Australian Government, 2011‑12 Budget

Part 3: Fiscal strategy and outlook


The Government remains on track to deliver a surplus in 2012‑13, well ahead of Australia's peers and notwithstanding ongoing challenges to the near‑term fiscal outlook that have made the return to surplus more difficult.

The deterioration in the global economy and uneven domestic conditions have resulted in a downward revision to tax receipts by over $20 billion across the forward estimates.

The Government has responded to the more challenging fiscal outlook in a measured way by making $6.8 billion in net savings, including meeting the costs of the Clean Energy Future package.

Savings have also been achieved through a combination of expenditure cuts, deferrals in initiatives, and measures to improve the integrity and fairness of the taxation system.

At a time of heightened volatility in financial markets, caused by sovereign debt concerns in Europe, it is important for the Government to continue its disciplined approach to spending and return the budget to surplus.

The underlying cash deficit is expected to be $37.1 billion (2.5 per cent of GDP) in 2011‑12, returning to a small surplus of $1.5 billion (0.1 per cent of GDP) in 2012‑13 (Table 3.1).

The return to surplus will ensure Australia's public finances remain among the strongest in the developed world, leaving us well placed to respond to any external shocks to the economic outlook.

Net debt is forecast to peak at 8.9 per cent of GDP in 2011‑12, higher than previously anticipated. Still, the average net debt position of the major advanced economies (G7) is projected to reach 92.9 per cent of GDP in 2016, more than 10 times higher than the expected peak in Australia's net debt.

Table 3.1: Budget aggregates

Table 3.1: Budget aggregates

  1. Excludes expected Future Fund earnings

Fiscal strategy

The Government's medium‑term fiscal strategy is designed to ensure fiscal sustainability while allowing the flexibility to respond to fluctuations in the economic outlook.

The Government's medium‑term fiscal strategy is to:

  • achieve budget surpluses, on average, over the medium term;
  • keep taxation as a share of GDP below the level for 2007‑08, on average; and
  • improve the Government's net financial worth over the medium term.

The strategy has remained unchanged since 2008‑09, the Government's first budget. It guided the Government's response to the global financial crisis and provides the basis for the Government's commitment to return the budget to surplus.

The strategy provides the necessary flexibility for the budget position to vary in line with economic conditions to support macroeconomic stability.

Consistent with the fiscal strategy, the Government took action through 2008 and 2009 to support the economy through the global financial crisis. The Government's delivery of a timely, targeted and temporary fiscal stimulus supported economic growth at a time that the private sector was in retreat.

In the Updated Economic and Fiscal Outlook (UEFO) released in February 2009 the Government also committed to return the budget to surplus as quickly as economic conditions permitted, once the economy recovered to grow above trend. Returning the budget to surplus is consistent with the medium‑term strategy and will support Australia's capacity to respond to any further external shocks.

To help achieve this, the Government committed to allow tax receipts to recover in line with the economy and to hold real growth in spending to 2 per cent a year while the economy is growing above trend until the budget returns to surplus.

In the 2010‑11 Budget the Government also committed to maintain a 2 per cent annual cap on real spending growth, on average, until surpluses are at least 1 per cent of GDP, once the budget returns to surplus and while the economy is growing at or above trend.

Returning the budget to surplus

The ongoing European financial crisis has emphasised the importance for governments of maintaining their fiscal credibility.

Australia's strong public finances contrast starkly with that of the major advanced economies, and the Government's disciplined approach to spending will help sustain confidence at a time of heightened instability in financial markets.

Returning the budget to surplus is consistent with Australia's economic outlook, even allowing for the softening of conditions since Budget.

Pressures on the fiscal position since the Budget

The underlying cash deficit in 2011‑12 is projected to be $37.1 billion, with the increase in the deficit since the Budget largely the result of:

  • a downward variation of $4.8 billion in tax receipts (including GST), predominantly the result of the softer economic outlook as the deterioration in global economic conditions has impacted on asset returns, investment and employment prospects, particularly in the non‑mining sector of the economy;
  • increased payments of $2.3 billion under the Natural Disaster Relief and Recovery Arrangements, including an additional advance payment to Queensland to ensure the necessary reconstruction and repair work can happen as soon as possible;
  • accelerated delivery of infrastructure projects under the Building Australia Fund and the Nation Building Programs, involving an additional payment of $1.4 billion; and
  • the decision to provide upfront support to households and businesses in the introduction of the Clean Energy Future package which has an impact of $2.9 billion in 2011‑12.

