Egypt, Libya and Tunisia are rewriting the nature of their government with a view to creating,each at their own pace, a nation based on sound democratic principles. Inevitably, the results will be flawed by compromise and by a need to get something into place which allows a starting point for each country to undertake its first free and fair democratic elections. Perhaps one or more of the governments will build into the process the idea of perfectibility and mechanisms to provide for continuous improvement of government.
However each turns out, the democratic structures of a state are only a part of government. In fact, they only provide the means of government by electing, in as transparent a way as possible, representatives, as fairly as possible, for limited durations.
Though essential to good government, this is only one half of the equation. What separates weak democracies from strong ones is sound fiscal policy. The previous article, Switzerland as a Model for Libya’s Financial Future, suggested where models might be sought for financials systems designed around effective government financial structures such as a central bank, treasury and so on.
Having the right structures in place only provides a basis for making financial decisions and policies. The fiscal decisions themselves have to be sound and responsible. This article touches on where the Interim National Council of Libya might look for guidance on what constitutes good fiscal discipline and what are sound fiscally responsible policies.
The Comeback America Initiative worked with the public policy and international studies programme at Stanford University to develop a fiscal responsibility index. When applied at a global level the results were a little surprising. Among 34 counties surveyed, Australia and New Zealand held first and second place respectively. We are not concerned here with how dreadful the score was for some leading industrialized nations. What is notable is the high ranking of governments that one wouldn’t necessarily have expected to score so highly when compared to those nations who actually came very low in the ranking. Despite widespread news of large scale corruption cases in China, its ranking is excellent, being placed fifth. Chile and Brazil come seventh and tenth respectively. The results should be encouraging to any government looking to improve its financial responsibility.
If Libya is seeking a framework around which to build a world class fiscal set of policies, recognizing that the first beneficiary of such a standard is the country and people of the country themselves, Libya could do worse than look at what the Australians did in 1996 to set themselves on a path that led directly to the performance that today puts them in first place in terms of good governmental fiscal responsibility.
Only a close study of the record would show just what Australians put into place at that time but a simple summary here should be sufficient to elicit interest and persuade skeptics that such a study is worthwhile and will pay dividends if implemented.
The Australian Government Treasury Intergenerational Report of 2007 has the following to say about the process adopted.
In 1996, the [Australian] Government implemented a medium-term framework [5 to 10 years], for fiscal policy. This has formed the basis for government fiscal management over the past decade and has delivered sound fiscal outcomes. Key elements include the Charter of Budget Honesty Act 1998 (the Charter) and the medium-term fiscal strategy. Both ensure fiscal policy is characterised by a disciplined approach to budgeting, transparent reporting and accountability.
The Charter requires the Government to frame its fiscal strategy having regard to: fiscal risks, including by maintaining Australian general government debt at prudent levels; the state of the economic cycle; the adequacy of national saving; the stability and integrity of the tax system; and the financial effect of policy decisions on future generations.
Consistent with the Charter’s requirements, the Government’s medium-term fiscal strategy is to maintain budget balance, on average, over the course of the economic cycle. Supplementary objectives include maintaining fiscal surpluses over the forward estimates period while economic growth prospects remain sound; not increasing the overall tax burden from its 1996-97 level; and improving the Australian Government net worth position over the medium to longer term.
The Charter also requires the Government to produce, at least every five years, an intergenerational report assessing the long-term sustainability of current Government policies, including by taking account of the financial implications of demographic change. By explicitly showing the long-term fiscal consequences of its policies, the Government has committed to improving its transparency and accountability to the community. The report also is an important tool in monitoring and improving policies and frameworks to facilitate sustainability through time.
Also central to the macroeconomic framework is the inflation targeting regime that aims to achieve Consumer Price Index (CPI) inflation of 2 to 3 per cent per year on average over the course of the economic cycle. The inflation targeting regime was formalised by the Government in August 1996 in a ‘Statement on the Conduct of Monetary Policy’, issued jointly by the Treasurer and the Governor of the Reserve Bank. This statement formalised the Reserve Bank’s operational independence in achieving this goal. It was recently renewed on 18 September 2006 between the Treasurer and the incoming Reserve Bank Governor.
Material in square brackets has been added by the author of the present article.
It will be immediately clear to the alert reader what almost all of the needed elements for a sound financial framework are. The two notable tools that the Australians availed themselves of are:
- Charter of Budget Honesty Act
- An intergenerational report assessing the long-term sustainability of current Government policies
The setting of a firm base, along with a rigorous periodic measuring, has in no small measure led to the success of the Australian government achieving and maintaining fiscal responsibility of a very high standard.
This article has no intention on embarking into areas of discussion of policy questions save to note that the setting of realistic inflation targets is at the heart of all such successful fiscal policies.
The Libyan government, whether in the incarnation of the TNC, or some intermediate body, does not need to reinvent the wheel, nor does it need to follow precedent simply because such and such systems and policies are followed in the region. Just as author in To the TNC: Safeguarding Libyan Oil and Gas Resources, a discussion and some suggestions , urged the setting up of working groups to find best practices for the Libyan oil interests, working groups can be formed to study various fiscal areas for best practices and report the findings back to the interested Libyan authorities. The purpose of this article has been to suggest that outstanding examples of fiscally responsible policies exist and material on them is not hard to find.
Malcolm D B Munro 30 March, 2011