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Australian Government Coat of Arms

Budget | 2014-15

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

Part 4: Developments in the Consolidated Non‑Financial Public Sector

Introduction

This Part provides a perspective on the financial position of all levels of government in Australia.

It discusses trends in key fiscal indicators including the net operating balance, fiscal balance, cash balance and net debt, at the Commonwealth level, State level, and the consolidated level, which includes local government.

This Part focuses on trends in the non‑financial public sector (NFPS) which comprises the general government sector and the public non‑financial corporations (PNFC) sector.1 The general government sector provides non‑market goods and services such as policing, health and education. The PNFC sector comprises government controlled corporations engaged in providing market goods such as electricity and public transport, but not financial services.

For further information on the fiscal indicators and the institutional structure of the public sectors see Budget Paper No. 1, Budget Strategy and Outlook 2014‑15, Statement 9: Budget Financial Statements.

State estimates in this Part come from their most recent publicly available financial reports. Victoria's are based on their 2014‑15 Budget, while the remaining jurisdictions are drawn from their mid‑year 2013‑14 financial reports. Aggregate State data are only available to 2016‑17, so references to the forward estimates in this Part relate to the period 2014‑15 to 2016‑17.

Additional data tables can be found in Appendix C (available online).

Net operating balance

The net operating balance measures in accrual terms the gap between recurrent expenses and revenue for a given period. This is the headline budget measure used by most States to provide an indication of the medium‑term sustainability of the existing level of government services. The Commonwealth does not use net operating balance as a headline fiscal indicator.

In aggregate, the States are expecting the general government sector to record a net operating surplus of 0.1 per cent of GDP in 2014‑15, improving to a surplus of 0.3 per cent of GDP in 2016‑17.

In aggregate, on average across the forward estimates, the States are expecting revenue as a proportion of GDP to be 13.9 per cent, which is below the pre‑Global Financial Crisis 10‑year average of 14.3 per cent of GDP. The return to surplus reflects a moderation in State expenses as a proportion of GDP.

As shown in Chart 4.1, the consolidated general government sector is expected to record a net operating deficit of 1.2 per cent of GDP in 2014‑15, improving to a surplus of 0.3 per cent of GDP in 2016‑17.

Chart 4.1: Consolidated net operating balance by sector(a)

This chart shows the consolidated net operating balance from 2001‑02 to 2015‑16. Data are unavailable for the public non‑financial corporations sector, and thus the non‑financial public sector, beyond 2013‑14. The consolidated non-financial public sector had net operating surpluses between 2001‑02 and 2007‑08. Since 2008‑09 the consolidated non-financial public sector has recorded net operating deficits and is expected to remain in deficit in 2013‑14. The general government sector follows a similar pattern to the non-financial public sector.

(a) Data for the PNFC sector (and therefore NFPS) are not available beyond 2014‑15.

[View chart data]

Fiscal and cash balances

A fiscal surplus indicates that a government is saving more than enough to finance all of its investment spending and is therefore not contributing directly to the current account deficit. A fiscal deficit indicates that a government needs to borrow or liquidate financial assets in order to fund its capital and/or recurrent expenditures.

As the fiscal balance includes capital transfers and investment in non‑financial assets, which are not included in the net operating balance, the difference between the fiscal balance and the net operating balance is the effect of investment in non‑financial assets, including infrastructure.

Chart 4.2: Consolidated fiscal balance by sector(a)

This chart shows the consolidated fiscal balance from 2001‑02 to 2015‑16. Data are unavailable for the consolidated public non-financial corporations sector, and thus the non-financial public sector, beyond 2013‑14. The consolidated non-financial public sector had fiscal surpluses between 2002‑03 and 2007‑08. Since 2008‑09 the consolidated non-financial public sector has recorded fiscal deficits and is projected to remain in deficit until 2013‑14.  The general government sector follows a similar pattern to the non-financial public sector.

(a) Data for the PNFC sector (and therefore the NFPS) are not available beyond 2014‑15.

[View chart data]

The fiscal balance of the Commonwealth general government sector is expected to remain in deficit over the forward estimates, however the expected 2014‑15 deficit of 1.6 per cent of GDP will decrease in both 2015‑16 and 2016‑17.

