Key features


Budget Review 2011-12 Index

Budget 2011–12: Key features[1]

Scott Kompo–Harms

Introduction

On 10 May 2011 at 7.30pm, Treasurer Wayne Swan handed down his fourth Budget, the first of the Gillard Government. The major theme of the 2011–12 Budget was a recommitment to the Government’s previously elucidated fiscal strategy (see ‘Fiscal outlook’ section below), which emerged in two distinct phases in the early days of the Rudd Government. The other main theme was the opportunities and challenges that arise from structural adjustment.

All of the policy initiatives seem to be quite modest, in large part because of the Government’s recommitment to their fiscal strategy, particularly when compared to the fanfare of some of the previous budgets. The most noteworthy were:

  • removal or modification of a number of tax expenditures
  • new participation requirements for the long–term unemployed and teenage parents as well as tougher eligibility conditions for the disability support pension
  • a focus on skills development and workforce planning
  • reform of mental health services, and
  • prioritisation of regional areas in terms of spending on health and hospitals.

Reactions from business associations and community groups

Australian Chamber of Commerce and Industry

The Australian Chamber of Commerce and Industry (ACCI) expressed support for the intent of the Budget, but qualified that support by expressing a degree of scepticism about the ability of the Government to successfully implement those intentions. Support was given to measures designed to increase workforce participation, skills development and skilled migration. ACCI expressed concern about the lack of initiatives to assist small businesses. In particular, ACCI Chief Executive Peter Anderson stated:

The Budget gets the short term thumbs up but whether it works in the mid to longer term on either the productivity side or the return to surplus depends heavily on good fortune and hope. The good fortune is that commodity prices and North Asia support big revenue flows. The hope is that the Reserve Bank [of Australia] decides the spending cuts to be enough to hold back on rate rises.[2]

Australian Council of Social Service

Dr Cassandra Goldie, chief executive officer of the Australian Council of Social Service (ACOSS), welcomed the initiatives to reduce the barriers to working for unemployed people, such as wage subsidies and easing of income tests, but was concerned at the impact of changes to benefit eligibility criteria and reductions in payments for sole parents with teenage children and young people on unemployment benefits. Mental health reforms won strong support from ACOSS, as did the changes to the private health insurance rebate, fringe benefits tax arrangements for company cars, the dependent spouse tax offset and the low income tax offset for investment income of children.[3]

Australian Council of Trade Unions

Overall, the Australian Council of Trade Unions (ACTU) was broadly supportive of the Budget. The ACTU supported new measures for workforce development, increasing workforce participation amongst disadvantaged groups, cuts to tax expenditures for higher income earners and mental health reforms. The President of the ACTU, Ged Kearney, cautiously welcomed a measure to provide mentoring for apprentices, while expressing concern about the increased public service efficiency dividend and increase in skilled migration intakes—particularly Enterprise Migration Arrangements (EMAs).[4]

Australian Industry Group

Australian Industry Group (AiG) Chief Executive Heather Ridout claims credit for suggesting the ‘Workforce Development’ agency concept in their pre–Budget submission, which the Government has pledged to establish as the National Workforce and Productivity Agency, as well as extra spending on Vocational Education and Training (VET) and apprentices. In addition, Ms Ridout also welcomed the commitment to infrastructure spending, improved resourcing and additional responsibilities for Infrastructure Australia and an increase in the skilled migration intake. AiG argued that more could have been done to assist exporting and import–competing sectors such as manufacturing, tourism and education that are struggling to compete with foreign producers as a result of a high Australian dollar.[5]

Australian Medical Association

The Australian Medical Association (AMA) President, Dr Andrew Pesce, stated that people will be asked to pay more for mental health care, advice and referrals from general practitioners (GPs), and that GPs’ role in managing mental health issues in the community will be devalued as a result of the Budget. Dr Pesce expressed concern about the diversion of funding from direct patient care to NGOs and ‘a new level of bureaucracy’ in the form of Medicare Locals. He stated:

We need to improve funding for mental health but this Budget decision gives with one hand and takes away with the other.[6]

Business Council of Australia

The Chief Executive of the Business Council of Australia (BCA), Jennifer Westacott, praised the Government for their continuing commitment to a budget surplus in 2012–13, as well as a focus on skills and skilled migration, the renewal of funding and enhanced transparency for Infrastructure Australia (including a commitment to publish cost–benefit analyses and a National Infrastructure Construction Schedule). Ms Westacott did warn of increasing economic headwinds in the future and that this required ‘bold policy leadership’. She also expressed a desire to see greater transparency in the budget papers on the sensitivity of estimates to movements in commodity prices and improved budgetary governance more generally.[7]

Mental Health Council of Australia

The Chief Executive Officer of the Mental Health Council of Australia (MCHA), Frank Quinlan, applauded the injection of new funds into services to provide mental health care and the establishment of a new Mental Health Commission. Mr Quinlan stated that the Federal government has laid down foundations for mental health reform and called on state and territory governments to work with the Commonwealth and build on the initiatives announced in this Budget. Mr Quinlan remarked:

Today is a very good day for the mental health sector – increased investment, reform and better governance and accountability in mental health.[8]

National Seniors Australia

Michael O’Neill, the Chief Executive of National Seniors Australia (NSA), said that seniors would generally emerge unscathed from the 2011–12 Budget. He welcomed support from the Government for older job seekers in the form of wage subsidies, new training opportunities and a doubling of allowable work hours for recipients of the Disability Support Pension (DSP), of whom a majority are aged over 50. Whilst welcoming these initiatives, he remarked:

More than anything, real jobs for older Australians will require an attitudinal change from employers, and that can’t be legislated.[9]

Economic Outlook

The economic outlook for Australia (and therefore the fiscal outlook) is predicated largely on little change in the international outlook. The section below on the international setting for the Budget outlines some significant uncertainties as to why the largely benign scenario presented by the Government might not unfold as expected.

The international setting for the Budget

The international outlook is precarious. While International Monetary Fund (IMF) and Treasury baseline projections are similar to one another and appear reasonable in the period ahead, there are considerable uncertainties that plague the outlook. These are shown in Table 1 below.

Both Treasury and the IMF accept that these significant uncertainties surrounding their GDP growth forecasts exist. Nevertheless, it is worth spelling out here exactly what lies at the heart of these uncertainties so as to emphasise just how finely balanced the world economy is at present. Readers might find that what is said below seems very pessimistic, and it is. The potential problems foreseen here may never materialise (and hopefully the worst–case scenarios will not) but it would be imprudent to ignore the possibilities altogether.

Table 1: International GDP growth forecasts—Treasury vs IMF (per cent)

   

Forecasts (a)

   

2011

2012

United States

Treasury

3

3

 

IMF

2.8

2.9

Euro area

Treasury

1 1/2

1 1/2

 

IMF

1.6

1.8

Japan

Treasury

1/4

2 1/2

 

IMF

1.4

2.1

China

Treasury(b)

9 1/2

9

 

IMF

9.6

9.5

India

Treasury(b)

8 3/4

8 1/4

 

IMF

8.2

7.8

Other East Asia(c)

Treasury

5

5

 

IMF

5.1

5.1

World

Treasury

4 1/4

4 1/2

 

IMF

4.4

4.5

(a) World, Euro area, and other East Asia growth rates are calculated using GDP weights based on purchasing power parity (PPP).
(b) Production–based measure of GDP.
(c) Other East Asia comprises the newly industrialised economies (NIEs) of Hong Kong, South Korea, Singapore and Taiwan and the Association of Southeast Asian Nations group of five (ASEAN–5), which comprises Indonesia, Malaysia, the Philippines, Thailand and Vietnam. IMF projections for this region are not directly available from the IMF. These have been calculated by the Parliamentary Library on the same basis as Treasury. Treasury projections are rounded to nearest quarter of a percentage point.

