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Mid-Year Economic and Fiscal Outlook 2015-16 - Part 3: Fiscal Strategy and Outlook, Overview
Overview The fiscal position is forecast to maintain an improving trajectory over the forward estimates period, consistent with the Government's commitment to returning the budget to a sustainable position and reducing debt over the medium term. This is despite changes in economic parameters detracting from the fiscal outlook since the 2015‑16 Budget.
The underlying cash deficit is expected to narrow from $37.4 billion (2.3 per cent of GDP) in 2015‑16 to $14.2 billion (0.7 per cent of GDP) in 2018‑19. Likewise, the fiscal balance is expected to improve from $35.8 billion (2.2 per cent of GDP) in 2015‑16 to $10.2 billion (0.5 per cent of GDP) in 2018‑19 (see Table 3.1).
Estimates 2015‑16 2016‑17 Budget
Underlying cash balance($b)(a) -35.1
Per cent of GDP -2.1
Fiscal balance($b) -33.0
Per cent of GDP -2.0
Projections 2017‑18 2018-19 Budget
Underlying cash balance($b)(a) -14.4
Per cent of GDP -0.8
Fiscal balance($b) -9.2
Per cent of GDP -0.5
The Government remains committed to repairing the budget by controlling expenditure. Government payments as a share of GDP are forecast to decline from 25.9 per cent in 2015‑16 to 25.3 per cent in 2018‑19.
Consistent with the Government's fiscal strategy, spending decisions taken since the 2015‑16 Budget, including those arising from Senate negotiations, have been more than offset by reductions in spending elsewhere in the budget. After taking into account the provision the Government has previously made for the China‑Australia Free Trade Agreement, policy decisions taken since the 2015‑16 Budget have been more than offset over the forward estimates (see Table 3.6). Economic parameter and other variations since the 2015‑16 Budget have contributed to a $33.8 billion downward revision to total receipts over the four years to 2018‑19. Declines in commodity prices have resulted in lower forecast company tax receipts, while weaker wages growth is weighing on income tax receipts. In addition, weaker equity markets have resulted in downward revisions to capital gains tax receipts.
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 by controlling expenditure 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;
stabilising and then reducing net debt 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 as soon as possible 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.
Medium‑term fiscal strategy
The underlying cash balance is expected to improve over the forward estimates. This is notwithstanding a deterioration since the 2015‑16 Budget that is largely attributable to considerably weaker tax receipts. Weaker commodity prices, low wages growth and equity markets have all contributed to the write‑down. Revised assumptions around the working‑age population have also impacted the underlying cash balance
(see Box A). The underlying cash balance is projected to return to surplus in 2020‑21, one year later than projected at the 2015‑16 Budget (see Chart 3.1). Modest surpluses, of up to 0.4 per cent of GDP, are projected over the remainder of the medium term, down from the 2015‑16 Budget. A surplus of 0.2 per cent of GDP is projected by the end of the projection period, down from 0.4 per cent at Budget. Along with lower‑than‑expected tax receipts, an increase in the Government's borrowing costs as a result of higher yields has contributed to the weaker medium‑term fiscal outlook (see Attachment E: Debt Statement). The write‑down in tax receipts has also meant the tax‑to‑GDP cap of 23.9 per cent is projected to be reached one year later than Budget, in 2021‑22. These impacts are partially offset by the effects of lower population growth on projections of some Government expenditure programs.
Chart 3.1: Underlying cash balance projected to 2025‑26
Note: A tax‑to‑GDP cap of 23.9 per cent is applied to these projections. The tax cap applies from 2021‑22 at the 2015‑16 MYEFO and from 2020‑21 at the 2015‑16 Budget. Net Future Fund earnings are included in projections of the underlying cash balance from 2020‑21 when drawdowns from the Future Fund commence.
Underlying cash balance projected to 2025‑26
2015-16 MYEFO
Box A: Impact of revised assumptions on the underlying cash balance
As outlined in Box A in Part 2, the Australian Bureau of Statistics has revised down estimates of the working‑age population in recent years as a result of lower net overseas migration (NOM) outcomes than initially estimated.
Taking account of these historical revisions and lower NOM projections by the Department of Immigration and Border Protection, the working‑age population is now projected to grow at around 1½ per cent over the next three years, significantly lower than the 1¾ per cent factored into the 2015‑16 Budget. By June 2019, this will result in a working age population around 150,000 less than that projected at the 2015‑16 Budget.