Aggregate State net capital investment is forecast to decline from 0.5 per cent of GDP in 2014‑15 to a low of 0.4 per cent of GDP in 2016‑17. Despite this decline in net capital investment and improvements in forecast general government State net operating balances over the forward estimates, the aggregate State fiscal balance is expected to remain in deficit.

At the consolidated level, the general government sector fiscal balance is expected to remain in deficit across the forward estimates, although the deficit is expected to narrow from 2.4 per cent of GDP in 2014‑15 to 0.8 per cent of GDP by 2016‑17. A fiscal deficit of 0.6 per cent of GDP is expected in the PNFC sector for 2014‑15, contributing to an NFPS deficit of 3.3 per cent of GDP in 2014‑15.

The cash balance is the equivalent of a fiscal balance measured on a non‑accrual basis, capturing payments and receipts as they occur. It therefore reflects the extent to which cash is available to a government.

The cash balance of the Commonwealth general government sector is expected to remain in deficit over the forward estimates, with a deficit of 1.8 per cent of GDP in 2014‑15 improving to a deficit of 0.6 per cent of GDP in 2016‑17. At the State level, the expected 2014‑15 deficit of 0.5 per cent of GDP will improve to a deficit of 0.1 per cent of GDP in 2016‑17.

As shown in Chart 4.3, the consolidated general government sector cash balance is expected to be a deficit of 2.6 per cent of GDP in 2014‑15, before improving to a deficit of 0.9 per cent of GDP in 2016‑17. A cash deficit of 0.7 per cent of GDP is also expected in the PNFC sector in 2014‑15, contributing to an NFPS deficit of 3.3 per cent of GDP in 2014‑15.

Chart 4.3: Consolidated cash balance by sector(a)

This chart shows the consolidated cash balance from 2001‑02 to 2015‑16.  Data for the public non-financial corporations sector and consolidated non-financial public sector are not available beyond 2013‑14.  This sector recorded cash surpluses between 2001‑02 and 2007‑08, but cash deficits since 2008‑09, which are estimated to continue through the forward estimates. The general government sector follows a similar pattern, while the public non-financial corporations sector has been in deficit since 2004‑05 and is expected to remain in deficit through the forward estimates.

(a) Data for the PNFC sector (and therefore the NFPS) are not available beyond 2014‑15.

[View chart data]

Net debt

Net debt is the sum of selected financial liabilities (deposits held, advances received, government securities, loans and other borrowing) less the sum of selected financial assets (cash and deposits, advances paid, investments, loans and placements). Net debt does not include superannuation‑related liabilities.

As shown in Chart 4.4, consolidated general government sector net debt is expected to increase from 17.4 per cent of GDP in 2014‑15 to 18.1 per cent of GDP in 2016‑17.

Commonwealth general government sector net debt as a proportion of GDP is expected to increase from 13.9 per cent in 2014‑15 to 14.6 per cent of GDP in 2016‑17. State net debt as a proportion of GDP is expected to peak at 4.2 per cent in 2014‑15, before declining to 3.8 per cent of GDP in 2016‑17. The local government sector is expected to continue to have negative net debt, that is, selected financial assets will exceed selected financial liabilities.

Commonwealth net debt is expected to continue to make up the bulk of consolidated net debt.

Chart 4.4: Consolidated net debt by sector
(as at end of financial year)(a)

This chart shows the consolidated net debt from 2001‑02 until 2015‑16.  Consolidated net debt in the non-financial public sector decreases until 2006‑07 and then increases from 2007‑08 as a result of the global financial crisis. Data for this sector are unavailable beyond 2013‑14. Consolidated net debt in the general government sector follows a similar pattern, but is forecast to ease in 2014‑15 and decrease slightly in 2015‑16.

(a) Data for the PNFC sector (and therefore the NFPS) are not available beyond 2014‑15.

[View chart data]

The Australian Loan Council

The Australian Loan Council (Loan Council) is a Commonwealth‑State council that coordinates public sector borrowing. It consists of the Prime Minister of Australia and the Premier/Chief Minister of each State and Territory. In practice, each member is represented by a nominee, usually the Treasurer of that jurisdiction, with the Commonwealth Treasurer as Chair.