Sources: ‘Statement 2: Economic Outlook’, Budget paper no. 1: 2011–12, Table 2; IMF, World Economic Outlook database, April 2011.[10]

The most significant uncertainties are:

  • the weak US economy still struggling with the after effects of the global financial crisis (GFC) accompanied by political uncertainty over the sustainability over public finances and whether the US federal debt limit will be raised and/or much-needed spending cuts are imposed
  • an overheating Chinese economy and the response thereto, and
  • continued concern over the sustainability of high sovereign debt levels in the Euro area, particularly peripheral European countries and whether a restructuring of public debt could lead to financial contagion across Europe and elsewhere.

In short, there remain significant international imbalances in the post–GFC environment and they have a common thread—the use of ‘fixed’ or ‘managed’ exchange rates, as is explained below. The chances that all of these imbalances can be resolved in an orderly manner are diminishing. A significant deterioration in the international economic environment has become more likely in recent months due to the increased likelihood of policy errors by economic policymakers around the world. The simple fact is that any disorderly unwinding as a result of international policy mistakes would have immense implications for the Australian budgetary position and so these uncertainties deserve a considerable discussion as to their nature and background. In addition, those advocating somehow managing the Australian dollar exchange rate in comparison to other currencies should consider the problems fixed/managed exchange rates are causing for other countries right now (and had caused in Australia prior to the float of our dollar). The difficulties arise because managed exchange rates limit the ability of a nation to run an independent monetary policy.

US and Chinese monetary and exchange rate policies

The Chinese Government has been pursuing a policy of preventing significant appreciation of the Chinese currency (the renminbi) relative to the US dollar in particular to encourage Chinese export-led economic growth for a number of years. By doing this, the Chinese Government has linked its monetary policy settings with those of the US, which at this point are highly expansionary. Hence the concern about the Chinese economy overheating and exporting inflation to the world, both directly through higher prices for Chinese-made goods and indirectly via commodity and asset price bubbles. Below is a simplified discussion of how the monetary policies of the two countries are linked through the exchange rate.[11] To keep things simple, the discussion is limited to the bilateral dimensions between China and the US.

The Chinese Government tries to keep its exchange rate lower than it would otherwise be in order to encourage US citizens, firms and their government to import Chinese goods, as it makes their (US dollar) prices lower than they otherwise would be.[12]

Feature box: Chinese exchange rate policy

The exchange rate is kept ‘artificially low’ by the Chinese central bank, the People’s Bank of China or PBoC, purchasing US dollar–denominated debt instruments (US Treasury bills—or US government bonds) with newly created renminbi. Thus, the PBoC accumulates US dollar reserve assets. The newly created renminbi then finds its way back into the Chinese economy through increased foreign direct investment (as well as through other ‘speculative inflows’, to the extent that they can get around strict Chinese rules on foreign capital inflows). In addition, Chinese exporters are paid in US dollars, which the exporters then convert into renminbi, further increasing the Chinese money supply. In short, an artificially low exchange rate (in the absence of further intervention) results in an increase in the domestic Chinese money supply. If this were allowed to go on unchecked, the prices of goods, services and domestic assets would start rising rapidly in China and the ability for the Chinese government to continue a policy of holding down their exchange rate would soon come to an end.

In order to counter the inflationary pressures that result from such a policy, the Chinese central bank sells government bonds in order to ‘soak up’ the excess renminbi. This process is known as ‘sterilised intervention’ in the foreign exchange market. While sterilised intervention allows a government to forestall the emergence of domestic asset price bubbles and inflation, there are limitations to the process. At some stage, there will come a point where Chinese interest rates will have to rise in order to make the bonds necessary for sterilisation attractive to domestic savers. This has already been occurring for some time and implies an increasing cost to the government in terms of interest payments which will be offset, to some extent, by the interest paid on the US Treasury bills—US interest rates are now very low and so are only likely to partially offset Chinese interest costs, if at all. Sterilisation is now most likely a loss-making activity for the Chinese central bank. In addition, rising Chinese interest rates, relative to US interest rates, only strengthen the incentives for foreigners to send their funds to China in search of higher returns.

To stop the Chinese economy from overheating and avoid central bank losses while still limiting appreciation of the renminbi against the US dollar, the Chinese government is having to become more reliant on other measures, such as increasing the amount of deposits Chinese banks are required to hold with the PBoC (otherwise known as the ‘reserve requirement ratio’) and issuing directives as to what sectors banks can lend to and how much. All of this adds up to an increasingly unstable financial system and economy overall, as investment is determined more and more by political, rather than economic imperatives. An appreciation of the renminbi against the US dollar would help the situation, but would need to be very large to make a difference. This, in turn, would most likely lead to significant falls in the profitability of Chinese exporters and significant losses for Chinese banks. A breakdown of this symbiotic relationship between the Chinese and US economies would have significant implications for Australian nominal GDP growth and therefore the Budget.

In addition, the US is engaged in unconventional monetary policies—particularly quantitative easing, which increase the US money supply. In this process, US government bonds are taken onto the Federal Reserve (i.e. the US central bank) balance sheet and exchanged for newly created US dollars which the government can then spend. The existing US dollar reserves accumulated by the PBoC (and others as well) are devalued, strengthening the incentive for the Chinese government to consider diversifying their foreign exchange reserves away from US dollars. This is creating bubbles in other asset and commodity markets around the world. As long as this process continues, the chances of a policy–induced ‘hard landing’ in China increase.

The Euro area sovereign debt crisis

Using a common currency is an extreme form of a fixed exchange rate between countries and so, like China and the US, European Union (EU) countries that use the Euro (known as the Euro area) are all locked into the same monetary policy settings even though these settings are not appropriate for all countries within the common currency area. A feature of a fixed exchange rate within a common currency area is that no country in Europe can devalue their currency or allow it to depreciate relative to others inside the Euro area. This is causing problems, particularly for ‘peripheral’ countries such as Greece, Ireland, Portugal and Spain. These countries all experienced large drops in output during the GFC and saw their net debt positions blow out, due to discretionary fiscal stimulus efforts, and more importantly, to collapses in revenue and significant capital injections into their banking systems to stop them from collapsing. These peripheral countries arguably require a devaluation, which would lower the foreign currency prices of their exports and help to restore their competitiveness with ‘core’ economies in Europe and beyond, but, as outlined above this is not an option.

In order to avoid defaulting on, or otherwise ‘restructuring’ their existing public debt—which has created a crippling interest burden as foreigners refuse to buy their government bonds at just about any price—the peripheral countries are instead in the midst of enacting deep spending cuts (‘austerity’ measures) as a way to restore their competitiveness. [13] The EU and IMF have announced bailout packages for these peripheral countries to buy them time in restructuring their public finances. Whether the packages are large enough, credible and will continue to receive enough political support within the stronger countries in the Euro area remains to be seen.[14] It also remains to be seen whether the spending cuts (including deep cuts to public sector wages) are politically palatable in the peripheral countries.

If the bailout measures prove to be insufficient and spending cuts in the peripheral economies prove too difficult to sustain politically for a number of years, then some sort of debt default or restructuring by the peripheral countries would be inevitable and this in turn could have dramatic effects on the banking system across Europe. An extreme scenario (which cannot be ruled out) is that one or more of the peripheral countries (either voluntarily or involuntarily) leave the Euro area and reintroduce their own currency. This would likely create havoc within the entire European Union and could lead to another global financial crisis. As with the US–China situation, there are no easy answers to the problems plaguing the EU.

