Australian Government, 2011‑12 Budget
Budget

Statement 3: Fiscal Strategy and Outlook (Continued)

Overview of fiscal position

The 2011‑12 Budget shows the Government remains on track to deliver a surplus in 2012‑13. This is despite short‑term challenges that have led to a deterioration of the budget bottom line this year and next and made the return to surplus more difficult.

The recent natural disasters are expected to result in additional payments of $6.6 billion over six years to assist affected communities with the costs of rebuilding.

Tax receipts have fallen by $16.3 billion over 2010‑11 to 2011‑12 relative to the estimates in the Mid‑Year Economic and Fiscal Outlook 2010‑11 (MYEFO) reflecting a more subdued economic outlook and larger than anticipated losses accumulated during the global financial crisis.

The downward revisions to tax receipts and the rebuilding cost of recent natural disasters have increased the budget deficit in 2010‑11 and in 2011‑12 compared to the 2010‑11 MYEFO. The underlying cash deficit is expected to be $49.4 billion (or 3.6 per cent of GDP) in 2010‑11 and $22.6 billion (or 1.5 per cent of GDP) in 2011‑12.

Notwithstanding these developments, the Government will deliver a surplus in 2012‑13 through its continuing focus on fiscal consolidation. Returning the budget to surplus will make room for the private sector to respond to the strong demand for Australia's commodity exports and avoid compounding capacity and price pressures. The fiscal consolidation will enable the Government to strengthen the position of the budget and support Australia's capacity to respond to unanticipated shocks.

The budget projects a surplus of $3.5 billion (0.2 per cent of GDP) in 2012‑13. This represents a fiscal consolidation of $52.9 billion (3.8 per cent of GDP) in the space of two years. This means that the Budget is projected to return to surplus only three years after the deficit peaked during the global financial crisis. This return to surplus will be the fastest in the 44 years for which data are available and is well ahead of any major advanced economy.

Table 1: Budget aggregates

Table 1: Budget aggregates

  1. Excludes expected Future Fund earnings.

The Government's fiscal strategy

The Government's medium‑term fiscal strategy is designed to ensure fiscal sustainability.

The Government's medium‑term fiscal strategy is to:

  • achieve budget surpluses, on average, over the medium term;
  • keep taxation as a share of GDP below the level for 2007‑08 (23.5 per cent of GDP), on average; and
  • improve the Government's net financial worth over the medium term.

The strategy has remained unchanged since 2008‑09, this Government's first budget. It has guided the Government's response to the global financial crisis and provides the basis for the Government's commitment to return the budget to surplus.

The strategy provides the necessary flexibility for the budget position to vary in line with economic conditions to support macroeconomic stability.

Consistent with the fiscal strategy, the Government took swift action through 2008 and 2009 to support the economy through the global financial crisis. The Government's delivery of a timely, targeted and temporary fiscal stimulus supported economic growth at a time that the private sector was in retreat.

In the Updated Economic and Fiscal Outlook (UEFO) released in February 2009 the Government also committed to take action to return the budget to surplus once the economy recovered to grow above trend. As part of this strategy, the Government will:

  • allow 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
  • hold real growth in spending to 2 per cent a year until the budget returns to surplus.

Once the budget returns to surplus, and while the economy is growing at or above trend, the Government will maintain expenditure restraint by retaining a 2 per cent annual cap on real spending growth, on average, until surpluses are at least 1 per cent of GDP.

Short term pressures on the fiscal position

Significant pressures have emerged since MYEFO which are affecting the budget position. These pressures have increased the size of the deficits expected in 2010‑11 and 2011‑12.

Chart 1: Decomposition of the change to the underlying cash balance
since the 2010‑11 MYEFO(a)

This chart shows over two thirds of the change in the deficits in 2010-11 and 2011-12 is the result of the write down in tax receipts. In 2010-11 all of the change in the fiscal position is driven by the downward revisions to tax receipts. In 2011-12, around half of the change in the fiscal position is driven by the downward revisions to tax receipts. Only one quarter of the change reflects government policy decisions. From 2012-13 the outlook for tax receipts is expected to improve.

  1. Includes GST receipts and GST payments, but excludes Future Fund earnings.

Chart 1 shows the change to the underlying cash balance since MYEFO.

Over two thirds of the change in the deficits in 2010‑11 and 2011‑12 is the result of the write down in tax receipts. This reflects the softer economy stemming from the impact of the recent natural disasters and the strong dollar, as well as the legacy of the global financial crisis, particularly the impact on tax receipts of unanticipated losses.

