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Australian Government Coat of Arms

Budget | 2014-15

Budget 2014-15
Australian Government Coat of Arms, Budget 2014-15

Statement 3 (continued)

Fiscal outlook

Budget aggregates

An underlying cash deficit of $29.8 billion (1.8 per cent of GDP) is expected in 2014‑15, improving to a deficit of $2.8 billion (0.2 per cent of GDP) in 2017‑18.

A headline cash deficit of $33.5 billion (2.1 per cent of GDP) is expected in 2014‑15, improving to a deficit of $11.4 billion (0.6 per cent of GDP) in 2017‑18.

In accrual terms, a fiscal deficit of $25.9 billion (1.6 per cent of GDP) is expected for 2014‑15, improving to a surplus of $1.0 billion (0.1 per cent of GDP) in 2017‑18.

Table 3 provides key budget aggregates for the Australian Government general government sector.

Table 3: Australian Government general government sector budget aggregates
  Actual   Estimates   Projections    
  2012‑13
$b
  2013‑14
$b
2014‑15
$b
2015‑16
$b
  2016‑17
$b
2017‑18
$b
  Total(a)
$b
Receipts 351.1   363.5 385.8 410.4   436.8 468.0   2,064.5
Per cent of GDP 23.1   23.0 23.6 24.0   24.4 24.9    
Payments(b) 367.2   410.7 412.5 424.2   443.9 467.1   2,158.4
Per cent of GDP 24.1   25.9 25.3 24.8   24.7 24.8    
Net Future Fund earnings 2.7   2.7 3.1 3.3   3.5 3.8   16.3
Underlying cash balance(c) -18.8   -49.9 -29.8 -17.1   -10.6 -2.8   -110.1
Per cent of GDP -1.2   -3.1 -1.8 -1.0   -0.6 -0.2    
Revenue 360.2   374.3 391.3 419.6   449.8 480.4   2,115.5
Per cent of GDP 23.6   23.6 24.0 24.5   25.1 25.5    
Expenses 382.6   415.3 414.8 431.1   453.8 475.4   2,190.5
Per cent of GDP 25.1   26.2 25.4 25.2   25.3 25.3    
Net operating balance -22.5   -41.0 -23.5 -11.5   -4.0 4.9   -75.0
Net capital investment 1.0   4.0 2.4 0.7   2.6 4.0   13.7
Fiscal balance -23.5   -45.1 -25.9 -12.2   -6.6 1.0   -88.7
Per cent of GDP -1.5   -2.8 -1.6 -0.7   -0.4 0.1    
Memorandum item:                    
Headline cash balance -21.0   -53.7 -33.5 -26.6   -22.7 -11.4   -148.0

(a) Total is equal to the sum of amounts from 2013‑14 to 2017‑18.

(b) Equivalent to cash payments for operating activities, purchases of non‑financial assets and net acquisition of assets under finance leases.

(c) Excludes net Future Fund earnings.

Table 4 provides a summary of the cash flows of the Australian Government general government sector.

Table 4: Summary of Australian Government general government sector cash flows
  Estimates   Projections 
  2013‑14
$b
2014‑15
$b
2015‑16
$b
  2016‑17
$b
2017‑18
$b
Cash receipts            
Operating cash receipts 363.0 383.5 407.7   436.6 467.8
Capital cash receipts(a) 0.5 2.2 2.7   0.2 0.2
Total cash receipts 363.5 385.8 410.4   436.8 468.0
Cash payments            
Operating cash payments 400.4 401.7 414.4   434.5 456.1
Capital cash payments(b) 9.8 10.8 9.8   9.4 11.0
Total cash payments 410.2 412.5 424.2   443.9 467.1
Finance leases and similar arrangements(c) 0.5 0.0 0.0   0.0 0.0
GFS cash surplus(+)/deficit(-) -47.2 -26.7 -13.8   -7.1 0.9
Per cent of GDP -3.0 -1.6 -0.8   -0.4 0.0
less Net Future Fund earnings 2.7 3.1 3.3   3.5 3.8
Underlying cash balance(d) -49.9 -29.8 -17.1   -10.6 -2.8
Per cent of GDP -3.1 -1.8 -1.0   -0.6 -0.2
Memorandum items:            
Net cash flows from investments in financial            
Net cash flows from investments in financial assets for policy purposes -6.6 -6.8 -12.8   -15.6 -12.4
plus Net Future Fund earnings 2.7 3.1 3.3   3.5 3.8
Headline cash balance -53.7 -33.5 -26.6   -22.7 -11.4

(a) Equivalent to cash receipts from the sale of non‑financial assets in the cash flow statement.

