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Statement 1: Fiscal Outlook and Strategy

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Part II: Budget Aggregates

Table 3 provides details of the Commonwealth general government budget outlook.

Table 3: Commonwealth General Government Budget Aggregates(a)

(a) Estimates in this table are presented on a Government Finance Statistics (GFS) basis, but with Goods and Services Tax (GST) revenue collected on behalf of the States and Territories netted off revenue and expenses (see Appendix B). There is an effective break in the revenue and expenses series in 2000-01 reflecting the introduction of The New Tax System.
(b) Net acquisition of non-financial assets.

In 2000-01 the Commonwealth budget is expected to remain in surplus, in both cash and accrual terms. Some reduction in the surplus is, however, expected relative to the anticipated outcome for 1999-2000. This reduction is explained by the substantial income tax cuts and increases in personal benefit payments that will be implemented from 1 July 2000 as part of The New Tax System.

Total revenue and expenses are expected to fall markedly as a percentage of GDP in 2000-01. These reductions reflect an effective break in both series with the introduction of The New Tax System, in particular the abolition of the wholesale sales tax and the abolition of financial assistance grants to the States. In addition, the delivery of personal income tax cuts will result in a large reduction in revenue. All revenue from the GST is appropriated to the States.

Although the estimated underlying cash and fiscal surpluses are broadly similar in most years, divergences can occur. In 2000-01, for example, the divergence is primarily explained by the introduction of the new Pay As You Go system for taxation collections.1

Chart 1 shows movements in the fiscal balance and underlying cash balance since 1996-97, while Chart 2 shows movements in revenue and expenses as a proportion of GDP. The growing surpluses beyond 2001-02 reflect further declines in the ratio of expenses to GDP, with revenue collections as a share of GDP remaining broadly stable.

Chart 1: Fiscal and Underlying Cash Balances

Chart 1: Fiscal and Underlying Cash Balances

Chart 2: Commonwealth General Government Budget Aggregates

Chart 2: Commonwealth General Government Budget Aggregates

(a) There is an effective break in the series in 2000-01 as a result of the introduction of The New Tax System.

Table 4 provides a reconciliation of the fiscal balance estimates between those at the time of the 1999-2000 Budget, the 1999-2000 MYEFO and the 2000-01 Budget.

Table 4: Reconciliation of 1999-2000 Budget, MYEFO and
2000-01 Budget Fiscal Balance Estimates

(a) Excluding the public debt net interest effect of policy measures.
(b) Effect on fiscal balance.
(c) Information on the reclassification of swap transactions is contained in Appendix B.

Since MYEFO, the estimated fiscal surpluses for 1999-2000 and 2000-01 have been revised upwards, with some reduction to the surpluses expected in the forward years.

In 2000-01, policy decisions since MYEFO total $2.1 billion. However, this is more than offset by economic parameter and other variations, including:

Major new policy decisions since MYEFO include:

A full description of all policy decisions taken since the 1999-2000 MYEFO can be found in Budget Paper No. 2 - Budget Measures 2000-01.

Box 1: Removal of the Defence - East Timor Levy

The Government is announcing in this Budget that it will not be proceeding with the Defence - East Timor levy. The temporary levy was to apply for twelve months commencing from 1 July 2000 and was expected to raise $900 million in 2000-01. The decision to remove the levy reflects the lower than expected cost of the Defence deployment in East Timor and the improvement in the budget position.

The Defence deployment to East Timor is now expected to cost $945 million in 2000-01, down from the $1089 million expected when the levy was announced last November. Taking into account United Nations (UN) reimbursement, the net cost of the Defence deployment is now expected to be $831 million in 2000-01. The lower cost in 2000-01 than originally expected reflects the success of the Australian-led International Force East Timor (INTERFET) and the smooth transition to the UN Transitional Administration in East Timor. Other contributing factors include free logistical support from the United States and lower defence personnel costs.

On the basis of the budget estimates when the levy was announced last November, the unanticipated costs of Australia's East Timor deployment would have pushed the Budget into deficit in underlying cash terms in 2000-01.

The improved budget position since then means that the costs of the East Timor deployment in 2000-01 can be absorbed without a levy while still achieving a substantial surplus.

Parameter and other variations since MYEFO are principally the result of reclassification between revenue and expenses.

