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Australian Government Coat of Arms

Budget | 2014-15

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

Part 3: Fiscal Strategy and Outlook

Overview

In 2014, the Government has made significant progress in delivering on its fiscal strategy to repair the budget and return to a sustainable surplus, despite the economy and the Senate driving significant impacts on tax receipts and payments.

Notably, around 75 per cent of over 400 measures in the 2014‑15 Budget have already been implemented. Despite expectations of the weakest nominal GDP growth in a financial year in over 50 years, deficits are still expected to decline each year of the forward estimates. And debt is now expected to reach $499 billion by 2023‑24 — a fall of nearly $170 billion compared with the projection of $667 billion in debt inherited a year ago.

However, since the Budget, the collapse in iron ore prices and lower than expected wage growth, have made the budget repair task more challenging, driving the write‑down of $31.6 billion in tax receipts over the forward estimates.

The impact of delays in passing legislation and negotiations with the Senate is also hampering budget repair, costing the Budget $10.6 billion over the forward estimates, and keeping debt and interest payments higher for longer.

Setting aside the cost of Senate negotiations, all new policy decisions have been more than offset by responsible savings — demonstrating the Government's ongoing, strong commitment to fiscal discipline.

The underlying cash balance has deteriorated by $10.6 billion in 2014‑15 and by $43.7 billion over the forward estimates. As a result, a deficit of $40.4 billion is forecast in 2014‑15, narrowing to $11.5 billion in 2017‑18. This highlights the size of the budget repair task and that there remains much work to do.

Table 3.1: Budget aggregates
  Estimates  
  2014‑15    2015‑16 
  Budget MYEFO   Budget MYEFO
Underlying cash balance($b)(a) -29.8 -40.4   -17.1 -31.2
Per cent of GDP -1.8 -2.5   -1.0 -1.9
Fiscal balance($b) -25.9 -39.8   -12.2 -27.2
Per cent of GDP -1.6 -2.5   -0.7 -1.6
  Projections    
  2016‑17    2017‑18 
  Budget MYEFO   Budget MYEFO
Underlying cash balance($b)(a) -10.6 -20.8   -2.8 -11.5
Per cent of GDP -0.6 -1.2   -0.2 -0.6
Fiscal balance($b) -6.6 -17.8   1.0 -5.0
Per cent of GDP -0.4 -1.0   0.1 -0.3

(a) Excludes expected net Future Fund earnings.

Change in the fiscal position since the Budget

There are two key drivers of the change in the fiscal position since the Budget: the impact of the economy on tax receipts and payments; and the impact of the negotiations and delays in the Senate.

Changes in the economic outlook since the 2014‑15 Budget, primarily relating to sharper than expected falls in iron ore prices and lower than forecast wage growth, have had a significant impact on the budget bottom line. Tax receipts have been revised down $31.6 billion over the forward estimates ($6.2 billion in 2014‑15), and government payments have increased.

The $10.6 billion impact on the Budget resulting from the Senate's decisions is comprised of two elements: a $3.4 billion cost from delaying the passage of legislation; and $7.2 billion in costs associated with negotiating the passage of key policies.

Setting aside the Senate negotiations, the net impact of Government decisions since Budget has improved the budget position over the forward estimates by $3.2 billion.

The Government remains committed to improving the long‑term sustainability of the budget position. The path of fiscal consolidation and policy settings will be considered comprehensively as part of the normal annual Budget process.

Chart 3.1: Changes to the Underlying Cash Balance since Budget

Since the 2014-15 Budget, the underlying cash balance has deteriorated by $43.7 billion over the four years from 2014-15 to 2017-18.

[View chart data]

Impact of the economy on tax receipts and payments

The substantial fall in iron ore prices of more than 30 per cent since the Budget is weighing particularly on company profits and tax receipts, while weaker wage growth is lowering individuals' income tax receipts, driving an overall reduction of $31.6 billion in tax receipts.