Domestic forecasts

GDP

There is a small difference between the Reserve Bank of Australia’s (RBA’s) forecasts versus those of the Government. The RBA is expecting slightly stronger real gross domestic product (GDP) growth outcomes in 2010–11 and 2011–12 than the Government. This can at least partially be attributed to the slightly different assumptions made about the Malaysian Tapis oil price.

Table 2: Real GDP growth forecasts—RBA vs Budget

 

2010/11

2011/12

2012/13

RBA forecasts

2 1/2

4 1/2

3 3/4

Government forecasts

2 1/4

4

3 3/4

N.B. Both RBA and Government forecasts based on A$/US$ exchange rate of $1.07 and a Trade–weighted Index of 78. RBA forecasts assume Malaysian Tapis oil price of $126 per barrel; Government assumes $132 per barrel.

Sources: ‘Statement 2: Economic Outlook’, Budget Paper No. 1: 2011–12, Table 1; RBA, Statement on Monetary Policy, Table 6.1, May 2011.[15]

In terms of the composition of real GDP growth, the Government is forecasting that business investment and commodity exports will be the predominant drivers of economic growth over the forward estimates period, while public final demand will decline as a contributor to growth as previous fiscal stimulus wanes. Household consumption and dwelling investment are expected to grow at the same pace or below household disposable income. Private business investment, particularly in the mining sector is forecast to increase substantially over the forward estimates. Also, imports are forecast to grow strongly, as the mining sector in particular imports more capital goods and the high Australian dollar makes imports generally more attractive. Commodity export growth is expected to be strong, although the overall outlook for exports is moderated by other sectors of the economy that are hampered by the high dollar. The forecasts for the various components of demand and output are shown in Table 3.

The increased mining investment in Australia (and presumably elsewhere in the world) which is occurring as a supply response to high commodity prices, will at some stage begin to generate extra mining output and exert at least some downward pressure on non-rural commodity prices.

Table 3: Domestic economy forecasts—demand and output

 

Outcomes(a)

 

Forecasts

 

2009–10

2010–11

2011–12

2012–13

Household consumption

2.1

3

3 1/2

3 1/2

Private investment

 

Dwellings

2.1

2 1/2

1 1/2

3

Total business investment(b)

–4.9

4 1/2

16

14 1/2

Non–dwelling construction(b)

–8.2

8

18 1/2

17 1/2

Machinery and equipment(b)

–4.8

2

17 1/2

14

Private final demand(b)

0.7

3

6

6

Public final demand(b)

7.0

3 1/2

1 1/4

–1 1/4

Total final demand

2.1

3

4 3/4

4 1/2

Change in inventories(c)

0.3

0

0

0

Gross national expenditure

2.4

3 1/4

4 3/4

4 1/4

Exports of goods and services

5.2

4

6 1/2

5 1/2

Imports of goods and services

4.9

9

10 1/2

8 1/2

Net exports(c)

0.1

–1

–1

–3/4

Real gross domestic product

2.3

2 1/4

4

3 3/4

Non–farm product

2.3

2

4

3 3/4

Farm product

1.5

13

1

–3

Nominal gross domestic product

2.3

8

6 1/4

5 3/4

All forecasts above represent the percentage change on previous year and are 'chain volume' or 'real' measures except for nominal GDP which is a 'current price' measure

(a) Calculated using original data unless otherwise indicated.
(b) Excluding second–hand asset sales from the public sector to the private sector.
(c) Percentage point contribution to growth in GDP.

Source: ‘Statement 2: Economic Outlook’, Budget Paper No. 1: 2011–12, Table 1, p. 2–10

Prices and Wages

Table 4 shows that, as is the case with the real GDP forecasts, there is a slight difference between RBA and Government forecasts for the headline consumer price index (CPI), which can at least partially be attributed to differences in the assumption about world oil prices.

Table 4: Headline CPI forecasts – RBA vs Budget

 

Year to:

 

June 2011

June 2012

June 2013

RBA forecasts

3 1/2

2 1/2

3

Government forecasts

3 1/4

2 3/4

3

N.B. Both RBA and Government forecasts based on US$ exchange rate of $1.07 and a Trade–weighted Index of 78. RBA forecasts assume Malaysian Tapis price of $126 per barrel; Government assumes $132 per barrel.

Sources: ‘Statement 2: Economic Outlook’, Budget Paper No. 1: 2011–12, Table 1; RBA, Statement on Monetary Policy, Table 6.1, May 2011.

The terms of trade[16] forecast (Table 5) is for a large increase in 2010–11, followed by a slight easing in 2011–12 and 2012–13. This relies on a continuation of Asian (particularly Chinese) economic growth, which, as discussed above, is far from assured. In addition, there is a risk that the supply response, and therefore downward pressure on non-rural commodity prices turns out to be greater than Treasury implicitly assumes. The worst-case scenario would be a sudden fall in Asian demand for commodities combined with a larger than anticipated supply response to previous high prices.

Table 5: Domestic economy forecasts—prices and wages

 

Outcomes(a)

 

Forecasts

 

2009–10

2010–11

2011–12

2012–13

Consumer price index(b)

3.1

3 1/4

2 3/4

3

Gross non–farm product deflator

0.2

6

2 1/4

2

Terms of trade

–4.4

19 1/4

–1/4

–3

Wage price index(c)

3.0

 

4

4

4 1/4

(a) Calculated using original data unless otherwise indicated.
(b) Through–the–year growth rate to the June quarter.
(c) Seasonally adjusted, through–the–year growth rate to the June quarter.

Source: ‘Statement 2: Economic Outlook’, Budget Paper No. 1: 2011–12, Table 1, p. 2–10

Labour Market

Table 6: Domestic economy forecasts—labour market

 

Outcomes(a)

 

Forecasts

 

2009–10

2010–11

2011–12

2012–13

Employment (labour force survey basis)(b)

2.4

2 3/4

1 3/4

1 3/4

Unemployment rate (per cent)(c)

5.2

5

4 3/4

4 1/2

Participation rate (per cent)(c)

65.3

 

66

66

66

(a) Calculated using original data unless otherwise indicated.
(b) Seasonally adjusted, through–the–year growth rate to the June quarter.
(c) Seasonally adjusted rate in the June quarter.

Source: ‘Statement 2: Economic Outlook’, Budget Paper No. 1: 2011–12, Table 1, p. 2–10

Chart 1 below shows that the Treasury is forecasting a slowdown in employment growth from the average rate that prevailed over the last 15 years. Keep in mind that the 15–year average includes slowdowns in employment growth associated with the 1997 Asian financial crisis, the 2000–01 introduction of the GST and the 2007–2009 global financial crisis. Nevertheless, the forecast rate of growth is still sufficient to see a reduction in the unemployment rate (see (Table 6).

Chart 1: Annual average employment growth vs average employment growth (March 1996 to March 2011)

Chart 1: Annual average employment growth vs average employment growth (March 1996 to March 2011)

Sources: ABS, Labour force, Australia, cat.no. 6202.0, March 2011 (seasonally adjusted); ‘Statement 2: Economic Outlook’, Budget Paper No. 1: 2011–12, Table 1.[17]

Fiscal Outlook

Restatement of the Fiscal Strategy

The first component of the fiscal strategy emerged out of the 2008–09 Budget. This part of the strategy states:

  • that the Government will aim to achieve budget surpluses, on average, over the medium term,
  • the Government will aim to keep taxation as a share of GDP, on average, below the level for 2007–08 (23.5 per cent), and
  • the Government will aim to improve its net financial worth over the medium term.[18]

It is worth noting that the ‘medium term’ timeframe is undefined and therefore somewhat meaningless. It is clearly longer than a year and less than 20 years. Beyond that it is hard to tell just what ‘medium–term’ actually means. Some further elucidation from the Government on this issue would be welcome, so as to enable critical appraisal of their performance. In addition, use of the term ‘on average’, without a definite timeframe attached is also rather meaningless.