Current Loan Council arrangements operate on a voluntary basis and emphasise transparency of public sector financing rather than adherence to strict borrowing limits. These arrangements are designed to enhance financial market scrutiny of public sector borrowing and facilitate informed judgments about each government's financial performance.

The Loan Council traditionally meets annually in March or April to consider jurisdictions' nominated borrowings for the forthcoming year. As part of the agreed arrangements, the Loan Council considers these nominations, having regard to each jurisdiction's fiscal position and the macroeconomic implications of the aggregate figure.

Outcome of the 2014 Loan Council meeting

The Loan Council met on 28 March 2014 to consider Loan Council Allocation nominations for 2014‑15. The Loan Council approved each jurisdiction's nominated allocation. In aggregate, the nominations represent a deficit of $60.9 billion (Table 4.1). The States nominated a deficit of $16.4 billion and the Commonwealth nominated a deficit of $44.5 billion.

Developments since the 2014 Loan Council meeting

As part of the Loan Council arrangements, all jurisdictions are required to update their Loan Council Allocation to reflect their Budget and to provide an explanation to the Loan Council if they are likely to exceed the tolerance limit.

2014‑15 Loan Council Allocation budget updates will be available in the States' 2014‑15 Budgets.

The Commonwealth's 2014‑15 Loan Council Allocation budget update is available in Budget Paper No. 1, Budget Strategy and Outlook 2014‑15, Statement 9: Budget Financial Statements, Appendix B.

Table 4.1: Loan Council Allocation nominations for 2014‑15(a)
  NSW VIC QLD WA SA TAS ACT NT C'wlth Total
  $m $m $m $m $m $m $m $m $m $m
Nominated 2014‑15 LCAs                    
General government sector cash surplus(-)/deficit(+) 3,315 603 723 1,446 236 50 158 262 30,953  
PNFC sector cash surplus(-)/deficit(+) 2,611 2,200 711 894 174 103 88 57 3,251  
NFPS cash surplus(-)/deficit(+)(b) 5,926 2,741 1,434 2,340 410 153 246 319 34,204  
plus Acquisitions under finance leases and similar arrangements 301 36 59 217 0 0 0 0 0  
equals ABS GFS cash surplus(-)/deficit(+) 6,226 2,778 1,493 2,557 410 153 246 319 34,204  
minus Net cash flows from investments in financial assets for policy purposes(c) -71 -1 0 0 -25 -6 2 17 ‑11,484  
plus Memorandum items(d) 826 625 1,137 56 -559 62 -9 0 -1,171  
Loan Council Allocations 7,123 3,404 2,630 2,612 -124 221 235 302 44,517 60,920
2014‑15 tolerance limit(e) 1,607 1,125 1,195 942 342 168 105 117 7,806  

(a) Loan Council Allocation (LCA) nominations for 2014‑15 reflect best estimates of cash surpluses/deficits. Nominations have been provided on the basis of policies announced up to and included in jurisdictions' mid‑year financial reports. Each jurisdiction will publish an updated LCA estimate as part of its budget documentation.

(b) The sum of the general government and PNFC sector balances may not equal the NFPS balance due to inter‑sectoral transfers.

(c) Net cash flows from investments in financial assets for policy purposes comprise net lending by governments with the aim of achieving government policy as well as net equity sales and net lending to other sectors or jurisdictions. Such transactions involve the transfer or exchange of a financial asset and are not included within the cash deficit. However, these flows have implications for a government's call on financial markets. Net cash flows from investments in financial assets for policy purposes are displayed with the same sign as reported in cash flow statements.

(d) Memorandum items are used to adjust the NFPS surplus/deficit to include in LCAs certain transactions — such as operating leases — that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the NFPS surplus/deficit certain transactions that the Loan Council has agreed should not be included in LCAs, for example, the funding of more than employers' emerging costs under public sector superannuation schemes, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes.

(e) Tolerance limits are designed, inter alia, to accommodate changes to LCAs resulting from changes in policy. Tolerance limits apply between jurisdictions' LCA nominations and budget estimates, and again between budget estimates and outcomes. They are calculated as two per cent of NFPS cash receipts from operating activities in each jurisdiction.


1 Due to inter-sectoral transfers, NFPS does not always equal the sum of the general government and PNFC sectors.