(b) Equivalent to cash payments for purchases of non‑financial assets in the cash flow statement.

(c) The acquisition of assets under finance leases decreases the underlying cash balance. The disposal of assets previously held under finance leases increases the underlying cash balance.

(d) Excludes expected net Future Fund earnings.

Underlying cash balance estimates

The estimated underlying cash deficit in 2014‑15 has improved by $4.1 billion, to $29.8 billion compared to the 2013‑14 MYEFO.

As outlined in the 2013‑14 MYEFO the deficits inherited from the former Government from the four years to 2016‑17 totalled $122.6 billion. In the Government's first four years to 2017‑18, deficits are estimated to total $60.2 billion.

The change in the estimated underlying cash balance since the 2013‑14 MYEFO is largely a result of major policy decisions, saving the bottom line $17.6 billion over the four years to 2016‑17. As a result of decisions, the Government has improved the bottom line by a further $18.5 billion in 2017‑18.

Since the 2013‑14 MYEFO, parameter and other variations have worsened the bottom line by $2.2 billion in the four years to 2016‑17. There have also been changes made to the projection methodology used to formulate projections for economic parameters factored into the budget. Further information on this change is detailed in Statement 2: Economic Outlook. Over the projection period, as a result of the revised methodology nominal GDP is higher, with stronger real GDP growth only partially offset by a lower GDP deflator, the number of unemployment benefit recipients is lower and growth in wage‑indexed payments is slower. Compared with the 2013‑14 MYEFO, the revised projection methodology results in a reduction in the underlying cash balance of $0.3 billion (0.02 per cent of GDP) in 2016‑17 and an increase of $0.9 billion (0.05 per cent of GDP) in 2017‑18. By 2024‑25, the new methodology increases the underlying cash balance by $3.4 billion (0.12 per cent of GDP).

Table 5: Reconciliation of underlying cash balance estimates
  Estimates   Projections    
  2013‑14
$m
2014‑15
$m

2015‑16
$m

  2016‑17
$m
  Total 
$m
2013‑14 Budget underlying cash balance(a) -18,043 -10,888 849   6,591   -21,491
Per cent of GDP -1.1 -0.6 0.0   0.4    
Changes from 2013‑14 Budget to 2013 PEFO              
Effect of policy decisions(b) -374 -1,663 3,315   6,915   8,193
Effect of parameter and other variations -11,725 -11,429 -8,826   -9,307   -41,288
Total variations -12,099 -13,093 -5,511   -2,392   -33,095
2013 PEFO underlying cash balance(a) -30,142 -23,981 -4,662   4,199   -54,586
Per cent of GDP -1.9 -1.5 -0.3   0.2    
Changes from 2013 PEFO to 2013‑14 MYEFO              
Effect of policy decisions(b) -10,266 -655 -1,505   -1,274   -13,700
Effect of parameter and other variations -6,582 -9,272 -17,916   -20,592   -54,362
Total variations -16,848 -9,926 -19,421   -21,866   -68,061
2013‑14 MYEFO underlying cash balance(a) -46,989 -33,907 -24,083   -17,668   -122,647
Per cent of GDP -3.0 -2.1 -1.4   -1.0    
Changes from 2013‑14 MYEFO to 2014‑15 Budget              
Effect of policy decisions(b)(c)              
Receipts -2 673 1,916   2,786   5,373
Payments 512 -1,045 -4,018   -7,628   -12,180
Total policy decisions impact on underlying cash balance -514 1,718 5,934   10,414   17,552
Effect of parameter and other variations(c)              
Receipts -1,432 2,362 -573   1,247   1,604
Payments 1,102 -167 -1,761   4,430   3,603
less Net Future Fund earnings -182 114 124   126   182
Total parameter and other variations impact on underlying cash balance -2,352 2,416 1,065   -3,309   -2,180
2014‑15 Budget underlying cash balance(a) -49,855 -29,773 -17,084   -10,562   -107,275
Per cent of GDP -3.1 -1.8 -1.0   -0.6    

(a) Excludes net Future Fund earnings.

