Statement 6: Expenses and Net Capital Investment

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• Overview
• Reconciliation of expenses since the 2001-02 Budget
• Expenses by function
• General public services
• Defence
• Public order and safety
• Education
• Health
• Social security and welfare
• Housing and community amenities
• Recreation and culture
• Fuel and energy
• Agriculture, forestry and fishing
• Manufacturing and mining
• Transport and communication
• Other economic affairs
• Other purposes

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Part I: General government expenses

Overview

Commonwealth general government expenses are expected to grow moderately in 2002-03, but to remain unchanged in real terms (see Table 1). Relative to the overall size of the Australian economy, expenses are forecast to fall from 23.5 per cent of GDP in 2001-02 to 22.7 per cent of GDP in 2002-03. Further reductions in the size of expenses relative to GDP are projected over the forward estimates period to 2005-06.

Table 1: Estimates of Commonwealth general government expenses

(a) Real growth is calculated using the non-farm gross domestic product (GDP) deflator.

Reconciliation of expenses since the 2001-02 Budget

Table 2 provides a reconciliation of expenses estimates between the 2001-02 Budget, 2001-02 MYEFO and the 2002-03 Budget, showing the effect of policy decisions and economic parameter and other variations.

Table 2: Reconciliation of Commonwealth general government expense estimates

(a) Excluding the public debt interest effect of policy measures.

Policy decisions

Policy decisions taken since the 2001-02 MYEFO have increased estimated expenses across all years. Major new policy decisions in this Budget for 2002-03 include:

• measures to upgrade domestic security, including initiatives aimed at increasing airport security and detecting and responding to terrorist incidents, involving expenditure totalling $265 million in 2002-03;
• additional funding for processing of unauthorised boat arrivals and border protection, totalling $238 million in 2002-03;
• net additional Defence funding of $194 million in 2002-03 to support Australia's participation in the war against terrorism in Afghanistan and the Persian Gulf (in addition to $330 million provided for these operations in 2001-02);
• the outcome of the independent pricing review of the Australian Taxation Office (ATO) of $359 million in 2002-03 to provide for the effective administration of the tax system. Enhanced compliance capabilities are expected to produce a broadly offsetting increase in taxation revenue over the forward estimates period;
• additional funding of $105 million in 2002-03 to help address unmet need for accommodation support, respite care, day services and other disability services provided by State governments under the third Commonwealth-State-Territory Disability Agreement. This funding is contingent on the States agreeing to the Commonwealth's conditions under the new agreement; and
• provision of further assistance to families through the introduction of the Baby Bonus, providing benefits of $85 million in 2002-03, rising to $510 million in 2005-06.

Offsetting these increases are:

• measures to enhance the sustainability of the Pharmaceutical Benefits Scheme (PBS), resulting in decreased expenses for the PBS of $384 million in 2002-03, increasing to $510 million in 2005-06;
• the cessation of indexation on petroleum Revenue Replacement Payments forgone and the implementation of a National Excise Scheme for Low Alcohol Beer, decreasing budget balancing assistance grants to the States and Territories by $202 million in 2002-03; and
• a package to improve and develop the work capacity of people with disabilities, entailing an increase in expenses in 2002-03 and 2003-04, but resulting in $337 million of net savings over the forward estimates period.

Parameter and other variations

Parameter and other variations since the 2001-02 MYEFO have increased estimated expenses across the Budget and forward years. The primary drivers in 2002-03 include:

• higher demand for family tax benefit, childcare benefit, and Disability Support Pension, increasing expenses by $667 million in 2002-03;
• an upward revision to expenses indexed to the Consumer Price Index (CPI) including pensions and other personal benefit programmes ($542 million in 2002-03); and
• an increase in estimated expenses for the Diesel Fuel Rebate Scheme ($170 million) and Diesel and Alternative Fuels Grants Scheme ($85 million) to reflect recent payments experience. The upward revision to Diesel Fuel Rebate Scheme expenses is largely due to increased demand for diesel fuel and higher collections of petroleum excise duty from eligible businesses.

These increases in expenses are partially offset in 2002-03 by:

• a reduction in forecast unemployment benefit expenses ($497 million in 2002-03), reflecting recent unemployment outcomes and an improved employment outlook;
• the reprofiling of roads expenditure, including for the National Highways, Roads of National Importance and Roads to Recovery programmes, reducing estimated expenses in 2002-03 ($200 million); and
• the regular draw-down of the conservative bias allowance in the Contingency Reserve ($800 million in 2002-03).

Expenses by function

Table 3 sets out the estimates of Commonwealth general government expenses by function for the period 2001-02 to 2005-06.

Table 3: Estimates of Commonwealth general government expenses
by function

Major movements within the estimates of expenses by function between 2001-02 and 2002-03 include increases in the following functions:

• General Public Services due to the increased resourcing of the ATO from 2002-03, the on-going growth in the General Research Sub-function reflecting the Backing Australia's Ability package announced in January 2001 as well as various one-off increases in a number of agencies;
• Defence due to additional funding to support Australia's participation in the war against terrorism, upgrading of domestic security, and funding increases flowing from the Government's White Paper: Defence 2000-Our Future Defence Force;
• Health due to a steady increase in the use of medical and pharmaceutical services over the period, increasing costs for the provision of medical services and a continuing trend towards newer and more expensive drugs under the PBS. The growth of the PBS will be reduced in 2002-03, and will be lower than previously expected over the forward years as a result of initiatives announced in this Budget;
• Education due to the effect of indexation on Commonwealth funding for schools, and the on-going impact of previously announced decisions. These decisions include: a new funding arrangement for non-government schools announced in the 1999-2000 Budget; initiatives from the Backing Australia's Ability package announced in January 2001; and growth funding under the Australian National Training Authority Agreement; and
• Social Security and Welfare due to the on-going effect of indexation of payments as well as demographic and social factors which affect demand-driven programmes.

These effects have been partially offset by decreases in expenses for the following functions:

• Housing and Community Amenities due to the conclusion in 2002 of the additional First Home Owners Scheme as well as the completion over the forward years of several programmes within the function;
• Manufacturing and Mining due to the conclusion of various industry assistance programmes;
• Agriculture, Forestry and Fishing due to the conclusion over the forward years of various rural assistance programmes;
• Transport and Communications due to the conclusion over the forward years of programmes designed to improve telecommunications service standards and broaden access to telephone and internet services in rural, regional and remote Australia; the conclusion of various rail and air transport initiatives; and the conclusion of the Roads to Recovery programme in 2004-05; and
• Other Purposes due to reduced Budget Balancing Assistance (BBA) grants to the States and Territories reflecting the cessation of indexation on petroleum Revenue Replacement Payments forgone and the implementation of a National Excise Scheme for Low Alcohol Beer.

Estimates presented in Table 3 above are more fully explained for each individual function below.

General public services

Table 4: Summary of expenses

This function includes expenses from the following portfolios:

• Attorney-General's;
• Defence;
• Education, Science and Training;
• Employment and Workplace Relations;
• Finance and Administration;
• Foreign Affairs and Trade;
• Health and Ageing;
• Immigration, Multicultural and Indigenous Affairs;
• Industry, Tourism and Resources;
• Parliamentary Departments;
• Prime Minister and Cabinet;
• Transport and Regional Services;
• Treasury; and
• Veterans' Affairs.

Nature of expenses and major trends

General public services include expenses on activities concerned with the organisation and operation of government. The function covers legislative and executive affairs, financial and fiscal affairs, foreign economic aid, general research, general services and government superannuation benefits.

A major underlying trend in this function is the increase in expenses in the General Research Sub-function over the budget and forward years. This is largely due to the Backing Australia's Ability - An Innovation Action Plan for the Future package announced in January 2001, which provides increased support for research and innovation. Other contributors to increases in the forward years are the preparations for the 2006 Census, the anticipated cost of a federal election, and the expected increases in foreign aid commitments in 2002-03 and 2005-06.

These increases are partially offset by declines (in nominal or real terms) for some years in other sub-functions, including Legislative and Executive Affairs, Foreign Affairs and Economic Aid and General Services.

Legislative and executive affairs

Expenses under this sub-function cover: support services for Senators and Members of Parliament; the funding of elections; drafting of Bills by the Office of Parliamentary Counsel; and expenses of the Department of the Prime Minister and Cabinet (including support services for former Governors-General and the Prime Minister's official residences), and the Office of the Official Secretary to the Governor-General.

Expenses for the Parliamentary Departments' component of this sub-function are expected to remain stable from 2002-03 to 2005-06.

The reduction in expenses in 2002-03 reflects the conclusion of the Commonwealth Heads of Government Meeting (CHOGM) in Coolum in March 2002, and a reduction in expenses for the Royal Commission into the Building and Construction Industry and the Royal Commission into the Failure of the HIH Insurance Group. These Royal Commissions conclude in 2002-03.

The growth in 2004-05 reflects the additional expenses expected to be incurred by the Australian Electoral Commission for the cost of a federal election expected in that year.

Financial and fiscal affairs

These expenses are related to the collection of taxes, including customs duties, management of public funds and public debt, monetary and fiscal policy, and formulation and review of government budgets. They exclude expenses related to the collection of licenses, fees and fines that are associated with a specific function, and interest payments classified to the Public Debt Interest Sub-function (Other Purposes Function).

In the Budget and forward years, increased resourcing is to be provided to the ATO to improve services and compliance following the recommendations of the independent pricing review. Other factors impacting on the estimates in the forward years include increased funding for the Australian Bureau of Statistics in 2005-06 for the preparation of the 2006 Census and a one-off increase in 2005-06 in the Commonwealth's contributions to the State and Territory governments for debt redemption, representing a final payment of debt redemption grants.

Foreign affairs and economic aid

Foreign Affairs and Economic Aid Sub-function expenses include both aid and non-aid components. The overseas aid component covers expenses for which the primary purpose is to fund concessional and non-concessional assistance to other countries. The non-aid component covers the expenses used for the operations of the foreign service, the conduct of foreign and international trade relations (excluding trade promotion activities) and contributions to international organisations not resulting in the recognition of a financial asset. For example, expenses associated with the United Nations (UN), including for its peacekeeping operations, would be attributed to this sub-function.

The increase in expenses in 2002-03 results from expected commitments to be made by the Commonwealth to the Global Environment Facility, the Montreal Protocol Multilateral Fund, increased contributions to international organisations, including peacekeeping operations, and the recognition of the overseas property estate under this sub-function. The Global Environment Facility is designed to meet growing environmental concerns in developing countries. The Montreal Protocol is designed to undertake investment operations in developing countries to support the phaseout of production and consumption of Ozone Depleting Substances. Australia's overseas property estate is made up of all properties relating to the conduct of foreign and international trade relations, for example Australian embassies and high commissions. Previously the overseas property estate was classified under the General Services Sub-function (General Public Services Function).

