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Statement 1: Fiscal Strategy and Budget Priorities

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Contents

Part I: Overview

Fiscal outlook
Economic outlook

Part II: Fiscal strategy

Benefits of the medium-term fiscal strategy
Fiscal policy response to economic shocks and the medium-term fiscal strategy
Fiscal policy beyond 2001-02

Part III: Budget priorities

Building a more effective welfare system

Acknowledging older Australians

Enhancing Australia's health system

Addressing indigenous disadvantage
Justice
Safeguarding Australia's natural resources
Assisting rural and regional Australians
Improving telecommunications services

Improving Australia's transport system
Innovation and education

Sports
Defence White Paper
Implementing tax reform

Statement 1: Fiscal Strategy and
Budget Priorities

Part I: Overview

The 2001-02 Budget provides for a fifth consecutive underlying cash surplus establishing the longest run of budget surpluses for almost thirty years. The Budget also delivers additional funding for national priority initiatives, including measures to assist older Australians and to build a more effective welfare system. The significant tax reductions provided in the Budget will help promote an early return to strong growth in the year ahead following a temporary slowdown in 2000-01.

Fiscal outlook

The budget projections, presented in Table 1, have been revised down from the corresponding estimates published in the 2000-01 Mid-Year Economic and Fiscal Outlook (MYEFO). This primarily reflects new policy measures and the impact of a slowdown in economic growth in the second half of 2000. Nevertheless, an underlying cash surplus of $1.5 billion is expected in 2001-02, and cash surpluses are projected for each of the forward years (Chart 1).

Table 1: Budget aggregates

Table 1:  Budget aggregates

In accrual terms, the fiscal balance is expected to move into a small deficit over the next two years, before returning to surplus. The divergence between the cash and accrual budget measures is principally due to the impact of transitional arrangements implemented for the introduction of the new Pay As You Go system of company tax collections in 2000-01. In accrual terms, the revenue is shown against 2000-01 even though it is not actually paid until subsequent years; in 2001-02 and following. As a result the outcome for 2000-01 is abnormally high as compared to the actual cash outcome and the fiscal outcome lower in subsequent years as a consequence.

The Government's fiscal policy continues to be guided by the primary objective of maintaining budget balance, on average, over the course of the economic cycle. This objective allows fiscal policy to respond to variations in economic growth, while ensuring that sound government finances are maintained over time.

The fiscal outlook reflects the Government's decision to support economic growth through an appropriate level of further tax reductions and targeted spending on priority areas. This builds on the fiscal stimulus from the personal income tax cuts delivered on 1 July 2000 under The New Tax System. Tax cuts provided in this Budget include the forthcoming further reduction in the company tax rate to 30 per cent and the abolition of State and Territory Financial Institutions Duty (FID) on 1 July 2001. In addition, State stamp duties on marketable securities will be abolished and full input tax credits for motor vehicles will be brought forward from 1 July 2002, allowing GST registered businesses to claim full input tax credits for motor vehicles acquired on or after 23 May 2001.

Chart 1: Underlying cash balance

Chart 1:  Underlying cash balance

The significant fiscal consolidation achieved in recent years has provided the scope for fiscal policy to be supportive of growth in 2001-02. The underlying strength of the fiscal position is demonstrated by the reduction in the Commonwealth's net debt. In June 1996, Commonwealth general government net debt stood at $96 billion, after an increase of around $80 billion over the previous five years. From June 1996 to June 2002 $58 billion of Commonwealth general government net debt will be repaid. This will lead to an annual interest saving of $4 billion compared with 1996-97. The net debt to GDP ratio will fall from its peak in 1995-96 of 18.9 per cent to 5.4 per cent by June 2002.

Economic outlook

Slower than expected growth in the second half of 2000 and a weaker outlook for the world economy in 2001, have led to downward revisions to the MYEFO growth forecasts for 2000-01 and 2001-02.

The slower growth in the second half of 2000 was concentrated in the residential construction sector. In part, this reflected an unwinding of the bring-forward of residential construction into the first half of 2000, ahead of the introduction of The New Tax System. The downturn in this sector had flow-on effects to other parts of the economy through its impact on employment, consumer spending and business sentiment.

Conversely, net exports have been contributing strongly to growth in 2000-01, buoyed by the lower exchange rate and the Olympics, despite a deteriorating international outlook and adverse seasonal conditions in the farm sector. Overall economic growth is now expected to be around 2 per cent in year-average terms, and around 1 per cent in through-the-year terms in 2000-01. Growth is expected to rebound in 2001-02 to around 3 ¼ per cent in year-average terms and around 4 per cent in through-the-year terms.

Table 2: Major economic parameters (percentage change from
previous year)

Table 2:  Major economic parameters (percentage change from
previous year)

(a) Labour force survey basis.

(b) Average earnings (national accounts basis).

(c) The Consumer Price Index (CPI) projections are set as the mid-point of the medium-term inflation target and as such make no allowance for any further impact of The New Tax System.

Following the sharp downturn in the second half of 2000, residential construction is expected to contribute strongly to growth in 2001-02, adding to moderate growth in household consumption, business investment and net exports. While employment growth is expected to strengthen in the second half of the year, average unemployment rates are forecast to be slightly higher than recent levels, at around 7 per cent. In addition, it is expected that inflation will decline as the one-off effect of tax changes washes out of the index and the current account deficit as a per cent of GDP will fall well below its average level of the last decade.

Australia's growth performance over the second half of the 1990s has been exceptionally strong, underpinned by a sustained productivity surge. This strongly improved productivity performance is the result of substantial macroeconomic and structural reforms.

Sustainable fiscal and monetary policies set transparently in a medium-term framework, more flexible labour markets, more intense competition and, in particular, important reforms to government business enterprises have created a good investment climate and strong competitive incentives to seek higher productivity.

Looking ahead, there is clear potential for a second wave of productivity growth in Australia as advances in information and communication technology are harnessed - a process supported by highly competitive markets and a favourable investment climate.

More information on the fiscal strategy is provided in Part II of this statement, and on budget priorities in Part III. Information on the fiscal outlook is provided in Statement 2, Statement 3 discusses the economic outlook and Statement 4 the role of new technology in productivity growth.

Box 1: One hundred years of Commonwealth Budgets

This year marks the centenary of Australian federation and of the presentation of Commonwealth Budgets. The Commonwealth Budget has grown from being largely a bookkeeping exercise to a major annual statement with a significant influence on the direction of national policy. The following extract from the first Budget speech illustrates the fiscal philosophy of the time:

    `(we are) animated by but one desire - to do that which is best for Australia, and fair, just, and equitable to all the States, and to all classes and sections of our community. Another grave responsibility which rests upon us at this particular time is to take the utmost care that there shall be no extravagant expenditure. While we should spend all that is reasonably necessary for the purpose of defending and developing our country we must see ... that there is no extravagance, because the money we spend is money which comes from the States, and if we do anything which may put them into a difficult position they will feel inclined to curse rather than to bless federation.'

    Sir George Turner, KCMG, Treasurer, Australia, House of Representatives 1901-02, Debates, Vol. 5, pp 5673-5674.

The increasing importance of Commonwealth Budgets over the succeeding 100 years arose largely from the demands of World War II and changes in community expectations of the role of government. In response to the latter, the range of issues that the budget addresses has expanded over time, now including most areas of economic and social activity.

The need for care remains a priority for the Government and is put into practice through the objective of budget balance over the medium term.

Commonwealth Budget balances(a)

Commonwealth Budget balances (a)

(a) Headline cash balance to 1957-58, underlying cash balance after 1958-59.

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