In terms of actual performance at this point in time against the Government’s own criteria, the ALP–led Government has not yet delivered a budget in surplus and net financial worth has fallen every year since 2007–08. These trends are projected to continue until the end of the 2011–12 financial year. However, the Government has successfully managed to keep the taxation-to-GDP ratio below 23.5 per cent. This is projected to continue until at least the end of 2014–15. All of these outcomes have been significantly affected by the reduction in expected tax receipts that has occurred since the onset of the GFC.[19]

The Government committed to the second component of the fiscal strategy in the Updated Economic and Fiscal Outlook (UEFO) in February 2009, in order to lay out the means by which the Government plans to return the Budget to surplus. There are two elements:

  • allowing the level of tax receipts to recover naturally as the economy improves, while maintaining the Government’s commitment to keep taxation as a share of GDP below the 2007–08 level on average, and
  • holding real growth in spending to two per cent a year once the economy is growing above trend until the Budget returns to surplus. [20]

The Government also states that the two per cent real spending growth target will be maintained, ‘on average’ until the budget surplus is at least one per cent of GDP.

The first element of this part of the strategy is merely a restatement of the commitment above regarding the level of the taxation-to-GDP ratio, combined with the observation that tax receipts should recover naturally as economic growth returns to trend after a period of weakness. The second element utilises the consumer price index (CPI) as the deflator for nominal payments growth, as opposed to the non-farm GDP deflator, which was used to measure real growth in spending in Budgets prior to 2008–09. It is interesting to note that if the two per cent real payments growth cap was applied using the non-farm GDP deflator, anticipated payments growth would exceed two per cent in 2013–14 and 2014–15.

One other noteworthy feature of the Government’s fiscal strategy is the focus on the quantity of government spending and the lack of attention devoted to the quality of that spending. There is no embodiment in the fiscal strategy of the notion that the benefits of particular forms of government spending should outweigh the costs of such spending or of ‘value for money’, however defined. All government spending, at least for the purposes of the fiscal strategy, is implicitly viewed as perfectly substitutable and similarly effective. Having said that, trying to measure the effectiveness of government spending is notoriously difficult and even more so on an ex ante basis. It should be noted that the expansion of Infrastructure Australia is welcome in this context, but there are still a lot of areas of government expenditure other than funding of infrastructure projects that deserve considerably more scrutiny than is currently the case. It is hoped that the establishment of an independent Parliamentary Budget Office, as announced in the Budget might improve this situation.

Budget aggregates

As shown in Table 7, in underlying cash terms, the Government has forecast a $49.4 billion deficit in 2010–11 which represents a deterioration of $8.6 billion since the 2010–11 Budget and $7.9 billion since the Mid–year Economic and Fiscal Outlook (MYEFO) was released in November 2010. For 2011–12, the Government has forecast a deficit of $22.6 billion (a deterioration of $10.3 billion since the 2010–11 MYEFO and $9.6 billion since the 2010–11 Budget). The Government is still forecasting a return to surplus in 2012–13. Specifically, they are forecasting a surplus of $3.5 billion, an improvement of around $0.4 billion since MYEFO and around $2.5 billion since the previous Budget.

Table 7: Policy changes and parameter variations—underlying cash balance, MYEFO 2010–11 to Budget 2011–12

 

Estimates

 

Projections

 

2010–11

2011–12

2012–13

2013–14

 

$m

$m

$m

$m

2010–11 Budget underlying cash balance(a)

–40,756

–13,045

1,016

5,432

2010 PEFO underlying cash balance(a)

–40,689

–10,384

3,503

4,546

2010–11 MYEFO underlying cash balance(a)

–41,468

–12,288

3,120

3,257

Per cent of GDP

–3.0

–0.8

0.2

0.2

Changes from 2010–11 MYEFO to 2011–12 Budget

 

Effect of policy decisions(b)(c)

 

Receipts

82

–406

2,001

1,906

Payments

1,989

2,153

51

561

Total policy decisions impact on underlying cash balance

–1,908

–2,559

1,950

1,345

Effect of parameter and other variations(c)

 

Receipts(d)

–9,957

–5,560

–312

1,660

Payments

–3,964

2,212

1,260

2,590

Total parameter and other variations impact on underlying cash balance

–5,993

–7,772

–1,572

–930

2011–12 Budget underlying cash balance(a)

–49,369

–22,618

3,498

3,672

Per cent of GDP

–3.6

–1.5

0.2

 

0.2

(a) Excludes expected Future Fund earnings.
(b) Excludes secondary impacts on public debt interest of policy decisions and offsets from the contingency reserve for decisions taken.
(c) A positive number for receipts indicates an increase in the underlying cash balance, while a positive number for payments indicates a decrease in the underlying cash balance.
(d) Receipts will differ from the cash receipts reconciliation published in Budget Statement 5 because they exclude Future Fund earnings.

Source: ‘Statement 3: Fiscal Strategy and Outlook’, Budget Paper No. 1: 2011–12, Table 5, p. 3–16.

Similarly, the outlook for the fiscal balance has also deteriorated for 2010–11 and 2011–12, but improved for 2012–13. The fiscal balance is forecast to be in deficit to the tune of $45.7 billion in 2010–11 and $20.3 billion in 2011–12. A fiscal surplus of nearly $4 billion is forecast for 2012–13.

Table 8: Policy changes and parameter variations—fiscal balance, MYEFO 2010–11 to Budget 2011–12

 

Estimates

 

Projections

 

2010–11

2011–12

2012–13

2013–14

 

$m

$m

$m

$m

2010–11 Budget fiscal balance

–39,598

–12,093

1,960

6,325

2010 PEFO fiscal balance

–39,422

–8,738

5,101

6,088

2010–2011 MYEFO fiscal balance

–41,920

–10,943

4,211

4,314

Per cent of GDP

–3.0

–0.7

0.3

0.3

Changes from 2010–11 MYEFO to 2011–12 Budget

 

Effect of policy decisions(a)(b)

 

Revenue

102

–367

2,043

1,943

Expenses

1,971

1,722

–119

798

Net capital investment

33

379

54

–358

Total policy decisions impact on fiscal balance

–1,901

–2,467

2,107

1,504

Effect of parameter and other variations(a)

 

Revenue

–9,006

–5,049

758

2,746

Expenses

–5,516

2,094

3,853

5,665

Net capital investment

–1,574

–291

–742

–267

Total parameter and other variations impact on fiscal balance

–1,916

–6,852

–2,352

–2,652

2011–12 Budget fiscal balance

–45,737

–20,262

3,966

3,166

Per cent of GDP

–3.3

–1.4

0.3

0.2

(a) A positive number for revenue indicates an increase in the fiscal balance, while a positive number for expenses and net capital investment indicates a decrease in the fiscal balance.
(b) Excludes secondary impacts on public debt interest of policy decisions and offsets from the contingency reserve for decisions taken.

Source: ‘Statement 3: Fiscal Strategy and Outlook’, Budget Paper No. 1: 2011–12, Table 6, p. 3-22.