The expected fall in expenses between 2002-03 and 2003-04 results from the Commonwealth not expecting to enter any new multilateral aid commitments during this period. Conversely the increase in expenses from 2004-05 to 2005-06 results from further commitments expected to be made by the Commonwealth to the Global Environment Facility and the Montreal Protocol Multilateral Fund, and commitments expected to be made by the Commonwealth to the International Fund for Agricultural Development. The International Fund for Agricultural Development provides finance for agricultural development projects primarily for food production in developing countries.

This sub-function also includes the expenses of the Australian Centre for International Agricultural Research and minor expense components from the Department of Immigration and Multicultural and Indigenous Affairs (DIMIA) and the Department of Health and Ageing (DoHA). The DIMIA expenses support international initiatives to address the situation of displaced Afghan and Iraqi refugees. The DoHA expenses are for payments to the World Health Organisation and the International Agency for Research on Cancer.

General research

The General Research Sub-function covers expenses associated with scientific knowledge and its application. This includes the expenses incurred by Commonwealth research authorities such as the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Australian Nuclear Science and Technology Organisation (ANSTO). Also included are elements of the national research infrastructure and general research programmes, including grants for research in higher education institutions, both directly and through the Australian Research Council, and contributions to Cooperative Research Centres.

General research expenses increase by an average real rate of 5.3 per cent per annum. This increase is primarily attributable to Backing Australia's Ability - An Innovation Action Plan for the Future - a plan announced in January 2001 to foster research and enhance the commercialisation and diffusion of applied research to improve business productivity. The major components of the increase in research expenses, as a result of Backing Australia's Ability, are an additional:

• $722 million for competitive research grants administered by the Australian Research Council;
• $255 million for Higher Education research grants;
• $132 million for Major National Research Facilities; and
• $214 million for Cooperative Research Centres.

The other major components of increase in research expenses are attributable to increases in the expenses of CSIRO and ANSTO of $374 million and $92 million respectively. The increases reflect the implementation of CSIRO's Strategic Action Plan, realignment of ANSTO's funding from 2001-02 to forward years until 2004-05, and price adjustments to maintain funding in real terms.

Programmes supporting research in specific sectors are generally included under the relevant function. For example, health research is included in the Other Health Services Sub-function (Health Function).

General services

The General Services Sub-function covers expenses relating to the administrative processes of government not classified elsewhere, including the provision of real property, centralised employee compensation (provided by Comcare) and centralised insurance arrangements for Commonwealth departments and agencies.

Comcare's expenses relate to the management of occupational health and safety, rehabilitation and workers' compensation claims management for the Commonwealth jurisdiction. Expenses increase marginally over the forward years to reflect small increases in expected workers' compensation claim costs.

This sub-function also includes expenses incurred by the Department of Finance and Administration on departmental outputs allocated to improve government operations by developing whole-of-government frameworks and strategies, providing shareholder advisory services on Government Business Enterprises and managing the Commonwealth's domestic property portfolio and insurance services. These expenses are expected to increase marginally across the forward years.

This sub-function also includes:

• Expenses associated with the provision of services and infrastructure in the Indian Ocean Territories funded through the Transport and Regional Services portfolio;
• Minor administrative expenses for the Department of Veterans' Affairs; and
• Expenses relating to the operations of the Public Service and Merit Protection Commission in the Prime Minister and Cabinet portfolio.

Government superannuation benefits

The Government Superannuation Benefits Sub-function covers the Commonwealth's superannuation schemes for its employees, military personnel and Senators and Members of Parliament. The expenses include the accruing liability in relation to current year employment and the administration of the schemes.

The major Commonwealth civilian superannuation schemes are the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS), and the Parliamentary Contributory Superannuation Scheme for Parliamentarians. The Military Superannuation and Benefits Scheme and the Defence Force Retirement and Death Benefits Scheme cover military personnel.

Expenses under this sub-function are forecast to remain relatively constant over the forward years. The assumed impact of the closure of the PSS to new members and the introduction of choice from 1 July 2003 reduces estimated expenses for Commonwealth civilian schemes. This is offset by a matching increase in estimated expenses for external schemes. This sub-function does not include the nominal interest on the unfunded liabilities of the Commonwealth superannuation schemes. These expenses are included under Nominal Superannuation Interest Sub-function (Other Purposes Function).

Defence

Table 5: Summary of expenses

This function includes expenses from the following portfolio:

• Defence

Nature of expenses and major trends

Expenses in this function are within the Defence portfolio and support the specific portfolio outcome of `The defence of Australia and its National Interests'. Real growth of 5.3 per cent from 2001-02 to 2002-03 occurs despite the additional $856 million provided in 2001-02 - for the White Paper ($507 million see below) and supplementation of $348.5 million including for the war against terrorism and for patrolling Australia's northern approaches.

The increase in 2002-03 reflects increased Defence spending amounting to $216 million in 2002-03 for increased operational commitments, including contributions to the war against terrorism and border protection. A further increase of $51 million in 2002-03 and $167 million across the forward estimates has been included for the establishment of a second Tactical Assault Group (TAG) and a Chemical, Biological Radiological, Nuclear and Explosive (CBRNE) Incident Response Regiment, in response to the increased terrorist threat after the 11 September 2001 terrorist attacks. Additional funding has been provided to enhance protective security measures and to improve Defence's real time and secure communications systems. Funding has also been redirected to the purchase of additional war-stocks of explosive munitions to replenish stocks.

This funding increase reflects military activity beyond the operational tempo on which the additional funding commitment identified in the Government's White Paper: Defence 2000 - Our Future Defence Force was based. This provided for approximately 3 per cent real growth per annum on average over the next decade.

Defence has rephased $150 million of its specialist military equipment aquisition programme from 2002-03 to 2003-04 ahead of the Defence strategic review in late 2002. As envisaged in the White Paper, the Defence Capability Plan will be revised to take account of changing strategic circumstances, new technologies and changed priorities.

Defence

The Defence Function covers expenses on personnel and related benefits, military equipment and technology, stores and Defence administration.

The main components of these expenses are:

• personnel costs, which include the payment of salaries and allowances to Defence military and civilian staff (totalling $5.9 billion in 2002-03). Expenses related to the accruing superannuation liability for current staff are shown in the Government Superannuation Benefits Sub-function (General Public Services Function) while the nominal interest on unfunded liabilities of the Commonwealth superannuation schemes is included under the Nominal Superannuation Interest Sub-function (Other Purposes Function);
• an acquisition programme of $4.1 billion in 2002-03 to implement the Defence Capability Plan. This includes continuing projects like Airborne Early Warning and Control aircraft, Armed Reconnaissance helicopters and ANZAC ships, as well as numerous new projects to be started in 2002-03;
• the acquisition of stores, including ammunition and fuel, required to maintain the operations of the Australian Defence Force (ADF);
• the development of bases, airfields, communications, training and other facilities; and
• housing for eligible ADF personnel and their families, largely through payment of rent to the Defence Housing Authority.

Public order and safety

Table 6: Summary of expenses

This function includes expenses from the following portfolios:

• Attorney-General's; and
• Prime Minister and Cabinet.

Nature of expenses and major trends

Expenses for the Public Order and Safety Function support the administration of the Federal legal system and the provision of legal services, including legal aid, to the community. Public Order and Safety expenses also include law enforcement activities and the protection of Commonwealth property.

As a result of the 11 September 2001 terrorist attacks on the United States of America, the Government will introduce new domestic security arrangements and programmes. This will include new funding for the Australian Federal Police (AFP), Australian Customs Service (Customs), Attorney-General's Department and the Australian Security Intelligence Organisation (ASIO).

Courts and legal services

Expenses under this sub-function include payments for Federal courts and tribunals. They also include expenses for the administration of bankruptcies by the Insolvency and Trustee Service Australia, and operational expenses for the Office of the Director of Public Prosecutions and the Commonwealth's contribution to funding for state legal aid commissions.

Expenses for the Courts and Legal Services Sub-function remain steady through to 2005-06.

Other public order and safety

This sub-function incorporates all other expenses on public order and safety activities.

Included under this sub-function are the operations of ASIO, the Australian Secret Intelligence Service, the Office of National Assessments, and the operations of the Office of the Inspector-General of Intelligence and Security. These agencies collect and assess information relevant to the protection of Australia against threats to its national interests and provide security at overseas posts, counter-terrorist training and equipment.

Other agencies which are part of this sub-function include, but are not limited to, the AFP, the Australian Bureau of Criminal Intelligence, the Australian Institute of Criminology, the National Crime Authority and the Australian Transaction Reports Analysis Centre.

The Other Public Order and Safety Sub-function incorporates the Customs activities relating to the movement of people and goods across Australia's borders. The sub-function also includes Customs' Coastwatch unit which is responsible for the aerial surveillance of Australian Coastal and Fishing Zone areas to enable detection of smuggling, illegal entry, unauthorised fishing and quarantine breaches.

The events of 11 September 2001 resulted in the implementation of increased domestic security programmes across a number of agencies. Consequently, associated expenditure will rise sharply in 2002-03 and then stabilise around this higher level in the following years.

For other significant expenses relating to domestic security see the Defence Function.

Education

Table 7: Summary of expenses

This function includes expenses from the following portfolios:

• Education, Science and Training;
• Family and Community Services;
• Immigration and Multicultural and Indigenous Affairs; and
• Veterans' Affairs.

Nature of expenses and major trends

Education expenses support the delivery of education services through higher education institutions; vocational education and training providers (including technical and further education institutions); and government (State and Territory) and non-government schools.

Expenses under this function also include the ABSTUDY scheme, Assistance for Isolated Children, income support for students aged twenty-five years and over through AUSTUDY and relevant departmental costs within the Education, Science and Training portfolio.

Total expenses under the Education function are estimated to increase by 15.7 per cent in nominal terms over the period from 2002-03 to 2005-06, or 5.0 per cent annually on average. The major drivers of this growth are:

• indexation of Commonwealth Government spending on schools (both government and non-government), vocational education and training and higher education (further explained under individual sub-functions);
• the effect of previously announced decisions - in particular the introduction of a new funding arrangement for non-government schools announced in the 1999-2000 Budget context (which provided an additional $800 million over a five year period from 2000-01 to 2004-05), and Backing Australia's Ability - An Innovation Action Plan for the Future (of which approximately $650 million over a six-year period from 2000-01 to 2005-06 relates to the Education Function); and
• growth funding under the Australian National Training Authority Agreement ($231 million over three years from 2001-02).