Abstracting from policy measures and the DFRS and FTB revisions, estimated expenses in 2000-01 have increased by around $0.4 billion since MYEFO. This is partly explained by the effect of economic parameter variations, with the regular drawdown of the conservative bias allowance largely offsetting a range of programme specific parameter and other variations.

As indicated in Table 4, parameter and other variations are expected to result in a substantial reduction in net capital investment of around $2.8 billion in 2000-01. This variation mainly reflects an upward revision to the expected proceeds from the sale of non-financial assets, principally telecommunications spectrum licences. In the calculation of net capital investment, proceeds from the sale of non-financial assets are subtracted from purchases of non-financial assets. Consequently, an increase in the proceeds from the sale of non-financial assets reduces net capital investment and increases the fiscal balance.

Beyond 2000-01, the upward revisions to net capital investment since MYEFO mainly reflect the inclusion, for the first time, of a conservative bias allowance to account for an identified tendency for agencies to underestimate their capital investment expenditure beyond the budget year.

Further details on variations in the expenses and net capital investment estimates since MYEFO are provided in Budget Statement 6.

On the revenue side, estimated taxation revenue in 2000-01 has been revised upwards by around $1 billion since MYEFO (again abstracting from policy measures and the DFRS and FTB changes). This reflects an assessment that recent stronger than expected revenue collections, particularly from companies and oil producers, will have some flow-on effect into 2000-01. Upward revisions to forecast economic activity since MYEFO also point to a stronger outlook for taxation revenue in 2000-01.

Further details on variations in taxation and non-taxation revenue since MYEFO are provided in Budget Statement 5.

Appendix C in Statement 4 contains a Statement of Risks which details potential factors which could materially affect the fiscal outlook. A discussion of the estimated sensitivity of the expenses and revenue estimates to changes in economic parameters is provided in Appendix B of Statement 4.

Net Assets and Net Debt

The level of Commonwealth general government net debt has fallen consistently since the mid-1990s, from a peak of almost 20 per cent of GDP in 1995-96 to an expected 7.1 per cent of GDP in 2000-01. This means that the Government's target of halving the ratio of Commonwealth general government net debt to GDP by 2000-01 will be comfortably exceeded. This represents a sharp turnaround from the rapid build-up in net debt levels in the first half of the 1990s. In dollar terms, around $50 billion of net debt has been repaid since the Coalition came to office in 1996, reflecting the combined effect of budget surpluses and asset sales, principally Telstra.

The fiscal surpluses in prospect beyond 2000-01 provide the opportunity for Australia to further reduce its net debt in coming years. Factoring in the sale of further equity in Telstra in the projection period from 2001-02 means that net debt can be completely eliminated by 2003-04.

Chart 3: Commonwealth General Government Net Debt(a)

Chart 3:  Commonwealth General Government Net Debt

(a) Includes the impact of the sale of the Government's remaining shareholding in Telstra.

Australia's government net debt level compares very favourably with levels in other countries (Chart 4). In fact, Australia's net debt is among the lowest in the OECD, with the OECD average at over 40 per cent of GDP.

Chart 4: Government Net Debt Levels in Selected Countries(a)

Chart 4:  Government Net Debt Levels in Selected Countries

(a) Data are for the total general government sector (that is, the aggregate of all levels of government, including the social security sector but excluding the PTE sector).
Source: OECD Economic Outlook 66, Reserve Bank of New Zealand Monetary Policy Statement, December 1999, ABS Public Sector Financial Assets and Liabilities, 1998 (Cat No 5513.0) and Treasury estimates.

Last year's Budget incorporated, for the first time, a statement of financial position or balance sheet, consistent with the Commonwealth's move to accrual budgeting and reporting.

Chart 5 shows recent trends, current estimates and projections in Commonwealth net asset levels as a share of GDP.

Chart 5: Commonwealth General Government Net Assets

Chart 5:  Commonwealth General Government Net Assets

Net assets is defined as physical and financial assets less total liabilities.

Consistent with the Government's objective to improve its net assets position over the medium to long term, net assets are projected to improve over the forward estimates period. This reflects both expected operating surpluses and revaluation effects associated with the proposed sale of the Government's remaining share in Telstra.

1 Under the PAYG arrangements, there will be an effective bring forward of the taxation liabilities of companies and superannuation funds. This will boost accrual revenue significantly in 2000-01. However, as a transitional arrangement, some of the liabilities in 2000-01 can be deferred and paid in cash over the following 2½ to 5 years.

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