Australian Government, 2012‑13 Budget
Budget

Statement 6: Expenses and Net Capital Investment (Continued)

Overview

Australian Government general government sector (GGS) accrual expenses are expected to decrease by 1.8 per cent in real terms in 2012‑13, and then grow in 2013‑14 and for the remainder of the forward estimates. Total expenses are expected to fall as a percentage of GDP between 2011‑12 and 2012‑13, then remain broadly stable over the forward estimates.

Table 1: Estimates of general government sector expenses

Table 1: Estimates of general government sector expenses

(a) Real growth is calculated using the Consumer Price Index.

As set out in Statement 3 of Budget Paper No.1, the Government also reports spending on a cash basis. When expressed in cash terms, Government spending is forecast to grow by an average of 1.8 per cent per annum over the five years to 2015-16.

General government sector expenses

Reconciliation of expenses since the 2011‑12 Budget

Table 2 provides a reconciliation of expense estimates between the 2011‑12 Budget, the Mid‑Year Economic and Fiscal Outlook 2011‑12 (MYEFO) and the 2012‑13 Budget showing the effect of policy decisions, and economic parameter and other variations.

Table 2: Reconciliation of expense estimates

Table 2: Reconciliation of expense estimates

(a) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

Economic parameter variations are forecast to reduce expenses in 2012‑13 and over the forward estimates compared to forecasts at the time of the 2011‑12 MYEFO. This is largely due to a reduction in goods and services tax (GST) payments to the States and Territories, consistent with a reduction in GST revenue collections. The indexation of many government payments, including social security payments, also contributes to the reduction in the growth of expenses since the 2011‑12 MYEFO, reflecting lower estimates of prices and wages growth relative to those in MYEFO.

Program specific parameter variations are expected to remain fairly stable across the Budget and forward estimates.

Estimated expenses by function

Table 3 sets out the estimates of Australian Government GGS expenses by function for the period 2011‑12 to 2015‑16.

Table 3: Estimates of expenses by function

Table 3: Estimates of expenses by function

Major expense variations from 2012‑13 over the forward years include movements in the following functions:

  • defence the Government will achieve savings in the Defence portfolio of $5.5 billion over four years, including through deferring some Defence acquisitions, adjusting the Defence capital equipment program and delivering further operating efficiencies, while delivering priority 2009 Defence White Paper capabilities;
  • social security and welfare the increase in expenses is largely due to the indexation of personal benefits and income support payments, such as the Age Pension, and the continuing demographic shift to an older population;
  • health the increase in expenses reflects indexation of the Commonwealth's contribution to the provision of hospital services under the National Health Reform Agreement and, from 2014‑15, projected growth in hospital services. Medicare expenses are also expected to increase as a direct result of the increase in the Australian population — and in particular, the number of Australians aged over 65 — as well as technology and social factors;
  • education — expenses are expected to increase reflecting the introduction by the Government of a demand driven funding system and more generous indexation arrangements for higher education, and the level of indexation applied to schools funding together with student enrolment growth;
  • housing and community amenities — expenses are expected to increase primarily due to the implementation of various programs under the Clean Energy Futures package;
  • agriculture, forestry and fishing — expenses are expected to decrease reflecting a general return to normal seasonal conditions across Australia and an anticipated reduction in spending on drought assistance; and
  • other purposes — the increase in expenses is primarily due to growing general revenue assistance payments (primarily GST) to be made to the States and Territories and the conservative bias allowance component of the Contingency Reserve.

Government expenses are strongly influenced by underlying trends in spending in the social security and welfare, health and education functions (see Boxes 1 and 2). Together, these functions account for 59.1 per cent of all Government expenses in 2012‑13. Health spending is forecast to grow faster in real terms than education and social security and welfare spending over the forward estimates period and is expected to increase its share of total expenses from around 14.0 per cent in 2000‑01 to 16.2 per cent in 2015‑16.

Further details of spending trends against all functions are set out under individual function headings. Specific information regarding initiatives in the defence, education, health and social security and welfare functions is set out in Boxes 3 to 9.

Box 1: Where does government spending go in 2012‑13?

Government spending provides a wide range of services to the community. The most significant component of government spending relates to social security and welfare, with around one third of total expenses providing support to the aged, families with children, people with disabilities, veterans, carers and unemployed people.

Another one sixth of government expenses occur in health, including Medicare Benefits Schedule (MBS) and Pharmaceutical Benefits Scheme (PBS) payments. A similar amount is also transferred to the States and Territories in general revenue assistance under the other purposes function.

The Government also provides significant investment under the education function, supporting government and non‑government schools, as well as higher education and vocational education and training. The remainder is spent on defence and a range of other public services.