Over the next four decades, total Commonwealth education spending is projected to decline marginally as a proportion of GDP, mainly reflecting the generally slower growth expected in the total number of students, especially in the principal age group for education (five to twenty-four year olds). The fall in expenditure is expected to occur despite projected increases in real average funding per student and projected higher participation rates for post-secondary education. These longer term trends are discussed further in the Intergenerational Report 2002-03.

Higher education

Higher education funding rises by about 6.4 per cent in nominal terms from 2002-03 to 2005-06. This primarily reflects the indexation of Commonwealth funding - indexation is via a Cost Adjustment Factor that takes account of movement in both salary (Safety Net Adjustment) and non-salary (CPI) costs.

Increased funding arising since 2001-02, from measures in Backing Australia's Ability, include the additional funding for research and training infrastructure in universities, funding for 2,000 additional targeted university places and a new loans scheme for postgraduates.

Vocational and other education

The Commonwealth's funding for vocational education and training is primarily provided to the State and Territory Governments through the Australian National Training Authority under the Commonwealth, State and Territory Australian National Training Authority Agreement.

Growth in this sub-function (averaging about 3.3 per cent per annum in nominal terms from 2002-03 to 2005-06) is driven by additional funding associated with the new Australian National Training Authority Agreement. Growth in this sub-function is also driven by indexation of Commonwealth funding to the Authority to maintain real base funding levels over time. In the 2002-03 Budget, the Government will provide funding of $33 million over three years for additional vocational education and training places for people with disabilities to provide a greater focus to developing and improving their working capacity.

Expenses under this sub-function also includes the Veterans' Children Education Scheme which provides support services and financial assistance to eligible children (of veterans) at school and tertiary levels of education.

Schools

Commonwealth Specific Purpose Payments represent about 12 per cent of total spending on government schools with the balance being met by State and Territory governments from their own revenue sources. The Commonwealth provides about 45 per cent of total support for non-government schools with the balance being met by other governments (12 per cent) and private sources (43 per cent).

Commonwealth targeted programmes for government and non-government schools are grouped into two priority areas:

• improving learning outcomes for educationally disadvantaged students. For example, the Strategic Assistance for Improving Student Outcomes Programme aims to improve learning outcomes for educationally disadvantaged students, particularly in literacy and numeracy, and the educational participation and outcomes of students with disabilities; and
• improving outcomes in specific targeted teaching and learning areas. For example, the Languages Other Than English Programme seeks to help schools and school communities to improve the learning outcomes of students who are learning other languages.

The other major element within the sub-function is the Indigenous Education Strategic Initiatives Programme which provides supplementary funding assistance to pre-schools, government and non-government school systems, vocational education and training authorities and independent indigenous education providers to improve educational outcomes for indigenous people.

Growth in the Schools Sub-function averages about 7.4 per cent per annum in nominal terms from 2002-03 to 2005-06. This primarily reflects the impact of the needs-based funding arrangements (based on the socio-economic status of the school community) for non-government schools recurrent funding announced in the 1999-2000 Budget context, and the effects of indexation arrangements for both government and non-government schools. Since 1993, government and non-government schools' funding has been indexed by a sector-specific index, the Average Government Schools Recurrent Cost Index, which is based on the year-on-year change in the recurrent cost of educating a child in a government school.

Student assistance

Expenses under the Student Assistance Sub-function include:

• payments for AUSTUDY (income support for students aged twenty-five years and over);
• the Student Financial Supplement Scheme (a voluntary loan scheme which gives some tertiary students the option of borrowing money to help cover expenses while studying);
• ABSTUDY (assistance to Aboriginal and Torres Strait Islander full-time secondary and tertiary students and some primary school students);
• the Assistance to Isolated Children programme (assistance to the families of students who do not have reasonable daily access to an appropriate government school); and
• the Adult Migrant English Programme (provides access to tuition in English as a second language for all recently arrived migrants without functional English).

For information on the Youth Allowance which replaced AUSTUDY for students aged under 25 years from 1 July 1998, see the Common Youth Allowance Sub-function (Social Security and Welfare Function).

General administration

Expenses under this sub-function consist almost entirely of departmental expenses associated with the administration of the Department of Education, Science and Training. Expenses are relatively stable over the forward years.

School education - specific funding

Expenses under this sub-function consist of programmes that target specific initiatives or are designed specifically for the benefit of certain groups, such as:

• grants to primary school libraries and text book subsidies under the Book Industry Assistance Plan;
• information for indigenous students and/or their parents on career and education options; and
• activities aimed at improving access, participation and outcomes for indigenous school and pre-school students.

The majority of expenses arise from the Quality Outcomes Programme, which seeks to improve student learning outcomes in schools, for example through the National School Drug Education Strategy, civics and citizenship education, and training to enhance the professional role of principals and teachers. The Government has reaffirmed its support for Teachers of the 21^st Century, announced in September 2000 by continuing funding for the Quality Teacher Programme (QTP) for a further three years from 2002-03.

Health

Table 8: Summary of expenses

(a) The financial impact of premium growth on the forward estimates for the 30 per cent Private Health Insurance Rebate has been allocated to the Contingency Reserve.

(b) The bulk of Department of Health and Ageing and Department of Veterans' Affairs expenses for assistance to the aged are now classified to the Assistance to the Aged Sub-Function (Social Security and Welfare Function).

This function includes expenses from the following portfolios:

• Health and Ageing; and
• Veterans' Affairs.

Nature of expenses and major trends

The major purpose of Commonwealth health expenditure is to ensure that all Australians have access to necessary health services through a choice of providers and without excessive price barriers.

Health Function expenses are expected to total around $29.1 billion in 2002-03 and grow on average by around 2.7 per cent per annum in real terms over the forward years. This growth reflects a steady per capita increase in use of medical and pharmaceutical services over the period, increasing costs for the provision of medical services, and a continuing trend toward the use of newer and more expensive drugs under the Pharmaceutical Benefits Scheme (PBS).

Over the next four decades, total Commonwealth health spending is projected to increase from around 4 per cent of GDP in 2001-02 to 8.1 per cent of GDP in 2041-42. Expenses related to health and ageing are likely to be the main contributor to increased Commonwealth government spending in the future. Much of this projected growth comes from increased use of new and expensive diagnostic procedures and medicines. The PBS accounts for the greatest part of the projected increase in health spending. These longer term trends are discussed further in the Intergenerational Report 2002-03.

Medical services and benefits

This sub-function includes Medicare Benefits Schedule (MBS) rebates for general practitioner (GP) and specialist attendances ($8.3 billion in 2002-03) and the 30 per cent Private Health Insurance Rebate ($2.3 billion in 2002-03). It also includes funding ($0.9 billion in 2002-03) for the provision of health services to veterans and their dependants by the Department of Veterans' Affairs (DVA). Commonwealth programmes under this sub-function are intended to provide high quality health outcomes for people by enabling access to timely and appropriate health care services at reasonable cost (or, in the case of eligible veterans and their dependants, no cost).

Growth in this subfunction is largely explained by the increasing costs of medical services funded through Medicare, increasing per capita utilisation of medical services and general population growth. Declining real growth in 2005-06 represents the completion of two smaller programmes (GP IT Development and Diagnostic Imaging Reform) and the transfer of forecast premium growth for the 30 per cent Private Health Insurance Rebate to the Contingency Reserve (Other Purposes Function).

The underlying growth in veteran expenditure in this sub-function is largely driven by the ageing of the veteran population and the resultant increase in demand for specialist and dental services as well as rehabilitation and surgical aids. This growth is masked to some extent in 2001-02 by the gradual increase in flow-on savings as a result of the 2000-01 Veterans' home care measure which peaks in 2002-03 and will plateau thereafter.

Health care agreements

To support free public hospital care under Medicare, the Commonwealth will provide $7.1 billion in 2002-03 to the States and Territories under the Australian Health Care Agreements (AHCA). The current Agreements cover the period 1 July 1998 to 30 June 2003, and focus on increasing public patient access and improving the efficiency and effectiveness of service delivery. AHCA funding is forecast to grow by around 3.4 per cent per annum in real terms over the forward estimates period as a result of expected movements in the cost of medical services, growth in hospital utilisation, and expected population changes. Ongoing adjustments to funding resulting from movements in these cost drivers are incorporated in the current Agreements with the States and Territories. Growth in the forward estimates is subject to the negotiations for the next round of agreements. New Agreements are due to commence on 1 July 2003.

Hospital services

The Hospital Services Sub-function includes funding for the provision of in-hospital treatment to eligible veterans and their dependants, and grants to public and not-for-profit hospitals to ease the costs of transition to new Fringe Benefits Tax (FBT) arrangements (announced in the 2000-01 Budget).

Expenses are forecast to be relatively stable over the Budget and forward years, apart from a decline in real growth from 2002-03 to 2003-04, which reflects the cessation of the FBT transitional arrangements.

Pharmaceutical services and benefits

Expenses for this sub-function include the PBS administered by the Department of Health and Ageing (DoHA), and the Repatriation Pharmaceutical Benefits Scheme (RPBS) administered by DVA. Under these schemes, the Commonwealth provides assistance towards the cost of a wide range of pharmaceuticals.

Expenses for this sub-function are forecast to increase from $5.4 billion in 2002-03 to $6.7 billion in 2005-06, or an average of around 5.2 per cent per annum in real terms. The reduction in growth in 2002-03 and lower than previously expected growth in the forward years is driven primarily by measures announced in this Budget, including the increase in co-payments charged to patients and initiatives to ensure medicines are prescribed in accordance with PBS requirements.

Major components of the Pharmaceutical Benefits are examined in more detail below.

Box 6.1: Pharmaceutical services and benefits Table 8.1:  Trends in major components of the Pharmaceutical Benefits sub-function (a) For a detailed discussion of the Pharmaceutical Benefits Scheme, refer to Outcome 2 of Health and Ageing 2002-03 Portfolio Budget Statement. (b) Veterans' Pharmaceutical Services are covered under Outcome 2 of the Department of Veterans' Affairs (Defence Portfolio) 2002-03 Portfolio Budget Statement. (c) Subsumed within Outcomes 1 and 2 of Health and Ageing 2002-03 Portfolio Budget Statement.

Aboriginal and Torres Strait Islander health

The Commonwealth funds a network of community controlled primary health care services for Aboriginal and Torres Strait Islander people. Commonwealth funding also supports a range of specialist services including mental and sexual health, and hearing services. The Commonwealth also works with State and Territory Governments and other stakeholders in the planning and funding of Aboriginal and Torres Strait Islander specific health services.