Of this reduction, company tax receipts have been revised down by $2.3 billion in 2014‑15 and $14.4 billion over the forward estimates — around half of the total reduction in tax receipts since the Budget. In addition, the weaker outlook for wages growth is expected to lead to lower taxes on individuals of $2.3 billion in 2014‑15 and $8.6 billion over the forward estimates. Economic effects such as this highlight the importance of improving the structural budget position over time.

Since the 2014‑15 Budget, economic parameters have also resulted in increased payments over the forward estimates. In particular:

  • payments related to Family Tax Benefits are expected to increase by $3.2 billion over the forward estimates, largely reflecting the impact of lower than expected wage growth which is driving up average payment rates and recipient numbers;
  • defence and other foreign spending is $1.5 billion higher over the forward estimates reflecting the depreciation in the exchange rate; and
  • increased income support payments (an increase of $966 million over the forward estimates) reflecting updated benefit recipient numbers and average payments rates.

Payment levels for some government programs are also being driven higher as a result of other parameter variations. In particular:

  • Child Care Rebate and Benefit payments, which are demand driven, are expected to increase by $2.4 billion over the forward estimates, largely reflecting higher than expected utilisation of child care services, both in terms of the number of children in childcare and hours claimed, and higher than expected fees; and
  • support for government and non‑government schools has increased by $878 million over the forward estimates as a result of higher than expected enrolments in 2013.

In MYEFO, the Government has allowed the variations arising from economic and other parameter variations to flow through to the budget bottom line, rather than take decisions to cut expenditure dramatically or increase taxes.

Were the Government to immediately react to offset these automatic variations in taxes and payments, largely arising from weaker national income growth, it would risk exacerbating the impact of these changes on the economy. The path of fiscal consolidation and policy settings will be considered comprehensively as part of the normal annual Budget process.

Impact of the Senate

In the 2014‑15 Budget, the Government set out the savings required to reduce the spiralling growth in government payments inherited from the previous government.

The decisions announced in the 2014‑15 Budget were estimated to improve the bottom line by $36.0 billion over the four years to 2017‑18. The impact of these savings decisions was designed to build over time, reducing payments growth and ensuring the sustainability of the budget position in the medium‑term.

While considerable progress has been made in implementing the Budget, delays in passing legislation to allow Budget measures to commence has, to date, cost the budget $3.4 billion. This primarily reflects the delay in passing legislation associated with the family payments reforms in the 2014‑15 Budget, which improve the ongoing sustainability of the system and ensure that family payments are better targeted to those who need them the most.

Costs have also been incurred over the forward estimates as a result of completed and ongoing negotiations to pass legislation through the Senate. The cost of these negotiations to date totals $7.2 billion over the forward estimates and includes changes required to repeal the Minerals Resource Rent Tax and associated spending, amendments to the higher education reforms, and restoring Temporary Protection Visas and introducing Safe Haven Enterprise Visas.

As part of negotiations in the Senate to pass legislation to abolish the Minerals Resource Rent Tax, the Government took decisions to temporarily maintain the Low Income Superannuation Contribution, Income Support Bonus and Schoolkids Bonus at a total cost of $6.6 billion over the forward estimates. An income test will be applied to the Schoolkids Bonus from 1 January 2015. Notably, however the budget costs associated with the Minerals Resource Rent Tax repeal package are fully offset by the end of 2023 by the decision to delay the increase in the superannuation guarantee rate until 1 July 2021. The repeal of the Minerals Resource Rent Tax and other related measures will save the budget over $10 billion over the forward estimates and around $50 billion over the next decade.

The total impact of the Senate's decisions on the budget due to negotiations and legislative delays is $10.6 billion over the forward estimates ($13.1 billion in fiscal terms). These costs are detailed in Table 3.2 below. These delays come at a significant cost to the budget, but also result in debt and interest payments staying higher for longer.