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

(c) A positive number for receipts indicates an increase in the underlying cash balance, while a positive number for payments indicates a decrease in the underlying cash balance.

Receipts estimates

Total receipts are expected to be $3.0 billion higher in 2014‑15 than estimated at the 2013‑14 MYEFO, tax receipts are $1.8 billion higher and non‑tax receipts are $1.3 billion higher.

Since the 2013‑14 MYEFO, over the four years to 2016‑17, total receipts have been revised up by $5.4 billion from policy decisions and revised up by $1.6 billion from parameter and other variations.

Chart 10: Government decisions have lowered the overall impact of revenue measures

This chart shows the cumulative value of revenue measure decisions by the former government from the 2008-09 Budget to the 2013 PEFO building to over $100 billion. The cumulative value of revenue decisions of this government from MYEFO 2013-14 to the 2014-15 Budget is a reduction in revenue of over $5 billion.

*Cumulative value of revenue measures taken in each budget year

[View chart data]

Policy decisions

Policy decisions since the 2013‑14 MYEFO are expected to increase receipts by $673 million in 2014‑15, $1.9 billion in 2015‑16, $2.8 billion in 2016‑17 and $2.9 billion in 2017‑18. These decisions include: reintroducing the indexation of fuel excise, introducing a temporary levy on individuals' incomes above $180,000 and removing poorly targeted tax concessions.

Significant measures include:

  • Reintroducing the indexation of fuel excise rates. From 1 August 2014, fuel excise and fuel excise‑equivalent customs duty will be indexed biannually in line with the consumer price index. This is expected to increase receipts by $4.2 billion over the forward estimates period, however taking into account the corresponding payments increases, such as to fuel tax credits, the net increase in the underlying cash balance is $2.3 billion.
  • The introduction of a Temporary Budget Repair Levy. From 1 July 2014 until 30 June 2017, there will be a temporary levy of two per cent on individuals' taxable income above $180,000. This measure is expected to increase receipts by $3.1 billion over the forward estimates period.
  • The Mature Age Workers Tax Offset and the Dependent Spouse Tax Offset will both be abolished from 1 July 2014. Removing these tax concessions that are no longer well targeted, is expected to increase receipts by $1.1 billion over the forward estimates period.
Parameter and other variations

While the forecast for nominal GDP is similar to the 2013‑14 MYEFO, estimated changes to the components of growth have affected the composition of tax receipts. Stronger than expected company profits and household consumption have resulted in upward revisions to company tax and GST, while weaker than expected wage growth has contributed to the write‑down to taxes from individuals and superannuation funds.

This has resulted in a small overall downward revision to total tax receipts of $1.8 billion in 2013‑14 and $2.9 billion over the four years to 2016‑17 compared with the 2013‑14 MYEFO. Excluding GST, tax receipts are expected to be lower by $2.6 billion in 2013‑14 and $7.4 billion over the four years to 2016‑17.

Since the 2013‑14 MYEFO, non‑tax receipts have increased by $1.3 billion in 2014‑15 and $4.8 billion over the four years to 2016‑17. The increase in 2014‑15 primarily reflects higher forecasts of expected dividend and interest receipts ($479 million). In addition, recognition of State and Territory contributions to the National Disability Insurance Scheme (NDIS) for the first time has increased non‑tax receipts by $176 million in 2014‑15 ($3.1 billion over the four years to 2016‑17). These State and Territory contributions are directly offset by a corresponding increase in payments to NDIS recipients.