Expenses will grow significantly in 2002-03 (14.4 per cent) and 2003-04 (11.7 per cent), primarily as a result of measures to improve access to primary health care in the 1999-2000 and 2001-02 Budgets.

Health services

Expenses under the Health Services Sub-function include funding for the provision of blood and blood products through the Australian Red Cross Blood Service (ARCBS) and Commonwealth Serum Laboratories Limited, population health programmes, and development of Mental Health Care strategies.

Expenses increase in 2002-03 following an increase in funding to the ARCBS and the Health component of the Budget measure Incident Response Capability. Expenses are then forecast to grow only slowly over the forward years to 2004-05 and to decline slightly in 2005-06 due to the conclusion of the Alcohol Education and Rehabilitation programme.

Other health services

Expenses under the Other Health Services Sub-function include medical research grants administered by the National Health and Medical Research Council (NHMRC), and funding for promotion of public health under the Public Health Outcome Funding Agreements between the Commonwealth and the States and Territories.

The increase in expenses for this sub-function is largely due to increased funding for health and medical research through the NHMRC. The increase arises from the Government's response to the Wills Review contained in the 1999-2000 Budget, in which the Government committed an additional $600 million over six years (from 1999-2000) to health and medical research.

General administration - health

Expenses under this sub-function include programmes to support training and education of health workers and the development of acute and primary care strategies administered by DoHA, as well as part of the general departmental expenses of DoHA, and the Health Insurance Commission (HIC).

The HIC operates under a purchaser-provider relationship with DoHA, DVA and other client agencies. It is responsible for the management of Medicare and other payments to the public, and collates and publishes data on the MBS, PBS and RPBS. The HIC also has a monitoring and enforcement role - for example, ensuring that providers of services are billing Medicare correctly and that pharmaceuticals are being prescribed in accordance with PBS criteria.

Health assistance to the aged

Expenses under this sub-function include the Community Nursing Programme and Community Care Seeding Grants administered by DVA. The Community Nursing Programme provides support for veterans, war widow(er)s and their dependants in improving their health and in regaining and maintaining an optimal level of independence in their homes. The growth in expenses reflects increasing demand due to the frailty of the veteran population, and the trend towards shorter hospital stays.

Social security and welfare

Table 9: Summary of expenses

(a) The bulk of Department of Health and Ageing and Department of Veteran's Affairs expenses relating to assistance to the aged are now classified to this sub-function.

(b) Carer Allowance (Adult) and Carer Payment have been reclassified from the Assistance to the Aged Sub-function to the Assistance to People with Disabilities Sub-function.

This function includes expenses from the following portfolios:

• Attorney-General's;
• Family and Community Services;
• Health and Ageing;
• Immigration and Multicultural and Indigenous Affairs; and
• Veterans' Affairs.

Nature of expenses and major trends

Social Security and Welfare expenses primarily support the promotion of a fair and cohesive society while improving the capacity of families, communities and individuals to support themselves. The function includes services to the aged, assistance to people with disabilities, a variety of assistance to families with children, income support and compensation for veterans and their dependants, and advancement programmes for reconciliation and more generally for Aboriginal and Torres Strait Islander people.

Priorities within the Social Security and Welfare Function have moved away from universal provision of benefits to an approach to welfare assistance that emphasises prevention, early intervention, and mutual obligation in the provision of assistance to recipients.

The Budget measure Recognising and Improving the Capacity of People with a Disability will continue the move towards a more active social security system tailored to addressing individual circumstances and maintaining participation in the workforce.

Social Security and Welfare expenses are estimated to total around $72.9 billion in 2002-03 and grow moderately over the forward years. The major factors contributing to this growth are assistance to the aged, assistance to families with children and assistance to people with disabilities. Growth in these expense categories is due to the indexation of payments, including maintaining the single rate of age pension and disability pension at a minimum of at least 25 per cent of Male Total Average Weekly Earnings (MTAWE), as well as demographic and social factors that are altering the age, family and community profile and affecting demand-driven programmes.

Over the next four decades, age pensions and aged care (including nursing homes) could lead to increases in Commonwealth expenses of 2.8 per cent of GDP. Assistance to veterans is included in these projections. Spending on disability support pension and unemployment allowances is projected to decline. These longer term trends are discussed further in the Intergenerational Report 2002-03.

Assistance to the aged

Expenses within this sub-function provide income support for aged people and their dependants as well as funding for residential aged care, community care for older Australians, and flexible care services for older Australians who live in regional, rural or remote areas. Carer Allowance (Adult) and Carer Payment which formed part of this sub-function in 2001-02 are now reported under the Assistance to People with Disabilities Sub-function.

The main contributor to growth in this sub-function is the Age Pension, with smaller growth in residential and community care expenses. The substantial annual growth in the Age Pension is primarily due to indexation, including the Government's commitment to maintain single pension rates at a minimum of at least 25 per cent of MTAWE and, to a lesser extent, increases in recipient numbers and the effect of the reduction to deeming rates for pensions (announced on 6 March 2002).

The growth in residential care expenses is driven by the ageing of the population and associated costs of providing appropriate care for older Australians in a range of care settings.

Assistance to veterans and dependants

The expenses in this sub-function provide income support and compensation, in the form of pensions, to veterans and their dependants for incapacity or death resulting from war or defence service. The main contributors to expenses in this sub-function are the Service Pension, War Widows Pension and the Disability Pension administered by the Department of Veterans' Affairs.

Expenses for this sub-function exhibit virtually no growth over the forward years to 2003-04 and a subsequent decline in expenses from 2004-05 onwards. This is consistent with the increase in War Widows and Disability Pensions expenses which more than offset the fall in Service Pension expenses in the short term, as more widows become eligible due to the increasing mortality of the veteran population and as Disability Pension recipients move to higher rates of disability due to ageing and increased frailty. In 2004-05 this trend is reversed as the effects of higher expected rates of mortality impact on expenses.

For other significant expenses on veterans see the Health Function - Medical Services and Benefits, Hospital Services, Pharmaceutical Services and Benefits and Health Assistance to the Aged Sub-Functions.

Assistance to people with disabilities

Expenses for this sub-function provide means-tested income support to people with disabilities as well as partners, parents and other carers of people with disabilities, assistance with employment-related transport costs, and services which increase the independence and employment opportunities of people with disabilities. This sub-function includes payments such as the Disability Support Pension, the Wife Pension, disability employment assistance and contributions to the States and Territories under the Commonwealth State and Territory Disability Agreement. Carer Allowance (Adult) and Carer Payment, which formed part of the Assistance for the Aged Sub-function for Budget 2001-02 are now reported under this sub-function.

The expenses for this sub-function exhibit growth from 2001-02 to 2002-03 due largely to increasing Disability Support Pension expenses resulting from an increase in the expected number of recipients and indexation of payments, including the Government's commitment to maintain the single rate of pension at a minimum of at least 25 percent of MTAWE. This pension payment has historically experienced strong growth in the number of recipients, partly in line with the ageing of the population, as the incidence of disability increases with age.

From July 2003, the growth in this sub-function is anticipated to be reduced by measures announced in this Budget. Recognising and Improving the Capacity of People with a Disability will substantially reduce the number of new claims approved for the Disability Support Pension, with most unsuccessful claimants moving onto other more appropriate income support payments, such as Newstart Allowance, which is reported under the Assistance to the Unemployed and the Sick Sub-function. This movement will result in an increase in the expected growth of expenses in that sub-function.

Existing recipients will be assessed under the new criteria within five years of implementation, which will result in a reduction in growth of the number of Disability Support Pension recipients and an associated increase in growth in numbers of recipients of Newstart Allowance.

Expenses in this sub-function have also increased because additional funding of $547.5 million over five years has been provided to assist the States and Territories to continue to address unmet need for disability accommodation services under the Third Commonwealth State Territory Disability Agreement.

Assistance to families with children

Expenses under this sub-function ensure that families with children receive financial assistance towards the support of their children. The majority of these expenses are paid through Family Tax Benefit (FTB) Parts A and B, Parenting Payments (Partnered and Single) and Child Care Benefit. This Sub-function also includes provision of further assistance to families through the introduction of the Baby Bonus, providing benefits of $85 million in 2002-03, rising to $510 million in 2005-06.

FTB Parts A and B provide means-tested financial assistance to families with the cost of raising children while the Parenting Payment provides means-tested financial assistance for people who are primary carers of children. The Child Care Benefit payment provides assistance with the cost of child care for long day care, family day care, occasional care, outside school hours care, vacation care and registered care.

The growth in this estimate is due to a combination of indexation of the payments (FTB and Childcare Benefit) by the CPI, increasing use of child care services and increasing Parenting Payment (Single) expenses. Parenting Payment (Single) expenses are increasing due to a combination of growth in new claims for this payment and indexation of the payment, including the Government's commitment to maintain the pension at a minimum of at least 25 per cent of MTAWE.

Assistance to the unemployed and the sick

Income support is provided to persons who are unemployed, or unable to work because of temporary incapacity, and who have limited alternative means of support. The major payments made under this sub-function are Newstart Allowance, Partner Allowance Benefit, Mature Age Allowance and Sickness Allowance.

Expenses for this sub-function increase substantially between 2003-04 and 2004-05, largely as a result of the measure Recognising and Improving the Capacity of People with a Disability. This measure will result in a movement of claimants from Disability Support Pension, which is reported under the Assistance to People with Disabilities Sub-function, onto Newstart Allowance and a consequential increase in Newstart Allowance expenses.

These increases are partially offset by the impact of previous Budget measures reducing Newstart Allowance expenses (for example Introduction of a preparing for work activity agreement for new claimants of unemployment benefits and the Compliance strategy from the 2000-01 Budget). The slight decline in expenses exhibited between 2004-05 and 2005-06 is driven by forecasts for unemployment which show a decline between 2004-05 and 2005-06.

Common youth allowance

Expenses under this sub-function relate to Youth Allowance, which is designed to provide income support payments to students under twenty-five years of age and unemployed people under twenty-one years of age. Receipt of the Allowance requires recipients to engage in education, training, job search or other activities that contribute to society.

The increase in expense growth for this sub-function in 2002-03 is driven by indexation of the Youth Allowance by the CPI and forecasts of youth unemployment for 2002-03. Unemployment numbers are estimated to increase in the Budget year and then decline from 2003-04, consistent with current economic forecasts.

The small growth in Youth Allowance expenses over the forward years is in part due to indexation as well as changes in the composition of the student population which result in increases in projected average rates.

