BP1ST1 - PART III: FISCAL STRATEGY

PART III: FISCAL STRATEGY

The Government's medium-term fiscal strategy is to pursue, as a guiding principle, the objective of underlying budget balance, on average, over the course of the economic cycle. This strategy, set out in detail in the 1996-97 Budget Papers, is designed to ensure that the Commonwealth budget does not, over time, make a call on private saving and thereby contribute to the national savings-investment imbalance. Adherence to the medium-term fiscal strategy will also assist in reducing net debt over the forward estimates period and in ensuring that net debt does not ratchet up over successive economic cycles.

The shorter-term fiscal objectives adopted by the Government in its 1997-98 Budget strategy were developed against * and are consistent with * its medium-term fiscal strategy. More specifically, in shaping the 1997-98 Budget, the Government has sought to:

implement its commitment to achieve underlying budget balance within the term of this Parliament;
build upon the substantial fiscal consolidation implemented in the 1996-97 Budget;
maintain its commitment not to introduce new taxes or increase existing tax rates over the term of this Parliament, while working to ensure that all taxpayers pay their fair share of taxes; and
direct appropriate resources to high priority areas, consistent with the Government's economic and social objectives.

The Government's short and medium-term fiscal objectives accord with the principles of sound fiscal management outlined in the Government's Charter of Budget Honesty Bill 1996. [5] The Government's fiscal policy has been developed within a sustainable medium-term framework while giving due attention to the current economic climate. Fiscal policy is directed at ensuring adequate national saving, managing the financial risks of the Commonwealth, and ensuring debt is maintained at prudent levels. It also has regard to the stability and integrity of the tax base and the financial implications of present fiscal policies for future generations.

The consistency of the Government's strategy and objectives with these principles * and the way in which the Government has implemented its short and medium-term fiscal strategies * are discussed in further detail below. [6]

Implementing the fiscal strategy

As was discussed in Part II, the prospects for continued economic growth support * and provide the imperative for * action by the Government to achieve, and then maintain, underlying surpluses.

The major element of the Government's programme of fiscal consolidation was provided in the 1996-97 Budget with the announcement of measures amounting to $3.9 billion in 1996-97 and $7.2 billion in 1997-98. The bulk of these measures have been passed by Parliament. The 1997-98 Budget seeks to build on this consolidation. The Government has set itself the following targets to meet its medium-term fiscal objective:

to move to underlying balance in 1998-99; and
to maintain surplus beyond 1998-99 while solid economic growth continues.

Chart 1 shows the projected improvement in the underlying and headline budget balances, while Chart 2 shows the cumulative impact of budget measures announced by the Government since its election. [7]

CHART 1: HEADLINE AND UNDERLYING BUDGET BALANCE

The Government's programme of fiscal consolidation has focussed primarily on outlays restraint. This reflects the Government's view that expenditure control holds the key to achieving sustainable improvements in the fiscal position and that, given the sharp increase in outlays as a share of GDP in the first half of this decade, scope has existed for rationalising programmes and for improvements in efficiency. In total, outlays savings measures announced by the Government since the election amount to 1.6 per cent of GDP in each of 1997-98 and 1998-99. These savings have enabled the Government to direct 0.6 per cent of GDP in new spending to a number of high priority areas, in these years, while still making a significant contribution to fiscal consolidation.

On the revenue side, the Government's policy emphasis in the 1997-98 Budget has been on protecting the tax base and addressing anomalies in the tax system, with the primary purpose of many of the revenue measures being to prevent risks to the revenue base and therefore the fiscal outlook, that would otherwise emerge. In total, revenue measures since the election amount to 0.3 per cent of GDP in each of 1997-98 and 1998-99.

The Government's budget priorities, including in relation to superannuation and private savings incentives, are spelled out in greater detail in Part IV of this Statement.