In 2010‑11, all of the change in the fiscal position is driven by the downward revisions to tax receipts.

In 2011‑12, around half of the change in the fiscal position is driven by the downward revisions to tax receipts. Only one quarter of the change reflects government policy decisions, and these largely reflect the Government's commitment to the military operations in Afghanistan and the bring forward of the Low Income Tax Offset.

From 2012‑13, the outlook for tax receipts is expected to improve, particularly as the impact of the natural disasters diminishes and the stronger economic outlook in 2011‑12 — buoyed by the higher terms of trade — flows through to tax collections. The improving outlook for tax receipts is also assisted by policy measures in this Budget to remove or adjust tax expenditures. As a result tax receipts as a share of the economy are expected to recover to 22.7 per cent of GDP in 2012‑13 which is the level projected at the MYEFO.

Natural disasters

The recent natural disasters have placed considerable strain on the budget because of their unprecedented economic and fiscal costs. It is estimated that the cost to the budget from increased spending will be $6.6 billion over six years.

Recognising this significant impact, the Government has cut spending, and introduced a modest progressive temporary levy, to make room in the budget for the cost of rebuilding. Through these actions the Government has fully funded the costs of its contribution to the recovery effort over the five years of the budget estimates.

In addition, the production losses associated with the natural disasters experienced in 2010‑11 are expected to reduce tax receipts by around $1¾ billion, almost entirely in the 2010‑11 and 2011‑12 years, compounding the impact on the budget of the increased spending on natural disasters.

Box 1 : Recovering and rebuilding from the recent natural disasters

The recent natural disasters throughout much of Australia are estimated to cost the Australian Government $6.6 billion over six years ($5.9 billion over the forward estimates) owing to increased spending to assist the States in the recovery effort through the Natural Disaster Relief and Recovery Arrangements (NDRRA) and direct Commonwealth assistance to those affected by the disasters.

The vast majority of this funding will rebuild damaged public infrastructure, mostly roads and bridges, but also other items such as schools and local council utilities and infrastructure.

The Government is also providing assistance for individuals, families, businesses, primary producers and not‑for‑profit organisations affected by the disasters, and assistance to help communities recover from the devastating events.

Of the total estimated expenditure, $3.9 billion will fall in 2010‑11. The Budget impact in this financial year reflects immediate assistance made available to help people, business and communities affected by the disasters. The Commonwealth also agreed to provide advance payments to Queensland and Victoria (as soon as Victoria signs a national partnership agreement) to ensure that the recovery and rebuilding task could start as quickly as possible and to help fund recovery in Queensland as the work is taking place.

Rebuilding infrastructure will take time given the unprecedented scale of the natural disasters and to ensure that it is done properly. Reconstruction activities are not expected to be completed by the States until 2013‑14. The Commonwealth's reimbursement of the States' costs normally occurs a year or two following reconstruction activities. Historically there have been lags in payments following significant natural disasters. For Tropical Cyclone Larry, which occurred in March 2006, the Commonwealth made payments to Queensland to fund reconstruction through to the 2009‑10 financial year.

While the majority of the impact is in the early years, it is anticipated that significant expenditure as a result of the floods and cyclone will occur across the forward estimates. The Commonwealth expects to provide reimbursements of more than $1.3 billion in 2012‑13 to 2014‑15, with $0.7 billion anticipated to be paid outside the forward estimates. However, if reconstruction and repair work is finalised more quickly than expected then the affected States will be reimbursed sooner.

Table A: Budget impact of Commonwealth recent natural disasters assistance(a)

Table A: Budget impact of Commonwealth recent natural disasters assistance(a)

  1. Underlying cash basis.

The Government has fully funded its contribution to the cost of the floods as part of the $22 billion in savings identified in the budget. These include the spending cuts, infrastructure deferrals and the temporary levy which were announced on 27 January 2011.

Weaker tax receipts

The outlook for tax receipts has been revised down significantly in the near term, with this year and next being the most significantly affected. In total, tax receipts have been revised down since MYEFO by $9.8 billion in 2010‑11 and $6.6 billion in 2011‑12.

The downward revisions reflect the influence of a number of important factors including:

  • slower economic growth in 2010‑11 and reduced production associated with the impact of natural disasters, a stronger than anticipated exchange rate and weakness in household consumption expenditure; and
  • larger than anticipated losses accumulated during the global financial crisis, with the utilisation of those losses driving significant downward revisions to receipts since MYEFO, particularly to company tax and capital gains tax collections.