Other welfare programmes

The major expenses for this sub-function relate to Special Benefit payments and Widow B Pension. Widow B Pension is payable to previously married women who do not have dependent children and who were aged 50 years or more, or were sole parent pensioners aged 45 years or more, at 1 July 1987. Increases in 2002-03 and across the forward years are due to increased expenses for Special Benefit, which provides income support payments to those in severe financial need who do not satisfy eligibility requirements for other payments. The number of Special Benefit recipients is expected to increase over the forward years as eligibility for other payments becomes more tightly targeted and as the number of temporary protection visa holders increases.

This increase is partially offset by the trend in expenses for Widow B Pension, which was closed to new claims in 1997, as existing recipients become eligible for other payments such as Age Pension.

Aboriginal advancement (nec)

A wide range of programmes targeting economic, social and cultural outcomes for indigenous people are delivered within this sub-function. Many of the programmes are intended to supplement, support or accelerate the delivery of services to indigenous people where prime responsibility for service delivery rests within Commonwealth agencies and/or State, Territory and Local Governments.

The majority of expenses relate to programmes delivered by the Aboriginal and Torres Strait Islander Commission, in particular the Community Development Employment Projects scheme ($484 million in 2002-03) and the Community Housing and Infrastructure Programme ($251 million in 2002-03).

Expenses are expected to increase over the Budget and forward years. Measures announced in the 2001-02 Budget targeting housing, native title and FBT supplementation for Aboriginal and Torres Strait Islander organisations are a driver for much of the increase in the forward years. Growth within the Community Development Employment Projects Scheme of 550 participants per annum, together with the addition of 1,500 participant places provided in the 2000-01 Budget, contributes to approximately half of the increased expenses within this sub-function.

For other significant expenses on aboriginal programmes see the following sub-functions: Schools (Education Function), Aboriginal and Torres Strait Islander Health (Health Function), Housing (Housing and Community Amenities Function) and Labour Market Assistance to Jobseekers (Other Economic Affairs Function).

General administration

Expenses within this sub-function consist almost entirely of administration costs associated with the Social Security and Welfare Function spread across agencies, mainly Centrelink, the Department of Family and Community Services, and a proportion of expenses of the Department of Health and Ageing.

Housing and community amenities

Table 10: Summary of expenses

(a) Refinement of the functional attribution of the Departmental Expenses of the Department of Transport and Regional Services has led to a reclassification to this sub-function of expenses previously classified to the General Services Sub-Function (General Public Services Function) and Other Transport and Communications Sub-Function (Transport Function).

This function includes expenses from the following portfolios:

• Defence (Defence Housing Authority);
• Education, Science and Training;
• Environment and Heritage;
• Family and Community Services;
• Industry, Tourism and Resources;
• Transport and Regional Services;
• Treasury; and
• Veterans' Affairs.

Nature of expenses and major trends

Housing and Community Amenities Function expenses support the Commonwealth's housing policies, regional development and environmental protection.

Total expenses decline from 2001-02 to 2002-03 reflecting the conclusion of the additional First Home Owners Scheme (FHOS) grant in the Housing Sub-function.

Overall expenses across all years for the Environment Protection Sub-function have reduced from expenses published in the 2001-02 Budget primarily due to the rescheduling of Australian Greenhouse Office programme expenditure in line with anticipated levels of activity.

Also contributing to the decline in expenses in 2002-03 from 2001-02 levels are the changes to the programme structure of the Natural Heritage Trust (NHT), which reprioritise expenditure across four broad themes resulting in a changed pattern of expenditure across functions.

The decline in expenses from this peak in the forward years reflects the completion of several programmes within the Housing and Urban and Regional Development sub-functions.

Housing

This sub-function includes grants under the Commonwealth-State Housing Agreement (CSHA) as well as the operations of the Defence Housing Authority (DHA). The CSHA, in conjunction with contributions from the States, assists in the expansion and maintenance of the public rental housing stock by State governments. The DHA provides housing services for members of the Australian Defence Force and their families. This sub-function also includes grants paid to first home owners who contracted to buy or build a new dwelling in 2001-02 under the additional First Home Owners Scheme.

The decline in expenses from 2001-02 to 2002-03 largely reflects the end of the additional FHOS grant. Under temporary arrangements that commenced on 9 March 2001, a $7,000 additional FHOS grant funded by the Commonwealth was available to eligible recipients who purchased or built a new dwelling. The additional grant payment was to end on 31 December 2001 but was extended to 30 June 2002 at a reduced rate of $3,000 per eligible recipient. This grant was available in addition to the $7,000 grant available since 1 July 2000 to eligible first home owners purchasing either new or established homes.

Expenses also decline from 2003-04, largely as a result of the cessation in 2002-03 of the goods and services tax (GST) transitional funding provided under the CSHA.

DHA expenses remain relatively constant across the forward years.

Urban and regional development

This sub-function covers programmes that aim to support sustainable economic development of communities. It includes the Stronger Regions, Regional Solutions, Rural Transaction Centre and Regional Flood Mitigation Programmes.

The Stronger Regions Programme provides assistance to eight identified regions facing economic, social and environmental change. The Regional Solutions Programme has a broader focus and provides funding for individual projects that provide communities with local solutions to local challenges. The Rural Transaction Centres Programme helps small communities establish their own access to services such as financial, post, phone, fax and internet. The Regional Flood Mitigation Programme provides for flood mitigation works and measures in rural, regional and outer metropolitan Australia.

Funding for the Stronger Regions Programme peaks in 2002-03 before tapering off across the forward years and concluding in 2004-05, contributing to the decline in expenses in 2005-06. In addition, the conclusion of the Regional Solutions and Rural Transactions Centre Programmes in 2003-04 contributes to the 2004-05 decline. The completion of the Regional Flood Mitigation Programme in 2004-05 contributes to the 2005-06 decline.

Environment protection

This sub-function includes funding for the environment primarily provided through the Measures for a Better Environment Package and through the Natural Heritage Trust. Also included are departmental expenses for the Department of Environment and Heritage, the Australian Greenhouse Office and the National Oceans Office, who administer most of the programmes within this sub-function. These programmes contribute to the sustainable management of the environment including greenhouse gas abatement, protection of the marine environment and promotion of sustainable development of environmental resources.

Departmental expenses for the Department of Environment and Heritage and the Australian Greenhouse Office, which make up the greater part of expenses for this sub-function, are relatively stable over the budget and forward years.

Australian Greenhouse Office programme expenditure has been rescheduled to take into account delays in industry gearing up to undertake projects that would qualify for funding. This has resulted in a reduction in the expense profile for this sub-function of $104 million in 2001-02, $76 million in 2002-03, $47 million in 2003-04, $13 million in 2004-05 and increases of $84 million in 2005-06, and $152 million in the years beyond 2005-06 to 2012-13.

Expenses show a decline in 2002-03 from 2001-02 levels, which has been partially offset by increases in expenditure in the National Estate and Parks and Natural Resource Development sub-functions. This is a result of the Government's decision to extend the operation of the NHT and reprioritise expenditure across four broad themes of action (as shown in Table 10.1 below). Expenses increase again in 2003-04 due to the peak in expenditure for the Measures for a Better Environment package. In 2004-05, expenses show a slight increase before plateauing from 2005-06, reflecting the profile of the extended NHT. (Refer to Table 10.1 in Box 6.2 for more information).

For other significant expenses on conservation and sustainable use and repair of Australia's natural environment see the National Estates and Parks Sub-function (Recreation and Culture Function) and the Natural Resources Development Sub-function (Agriculture, Forestry and Fishing Function). NHT funding, which is spread across these various sub-functions is summarised in Table 10.1 in Box 6.2 below.

Box 6.2: Natural Heritage Trust Table 10.1: Natural Heritage Trust Expenses (across all functions) (a) Expenses in 2001-02 were split against multiple programmes and are not directly comparable to the structure of the NHT extension from 2002-03 onwards, which targets the four broad themes identified. Various NHT projects are discussed in Outcome 1 of the Environment and Heritage 2002-03 Portfolio Budget Statement (b) NHT Expenses include estimated interest earnings (on the annual balance of the Trust Special Account) and therefore may vary according to the actual interest rate and annual account balance.

Recreation and culture

Table 11: Summary of expenses

This function includes expenses from the following portfolios:

• Communications, Information Technology and the Arts;
• Environment and Heritage;
• Industry, Tourism and Resources; and
• Veterans' Affairs.

Nature of expenses and major trends

Recreation and Culture Function expenses support public broadcasting, the regulatory framework for Australia's broadcasting sector, cultural institutions, funding for the arts and film industry, assistance to sport and recreation activities, and the management and protection of national parks and other world heritage areas. This function also includes expenses relating to the protection and preservation of historic sites and buildings, including war graves.

Total expenses for the Recreation and Culture Function are relatively stable across the forward period although there will be some changes within the sub-functions. Expenses for the National Estate and Parks Sub-function increase over the forward years in line with the expenditure profile for the NHT.

Broadcasting

The majority of expenses on broadcasting fund the Australian Broadcasting Corporation (ABC) and the Special Broadcasting Service Corporation (SBS). The ABC provides domestic and overseas radio and television services. The SBS provides a domestic multilingual radio and television service.

The slight increase in expenses over the forward years for the Broadcasting Sub-function reflects the Government's support for services to the Asia Pacific region and the rollout of digital television by the ABC and SBS.

Arts and cultural heritage

The most significant component of this sub-function is the funding provided for the collection institutions such as the National Library of Australia, the National Archives of Australia, the National Gallery of Australia, the Australian National Maritime Museum, the National Museum of Australia and the Australian War Memorial.

The Government also provides direct financial support for a wide range of arts, cultural and heritage organisations. These include the Australian Film, Television and Radio School, the Office of Australian War Graves, the Australian Film Finance Corporation Limited, the Australian Film Commission, Film Australia Pty Ltd and the Australia Council, which provides funding to bodies such as the Australian National Opera and Symphony Australia Limited. Funding for arts and cultural activities is also provided through the provision of grants from the Cultural Development Programme, administered by the Department of Communications, Information Technology and the Arts (DCITA). ScreenSound Australia and the National Science and Technology Centre (trading as Questacon) are also components of this sub-function. ScreenSound and Questacon operate as separate business units within DCITA.

The expenses for this sub-function decline in 2002-03 due to the cessation of expenses associated with the Federation Fund. The decline in expenditure in the forward years for this sub-function is due to the cessation of the Book Industry Assistance Package and the Regional Arts Fund in 2003-04.

Sport and recreation

The Commonwealth provides financial assistance to encourage community interest and participation in sport and recreational activities and to assist Australian athletes competing at major sporting events such as the Commonwealth Games, the Olympics and the Paralympic Games. These funds are delivered through the Australian Sports Commission and the Australian Sports Drug Agency. The Australian Sports Commission promotes and facilitates the pursuit of excellence in sport, sports development and participation. The Australian Sports Drug Agency promotes a drug-free environment within Australian sports.