CHART 2: CUMULATIVE NET SAVINGS DECISIONS SINCE THE 1996 ELECTION

National Saving

Raising national saving is the primary focus of the Government's medium-term fiscal strategy. Increasing national saving, relative to national investment, holds the key to reducing the current account deficit over time and thereby raising longer-term growth prospects. The risks that continued high levels of the current account deficit pose to economic growth * and the benefits of raising national saving * were set out in Budget Paper No. 1 1996-97.

The Government's fiscal objectives and targets are formulated with reference to the underlying balance. The emphasis on the underlying balance as a policy indicator reflects the fact that the underlying budget balance closely approximates the direct contribution of the Commonwealth budget sector to the national saving-investment imbalance as measured by the 'net lending' concept in the national accounts. It is the part of public net lending over which the Commonwealth Government has direct control. An emphasis on the underlying budget balance is therefore consistent with a policy emphasis on raising national saving.

The fiscal consolidation in the 1997-98 Budget, on top of the significant consolidation achieved in the 1996-97 Budget, will provide a substantial boost to public saving over the next few years and will thereby assist in ensuring that, over the course of the economic cycle, the Government will not, on average, be calling on private saving to fund its own investment needs.

The degree to which this improvement in Commonwealth budget sector net lending translates into an improvement in national net lending will depend on the actions of other sectors of the economy, viz the State/local government sector and the private sector.

From this perspective, it is important that the State/local governments also run responsible fiscal policies. Chart 3 shows that the State/local general government sector is projected to continue its recent trend of delivering small surpluses, albeit at a lower level. These surpluses complement the improvement in the Commonwealth general government [8] fiscal position, so that the combined Commonwealth and State/local general government sector should achieve an underlying surplus in 1998-99 somewhat larger than that in the Commonwealth sector alone. [9] Developments for the public sector as a whole are discussed in more detail in Statement 7.

CHART 3: GENERAL GOVERNMENT UNDERLYING BALANCE

Private sector saving and investment decisions are affected by fiscal consolidation both in response to specific revenue and outlays measures and as a result of the improved economic outlook that results from fiscal consolidation. As discussed in last year's Budget Paper No. 1, the weight of evidence suggests that while private sector behaviour does tend to offset changes to public sector saving, the offset is only partial. Consequently, improvements in saving by governments tend to lead to rises in national saving and thereby provide scope for higher investment or a reduced call on foreign saving.

The Government is, moreover, implementing measures which should assist in increasing private saving. A major initiative of the 1997-98 Budget is the introduction of a broadly based savings rebate. Proposed enhancements to the operation of the retirement income system should also improve Australia's national saving performance. These measures are discussed in further detail in Part IV of this Statement.

Net Debt

Reducing public indebtedness in periods of strong economic growth is crucial if the Government is to retain the capacity to use fiscal policy to support economic growth during periods of weakness without ratcheting up public debt from one cycle to the next. Lower public debt levels also reduce the vulnerability of the economy to shocks and assist the Government to cope with longer-term fiscal pressures such as those stemming from the ageing of the population.

Over the past two decades, the deterioration in the fiscal position has resulted in a ratcheting up of Commonwealth general government net debt. Taking action now is necessary to ensure that, in the longer term, net debt levels do not continue to ratchet up, requiring future generations to pay for the consumption of the present generation. Lower net debt levels will also lower interest payments in future years, releasing funds for spending in high priority areas.

The Government's fiscal strategy will see net debt reduced to around 10½ per cent of GDP in 2000-01, with substantial net retirement of debt in 1997-98 and the outyears. These debt levels compare favourably with the positions of many OECD countries which require substantial remedial action.

CHART 4: COMMONWEALTH GENERAL GOVERNMENT NET DEBT^(A)

(a) Figures are for net debt stocks as at the end of each financial year. Data for 1987-88 to 1995-96 are from ABS Public Sector Financial Assets and Liabilities (Cat. No. 5513). Data for years prior to 1987-88 are Treasury estimates. The chart differs slightly from that published in Budget Paper No. 1 1996-97, reflecting revisions to the Treasury estimates for the period prior to June 1978 to take account of the non-repayable nature of loans made for the provision of postal and telecommunication services. The revised series treats these payments as grants rather than net advances.