The change in the estimated deficit in 2011‑12 is largely the result of variations to tax receipts and government payments as distinct from changes to government policy. These variations account for around two thirds of the increase in the deficit since the Budget.

The impact of the shift in global economic conditions since Budget has had a further significant impact on the fiscal outlook for 2012‑13 onwards with a downward revision to tax receipts of over $20 billion across the forward estimates being the direct result of the softer economic outlook.

The Government has responded to the changing economic and revenue outlook by taking discretionary policy decisions that have generated net savings that grow steadily over the forward estimates to sustain the strength of Australia's public finances.

The relative impact of the revisions in tax receipts (and other variations in the budget) 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 with the contribution growing over the forward estimates.

Chart 3.1: Change to the underlying cash balance since the 2011‑12 Budget

Chart 3.1: Change to the underlying cash balance since the 2011‑12 Budget


The Government has taken savings decisions of $11.5 billion over the budget and forward estimates.

After paying for the cost of the Clean Energy Future package and all other policy decisions since the 2011‑12 Budget, the Government has achieved a net save of $6.8 billion in this MYEFO.

Table 3.2 outlines the net budget impact of policy decisions taken since the 2011‑12 Budget. It takes into account amounts that have been previously been provided for in the Contingency Reserve (and as a result have no net impact on the budget position) and which principally relate to Official Development Assistance.

This is the third consecutive MYEFO to deliver policy decisions that improve the fiscal outlook across the forward estimates, with many of the decisions in this MYEFO providing ongoing benefits to the budget position.

Table 3.2: Delivering fiscal reprioritisation(a)

Table 3.2: Delivering fiscal reprioritisation

  1. Underlying cash basis.
  2. Excluding the Clean Energy Future package.
  3. This CPI indexation which was published with the Clean Energy Future package is an estimates variation, and is therefore not counted in the total effect of policy decisions.

The estimated cost of the Clean Energy Future package has been revised since the publication of the financial implications of the Clean Energy Bill 2011 to reflect more up‑to‑date and accurate information. The package is estimated to have a net cost to the budget of $3.3 billion over the forward estimates, although the package is broadly budget neutral over the years 2012‑13 to 2014‑15. The cost of the Clean Energy Future package is made up of $2.5 billion as a direct result of all policy decisions, and $769 million associated with the automatic CPI indexation of household assistance payments, which have been reflected against individual agency estimates as parameter variations.

Tax receipts

The commitment to allow the natural increase in tax receipts associated with a growing economy to flow through to the budget is a significant part of the fiscal consolidation.

Downward revisions to the economic outlook since Budget have reduced tax receipts by over $20 billion over the forward estimates. Even with the introduction of a price on carbon and associated tax cuts, the projected tax‑to‑GDP ratio in 2012‑13 remains significantly below the cap specified in the Government's fiscal strategy, placing a greater weight on spending restraint to return the budget to surplus.

Real growth in payments

In 2011‑12, the Government is providing significant assistance to households and businesses in delivering the Clean Energy Future package and addressing the effects of the most expensive natural disasters in Australia's history. These decisions have contributed 1.5 percentage points to the increase in real growth in payments in 2011‑12. Lower payments in 2010‑11 at the Final Budget Outcome compared to estimated payments in the 2011‑12 Budget have contributed 1.0 percentage point to real growth in 2011‑12. In total, real growth in payments is estimated to be 3.7 per cent in 2011‑12. This follows from a contraction in real spending growth of ‑0.4 per cent in 2010‑11.

The unique circumstances affecting payments growth in 2011‑12 means that it is more appropriate to assess real payments growth over a longer period.

The savings reported in this MYEFO have contributed to containing average real growth in payments to 1.5 per cent across the forward estimates (see Table 3.3). In comparison, real payments growth averaged around 3.7 per cent in the decade prior to the global financial crisis.

Table 3.3: Real growth in payments

Table 3.3: Real growth in payments

The commitment to restrain real growth in spending to 2 per cent, on average, once the budget has returned to surplus and while the economy is growing at or above trend will continue to place a significant restraint on Government expenditure.

The constraint imposed on real growth in payments means that government spending, as a share of the economy, is projected to fall from 24.8 per cent of GDP in 2011‑12 to 23.6 per cent of GDP by 2014‑15. This is significantly below the average of the ten years preceding the financial crisis of 24.1 per cent of GDP, and highlights the key role disciplined spending is playing in the fiscal consolidation.

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