Backing Australia's Sporting Ability - A More Active Australia, announced in April 2001, provided increased base level funding for sport at all levels. Expenses for the Sports and Recreation Sub-function increase in 2003-04 due to assistance being provided for the redevelopment of the Melbourne Cricket Ground (MCG) in preparation for the 2006 Commonwealth Games.

National estate and parks

This sub-function covers funding provided for the management and protection of national parks and world heritage areas including Uluru-Kata Tjuta and Kakadu National Parks and the Great Barrier Reef. These activities are delivered by agencies within the Environment and Heritage Portfolio, which include the Director of National Parks, the Sydney Harbour Federation Trust, the Great Barrier Reef Marine Park Authority and the Australian Heritage Commission. The National Heritage Trust (NHT) has provided additional funding for programmes addressing the management and protection of national wetlands and reserve systems and world heritage areas above and beyond funds committed on an ongoing basis by the Government for these activities.

The increase in expenses from 2001-02 to 2002-03 is offset by decreases to expenses in the Environment Protection Sub-function (Housing and Community Amenities Function). This is a result of the Government's decision to extend the operation of the NHT and reprioritise funding across four broad themes of action (as shown in Table 10.1, Box 6.2 Environment Protection Sub-function section). Expenses continue to increase reflecting the funding profile of the extended NHT.

For other significant expenses on conservation and sustainable use and repair of Australia's natural environment see the Environment Protection Sub-function (Housing and Community Amenities Function) and the Natural Resources Development Sub-function (Agriculture, Forestry and Fishing Function).

Fuel and energy

Table 12: Summary of expenses

This function includes expenses from the following portfolios:

• Environment and Heritage;
• Industry, Tourism and Resources; and
• Treasury.

Nature of expenses and major trends

This function includes expenses on the Diesel Fuel Rebate Scheme (DFRS), the Diesel and Alternative Fuels Grants Scheme (DAFGS) and the Fuels Sales Grants Scheme as administered by the Australian Taxation Office (ATO). This function also includes expenses of the Australian Greenhouse Office (AGO) for programmes funded through the Measures for a Better Environment Package.

In nominal terms expenditure by the Commonwealth for this function will grow slowly across the forward estimates period, with total expenses expected to increase from 2001-02 until 2005-06 by $296 million (9.3 per cent). However, in real terms expenditure for this function is expected to decline by 0.5 per cent from 2001-02 until 2005-06. This primarily reflects reduced rebate payments due to lower demand for diesel fuel. Nominal growth in this function relates solely to growth in demand for diesel following the removal by the Government of indexation arrangements for diesel fuel.

Expenditure for programmes administered by the ATO is expected to grow in line with economic growth. Expenditure for programmes administered by the AGO will remain relatively constant across the forward estimates.

Fuel and energy

The DFRS provides a rebate to off-road users of diesel fuel. Recipients of the grants include the farming and mining industries, rail and shipping and remote power generation units that use diesel. The Government has expanded this scheme to provide a rebate for diesel fuel used for electricity generation by the hospitality and retailing industries in remote areas. The DAFGS pays grants for the business-related, on-road use of diesel and alternative fuels. The Fuel Sales Grants Scheme is a tiered grant scheme paid to distributors and retailers of petrol and diesel in non-metropolitan and remote regions. The grant scheme was introduced to ensure that the introduction of The New Tax System did not widen the difference in fuel prices between city and regional areas.

Also included in this function are programmes funded through the Measures for a Better Environment Package. These programmes are administered by the AGO and include the Alternative Fuels Conversion Programme, the Renewable Energy Commercialisation Programme, the Remote Renewable Power Generation Programme and the Photovoltaic Rebate Programme. These programmes are intended to meet national environmental requirements by supporting the development and further use of renewable and alternative energy.

Agriculture, forestry and fishing

Table 13: Summary of expenses

This function includes expenses from the following portfolios:

• Agriculture, Fisheries and Forestry;
• Environment and Heritage; and
• Transport and Regional Services.

Nature of expenses and major trends

Agriculture, Forestry and Fishing Function expenses support forestry, fishing, land and water resources management, quarantine services and contributions to research and development. Approximately half the expenses in this function are funded by levies and charges collected by the Government on behalf of industry.

Expenses decline progressively over the forward years primarily reflecting declining expenses within the Rural Assistance Sub-function.

Wool industry

This sub-function consists of payments to Australian Wool Services Ltd for research and development, commercial branding and technical assistance activities. These expenses are funded by a wool levy on producers, with a matching Government contribution for research and development of up to 0.5 per cent of the gross value of wool production per annum.

Expenses decline in 2002-03 due to lower production levels. However, they increase from 2003-04 due to a projected rise in production, which will increase the Government's contributions for research and development.

Grains industry

Expenses in this sub-function predominantly relate to Government support of the wheat industry. The wheat levy funds the commercial and regulatory activities of the Australian Wheat Board (International) Ltd, the Wheat Export Authority and the Grains Research and Development Corporation (GRDC). The Government also provides a matching contribution for research and development to the GRDC of up to 0.5 per cent of the gross value of wheat production per annum.

Expenses in this sub-function gradually increase over the forward estimates period in line with a projected rise in production, which will increase the Government's contributions for research and development.

Dairy industry

The Government supports dairy industry promotion, administration, market support and research and development. The bulk of the expenses in this sub-function relate to levy-funded grants paid to the Australian Dairy Corporation (ADC) for the $1.78 billion Dairy Structural Adjustment Package.

Expenses are forecast to remain relatively stable over the forward years.

Cattle, sheep and pig industry

Expenses in this sub-function consist of contributions to the meat, livestock, lamb and pork industries, through Meat and Livestock Australia and Australian Pork Limited, for market promotion, research and development, and the control of cattle diseases. These expenses are funded primarily through industry levies, with the Government providing a matching contribution for research and development of up to 0.5 per cent of the gross value of meat and livestock production per annum.

Expenses decline from 2001-02 due to the completion of a number of animal disease and industry development programmes.

Fishing, horticulture and other agriculture

This sub-function includes expenses associated with the Australian Fisheries Management Authority (AFMA), the Fisheries Research and Development Corporation, the Grape and Wine Research and Development Corporation, and Horticulture Australia Limited. AFMA recovers costs attributable to industry while the Government funds community service obligations and fisheries research.

Industry levies fund the activities of the Fisheries Research and Development Corporation, the Grape and Wine Research and Development Corporation and Horticulture Australia Limited. The Government provides a matching contribution for research and development activities in these industries up to a maximum of 0.5 per cent of the gross value of production in each industry.

Expenses are forecast to remain relatively stable over the forward years.

General assistance not allocated to specific industries

The expenses in this sub-function predominantly relate to the operations of the Australian Quarantine and Inspection Service (AQIS) and plant and animal pest and disease eradication programmes. AQIS conducts inspection services for the export and import of animals, animal products, plant and plant products, and the quarantine surveillance of arriving vessels, persons and goods.

Expenses are relatively stable over the forward years, but are expected to decline from 2004-05 due to the conclusion of enhanced quarantine border control initiatives and a plant pest eradication programme.

Rural assistance

This sub-function includes expenses for Government support of rural producers and rural industry adjustment initiatives. The key expense in this sub-function are the Agriculture - Advancing Australia (AAA) programmes, complemented by rural industry assistance programmes, which provide funding to address specific events adversely affecting farmers. These programmes provide assistance to farmers through a variety of means such as income support, interest rate subsidies, grants for structural adjustment, financial counselling, training and innovation grants.

Expenses in the forward years for this sub-function are expected to decline with the conclusion of the Sugar Industry and NSW Flood Assistance packages, and the completion of AAA programmes in 2003-04.

Natural resources development

Expenses in this sub-function include water, land and forest management programmes which are administered by the Department of Agriculture, Fisheries and Forestry and largely funded through the Natural Heritage Trust (NHT).

The increase in expenses from in 2001-02 to 2002-03 largely reflects the funding profile of the National Action Plan for Salinity and Water Quality.

Expenses remain relatively stable from 2002-03 to 2003-04, then increase from 2004-05 reflecting the Government's decision to extend the operation of the NHT and reprioritise expenditure across four broad themes of action (as shown in Table 10.1). Expenses for the National Action Plan for Salinity and Water Quality have been rescheduled over the forward years to meet anticipated major project funding requirements emanating from Bilateral Agreements with States and Territories. This rescheduling has the effect of reducing expenses by $34 million in 2001-02, $49 million in 2002-03, $52 million in 2003-04 and $13 million in 2004-05, while increasing expenses by $59 million in 2005-06 and $89 million in 2006-07.

For other significant expenses on conservation and sustainable use and repair of Australia's natural environment see the Environment Protection Sub-function (Housing and Community Amenities Function) and the National Estate and Parks Sub-function (Recreation and Culture Function). NHT funding, which is spread across these various sub-functions is summarised Table 10.1 in Box 6.2 appearing at the end of the Environment Protection Sub-function section.

General administration

This sub-function comprises expenses relating to the administration of relevant programmes in the Department of Agriculture, Fisheries and Forestry.

Expenses remain relatively stable over the forward years. However, they decline from 2005-06 due to the conclusion of a range of programmes.

Manufacturing and mining

Table 14: Summary of expenses

This function includes expenses from the following portfolios:

• Education, Science and Training;
• Foreign Affairs and Trade; and
• Industry, Tourism and Resources.

Nature of expenses and major trends

Expenses under this function relate to the mining, manufacturing and export sectors, and are designed to improve the efficiency and competitiveness of Australian industries. The major expenses in the Industry, Tourism and Resources portfolio include programmes specific to the automotive, textile clothing and footwear (TCF) and pharmaceutical industries, a general programme providing research and development grants to small to medium enterprises and a programme of strategic investment incentives. Commonwealth assistance to exporters through the Foreign Affairs and Trade portfolio includes direct financial assistance for the development of export markets, information and promotional assistance, finance and insurance services, and the development of trade policy.

The decline in expenses in 2002-03 is mainly due to R&D Start grants returning to planned levels following additional spending to meet the high demand for the programme in 2001-02. The decline in 2004-05 is driven by the conclusion of the Pharmaceutical Industry Investment Programme. In 2005-06 expenses decline by 25 per cent due primarily to the termination of the Automotive Competitiveness and Investment Scheme (ACIS), in December 2005.

All activities relating to mineral fuels, and manufacturing relating to the production of fuel and energy, are classified in the Fuel and Energy Function.