Due to the legacy of the former Government, $13.6 billion of taxpayers' money will be used to pay interest on government debt in 2014‑15. This is more than the Government will spend on carers, aged care or unemployment benefits in that year — underlining the importance of urgent budget repair. The projected improvement in the underlying cash balance, debt, and the reduction in interest payments is dependent on the Senate passing the Government's responsible savings measures. If this does not occur, the budget and the economy will be substantially weakened.

While these delays are hampering progress towards budget repair in the short‑term, the Government is committed to continuing to methodically work through negotiations with the Senate on Budget measures to ensure the long term sustainability of the budget position and build a stronger economy.

Around $33.9 billion of measures that improve the budget position also remain subject to the passage of legislation. Over $5 billion in measures that were policies of the former Government are yet to secure passage through the Parliament.

Table 3.2: Impact of Senate on the Budget (underlying cash balance)
  Estimates   Projections    
  2014‑15 2015‑16   2016‑17 2017‑18   Total
  $m $m   $m $m   $m
Impact of decision taken as part of Senate negotiations(a)              
Repeal of the Minerals Resource Rent Tax and related measures -1,684 -2,334   -1,670 -947   -6,634
Research and Development tax incentive — amending the start date of the targeting access measure -350 -50   100 0   -300
Restoring Temporary Protection Visas and introducing Safe Haven Enterprise Visas 3 62   -239 -27   -201
Humanitarian Programme — additional places from 2017‑18 0 0   0 -46   -46
Reintroduction of fuel excise indexation — change to the start date -35 0   0 0   -35
Higher Education — reform amendments and Structural Adjustment Fund(b) -3 0   -13 4   -12
Total impact of decisions taken as part of Senate negotiations -2,069 -2,321   -1,822 -1,015   -7,227
Impact of delays in passing legislation(c)              
Social Services -1,287 -547   -547 -526   -2,907
Education -98 -229   -33 -38   -398
Health -64 3   -3 -2   -67
Employment -8 0   0 0   -8
Total impact of delays in passing legislation -1,456 -773   -584 -566   -3,379
Total impact of Senate delays/negotiations on Budget -3,525 -3,095   -2,405 -1,581   -10,606

(a) Impacts from decisions taken as part of Senate negotiations are reflected in the 2014‑15 MYEFO as policy decisions.

(b) The fiscal balance impact of this measure is $414.2 million in 2014‑15 and $3.3 billion over the four years to 2017‑18.

(c) Impacts from delays in passing legislation are reflected in the 2014‑15 MYEFO as estimates variations.

Strong fiscal discipline

The Government's fiscal strategy outlined in the 2014‑15 Budget committed the Government to maintain strong fiscal discipline; to live within our means, pay down debt and reduce the Government's share of the economy, so as to free up resources for private investment to drive jobs and economic growth.

Consistent with its fiscal strategy, the Government has more than offset all of its new spending decisions, other than those decisions taken as part of negotiations with the Senate. This results in an improvement to the budget of $3.2 billion over the forward estimates from 2014‑15 (including $2.0 billion in 2017‑18).

Table 3.3: Impact of decisions in the 2014‑15 MYEFO (underlying cash balance)
  Estimates   Projections    
  2014‑15 2015‑16   2016‑17 2017‑18   Total
  $m $m   $m $m   $m
Total impact of decisions taken since the 2014‑15 Budget -2,314 -2,195   -501 950   -4,059
Less decisions taken as part of negotiations with the Senate -2,069 -2,321   -1,822 -1,015   -7,227
Net budget impact of new policy decisions -245 127   1,320 1,966   3,168

Since the 2014‑15 Budget, the Government has made new decisions to respond to changes in the international security environment and to further drive growth and support a strong economy.

The Government has responded to a rapidly changing security environment, investing around $1.3 billion to keep Australians safe and secure. To counter the threat of home‑grown terrorism, security and law enforcement agencies have been given $631.4 million in extra resources to track, disrupt and prosecute Australians involved in violent extremism, both at home and overseas. Operations in Iraq are addressing the enduring threat of terrorism at a cost of $306.4 million to 30 June 2015.

