Tax receipts have been revised down by over $20 billion over the forward estimates, primarily reflecting a weaker global economy and falls in global commodity prices. This substantial write‑down in tax receipts has made the return to surplus more difficult.
Returning the budget to surplus in 2012‑13 remains appropriate given the current economic conditions, reflecting a targeted approach to savings that minimises the impact of the Government's fiscal consolidation on the economy. The Australian economy is forecast to grow around trend, the unemployment rate is forecast to remain low and global commodity prices remain high by historical standards.
The Government's ongoing commitment to fiscal discipline will ensure that Australia's public finances remain strong and will sustain confidence in the strength of Australia's economy at a time of global economic uncertainty.
It will also leave Australia well placed to withstand external shocks to the economic outlook. This is important given ongoing uncertainty about how key international risks, including the European sovereign debt crisis, will unfold.
In this MYEFO the Government has made $16.4 billion in targeted and responsible savings to return the budget to a small surplus, fund new services such as the Dental Health Reform Package, and help make room for the delivery of new priorities in future years.
Savings have been achieved through a range of measures including reforms to improve the operation and integrity of the taxation and superannuation systems, reforms to Private Health Insurance (PHI) and reforms to better target training funding to areas of high skill need. These measures will deliver enduring savings, while minimising the impact on the economy.
The underlying cash surplus is expected to be $1.1 billion (0.1 per cent of GDP) in 2012‑13, growing to $6.4 billion (0.4 per cent of GDP) in 2015‑16.
Net debt is expected to be 9.4 per cent of GDP in 2012‑13, slightly higher than expected at Budget. The average net debt position of the major advanced economies (G7) is projected to peak at 95 per cent of GDP in 2016, almost ten times higher than the expected peak in Australia's net debt of 10.0 per cent of GDP in 2011‑12.
|Underlying cash balance($b)(a)||1.5||1.1||2.0||2.2|
|Per cent of GDP||0.1||0.1||0.1||0.1|
|Per cent of GDP||0.2||0.1||0.2||0.3|
|Underlying cash balance($b)(a)||5.3||3.3||7.5||6.4|
|Per cent of GDP||0.3||0.2||0.4||0.4|
|Per cent of GDP||0.4||0.4||0.5||0.5|
(a) MYEFO figures include net Future Fund earnings, whereas Budget figures include gross Future Fund earnings. This is further explained in Appendix B.
The Government's medium‑term fiscal strategy is designed to ensure fiscal sustainability, while providing the necessary flexibility for the Budget position to vary in line with economic conditions.
The medium‑term fiscal strategy, which has remained unchanged since the Government's first Budget in 2008‑09, is to:
- achieve budget surpluses, on average, over the medium-term;
- keep taxation as a share of GDP, on average, below the level for 2007‑08 (23.7 per cent); and
- improve the Government's net financial worth over the medium-term.
To ensure a timely return to surplus and recovery in the fiscal position, since the beginning of the global financial crisis the Government has further committed to:
- 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
- build growing surpluses by holding real growth in spending to 2 per cent a year, on average, until the budget surplus is at least 1 per cent of GDP, and while the economy is growing at or above trend.
The change in global economic conditions and prospects since the Budget has had a significant impact on the fiscal outlook, with a downward revision to tax receipts of around $4 billion in 2012‑13 and over $20 billion over the four years to 2015‑16.
The changed economic conditions are expected to mainly affect company profits, particularly in the resource sector due to lower global commodity prices, with resultant write‑downs to company tax receipts. The falls in commodity prices have also caused significant downgrades to resource rent taxes.
Other major variations since the 2012‑13 Budget include:
- an increase in payments of $1.2 billion in 2012‑13 associated with a range of immigration‑related programs, mainly owing to higher than expected numbers of irregular maritime arrivals in the first quarter of 2012‑13;
- an expected increase in payments for Tertiary Student Assistance of $381 million in 2012‑13 ($2.0 billion over the forward estimates) associated with an increase in current and projected enrolments in higher education and a growing take-up of income support payments by higher education students; and
- an expected increase in Medicare payments of $358 million in 2012‑13, primarily resulting from the extension of the Chronic Disease Dental Scheme (CDDS) to 30 November 2012.
Returning to surplus in 2012‑13 remains appropriate given current economic conditions, notwithstanding the task becoming more difficult because of further substantial write‑downs in tax receipts, driven by a weakening of international growth prospects and falls in global commodity prices.
The economy is forecast to grow at around its trend rate, unemployment is expected to remain low and global commodity prices remain high by historical standards.
While risks to international growth remain firmly on the downside, Australia remains well placed to manage the effects of any further deterioration in the global economy.
The European sovereign debt crisis has highlighted the importance of maintaining strong fiscal discipline and credibility to sustain confidence at a time of heightened instability in financial markets.
The strength of Australia's public finances is a key reason behind Australia's being one of only seven countries to have a AAA rating with a stable outlook from all three major rating agencies.
The Government's fiscal consolidation should continue to provide scope for monetary policy to be eased, if appropriate, without generating price and wage pressures. This recognises that in normal circumstances, monetary policy should play the primary role in managing demand to keep the economy growing at close to capacity, consistent with the medium‑term inflation target. The impact of the fiscal consolidation in 2012‑13 should be more than offset by growth in private demand, with the aggregate economy growing around trend.
