Australian Government, 2011‑12 Budget
Budget

Statement 7: Asset and Liability Management (Continued)

Overview of the Australian Government's balance sheet

The Government's balance sheet shows the stocks of all government assets and liabilities. Measures such as net debt, net financial worth and net worth are aggregates drawn from the balance sheet that provide an indication of the Government's financial strength at a point in time (see Box 1).

The outlook for the Government's stocks of assets and liabilities — or the Government's balance sheet — over the forward estimates is based on a range of estimates and assumptions about those assets and liabilities. If the estimates or assumptions change, this is likely to impact on the projected value of assets and liabilities, and hence change the projected path of the balance sheet measures outlined above.

The outlook for the Government's stocks of assets across the forward estimates is broadly similar to the 2010‑11 Budget. However, the downward revision to expected tax receipts in 2010‑11 and 2011‑12 and the impact of the natural disasters on the fiscal outlook have driven an increase in expected liabilities, predominantly in Commonwealth Government Securities. These changes have contributed to higher estimates for net debt, and lower estimated net financial worth and net worth than was expected at the 2010‑11 Budget.

However, the outlook for net debt, net financial worth and net worth remains significantly better than during the height of the global financial crisis, and the Australian Government's finances remain amongst the strongest in the developed world.

Statement 3: Fiscal Strategy and Outlook examines the impact of altering key economic assumptions on payments and receipts. Since the Budget position 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 the Government's financial stocks.

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 or revenue and, as a result, may contribute to variability in the Government's projected net debt, net financial worth and net worth position.

Measurement of the Government's financial position

Box 1: Net debt, net financial worth and net worth

Net debt is a commonly quoted measure of a government's financial strength. Historically, this was the only available stock measure for governments that were recording financial information in a cash‑based accounting system. Net debt provides the most useful measure for international comparisons, given most OECD countries report on it.

Net financial worth is used by the Government as the primary indicator of balance sheet sustainability because it provides a more effective and intuitive indicator of the sustainability of the Government's finances. It 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 to excluding non‑financial assets since they are often illiquid and cannot easily be drawn upon to meet the Government's financing needs.

Net worth is the broadest measure of the Government's financial position. It is the net position of total assets and liabilities recorded on the balance sheet.

Net debt, net financial worth and net worth

The economic and fiscal impacts of recent natural disasters at home and overseas and the weaker outlook for tax receipts have contributed to a higher expected level of net debt, and lower expected net financial worth and net worth, than was forecast in the 2010‑11 Budget. However, these estimates are significantly better than those expected during the global financial crisis — net debt, for example, was expected to peak at 13.8 per cent of GDP in 2013‑14 in the 2009‑10 Budget.

Net debt is now expected to peak at $106.6 billion in 2011‑12 (7.2 per cent of GDP), falling to 5.8 per cent of GDP by the end of the forward estimates.

In 2011‑12, net financial worth is estimated to be ‑$200.6 billion, compared to the 2010‑11 Budget estimate of ‑$174.3 billion. Net financial worth is estimated to be ‑$188.5 billion by the end of the forward estimates.

Chart 1 shows the projected movements in net financial worth since the 2009‑10 Budget.

Chart 1: Net financial worth comparison

This chart shows the projected level of net financial worth across the forward estimates in the 2009-10, 2010-11 and 2011-12 Budgets. The chart shows that since the 2009-10 Budget, the outlook for net financial worth has improved.

Note: Net financial worth for 2013‑14 was not projected in the 2009‑10 Budget; net financial worth for 2014‑15 was not projected in the 2010‑11 Budget.

Net worth is currently estimated at ‑$87.5 billion for 2011‑12, compared with ‑$66.4 billion estimated at the time of the 2010‑11 Budget.

The Australian Government's financial position remains amongst the strongest in the developed world (Box 2) and is a key reason behind the retention of the Australian Government's AAA credit rating. Other key factors underpinning Australia's credit rating are the strength and resilience of the economy, stability of the financial system and the quality of policy and institutional arrangements, including independent monetary policy, strong financial regulation and the Government's adherence to a credible medium‑term fiscal framework.

Box 2: The strength of the Australian Government's financial position

During 2010‑11, many countries have faced profound financial challenges as a result of the accumulation of large budget deficits and high levels of sovereign debt. Several governments have had to implement severe austerity measures in order to support more sustainable trajectories for government debt.

This stands in sharp contrast to the strength and resilience of the Australian Government's financial position.

Australia's level of net debt remains extremely low by international standards (Chart A). Australian Government net debt is expected to peak at 7.2 per cent of GDP in 2011‑12, which is less than one tenth of the average net debt position of the major advanced economies in 2011. The peak in Australia's net debt compares with the net debt position of the United States, which the IMF projects will continue to increase until at least the end of 2016.

Chart A: Government net debt for Australia and selected economies

This chart shows the level of net debt (as a percentage of GDP) for Australia, the US, Japan and the average of the major advanced economies over the period 2007 to 2014. The chart shows that Australia's level of net debt is significantly lower than these economies.

Note: Australian data are for the Australian Government general government sector and refer to financial years beginning 2007‑08. Data for all other economies are total government and refer to calendar years beginning 2007.

Source: IMF Fiscal Monitor April 2011 and Treasury.

Similarly, Australia's net interest payments are low by international comparison (Chart B).

Chart B: Net interest payments for Australia, the US and the euro area

This chart shows the level of net interest payments for Australia, the US and the Euro area, from 1984-85 to 2014-15 (since 1991 for Euro area), as a percentage of GDP. The chart shows that Australia's net interest payments have been significantly lower than both the US and the Euro area over this period.

Note: Net interest payments are equal to the difference between interest paid and interest receipts on government assets and liabilities. Australian and US data are federal government data. Australian data refer to financial years beginning 1984‑85. US data refer to US fiscal years beginning October 1984. Euro area data are total government and refer to calendar years beginning 1991.

Source: United States Congressional Budget Office Budget and Economic Outlook January 2011, OECD Economic Outlook 88 November 2010, Thomson Reuters and Treasury.

Not only are the Government's debt levels extremely low by international comparison, the expected return to budget surplus in 2012‑13 means that the Government is well placed to reduce net debt.

A return to budget surpluses will strengthen the balance sheet further, thereby ensuring Australia continues to have the flexibility to respond to any unanticipated future events that have a fiscal impact.

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