CHART 5: PUBLIC SECTOR NET DEBT BY SECTOR
OUTSTANDING STOCK AS AT 30 JUNE
Net debt trends for the total public sector, and the contributions of the general government and PTE sectors, are shown in Chart 5. Two major trends are evident - the increase in general government net debt as a share of GDP following the recession of the early 1990s, to a level higher than the previous peak in the mid-1980s, reflecting the financing of Commonwealth budget deficits that continued into the cyclical upturn; and the decline in PTE sector net debt as a share of GDP since the late 1980s, reflecting lower levels of capital expenditure, improved efficiency and privatisations.
The net result has been high but relatively stable levels of net debt to GDP for the total public sector in the four years to 1995-96. The improvement evident since then reflects lower net borrowing requirements for the Commonwealth and the application of privatisation proceeds to debt retirement at the State/local level. Following privatisations in its electricity industry, Victoria has repaid substantial amounts of outstanding debt in both the general government and PTE sectors.
Through the projection period, general government net debt as a share of GDP is expected to decline further - mainly due to Commonwealth fiscal consolidation, but also Commonwealth asset sales and continuing fiscal restraint at the State/local level. For the PTE sector, net debt as a share of GDP is expected to decline slowly, consistent with a profile of small surpluses. These trends would result in total public sector net debt of around 18 per cent of GDP in 2000-01, compared with the most recent peak of 36 per cent in 1994-95.
The distribution of debt across institutional sectors differs between levels of government, making comparisons difficult. Most Commonwealth net debt is owed by the general government sector whereas more than half of State/local net debt is owed by the PTE sector. This is demonstrated in Chart 6, which shows movements in net debt by sector and level of government since 1972.
Panel A of Chart 6 shows that Commonwealth general government sector net debt as a share of GDP ratcheted up from low levels in the 1970s to a peak of 19 per cent in 1995-96, with a sharp acceleration in the current decade. In contrast, general government sector net debt at the State/local level has declined from 32 per cent of GDP in 1971-72 to around 4 per cent in 1996-97, as shown in Panel B. The recent trend for the State/local general government sector reflects the impact of relatively large deficits between 1988-89 and 1991-92, followed by fiscal consolidation and the achievement of consolidated surpluses, and asset sales.
The projections for the Commonwealth include the expected impact of measures announced in this Budget. They indicate that Commonwealth general government sector net debt will decline from 19 per cent of GDP in 1995-96 to around 10 per cent in 2000-01. State/local general government net debt as a share of GDP should continue to decline gradually in line with explicit or implicit debt reduction programmes which form part of States' medium-term fiscal strategies.
Panel C indicates the importance of the Commonwealth reduction for the projected decline in the total public sector figure from 32 per cent of GDP in 1995-96 to around 18 per cent in 2000-01. This also incorporates an expected further small decline in total PTE sector net debt as a share of GDP, reflecting a continued reduction at the State/local level with the Commonwealth figure expected to remain flat at around 2 per cent of GDP.
CHART 6: PUBLIC SECTOR NET DEBT BY LEVEL OF GOVERNMENT AND SECTOR
A: COMMONWEALTH
B: STATE/LOCAL
C: TOTAL PUBLIC SECTOR
In particular, unfunded employer contributions to public sector superannuation schemes, accrued long service leave and other employee entitlements are a significant liability for governments. For the Commonwealth general government sector, these unfunded entitlements amounted to $68.7 billion at 30 June 1996, or 14.1 per cent of GDP, while those of the States and Territories totalled $53.8 billion or 11 per cent of GDP - although the position varies considerably between individual States and Territories, ranging from 8.9 per cent to 19.9 per cent of gross state product.
The future growth of these unfunded entitlements is expected to be limited by moves by most States toward funding accruing superannuation liabilities and the introduction of less expensive public sector superannuation schemes. The Commonwealth has reduced its future superannuation costs by closing entry to the Commonwealth Superannuation Scheme and Defence Force Retirement and Death Benefits Scheme in 1990 and 1991 respectively, and replacing them with two lower cost schemes (the Public Sector Superannuation Scheme and the Military Superannuation and Benefits Scheme).
The broader measure of financial assets and liabilities also takes into account changes in equity holdings. It thus recognises, for example, that where the proceeds of sale of a PTE business reduce general government sector net debt, there will also be an offsetting reduction in the general government sector's holdings of PTE equity.
Chart 7 shows the relative size of total liabilities and financial assets by component parts for the Commonwealth and State/Territory general government sectors at 30 June 1996. [2]
CHART 7: GENERAL GOVERNMENT NET LIABILITIES POSITION
AS AT 30 JUNE 1996
The State/Territory general government sector is in a small net asset position overall, with net debt more than offset by an excess of non-debt financial assets over non-debt liabilities. [3] This excess mainly reflects the fact that equity holdings are larger than unfunded employee entitlements. In contrast, the Commonwealth has a high level of unfunded employee entitlements and a low level of equity holdings.
Net interest outlays are defined as interest payments on gross debt less interest received on loans and advances, and are affected by the volume of net debt on issue and interest rates. As shown in Chart 8, the Commonwealth general government sector moved in the late 1970s from being a net interest recipient to a net payer. Net interest outlays of the total general government sector peaked in the mid 1980s at around 2.2 per cent of GDP, reflecting the cyclical increase in general government sector (particularly Commonwealth) net debt and prevailing high interest rates. The total fell to about 1.8 per cent in 1992-93 mainly due to the lagged effect of falling interest rates.
Since then, the persistence of Commonwealth budget deficits into the expansionary phase of the cycle has put upward pressure on net interest outlays as a share of GDP, more than offsetting recent improvements at the State/local level in line with reduced levels of net debt to GDP.
CHART 8: GENERAL GOVERNMENT NET INTEREST OUTLAYS BY LEVEL OF GOVERNMENT
In contrast, the PTE sector has been able to reduce its net interest outlays as a share of GDP over the longer term. This is particularly evident at the State/local level and is consistent with lower levels of net debt to GDP stemming from reduced capital outlays and improvements in PTE performance. It also reflects a reduction in the size of the PTE sector through privatisation. As a result, the contribution of the PTE sector to total net interest outlays is now significantly lower than in the mid 1980s.
The PTE sector is an important source of revenue to the general government sector, particularly at the State/local level, with dividend streams corresponding to equity holdings and interest payments reflecting the stock of general government sector loans to the PTE sector.
Since the early 1980s, the financial relationship between the general government and PTE sectors at all levels has changed considerably, and is now at arm's length in most cases. Advances from general government to PTEs have largely been repaid and new borrowings undertaken from financial markets, either directly or through State central borrowing authorities. Capital structures and dividend policies are now more comparable with those applying in the private sector. Privatisations have the effect of reducing both dividend and interest payments to the general government sector.
The net effect of these changes has been an increasing trend in income transferred to general government by PTEs, as shown in Chart 9, with growth in dividends (despite privatisations) more than offsetting a decline in interest paid.
CHART 9: INCOME AND INTEREST TRANSFERRED FROM PTES TO GENERAL GOVERNMENT SECTOR