This chart shows the percentage of government expenses directed to specific functions in 2012-13. Roughly one-third of government expenses relate to social security and welfare. Other significant expense areas include General revenue assistance to the States and Territories (primarily Goods and Services Tax payments in the other purposes function) and expenses for health and education.

The estimates presented in the chart above are explained in greater detail under each individual function in the following pages.

Box 2: Trends in future spending

Social security and welfare expenses are projected to grow strongly over the forward estimates. Key factors driving this include the Age Pension, with demographic factors resulting in the number of people receiving the Age Pension expected to increase by 220,000 from 2012‑13 to 2015‑16; income support for carers, as a result of the increasing number of senior Australians receiving care and assistance; and child care fee assistance, reflecting the growing use of child care services which is in part due to the Government's reforms designed to increase workforce participation.

A number of major health programs will continue to see strong expenditure growth, including the MBS, the PBS, and payments to the States and Territories under the Australian Health Care Agreement and the National Health Reform Agreement. Spending on health, particularly the MBS and PBS, is influenced by population growth and to some extent by the ageing of the population together with developments in health technology and the resulting listing of new products and services.

Spending growth in the education function is largely expected to come from assistance to government and non‑government schools. University spending is also forecast to continue to rise strongly due to the recent uncapping of student places and revised indexation arrangements.

Total real growth by function — 2012‑13 to 2015‑16(a)

This chart shows the total real growth from 2012-13 to 2015-16 for each function (in real terms based on 2012-13 dollars). Over the forward years, there will be significant increases in spending for the social security and welfare and health functions in particular, although expenses in most other functions are projected to increase. The other economic affairs, recreation and culture, and public order and safety functions have slight decreases in expenses forecast over the forward years.

(a) The other purposes function is not included in this chart as it contains expenses in the Contingency Reserve, the impact of which will fall to other functions, as well as general revenue assistance to the State and Territory governments (primarily GST). Total real growth in the other purposes function is $12.9 billion from 2012‑13 and over the forward estimates.

Major savings

As part of the Government's commitment to return the Budget to surplus in 2012‑13, it has identified around $32.6 billion of savings over four years in this Budget, of which $16.3 billion relates to savings in expenses and net capital investment. These savings reduce expenses and net capital investment across a range of functions.

The Government will achieve savings in the Defence portfolio, including through deferring some Defence acquisitions, adjusting the Defence capital equipment program and delivering further operating efficiencies, while delivering priority 2009 Defence White Paper capabilities. These measures will result in savings of $5.5 billion in the defence function over four years.

The deferral of Australia's ODA growth target will reduce expenses by $2.9 billion over four years, largely through a reduction in the provision for expanded aid funding held in the Contingency Reserve. These expenses are allocated to the foreign affairs and economic aid sub‑function.

In the social security and welfare function, savings from improving the Aged Care Funding Instrument ($1.1 billion over four years) and fairer means testing arrangements for home care and residential care ($256.8 million over four years) will be redirected to support the Government's Aged Care reform measures. Changes in eligibility for Parenting Payment are expected to reduce expenses by $687.1 million over four years. Savings from ceasing the Community Development Employment Projects (CDEP) program from 30 June 2013 ($584.4 million over four years) will be redirected to support components of the new Remote Jobs and Communities program. A further $360.9 million in savings over four years will result from new limits to age eligibility for Family Tax Benefit Part A.

In the health function, savings of $1.5 billion will be redirected to other health spending and contribute to the sustainability of the health system over the forward estimates. Savings will be achieved across a range of programs over four years including: redirecting funding from the Commonwealth Dental Health program ($290.0 million) to new dental health initiatives; redirecting funding from the supporting longer stay older patient initiative as part of Aged Care reform measures ($150.0 million); ceasing funding for expanding access to multi‑purpose services as part of the National Health Reform Agreement ($120.7 million); and price decreases to some medicines listed on the Pharmaceutical Benefits Scheme ($111.3 million).

Major savings will also be achieved by removing grandfathering arrangements for student contributions for maths and science courses ($314.9 million over four years) in the education function. Further details of all savings measures are available in Budget Paper No. 2, Budget Measures 2012‑13.

Program expenses

Table 3.1 reports the top 20 expense programs in the 2012‑13 financial year. These programs represent 64.4 per cent of total expenses in that year. The revenue assistance to the States and Territories program comprises 13.1 per cent of total expenses for 2012‑13. Of the remaining programs in the top 20, more than half provide financial assistance or services to seniors, families, people with a disability, students, carers and the unemployed.

Table 3.1: Top 20 programs by expenses in 2012‑13

Table 3.1: Top 20 programs by expenses in 2012‑13

(a) The 'Residential and flexible care' program commencing on 1 July 2012 is a result of a change to the Department of Health and Ageing program structure.

(b) This program is a combination of public sector superannuation nominal interest and benefits programs.

(c) Department of Human Services departmental expenses.

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