The Government has also invested $1.8 billion in measures since the Budget to further support growth, jobs and new market opportunities, including through the finalisation of the Japan‑Australia Economic Partnership Agreement, the reinstatement of Employee Share Scheme arrangements and the establishment of the Global Infrastructure Hub in Sydney.

The Government has offset the impact of these decisions by taking a small number of responsible new decisions.

The Government will return the level of Official Development Assistance (ODA) spending in real terms to the levels that applied when ODA was last funded from budget surpluses rather than debt and then grow ODA in line with the Consumer Price Index. This will improve the budget position by $3.7 billion over the four years to 2017‑18.

The Government has also preserved the policy intent of the 2014‑15 Budget measures to maintain eligibility thresholds for allowances and Family Tax Benefit payment rates, by extending the end date to 1 July 2018 and 1 July 2017 respectively, as legislation was not passed in time for the start date outlined in the Budget. This will provide a saving of $852 million.

The Government will increase the period over which capital expenditure on in‑house computer software is depreciated from four years to five years. This is estimated to increase revenue by $420 million over the four years to 2017‑18.

The Government has continued to take action to reduce both the size of government and the regulatory burden government imposes on the community (see Boxes A and B).

Box A: Smaller Government

The Government continues to deliver a comprehensive package of Smaller Government reforms, designed to eliminate waste and duplication, improve the efficiency of the Commonwealth public service and enhance the delivery and focus of public services. These reforms are already contributing significantly to budget repair, while improving the responsiveness and effectiveness of government.

Key elements of the Government's ongoing Smaller Government reforms include:

  • Reducing the size of the Commonwealth public service. In 2014‑15, total staffing in the general government sector is expected to return to levels last recorded in 2007‑08.
  • Public sector wage restraint. Over the last decade, Commonwealth public servants received annual median wage increases totalling 42 per cent, well above CPI increases of 28 per cent over the same period. This included strong wage rises through the Global Financial Crisis, when private sector wages growth and employment were much lower. Given the position of the budget, the Government has indicated its intention to keep average annual wage rises across the public service to 1.5 per cent or less over the next three years. Wage rises will also have to be offset by productivity gains, to ensure that they are affordable, sustainable and in line with community expectations.
  • Streamlined and better targeted programme delivery. The Government is eliminating wasteful fragmentation in service delivery and removing unnecessary bureaucratic demarcations, which undermine policy effectiveness. For example, in the 2014‑15 Budget over 150 Indigenous programmes were streamlined into five broad program categories, to improve their focus and co‑ordination and to reduce the red tape burden on service delivery organisations that partner with government. Similar reforms in the Social Services portfolio have streamlined 18 grants programs into seven, thereby reducing reporting burdens for providers. Additionally grants administration in the Department of Health has been consolidated into a single division, to promote the development of expertise and more efficient delivery across all stages of the grant life cycle.
  • Enhanced contestability of government service provision. The Government recently completed the successful privatisation of Medibank Private. This sale removed the Commonwealth from the highly competitive private health insurance market, releasing $5.7 billion in capital, now available for investment in productivity enhancing infrastructure through the government's asset recycling initiative.
    Complementing scoping studies into the potential sales of Defence Housing Australia, ASIC Registry Services, the Royal Australian Mint and Australian Hearing announced in the Budget, the 2014‑15 MYEFO includes the commencement of a further scoping study exploring options for the operation or ownership of the Government's Canberra communications network.
    In addition, the Government has established a Contestability Programme, to assess whether government functions should be open to competition and to encourage more entrepreneurial approaches to product or service delivery. To ensure services are delivered as efficiently and as effectively as possible, and by those who are best placed to provide them, alternative delivery approaches will continue to be explored.
  • Functional and efficiency reviews of major government bodies. The Government will commence in‑depth reviews of the functions and efficiency particularly of larger government agencies and departments. These reviews will determine whether the current resourcing and functions performed within an entity are aligned with the Government's policy priorities and that they are being undertaken as efficiently as possible. The Departments of Health and Education (other than higher education) will be the first bodies to be reviewed.
  • Streamlining of government bodies. The 2014‑15 MYEFO includes a further tranche of major rationalisation of government bodies, to ensure the public sector is as streamlined, effective and transparent as possible. Delivering a smaller and more rational government footprint is designed to clarify lines of accountability, to make the public sector more agile and better able to address changing pressures and Government priorities.

