Chart 1 shows the trend in the total public sector underlying deficit as a share of GDP and the contributions of the general government and PTE sectors. Apart from a small surplus in 1988-89, deficits have been recorded consistently over recent decades. Despite the decline from a recent peak of 4.5 per cent of GDP in 1992-93 to 1.4 per cent in 1995-96, deficits have been recorded throughout the expansionary phase of the cycle.
A further decline to an estimated 1.1 per cent of GDP in 1996-97 reflects the measures implemented in the 1996-97 Budget as part of the Government's fiscal consolidation programme. The overall improvement has been achieved notwithstanding an expected fall in the State/local public sector's underlying balance from a surplus of 0.8 per cent of GDP in 1995-96 to a 0.5 per cent surplus in 1996-97.
Chart 1 also shows projections for the period to 2000-01.  The total public sector is expected to move into surplus in 1998-99, at about 0.8 per cent of GDP, largely due to the Government's fiscal consolidation programme including the measures announced in the Budget.
CHART 1: NON-FINANCIAL PUBLIC SECTOR UNDERLYING DEFICIT BY SECTOR
The deficit since 1984-85 for each level of government and institutional sector is shown in Chart 2. This demonstrates the major impact of past deficits in the Commonwealth general government sector on the total public sector deficit and, over the projection period, the role that fiscal consolidation by the Commonwealth will play in ensuring that the public sector makes a positive contribution to national saving.
The State/local general government sector has recorded small surpluses since 1994-95 following an improvement in fiscal performance beginning in 1991-92. Although the surplus is expected to decline in 1996-97 and 1997-98, the sector is expected to remain in small surplus over the projection period.
With the total PTE sector also expected to remain close to balance, the projections show the transition to a total public sector surplus in 1998-99 being driven by a shift to surplus in the Commonwealth general government sector in the same year. The total surplus is projected to increase to 2.2 per cent of GDP in 2000-01.
Trends in general government and PTE sector deficits are analysed in more detail in the following sections.
CHART 2: UNDERLYING DEFICIT BY SECTOR AND LEVEL OF GOVERNMENT
A: GENERAL GOVERNMENT
B: PUBLIC TRADING ENTERPRISES
Saving of the general government sector depends on the balance between its current expenditure and its revenue. If it is not saving, or if its saving is insufficient to fund its capital expenditure, then it is adding directly to the national saving-investment imbalance. This direct contribution to the national saving-investment imbalance, represented by the difference between underlying outlays and revenue, will vary depending on the stage of the economic cycle and the stance of government policy.
The PTE sector, on the other hand, should be a significant ongoing saver if it operates efficiently, leaving only part of its investment needs to be funded from borrowing. Nevertheless, it is appropriate for the PTE sector to be a consistent borrower to fund capital expenditure that generates an ongoing revenue stream and/or provides services over a considerable period of time. Thus it can be expected to contribute to some degree to the national saving-investment imbalance over the medium term even if its investment and borrowing decisions are commercially based. In fact, Chart 2 indicates that this contribution has been minor, particularly in the period since the late 1980s when PTEs have been set on a more commercial path.
Chart 3 shows trends in general government underlying outlays and revenue and their effect on the general government deficit. Panel A indicates the cyclical nature of Commonwealth outlays and revenue due to the Commonwealth's responsibility for social security and welfare outlays and the sensitivity of revenues to rates of economic growth and price and income pressures.
However, structural factors and policy decisions have also been an influence - the maintenance of high levels of Commonwealth outlays (as a proportion of GDP) during the cyclical upturn; and a flat outlook for revenues as a proportion of GDP at levels below those recorded in the mid-1980s, reflecting the low inflation environment, slower indirect tax growth and lower interest receipts from the States.
The projections in Chart 3 demonstrate the importance of outlays restraint to achieving the Government's fiscal objectives. Reductions in underlying outlays as a share of GDP will be achieved through lower current outlays across a range of government functions, whereas capital outlays (abstracting from net advances) are expected to remain broadly constant over the projection period.
