Australian Government, 2010‑11 Budget
Budget

Statement 3:
Fiscal Strategy and Outlook
(Continued)

Fiscal outlook

An underlying cash deficit of $40.8 billion is expected in 2010‑11, compared with an estimated deficit of $46.6 billion at MYEFO. In accrual terms, a fiscal deficit of $39.6 billion is expected for 2010‑11.

Table 4: Australian Government general government sector budget
aggregates

Table 4: Australian Government general government sector budget aggregates

  1. Excludes expected Future Fund earnings.

Underlying cash balance estimates

In 2010‑11, an underlying cash deficit of $40.8 billion is estimated, which is $5.8 billion lower than the MYEFO estimate of $46.6 billion. A headline cash deficit of $48.0 billion is forecast for 2010‑11. Table 5 provides a summary of Australian Government general government sector cash flows.

Table 5: Summary of Australian Government general government sector
cash flows

Table 5: Summary of Australian Government general government sector cash flows

  1. Equivalent to cash receipts from the sale of non‑financial assets in the cash flow statement.
  2. Equivalent to cash payments for purchases of non‑financial assets in the cash flow statement.
  3. The acquisition of assets under finance leases decreases the underlying cash balance. The disposal of assets previously held under finance leases increases the underlying cash balance.
  4. Excludes expected Future Fund earnings.

Table 6 provides a reconciliation of the variations in the underlying cash balance estimates.

Table 6: Reconciliation of 2009‑10 Budget, 2009‑10 MYEFO and
2010‑11 Budget underlying cash balance estimates

Table 6: Reconciliation of 2009-10 Budget, 2009-10 MYEFO and 2010-11 Budget underlying cash balance estimates

  1. Excludes expected Future Fund earnings.
  2. GDP forecasts for the 2009‑10 Budget were prepared according to the System of National Accounts 1993, while forecasts for MYEFO and the 2010‑11 Budget were prepared according to the System of National Accounts 2008.
  3. Excludes secondary impacts on public debt interest of policy decisions and offsets from the contingency reserve for decisions taken.

Policy decisions

Policy decisions since MYEFO are expected to increase the underlying cash deficit by $3.0 billion in 2010‑11.

Further detail of the impact of these policy decisions on the fiscal outlook is provided in the 'Fiscal balance estimates' section below. More detail on the decisions can be found in Budget Paper No. 2, Budget Measures 2010‑11.

The majority of these policy decisions have broadly the same underlying and fiscal impacts. The deferral of the Carbon Pollution Reduction Scheme (CPRS) has different underlying cash and fiscal impacts. The deferral of the CPRS is estimated to reduce the underlying cash balance by $375 million in 2010‑11 (and increase the underlying cash balance by $545 million over four years). In fiscal terms, the deferral of the CPRS is expected to increase the fiscal balance by $439 million in 2010‑11 (an increase of $2.9 billion over four years). The deferral of the CPRS has a negative impact on the underlying cash balance in 2010‑11 because of the removal of receipts from the advance sale of future vintage permits ahead of the related fiscal balance impact (see Box 2).

Box 2: Budget impact of the Carbon Pollution Reduction Scheme

The Australian Government remains committed to tackling the challenge of climate change through the Carbon Pollution Reduction Scheme (CPRS). The economic and environmental risks posed by climate change remain undiminished, and governments around the world recognise that market‑based approaches are the most effective and least‑cost way to reduce emissions.

However the Australian Government recognises that, in light of the continued absence of Parliamentary support for the CPRS, it will not be possible to commence the CPRS on 1 July 2011.

The Government will not move to introduce legislation for the CPRS until after the end of the current commitment period of the Kyoto Protocol and only when there is greater clarity on the actions of major economies, including the US, China and India. This means that the Government will not move to legislate the CPRS before the end of 2012, and will only do so after this time if there is sufficient international action.

The budget treatment of the CPRS is affected by this delay. The forward estimates of revenue and expenses in the Budget incorporate the assumptions and judgments based on the best information available at the time of publication. Standard Budget practice requires some certainty around the timing and fiscal impacts of a policy in order for it to be included in the forward estimates. As the financial impact of deferring the CPRS will depend, in part, on the timing of its introduction, and given that a start date cannot be determined at this time, the financial implications of the Scheme have been removed from the forward estimates. The deferral of the CPRS package improves the underlying cash balance by $415 million over five years from 2009‑10, with additional net departmental saves taking this amount to $652 million.

The reintroduction of the CPRS is reported as a factor which is likely to influence the actual budget outcome in future years, in Budget Paper No. 1, Statement 8: Statement of Risks. This is similar to the treatment of the Government's commitment to the Kyoto Protocol as an unquantifiable contingent liability.

