Source: http://www.budget.gov.au/2015-16/content/bp1/html/bp1_bs3-02.htm
Timestamp: 2016-05-31 21:50:14
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Budget 2015 - Budget Paper No. 1 - Statement 3: Fiscal strategy
The Government's fiscal strategy, consistent with the requirements of the Charter of Budget Honesty Act 1998, is outlined in Box 1. Box 1: The Government's fiscal strategy
The Government's medium‑term fiscal strategy is to achieve budget surpluses, on average, over the course of the economic cycle. Our strategy is underpinned by the following three policy elements:
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. Our strategy sets out that:
The fiscal strategy aims to guide the budget back to a sustainable surplus at a responsible pace, while redirecting spending towards investment to promote jobs, growth and opportunity. Budget surpluses over the course of the economic cycle
The Government remains strongly committed to returning the budget to surplus as soon as possible. This Budget maintains a steady and credible trajectory towards surplus. The underlying cash deficit is expected to improve in each and every year over the forward estimates, from $35.1 billion in 2015‑16 (2.1 per cent of GDP) to $6.9 billion in 2018‑19 (0.4 per cent of GDP).
Compared with the 2014‑15 MYEFO, the underlying cash balance has deteriorated by $3.9 billion in 2015‑16 and $12.5 billion in the four years to 2017‑18. However, the downgrade to total tax receipts is significantly larger than the size of this deterioration. Expected tax receipts have been written‑down by around $5.9 billion in 2015‑16 and $20.1 billion over the four years to 2017‑18 since the 2014‑15 MYEFO. Since the 2014‑15 Budget, this brings the total write‑down in tax receipts over the four years to 2017‑18 to $52 billion. The rapid fall in the iron ore price has been the largest single contributor to write‑downs to Government tax receipts over the past year, contributing around $20 billion of the total $52 billion. Weaker expected wage growth since the 2014‑15 MYEFO has also significantly downgraded expected tax receipts. This Budget does not seek to offset the deterioration in receipts by dramatically reducing Government spending or hiking taxes. Nevertheless, the average annual pace of consolidation until 2018‑19 is 0.5 per cent of GDP, broadly consistent with the average pace of consolidation in the 2014‑15 Budget. The Government has set itself a target of reaching a surplus of 1 per cent of GDP by 2023‑24, consistent with the medium‑term fiscal strategy of running surpluses on average over the course of the economic cycle.
The surpluses currently projected over the medium‑term do not yet meet this target, which means that although significant progress has already been made, there is more work required in the future to deliver on the task of budget repair.
The underlying cash balance is projected to return to surplus in 2019‑20, the same year as projected at the 2014‑15 MYEFO. Modest surpluses, of up to 0.7 per cent of GDP, are expected over the remainder of the medium‑term with a surplus of 0.4 per cent of GDP by the end of the projection period.
Chart 1 shows the projection of the underlying cash balance to 2025‑26.
Chart 1: Underlying cash balance projected to 2025-26
Note: A tax‑to‑GDP cap of 23.9 per cent is applied to these projections from 2020‑21, except for the 2013‑14 MYEFO where the tax cap applies from 2019‑20. 2013‑14 MYEFO projections were not originally published with a tax cap. Net Future Fund earnings are included in projections of the underlying cash balance from 2020‑21 when drawdowns from the Future Fund commence. The projections of the underlying cash balance originally published in the 2013‑14 MYEFO, the 2014‑15 Budget, and the 2014‑15 MYEFO did not include net Future Fund earnings.
2014-15 MYEFO 2014-15 Budget
Investing in a stronger economy by redirecting government spending
The Australian economy is adjusting to the end of the resource investment boom and is currently going through a period of below‑trend economic growth, which has affected fiscal settings. This Budget deliberately redirects spending towards areas that will build a stronger economy, recognising the importance of growth to fiscal sustainability.