In the 2014‑15 MYEFO the Government is reducing the total number of government bodies by a further 175. This third tranche of reductions in the number of Australian Government bodies builds on previous decisions announced in the 2013‑14 MYEFO and the 2014‑15 Budget, taking the total reduction in the number of government bodies since the election to 251.

This latest tranche includes the abolition of statutory bodies, advisory committees, councils and boards and merger of other government bodies.

Specifically, in the 2014‑15 MYEFO the Government is:

  • abolishing 138 government bodies;
  • consolidating the functions of 15 government bodies into departments;
  • transferring responsibility for two bodies outside the Commonwealth; and
  • merging 26 bodies (for a net reduction of 20 bodies) while five will consolidate their back office functions with shared service centres or supporting departments.

These measures will further reduce the overheads from an excessive number of stand‑alone bodies, reducing inefficiencies and removing duplicated effort across the public sector.

Further details of these changes are available in the Finance Minister's Ministerial Paper and in the associated Ministerial Statement.

In addition, to ensure greater transparency around government bodies and greater discipline around their creation, the 2014‑15 MYEFO includes two further initiatives, namely:

  • the introduction of an Australian Government Governance Policy, to take effect from 15 December, to impose new constraints on the establishment and design of new government bodies; and
  • the launch of an Australian Government Organisations Register, to create the first complete online listing of all government bodies.

Announcements in the 2014‑15 MYEFO take total savings from the reduction in the number of government bodies to $539.5 million so far.

Box B: Reducing the regulatory burden

Regulation has grown rapidly over recent decades, increasing costs for business and the community and leading to the sort of complexity and uncertainty that impede innovation and entrepreneurship.

The Government is committed to reducing regulatory burdens in order to improve Australia's productivity. It is doing this in three main ways: by reducing the stock of existing regulations, managing the flow of new regulations, and reviewing the performance of regulators so that they minimise the compliance costs arising from their work.

To reduce the stock of existing regulation, the Government established a red and green tape reduction target of $1 billion per year and has set aside two parliamentary sitting days each year to repeal counterproductive, unnecessary or redundant legislation. During the 2014 Repeal Days, the Government announced more than $2 billion in compliance cost savings for businesses and the community and introduced legislation to repeal more than 11,000 pieces of regulation.

To manage the flow of new regulation, the Government has reinvigorated the Regulatory Impact Assessment process and requires compliance costs to be calculated and offset for all new proposals.

Finally, to help shape regulator behaviour, the Government has established a new Regulator Performance Framework. The aim of this Framework is to ensure that regulators minimise the burden that arises as they discharge their responsibilities. Regulators will assess themselves against six key performance indicators each year. The Government has also issued Statements of Expectations to regulators, setting out the importance of administering regulation in a way that reduces compliance costs wherever possible.

Fiscal Strategy

As outlined in the 2014‑15 Budget, the Government's medium‑term fiscal strategy is to achieve budget surpluses, on average, over the course of the economic cycle. The fiscal strategy underlines the commitment to budget discipline and outlines how the Government will set medium‑term fiscal policy while allowing for flexibility in response to changing economic conditions. The strategy is underpinned by the following three policy elements:

  • investing in a stronger economy by redirecting Government spending to quality investment to boost productivity and workforce participation;
  • maintaining strong fiscal discipline to reduce the Government's share of the economy over time in order to free up resources for private investment to drive jobs and economic growth, with:
    • the payments‑to‑GDP ratio falling;
    • paying down debt by stabilising and then reducing Commonwealth Government Securities on issue over time; and
  • strengthening the Government's balance sheet by improving net financial worth over time.