It should be noted that in tables 7 and 8 above, which reconcile the 2011–12 Budget with the 2010‑11 Budget (and the updates in between), policy decisions actually contribute to a worsening of both the underlying cash balance and the fiscal balance in 2010–11 and 2011–12 (by around $1.9 billion and $2.5 billion, respectively), while improving both balances in 2012–13 and 2013–14. Whether this is a deliberate ploy to shuffle policy decisions between individual years so as to meet the promised return to surplus by 2012–13 or an inadvertent consequence of those policy decisions, is left to the reader to form an opinion. The truth probably lies somewhere in the middle.

As was the case in previous Budgets, the Government has produced sensitivity analyses which show how the economic and fiscal forecasts would be affected by:

  • a fall in non–rural commodity prices, equivalent to a one per cent fall in nominal GDP, and
  • a one per cent rise in real GDP caused by an equal increase in both labour productivity and labour force participation.[21]

As the discussion above on the international outlook above makes clear, there is a substantial danger that commodity prices might fall much more sharply than the modest easing from their current historical highs assumed by Treasury in the central budget scenario. Therefore, this brief concentrates on the first scenario, as it has implications for the Government’s promised return to surplus. The second scenario, if it were to materialise would mean no qualitative change to the outlook and so it is not considered here.

Qualitatively speaking, assuming (as Treasury does) no change to the exchange rate and no change to fiscal or monetary policy settings, a fall in non–rural commodity prices would, over the next two years, reduce real GDP. The falls in both real GDP and non-rural commodity (i.e. export) prices would lead to substantial falls in company profits, employment growth and consumption. In terms of fiscal effects, company tax receipts in particular, but also individuals and withholding tax receipts and resource rent tax receipts would be impacted. Combined with minor rises in some payments, the total impact on the Budget would be a deterioration in the underlying cash balance of $2.8 billion in 2011–12 and $6.3 billion in 2012–13. Thus, the predicted budget surplus in 2012–13 would evaporate. As noted above, a more serious deterioration in our terms of trade (arising from a larger fall in non–rural commodity prices) would worsen the budget position even more dramatically. This cannot be ruled out, given the precarious international economic environment described above.

Receipts/revenue

General government sector (GGS) receipts (cash basis) are projected to increase from $284.7 billion in 2009–10 to $415.5 billion in 2014–15.[22] In accrual terms, total GGS revenue is projected to increase from $292.8 billion to $425.8 billion over the same period.

Total receipts fell by around $10.3 billion between 2007–08 and 2009–10 and so at least part of the projected growth is attributable to a rebound from the effects of the GFC. It should be noted however that the 2008–09 Budget forecast a rise in receipts from an estimated $295.6 billion in 2007–08 to $313.0 billion in 2008–09 and $330.1 billion in 2009–10, implying a shortfall in expected receipts. Table 9 below shows the expected receipts shortfall throughout the overlapping forward estimates years between the 2008–09 Budget and the 2011–12 Budget.

Table 9: Expected receipt shortfalls—2008–09 Budget vs 2011–12 Budget

 

2008–09 Budget

2011–12 Budget

 

Shortfall

 

$m

$m

$m

2007–08

295,622 (e)

294,917

705

2008–09

312,961 (e)

292,600

20,361

2009–10

330,095 (p)

284,662

45,433

2010–11

343,705 (p)

303690 (e)

40,015

2011–12

359,018 (p)

342390 (e)

 

16,628

(e) estimates; (p) projections

Sources: ‘Statement 10: Historical Australian Government Data’, Budget Paper No. 1: 2011–12, p. 10-6; ‘Statement 10: Historical Australian Government Data’, Budget Paper No. 1: 2008–09, p. 10–8.

In terms of the composition of receipts, Table 9 shows a few interesting features:

  • some components of receipts are more cyclical than others
    • the components that fall between 2007–08 and 2008–09/2009–10 are the components relatively affected by movements in the economic cycle whereas the components that rise show a degree of invariance to the cycle
  • notwithstanding cyclical effects, the combined effect of wages growth, bracket creep and employment growth makes personal income taxes a more important source of revenue over time
  • the lagged cyclical impact on company tax
  • the jump in the proportion of receipts raised by resource rent taxes in 2012–13 indicating the introduction of the Minerals Resource Rent Tax (MRRT) which is partially offset by changes to company tax as a result of the introduction of the MRRT.

Table 10: Composition of total (cash) receipts 2007–08 to 2014–15

 

Actual

 

Estimates

 

Projections

 

2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

2013–14

2014–15

 

%

%

%

%

%

%

%

%

Total individuals and other withholding

42.01

41.82

42.18

43.68

43.08

43.29

44.43

45.41

Fringe benefits tax

1.31

1.16

1.23

1.19

1.08

1.10

1.19

1.24

Superannuation funds

4.09

3.15

2.14

2.33

2.70

2.74

2.95

3.05

Company tax

20.92

20.64

18.34

18.80

21.26

20.16

19.80

19.62

Resource rent taxes(a)

0.57

0.75

0.44

0.28

0.61

2.14

2.24

1.76

Total sales taxes

14.76

14.50

15.87

15.47

14.53

14.06

14.20

14.21

Total excise duty

8.05

8.33

8.59

8.58

7.67

7.11

7.11

7.01

Customs duty

1.89

1.99

1.88

1.84

2.11

2.10

2.12

2.11

Total other indirect taxation receipts

0.80

0.84

1.01

0.85

0.75

0.67

0.75

0.76

Non–taxation receipts

5.61

6.83

8.32

6.97

6.22

6.63

5.21

4.83

TOTAL RECEIPTS

100.00

100.00

100.00

 

100.00

100.00

100.00

 

100.00

100.00

Source: ‘Statement 5: Revenue’, Budget Paper No. 1: 2011–12, Table C3, pp. 5-44 – 5-55.

Payments/expenses

GGS payments (cash basis) are projected to increase from $336.9 billion to $406.5 billion over the five years to 2014–15. The Government’s fiscal policy response to the GFC resulted in rapid growth in payments, particularly in 2008–09 and 2009‑10. GGS expenses (accrual basis) are also projected to increase from $339.2 billion to $414.1 billion over the same period.

Table 11: Composition of total (accrual) expenses—2008–09 to 2014–15

 

Actual

 

Estimates

 

Projections

 

2008–09

2009–10

2010–11

2011–12

2012–13

2013–14

2014–15

General public services

5.30

5.66

6.05

5.71

5.65

5.60

5.58

Defence

5.91

5.94

5.74

5.82

5.44

5.49

5.50

Public order and safety

1.10

1.06

1.12

1.08

1.04

0.99

0.97

Education

6.96

10.28

9.28

8.17

7.88

7.80

7.84

Health

15.14

15.16

16.32

16.36

16.18

16.22

16.36

Social security and welfare

38.38

32.19

33.28

33.32

33.56

33.42

33.61

Housing and community amenities

1.57

2.66

1.64

1.27

1.32

1.22

1.06

Recreation and culture

0.96

0.97

0.95

0.93

0.91

0.83

0.78

Fuel and energy

1.79

2.50

1.79

1.72

1.71

1.65

1.60

Agriculture, forestry and fishing

0.84

0.83

0.87

0.94

0.66

0.56

0.58

Mining, manufacturing and construction

0.59

0.48

0.58

0.55

0.53

0.49

0.48

Transport and communication

2.14

1.96

1.35

1.89

1.87

1.69

1.51

Other economic affairs

2.00

2.54

2.58

2.57

2.28

2.06

1.97

Other purposes

17.32

17.77

18.44

19.67

20.97

21.97

22.16

TOTAL EXPENSES

100.00

100.00

 

100.00

100.00

100.00

 

100.00

100.00

Source: ‘Statement 6: Expenses and Net Capital Investment’, Budget Paper No. 1: 2010–11, Table A1, ‘Statement 6: Expenses and Net Capital Investment’, Budget Paper No. 1: 2011–12, Table A1.

