Statement 3: Fiscal Strategy and Outlook
The Government's fiscal strategy
The Government's fiscal strategy aims to ensure fiscal sustainability over the medium term. During a period of global economic uncertainty, fiscal sustainability becomes increasingly important. A credible fiscal policy, set in a medium‑term framework, will facilitate steady growth and help cushion the economy against damaging short‑term fluctuations. It promotes confidence and provides greater certainty for decision‑makers.
Key elements of a sustainable medium‑term fiscal strategy
The Government remains committed to its medium‑term fiscal strategy of:
- achieving budget surpluses, on average, over the economic cycle;
- keeping taxation as a share of GDP on average below the level for 2007‑08; and
- improving the Government's net financial worth over the medium term.
These medium‑term objectives anticipate that fiscal policy will support economic growth and jobs by allowing the budget to move into temporary deficit during an economic downturn.
To ensure that growth is supported in a way that is consistent with the medium‑term fiscal strategy, the Government committed in the February 2009 Updated Economic and Fiscal Outlook (UEFO) to a two‑stage fiscal strategy:
1. Support the economy during the global recession
During periods of economic slowdown of uncertain extent and duration, it is critical that the Government continues to support the economy and jobs by:
- allowing the variations in receipts and payments, which are naturally associated with slower economic growth, to drive a temporary underlying cash budget deficit; and
- using additional spending to deliver timely, targeted and temporary stimulus, with the clear objective of other budget priorities and new policy proposals being met through a reprioritisation of existing policies.
2. Deficit exit strategy as the economy recovers
As the economy recovers, and grows above trend, the Government will take action to return the budget to surplus by:
- allowing the level of tax receipts to recover naturally as the economy improves, while maintaining the Government's commitment to keep taxation as a share of GDP below the 2007‑08 level on average; and
- holding real growth in spending to 2 per cent a year until the budget returns to surplus.
Delivering on the fiscal strategy
The 2009‑10 Budget delivers on the two‑stage fiscal strategy of supporting growth now while investing for the future, and returning the Budget to surplus once the economy recovers.
Allowing the automatic stabilisers to support the economy
The change in the economic outlook since the 2008‑09 Budget has implications for both the receipt and payment sides of the budget. Much of the deterioration in the budget position is as a result of the revised economic parameters that have lowered forecast tax receipts.
Since the 2008‑09 Budget, tax receipts have fallen by around an estimated $210 billion across the forward estimates to 2012‑13. This estimate takes into account potential downward revisions to estimated tax receipts in 2012‑13. Chart 1 does not include 2012‑13 as this Budget reports estimates for 2012‑13 for the first time. In this Budget, the government has fully offset new spending in 2012‑13.
Chart 1: Variations in the underlying cash balance since the 2008‑09 Budget
Variations to taxes and payments (parameter and other variations) represent around two thirds of the total decrease in the underlying cash balance since the 2008‑09 Budget over the 4 years from 2008‑09, and more than three quarters of the decrease in 2010‑11 and 2011‑12.
The global recession and collapse in commodity prices are the primary cause of the substantial downward revisions to revenue. These revisions wipe out most of the large revenue gains from strong global growth and rising commodity prices between the 2005‑06 Budget and 2008‑09 Budget.
Were the Government to offset these automatic variations in taxes and payments it would be contributing to — rather than leaning against — the macroeconomic instability arising out of the global recession. Instead, by allowing the 'automatic stabilisers' of the budget to operate, the Government's fiscal policy is playing a continuing important role in stabilising the economy.
A temporary deficit, financed through borrowings that will be repaid when economic conditions improve, is the only sensible course of action in the current economic circumstances.
Supporting the economy and jobs now, while investing for the future
Discretionary fiscal policy will temporarily add to the deficit in order to support economic activity and employment. The net measures in the Budget raise the level of GDP by ¾ of a per cent in 2009‑10.
To support the economy through the global recession, the Government's fiscal stimulus program started with income support and then moved into 'shovel‑ready' infrastructure. This Budget marks the start of the next phase — a move into larger and longer term nation building projects.
Investments in road, rail, ports and the national broadband network will support jobs in the short term, and enhance productivity and innovation in the longer term. Also contributing to productivity will be the investment in world‑class higher education, hospital systems and innovation. At the same time, the paid parental leave system will support increased participation and income security for pensioner and carers has been enhanced.