Analysis of the sensitivity of the receipts estimates to changes in the economic outlook is provided in Appendix A to this Statement.

Payment estimates

Since the 2013‑14 MYEFO, total cash payments for 2014‑15 have decreased by $1.2 billion, comprised of new policy decisions which have decreased payments by $1.0 billion and parameter and other variations which have decreased payments by $167 million.

Policy decisions

The net impact of policy decisions since the 2013‑14 MYEFO is expected to decrease payments by $1.0 billion in 2014‑15, $4.0 billion in 2015‑16, $7.6 billion in 2016‑17 and $15.5 billion in 2017‑18. These decisions include:

  • establishing the Asset Recycling Initiative, which will provide State and Territory governments with incentive payments to unlock capital from state‑owned assets and reinvest the proceeds in new productivity‑enhancing economic infrastructure. The Initiative is expected to increase cash payments by $335 million in 2014‑15 ($5.0 billion over the five years to 2018‑19);
  • funding for new infrastructure investments, under the Infrastructure Investment Programme to support economic growth, which is expected to increase cash payments by $202 million in 2014‑15 ($3.7 billion over the five years to 2017‑18). Funding will be provided to States and Territories to expedite existing large infrastructure projects and new high productivity infrastructure projects ($2.9 billion), and to boost funding for the existing Black Spot Programme ($200 million), Roads to Recovery Programme ($350 million), and the National Highway Upgrade Programme ($229 million);
  • delivering a Western Sydney Infrastructure Plan, by funding major road projects for the development of a second Sydney airport at Badgerys Creek and providing the transport infrastructure necessary to support a growing population in Western Sydney. This Plan is expected to increase cash payments by $103 million in 2014‑15 ($2.9 billion over the ten years to 2023‑24);
  • establishing the Emissions Reduction Fund from 1 July 2014, which will provide an incentive based approach to support abatement activities across the economy to contribute to Australia meeting its target of reducing emissions by 5 per cent below year 2000 levels by the year 2020. This measure is expected to increase cash payments by $75 million in 2014‑15 ($2.6 billion over the ten years to 2023‑24); and
  • strengthening incentives for mature age job seekers to re‑enter the workforce with the creation of a new wage subsidy — Restart which is expected to increase cash payments by $18 million in 2014‑15 ($304 million over the four years to 2017‑18). A payment of up to $10,000 will be available to employers who hire a mature age job seeker aged 50 years or over. The $221 million over four years for a seniors employment incentive payment, previously announced at the 2013‑14 MYEFO, will also be redirected to the Restart Programme.

The impact of these policy decisions on payments has been more than offset over the five years to 2017‑18 by a number of decisions that have reduced cash payments, including:

  • maintaining official development assistance (ODA) at its nominal 2013‑14 level of $5 billion in both 2014‑15 and 2015‑16 and growing it in line with the consumer price index from 2016‑17. This measure is expected to decrease cash payments by $559 million in 2014‑15 ($7.9 billion over the five years to 2017‑18, which includes $2.0 billion in 2017‑18 from extinguishing a provision for new ODA spending);
  • reducing Medicare Benefits Schedule rebates by $5 for general practitioner consultations and out‑of‑hospital pathology and diagnostic imaging services and allowing the providers of these services to collect a $7 patient contribution, which is expected to reduce cash payments by $3.4 billion over the five years to 2017‑18. These savings will be reinvested in the Medical Research Future Fund, which will be established on 1 January 2015;
  • maintaining current Family Tax Benefit (FTB) payment rates in nominal terms for two years from 1 July 2014, which is expected to reduce cash payments by $377 million in 2014‑15 ($2.6 billion over the four years to 2017‑18);
  • limiting eligibility for the FTB Part B to families whose youngest child is younger than six years of age from 1 July 2015, with transitional arrangements for two years, which is expected to increase cash payments by $17 million in 2014‑15 but reduce cash payments by $1.6 billion over the five years to 2017‑18; and
  • changing access to income support arrangements for people under 30 years of age, to encourage young people with full work capacity to be earning, learning or participating in Work for the Dole. This is expected to reduce cash payments by $221 million in 2014‑15 ($1.2 billion over the four years to 2017‑18).