The composition of expenses (accrual basis) changed quite significantly as a result of the discretionary fiscal stimulus implemented as part of the Government’s response to the GFC. The two most affected functions were education (which saw a big rise as a result of the Building the Education Revolution program) and social security and welfare (stemming mainly from the one-off transfer payments). The ‘other purposes’ function is affected by a rise in public debt interest, which was accumulated partly as a result of the discretionary fiscal stimulus spending, increasing general revenue assistance payments to states and territories (essentially the distribution of GST revenues) and also because of increased spending on natural disaster relief.

Balance sheet measures—net debt, net worth and net financial worth

The net debt, net worth and net financial worth positions of the GGS are all forecast to deteriorate in 2011–12, before improving throughout the rest of the forward estimates period. These are all shown in Table 12.

Table 12: GGS balance sheet

 

Estimates

 

Projections

 

2010-11

2011-12

2012-13

2013-14

2014-15

 

$m

$m

$m

$m

$m

Cash and deposits

1,998

2,000

1,936

1,965

1,996

Advances paid

27,184

29,501

31,885

34,491

36,894

Investments, loans and placements

99,661

110,443

110,878

110,049

111,151

Other financial assets

85,806

90,149

96,300

105,702

113,815

Total financial assets

214,649

232,092

240,998

252,208

263,856

Total non-financial assets

108,378

113,080

115,081

115,400

117,428

Total assets

323,027

345,173

356,079

367,608

381,284

Deposits held

232

232

232

232

232

Government securities

200,569

234,885

236,515

239,147

238,351

Loans

9,633

12,694

11,926

11,879

11,934

Other borrowing

791

780

667

561

431

Total interest bearing liabilities

211,224

248,590

249,340

251,819

250,948

Total provisions and payables

180,072

184,115

190,110

195,764

201,367

Total liabilities

391,297

432,705

439,450

447,583

452,315

Net worth(a)

-68,270

-87,532

-83,372

-79,975

-71,031

Net financial worth(b)

-176,648

-200,613

-198,452

-195,375

-188,459

Net debt(c)

82,381

106,646

104,642

 

105,313

100,907

(a) Net worth is calculated as total assets minus total liabilities.
(b) Net financial worth equals total financial assets minus total liabilities.
(c) Net debt equals the sum of deposits held, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid, and investments, loans and placements.

Source: ‘Statement 9: Budget Financial Statements’, Budget Paper No. 1: 2011–12, Table 2, p. 9–4.

The market value of Commonwealth Government Securities (CGS) on issue, which makes up the bulk of what is commonly termed ‘gross debt’, is forecast to exceed $200 billion by the end of June 2011, while the face value is expected to be $192 billion by 30 June 2011. The expected net issuance of CGS in 2011–12 is around $33 billion—that is the face value of newly issued CGS over and above the issuance of CGS to rollover CGS that are due to mature during that period.[23] The Commonwealth Inscribed Stock Act 1911 (CIS Act) currently specifies that the stock of CGS on issue, in face value terms, must not exceed $200 billion. The CIS Act as it currently stands actually specifies a limit of $75 billion. However, the Treasurer has the authority to issue a declaration of ‘special circumstances’ which has the effect of increasing the limit to $200 billion. Such a declaration is currently in force. The Government has included a provision in Part 5 of the Appropriation Bill (No.2) 2011–12 to amend section 5 of the CIS Act to increase the limit to $250 billion and repeal section 5A, thereby eliminating the need to issue a declaration of ‘special circumstances’.

The market for CGS

Statement 7 in Budget Paper No. 1 contained some announcements that will have an impact on the CGS market. These relate to:

  • the previously announced decision to issue Aussie Infrastructure Bonds (AIBs), which were to be used to partially fund the Government’s investment in NBN Co. These were to be marketed directly to retail and institutional investors[24], and
  • the recommendation from a panel of financial market participants and regulators to maintain the CGS market at its current size over time—around 12 to 14 per cent of GDP.

On the first issue, the Government states that AIBs will not be required in 2010–11, as all of the Government’s equity contribution will be sourced from the Building Australia Fund. The Government expects to fund $2.7 billion of the equity contribution using AIBs. This is to be achieved through wholesale issuance of CGS as part of the Commonwealth’s overall debt issuance program administered by the Australian Office of Financial Management (AOFM). AIBs will not be distinguishable from CGS when they are auctioned; however, they will apparently be reported after the fact as AIBs in future budget financial statements. In addition, at the beginning of the 2011‑12 financial year, the tender notices issued by the AOFM prior to each auction will indicate that some of the proceeds of those tender auctions will be used to fund the Government’s equity contribution to NBN Co. As a rough calculation, using the figure of $53 billion gross issuance, it appears that around five per cent of the issuance of new bonds during 2011–12 will be used to finance the Government’s equity contribution to NBN Co. Disregarding the rolling over of existing bonds and replacement of shorter maturity debt with longer-maturity debt, then the proportion rises to just over eight per cent.

The genesis of the second issue dates back to the 2002–03 Budget, which indicated that a review of the market for CGS would take place, in light of the effect of continual budget surpluses and privatisations of Public Non-financial Corporations (PNFCs) on the market for CGS. If those surpluses and proceeds from privatisations were devoted to the retirement of Commonwealth debt, it could have led to the closure of the CGS market altogether.[25] The Government of the day announced in the 2003–04 Budget that the CGS market would not be closed so as to maintain liquidity in the CGS market for (private sector) interest rate risk management purposes and net debt would be reduced by other means.[26] These were the retirement of other Commonwealth liabilities (such as public sector superannuation) and the accumulation of assets via the Future Fund.

The Government amended the CIS Act in 2008 to implement a legislated $75 billion limit on the face value of CGS and amended it again in 2009 to effectively increase the limit to $200 billion, so as to allow the Government to issue CGS to cover the Budget shortfall as a result of the cyclical deterioration in revenue and also discretionary fiscal stimulus spending during and after the GFC.

In light of changes to banking regulation, as part of the so-called ‘Basel III’ reforms,  the CGS market is set to undergo further change. [27] The implementation of Basel III in Australia will require Authorised Deposit-taking Institutions (ADIs) to hold larger stocks of CGS and other highly rated securities on their balance sheets. The Government has, once again, expressed concerns regarding liquidity in the CGS market, as the holdings of CGS by ADIs will largely be ‘passive’ (i.e. not actively traded). Therefore, a review panel has recommended that the CGS market should be maintained at around its current size (12 to 14 per cent of GDP).[28] The Government has indicated that it is considering the panel’s recommendations.

Conclusions

It is hoped that the discussion above gives readers some indication of the economic outlook assumed by the Government and serves to reinforce the short- to medium-term vulnerability of the Budget to changes in the international economic environment in particular. The current economic environment is particularly challenging for forecasters and policymakers, certainly in recent times. There is little doubt that emerging economies such as China and India, are on a growth path that, if it continues, would see the living standards of their citizens ‘converge’ to those enjoyed by those in advanced economies. The sheer size of their populations means that growth in individuals’ living standards will have impacts across the globe as they become more significant players in world markets. This process of convergence is in its formative stages and, all going well, will be a long-term trend. Nevertheless, there can be significant deviations from that trend in the short- to medium-terms. Furthermore large, unanticipated events might be sufficient to derail emerging economies from their long-run growth path altogether—nothing is pre-ordained.