The Budget repair strategy is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023‑24 consistent with the medium‑term fiscal strategy.

This strategy sets out that:

  • new spending measures will be more than offset by reductions in spending elsewhere within the budget;
  • the overall impact of shifts in receipts and payments due to changes in the economy will be banked as an improvement to the budget bottom line, if this impact is positive; and
  • a clear path back to surplus is underpinned by decisions that build over time.

The Budget repair strategy will stay in place until a strong surplus is achieved and so long as economic growth prospects are sound and unemployment remains low.

Delivering on the medium‑term fiscal strategy

The Government set out a comprehensive path towards achieving its medium‑term fiscal objectives in the 2014‑15 Budget and, while the changes in the economic outlook and the Senate have had an impact, considerable progress has been made to return to a sustainable trajectory over the medium‑term. The budget position is now fundamentally stronger than it was under the unsustainable trajectory of the former Government.

Despite expectations of the weakest nominal GDP growth in a financial year in over 50 years, the average annual pace of consolidation in the 2014‑15 MYEFO forward estimates remains at the 2014‑15 Budget level of 0.6 per cent of GDP.

Consistent with the fiscal strategy, the payments‑to‑GDP ratio falls from 25.9 per cent of GDP in 2014‑15 to 25.2 per cent of GDP in 2017‑18. By 2024‑25, the payments‑to‑GDP ratio is projected to reduce to 24.7 per cent of GDP. This is below the long term average of 24.9 per cent of GDP.

Continued effort to reduce the payments‑to‑GDP ratio through a disciplined approach to spending will be necessary to return the Budget to a credible path to surplus. A falling payments‑to‑GDP ratio will mean that the Government will be better placed to lower taxes and respond to changing economic conditions.

Budget surpluses over the course of the economic cycle

The Government's fiscal strategy provides necessary flexibility for the budget position to vary in line with economic conditions. This allows the 'automatic stabilisers' — the tendency for both receipts and spending to vary in line with economic conditions — to contribute to stability in aggregate demand.

Responsible fiscal policy must also look beyond the forward estimates period — promoting fiscal sustainability over a longer time horizon.

The fiscal position inherited by the Government was unsustainable. The 2013‑14 MYEFO showed that, without action, the budget would not return to surplus for at least a decade and debt would reach over $667 billion, even without any allowance for future tax relief from bracket creep.

The 2014‑15 Budget delivered medium‑term structural budget reform by placing government spending on a more affordable trajectory while allowing for future tax relief once the tax‑to‑GDP ratio reaches 23.9 per cent in 2020‑21.

Since the 2014‑15 Budget, the budget deterioration in the forward estimates has also impacted on the medium‑term outlook. The underlying cash balance is still projected to reach surplus in 2019‑20, with the surplus reaching 0.8 per cent of GDP by 2024‑25.

This remains a major improvement from the 2013‑14 MYEFO projections of at least a decade without surplus.

The Government remains committed to its objective of building a stronger economy and achieving surpluses, which build to at least 1 per cent of GDP by 2023‑24. While budget repair is underway, there is more work to do to deliver on this commitment.

Chart 3.2: Underlying cash balance projected to 2024‑25

The underlying cash balance is projected to reach surplus in 2019-20, with the surplus reaching 0.8 per cent of GDP by 2024-25.

Note: The underlying cash balance excludes Future Fund earnings and payments. A tax‑to‑GDP cap of 23.9 per cent is applied on 2014‑15 Budget and 2014‑15 MYEFO projections.

Source: Treasury projections.

[View chart data]

Real payments growth over the medium‑term (the period from 2018‑19 to 2024‑25) is projected to be 2.7 per cent per annum, unchanged since the 2.7 per cent per annum at Budget and well below the 3.7 per cent per annum projected under the previous Government's policy settings, as outlined in the 2013‑14 MYEFO.

