Statement 3: Fiscal Strategy and Outlook
This Budget is the Government's first major step towards meeting our election commitment to repair the 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. To deliver on this medium‑term fiscal strategy over time, the Government will repair the Budget by ensuring new spending is more than offset by reduced spending, and positive variations in receipts and payments from favourable economic conditions are banked as improvements to the budget bottom‑line.
The deficits inherited from the former Government over the four years to 2016‑17 totalled $123 billion at the 2013‑14 MYEFO. In the Government's first four years to 2017‑18, deficits are estimated to total just $60 billion — an improvement of $43.8 billion over these four years compared with the 2013‑14 MYEFO. This improvement will be achieved by decisions that reduce wasteful spending, improve the sustainability of our social safety net, encourage greater personal responsibility and encourage the states to take greater responsibility for their hospitals and schools. Of the decisions taken in this Budget, 77 per cent of the improvement to the bottom line is the result of reductions to spending. The Government is redirecting spending from consumption to investments that will drive economic growth.
In the 2014‑15 Budget, the Government is budgeting for an underlying cash deficit of $29.8 billion (1.8 per cent of GDP) in 2014‑15, improving to a deficit of $2.8 billion (0.2 per cent of GDP) in 2017‑18. The pace of fiscal consolidation balances the need for structural fiscal repair with the shorter term impact on the economy.
The Budget also deals with the significant real growth in payments inherited from the former Government in 2017‑18, where payments were previously growing at 5.9 per cent above inflation between 2016‑17 and 2017‑18. As a result of the actions in the Budget, the Government has reduced this real growth in payments to 2.6 per cent. The improvement to the budget bottom line in 2017‑18 is $25.6 billion, $20.3 billion is the result of decisions to cut spending.
The structural savings we have put in place reduce the spiralling of payments growth and drive a significantly more sustainable budget position in the medium term. Based on the economy continuing to grow, the medium‑term projections indicate a return to surplus by the end of the decade.
At the 2013‑14 MYEFO, Commonwealth Government Securities on issue were projected to reach $667 billion in 2023‑24. This is projected to reduce to $326 billion in this Budget assuming no tax relief. With a tax‑to‑GDP cap of 23.9 per cent, Commonwealth Government Securities on issue in 2023‑24 would still reduce to $389 billion compared to $748 billion if a tax cut had been in place at MYEFO.
The 2014‑15 Budget reins in wasteful spending, improves the sustainability of our social safety net and encourages greater personal responsibility. The Government is asking all Australians to make a contribution to repair the budget and refocus government spending on those areas of the economy that will drive economic growth and safeguard our future prosperity. This Budget delivers medium‑term structural budget reform by ensuring government spending is on a manageable trajectory, providing a credible path to a projected surplus and ensuring Australia's medium‑term fiscal sustainability.
The deficits inherited from the former Government that were outlined in the 2013‑14 MYEFO for the four years to 2016‑17 totalled $123 billion. In our first four years to 2017‑18, deficits are estimated to total just $60 billion — an improvement of $43.8 billion over these four years compared with the 2013‑14 MYEFO. Savings decisions begin to have an impact from 2014‑15 where government spending is redirected from recurrent expenditure to productive investments in infrastructure. A significant contribution to this improvement in the bottom line is in 2017‑18 where a $25.6 billion improvement to the deficit includes hard decisions taken to deliver $20.3 billion of savings from payments. These decisions are needed to ensure the sustainability of the budget position in the medium term, reducing the average real growth in payments to 2.7 per cent from an unsustainable 3.7 per cent at the 2013‑14 MYEFO. Current medium‑term projections indicate a return to surplus by the end of the decade. There is however, much work still to be done to improve on that position.
Note: The starting point for 2017‑18 was a deficit of $28.4 billion.
The Government is budgeting for an underlying cash deficit of $29.8 billion (1.8 per cent of GDP) in 2014‑15, improving to a deficit of $2.8 billion (0.2 per cent of GDP) in 2017‑18 as shown in Table 1.
|Underlying cash balance ($b)(b)||-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|
|Fiscal balance ($b)||-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|
(a) Total is equal to the sum of amounts from 2013‑14 to 2017‑18.
(b) Excludes net Future Fund earnings.
The Government's actions will also strengthen the Commonwealth's balance sheet by stabilising and then reducing debt. This will recharge the fiscal buffers to ensure we are able to respond to future economic challenges. The face value of Commonwealth Government Securities on issue is expected to fall from $667 billion in 2023‑24 as outlined in the 2013‑14 MYEFO to $389 billion, even with the Budget projection (unlike the MYEFO projection) building in future tax relief through an assumed tax cap of 23.9 per cent of GDP.1
Net financial worth is estimated to be ‑$329.2 billion (‑20.2 per cent of GDP) in 2014‑15 and is expected to stabilise at around ‑$352.7 billion (‑18.7 per cent of GDP) in 2017‑18.
1 This is the average tax-to-GDP ratio of the years following the introduction of the GST and prior to the global financial crisis (from 2000‑01 to 2007‑08 inclusive).