Rapid growth in the emerging economies presents large opportunities for Australia as a supplier of critical materials to fuel economic development, as we have seen with the rise of post-war Japan. But with those opportunities come huge challenges. If the rapid rates of economic growth in large emerging economies continue in the decades ahead, a vast restructuring of the Australian economy will be required in order to take full advantage of the opportunities that presents. As with all structural changes, the benefits are not necessarily felt by all individuals, households or businesses in the same way. Some groups are damaged by structural change while others feel a sense of being left behind. Some of the benefits are not really apparent until they disappear and thus taken for granted. The challenge for policymakers is to resist pleading from special interest groups that seek to use structural change as an opportunity to gain an advantage over other groups in society. In addition, resisting structural change can ultimately be futile and a lot of resources and effort can be wasted in attempting to do so. Ensuring that, as a nation, we are flexible and able to adapt to change will hold us in good stead. Economic reforms of previous decades have been vital in increasing the ability of Australia to adapt to, and indeed prosper from, large external shocks, such as the rise of emerging economies. But, above all, Australian policymakers and citizens must not become complacent. Some countries like Greece, Ireland, Portugal and the United Kingdom are currently finding out just how painful long periods of complacency followed by a crisis can be, while others like the United States seem to be unwilling to face up to their fiscal problems. Australia is a long way from that, but the combination of complacency and unexpected events can rapidly change the situation facing a nation.

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Appendix A: General government sector receipts, payments and underlying cash balance

 

Receipts(b)

 

Payments(c)

 

Future Fund earnings

 

Underlying cash balance(d)

 

$m

 

Per cent of GDP

 

$m

 

Per cent real growth (CPI)

Per cent real growth (NFGDP deflator)(f)

Per cent of GDP

 

$m

 

$m

Per cent of GDP

1985-86

66,206

-

25.2

 

71,328

-

1.5

3.4

27.2

 

-

 

-5,122

-2.0

1986-87

74,724

12.9

26.0

 

77,158

8.2

-1.1

0.8

26.8

 

-

 

-2,434

-0.8

1987-88

83,491

11.7

25.5

 

82,039

6.3

-0.9

-0.3

25.0

 

-

 

1,452

0.4

1988-89

90,748

8.7

24.4

 

85,326

4.0

-3.1

-4.2

23.0

 

-

 

5,421

1.5

1989-90

98,625

8.7

24.2

 

92,684

8.6

0.6

1.7

22.7

 

-

 

5,942

1.5

1990-91

100,227

1.6

23.9

 

100,665

8.6

3.1

3.9

24.0

 

-

 

-438

-0.1

1991-92

95,840

-4.4

22.4

 

108,472

7.8

5.7

6.1

25.4

 

-

 

-12,631

-3.0

1992-93

97,633

1.9

21.8

 

115,751

6.7

5.6

6.0

25.8

 

-

 

-18,118

-4.0

1993-94

103,824

6.3

22.0

 

122,009

5.4

3.5

4.3

25.9

 

-

 

-18,185

-3.9

1994-95

113,458

9.3

22.7

 

127,619

4.6

1.4

2.7

25.5

 

-

 

-14,160

-2.8

1995-96

124,429

9.7

23.4

 

135,538

6.2

1.9

3.6

25.5

 

-

 

-11,109

-2.1

1996-97

133,592

7.4

23.9

 

139,689

3.1

1.7

1.5

25.0

 

-

 

-6,099

-1.1

1997-98

140,736

5.3

23.8

 

140,587

0.6

0.6

-0.2

23.8

 

-

 

149

0.0

1998-99

152,063

8.0

24.4

 

148,175

5.4

4.1

4.9

23.8

 

-

 

3,889

0.6

1999-00

166,199

9.3

25.0

 

153,192

3.4

1.0

1.0

23.1

 

-

 

13,007

2.0

2000-01

182,996

10.1

25.8

 

177,123

15.6

9.1

10.9

25.0

 

-

 

5,872

0.8

2001-02

187,588

2.5

24.7

 

188,655

6.5

3.5

4.0

24.9

 

-

 

-1,067

-0.1

2002-03

204,613

9.1

25.4

 

197,243

4.6

1.4

1.8

24.5

 

-

 

7,370

0.9

2003-04

217,775

6.4

25.2

 

209,785

6.4

3.9

2.6

24.2

 

-

 

7,990

0.9

2004-05

235,984

8.4

25.5

 

222,407

6.0

3.5

1.7

24.0

 

-

 

13,577

1.5

2005-06

255,943

8.5

25.6

 

240,136

8.0

4.6

2.8

24.0

 

51

 

15,756

1.6

2006-07

272,637

6.5

25.0

 

253,321

5.5

2.5

0.2

23.2

 

2,135

 

17,182

1.6

2007-08

294,917

8.2

24.9

 

271,843

7.3

3.8

2.6

22.9

 

3,370

 

19,704

1.7

2008-09

292,600

-0.8

23.3

 

316,046

16.3

12.7

11.0

25.2

 

3,633

 

-27,079

-2.2

2009-10

284,662

-2.7

22.2

 

336,900

6.6

4.2

6.4

26.2

 

2,512

 

-54,750

-4.3

2010-11(e)

303,690

6.7

21.9

 

349,685

3.8

0.7

-2.1

25.2

 

3,374

 

-49,369

-3.6

2011-12(e)

342,390

12.7

23.2

 

362,078

3.5

0.5

1.2

24.5

 

2,931

 

-22,618

-1.5

2012-13(e)

378,520

10.6

24.3

 

372,125

2.8

-0.1

0.8

23.9

 

2,898

 

3,498

0.2

2013-14(p)

395,935

4.6

24.1

 

389,249

4.6

1.9

2.3

23.7

 

3,014

 

3,672

0.2

2014-15(p)

415,453

4.9

24.0

 

406,464

4.4

1.9

2.2

23.5

 

3,193

 

5,795

0.3

(a) Data has been revised in the 2011-12 Budget to improve accuracy and comparability through time.
(b) Receipts are equal to receipts from operating activities and sales of non-financial assets.
(c) Payments are equal to payments for operating activities, purchases of non-financial assets and net acquisition of assets under finance leases.
(d) Underlying cash balance is equal to receipts less payments, less expected Future Fund earnings. For the purposes of consistent comparison with years prior to 2005-06 Future Fund earnings should be added back to the underlying cash balance.
(e) Estimates.
(f) Real spending growth using Non-Farm GDP as the deflator has not been used as a basis for calculating real spending growth in the Budget since 2007-08, and is included for comparative purposes only. Real spending growth, using the Consumer Price Index as the deflator, is the benchmark against which the Government’s fiscal strategy has been based since it was introduced.
(p) Projections.

Source: ‘Statement 10: Historical Australian Government Data’, Budget Paper No. 1: 2011–12, Table 1, p. 10–6



[1].       The budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget strategy and outlook: budget paper no. 1: 2011–12, Commonwealth of Australia, Canberra, 2011, viewed 11 May 2011, http://www.budget.gov.au/2011-12/content/bp1/html/index.htm; All references to ‘the Government’ refer to the Australian Government, unless otherwise mentioned. The author would like to thank Julie King for her assistance in the preparation of the tables in this article and Paige Darby for her assistance with editing the article. Any errors are my own.