The $5.5 billion Jobs and Small Business Package will make it easier for Australian small businesses to invest, hire and grow; and for Australia's unemployed, particularly young people, to move into long‑term employment. This Budget also includes a $4.5 billion Families Package. It recognises that workforce participation can be assisted if Australian families have simpler, more affordable, accessible and flexible child care arrangements. The Budget responds to emerging infrastructure opportunities as the economy transitions away from resources‑led growth. The Northern Australia Infrastructure Facility will help promote private sector participation in major infrastructure necessary for economic development in the north. The National Stronger Regions Fund is also being targeted toward areas of particular economic stress and community need. The trade and investment generated through Australia's recently completed free trade agreements with China, Japan and Korea will help to strengthen the overall economy. These agreements help shore up Australia's competitive position in these important markets and open up new opportunities for Australian exporters and investors. The budget position is also being strengthened with a package of measures that improve the fairness of the tax and benefits systems. Together these packages deliver on the Government's medium‑term fiscal strategy of redirecting spending to quality investment that will boost productivity and workforce participation. Maintaining strong fiscal discipline
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. The Government's fiscal strategy aims to have the payments‑to‑GDP ratio and Commonwealth Government Securities (CGS) on issue reducing over time.
The payments‑to‑GDP ratio falls from 25.9 per cent to 25.3 per cent over the forward estimates period. The ratio is projected to stabilise over the medium‑term and be 25.4 per cent of GDP in 2025‑26, highlighting the need to do more to bring spending down over the medium‑term.
Since the 2014‑15 MYEFO, the payments‑to‑GDP ratio has been affected by slower‑than‑anticipated nominal GDP growth over the forecast period. In the forward estimates the value of payments is forecast to be lower in each and every year compared with the 2014‑15 MYEFO. Real payments growth until 2017‑18 is expected to be 1.1 per cent per annum on average. Over the medium‑term (the period from 2019‑20 to 2025‑26) it is projected to be 3.1 per cent per annum. This indicates that further budget repair is necessary over the medium‑term. The face value of CGS on issue is projected to rise to $573 billion by 2025‑26, reflecting a modestly weaker underlying cash balance, and its associated higher public debt interest expense, accumulating over the medium‑term. In 2023‑24 the face value of CGS on issue is projected to reach $555 billion, some $112 billion less than the $667 billion projected at the 2013‑14 MYEFO. This improvement would be even greater compared with the 2013‑14 MYEFO, if the original scenario had assumed taxes were capped at 23.9 per cent of GDP (that is, assuming future tax relief). The projected face value of Commonwealth Government Securities on issue is shown in Chart 2. Chart
Chart 2: Face value of Commonwealth Government Securities on issue projected to 2025-26
Note: A tax‑to‑GDP cap of 23.9 per cent is applied to these projections from 2020‑21, except for the 2013‑14 MYEFO where the tax cap applies from 2019‑20. 2013‑14 MYEFO projections were not originally published with a tax cap.
Face value of Commonwealth Government Securities on issue projected to 2025-26
Further details on debt and the Government's balance sheet can be found in Statement 6: Debt Statement, Assets and Liabilities.
Strengthening the Government's balance sheet over time
A strong balance sheet provides the Government the flexibility to respond to unanticipated events during times of financial crises or economic shocks. Key aggregates of fiscal sustainability are set out in Table 2. Net financial worth is the primary indicator of fiscal sustainability articulated in the medium‑term fiscal strategy. It provides a broader measure of the Government's assets and liabilities as it includes both the full assets of the Future Fund and the superannuation liability that the Future Fund is intended to offset.
Table 2: Net worth, net financial worth, net debt and net interest payments
2018‑
19$b
‑261.4
‑280.4
‑285.3
‑282.8
‑350.1
‑383.5
‑406.0
‑415.2
‑417.8
‑22.6
Net debt is estimated to be $285.8 billion in 2015‑16 (17.3 per cent of GDP) and to peak as a share of GDP at $313.4 billion (18.0 per cent of GDP) in 2016‑17, slightly above the peak of $304.4 billion (17.2 per cent of GDP) expected at MYEFO. Net debt then declines as a share of GDP to 16.8 per cent by 2018‑19. In the medium‑term, there will be a substantial improvement in projected net debt with it falling to $201 billion (7.1 per cent of GDP) in 2025‑26 (Chart 3). Chart
chart3: Net debt projected to 2025­26
Net debt projected to 2025­26
Net worth is expected to be ‑$261.4 billion (‑15.8 per cent of GDP) in 2015‑16, $7.9 billion less than estimated at the 2014‑15 MYEFO. Net worth is expected to be ‑$282.8 billion (‑14.6 per cent of GDP) by the end of the forward estimates.
