Statement 7: Asset and Liability Management
The Government is forecasting strong surpluses over the forward estimates and will invest these in Australia's future by creating three new nation building funds. The establishment of these funds will substantially improve the Government's financial position, make provision for building the nation's assets, and leave the Government well placed to deal with emerging fiscal pressures from an ageing population.
The Australian Government's major assets and liabilities
The Government reports on a range of financial measures including net debt, net worth and net financial worth. While previous budget statements addressing the Government's assets and liabilities have focused on net debt and net worth, these measures have limitations as indicators of the Government's financial position (see Box 1). By contrast, net financial worth is a more effective and intuitive indicator of the sustainability of the Government's finances.
A summary of the Government's net financial worth position is provided in Chart 1.
Chart 1: Australian Government general government sector
net financial worth: 2003‑04 to 2011‑12
The projected improvement in net financial worth is primarily driven by forecast budget surpluses, reflecting the strength of the economy, budget discipline, and the returns from existing and newly created investment funds. The increase in total financial assets over the forward estimates period significantly outweighs the growth in the Government's liabilities.
Box 1: Measurement of the Government's financial position Net debt is the sum of selected financial liabilities minus the sum of selected financial assets. Net debt does not include accrued employee superannuation liabilities, which is the largest liability on the Australian Government's balance sheet. It does not provide information on whether the Government's net debt position is being used to finance the accumulation of assets or recurrent expenditure. This additional information is important in gauging the strength of the Government's financial position. Net debt is currently estimated at ‑$43 billion for 2007‑08 and is expected to remain below zero over the forward estimates. Net worth is calculated as total assets (both financial and non‑financial) minus total liabilities. Net worth incorporates non‑financial assets such as land, as well as financial assets and liabilities not captured by the net debt measure, most notably accrued employee superannuation liabilities and equities. Although the net worth measure provides a more comprehensive picture of the Government's overall financial position than net debt, it is not without limitations. For example, the valuation of physical assets can be problematic as they are typically valued without consideration of their potential use. Also, the Government may not be in a position to sell certain non‑financial assets, and therefore these assets would not be available to meet the Government's financing requirements. Net worth is currently estimated at $61 billion for 2007‑08 and is expected to remain positive over the forward estimates. Net financial worth measures the Government's net holding of financial assets. It is calculated as total financial assets minus total liabilities. Net financial worth is a broader measure than net debt as it includes government borrowing, superannuation and all financial assets, but is narrower than net worth since it excludes non‑financial assets. There are advantages from excluding non‑financial assets since they are often illiquid and cannot easily be drawn upon to meet the Government's financing needs. Net financial worth is currently estimated at ‑$26 billion for 2007‑08 and ‑$4 billion in 2008‑09, and projected to become positive in 2009‑10 and remain positive over the forward estimates. |
The outlook for the Government's balance sheet, including the aggregates of net debt, net worth and net financial worth, are based on a range of assumptions. If the basis for these assumptions change they are likely to impact the projected value of assets and liabilities, and hence change the projected path of net financial worth.
Statement 3: Fiscal Strategy and Outlook examines the impact of altering key economic assumptions on expenses and/or revenue. Since the budget outcome is one of the main drivers of the movement in the Government's asset and liability position, changes in the economic assumptions will also impact on net financial worth.
The Government reports on a range of other fiscal risks in Statement 8: Statement of Risks. These risks comprise general developments or specific events that may affect the fiscal outlook. Fiscal risks may affect expenses and/or revenue and, as a result, may contribute to variability in the Government's projected net financial worth position.
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