for Budget Honesty

analysis

Over the past 20 years many African countries have made tremendous strides in reforming their budget processes. The aim has been to increase both budget transparency and public participation. South Africa has led the way. For the past few years it has been consistently ranked among the top three in the world for budget transparency.

As an international leader in budget reform, what incremental changes can South Africa make to improve its standard of budgeting? It is in this context that the idea of a Charter of Budget Honesty, a best practice from Australia, may be of interest to countries amenable to budget reforms.

The term "budget honesty" derives from the belief that greater transparency in budgeting leads to better economic outcomes and stronger democracies. It stems from a set of policies that advocates a clearer budget process premised on "sound fiscal management", a term used in countries such as New Zealand, Australia and the UK.

Broadly applied, the term refers to the management of financial risks facing Australia in a prudent way and with "regard to economic circumstances", while achieving adequate national savings and moderating economic fluctuations. In this sense, sound fiscal management is a principle that all countries can draw from.

How Australia has done it

In Australia the Charter of Budget Honesty was established in 1998 as part of broader government reforms. It now occupies a central role in the national budget. Its processes include the Parliament, the Treasury, the Department of Finance and the Parliamentary Budget Office.

The charter has initiated a set of rituals now considered core aspects of the annual budget. These rituals have come to be regarded by much of the Australian public as standard political and economic practice.

When it was instituted, the charter represented the very best in fiscal policy legislation, both in terms of scope and rigour. It essentially provided a series of guidelines and schedules for what each institution in the budget process should do "to improve fiscal policy outcomes". To address such a big question, the charter comprised several important moving parts that were to work in concert.

The most important documents that collectively give the charter force as budget legislation include:

a Fiscal Strategy Statement, which outlines government budget priorities;

several updates, including the Mid-Year Economic and Fiscal Outlook report;

the Pre-Election Fiscal Outlook and the Budget Outcome Report; and

the intergenerational report, a long-term (40-year) assessment of Australia's economy.

The Australian Parliamentary Budget Office also has a role to play. Its mandate is to cost proposed budget policies for the opposition. In this role, the office levels the playing field between government and opposition.

These reports create a regular stream of reports that apprise the legislature, government departments and the general public of the national budgetary situation.

But the process is not without its critics.

Criticisms of the charter

Even before implementation in Australia, the charter approach had its detractors.

A general criticism is that there is always an element of economic uncertainty that may require government flexibility, rather than the rigidness of budget discipline charters, to cope with adequately. In developing countries this argument is even stronger due to greater economic volatility.

A second criticism is that the charter is restricted and bound by constitutionally defined parameters for parliamentary involvement in the budget process. It can therefore only go so far in enhancing transparency.

Another criticism is based on the experience of practitioners. They note that any regulation on fiscal discipline cannot, on its own, guarantee fiscal prudence. History shows this from time to time, as in the example of New York in 1974, which faced default despite its constitutional balanced-budget requirement.

And since its promulgation various budget scholars, government officials and parliamentarians have had varying opinions on the adequacy of the charter.

One criticism is that it has perhaps led to an overproduction of fiscal data, which in fact restricts the ability of decision-makers to conduct oversight. This implies that it has created more rituals than "best practices".

A Senate review of the Charter, called "Operation Sunlight", highlighted this sort of shortcoming as akin to paying lip service to principles of fiscal soundness.

Could such charters work in Africa?

Although there are valid criticisms, in Australia the charter has come to form a cornerstone of the national budget process. But there are factors unique to Australia that have made the charter work there effectively.

The first is the country's generally stable macroeconomic environment. This has allowed for a trade-off between budget discipline and budget flexibility to naturally veer towards discipline as macroeconomic variables such as inflation, employment and growth have been stable.

Second, a strong parliamentary role in the budget process, particularly for the Senate, has allowed the legislature to enforce the charter. In countries where executive power is very strong this would be more difficult.

Third, the charter came as part of broader reforms of the Australian government, and represented part of a larger social commitment to reorganisation of government. In countries where such political will is not present a charter may not invite the same stakeholder interest.

So could African countries consider Charters of Budget Honesty? The answer would depend on the goal of the charter. If the objective is to ensure full and rigorous fiscal transparency and discipline, then the charter would be an insufficient piece of legislation on its own. But if the objective is to incrementally enhance a portion of the budget process, within the larger framework of socioeconomic and sociopolitical reforms, then a charter could be one component within that broader commitment to reform.

Various African countries, including South Africa and Uganda, already have some of the core ingredients for a charter in place, such as a parliamentary budget office. If charters help to reinforce the work of such institutions, and if there is broader political support for reform, then they may be worth considering.

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