CHART 3: GENERAL GOVERNMENT UNDERLYING OUTLAYS AND REVENUE BY LEVEL OF GOVERNMENT
C: TOTAL GENERAL GOVERNMENT
The State/local general government sector is less sensitive than the Commonwealth to changes in economic conditions. Panel B of Chart 3 shows the underlying surpluses achieved by the State/local level in 1994-95 and 1995-96. These largely reflected outlays restraint. Total outlays are projected to decline as a share of GDP over the projection period due mainly to restraint in the growth of current outlays, reflecting improvements in public sector efficiency and lower interest costs associated with declining net debt.
Both grants from the Commonwealth and own-source revenue are expected to decline as a share of GDP over the projection period. State/local revenue is expected to grow more slowly than economic activity, with a number of States explicitly seeking to constrain tax levels. Privatisations are also reducing revenue streams through lower dividends from the PTE sector to the general government sector, although this is offset by savings in public debt interest.
Although fiscal and economic performance continues to differ between States, the extent of these differences has decreased since the early 1990s. All States and Territories have announced medium term fiscal strategies which aim to improve their fiscal positions over the medium term. These strategies are expected to underpin a continuation of combined State/local surpluses, although faster than anticipated growth in wages and demand for health services could pose some risk to this outlook. Any deterioration in State/local fiscal performance would offset the contribution of Commonwealth fiscal consolidation to the savings task.
Fiscal consolidation in Australia is being driven by outlays restraint across the general government sector. In contrast, OECD projections suggest that the significant consolidation being undertaken in other industrialised countries places greater emphasis on the revenue side. The IMF and OECD have found that fiscal consolidation is more likely to be durable and encourage sustained economic growth if it is achieved through outlays restraint.
As shown in Panel A of Chart 4, Commonwealth general government own-purpose outlays increased as a proportion of GDP in the six year period to 1995-96, in contrast to a declining trend for the State/local level from 1992-93. Panel B shows that, in real terms, State/local own-purpose outlays increased over the six year period but at a substantially slower rate than the Commonwealth's.
The projections for the Commonwealth show an expected substantial decline in own-purpose outlays as a share of GDP over the period to 2000-01 as a result of the Government's budget measures. A smaller decline is expected for the State/local level.
CHART 4: GENERAL GOVERNMENT UNDERLYING OWN-PURPOSE OUTLAYS BY LEVEL OF GOVERNMENT
A: PER CENT OF GDP
B: REAL (1989-90 BASE)
Source: Government Finance Statistics, unpublished ABS data. Estimates for State/local own-purpose outlays are based on information supplied by the States for the 1997 National Fiscal Outlook, supplemented by recent State budgets.
The PTE sector has undergone significant changes in recent years, involving privatisations, an increased emphasis on operating efficiency - particularly in loss-making enterprises - and improvements in profit performance and market orientation. Governments are continuing to assess whether it is appropriate for the public sector to own businesses and the conditions under which they operate. The Competition Principles Agreement between the Commonwealth and the States provides a framework in which these changes can be considered.
Recent major PTE privatisations have included those in the Victorian electricity industry, which have generated proceeds of $17.8 billion in 1995-96 and 1996-97 (mainly used to repay State debt), and the Commonwealth's sale of Qantas. Other major sales have occurred in the public financial enterprise sector (at the Commonwealth level, the Commonwealth Bank and Commonwealth Funds Management Limited, while the sale of AIDC Limited is also proposed).
The Commonwealth is proceeding with the sale by public float of one-third of its equity in Telstra Corporation Limited (which will, however, remain classified to the Commonwealth PTE sector) and has announced an intention to sell the Australian National Railways Commission, ANL Limited, and long-term leases over Federal airports. Victoria has announced the restructuring of its gas utility, GASCOR, with a view to privatisation of individual units from mid-1998, and Western Australia has indicated that it intends to privatise (at least partially) the Dampier to Bunbury Natural Gas Pipeline in 1997-98.
The PTE sector has typically been in underlying deficit, reflecting a business need to borrow on a net basis to finance capital investment. As shown in Chart 1, the deficit has declined gradually, moving into surplus in 1991-92. Much of the improvement since the late 1980s was due to an increase in commercial focus under corporatisation policies and increased efficiency. These influences have also contributed to a decline in PTE sector capital outlays as a share of GDP from a peak in the early 1980s and (as discussed in Part III) to reduced PTE sector net debt levels.
The PTE sector projections indicate that small surpluses will continue over the projection period in line with economic growth and continued PTE reform.