·
Based on the 5 principles of tax
o Equitable
o Economical
o Efficient
o Convenient
o Flexible
Includes:
·
The Golden Rule
o The government should only borrow to fund new social capital
(capital spending, i.e. schools,
roads…etc) and not current spending (e.g. welfare benefits)
·
The Sustainable Investment Rule
o Public sector net debt should not rise above 40% of national income at the end of each financial
year of the economic cycle
·
If the government stuck to the two rules, the
public sector budget should, in theory, balance out over the course of one
economic cycle because the government is not increasing current spending. A
deficit is run on capital spending instead, thus balancing it out.
·
Aims
o To
limit how much the government borrows
and for what purpose
o Allow
automatic stabilisers (see here) to
smooth over the economy
o Support
the role of the monetary policy
o Avoid an unsustainable increase in public
sector debt
o Ensure
that tax revenues that are collected
finance public spending as far as possible
·
Australia
and New Zealand
·
The government complied with the rules from the
full economic cycle between 1997-1998 to 2006-2007, just before the
recessions/economic crisis.
·
In November 2008, it was written in the pre-budget
report that the code had been suspended to allow for the government to act
appropriately in response to the global recession.
·
It was replaced by a less restrictive ‘temporary
operating rule’ where the target was to manage public finances over the medium
term.
Please note, the Fiscal Policy Framework and the Code for
Fiscal Stability should be used in the exam for demonstrating your
understanding of past and previous
fiscal policy used by governments. As it is no longer in use, be careful
when mentioning in the exam.
