Statement 3: Fiscal Strategy and Outlook (Continued)
The Government is returning the budget to surplus in 2012‑13, with surpluses growing across the forward estimates. This delivers on the Government's fiscal strategy, first set out in the Updated Economic and Fiscal Outlook in 2009, to return the budget to surplus as the economy recovers.
The return to surplus in 2012‑13 reflects a fiscal consolidation of 4.3 per cent of GDP since 2009‑10. This is appropriate in the context of an economy where the fundamentals remain strong and the outlook remains positive.
The challenge in returning to surplus has increased since MYEFO with the recovery in tax receipts weaker than anticipated. Tax receipts (excluding GST) in 2012‑13 have been revised down by $4.6 billion since MYEFO. The return to surplus in 2012‑13 is being achieved by the Government making net savings of $3.0 billion and lower payments than expected at MYEFO.
The fiscal consolidation across the forward estimates is being supported by the post‑global financial crisis recovery in tax receipts. Notwithstanding this rebound, tax receipts as a share of GDP are expected to reach around 1 percentage point below the unsustainable levels reached in the mid‑2000s. This means that tax as a proportion of GDP in 2011‑12 and the previous two years is the lowest it has been since 1993‑94.
In response, the Government has made $33.6 billion in savings in this Budget to make room for priority spending and to improve fiscal sustainability. The net budget impact of policy decisions is a $17.0 billion improvement to the underlying cash balance over the forward estimates.
The Government is funding initiatives to spread the benefits of the resources boom to families and businesses struggling with the economy in transition, and to assist families with the costs of educating their children. The Government also has been able to support key social reforms such as the first stage of a National Disability Insurance Scheme and reforms to aged care.
Table 1: Budget aggregates
(a) Excludes expected Future Fund earnings.
In 2012‑13 and each subsequent year across the forward estimates, payments as a percentage of GDP, are expected to be at their lowest level since the onset of the global financial crisis. This Budget is also delivering payments below 24 per cent of GDP across the forward estimates from 2012‑13, the longest period since the early 1980s.
Following a revised underlying cash deficit of $44.4 billion (3.0 per cent of GDP) in 2011‑12, a surplus of $1.5 billion (0.1 per cent of GDP) is expected in 2012‑13, growing to $7.5 billion (0.4 per cent of GDP) in 2015‑16.
Net debt is expected to peak at 9.6 per cent of GDP in 2011‑12, reducing to 7.3 per cent of GDP by 2015‑16. Although the peak is higher than previously expected, the Australian Government's net debt position remains low by international standards. The Government's commitment to fiscal discipline will ensure Australia's balance sheet remains one of the strongest in the developed world.
The Government's fiscal strategy is designed to ensure fiscal sustainability while providing the necessary flexibility for the budget to vary in line with economic conditions to support macroeconomic stability.
The medium‑term fiscal strategy has remained unchanged since 2008‑09, the Government's first budget.
- achieve budget surpluses, on average, over the medium term;
- keep taxation as a share of GDP below the level for 2007‑08 (23.7 per cent of GDP), on average; and
- improve the Government's net financial worth over the medium term.
Following its response to the global financial crisis, the Government committed to ensuring a timely return to surplus as the economy recovered to grow above trend 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.
With the budget returning to surplus, the Government remains committed to allowing tax receipts to recover naturally as the economy improves, and to maintaining a 2 per cent annual cap on real spending growth, on average, until surpluses are at least 1 per cent of GDP and while the economy is growing at or above trend.
The Government's medium‑term fiscal strategy guided the Government's successful response to the global financial crisis and provides the basis for the Government's determination to return the budget to surplus.
Consistent with this strategy, the Government delivered its fiscal stimulus at the height of the global financial crisis and, at the time, committed to return to surplus as the economy recovered.
At MYEFO it was recognised that there were some challenges to the domestic economic outlook arising from a deterioration in global economic conditions, but that it was important for the Government to remain committed to returning the budget to surplus.
Returning the budget to surplus in 2012‑13 remains appropriate given domestic economic conditions. The economy is forecast to grow around trend over the next two years, the unemployment rate is expected to remain low and commodity prices are still close to historical highs.
Importantly, the forecasts for Australia's overall economic growth remain around trend in 2012‑13 even after this consolidation.
A significant portion of the consolidation is occurring through taxation receipts rebuilding, albeit from the very low levels of the global financial crisis. This is to be expected as the economy recovers, and is consistent with the experience in previous cycles. For instance, while tax receipts are growing, total tax receipts are weaker than expected at MYEFO. However, this rebound in receipts notwithstanding, receipts as a share of GDP remain at relatively low levels.
Fiscal consolidation is also being driven by carefully considered saving decisions, adding to the savings made at MYEFO and earlier budgets.
Returning to surplus provides ongoing scope for monetary policy to respond to economic developments. It allows monetary policy to play the primary role in managing demand to keep the economy growing at close to capacity consistent with achieving the medium‑term inflation target.
A strong fiscal position sustains confidence in the strength of Australia's public finances. The European sovereign debt crisis has underscored the importance of maintaining strong fiscal discipline and credibility. That is now more important than ever, with financial markets punishing those economies without it. Growing surpluses provide a fiscal buffer in uncertain global economic times.
Together with Australia's very low level of public debt, the Government's strategy to return the budget to surplus reinforces fiscal credibility and demonstrates the strength and sustainability of Australia's public finances. This is a key support for the AAA credit rating which it has received from all three major ratings agencies for the first time in Australia's history.