Further details of Government policy decisions are provided in Budget Paper No. 2, Budget Measures 2014‑15. The expense estimates provided in Budget Paper No. 2 are in accrual terms and may not align with the payment figures provided in this Statement.

Parameter and other variations

This Budget also incorporates some major changes in expected payments in 2014‑15 as a result of parameter and other variations since the 2013‑14 MYEFO. Major increases include:

  • Disability Support Pension payments, which are expected to be $325 million higher in 2014‑15 ($962 million over the four years to 2016‑17), largely reflecting higher than expected average payment rates and marginally higher than expected customer numbers;
  • Private Health Insurance Rebate payments, which are expected to be $300 million higher in 2014‑15 ($1.8 billion over the four years to 2016‑17), largely reflecting stronger than expected growth in the number of people with subsidised private health cover and more people upgrading their level of health insurance;
  • Child Care Fee Assistance payments, which are expected to be $298 million higher in 2014‑15 ($1.1 billion over the four years to 2016‑17), largely reflecting higher than expected utilisation of child care services;
  • Payments under the Natural Disaster Relief and Recovery Arrangements, which are expected to be $244 million higher in 2014‑15 (although a reduction in payments of $96 million is expected over the four years to 2016‑17). This primarily relates to an expected delay in disaster recovery payments to Queensland, which largely reflects a delay in the completion of reconstruction works as a result of drought;
  • Defence payments, mainly in relation to capital purchases, which are expected to be $186 million higher in 2014‑15 ($436 million over the four years to 2016‑17) as a result of foreign exchange rate movements; and
  • National Disability Insurance Scheme (NDIS) payments, which are expected to be $176 million higher in 2014‑15 ($3.1 billion over the four years to 2016‑17), reflecting the recognition of payments made on behalf of the States and Territories for the first time. This increase in payments is directly offset by an increase in non‑tax receipts reflecting State and Territory contributions to the Scheme.

Major reductions in expected payments in 2014‑15 as a result of parameter and other variations since MYEFO, include:

  • Illegal Maritime Arrival management costs, which are expected to be $309 million lower in 2014‑15 ($1.6 billion over the four years to 2016‑17), reflecting the impact of reduced forecasts and projections of the numbers of Illegal Maritime Arrivals;
  • Income Support for Seniors payments, which are expected to be $307 million lower in 2014‑15 ($2.1 billion over the four years to 2016‑17), reflecting lower than expected customer numbers and average payment rates, related to the incremental increase in the Age Pension age and an improvement in the value of financial assets held by part—rate pensioners;
  • Payments under the National Health Reform Agreement, which are expected to be $243 million lower in 2014‑15 ($1.0 billion over the four years to 2016‑17), due to a lower than expected rate of hospital utilisation and slower than expected growth in the price of hospital services;
  • Payments under the National Rental Affordability Scheme which are expected to be $121 million lower in 2014‑15 ($312 million over the four years to 2016‑17), reflecting a lower than anticipated number of dwellings delivered through the National Rental Affordability Scheme; and
  • Fuel Tax Credit payments, which are expected to be $119 million lower in 2014‑15 ($140 million over the four years to 2016‑17), reflecting lower than expected usage of fuels which are eligible for the payments.

Consistent with previous budgets, the underlying cash balance has been improved by the regular draw down of the conservative bias allowance. Details of this draw down are provided in the Other Purposes section of Statement 6: Expenses and Net Capital Investment.

Analysis of the sensitivity of payments estimates to changes in the economic outlook is provided in Appendix A to this Statement.

Fiscal balance estimates

The fiscal deficit is expected to be $25.9 billion (1.6 per cent of GDP) in 2014‑15, which reflects an improvement of $5.6 billion compared to the 2013‑14 MYEFO.

Table 6 provides a reconciliation of the variations in the fiscal balance since the 2013‑14 Budget.