As the economy recovers: deficit exit strategy
The Government remains committed to the medium‑term fiscal strategy, including keeping the Budget in surplus, on average, over the economic cycle. As soon as economic growth returns to above trend levels, the Government is committed to taking action to return the Budget to surplus as quickly as possible, by allowing tax receipts to recover and limiting growth in real spending. Based on this strategy the budget is projected to return to underlying cash balance surplus by 2015‑16.
Allowing tax receipts to recover naturally
As the economy strengthens there will be a natural recovery in the level of tax receipts without any policy changes. The Government will 'bank' any improvement in tax receipts associated with this economic recovery, allowing this to flow through to improve the budget position.
Taxation receipts are currently an estimated 22.0 per cent of GDP in 2009‑10, significantly below the 2007‑08 level of 24.6 per cent of GDP reflecting the current economic slowdown. There is, therefore, the scope for tax receipts to recover, while maintaining our commitment to keep taxation as a share of GDP below the 2007‑08 level on average.
Reprioritising spending to fast‑track the return to surplus
The Government has already put in place the foundations to deliver expenditure restraint once the economy returns to above trend rates of economic growth. The Government is delivering on its deficit exit strategy.
New spending has been fully offset in the final year of the forward estimates in cash terms. Real spending growth has been held below 2 per cent in each of 2011‑12 and 2012‑13 — two years where above trend economic growth has been projected.
The table below shows the net effect of policy decisions taken since UEFO. In assessing performance against the fiscal strategy, the total effect of policy decisions is adjusted to account for the impact of the changed implementation arrangements for CPRS and for amounts that have previously been provided for in the contingency reserve.
Table 2: Delivering our fiscal strategy
In cash terms, the revised Carbon Pollution Reduction Scheme (CPRS) implementation package adversely affects the Budget in 2009‑10, 2010‑11 and 2011‑12, and improves the Budget in 2012‑13. This reflects the temporary timing divergence between CPRS expenditures and revenues during the transition period. In assessing performance against the fiscal target, and its contribution to medium term sustainability, these temporary cash effects are disregarded.
In the 2008‑09 Budget, provision was made for a number of programs that were reasonably expected to affect the budget estimates. For example, a provision of around $12.5 billion was put aside for nation‑building infrastructure. Delivery of these programs which have previously been provided for does not increase expected spending, and as such does not impact on the overall budget position. Accordingly, in assessing performance against the fiscal target, and its contribution to medium‑term sustainability, the total effect of policy decisions on the Budget should be adjusted for contingency reserve offsets.
The Government has been prepared to make the hard decisions now in order to position Australia for the future through major structural savings underpinning fiscal sustainability.
A key feature of the Government's pension reform package is the introduction of measures to preserve the medium‑term sustainability of the retirement income system, including increasing the qualifying age for the Age Pension and reprioritising spending within the pension system.
To ensure Australia's retirement income system remains sustainable into the future, the Government will reduce the generosity of some superannuation concessions to those with greater private resources. The Government will rebalance its suite of policies supporting private health insurance, so that people with a greater capacity to provide for their own health insurance do so. It will also make changes to the Family Tax Benefit Part A (FTB‑A) as part of ensuring fiscal sustainability in the medium term.
Reflecting the projected improvements in receipts and the hard choices to ensure spending is sustainable, the Government projects the budget position will strengthen in the projection years, bringing the deficit down to 2.0 per cent of GDP in 2012‑13 (a halving of the 2009‑10 deficit). Outside the forward estimates, the projected continued strengthening of the economy will translate to further improvements in receipts. With the Government's continued action to restrain real spending growth to 2 per cent, the Budget is currently projected to return to surplus in 2015‑16, and remain in a surplus position for the remainder of the medium‑term projections (Chart 2).
Chart 2: Underlying cash balance projected to 2019‑20
Source: Treasury projections.
Net debt will remain low by international standards and will begin to improve once the budget approaches surplus (Chart 3). Net debt is projected to peak at 13.8 per cent of GDP in 2013‑14, which is significantly smaller as a proportion of GDP than most other advanced countries. This is considerably lower than the 80 per cent net debt that the IMF predicts for countries such as the US, UK, Germany and France by 2014.
Chart 3: Government net debt projected to 2019‑20
Source: Treasury projections.
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