Variations to the fiscal balance estimates

The upward revision of $0.6 billion in the 2006-07 fiscal surplus since MYEFO largely reflects higher than anticipated revenue from companies. This is partly offset by the impact of the Government’s decision to provide additional tax relief and to increase the diminishing value rate of depreciation of eligible company assets acquired from 10 May 2006.

Table 2 provides a reconciliation of the fiscal balance estimates between the 2005-06 Budget, the 2005‑06 MYEFO and the 2006-07 Budget.

Table 2: Reconciliation of 2005-06 Budget, 2005-06 MYEFO and 2006-07 Budget fiscal balance estimates

1. Excludes the public debt net interest effect of policy measures.
2. 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.

Variations in revenue estimates

Total revenue for 2006-07 has been revised up by $4.2 billion since 2005-06 MYEFO. The upward revision represents the flow-on effect of stronger growth in expected revenue from companies and individuals in 2005-06, together with a stronger outlook for corporate profits in 2006. These upward revisions have been partly offset by the impact of the Government’s decision to provide personal tax cuts (including the reduction in the fringe benefits tax rate) worth $6.6 billion in 2006-07, and $36.7 billion over the forward estimates and increasing the diminishing value rate for determining depreciation deductions at a cost of $3.7 billion over the forward estimates.

Other major policy decisions affecting revenue over the four year period from 2006‑07 to 2009‑10 include:

• the taxation of distributions to non-resident trustee beneficiaries which is expected to increase taxation revenue by $250 million in 2007-08 and $800 million over the forward estimates;
• the Government providing the Australian Taxation Office with an additional $82 million over four years to maintain tax compliance by high wealth individuals and their associated entities. This funding is expected to raise an additional $65 million in revenue in 2006-07 and $615 million over the forward estimates; and
• preventing some public sector superannuation schemes from improperly using pre-1 July 1988 funding credits. This is expected to increase taxation revenue by $150 million in 2006-07 and $600 million over the forward estimates.

Parameter and other variations are expected to increase revenue in 2006-07 by $11.2 billion, relative to the MYEFO forecasts. The strength in taxation revenue largely stems from the improvements in corporate profitability, bolstered by the flow-on effect of stronger outcomes in 2005-06.

Looking ahead, expected growth in nominal GDP remains supportive of continued strength in revenue, particularly from the corporate sector. In underlying terms, personal income is expected to continue to grow strongly on the back of solid growth in compensation of employees and the realisation of capital gains by investors.

Further detail on how the revised outlook for the economy has affected individual revenue heads over the forward estimates is provided in Statement 5. An analysis of the sensitivity of the taxation revenue estimates to changes in the economic parameters is provided in Appendix C.

Variations in expense estimates

Since MYEFO, estimated expenses for 2006-07 have increased by $2.9 billion reflecting the impact of new policy decisions of $4.3 billion partially offset by parameter and other variations of $1.4 billion.

Major policy decisions since MYEFO that have increased expenses include:

• $792 million in 2006-07 ($1.7 billion over four years) to acquire a new heavy airlift capability for the Australian Defence Force. The total cost amounts to $2.2 billion over six years;
• $242 million in 2006-07 ($993 million over four years) to expand the eligibility for the maximum rate of Family Tax Benefit Part A so that, from 1 July 2006, a family can earn $40,000 (up from $33,361 in 2005‑06) without having their entitlement reduced;
• $178 million in 2006-07 ($1.1 billion over four years) for a range of national security measures under the National Security — Preventing Terrorism package;
• $137 million in 2006-07 ($971 million over four years) to introduce the health and social services access card, to provide more convenient and efficient access to Australian Government health and social services benefits;
• $136 million in 2006-07 to finance Australia’s share of the Multilateral Debt Relief Initiative announced by G8 Finance Ministers in June 2005. The funding will enable up-front payment of Australia’s contribution for the ten-year period 2006-07 to 2015-16;
• $133 million in 2006-07 ($1.9 billion over five years to 2010-11) for mental health reform measures including a major increase in clinical and health services available in the community; and
• $114 million in 2006-07 ($497 million over four years) to extend the Family Tax Benefit Part A Large Family Supplement to families with three children.

In 2006-07, parameter and other variations have decreased forecast expenses by $1.4 billion since MYEFO largely reflecting:

• a $287 million reduction in estimated Parenting Payment expenses largely due to a stronger labour market reducing the expected number of benefit recipients;
• a $260 million reduction in estimated Age Pension expenses, largely due to an increase in the number of part-rate pension recipients and a decrease in the population projection for people eligible to receive Age Pension;
• a $260 million reduction in expenses for the Pharmaceutical Benefits Scheme due to lower than expected growth in certain drug groups including anti-inflammatory, cholesterol lowering and psycho analeptic drugs;
• a $186 million reduction in Disability Support Pension payments, largely due to increased workforce participation resulting in a revised forecast of growth in recipient numbers;
• a $178 million reduction in Youth Allowance expenses, largely due to lower than estimated take up by new apprentices; and
• the regular draw-down of the conservative bias allowance¹ reducing estimated expenses in 2006‑07 by around $1 billion.

The above decreases in expenses are partially offset by:

• a $200 million increase in 2006-07 due to the re-scheduling of the acquisition, maintenance and logistics support of defence weapon platforms originally planned to take place in 2005-06;
• a $190 million increase in spending on the Investing in Our Schools programme largely due to funding being brought forward from calendar year 2008 to calendar year 2006 to meet stronger than expected demand; and
• a $188 million increase in estimated civilian superannuation expenses, largely due to changes in demographics such as improved life expectancy of members.

In 2005-06, estimated expenses have decreased by $1 billion since MYEFO. This largely reflects parameter and other variations, including a $323 million reduction in civilian superannuation expenses and a $298 million reduction in estimated expenses for the Water Smart Australia and Raising National Water Standards programmes. These decreases have been partially offset by new spending of $2 billion, including $444 million for the Government’s response to Cyclone Larry, $354 million for a one-off lump sum payment to eligible carers and $270 million for the Australian Rail Track Corporation to improve rail track quality on the North‑South rail corridor.

More detailed information on expenses can be found in Statement 6. A full description of all policy measures since MYEFO can be found in Budget Paper No. 2, Budget Measures 2006-07.

Variations in net capital investment estimates

In 2006-07, forecast net capital investment has increased by $780 million since the 2005-06 MYEFO. This represents the combined effect of:

• new policy measures of $398 million, including $136 million for national security and counter-terrorism measures and $70 million for the upgrade of information technology systems for the Department of Immigration and Multicultural Affairs as part of the Government’s response to the Palmer and Comrie reports; and
• parameter and other variations of $382 million, including $100 million for the purchase of items in the national medical stockpile delayed from 2005-06 as a result of increased worldwide demand for antivirals and personal protective equipment resulting from the spread of avian influenza in Europe, Asia and Africa, and $56 million for the re-scheduling from 2005-06 of capital works relating to the security upgrade of overseas missions.

In 2005-06, estimated net capital investment has decreased by $306 million since MYEFO, largely reflecting $100 million due to the above mentioned delay in the purchase of items in the national medical stockpile and $65 million relating to the above mentioned re-scheduling of capital works for the security upgrade of overseas missions.

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¹ The forward estimates include an allowance for the established tendency of existing Government policy (particularly demand driven programmes) to be higher than estimated in the forward years. To offset this, the contingency reserve includes an allowance based on past experience to preserve the overall integrity of the forward estimates. This allowance, known as the conservative bias allowance, is progressively reduced so that the budget year conservative bias is zero by budget night.