Mining and mineral resources (other than fuel), manufacturing and construction

The main drivers of these expenses are ACIS, R&D Start, the Export Market Development Grants Scheme (EMDG), the Textile Clothing and Footwear Strategic Investment Programme (TCF SIP), Strategic Investment Coordination and the Pharmaceutical Industry Investment Programme.

• ACIS provides import duty credits to registered automotive industry participants and is aimed at encouraging new investment and innovation in the automotive industry. ACIS is capped at $2 billion over five years to December 2005.
• R&D Start provides grants to small to medium enterprises for research and development and the commercialisation of new products and technologies. Funding was increased and extended in the Government's innovation action plan Backing Australia's Ability, announced in January 2001, and will total $850 million over the five years 2001-02 to 2005-06.
• The EMDG scheme pays cash rebates to small and medium sized Australian based businesses that have promoted their products in overseas markets.
• The TCF SIP is providing $678 million over the five years from 2001-02 through to 2005-06 through a competitive grants programme to promote investment and innovation in the industry and the development of sustainable jobs.
• The Strategic Investment Coordination process aims to attract to Australia projects with significant net economic and employment benefits that would otherwise locate offshore.
• The Pharmaceutical Industry Investment Programme is a competitive grants programme designed to promote greater investment in pharmaceutical research and development in Australia. This is a five year $300 million programme operating from 1999-2000 to 2003-04.

Transport and communication

Table 15: Summary of expenses

(a) Refinement of the functional attribution of the Departmental Expenses of the Department of Communications, Information Technology and the Arts has led to a reclassification to this sub-function of expenses previously classified to the Recreation and Culture Function

(b) Refinement of the functional attribution of the Departmental Expenses of the Department of Transport and Regional Services has led to a reclassification of expenses from this sub-function to the Urban and Regional Development Sub-function (Housing and Community Amenities Function)

This function includes expenses from the following portfolios:

• Communications, Information Technology and the Arts;
• Industry, Tourism and Resources; and
• Transport and Regional Services.

Nature of expenses and major trends

Transport and Communication Function expenses support the infrastructure and regulatory framework for Australia's transport and communications sectors. Expenses are expected to peak in 2001-02 and then fluctuate over the forward years due mainly to movements in expenses in the Communication, Road Transport, Air Transport and Rail Transport Sub-functions. 

Communication

This sub-function includes the expenses of the Australian Communications Authority and the National Office for the Information Economy as well as programmes associated with the past partial sale of the Government's shareholding in Telstra and in response to the Telecommunications Service Inquiry (Besley Report).

Expenses are forecast to decline in 2002-03 and the forward years due to the conclusion of programmes which were associated with the sale of 49.9 per cent of Telstra through two sales of shares in 1997 and 1999. Funding of $250 million was allocated to these programmes over five years from 1997-98 and a further $670 million over five years was allocated in 1999-2000 to improve telecommunications service standards and broaden access to telephone and internet services in rural, regional and remote Australia. In excess of $750 million of the total of $920 million is expected to be committed to projects by the end of 2001-02.

The decline in expenses is partially offset by funding on new programmes announced as part of the Backing Australia's Ability initiatives, announced in January 2001, to improve innovation in information technology and through the Government's response to the Besley Report, which will further strengthen telecommunications performance in Australia, particularly in rural and regional areas.

Rail transport

Expenses decline significantly after 2001-02 due to the conclusion of the initial funding for the Alice Springs to Darwin Railway. Further funding of $26 million for the Alice Springs to Darwin Railway will be provided over the period 2002-03 to 2006-07.

Expenses decline further in 2004-05 due to the conclusion of the Upgrade of the Mainline Interstate Rail Track Programme in 2003-04. Activity in the rail sector will continue in the form of an equity injection of $111 million in 2002-03 provided to the Australian Rail Track Corporation for rail track initiatives - as this is not an expense it is not reflected in the forward year profile.

Air transport

This sub-function includes expenses for the operations of the Civil Aviation Safety Authority, the provision of aviation infrastructure, and noise amelioration programmes around selected airports.

Funding declines sharply in 2002-03 partly due to the termination of temporary assistance of $48 million provided in 2001-02 to stranded passengers and regional aircraft owners/operators affected by the collapse of the Ansett Group in September 2001. The conclusion of the Sydney Airport Noise Amelioration Programme, and of the airport infrastructure upgrades as part of Australia's response to Foot and Mouth Disease and other quarantine risks in 2002-03, also contributes to the decline in funding in 2003-04. The decline in expenses in 2004-05 is a direct result of the completion of the Adelaide Airport Noise Amelioration Programme in 2003-04.

The regional aviation industry will be assisted by the Government's payment of enroute air traffic control charges on regional Regular Public Transport aircraft with a maximum take-off weight of 15 tonnes or less, and on aeromedical aircraft, at a cost of $21 million from 2001-02 to 2004-05.

Air safety operations will be strengthened through additional funding of $24 million from 2001-02 to 2004-05 to the Civil Aviation Safety Authority. A pricing subsidy for the provision of location-specific air traffic control tower services will be continued in 2002-03 to support affordable transport access in regional Australia.

Road transport

The Government funds the National Highway System and contributes to the capital cost of State/Territory roads that have been identified to be of national importance. The Government is providing additional funding of $137.6 million from 2002-03 to 2005-06 through the National Highway and Roads of National Importance Programme to upgrade and maintain Australia's roads. The Government will also extend the Federal Road Safety Black Spot Programme for a further four years, with funding of $45 million per annum from 2002-03 to 2005-06.

Special assistance of $1.2 billion over five years from 2001-02 is being provided directly to local councils through the Roads to Recovery Programme for the construction, upgrade and maintenance of local roads.

Expenses fluctuate from 2001-02 to 2005-06 mainly due to rescheduling of projects in the National Highway and Roads of National Importance Programme and the Roads to Recovery Programme. This rescheduling reduced expenses by $200 million in 2002-03 and $100 million in 2003-04, with an increase in expenses of $300 million in 2004-05. The significant decline in expenses in 2005-06 reflects the rescheduling of projects and the conclusion of the Roads to Recovery Programme in 2004-05.

The Government also provides untied funding to local government through Financial Assistance Grants that are identified for roads - see the General Purpose Inter-Government Transactions Sub-Function (Other Purposes Function).

Major components of the Road Transport function are outlined in further detail in Box 6.3 below.

Box 6.3: Components of Road Transport Funding Table 15.1:  Trends in major components of the Road Transport sub-function (a) Largely Specific Purpose Payment funding to States and Territories but with a small additional component for land transport research. (b) See Outcome 1 of Transport and Regional Services 2002-03 Portfolio Budget Statement.

Sea transport

The key components of this sub-function include the Tasmanian Freight Equalisation Scheme, the Bass Strait Passenger Vehicle Equalisation Scheme and funding for the Australian Maritime Safety Authority.

Expenses fall after 2001-02 following final Commonwealth contributions from the Federation Fund for the development of marine facilities in Jervoise Bay, Western Australia. From 2002-03, additional funding will be provided to the Bass Strait Passenger Vehicle Equalisation Scheme to remove the current seasonal variation in the passenger vehicle rebate by introducing a year round rebate for eligible passenger vehicles.

Other transport and communication

This sub-function covers expenses relating to the administration of relevant programmes in the Transport and Regional Services portfolio and the expenses for the construction of the Asia Pacific Space Centre on Christmas Island through the Industry, Tourism and Resources portfolio. The fluctuation in expenses across this sub-function reflects the funding profile for this project, which concludes in 2003-04.

Other economic affairs

Table 16: Summary of expenses

(a) Departmental expenses of the Australian Prudential Regulation Authority are now being classified to this sub-function.

This function includes expenses from the following portfolios:

• Education, Science and Training;
• Employment and Workplace Relations;
• Environment and Heritage;
• Immigration and Multicultural and Indigenous Affairs;
• Industry, Tourism and Resources;
• Treasury; and
• Veterans' Affairs

Nature of expenses and major trends

The Other Economic Affairs Function includes expenses on tourism and area promotion, labour market assistance, immigration and other economic affairs not elsewhere classified (nec). Expenses are projected to increase over the Budget and forward years due mainly to increases in the Labour and Employment Affairs Sub-function relating to labour market assistance to job seekers and industry.

Changes in expenses trends in this function are mainly attributable to one-off assistance in 2001-02 to former Ansett Group employees, additional activity under the Job Network programme, the Dairy Structural Adjustment Package (which concludes in 2003-04) and the Government's Australians Working Together initiatives. Additionally, the Immigration Sub-function is projected to increase due to initiatives relating to the offshore reception and processing of asylum seekers.

Tourism and area promotion

Commonwealth expenses contribute to tourism research and analysis, policy development, international and domestic tourism marketing and funding for specific tourism programmes and projects. Funding for tourism in 2001-02 was increased substantially to counteract the effects of national (Ansett collapse) and international events that severely affected the domestic tourism industry. The apparent decline in 2002-03 masks the fact that expenses have stabilised at a level that is higher than that projected at the 2001-02 MYEFO. Tourism-related measures announced at this Budget are one of the drivers of this change.

Labour and employment affairs

Vocational and industry training

Expenses largely cover wage subsidies and incentive payments to employers, and allowances to apprentices and trainees. Expenses also cover pre-apprenticeship and traineeship training for people who are disadvantaged in the labour market.

The increase in expenses of 11.7 per cent in real terms from 2002-03 to 2005-06 is driven by a higher number of incentive payments made to employers of apprentices/trainees. This reflects a strong rise in apprenticeship/traineeship commencements since 1997-98. The increase in commencements was due in part to the introduction of the New Apprenticeship System from 1 January 1998, and the introduction of new flexibilities such as user choice in training providers. Growth over subsequent years is driven by estimated increases in New Apprentice commencements and the take-up by employers of incentive payments.

Expenses on vocational education and training (mainly relating to the national Technical and Further Education system) are recorded under the Vocational and Other Education Sub-Function (Education Function).

Labour market assistance to job seekers and industry

The majority of expenses under this sub-function cover programmes aimed at helping people gain employment. This includes expenses under the following programmes: Job Network, Work for the Dole, Regional Assistance, Indigenous Employment, Area Consultative Committees and Return to Work. It also includes expenses incurred in New Apprentice Centres that provide information on New Apprenticeships options to job seekers and employers.

Overall expenses are expected to increase in 2002-03. This increase is mainly attributable to the Australians Working Together initiatives announced in the last Budget, including:  Helping People Find Jobs, A Fair Go for Mature Age Workers and Promoting Self-reliance for Indigenous People, which will add to this sub-function a net $68 million in 2002-03, $74 million in 2003-04 and $83 million in 2004-05. Additional activity under the Job Network programme is also expected to contribute to the increase in expenses. This will be partly offset by the termination of the Dairy Regional Assistance Programme in 2003-04.

