Statement 7: Asset and Liability Management (continued)
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 affect 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 that at the 2011‑12 Budget. Several factors, including the further write‑down in tax receipts and the fall in interest rates on Commonwealth Government Securities (CGS) to some of the lowest levels seen in Australia's history, have resulted in an increase in the value of expected liabilities. These market value adjustments have contributed to higher estimates for net debt, and lower estimated net financial worth and net worth than was expected at the 2011‑12 Budget.
However, Australia's net debt position remains very low by international standards, with Australia one of only eight countries to have a AAA credit rating with a stable outlook from all three major credit ratings agencies.
Delivering a budget surplus through the Government's ongoing commitment to fiscal discipline will sustain confidence in the strength of Australia's public finances, and provide a buffer against adverse global economic developments.
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 affect 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.
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.
A range of factors, including the further write‑down in tax receipts and the increase in the market value of CGS on issue, have contributed to a higher expected level of net debt, and lower expected net financial worth and net worth, than was forecast in the 2011‑12 Budget. However, these estimates remain well below 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, in nominal terms, at $144.9 billion in 2013‑14 (8.9 per cent of GDP), falling to 7.3 per cent of GDP by the end of the forward estimates.
In 2012‑13, net financial worth is estimated to be ‑$248.6 billion, compared to the 2011‑12 Budget estimate of ‑$198.5 billion. Net financial worth is estimated to be ‑$225.8 billion by the end of the forward estimates.
Chart 1 shows the projected movements in net financial worth since the 2010‑11 Budget.
Chart 1: Net financial worth comparison
Note: Net financial worth for 2014‑15 was not projected in the 2010‑11 Budget; net financial worth for 2015‑16 was not projected in the 2011‑12 Budget.
Net worth is currently estimated at ‑$137.8 billion for 2012‑13, compared with ‑$83.4 billion estimated at the time of the 2011‑12 Budget.
The Australian Government's financial position remains amongst the strongest in the developed world (Box 2) and is a key reason behind Australia's receiving a AAA credit rating from all three major rating agencies for the first time in our history. Indeed, Australia is now one of only eight countries to have a AAA rating with a stable outlook from all three agencies. In addition to the Government's adherence to a credible medium‑term fiscal framework, other key factors underpinning Australia's credit rating are the strength and resilience of the economy, the stability of the financial system and the quality of policy and institutional arrangements, including independent monetary policy and strong financial regulation.
Box 2: The strength of the Australian Government's financial position
During 2011‑12, many countries have faced profound financial and fiscal 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 at a time when they also face the significant task of generating growth.
This stands in sharp contrast to the strength and resilience of the Australian Government's financial position and the domestic economy, forecast to grow around trend.
Australia's level of net debt remains very low by international standards (Chart A). Australian Government net debt is expected to peak at 9.6 per cent of GDP in 2011-12, compared to the expected average net debt position of the major advanced economies of around 93 per cent of GDP in 2016 and 2017.
Chart A: Comparison of Government net debt for selected economies, 2011‑2017
Note: Australian data are for the Australian Government general government sector and refer to financial years beginning 2011‑12. Data for all other economies are total government and refer to calendar years beginning 2011.
Source: IMF Fiscal Monitor April 2012 and Treasury.
Similarly, Australia's net interest payments are very low by international comparison (Chart B).
Chart B: Net interest payments for Australia, the US and the euro area
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 1985‑86. US data refer to US fiscal years beginning October 1985. Euro area data are total government and refer to calendar years beginning 1985.
Source: United States Congressional Budget Office The Budget and Economic Outlook January 2012 and Updated Budget Projections March 2012, OECD Economic Outlook 90 November 2011, Thomson Reuters and Treasury.
Not only are the Government's debt levels very low by international comparison, the return to budget surplus in 2012‑13 and beyond means that the Government is well placed to reduce net debt from its already modest level.
Returning the budget to surplus and having those surpluses growing over time will strengthen the balance sheet further. This will ensure Australia continues to have the flexibility to respond to any unanticipated adverse future events that have a fiscal impact and to other longer‑term challenges.
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