Net financial worth is estimated to be ‑$383.5 billion (‑23.2 per cent of GDP) in 2015‑16, $8.7 billion lower than estimated at the 2014‑15 MYEFO. This reflects higher CGS issuance and growing superannuation liabilities, partially offset by the higher value of investments held by the Government, including the Future Fund. Net financial worth improves significantly as a share of GDP over the medium term, rising to ‑$150 billion (‑5.3 per cent of GDP) by 2025‑26 (Chart 4).
Chart 4: Net financial worth projected to 2025‑26
Net financial worth projected to 2025‑26
2014-15 MYEFO 2014-15
Delivering on the budget repair strategy
The 2015 IGR shows that structural savings measures already implemented by the Government are projected to make a significant contribution towards achieving fiscal sustainability over the longer term. More than 80 per cent of all the 2014‑15 Budget measures have been implemented, enabling a $15.6 billion improvement in the budget bottom line in the five years to 2017‑18 and growing beyond then.
While significant progress has been made, the task of budget repair remains ongoing and more work needs to be done to achieve a sustainable fiscal trajectory. Offsetting our decisions
The Government remains committed to offsetting all new policy decisions. After taking into account the provisions the Government has previously made relating to the Paid Parental Leave Scheme, as well as the associated Levy and Company Tax cut, the overall impact of policy decisions on the bottom line at this Budget is an improvement to the budget position of $1.6 billion over the five years to 2018‑19 (Table 3). Table 3: Offsetting new decisions
Total effect of policy decisions since MYEFO
‑8,821
Add: Provisions made for the Paid Parental Leave Scheme, Levy and Company Tax cut
‑2,153
The 2014‑15 Budget included a number of savings measures that have been delayed by the actions of the Senate, causing a negative impact on the bottom line.
The Government has also taken decisions not to proceed with certain measures from the 2014‑15 Budget where the prospect of legislation passing seemed remote. The total impact of not proceeding with, and delays in passing, measures associated with the 2014‑15 Budget is $5.2 billion over the five years to 2018‑19 (Table 4). Table 4: Impact of non‑passage of 2014‑15 Budget savings measures
Significant decisions not to proceed with prior Budget proposals
Medicare Benefits Schedule ‑ changes to GP rebates — reversal
‑628
‑691
‑716
‑2,948
Reversal of Stronger Participation Incentives for Job Seekers under 30
‑461
‑507
‑2,025
Total impact of significant decisions not to proceed with prior Budget proposals
‑157
‑1,089
‑1,189
‑1,223
‑4,973
Impact of delays in passing legislation (a)
‑149
‑89
Total impact of not proceeding with, and delays in passing legislation for proposals
‑1,178
‑1,184
‑5,205
(a) Since 2014‑15 MYEFO
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 Budget, the net impact of parameter and other variations has reduced the underlying cash balance by $3.2 billion in the four years to 2017‑18. As economic recovery gathers momentum, improvements from favourable parameter variations will be allowed to flow through to the bottom line in future budgets.
A clear path back to surplus
The underlying cash balance is projected to return to surplus in 2019‑20, the same year as projected at the 2014‑15 MYEFO. Modest surpluses, of up to 0.7 per cent of GDP, are expected over the remainder of the medium term with a surplus of 0.4 per cent of GDP by the end of the projection period.
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.
The structural budget balance is estimated to improve from a deficit of around 1¼ per cent of GDP in 2015‑16 to modest surpluses from 2018‑19 through to the end of the projections period (Chart 5), largely unchanged from the 2014‑15 MYEFO. The structural budget balance estimates remove factors that have a temporary impact on revenues and expenditures, such as fluctuations in commodity prices and the extent to which economic output deviates from its potential level. Considered in conjunction with other measures, estimates of the structural budget balance can provide insight into the sustainability of current fiscal settings. Chart
Chart 5: Structural budget balance estimates
Structural budget balance Upper bound