Economist Robert Carling has criticised the Australian government's reliance on the underlying cash balance as a key fiscal measure, arguing it obscures the true state of the budget and undermines transparency. In a new analysis, Carling contends that the measure fails to account for important accrual-based items, such as changes in liabilities and assets, which can paint a misleading picture of fiscal sustainability.
Flaws in the Underlying Cash Balance
The underlying cash balance, which excludes certain one-off items and focuses on cash flows, has long been the primary metric used by Australian treasuries to assess budget performance. However, Carling points out that this approach ignores non-cash items like depreciation, provisions for future expenses, and changes in superannuation liabilities. According to Carling, these omissions can lead to an overstatement of fiscal health, particularly when governments defer payments or incur future obligations without immediate cash outlays.
Carling notes that the underlying cash balance was originally designed to provide a clearer picture of the government's net borrowing requirement. Yet, he argues, it has become a political tool that allows governments to claim budget surpluses or deficits that do not reflect the full economic reality. For example, a government might report an underlying cash surplus while simultaneously accumulating significant future liabilities through public sector superannuation or infrastructure maintenance deferrals.
Call for Accrual Accounting
To address these transparency issues, Carling advocates for a shift to accrual-based accounting, which records revenues and expenses when they are earned or incurred, regardless of when cash changes hands. He points out that many other countries, including New Zealand and the United Kingdom, have already adopted accrual budgeting and reporting frameworks. Accrual accounting would provide a more comprehensive view of the government's financial position, including its assets, liabilities, and net worth.
Carling acknowledges that transitioning to accrual accounting would require significant changes to budget processes and public sector financial management. However, he argues that the benefits in terms of transparency and accountability would outweigh the costs. He suggests that the government could begin by publishing accrual-based supplementary reports alongside the traditional cash-based budget documents, allowing for a gradual transition.
Political Implications
The debate over budget transparency has political implications, as the underlying cash balance has been a key metric for both major parties. Carling's critique could put pressure on the government to reconsider its fiscal reporting practices. He notes that the Australian public deserves a clear and honest picture of the nation's finances, especially given the long-term challenges posed by an ageing population and rising healthcare costs.
Carling's analysis adds to a growing body of criticism from economists and fiscal experts who argue that the underlying cash balance is an outdated and misleading measure. The call for reform is likely to resonate with those who believe that budget transparency is essential for informed public debate and sound fiscal policy.
