Fiscal strategy
The Government’s medium-term fiscal strategy is an integral part of the economic management framework designed to deliver sustainable economic growth, rising employment and higher living standards.
A medium-term approach to fiscal policy
The primary objective of the medium-term fiscal strategy is to maintain budget balance, on average, over the course of the economic cycle. This helps deliver macroeconomic stability, encourages private investment in a low interest rate environment, entrenches low public debt and ensures that, over time, the current account reflects private saving and investment decisions.
The Government’s medium-term fiscal strategy has a number of supplementary objectives, including: maintaining budget surpluses over the forward estimates period while growth prospects are sound; not increasing the overall tax burden from 1996‑97 levels; and improving the Australian Government’s net worth position over the medium to longer-term. The supplementary objective of no increase in the overall tax burden means that the Government achieves budget balance over the cycle through a disciplined and prioritised approach to spending and not by recourse to increased taxation.
Central to the Government’s objective of improving net worth is the establishment of the Future Fund, dedicated to funding the public sector superannuation liability — the largest liability on the balance sheet, currently valued at $91 billion. To ensure that government saving will grow sufficiently to meet future superannuation payments, expected Fund earnings are excluded from the underlying cash balance. This means that the Fund’s earnings are not available for recurrent spending and will contribute to improving the Government’s net worth over time.
Consistent with the Government’s fiscal strategy, this budget delivers another substantial surplus in 2005‑06 and further surpluses over the medium term. This will help contain inflationary pressures in the economy, thus supporting a low interest rate environment, and will add to national savings.
The surplus in 2005‑06 is larger than envisaged at the time of MYEFO, supported by recent unexpected increases in commodity export prices. Larger surpluses mean that the Government is saving some of the additional income Australia is earning from the rest of the world.
A decade of sound economic management has enabled Australia to make the most of its opportunities in the global economy. The Government remains committed to ensuring strong economic outcomes are sustained. It is appropriate that the Government take a prudent approach to fiscal policy, particularly as national income is currently being boosted as a result of higher commodity prices which are not expected to be permanent. This prudent approach ensures public finances will be well-positioned to meet future challenges, including those flowing from demographic change and the increasing demand for high-quality health care.
The Government has a strong record of fiscal sustainability, having already delivered a major reduction in the level of general government net debt. Australia now has one of the lowest levels of net debt in the OECD (Chart 2).
Chart 2: General government net debt levels in selected countries (1997 to 2006)
Source: International data are sourced from OECD Economic Outlook 76 December 2004. Australian data are sourced from Statement 12. All data are for the total general government sector.