Table 6: Reconciliation of fiscal balance estimates
  Estimates   Projections    
  2013‑14
$m
2014‑15
$m
2015‑16
$m
  2016‑17
$m
  Total
$m
2013‑14 Budget fiscal balance -13,497 -6,255 5,955   10,819   -2,978
Per cent of GDP -0.8 -0.4 0.3   0.6    
Changes from 2013‑14 Budget to 2013 PEFO              
Effect of policy decisions(a) -749 -3,835 4,712   6,515   6,643
Effect of parameter and other variations -11,262 -11,988 -8,820   -9,543   -41,613
Total variations -12,011 -15,823 -4,109   -3,028   -34,970
2013 PEFO fiscal balance -25,508 -22,078 1,847   7,792   -37,948
Per cent of GDP -1.6 -1.3 0.1   0.4    
Changes from 2013 PEFO to 2013‑14 MYEFO              
Effect of policy decisions(a) -8,063 -207 -1,450   -1,185   -10,905
Effect of parameter and other variations -8,272 -9,218 -19,173   -21,062   -57,726
Total variations -16,335 -9,426 -20,623   -22,247   -68,631
2013‑14 MYEFO fiscal balance -41,843 -31,504 -18,776   -14,456   -106,579
Per cent of GDP -2.7 -1.9 -1.1   -0.8    
Changes from 2013‑14 MYEFO to 2014‑15 Budget              
Effect of policy decisions(a)(b)              
Revenue 1 720 2,032   2,762   5,515
Expenses 51 -1,939 -5,498   -7,688   -15,075
Net capital investment 460 388 688   216   1,753
Total policy decisions impact on fiscal balance -510 2,271 6,842   10,234   18,837
Effect of parameter and other variations(b)              
Revenue 343 2,746 157   2,046   5,292
Expenses 3,184 -974 597   4,384   7,190
Net capital investment -139 343 -160   36   80
Total parameter and other variations impact on fiscal balance -2,702 3,377 -280   -2,374   -1,978
2014‑15 Budget fiscal balance -45,055 -25,855 -12,214   -6,596   -89,720
Per cent of GDP -2.8 -1.6 -0.7   -0.4    

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

(b) A positive number for revenue indicates an increase in the fiscal balance, while a positive number for expenses and net capital investment indicates a decrease in the fiscal balance.

Revenue estimates

Changes in accrual revenue are generally driven by the same factors as cash receipts, though differences arise where revenue raised in a given year is not received in that year.

Expense and net capital investment estimates

Movements in accrual estimates and net capital investment over the forward estimates are broadly similar to the movements in cash payments. The key exceptions include:

  • an increase in the accrued superannuation expenses for civilian and military superannuation schemes of $3.5 billion, where there are differences between the timing of cash payments and accrued expenses;
  • a decrease in Higher Education Loan Programme (HELP) expenses of $2.1 billion, where the value of the concessionality of the loans has reduced as a result of changing the indexation applied to HELP debts from 1 June 2016; and
  • an increase in expenses of $756 million in relation to the concessional loan the Government will provide to accelerate the delivery of the WestConnex Stage 2 project.

Detailed information on expenses and net capital investment can be found in Statement 6: Expenses and Net Capital Investment.

Headline cash balance estimates

The headline cash balance consists of the underlying cash balance, net cash flows from investments in financial assets for policy purposes (for example, the equity funding of NBN Co), and net Future Fund earnings.

Table 7 provides further detail between the underlying and headline cash balance estimates of the Australian Government general government sector.