Along with lower estimates of trend average hours worked, the downward revision to the working‑age population has led Treasury to reduce its estimates of the economy's potential output over coming years. Lower estimates of trend average hours worked and the downward revision to the working‑age population results in lower expected nominal GDP and therefore tax receipts. Around $13 billion of the reduction in tax receipts (including GST) over the forward estimates reported in this MYEFO is a result of these changes in assumptions. A smaller population also affects total payments. It results in lower expenditure on Medicare, and a smaller labour force reduces the number of unemployment benefit recipients. There is also a small impact on other payments, as in most cases population growth is only a minor driver and in other cases the revision to the relevant population cohort is relatively small (for instance, the cohort eligible for the Age Pension). In aggregate, the revision to projected population lowers expected payments by around $4 billion (including GST payments to the States) over the four years to 2018‑19. In aggregate, the net impact of the revised assumptions on the underlying cash balance is in the order of $9 billion over the four years to 2018‑19. The change to the assumptions contributes around two thirds of the total reduction in projected tax receipts to 2021‑22 compared with the 2015‑16 Budget. Investing in a stronger economy
Continued investment in Australia's productive capacity is important for building a stronger, dynamic and competitive economy that rewards effort, incentivises innovation and sets Australia up to capitalise on the abundant opportunities in the fast‑growing Asian region. The Government is investing in a stronger economy by redirecting spending to quality investment to boost productivity and workforce participation. This includes the Government's National Innovation and Science Agenda (see Box B). The Government is supporting record levels of infrastructure investment through its $50 billion infrastructure package announced in the 2014‑15 Budget, increasing the economy's productive capacity, generating jobs and expanding business and labour market opportunities. As part of this, the Government is partnering with the States and Territories to release capital to fund productive infrastructure through the Asset Recycling Initiative.
The economic strength of Asia and ever‑growing integration of the global economy present exciting opportunities for Australian businesses. These future growth opportunities are boosted by our recent historic Free Trade Agreements with Japan, Korea and China, all creating new markets for Australian businesses. The trade and investment generated through the China‑Australia Free Trade Agreement will help drive growth, increase productive capacity and create jobs. The China‑Australia Free Trade Agreement will help attract investment to Australia, make key industries more competitive and increase opportunities for Australian businesses.
Delivering a better tax system will help grow the economy and create jobs, while ensuring that the burden of taxation is fair. The Government has initiated an open and constructive conversation with the community on how we can achieve this. The response to the Financial System Inquiry will further strengthen Australia's already robust financial system and ensure that it continues to meet the needs of Australians and support sustainable growth in the economy. The Government's financial system program will be implemented in stages over the coming years, ensuring Australia's financial system is equipped to respond to future challenges and embrace technology‑driven innovation. The Government is also strengthening Australia's competition frameworks to support a more dynamic, agile and innovative economy. This includes working with the State and Territory governments to unlock the benefits of choice and diversity in areas such as health and aged care. Box B: National Innovation and Science Agenda
The Government announced its $1.1 billion National Innovation and Science Agenda on 7 December 2015. Building on existing policy settings, the Agenda plays a key role in supporting innovation by setting out an ambitious vision and putting in place a strategy and the architecture to deliver it. The measures in the Agenda demonstrate the Government's focus on enabling an environment that incentivises and rewards innovation, science and taking risks to succeed. The Agenda builds on the Government's responses to the Harper Competition Policy Review and the Murray Financial System Inquiry and is the next step in building a more innovative and agile economy. This is a dynamic process and the Government will seek to model and encourage innovation in everything it does, including focusing on innovation and productivity in its forthcoming reform processes such as the Defence White Paper and the Tax White Paper.
