2003-04 Commonwealth Budget – Budget Paper No. 1

Variations to the fiscal balance estimates

After the delivery of personal tax cuts of $2.4 billion, a fiscal surplus of $0.7 billion is now forecast for 2003-04, a downward revision of $2.7 billion relative to the estimate at MYEFO. The fiscal balance estimates have also been revised downwards for 2004-05 and 2005-06, while the estimated fiscal balance for 2002-03 has improved.

The fall in fiscal surpluses over 2003-04 and the forward estimates period largely reflects personal tax cuts. In addition, new spending is concentrated on priority areas such as defence, domestic security, higher education and health. In 2003-04, these decisions are partly offset by parameter and other variations.

Table 2 provides a reconciliation of the fiscal balance estimates between the 2002-03 Budget, the 2002-03 MYEFO and the 2003-04 Budget.

Table 2: Reconciliation of 2002-03 Budget, 2002-03 MYEFO and
2003-04 Budget fiscal balance estimates^(a)

A positive number for revenue indicates an increase in the fiscal balance, while a positive number for expenses and net capital investment indicates a decrease in the fiscal balance.
Excluding the public debt net interest effect of policy measures.

Variations in revenue estimates

Forecast revenue for 2003-04 has been revised down since MYEFO by $1.8 billion, largely reflecting the Government's decision to provide further reductions in personal income tax from 1 July 2003. This decision will also detract from revenue over the forward years.

Total estimated tax revenue for 2003-04 has fallen by $2.9 billion since MYEFO, including:

income tax withholding revenue has been revised down by $4.2 billion, reflecting the effect of the Government's decision to provide further reductions in personal income tax and the flow-on effects from a lower level of expected revenue for 2002-03;

company tax revenue has been revised up by $1.3 billion, reflecting stronger company profit growth;

revenues from Commonwealth indirect taxes have been revised up by $440 million, largely reflecting stronger revenue from tobacco excise and higher customs duty revenue;

fringe benefits tax revenue has been revised down by $250 million, reflecting a decline in the use of fringe benefits since the introduction of The New Tax System; and

revenue has also been revised down by $230 million as a result of an increase in estimated tax refunds to individuals.

Partially offsetting the fall in tax revenue is an increase in non-tax revenue of $1.1 billion in 2003-04, largely reflecting an increase of $728 million in estimated dividend revenue from public financial and non-financial corporations.

Policy decisions included in the above variations since MYEFO are expected to reduce revenue by around $2.5 billion in 2003-04 and around $2.8 billion in 2004-05. The major revenue policy decisions include:

reductions in personal income tax, which are expected to reduce tax revenue by around $2.4 billion in 2003-04 and by around $2.7 billion in 2004-05;

the Government's response to the Board of Taxation's Review of International Tax Arrangements which is expected to reduce tax revenue by $60 million in 2003-04 and $165 million in 2004-05;

the Singapore-Australia Free Trade Agreement (SAFTA), expected to come into force in July 2003, which will reduce customs duty revenue by $30 million in each of 2003-04 and 2004-05; and

the increase in the Medicare levy thresholds, in line with the increase in the Consumer Price Index, which will reduce tax revenue by $34 million in 2003-04 and $17 million in 2004-05.

In 2002-03 estimated revenue has been revised up by around $2.2 billion since MYEFO, largely due to revisions to economic parameters and other variations. These include higher than expected company tax revenue of around $2.0 billion due to higher than expected company profit growth and higher than anticipated indirect tax revenue of around $810 million, primarily due to higher tobacco, diesel and petrol excise and customs duty revenue.

More detailed information on revenue can be found in Statement 5. A full description of all policy decisions taken since MYEFO can be found in Budget Paper No. 2, Budget Measures 2003-04.

Variations in expenses estimates

Since MYEFO, estimated expenses have been revised upwards by around $0.9 billion in 2003-04, with increases in expenses also projected for the forward years. This increase reflects the impact of new policy measures, which has been partly offset by parameter and other variations including savings associated with the recent appreciation of the Australian dollar and a fall in estimated personal benefits expenses.

