Appendix C: Sensitivity of fiscal aggregates to economic developments
A guide to the sensitivity of the forward estimates of expenses and revenue due to variations in economic parameters in 2004-05 is provided in Table C1. It is important to note that the sensitivity analysis gives only a ‘rule of thumb’ indication of the impact on the budget of changes in prices, wages and other parameters. In each case, the analysis presents the estimated effects of a change in one economic variable only, and does not attempt to capture the linkages between economic variables that characterise changes in the economy more broadly.
Table C1: Sensitivity of fiscal aggregates to changes in economic parameters
Expenses
On the expenses side, the sensitivity analysis of the estimates provides for the following assumptions about changes to four broad groups of parameters. An increase in any of the parameters considered will lead to an increase in expenses, and a decrease in any parameters will lead to a reduction in expenses.
Prices
All price deflators are assumed to change by one percentage point at the start of the September quarter 2004, with wage deflators left unchanged.
- The effect of a change in prices is due to the indexation of Australian Government expenses and a change in the nominal superannuation interest expense.
Wages
All wage and salary growth rates are assumed to change by one percentage point from the beginning of the September quarter 2004, with price deflators left unchanged.
- The effect of a change in wage and salary growth rates is largely due to the Government’s commitment to maintain selected pensions at 25 per cent of Male Total Average Weekly Earnings. The wages effect in Table C1 above does not include changes to wage and salary payments in Australian Government departmental expenses.
Unemployment Benefit recipients (includes Newstart Allowance and Unemployed Youth Allowance recipients)
The total number of recipients is assumed to change by five per cent in the Budget year and in all the forward years.
Safety Net Adjustment
The Safety Net Adjustment determined by the Australian Industrial Relations Commission is assumed to change by $2 per week, taking effect from the beginning of the September quarter 2004, and each year after that.
- About $46 billion of expenses, comprising agency departmental expenses, other Australian Government Own Purpose Expenses and Specific Purpose Payments to the States of a departmental expense nature, are indexed to weighted averages of movements in inflation and the Safety Net Adjustment.
- The $30 million figure in the Budget year is lower than in previous years. This is due to the reinstitution of rules preventing post-Budget retrospective adjustments to agencies and programmes funded through annual appropriations.
Revenue
On the revenue side, the sensitivity analysis of the estimates provides for the following assumptions about changes to five broad groups of parameters. An increase in any of the parameters considered will lead to an increase in revenue, and a decrease in any of the parameters will lead to a reduction in revenue.
Prices
All price deflators are assumed to change by one percentage point at the start of the September 2004 quarter, with wage deflators left unchanged.
- A change in prices affects revenue primarily through changes in excise revenue.
Wages
All wage and salary growth rates are assumed to change by one percentage point from the beginning of the September 2004 quarter, with price deflators left unchanged.
- A change in wage and salary growth rates affects revenue through changes in income tax withholding and fringe benefits tax collections.
Employment
The level of employment is assumed to change by one percentage point from the beginning of the September 2004 quarter, with no change in the composition of employment.
- A change in employment affects revenue through increases in income tax withholding collections.
Private final demand
The level of private final demand (consumption plus investment) is assumed to change by one percentage point from the beginning of the September 2004 quarter, with no change in the composition of demand.
- A change in private final demand affects revenue primarily through changes in excise and customs duty collections.
Profits
The level of company profits is assumed to change by one percentage point from the beginning of the September 2004 quarter.
- A change in the level of company profits affects revenue through changes in company tax collections.