title: Fiscal Policy Rules and Public Capital Formation in Australia
Creators: name: Carne, Kerry Ann
Publisher: name: Griffith University
Year: 2007
Subjects: subject: Fiscal policy
subject: fiscal policy rules
subject: Australia
subject: Australian Government
subject: Public policy
subject: public capital formation
subject: debt
subject: Bretton-Woods agreement
subject: government expenditures

description: Subsequent to the abandonment of the Bretton-Woods agreement, many governments experienced worsening fiscal outcomes and subsequent heightening debt levels over several decades. Many have recently adopted rules-based fiscal policy regimes in an attempt to correct this. The experience of capital formation by Australian national and sub-national governments is therefore examined before and after their adoption of fiscal policy rules. Applying non-parametric and parametric methods to data drawn from public policy documents, the degree to which the examined governments complied with the constraints imposed on fiscal measures by adoption of fiscal policy rules was ascertained. The Australian governments have generally, though not always, met fiscal constraints imposed by their fiscal policy rules. The absence of penalties for non-compliance may have contributed to the occasional exceptions to this high level of compliance. However, intentionality of compliance where observed cannot be ascertained due to the virtually simultaneous adoption of accrual-based financial reporting frameworks, and resulting informational effect, and other possible causal factors. The degree of compliance varied with the type of fiscal policy rule. In order, constraints imposed by net debt, followed by net worth and budgetary balance rules were most frequently met. Possible causes include the significantly enhanced information set available to governments after adoption of accrual-based financial reporting networks and the significance attributed by governments to their credit ratings. Attention was then focused on the experience of public capital formation and whether it changed at the date of adoption of net worth fiscal policy rules. The Commonwealth, Victorian, Queensland and Western Australian Governments increased the level, growth rate or output elasticity of their investment when they adopted a fiscal policy rule requiring, at a minimum, that they maintain their net worth. The Victorian Government’s experience showed the effects of unique infrastructure financing arrangements. The investment experience of the New South Wales Government cannot be modelled effectively in this way due to its practice of transfer of assets to other levels of government during the period of the study. One potential implication of the research findings reported in this thesis is that the usual macroeconomic assumption of exogeneity of government expenditures may be too strong in circumstances where governments have adopted such fiscal policy rules. Specifically, it appears necessary to review the general assumption that only certain elements of government expenditures, those that are related to automatic stabilisers, are business cycle dependent. That is, other government expenditures, those usually considered to be independent of levels of economic activity, may no longer be able to be considered to be so when certain institutional arrangements, such as fiscal policy rules, exist. Instead, constraints imposed by adoption of fiscal policy rules appear likely to assume the position of determining upper or lower bounds on certain fiscal measures. Further, consistent with the literature on supply-side effects of public capital formation, the jurisdictions experiencing increased growth of public capital formation subsequent to adoption of fiscal policy rules are those which have experienced higher growth rates than other jurisdictions. This indicates the existence of a number of interesting directions for further research.