Parameter and other variations

Total parameter and other variations since MYEFO have increased the forecast of the underlying cash balance in 2010‑11 by $8.9 billion. Since the 2009‑10 Budget, parameter and other variations are expected to have a total positive impact of $83.3 billion on the underlying cash balance in the four years to 2012‑13.

Variations in receipts

Parameter and other variations since MYEFO have increased taxation receipts by $16.8 billion in 2010‑11. The variations primarily relate to receipts from individuals, companies and GST. The $2.5 billion increase relating to GST in 2010‑11 is returned in full to the States and Territories as payments.

Since the 2009‑10 Budget, parameter and other variations are expected to increase taxation receipts by around $95 billion in the four years to 2012‑13.

Non‑tax receipts in 2010‑11 are expected to be $402 million lower than forecast at MYEFO. This reduced estimate primarily reflects reductions in the Reserve Bank of Australia dividend and in fee receipts from eligible financial institutions for the Guarantee Scheme for Large Deposits and Wholesale Funding.

Variations in payments

Total payment parameter and other variations have increased the expected underlying cash deficit in 2010‑11 by $7.5 billion. The main variations relate to increases in GST payments to the States and Territories, Private Health Insurance Rebate payments, and Family Tax Benefit payments, partly offset by reduced Job Seeker Income Support payments.

Variations in payments are broadly consistent with variations in expenses. Further detail is provided in the 'Fiscal balance estimates' section below.

Fiscal balance estimates

In 2010‑11, a fiscal balance deficit of $39.6 billion is estimated, compared with the deficit of $46.5 billion estimated at MYEFO. Table 7 provides a reconciliation of the fiscal balance estimates.

Table 7: Reconciliation of 2009‑10 Budget, 2009‑10 MYEFO and 2010‑11
Budget fiscal balance estimates(a)

Table 7: Reconciliation of 2009-10 Budget, 2009-10 MYEFO and 2010-11 Budget fiscal balance estimates(a)

  1. 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.
  2. GDP forecasts for the 2009‑10 Budget were prepared according to the System of National Accounts 1993, while forecasts for MYEFO and the 2010‑11 Budget were prepared according to the System of National Accounts 2008.
  3. Excludes secondary impacts on public debt interest of policy decisions and offsets from the contingency reserve for decisions taken.

Revenue estimates

As a result of the improving economic outlook, total revenue has been revised up by $17.9 billion in 2010‑11 since MYEFO. New policy decisions have increased revenue by $1.7 billion, and parameter and other variations have increased revenue by $16.2 billion in 2010‑11 since MYEFO.

Major policy decisions that have increased revenue over the four year period from 2010‑11 to 2013‑14 include:

  • introducing a 40 per cent Resource Super Profits Tax (RSPT) on non‑renewable resources from 1 July 2012. The RSPT will raise $12 billion over four years to 2013‑14;
  • increasing tobacco excise by 25 per cent, with effect on and from 30 April 2010, which will raise $5.2 billion over four years (and a further $255 million in 2009‑10); and
  • increasing funding to the Australian Taxation Office for GST compliance which is expected to increase revenue by $3.0 billion over the forward estimates. This measure will result in an additional $1.6 billion in underlying cash GST collections that will be paid to the States and Territories.

The impact of these policy decisions on revenue has been partially offset by a number of decisions that have reduced revenue, including:

  • deferring the CPRS, with its removal from the estimates expected to reduce revenue by $15.3 billion over the forward estimates period;
  • reducing the company tax rate from 30 per cent to 29 per cent for 2013‑14 and 28 per cent from 2014‑15, at a cost of $2.3 billion over the forward estimates;
  • increasing the superannuation contribution cap for individuals over 50 years old with superannuation balances below $500,000, at a cost to revenue of $1.3 billion over the forward estimates;
  • providing small businesses with an instant asset write‑off for assets with an acquisition cost under $5,000, as well as a simplified pooling arrangement, at a cost to revenue of $1.0 billion over the forward estimates; and
  • providing a 50 per cent discount for deposit interest income at a cost to revenue of $1.0 billion over the forward estimates.

Most revenue heads have been revised up in 2010‑11 since MYEFO as nominal GDP is now forecast to be higher. The largest revisions occur in individuals' income taxes, company tax and GST.

The upwards revision to individuals' income taxes reflects the improved outlook for employment growth, unincorporated business income and capital gains. Overall, parameter and other variations have increased individuals' income taxes by $6.6 billion since MYEFO. Company profits in 2010‑11 are expected to be higher than at MYEFO resulting in company tax being revised up by $7.4 billion, despite prior year losses and collection system lags. Higher forecasts for consumption have increased the forecast for GST by $2.5 billion.