The global financial crisis affected all aspects of the economy — production, consumption, profits and employment. As a result, all revenue heads were hit, and the tax‑to‑GDP ratio fell 3.6 percentage points from its pre‑crisis level in 2007‑08 to 20.1 per cent in 2010‑11. This was the biggest decline in the ratio since the 1950s. Relative to the forecasts made at the 2008‑09 Budget, total tax receipts have been written down by around $150 billion over the five years to 2012‑13.
Combined with the write down in revenues across the forward estimates, tax receipts, as a percentage of GDP, are expected to be significantly lower than their 2007‑08 level across the forward estimates.
In 2012‑13, the tax‑to‑GDP ratio is expected to be 1.6 percentage points lower than the 2007‑08 level, which equates to around $24.1 billion of tax in that year. Tax receipts are projected to reach 22.9 per cent of GDP in 2015‑16, around 1 percentage point below the unsustainable levels reached in the mid‑2000s. This means that tax as a proportion of GDP in 2011‑12 and the previous two years is the lowest it has been since 1993‑94.
Since the post‑crisis trough, receipts have begun to recover, but at a slower pace than expected at MYEFO. Tax receipts are expected to be around $18.4 billion lower over the four years to 2014‑15 than projected at MYEFO. The downward revisions since MYEFO principally reflect sluggish asset prices, consumer caution, weak profitability outside the resources and resources‑related sectors, and high levels of investment‑related tax deductions within the mining sector.
In the mid‑2000s, strong growth in asset prices combined with a maturing capital gains tax system resulted in strong capital gains tax receipts. With asset markets currently sluggish, capital gains tax receipts are expected to remain much lower than their pre‑crisis levels. Also affecting capital gains tax is the larger‑than‑anticipated stock of losses generated during the global financial crisis, which will take a number of years to be fully utilised against future gains.
Consumers remain cautious which is damping GST and other indirect tax collections.
This ongoing consumer caution and the sustained high dollar continue to put pressure on the profitability of industries outside the resources and resources‑related sectors, such as manufacturing, retail and tourism, affecting company tax receipts from these sectors. Tax receipts from the mining sector are being affected by the substantial pipeline of investment which means depreciation deductions will remain high.
The downward revision in tax receipts since MYEFO has meant that to deliver on the Government's commitment to return to surplus and build surpluses across the forward estimates it has had to make further targeted savings.
Table 2 shows the effect of spending and savings decisions since MYEFO. The net budget impact of policy decisions takes into account amounts that previously have been provisioned for in the Contingency Reserve (and as a result have no net impact on the budget position) and which principally relate to the Nation Building 2 Program and Official Development Assistance.
Table 2: Effect of spending and savings decisions in the 2012‑13 Budget(a)
(a) On an underlying cash basis.
The net budget impact of policy decisions is a $17.0 billion improvement to the underlying cash balance over the forward estimates.
The Government has made $33.6 billion in savings in the budget to return to surplus and pay for new spending of $22.4 billion (of which $5.8 billion had been provisioned for in the Contingency Reserve). The savings in this Budget build on the $11.5 billion of savings in MYEFO and more than $100 billion of savings identified in the four budgets since 2008‑09. Less than half of the savings in this Budget are from changes in tax receipts.
The budget contains decisions not to proceed with (or defer) some previously announced measures that otherwise would have reduced tax receipts. The decisions in this Budget not to proceed with some measures will maintain tax liabilities at present levels.
The tax reforms in this Budget build on past measures to improve the integrity and fairness of the tax system, such as the reforms to car fringe benefits and the Dependent Spouse Tax Offset announced in the 2011‑12 Budget.
A continuing focus on restraining growth in payments remains an important element of the Government's fiscal strategy. Given the range of factors that can affect payments in any one year, looking at payments over a number of years is a better indicator of spending restraint.
The discipline imposed on real spending growth has reduced payments as a proportion of GDP to 23.5 per cent in 2012‑13, a fall of 1.6 percentage points from 2011‑12. Payments as a share of GDP then remain broadly constant over the forward estimates. This is the longest period that payments have remained below 24 per cent of GDP since the early 1980s.
The budget also sees a fall in nominal payments in 2012‑13 compared to 2011‑12, the first fall in the 42 years for which data are available. The fall in payments in 2012‑13 highlights the key role disciplined spending is playing in the fiscal consolidation.
Assessing payments over a number of years to judge spending restraint is reflected in the fiscal strategy that commits to maintaining a 2 per cent annual cap on real spending growth, on average, until surpluses are at least 1 per cent of GDP and while the economy is growing at or above trend.
Average real growth in payments across the forward estimates is 1.8 per cent (Table 3).
Table 3: Real growth in payments
Real growth in payments is estimated to be 4.8 per cent in 2011‑12 and ‑4.3 per cent in 2012‑13, averaging 0.3 per cent over these two years. There are a number of common factors which have contributed to the real growth rates in payments in 2011‑12 and 2012‑13.
MYEFO outlined a number of one‑off factors affecting real growth in payments in 2011‑12, including the significant assistance to households and businesses in delivering the Clean Energy Future package and addressing the effects of the most expensive natural disasters in Australia's history. These factors reduce real growth in payments in 2012‑13. Since MYEFO, increased payments have further contributed to the increase in real growth in payments in 2011‑12 and will detract from real growth in 2012‑13. These increased payments include: the Schoolkids Bonus; the bring forward of payments for local government services; and earlier‑than‑expected payment for the Ipswich Motorway upgrade (Dinmore to Goodna), which is expected to be completed ahead of schedule.
The commitment to restrain real growth in spending to 2 per cent, on average, until surpluses are at least 1 per cent of GDP and while the economy is growing at or above trend will continue to restrain government expenditure.
The sustainability of Government finances has also been improved as many of the budget savings identified deliver continuing benefits to the bottom line beyond the forward estimates.
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