Tax receipts in the near term are therefore projected to remain significantly below the projections published in the 2008‑09 Budget, with the shortfall being around $40 billion in 2010‑11 and around $15 billion in 2011‑12.

Returning the budget to surplus

Notwithstanding the challenges posed by natural disasters and the near term revenue weaknesses, the Government remains committed to return the budget to surplus as the appropriate policy response given the domestic economic outlook. Recent natural disasters will reduce Australia's economic growth in the first half of 2011, but the negative macroeconomic impacts are expected to be temporary. Australia's medium‑term outlook remains strong. The economy is forecast to grow at an above‑trend rate in 2011‑12 and 2012‑13 underpinned by an extremely strong outlook for resources investment and exports. Solid growth in jobs is forecast to reduce unemployment to 4½ per cent by the end of 2012‑13.

Returning the budget to surplus will reduce the public sector's call on resources and create space for the private sector to grow, particularly in response to strong demand for Australia's commodity exports. The planned fiscal consolidation is particularly important to avoid compounding the capacity pressures expected to emerge as the result of the extremely high level of investment in the resources sector.

Australia's economic outlook remains favourable with above trend economic growth forecast over the next two years. But risks to the international outlook, if realised, would have serious negative implications for Australia. The fiscal consolidation will help ensure that the Government is well placed to respond to any eventuality.

The Government is delivering the return to surplus through its ongoing commitment to the fiscal strategy and the implementation of the most rapid fiscal consolidation in the 44 years for which data are available.

Tax receipts

The commitment to allow the natural increase in tax receipts associated with a strengthening economy to flow through to the budget is a significant part of the fiscal consolidation.

Tax receipts are expected to recover from the short term weakness that characterises 2010‑11 and 2011‑12, to remain broadly in line with the MYEFO projections from 2012‑13 in nominal terms and as a share of the economy.

As a result, tax as a share of the economy is projected to grow from 20.3 per cent of GDP in 2010‑11 to 22.7 per cent in 2012‑13. This represents an increase in tax receipts of over 2 per cent of GDP which is an important part of returning the budget to surplus. Still, the projected tax‑to‑GDP ratio in 2012‑13 remains significantly below the level specified in the Government's fiscal strategy.

The 2 per cent cap on spending

The Government has continued to meet its commitment to keep real growth in spending to 2 per cent or less in the years when the economy is expected to grow above trend. The Government has kept real growth below 2 per cent for the five years from 2010‑11 to 2014‑15.

Table 2: Delivering on the 2 per cent commitment

Table 2: Delivering on the 2 per cent commitment

The commitment to hold real growth in spending to 2 per cent has placed — and will continue to place — a significant constraint on Government spending.

  • Real spending growth was above 2 per cent in 8 out of the 10 years preceding the financial crisis, with average real spending growth around 3.7 per cent.
  • Real growth in spending averages around 1 per cent per year over the forward estimates, the lowest average growth rate in a five year period since the 1980s.
  • Government spending, as a share of the economy, is projected to fall to 23.5 per cent of GDP by 2014‑15. This is significantly below the average of the ten years preceding the financial crisis (24.0 per cent).

Chart 2: Real Growth in payments

This chart shows that the average real growth in payments over the forward estimates is around 1 per cent per year, well below the 10 year average of real spending growth preceding the global financial crisis of 3.7 per cent.

This restraint in spending growth in the years immediately following the global financial crisis is the result, in part, of the withdrawal of the temporary fiscal stimulus. In addition, the Government has constrained spending growth by delivering its fiscal strategy.

In this Budget, the Government has built on the 2010‑11 Budget by continuing to offset the cost of its new policies by making over $22 billion in savings decisions.

Fiscal discipline — savings

As part of the savings task, the Government has identified significant reductions in expenditure to help fund new priorities, with savings broadly drawn from the following areas:

  • limiting growth in payments to families higher up the income scale, by maintaining the upper income thresholds for certain family payments at their current levels. This policy will improve the long‑term sustainability of the family payment system;
  • reforming income support payments, including Parenting Payment Single, Newstart and Youth Allowance (along with phasing out the Dependent Spouse Tax Offset), to encourage participation and enhance social and economic outcomes for individuals and the economy more broadly;
  • further improving the sustainability of the health budget by capping pathology services expenditure under the Medicare Benefits Schedule;
  • making the higher education loan program fairer, by reducing the upfront discount;
  • requiring greater efficiency from the public sector, by temporarily increasing the efficiency dividend;
  • delivering new efficiencies in defence, through ongoing reforms; and
  • reducing industry assistance and spending across the budget, and better targeting the timing of programs, including infrastructure deferrals to enable re‑building in flood and natural disaster affected areas.