Table 7: Details of the Australian Government general government sector items between the underlying and headline cash balance estimates
  Estimates Projections    
  2013‑14
$m
2014‑15
$m
2015‑16
$m
  2016‑17
$m
2017‑18
$m
Total
$m
2014‑15 Budget underlying cash balance(a) -49,855 -29,773 -17,084   -10,562 -2,825   -110,099
plus Net cash flows from investments in financial assets for policy purposes                
Student loans -4,630 -5,598 -6,885   -8,091 -9,258   -34,462
NBN investment -3,380 -5,200 -6,420   -6,865 -2,407   -24,272
Residential mortgage backed securities 2,894 1,556 1,495   954 611   7,510
WestConnex 0 0 -226   -854 -831   -1,912
Trade support loans 0 -144 -460   -511 -563   -1,677
Net other -1,458 2,566 -291   -225 90   683
Total net cash flows from investments in financial assets for policy purposes -6,575 -6,819 -12,787   -15,592 -12,358   -54,131
plus Net Future Fund earnings 2,689 3,068 3,262   3,499 3,750   16,267
2014‑15 Budget headline cash balance -53,741 -33,524 -26,609   -22,656 -11,432   -147,963

(a) Excludes expected net Future Fund earnings.

The headline cash balance for 2014‑15 is estimated to be a deficit of $33.5 billion (2.1 per cent of GDP), compared with a deficit of $42.4 billion at 2013‑14 MYEFO (2.6 per cent of GDP). Over the four years to 2017‑18, the headline cash deficit improves by $22.1 billion, from $33.5 billion in 2014‑15 to $11.4 billion in 2017‑18.

The improvement in the headline cash balance is primarily driven by policy decisions that have affected the underlying cash balance. From 2015‑16, this improvement from policy decisions has been partially offset by changes to the Higher Education Loan Program and bringing forward some NBN Co equity funding to within the forward estimates.

Structural budget balance estimates

The outlook for the structural budget balance has improved significantly since the 2013‑14 MYEFO, in line with the improvement in the outlook for the underlying cash balance. The structural position of the budget is forecast to improve to around balance by 2018‑19 and is projected to be in surplus beyond that. By comparison, at the 2013‑14 MYEFO the budget was expected to remain in structural deficit throughout the entire medium‑term projections period. Following a prolonged period of significant structural deficits, the policy decisions taken by the Government are projected to restore the budget to a position that is structurally sustainable in the medium term.

Chart 11: Structural budget balance estimates3

The grey range spans structural budget estimates using the average terms of trade between 1986-87 and 2010‑11 (lower bound), which is the OECD's assumption for Australia's structural level of the terms of trade, and using the forecast average from 2003‑04 to 2015‑16 (upper bound). The central estimate is based on the structural level of the terms of trade in the Government's medium‑term economic projections.

Note: The grey range spans structural budget estimates using the average terms of trade between 1986‑87 and 2010‑11 (lower bound), which is the OECD's assumption for Australia's structural level of the terms of trade, and using the forecast average from 2003‑04 to 2015‑16 (upper bound). The central estimate is based on the structural level of the terms of trade in the Government's medium‑term economic projections. The methodology for producing the structural budget balance estimates was detailed in Treasury Working Paper 2013‑01.

Source: ABS cat. no. 5206.0, 5302.0, 6202.0, 6401.0 and Treasury.

[View chart data]

Structural budget balance measures are sensitive to the assumptions and parameters underpinning the estimates, including identifying the structural level of the terms of trade and the relationship between tax receipts and economic activity. Due to the sensitivity of estimates to assumptions, it is best to consider a range of structural budget balance estimates based on plausible assumptions for the underlying parameters as one element of a broader assessment of fiscal sustainability.


3 The structural budget balance estimates shown in Chart 11 incorporate the changes to the medium-term economic projections framework detailed in Budget Statement 2 and Treasury Working Papers 2014-01 and 2014-02. Because structural budget balance calculations are sensitive to estimates of the output gap, these methodological changes have resulted in revisions to the structural budget balance estimates. The peak impact is in 2015‑16, when the structural budget deficit is projected to be 0.8 percentage points smaller than would have been the case had the previous medium-term projections framework been retained. The impact becomes smaller as the estimated output gap closes, falling to 0.5 percentage points in 2018-19 and close to zero by 2022-23. These impacts are within the range of structural balance estimates shown in the 2013‑14 MYEFO and do not affect the result that the budget was projected to remain in structural deficit throughout the medium-term projections period at the 2013‑14 MYEFO and is now projected to reach structural balance in around 2018-19.