Industrial relations

The Industrial Relations Sub-function includes expenses associated with improving the industrial framework and its operation. These include the costs of advice provided by the Department of Employment and Workplace Relations, and operations of the Australian Industrial Relations Commission and the Australian Industrial Registry.

The sub-function also includes the General Employee Entitlements and Redundancy Scheme (GEERS) and in 2001-02, the Special Employee Entitlements Scheme for Ansett Group Employees (SEESA). Both schemes are designed to assist employees who suffer a loss of employee entitlements as a result of their employer being insolvent.

The high level of expenses in 2001-02 and their sharp decline in 2002-03 reflects the one-off impact of SEESA. While in GFS terms these are expenses, they are neutral in their underlying cash impact as cash payments are balanced by receipts from the Air Passenger Ticket Levy which has been put in place to fund these arrangements.

Immigration

The Immigration Sub-function covers a significant proportion of the expenses incurred by the Department of Immigration and Multicultural and Indigenous Affairs (DIMIA) in administering Australia's immigration programme. This includes the management of the Migration and Humanitarian Programmes, temporary entry programmes, and the enforcement of immigration law and citizenship programmes.

The increase in expenses in 2002-03 is predominantly due to the development of initiatives for the offshore reception and processing of asylum seekers. These initiatives include the maintenance of a purpose built permanent Immigration Reception and Processing Centre on Christmas Island. They also include reception and processing costs at other offshore locations and other preventative strategies, such as the 2002-03 Budget Measure Regional Cooperation Agreement against people smuggling and illegal migration.

Other expenses incurred by DIMIA associated with migrant settlement and indigenous affairs are reported under the Other Welfare Programmes and Aboriginal Advancement nec sub-functions (Social Security and Welfare Function) and the Foreign Economic Aid Sub-function (General Public Service Function).

Other economic affairs (nec)

This sub-function covers economic services provided by the Commonwealth which are not included in other functional classifications. Expenses mainly comprise the operational costs of a number of advisory and regulatory agencies, including the Productivity Commission, the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC), Standards Australia, Australian Government Analytical Laboratories, IP Australia, the National Competition Council, the Bureau of Meteorology, and the Ionospheric Prediction Service, the Commonwealth Grants Commission and the National Standards Commission.

Expenses in this sub-function are projected to decline between 2001-02 and 2002-03, largely due to the cessation of one-off funding for legal expenses provided to the ACCC in 2001-02. Expenses are projected to increase over the forward estimates as a result of additional funding the Government has provided to the Australian Securities and Investments Commission (ASIC). These funds were provided for ASIC to administer the Financial Services Reform Act 2001 and enable it to increase its corporate law enforcement activities.

Other purposes

Table 17: Summary of expenses

This function includes expense from the following portfolios:

• Finance and Administration;
• Industry, Tourism and Resources;
• Transport and Regional Services; and
• Treasury.

Nature of expenses and major trends

The Other Purposes Function includes expenses incurred in the servicing of public debt interest, and assistance to the State and Territory Governments and local government. The function also includes items classified to natural disaster relief, the Contingency Reserve, and costs of asset sales.

The decline in expenses from 2001-02 to 2002-03 is largely due to reductions in General Revenue Assistance to the States and Territories, reflecting reduced BBA associated with the cessation of indexation on petroleum Revenue Replacement Payments forgone and the implementation of a National Excise Scheme for Low Alcohol Beer; reductions in Public Debt Interest due to reductions in the expected level of Commonwealth net debt on issue; and reductions in Nominal Superannuation Interest largely driven by a change in the nominal interest rate.

The increase in expenses over the forward years is largely due to growth in the Contingency Reserve Sub-function. The increase in the Contingency Reserve from 2002-03 over the forward years is largely due to the conservative bias allowance - an allowance that compensates for the trend in expenses on existing Commonwealth programmes to be underestimated by agencies in the forward years.

Public debt interest

This sub-function includes expenses relating to the cost of servicing the stock of Commonwealth debt incurred to meet budget financing and other borrowing requirements. All expenses relating to public debt interest are expenses of the Australian Office of Financial Management (AOFM), which is responsible for managing and reporting on the Commonwealth's net debt portfolio. This sub-function does not include interest on instalment purchase of buildings, overpayment of tax and other interest not associated with borrowings.

Expenses on public debt interest are governed by the volume of outstanding Commonwealth debt, and the average cost of debt service (the net effect of interest and exchange rate movements), which is in turn influenced by the mix of debt instruments and the term structure of the debt. The balance of influence of these factors on total public debt interest expenses will vary over time.

Public Debt Interest expenses also include interest expenses on debt issued by the Commonwealth on behalf of the State and Territory governments. Since 1990 the State and Territory governments have been borrowing on their own behalf. These interest expenses are offset by payments from the State and Territory governments. Interest expenses on debt issued by the Commonwealth on behalf of the State and Territory governments are projected to decline as the debt is extinguished.

Expenses in this sub-function are forecast to decrease over 2002-03 and the forward years largely to projected reductions in the volume of Commonwealth debt on issue.

Nominal superannuation interest

The Nominal Superannuation Interest Sub-function includes expenses relating to the cost of the accumulated and unfunded liability of the superannuation schemes provided by the Government for its civilian and defence personnel - including the Public Sector Superannuation scheme (PSS), the Commonwealth Superannuation Scheme (CSS), the Military Superannuation and Benefits Scheme and the Defence Force Retirement and Death Benefits Scheme. The interest expenses reflect the cost of not fully funding the superannuation liability. The Government is viewed as compulsorily borrowing the funds and incurs a nominal interest expense.

Nominal superannuation interest expenses are estimated to increase over time in line with increases in the unfunded liability of the superannuation schemes. Year-by-year fluctuations reflect the nominal interest rate assumptions in particular years. Expenses are projected to decline between 2001-02 and 2002-03, reflecting a reduction in the nominal interest rate.

Superannuation expenses relating to current year employment in relation to these schemes are included in the Government Superannuation Benefits Sub-function (General Public Services Function).

General purpose inter-government transactions

This sub-function includes grants and advances to the States and Territories and local government authorities, which are not classifiable to other functions. Detailed information on the Commonwealth's financial relations with State, Territory and local governments is provided in Budget Paper No. 3, Federal Financial Relations 2002-03.

The Commonwealth's estimates do not include GST payments to the States and Territories, as accrued GST revenues and associated payments to the States and Territories are treated as a state tax.

The General revenue assistance to the States and Territories component comprises payments made by the Commonwealth Government to the State and Territory Governments. These include BBA paid to ensure that State and Territory budgets are no worse off as a result of taxation reform, and National Competition Policy Payments which are paid subject to satisfactory progress with the implementation of specific National Competition Policy and related reforms.

The Local government assistance component relates to the provision of assistance to local government authorities through general purpose Financial Assistance Grants and untied local road grants. The increase in expenses for Local government assistance each year reflects the application of an escalation factor determined by the Treasurer with reference to the underlying movements in the CPI and population growth.

The Revenue assistance to the States and Territories component includes payments to compensate the States and Territories for the loss of companies' fees and fines that are now collected by the Commonwealth.

The Assistance to other governments component consists primarily of Offshore Petroleum Royalties/Fees to Western Australia for administration of petroleum exploration and production leases within Commonwealth jurisdiction. This payment is expected to decline between 2001-02 and 2002-03 due to a projected reduction in production. The payment is expected to increase over the forward years, largely due to projected increases in production (including from the Yodel gas field) and projected increases in crude oil, Liquid Nitrogen Gas (LNG) and Liquid Petroleum Gas (LPG) prices.

This component also includes compensation to the Australian Capital Territory for special fiscal needs arising from Canberra's status as the National Capital.

Expenses for the General Purpose Inter-Government Transactions Sub-function are projected to decrease over the years to 2004-05, largely due to projected increases in GST revenues causing corresponding decreases in BBA. BBA is projected to increase in 2005-06 as the loss of State and Territory revenue resulting from the abolition of debit taxes in that year will be included in the BBA calculation.

Natural disaster relief

This sub-function comprises expenses associated with natural disaster relief. Following the Administrative Arrangement Orders of December 2001, responsibility for this sub-function transferred from the Finance and Administration portfolio to the Transport and Regional Services portfolio.

Under the Natural Disaster Relief Arrangements (NDRA), the Commonwealth reimburses part of the States' expenses on restoration payments and payments for other eligible disaster relief measures where the expenses exceed certain funding thresholds. A large part of NDRA payments are made as partial reimbursement for the relief of personal hardship and distress and the repair and restoration of essential State and local government assets.

Commonwealth assistance towards natural disaster relief reflects the unpredictability of these events in terms of incidence and severity. The peak in expenses in 2002-03 is driven largely by reimbursement of other governments for assistance provided to the victims of the 2001 Christmas bushfires in New South Wales. The forward estimates are based on a broad average of annual net payments over recent years.

Drought assistance is included within Rural Assistance Sub-function (Agriculture, Forestry and Fishing Function).

Contingency reserve

The Contingency Reserve is used in budget estimates reporting to reflect anticipated events that cannot be allocated to specific agency or functional areas. All items in the Contingency Reserve are allocated to specific agencies and functions for outcome reporting.

The Contingency Reserve affects the budget balances in the same manner as other expense categories. The Contingency Reserve is therefore not a reserve to fund unanticipated events or new policy decisions.

Items in the Contingency Reserve include:

• a regular conservative bias allowance to adjust for the historical tendency of forward year expense estimates for existing programmes to be understated in aggregate. The conservative bias allowance is intended to improve the accuracy of the forward estimates by increasing estimated expenses in each of the forward years;
• a provision for underspends in the current year, adjusting for the historical tendency of agencies to overestimate expenses for the current financial year;
• commercial-in-confidence and national-security-in-confidence items that cannot be disclosed separately in agency and functional categories; and
• the effect of economic parameter revisions received too late in the process to be allocated against individual agency or functional classifications. The effect of these revisions is included as an aggregate item. An example of a late parameter revision would be the estimated impact of the Australian Industrial Relations Commission's Living Wage Case Decision released on 9 May 2002.

Asset sales

The Asset Sales Sub-function includes expenses associated with the Government's major asset sales and associated administration costs.

The estimates for 2001-02 and 2002-03 reflect funding for a range of previously announced asset sales, including the Kingsford Smith and Sydney Basin Airports and scoping studies. The estimates in the later years relate to the assumed timing of the proposed sale of Telstra.

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