Importantly, the economic impact of the fiscal consolidation in 2012‑13 is much smaller than the 3.1 per cent of GDP turnaround in the underlying cash balance. This is because the surplus is being achieved through a combination of targeted and responsible savings and the natural increase in tax receipts associated with a growing economy, assisted by policy measures in this MYEFO to improve the operation and integrity of the tax and superannuation systems.
The fiscal consolidation strengthens Australia's public finances, contributes to the long‑term sustainability of the budget and supports Australia's capacity to withstand future shocks.
In this MYEFO the Government has identified savings of $16.4 billion in 2012‑13 and across the forward estimates. These savings build on previous saves of over $130 billion identified by the Government in the five budgets since 2008‑09. After paying for all new expenditure since the 2012‑13 Budget, including the Dental Health Reform Package and the Government's response to the Expert Panel on Asylum Seekers, the Government has achieved a net saving of $10.5 billion in this MYEFO.
The savings in this MYEFO have been carefully targeted to minimise the overall impact of the fiscal consolidation on the economy and on vulnerable people. The Government will continue to balance these considerations, particularly if there is any further deterioration in economic conditions or in tax receipts. These savings have helped sustain strength in the position of the budget in 2012‑13 and over the forward estimates.
Importantly, some of the savings will continue to improve the underlying position of the budget after the end of the forward estimates by reducing the growth of significant areas of expenditure such as the PHI rebate. These enduring savings build on the long‑term savings that this Government has made since the 2008‑09 Budget and will help make room for emerging priorities over the medium-term.
Box 3.1: Long term savings and the budget position
The Government has made savings decisions since the 2008‑09 Budget that will continue to impact on the budget position well beyond the end of the forward estimates. In part, these enduring savings provided the room for significant new priorities, such as the pension increase in the 2009‑10 Budget. They have also contributed towards sustaining and improving the budget bottom line over the medium and long-term.
Since the 2008‑09 Budget some of the most significant of these savings are:
- Increasing the pension age to 67 by 2023.
- Reforms to the family payments system.
- Means testing of the PHI rebate.
- Reforms to personal tax offsets such as the net medical tax expenses offset and dependent spouse tax offset.
- Fringe benefits tax reforms including changes to the concessions for cars and living away from home allowances.
- Changes to the concessional contribution arrangements for superannuation.
- Means testing for aged care recipients.
In this MYEFO the Government is making further long‑term savings to contribute to the budget bottom line beyond the forward estimates. The reforms to the PHI rebate in MYEFO will control one of the fastest growing areas of health expenditure. Other savings include the changes to baby bonus, targeted increases to visa application charges, and the removal of fringe benefits tax concessions for in-house benefits accessed through salary sacrifice.
Without these savings since the 2008‑09 Budget, the medium‑term budget outlook would be in a much poorer position. Rather than net debt returning to zero in 2020‑21, it would be over $250 billion in that year.
Table 3.2 outlines the net budget impact of policy decisions taken since the 2012‑13 Budget. It 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).
This is the fourth consecutive MYEFO to deliver policy decisions that make a positive contribution to the fiscal outlook across the forward estimates.
|Effect of policy decisions since Budget|
|Total effect of policy decisions since Budget||1,411||5,121||1,917||1,897||10,346|
|Add Contingency Reserve
offsets to policy decisions (b)
|Net budget impact of policy decisions||1,421||5,141||1,961||1,941||10,465|
(a) Underlying cash basis.
(b) Includes the revenue provision for the signing of the Malaysian Free Trade Agreement.
The relative impact of revisions in tax receipts (and other variations in MYEFO) and the Government's discretionary policy decisions on the fiscal outlook is illustrated in Chart 3.1. Policy decisions improve the fiscal position in 2012‑13 and each year of the forward estimates.
Chart 3.1: Change to the underlying cash balance since the 2012‑13 Budget
Since the 2012‑13 Budget, the Government has made a further $16.4 billion in targeted and responsible savings to return the budget to surplus in 2012‑13 and deliver small but growing surpluses across the forward estimates. These decisions have contributed to the small change in real growth in payments in 2012‑13 compared with the 2012‑13 Budget. In total, real growth in payments is estimated to be ‑4.4 per cent in 2012‑13, compared with ‑4.3 per cent in the 2012‑13 Budget.
The Government is delivering on its commitment to restrain real growth in spending to 2 per cent a year 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 in 2012‑13 and across the forward estimates is around 1.1 per cent (see Table 3.3). In comparison, real payments growth averaged around 3.7 per cent in the decade prior to the global financial crisis.
|Real payment growth||-4.4||4.4||1.6||2.7|
|Average growth in real payments||1.1|
The discipline imposed on real growth in payments means that government spending, as a share of the economy, is projected to fall by 1.5 percentage points in 2012‑13 to 23.8 per cent. It is estimated that payments as a share of GDP will remain relatively stable over the forward estimates. This is the longest period payments will remain at 24 per cent or less as a share of GDP in over 30 years.
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