Statement 1: Fiscal Strategy and Budget Priorities
Contents
Medium term objectives of fiscal policy
Assessing Commonwealth Government finances over the next 40 years
Protecting Australia's borders
Supporting Australian families
Making the Pharmaceutical Benefits Scheme more sustainable
Commonwealth-State-Territory Disability Agreement
A better superannuation system
Investing in Australia's industry, infrastructure and resources
Part I: Overview
The 2002-03 Budget provides for an underlying cash surplus of $2.1 billion in 2002-03 and establishes the foundations for surpluses across the forward estimates. It delivers the Government's election commitments in full. It responds to the challenges of an uncertain international environment, particularly in the wake of the 11 September 2001 terrorist attacks in the United States. Substantial funding is provided to upgrade domestic security and to support Australia's contribution to the War Against Terrorism, including military operations in Afghanistan. The Budget also includes additional funding to protect the integrity of Australia's borders.
The Budget incorporates the first official Intergenerational Report, as required by the Charter of Budget Honesty Act passed by the Parliament in 1998. It provides long-term projections for Commonwealth spending over the next 40 years and a current snapshot of the long-term drivers of budget pressures. In international terms, Australia is well placed to confront the challenges of an ageing population. Nevertheless, the projected budgetary pressures are significant, particularly in the area of health and aged care. Sound budget and economic policies will be required to manage these pressures, including early action to address rapidly growing programmes such as the Pharmaceutical Benefits Scheme and the Disability Support Pension.
Fiscal outlook
The fiscal outlook for 2002-03 has strengthened since the 2001-02 Mid-Year Economic and Fiscal Outlook (MYEFO), despite the need for additional security and border protection expenditure. The budget estimates presented in Table 1 show that an underlying cash surplus of $2.1 billion is now expected in 2002-03, compared with an estimated $1 billion surplus at MYEFO. This improvement is primarily due to upward revisions to forecast economic growth, with Australia currently recording one of the strongest rates of growth in the industrialised world.
Table 1: Budget aggregates
The 2001-02 MYEFO forecast a small underlying cash surplus for 2001-02. As a result of subsequent policy decisions, principally on defence and border protection, combined with other revisions, the estimate has been revised down to a small deficit of $1.2 billion.
In accrual terms, the fiscal balance estimates for each year have improved since the MYEFO. Instead of a fiscal deficit, a small fiscal surplus is now estimated for 2002-03. The accrual deficit forecast for 2001-02 is expected to be smaller than expected at MYEFO. This follows a large accrual surplus in 2000-01, boosted by the impact of the transitional arrangements implemented for the introduction of the Pay As You Go system of company tax collections. Increasing fiscal balance surpluses are projected from 2003-04.
In 2001-02, a sharp slowdown in the United States, recession in Japan and weak conditions in Europe contributed to a global slowdown. Slower growth leading up to the events of 11 September 2001, and the security and defence costs associated with it, weakened the fiscal position of all major economies. Most countries in the OECD are expected to be in deficit in 2002-03. The latest OECD projections show that the United States is expected to record a deficit of 0.7 per cent of GDP in 2003, while the average deficit for the OECD as a whole is expected to be 1.7 per cent of GDP (Chart 1). By contrast, Australia will be in a much stronger budget position with one of the lowest levels of government debt in the OECD.
Chart 1: International comparison of budget balances 2002 and 2003(a)
(a) International data are for the total general government sector, sourced from OECD Economic Outlook (71) (preliminary edition, April 2001). Australian data is for the Commonwealth general government sector.
Economic outlook
Australia is set to be one of the world's strongest performing economies in both 2001-02 and 2002-03 after showing remarkable resilience to the recent global slowdown. The Australian economy strengthened as 2001 progressed, in sharp contrast to the rest of the world and is expected to grow by a robust 3¾ per cent in both 2001-02 and 2002-03, stronger than the United States, Japan and the European Union (Chart 2).
Chart 2: Economic growth in Australia and developed economies
(a) Germany, France, Italy, Austria, Belgium, Denmark, Finland, Greece, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom, weighted by purchasing power parity.
Economic growth in Australia in 2002-03 is expected to be underpinned by strengthening domestic demand, supported by a sharp rebound in business investment and continued robust household consumption growth. Investment in dwellings is expected to decline moderately in 2002-03 as the bring forward of building activity related to the additional First Home Owners Scheme (FHOS) is completed. While exports are expected to pick up in line with the recovery in the world economy, net exports are expected to be weaker in 2002-03 as strong domestic demand, particularly plant and equipment investment, leads to strong growth in imports.
Robust economic growth is expected to lead to stronger employment growth over the forecast period. In line with this improved outlook, the unemployment rate is forecast to decline to around 6 per cent in the June quarter of 2003. Inflation is forecast to be around 2¾ per cent in year-average terms in 2002-03 and 2½ per cent through the year to the June quarter 2003, within the Reserve Bank's medium term inflation target band. Labour costs, which are the key driver of inflation over the medium term, should remain in check with moderate wage increases and strong productivity growth.
Australia's resilient economic performance in 2001-02 has been driven by strong domestic demand, led by strong growth in dwelling investment and household consumption, which has more than offset the effect of weaker world growth on exports. Following a temporary slow down in overall economic growth in the second half of 2000, dwelling investment rebounded sharply in 2001-02, supported by historically low mortgage interest rates and the Government's more generous FHOS for new dwellings. Low interest rates, together with increases in household wealth, have also assisted strong growth in household consumption.
Table 2: Major economic parameters (percentage
change from
previous year)
(a) Labour force survey basis.
(b) Average earnings (national accounts basis).
Source: Australian Bureau of Statistics (ABS) Cat. No. 5206.0, 6202.0, 6401.0 and Treasury.
Australia's strong economic performance during the recent period of weak global growth has been assisted by sound macroeconomic policy and the payoff from sustained microeconomic reform. A sound macroeconomic policy framework, tax reform and ongoing labour market reform have all increased confidence in the Australian economy, making it more flexible and better able to adjust to external shocks. Imbalances that would have previously emerged in response to a period of global uncertainty and weaker world growth have not occurred, ensuring Australia's continued strong economic performance. Over the medium-term, if economic growth remains robust and progress is maintained on welfare and labour market reform, an unemployment rate below 6 per cent is achievable.