In 2010‑11, non‑taxation revenue is expected to be $193 million lower than forecast at MYEFO, largely reflecting a range of parameter and other variations, including:

  • Reserve Bank of Australia (RBA) dividend estimates decreasing by $810 million as a result of unrealised valuation losses from the appreciation of the exchange rate since MYEFO. Dividend estimates have been decreased by $2.8 billion over four years, as it is expected that the RBA will retain some future earnings to restore the balance of the Bank's Reserve Fund; and
  • the Guarantee Scheme for Large Deposits and Wholesale Funding fees from eligible financial institutions having decreased by $402 million ($1.5 billion over four years) due to lower than anticipated outstanding guaranteed liabilities and closure of the Guarantee Scheme on 31 March 2010.

The decreases in non‑taxation revenue are partially offset by a range of expected increases in other non‑taxation revenues including from interest earnings on investments and on increases in superannuation contributions.

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 A of Statement 3.

Expense estimates

Since MYEFO, estimated total expenses for 2010‑11 have increased by $9.7 billion, reflecting new policy decisions of $3.5 billion, and parameter and other variations of $6.2 billion (see Table 7).

Policy decisions

Since MYEFO, major policy decisions to increase expenses across the forward estimates are to:

  • implement a range of measures encompassing the National Health and Hospitals Network at a cost of $1.5 billion in 2010‑11 ($7.3 billion over five years including $310 million in 2009‑10);
  • continue and enhance Australia's military contribution to international efforts in Afghanistan and the wider Middle East Area of Operations, East Timor and the Solomon Islands at an expected cost of $1.1 billion in 2010‑11;
  • extend the drought (exceptional circumstances) assistance for primary producers and small business, at an expected cost of $316 million in 2010‑11 ($420 million over 2009‑10 and 2010‑11); and
  • increase Australia's official development assistance (ODA), consistent with the Government's long‑term commitment to increase ODA funding to 0.5 per cent of Gross National Income by 2015‑16, at an expected cost of $232 million in 2010‑11 ($1.8 billion over four years). This increase has been offset by a reduction for ODA contained in the contingency reserve which means there is no overall impact on the budget position.

The impact of these policy decisions on expenses has been partially offset by a number of decisions that have reduced expenses, including:

  • deferring the Carbon Pollution Reduction Scheme (CPRS), which is expected to reduce expenses by $445 million in 2010‑11 ($18.2 billion over four years). The deferral of the CPRS is also expected to reduce revenue over the forward estimates (see above);
  • phasing in the flow through to additional ODA funding from the adoption of a new international system of National Accounts that affects the calculation of Gross National Income. This is expected to generate savings of $208 million in 2010‑11 ($1.0 billion over four years), while still being consistent with the Government's commitment to increase ODA funding to 0.5 per cent of Gross National Income by 2015‑16;
  • introducing reforms to ensure the ongoing sustainability of the Pharmaceutical Benefits Scheme (PBS) and the Repatriation Pharmaceutical Benefits Scheme (RPBS), which are expected to deliver savings of $31 million in 2010‑11 ($1.3 billion over four years) and have been negotiated with Medicare Australia; and
  • negotiating the Fifth Community Pharmacy Agreement with the Pharmacy Guild of Australia, which is expected to deliver net savings of $125 million in 2010‑11 ($484 million over four years).
Parameter and other variations

In 2010‑11, parameter and other variations have increased forecast expenses by $6.2 billion since MYEFO. The largest increases are due to expected rises in:

  • GST payments to the States and Territories, by $2.5 billion in 2010‑11 ($10.2 billion over four years from 2010‑11), reflecting a forecast increase in GST collections;
  • Private Health Insurance (PHI) Rebate expenses, by $863 million in 2010‑11 ($615 million over four years) mainly due to the delay of savings measures announced in the 2009‑10 Budget measure Private health insurance — fair and sustainable support for the future in the Senate. The forward estimates are now based on this measure commencing on 1 July 2011. Means‑testing the PHI Rebate remains the Government's policy;
  • Family Tax Benefit expenses, by $678 million in 2010‑11, reflecting higher than previously projected recipient numbers, expected increases in rates of payment resulting from a higher than anticipated Consumer Price Index (CPI) and higher than anticipated top‑up payments after the lodgement of tax returns;
  • Higher Education Support expenses, by $671 million in 2010‑11 ($2.1 billion over four years), mainly due to a significant increase in enrolments at universities in 2009 and 2010, and a further projected increase in enrolments in 2011;
  • Disability Support Pension (DSP) expenses, by $549 million in 2010‑11, mainly due to higher than anticipated numbers of recipients and higher rates of payment. Based on historical trends, the number of people receiving the DSP is likely to remain at a higher level for a period of time after the general unemployment rate begins to decline;
  • ODA expenses, by $357 million in 2010‑11 ($1.8 billion over four years) as a result of the adoption of a new international system of National Accounts that affects the calculation of Gross National Income, and a strong economic growth outlook. This parameter variation is offset in part by a decision to phase in the flow through to additional funding from the methodological change; and
  • Medicare Services expenses, by $389 million in 2010‑11 ($1.2 billion over four years) mainly due to the extension of the Chronic Disease Dental Scheme (CDDS) to 30 September 2010 as a result of the Senate's not allowing the determination to close the program. The closure of the CDDS remains the Government's policy.

