Global

Details

  • Industry: Government & Public Sector
  • Type: White paper
  • Date: 1/21/2013

Fiscal sustainability framework 

Fiscal Sustainability Framework
Based on the findings of our research, we developed an outline of what a truly competent fiscal sustainability framework might look like.

This updated framework for the public sector includes:


  • balanced fiscal policies to govern for the common good of both current and future generations
  • defined targets set around key fiscal aggregates
  • a view not just across the budget cycle (1-5 years), but also the economic cycle (6+ years) and the intergenerational cycles (10+ years)
  • success factors and key performance indicators (KPIs) that can be used to monitor fiscal sustainability progress
  • committed and sustained implementation by governments that spans the political cycle
  • coordinated regulatory, policy and financial frameworks

Summary of a competent fiscal sustainability framework

Context:

To set the budget within the context of fiscal sustainability.

Objective:

To govern for the just and common good of current and future generations.

Defined:

A fiscal sustainability framework ensures that the balance of fiscal policies is constructed in such a way that the objective can be maximized within the constraints of:


  • economic affordability
  • national security priorities
  • social cohesion imperatives for citizen access and equity
  • environmental sustainability.
Description:

Budget cycle (1-5 years) or medium-term fiscal framework (MTFF)


Targets over the cycle are:


  • aggregated net operating balance (NOB) to be either balanced (= 0) or in surplus
  • aggregated comprehensive result (CR) to be either balanced (= 0) or in surplus.

It is important to note the following:


  • The net operating balance is the preferred MTFF fiscal sustainability measure as it best equates to the accrual measure of the ordinary transaction business of government.
  • The comprehensive result or change in net worth is the preferred, yet more challenging, MTFF fiscal sustainability measure as it best equates to the full accrual measure of the period.

Economic cycle (medium-term or 6+ years)


Targets over the cycle are:


  • net worth at zero or greater over the cycle
  • gross debt and net debt meet target limits
  • alignment of non-financial assets to interest bearing debt
  • alignment of financial assets to non-interest bearing debt.

Intergenerational cycle (long-term or 10+ years)


Target is to address the fiscal pressures through:


  • the preparation of intergenerational reports (IGR)
  • the preparation of a national infrastructure priority plan (NIPP)
  • the establishment of an insurer of last resort (ILR) provision.

Above all, a leading practice fiscal sustainability framework should encompass the bipartisan commitment to sustain or improve government finances over the short, medium and long term.

Key fiscal sustainability framework objectives should be measureable by:


  • the attainment and maintenance of government AAA credit ratings
  • the attainment of MTFF budget cycle fiscal sustainability targets related to NOB and/or CR
  • the attainment of economic cycle fiscal sustainability targets related to:
    • net worth
    • gross debt and net debt
    • alignment of non-financial assets to interest bearing debt
    • alignment of financial assets to non-interest bearing debt.
  • the attainment of intergenerational cycle fiscal sustainability initiatives, including:
    • the preparation of periodic intergenerational reports
    • the preparation of a national infrastructure priority plan
    • the establishment of an insurer of last resort provision.
 

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