The payments‑to‑GDP ratio is projected to decline from 25.9 per cent in 2014‑15 to 24.7 per cent in 2024‑25, below the long‑term average of 24.9 per cent.

Tax receipts are projected to reach the tax cap of 23.9 per cent of GDP in 2020‑21, the same year as projected at Budget.

Once the Budget returns to a surplus of 1 per cent of GDP, there will be more capacity to revisit the level of government support provided to groups such as age pensioners, while having regard to other factors such as the ageing population and a maturing superannuation system.

Strengthening the Government's balance sheet

The Government remains committed to paying down debt by stabilising and then reducing Commonwealth Government Securities on issue over time, returning the budget to a strong surplus of at least one per cent of GDP and strengthening the Government's balance sheet by improving net financial worth over time.

Paying down debt is important as it strengthens Australia's balance sheet which provides the Government with the flexibility to respond to unanticipated events during times of financial crisis or economic shock.

Commonwealth Government Securities (CGS) on issue are expected to reach $499 billion in 2023‑24, a fall of nearly $170 billion compared to $667 billion at the 2013‑14 MYEFO. This improvement is achieved despite allowance being included for future tax relief for which allowance was not included in the 2013‑14 MYEFO figures showing the fiscal position inherited from the previous Government. CGS on issue was projected to reach $389 billion in 2023‑24 at the time of the 2014‑15 Budget. The increase in CGS on issue since then is a result of the deterioration in the underlying cash balance across the forward estimates and the medium‑term.

Chart 3.3: Face value of Commonwealth Government Securities projected to 2024‑25

Commonwealth Government Securities (CGS) on issue are expected to reach $499 billion in 2023-24, a fall of nearly $170 billion compared to $667 billion at the 2013‑14 MYEFO. This allows for future tax relief for which allowance was not included in the 2013‑14 MYEFO figures. CGS on issue was projected to reach $389 billion in 2023-24 at the time of the 2014‑15 Budget.

Note: A tax‑to‑GDP cap of 23.9 per cent is applied on 2014‑15 Budget and 2014‑15 MYEFO projections. No tax cap has been applied on 2013‑14 MYEFO projections.

Source: Australian Office of Financial Management and Treasury projections.

[View chart data]

The primary indicator of the fiscal sustainability of the Government's longer term financial position and ability to withstand adverse economic shocks is net financial worth. It provides a broader measure of the Government's assets and liabilities as it includes both the full assets of the Future Fund and the superannuation liability that the Future Fund is intended to offset.

To promote balance sheet sustainability, the fiscal strategy includes a commitment to improving the Government's net financial worth over the medium‑term. The Government's commitment to improving net financial worth puts the focus on sustainability, thereby encouraging policies which boost productivity and participation for the long‑term benefit of the economy.

Table 3.4 provides a summary of Australian Government general government sector net financial worth, net worth, net debt and net interest payments.

Table 3.4: Australian Government general government sector net worth, net financial worth, net debt and net interest payments
  Estimates   
  2014‑15    2015‑16 
  Budget MYEFO   Budget MYEFO
  $b $b   $b $b
Financial assets 297.4 303.8   322.6 328.7
Non-financial assets 117.2 118.5   119.9 121.3
Total assets 414.6 422.2   442.5 450.0
Total liabilities 626.6 651.7   665.0 703.5
Net worth -212.0 -229.5   -222.5 -253.5
Net financial worth(a) -329.2 -347.9   -342.4 -374.8
Per cent of GDP -20.2 -21.6   -20.0 -22.3
Net debt(b) 226.4 244.8   246.4 279.6
Per cent of GDP 13.9 15.2   14.4 16.7
Net interest payments 10.5 10.8   11.5 11.3
Per cent of GDP 0.6 0.7   0.7 0.7
  Projections    
  2016‑17    2017‑18 
  Budget MYEFO   Budget MYEFO
  $b $b   $b $b
Financial assets 361.1 365.7   380.8 387.3
Non-financial assets 122.0 123.4   125.3 126.9
Total assets 483.2 489.0   506.1 514.3
Total liabilities 712.2 758.4   733.4 786.0
Net worth -229.0 -269.3   -227.4 -271.8
Net financial worth(a) -351.0 -392.7   -352.7 -398.7
Per cent of GDP -19.6 -22.2   -18.7 -21.5
Net debt(b) 261.3 304.4   264.2 315.8
Per cent of GDP 14.6 17.2   14.0 17.0
Net interest payments 12.2 12.1   12.9 12.7
Per cent of GDP 0.7 0.7   0.7 0.7