These increases in expenses are partially offset by expected decreases in:

  • job seeker income support expenses by $2.3 billion in 2010‑11 ($5.7 billion over four years), reflecting the reduction in the expected number of unemployment benefit recipients resulting from improvements in the economic outlook; and
  • public debt interest expenses, by $137 million in 2010‑11 ($5.3 billion over four years from 2010‑11), largely owing to the reduced forward funding task.

In 2009‑10, parameter and other variations have increased estimated expenses by $1.0 billion since MYEFO. This primarily reflects:

  • GST payments to States and Territories of $2.2 billion reflecting increased estimates of GST collections for the current financial year;
  • Family Tax Benefit payments of $615 million due to higher than projected customer numbers, rates of payment and increased top‑up payments made after the lodgement of tax returns; and
  • penalty remissions of $510 million for the Australian Taxation Office, reflecting higher than previously expected March year‑to‑date expenses and higher trends over the March to June period in the past year.

These increases in expenses have been partially offset by decreases in estimates for:

  • job seeker income support expenses, by $626 million, due to the downward revision of the expected unemployment benefit recipients resulting from improvements in the economic outlook;
  • Water Reform grants, by $484 million, mainly due to movement of funds from 2009‑10 into future years; and
  • public debt interest expenses, by $398 million, largely owing to a lower than expected financing requirement for 2009‑10.

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 2010‑11.

Net capital investment estimates

In 2010‑11, forecast net capital investment has increased by $1.3 billion since MYEFO. In part, this reflects new policy decisions of $693 million, including funding of $163 million to enhance force protection measures for Australian troops deployed to Afghanistan.

Parameter and other variations since MYEFO have increased estimated net capital investment for 2010‑11 by $645 million. This primarily reflects:

  • Broadband and Communications Infrastructure program net investment of $223 million mainly due to capital expenditure on the Regional Backbone Blackspots Program not being spent in 2009‑10. This is as a result of the program expenditure profile being adjusted to reflect the actual spread of payments and construction activity agreed with the contractor responsible for delivering the infrastructure; and
  • a movement of $476 million from 2009‑10 mainly due to the expectation that some water purchase tenders under the Restoring the Balance in the Murray‑Darling Basin component will not be settled until 2010‑11.

Further information on net capital investment 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 2010‑11.

Net financial worth, net worth and net debt

The strengthening of the balance sheet since MYEFO is largely due to the improved cash balance.

Net debt for the Australian Government general government sector is forecast to be $78.5 billion in 2010‑11, which is $11.9 billion lower than estimated at MYEFO. This primarily reflects the improved budget position — and therefore a reduced financing task.

The Australian Government's net debt position, at 5.6 per cent of GDP in 2010‑11, is extremely low compared with the major advanced economies.

The improvement in Australia's net debt is projected to be sustained across the forward estimates, as the reduction in the projections of the headline cash deficit relative to the 2009‑10 MYEFO continue to translate into a stronger balance sheet. By the end of the forward estimates in 2013‑14, net debt is expected to be $90.8 billion (or 5.5 per cent of GDP), having peaked as a proportion of GDP in 2011‑12 at 6.1 per cent of GDP.

Net financial worth for the Australian Government general government sector is forecast to be ‑$160.6 billion in 2010‑11, an improvement of $9.5 billion on the MYEFO figure.

Estimated net worth in 2010‑11 has improved to ‑$56.5 billion, which is $10.0 billion higher than the MYEFO estimate of ‑$66.5 billion. As with net debt, these improvements are largely due to the Government's lower interest bearing liabilities.

Further details on the balance sheet are outlined in Statement 7 Asset and Liability Management. Table 8 provides a summary of Australian Government general government sector net financial worth, net worth, net debt and net interest payments.

Table 8: Australian Government general government sector net financial
worth, net worth, net debt and net interest payments

Table 8: Australian Government general government sector net financial worth, net worth, net debt and net interest payments

  1. Net financial worth equals total financial assets minus total liabilities. That is, it excludes non‑financial assets.
  2. Net debt equals the sum of deposits held, advances received, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid and investments, loans and placements.

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