This content is produced by The Australian Financial Review in commercial partnership with Chartered Accountants

Australian taxpayers could be unwittingly risking their economic welfare by accepting the simplistic arguments that are consuming the national debate on debt and deficits. To paraphrase the sheep in George Orwell's Animal Farm, unless the debate goes beyond the present refrain of "budget surplus good, budget deficit bad", the governments' capacity to improve the lives of all Australians could be needlessly constrained.

Some of this attention is unsurprising since public debt as a share of GDP has increased significantly over the past decade. Historically though, public debt has been even higher in the past. The financing requirements of the Second World War were met through the issuance of War Savings Certificates to domestic retail investors. Australian government gross debt peaked about 120 per cent of GDP in 1945.

In the right circumstances, raising public debt can improve outcomes for individuals, businesses and governments – with benefits lasting for generations. For example, borrowing by Commonwealth and state governments allowed Australia to build the Sydney Harbour Bridge and inner-city rail tracks and roadways; finance military defence during the two world wars; and restrain the extent of unemployment during recessions and depressions.

Admittedly, people are worried that governments today are "mortgaging their future" by taking on more debt. However, they overlook the distinction between borrowing for consumption and borrowing for investment.

Borrowing for "public sector capital formation", otherwise known as public investment, has the potential to raise economic potential (and hence public sector revenue) by more than enough to service the resulting debt.  Accordingly, public debt is neither good nor bad in itself. Much depends on the economic return and risk to which public balance sheets are exposed as public debt levels rise.

Consequently it is important for the public to know – and understand – what their governments are doing and not doing. This is a vital part of a healthy democracy. It is critical to sound policy-making that meets society's objectives. Short-sightedness in policy making is not new; it often reflects the constraints of a system built around elections every three years. But the recent emphasis on debt management as a key part of managing public finances has made it more difficult to advance other policies aimed at the nation's longer-term prosperity.

Poor fiscal discipline

In fact, a degree of short-sightedness can be seen in the squandering of the benefits from the mining boom. Tax cuts implemented during the mining boom failed to recognise the temporary nature of the change in Australia's terms of trade and the impact on government finances.  Governments also showed poor fiscal discipline by failing to reverse temporary stimulus measures following the global financial crisis, while also adopting expensive new commitments during that phase.

Yet Australians aren't getting the right tools to determine correctly if their governments are properly managing the nation's public debt. Academics have laboured over many years to provide policymakers with analytical tools and standards, but it is seems that the public has not understood them.

Lacking the appropriate framework, it is not surprising that the public does not realise the limitations of focusing mainly on debt reduction. Only a public that is better informed about fiscal policy issues will change this situation. That will happen only if independent bodies provide sufficient oversight that helps ordinary citizens fully understand the longer-term consequences of big budget decisions.

One recommendation is to give an agency the responsibility to periodically review the assumptions and parameters that Treasury has used to estimate the budget balance. The government could instruct such an agency to evaluate the fiscal implications of key policy decisions beyond the forward estimates. This is especially important in instances where the biggest fiscal impacts occur beyond the four-year forward estimate horizon.  Instead, the fiscal impact of key new policy decisions would be forecast over a 10-year period and contrasted to a scenario without the policy.

The agency responsible should be independent of the executive government and the central agencies. One option would be to give this expanded role to the Parliamentary Budget Office that was established in 2012. Other alternatives to consider would be an independent institute similar to the Institute for Fiscal Studies in the United Kingdom, or an expert panel such as the German Council of Economic Experts.

Without a change to the current fiscal strategy, fiscal rules and institutional framework, the risk is very real of poor policy decisions in the future.  The decisions we make today will have an impact on generations to come. The overemphasis on achieving surpluses and eliminating debt at the expense of sound policy may hinder governments' capacity to improve the economic welfare of Australians.

– Lee White, CEO, Chartered Accountants Australia and New Zealand