To encourage innovation and risk taking and build an entrepreneurial culture in Australia, as part of the National Innovation and Science Agenda the Government is:
increasing access to equity capital for innovative new businesses by providing attractive tax incentives to Australian angel investors and venture capital funds;
removing features of our tax system that can impose extra costs on innovative businesses, including allowing greater access to tax losses and improving the tax treatment of intangible assets, such as patents, which are increasingly important in our knowledge‑based economy; and
improving our insolvency laws to facilitate the restructure of financially stressed companies and reducing the stigma of business failure. The Agenda also includes measures to help increase the level of collaboration between industry and research to drive world‑first innovation, such as a new $200 million CSIRO Innovation Fund to co‑invest in new spin‑off companies and existing start‑ups that will develop technology from CSIRO and other publicly funded research agencies and universities. In addition, the Government is continuing efforts to develop and attract the best talent to create a 21st Century workforce. This includes $84 million to ensure Australians have the digital and STEM skills needed for the future, and making it easier for Australian business to attract and retain the global skills and talents they need by making visas for entrepreneurs and high quality talent more readily available. The Government will also improve its own data analytic capability and skills by providing $75 million of extra funding for Data61. A new independent statutory board, Innovation and Science Australia, will be responsible for researching, planning and advising government on the long term strategic vision for innovation and science. One of its first responsibilities will be to review the current R&D Tax Incentive to improve its effectiveness and integrity, including by sharpening its focus on encouraging additional R&D spending, drawing on the detailed departmental review currently underway. Fiscal discipline
The Government remains committed to fiscal discipline by controlling expenditure. Strong fiscal discipline will 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. Payments‑to‑GDP
Government payments as a share of GDP are forecast to decline from 25.9 per cent in 2015‑16 to 25.3 per cent in 2018‑19. This decline is consistent with that reported in the 2015‑16 Budget despite total nominal payments being lower across the forward estimates and a fall in expected nominal GDP. The current payments‑to‑GDP ratio includes the contributions of State and Territory governments towards the National Disability Insurance Scheme. As shown in Chart 3.2, if State and Territory contributions to the NDIS were excluded the Commonwealth's payments‑to‑GDP ratio would decline to 25.0 per cent of GDP by 2018‑19.
Chart 3.2: Payments to GDP, 2015‑16 to 2018‑19 Source: Treasury.
Payments to GDP, 2015‑16 to 2018‑19
Payments including state contributions to the NDIS (% of GDP) Payments excluding state contributions to the NDIS (% of GDP) 2015-16
Based on the 2014‑15 Budget outcome, real growth in payments over the forward estimates has fallen since the 2015‑16 Budget from 2.0 per cent to 1.8 per cent per annum, due to a lower spending profile. This rate is currently projected to increase to 3.0 per cent on average over the medium‑term (2019‑20 to 2025‑26), indicating that further restraint in expenditure is necessary if payments growth is to remain in line with the lower rates of the forward estimates period.
The Government is focused on stabilising and then reducing net debt over time. Paying down debt is important as it enhances flexibility to respond to unanticipated events and reduces the Government's interest payments, freeing up resources for use in priority areas. Gross debt measures the face value of Commonwealth Government Securities (CGS) on issue at a point in time. As net debt incorporates both selected financial assets and liabilities mostly at their fair value, it provides a broader measure of the financial position of the Commonwealth than gross debt.
Net debt is estimated to peak at 18.5 per cent of GDP in 2017‑18, before declining to 18.2 per cent of GDP by the end of the forward estimates. Net debt is projected to continue to decline over the medium‑term, reaching 9.6 per cent of GDP by 2025‑26. The trajectory for net debt involves a higher peak and a smaller improvement than that projected at Budget (Chart 3.3). This reflects an increase in projected CGS on issue, although this impact is partially offset by higher yields which lower the market value of CGS on issue.
Chart 3.3: Net debt projected to 2025‑26 Note: A tax‑to‑GDP cap of 23.9 per cent is applied to MYEFO projections from 2021‑22. This tax cap is applied to 2015‑16 Budget projections from 2020‑21.
Net debt projected to 2025‑26
2015-16 Budget 2015-16 MYEFO 2014-15
Note: A tax‑to‑GDP cap of 23.9 per cent is applied to MYEFO projections from 2021‑22. This tax cap is applied to 2015‑16 Budget projections from 2020‑21.
Net interest payments are projected to increase over the medium term, reaching $19.5 billion in 2025‑26 (0.7 per cent of GDP) (Chart 3.4). This is $3.8 billion higher than projected at the 2015‑16 Budget, reflecting the increase in projections of CGS on issue and higher yields.
Chart 3.4: Net interest payments projected to 2025‑26 Note: A tax‑to‑GDP cap of 23.9 per cent is applied to MYEFO projections from 2021‑22. The tax cap applies to 2015‑16 Budget projections from 2020‑21.
Net interest payments projected to 2025‑26
2015-16 Budget ($b) 2015-16 MYEFO ($b) 2014-15
Note: A tax‑to‑GDP cap of 23.9 per cent is applied to MYEFO projections from 2021‑22. The tax cap applies to 2015‑16 Budget projections from 2020‑21.
