Structural fiscal targeting and good governance

Abstract

Structural fiscal targeting (the practice of setting of medium-term targets for taxation, government borrowing, spending and regulation) has a rightful place in any sensible longer term economic strategy. But the merits of targeting depend crucially on how and where the targets are set. If the targets are very constraining and arbitrarily set as part of an ideological commitment to "small government", they can limit the scope for governments to achieve an optimal balance between efficiency and equity. Indeed they may advance neither efficiency nor equity. This is especially so in a country like Australia which starts with a relatively small government base and where the community has shown a willingness to accept a reasonable sacrifice of efficiency for the sake of other values. The aim of this paper is to examine whether the particular structural targets currently in vogue in Australia are consistent with good governance. The paper analyses the present medium term fiscal stance (section 2) and its implications for economic efficiency (section 3) and for equity (section 4). It then considers whether a policy shift might be desirable (section 5). It starts by attempting to define good governance (section 1).