Policy decisions taken since MYEFO have increased estimated expenses by around $1.7 billion in 2003-04. Major new expense policy decisions affecting 2003-04 include:

an increase in defence funding of $573 million in 2003-04 ($2.1 billion over the 5 years from 2002-03), including funding for Australia's contribution to the international coalition to disarm Iraq and post-conflict rehabilitation activities, and funding to augment logistics and support for a range of platforms and equipment;

additional funding for drought relief of $297 million in 2003-04, including income support and interest rate subsidies to assist farmers, small businesses and communities hardest hit by the drought. In total, the government expects to provide around $740 million in drought-related financial support over the three years to 2004-05;

increased spending of $160 million in 2003-04 to further enhance Australia's security arrangements, including upgrading the security of Australia's critical infrastructure and increased funding for Australia's intelligence agencies and protective security services;

funding of $158 million in 2003-04 to improve the affordability and accessibility of medical services, under the A Fairer Medicare package; and

additional funding of $66 million in 2003-04 ($1.5 billion over the four years from 2003-04) to ensure the long-term sustainability of the higher education system.

Parameter and other revisions since MYEFO have reduced estimated expenses by around $0.9 billion in 2003-04. These include:

a downward revision of $425 million in defence expenses reflecting lower estimated Australian dollar acquisition costs associated with the recent appreciation of the Australian dollar;

a fall in anticipated unemployment benefit expenses of $297 million, due to a reduction in the expected number of benefit recipients in 2003-04 following a lower than expected take up of benefits in 2002-03;

a reduction in estimated Family Tax Benefit expenses of $231 million, largely due to the provision of higher income estimates by customers in 2002-03; and

the regular draw-down of the conservative bias allowance reducing estimated expenses by around $875 million each year from 2003-04.¹

These variations are partly offset in 2003-04 by:

increased personal benefits expenses of $343 million due to an upward revision to forecast Male Total Average Weekly Earnings, reflecting the Government's ongoing commitment to maintain selected pensions at 25 per cent of Male Total Average Weekly Earnings; and

increased superannuation related expenses of $316 million, largely resulting from an actuarial review of the Commonwealth's civilian superannuation schemes, which has resulted in the incorporation of an allowance for the effects of factors such as redundancy costs, lower than previously estimated mortality rates, and an increased take-up of the more generous early retirement options.

Since MYEFO, estimated expenses have fallen by $132 million in 2002-03. This largely reflects a reduction in estimated Budget Balancing Assistance of $786 million following an increase in estimated GST receipts, and a reduction in estimated personal benefits expenses of $691 million, mainly due to lower Family Tax Benefit and unemployment benefit expense estimates. These variations are partly offset by new spending on defence, drought assistance and the regular drawdown in the provision for underspends.²

More detailed information on expenses can be found in Statement 6. A full description of all policy decisions taken since MYEFO can be found in Budget Paper No. 2, Budget Measures 2003-04.

Variations in net capital investment estimates

In 2003-04, forecast net capital investment has increased by $51 million since MYEFO. This increase reflects new policy decisions that increase net capital investment by $65 million, including funding to extend Centrelink's capacity to deliver services online.

Further details on net capital investment can be found in Statement 6. A full description of all policy decisions taken since MYEFO can be found in Budget Paper No. 2, Budget Measures 2003-04.

1 The forward estimates include an allowance for the established tendency for spending on existing government policy (particularly demand driven programmes) to be higher than estimated in the forward years. This allowance, known as the conservative bias allowance, is progressively reduced so that the budget year conservative bias allowance is zero. The conservative bias allowance is a technique to provide for more reliable forward estimates. It is not a policy reserve or `rainy day' fund.

2 Each year at MYEFO, an allowance for underspends is included in the contingency reserve for the established tendency of departments and agencies to underspend their budgets in the current financial year. This allowance has been reduced in the budget estimates to reflect underspends incorporated into agency estimates since MYEFO. An allowance for underspends remains in the 2002-03 expenses estimates to cover expected underspends.