The face value of CGS on issue (gross debt) is estimated to rise from $429 billion in 2015‑16 to $552 billion by the end of the forward estimates period. Gross debt is projected to continue to rise over the medium term, reaching $647 billion by 2025‑26, up from $573 billion at the 2015‑16 Budget. The increase in projected CGS on issue since the 2015‑16 Budget is a result of the weaker underlying cash balance and the associated higher public debt interest expense, accumulating over the medium term.
Balance sheet aggregates Table 3.2 provides a summary of Australian Government general government sector net worth, net financial worth, net debt and net interest payments over the forward estimates. Table 3.2: Australian Government general government sector net worth, net financial worth, net debt and net interest payments
Financial assets 332.6
Non-financial assets 122.1
Total assets 454.7
Total liabilities 716.1
Net worth -261.4
Net financial worth(a) -383.5
Per cent of GDP -23.2
Net debt(b) 285.8
Per cent of GDP 17.3
Net interest payments 11.6
Per cent of GDP 0.7
Financial assets 398.2
Non-financial assets 129.9
Total assets 528.1
Total liabilities 813.4
Net worth -285.3
Net financial worth(a) -415.2
Per cent of GDP -22.6
Net debt(b) 323.7
Per cent of GDP 17.6
Net interest payments 12.3
Net debt is expected to be $278.8 billion (16.9 per cent of GDP) in 2015‑16, a slight improvement on the estimate at Budget due to valuation effects associated with an increase in yields. Net debt peaks in 2017‑18 at 18.5 per cent of GDP, before falling to 18.2 per cent of GDP in 2018‑19. Net financial worth is estimated to be ‑$377.5 billion (‑22.9 per cent of GDP) in 2015‑16 and is expected to be ‑$438.2 billion (‑23.0 per cent of GDP) by the end of the forward estimates in 2018‑19. Compared with Budget, net financial worth has improved in 2015‑16 (from ‑$383.5 billion or ‑23.2 per cent of GDP) but has deteriorated in the other years of the forward estimates. The deterioration in net financial worth over the forward estimates reflects increased issuance of Government securities. In part, this has been offset by the higher value of certain financial investments held by the Government, including at the Future Fund.
The budget repair strategy
The fiscal strategy explicitly recognises that the current fiscal position is in need of repair. As such, the impact of all policy decisions taken since the 2015‑16 Budget (including the cost of Senate negotiations) has been offset, after taking into account the provision the Government has previously made relating to the China‑Australia Free Trade Agreement. The net budget impact of new policy decisions over the forward estimates are detailed in Table 3.6. The budget repair strategy commits the Government to bank any positive overall shift in receipts and payments due to changes in the economy. In this update, the net impact of parameter and other variations has reduced the underlying cash balance.
The net impact of the economy on the budget has been negative at each government update since the 2010‑11 MYEFO. As the economy improves, net improvements from favourable parameter variations will be allowed to flow through to the bottom line.
Structural budget balance Restoring the structural integrity of the budget is crucial for achieving surpluses on average over the economic cycle and paying down government debt, consistent with the medium‑term fiscal strategy. Considered in conjunction with other measures, estimates of the structural budget balance can provide insight into the sustainability of current fiscal settings. The structural budget balance removes factors that have a temporary effect on revenues and expenditures, such as fluctuations in commodity prices and the extent of spare capacity in the economy. Treasury estimates of spare capacity (the output gap) have narrowed since Budget, in line with slower potential economic growth. This has led to downward revisions to cyclical revenues and expenditures. In net terms the estimates of the structural budget balance have, on average, deteriorated by around ½ per cent of annual GDP in each year over the next decade. Despite the downward revisions since Budget, the overall level of the structural budget balance improves from a deficit of around 1¾ per cent of GDP in 2015‑16, to a series of small surpluses from 2021‑22 onwards, converging to the underlying cash balance (see Chart 3.5). Chart
Chart 3.5: Structural budget balance estimates
Note:The methodology for producing structural budget balance estimates was detailed in Treasury Working Paper 2013‑01 and incorporates the medium‑term projection methodology detailed in Treasury Working Paper 2014‑02.
Structural budget balance estimates
Underlying cash balance Structural budget balance Upper bound Lower bound 2004-05
-0.8 Note:The methodology for producing structural budget balance estimates was detailed in Treasury Working Paper 2013‑01 and incorporates the medium‑term projection methodology detailed in Treasury Working Paper 2014‑02.