(a) Net financial worth equals total financial assets minus total liabilities.

(b) Net debt equals the sum of deposits held, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid and investments, loans and placements.

Net financial worth is estimated to be ‑$347.9 billion (‑21.6 per cent of GDP) in 2014‑15 and is expected to peak in 2015‑16 at ‑22.3 per cent of GDP before declining to ‑21.5 per cent of GDP in 2017‑18.

The deterioration in net financial worth since the 2014‑15 Budget reflects an increase in the issuance of Government securities. The increase in CGS is driven by an increase in the financing requirement relative to Budget and the impact of lower average yields, which increases the market value of CGS on issue.

The impact of the increase in CGS on issue has been partially offset by an increase in financial assets. The increase in financial assets is driven by small increases in the value of advances paid, investments, loans and placements, and equity investments.

The factors driving the change in net financial worth have also affected net worth and net debt. Net worth is expected to be ‑$229.5 billion in 2014‑15, $17.5 billion worse than estimated at the 2014‑15 Budget. Net worth is expected to be ‑$271.8 billion by the end of the forward estimates.

Net debt is estimated to be $244.8 billion in 2014‑15 (15.2 per cent of GDP) and $315.8 billion by the end of the forward estimates. Net debt is expected to stabilise in the forward estimates and then improve over the medium‑term as a share of GDP, although the improvement is smaller than at Budget. Over the next decade, the Government's action will see a substantial improvement in projected net debt from a peak in 2016‑17 of 17.2 per cent of GDP to 4.7 percent of GDP in 2024‑25 (Chart 3.4).

Chart 3.4: Net debt projected to 2024‑25

Commonwealth Government Securities (CGS) on issue are expected to reach $499 billion in 2023-24, a fall of nearly $170 billion compared to $667 billion at the 2013‑14 MYEFO. This allows for future tax relief for which allowance was not included in the 2013-14 MYEFO figures. CGS on issue was projected to reach $389 billion in 2023-24 at the time of the 2014-15 Budget.

Note: A tax‑to‑GDP cap of 23.9 per cent is applied on 2014‑15 Budget and 2014‑15 MYEFO projections.

Source: Treasury projections.

[View chart data]

Net interest payments are projected to rise from $10.8 billion in 2014‑15 (0.7 per cent of GDP) to $14 billion per annum in 2023‑24, still well below the projection of $27 billion per annum in the 2013‑14 MYEFO, based on the policy settings of the previous Government (Chart 3.5).

Chart 3.5: Net interest payments projected to 2024‑25

Commonwealth Government Securities (CGS) on issue are expected to reach $499 billion in 2023-24, a fall of nearly $170 billion compared to $667 billion at the 2013-14 MYEFO. This allows for future tax relief for which allowance was not included in the 2013-14 MYEFO figures. CGS on issue was projected to reach $389 billion in 2023-24 at the time of the 2014-15 Budget.

Note: Net interest payments are total interest receipts minus total interest payments. A tax‑to‑GDP cap of 23.9 per cent is applied on 2014‑15 Budget and 2014‑15 MYEFO projections. No tax cap has been applied on 2013‑14 MYEFO projections.

Source: Treasury projections.

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