Australia’s Fiscal Framework: Revisiting Options for a Fiscal Anchor

IMF Working Papers, December 22, 2017

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Bibliographic details

• Authors: Allan Dizioli, Philippe D Karam, Dirk V Muir, Siegfried Steinlein
• Published: December 22, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484335383.001

Summary and motivation

• Revisits options for fiscal anchors in Australia against the backdrop of a medium-term budget balance anchor that has led to larger than expected upward drift in the net debt to GDP ratio since the end of the mining investment boom.
• Compares a budget balance anchor with a long-term debt anchor using model simulations evaluated against objective macro stabilization–debt control criteria.
• Considers operationalization of a long-term debt anchor using a combination of fiscal rules, including expenditure restrictions and a flexible time horizon for convergence, with the aims of encouraging countercyclical fiscal policy and minimizing the cost in terms of real GDP foregone in the medium term under fiscal consolidation.

Methodology

• Model: IMF’s G20MOD model used to compare fiscal-anchor regimes.
• Evaluation approach: Model simulations evaluated against objective macro stabilization–debt control criteria.
• Scenarios: Analysis conducted under three likely scenarios for the Australian economy.

Key findings

• The long-term debt anchor is found to perform at least as well as the medium-term budget balance anchor when assessed with the model and criteria used.
• A medium-term budget balance anchor has coincided with a larger than expected upward drift in the net debt to GDP ratio since the end of the mining investment boom.
• Operationalizing a long-term debt anchor through a combination of fiscal rules can:
  • Include expenditure restrictions.
  • Use a flexible time horizon for convergence.
  • Encourage countercyclical fiscal policy.
  • Minimize the cost in terms of real GDP foregone in the medium term under fiscal consolidation.

Policy recommendations and operational considerations

• Adopt a long-term debt anchor as an alternative or complement to a medium-term budget balance anchor, given comparable or better performance in model simulations.
• Use a package of fiscal rules to operationalize a long-term debt anchor, notably:
  • Expenditure restrictions to control spending trajectories.
  • Flexible time horizons for convergence to allow countercyclical responses and reduce medium-term real GDP costs.
• Design the fiscal rule package to balance macro stabilization objectives with debt-control objectives across plausible economic scenarios.

Publication metadata (selected)

• Authors: Allan Dizioli, Philippe D Karam, Dirk V Muir, Siegfried Steinlein
• Publication date: December 22, 2017
• Series: IMF Working Papers, Working Paper No. 2017/286
• Pages: 40
• Issue: 286
• DOI: https://doi.org/10.5089/9781484335383.001
• ISBN: 9781484335383
• ISSN: 1018-5941

Source: IMF Working Paper "Australia’s Fiscal Framework: Revisiting Options for a Fiscal Anchor" (2017/286).

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• Australia’s Fiscal Framework: Revisiting Options for a Fiscal Anchor, WP/17/286, December 2017
  • Australia’s Fiscal Framework: Revisiting Options for a Fiscal Anchor, WP/17/286, December 2017 (Markdown version)
  • Australia’s Fiscal Framework: Revisiting Options for a Fiscal Anchor, WP/17/286, December 2017 (PDF)