The savings build on previously announced changes to the private health insurance arrangements, better targeting of family payments, and changes to pension eligibility, all of which are designed to improve the long‑term structural position of the budget.

Box 2: Savings in the 2011‑12 Budget

The 2011‑12 Budget makes $22 billion worth of savings to pay for the costs of natural disasters over the recent summer and the new priorities outlined in the Budget. This fiscal discipline required difficult choices, with around two‑thirds of the savings coming from reductions in expenditure.

Many of the budget savings identified deliver continuing benefits to the bottom line beyond the forward estimates, improving the sustainability of Government finances. These enduring savings build on previous saves identified by the Government in the three budgets since 2008‑09, where over $80 billion of savings had been identified.

Family Payments System

This Budget continues the reform of family payments to ensure the sustainability of family payments and targeting support to those most in need. To continue limiting growth in payments to families higher up the income scale now and in the future, the Government will maintain higher income thresholds for certain family payments at their current levels.

These saves build on previous changes that are delivering enduring benefits to the budget over time such as:

  • reforms in 2008‑09 which better targeted Baby Bonus and Family Tax Benefit Part B payments with an income test, to ensure support was provided to families on the basis of need; and
  • changes made in 2009‑10 which removed the link to pension indexation for FTB‑A, and maintained higher income thresholds for family payments for a three year period.

Health services

This Budget introduces reforms to pathology service items funded through the Medicare Benefits Schedule (MBS), including maximum growth rates over five years, resulting in a cap on pathology services expenditure under the MBS.

This save adds to previous changes introduced to reform the system so that it can better cope with the challenges of an ageing population and rising health care costs (the Intergenerational Reports identified these as a rapidly growing pressure in the budget), while also delivering a more responsive and better coordinated health and hospitals system.

  • Reforms in the 2009‑10 Budget included changes to private health insurance funding arrangements, and capping extended Medicare safety net benefits for items with excessive fees.
  • Longer‑term saves in the 2010‑11 Budget introduced ongoing pricing reforms to the Pharmaceutical Benefits Scheme, and new arrangements for supporting community pharmacy through the Community Pharmacy Agreement with the Pharmacy Guild of Australia.

Retirement incomes

The Government has also taken additional steps in this Budget to reform aspects of our retirement incomes system. The Government has extended the freeze on the co‑contribution income thresholds for another year to 2012‑13. This ongoing save builds on previous reforms to the retirement income system such as:

  • changes which enhanced the sustainability of the pension system by revising income test arrangements to target the pension to those who are most in need; and
  • the decision, in response to the long‑term cost of demographic change, and improvements in life expectancy, to increase gradually the qualifying age for the Age Pension to 67 years, at a rate of six months every two years, beginning in 2017.

Tax expenditures

The Budget also contains a number of tax measures to adjust or remove tax expenditures which improve the fairness and integrity of the tax system and provide enduring improvements to the tax system over time. These measures include:

  • reform of the statutory formula for valuing FBT on car fringe benefits to remove the incentive to drive greater distances; and
  • phasing out the Dependent Spouse Tax Offset for taxpayers with a dependent spouse who was born on or after 1 July 1971, strengthening the incentives for dependent spouses in couples without children to seek paid employment.

Other tax integrity measures include:

  • removal of access to the Low Income Tax Offset for unearned income of minors to reduce the tax benefits available from income splitting with children; and
  • improved reporting of taxable payments made to some contractors.

The overall impact of new spending and savings in the budget is a net saving of $5.2 billion over the forward estimates.

Table 3 shows the net savings achieved since the MYEFO. The net effect of policy decisions takes into account amounts that have previously been provided for in the Contingency Reserve (and as a result have no net impact on the budget position) and which principally relate to Official Development Assistance.

The savings in the budget more than cover the $4.4 billion variations in payments related to natural disasters, primarily being payments under the Natural Disaster Relief and Recovery Arrangements (NDRRA).

Table 3: Impact of policy decisions and natural disasters(a)

Table 3: Impact of policy decisions and natural disasters(a)

  1. On an underlying cash balance basis.
  2. The Cleaner Car Rebate Save is an estimates variation, but is included in this table because it is a decision not to proceed with an election commitment.
  3. On 27 January 2011, the Government also announced reductions in spending of $244 million, which are reflected in estimates variations which improve the budget position.

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