[2].       P Anderson, Budget workmanlike but more ambition needed, media release, Australian Chamber of Commerce and Industry, 10 May 2011, viewed 13 May 2011,
http://www.acci.asn.au/Research-and-Publications/Media-Centre/
Media-Releases-and-Transcripts/Economics-Industry/
Budget-Workmanlike-But-More-Ambition-Needed

[3].       C Goldie, Federal Budget takes as much as it gives, media release, Australian Council of Social Service, 10 May 2011, viewed 13 May 2011,
http://www.acoss.org.au/media/release/federal_budget_takes_as_much_as_it_gives

[4].       G Kearney, Australia’s prosperity to continue under strong plan for more jobs and better skills development, media release, Australian Council of Trade Unions, 10 May 2011, viewed 13 May 2011,
http://www.actu.org.au/Media/Mediareleases/
Australiasprosperitytocontinueunderstrongplanformorejobsandbetterskillsdevelopment.aspx

[5].       Australian Industry Group (AiG), Review of the 2011–12 federal budget, AiG, 10 May 2011, viewed 13 May 2011, http://www.aigroup.com.au/portal/binary/com.epicentric.contentmanagement.
servlet.ContentDeliveryServlet/LIVE_CONTENT/Publications/
Reports/2011/AiGroup_Federal_Budget_2011-12_analysis_report.pdf

[6].       A Pesce, Budget makes it more expensive for people to see their family doctor for mental health care, media release, Australian Medical Association, 10 May 2011, viewed 13 May 2011, http://ama.com.au/node/6666

[7].       J Westacott, Budget shows what is needed to build a stronger future, media release, Business Council of Australia, 10 May 2011, viewed 13 May 2011, http://www.bca.com.au/Content/101841.aspx

[8].       F Quinlan, Gillard Government delivers on mental health commitments, media release, Mental Health Council of Australia, 10 May 2011, viewed 13 May 2011,
http://www.mhca.org.au/MediaReleases/2011/Budget%
20delivers%20on%20mental%20health%20committments.pdf

[9].       M O’Neill, Seniors unscathed by vanilla budget, media release, National Seniors Australia, 11 May 2011, viewed 13 May 2011, http://www.nationalseniors.com.au/page/Driving_Change/
News/Press_Releases/2011_Media_Releases/Seniors_unscathed_by_vanilla_budget/

[10].     Australian Government, ‘Statement 2: economic outlook’, Budget strategy and outlook: budget paper no. 1: 2011–12, Table 2, Commonwealth of Australia, Canberra, 2011, p. 2-12, viewed 20 May 2011, http://www.aph.gov.au/budget/2011-12/content/bp1/html/bp1_bst2-03.htm; International Monetary Fund (IMF), ‘World economic outlook database’, April 2011, IMF website, viewed 20 May 2011,
http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

[11].     A good summary of the dynamics of Chinese monetary policy is available in: Organisation for Economic Cooperation and Development (OECD), ‘Chapter 2: Further monetary policy framework reform’, OECD economic surveys: China 2010, OECD, Paris, France, February 2010, (see in particular pp 60–65 – ‘China’s exchange rate regime’).

[12].     The US dollar/Chinese renminbi exchange rate is technically not ‘fixed’, but is more accurately characterised as a ‘managed float’ and some limited appreciation of the Chinese currency is allowed, within a tight band. Nevertheless, the point still stands that the US dollar/Chinese renminbi exchange rate is lower than it otherwise would be.

[13].     The European Central Bank (ECB) is hesitant to accept their bonds as collateral for monetary policy operations, although to cease doing so would only hasten the onset of a crisis. For a short summary of the dilemmas involved see, for example: ‘Trichet the intransigent’, The Economist, 12 May 2011, viewed 17 May 2011, http://www.economist.com/node/18681980

[14].     Australia could be classified as an Australian dollar fixed exchange rate area. However, there are no well–defined federal fiscal equalisation arrangements in the Euro area, such as those that operate between Commonwealth, state and territory governments in Australia. Also, unlike in Australia, there is no common European national identity, thus making such an institutional framework for redistribution less politically palatable across European borders.

[15].     Australian Government, Budget paper no. 1: 2011–12, op. cit., Table 1, p. 2–10; Reserve Bank of Australia, Statement on monetary policy, Table 6.1, RBA, 6 May 2011, p. 63, viewed 20 May 2011,
http://www.rba.gov.au/publications/smp/2011/may/pdf/0511.pdf

[16].     ‘Terms of trade’ refers to the ratio of export prices to import prices. Australian export prices are dominated by the prices for non-rural commodities, particularly iron ore and coal prices.

[17].     Employment growth in the chart is calculated in the same way as in the budget papers, i.e. annual average growth rates are based on quarterly averages of monthly data. Actual data from March 1996 to March 2011 are taken from ABS Labour Force publication, while the remainder of the data are linear interpolations derived using the Treasury forecasts. The March data, rather than the recently released April data from the ABS are used here so as to make the chart directly comparable to the Budget. Australian Bureau of Statistics, Labour force, Australia, cat. no. 6202.0, ABS, March 2011, viewed 20 May 2011,
http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/
4FFFF41FF7FB6D9ECA25788D0021C95D?opendocument

[18].     Australian Government, Budget paper no. 1: 2011–12, op. cit., p. 3-4.

[19].     It is arguable as to exactly when the global financial crisis began. The events which precipitated the initial financial crisis in the United States and elsewhere in the Northern Hemisphere occurred in 2007. However the financial crisis truly went global in September 2008. For a comprehensive timeline of events, see: Federal Reserve Bank of St Louis (St Louis Fed), ‘The financial crisis: a timeline of events and policy actions’, St Louis Fed website, viewed 13 May 2011, http://timeline.stlouisfed.org/index.cfm?p=timeline

[20].     Australian Government, Budget paper no. 1: 2011–12, op. cit., p. 3–4.

[21].     See: Australian Government, Budget paper no. 1: 2011–12, op. cit., pp. 3-26 – 3-30 for full details of the scenario analyses.

[22].     See Appendix A for historical data from 1970–71 to 2009–10 and estimates/projections out to 2014–15. The table in the Appendix is replicated from the Budget papers.

[23].     The Commonwealth expects gross issuance to be $53 billion during 2011–12 accompanied by $14 billion of maturities of existing bonds and a run down of $6 billion in the amount of Treasury Notes on Issue. CGS can be broadly categorised into two types of instruments—Treasury Bonds and Treasury Notes. Treasury Bonds are CGS that have a maturity of greater than one-year whereas Treasury Notes are shorter maturity instruments, predominantly used to fund within-the-year financing needs. A rundown of Treasury notes, accompanied by positive net issuance of Treasury Bonds implies that debt of shorter maturities is being replaced by debt of longer maturities.

[24].     K Rudd (Prime Minister), W Swan (Treasurer), L Tanner (Finance Minister) and S Conroy (Minister for Broadband, Communications and the Digital Economy), New National Broadband Network, media release, 7 April 2009, viewed 19 May 2011, http://www.minister.dbcde.gov.au/media/media_releases/2009/022

[25].     Australian Government, Budget strategy and outlook: budget paper no. 1: 2002–03, Commonwealth of Australia, Canberra, 2002, pp. 7-4 to 7-5, viewed 20 May 2011, http://www.budget.gov.au/2002-03/bp1/html/index.html

[26].     Australian Government, Budget strategy and outlook: budget paper no. 1: 2003–04, Commonwealth of Australia, Canberra, 2003, pp. 7-1 to 7-10, viewed 20 May 2011, http://www.budget.gov.au/2003-04/bp1/html/index.htm

[27].     For key references relating to the Basel III reforms, please see: Bank for International Settlements (BIS), ‘Basel Committee - Basel III’, BIS website, viewed 20 May 2011, http://www.bis.org/list/bcbs/tid_132/index.htm
For key details regarding the implementation of Basel III reforms in Australia, see: Australian Prudential Regulation Authority (APRA), Basel III reform package released, a Letter to Authorised Deposit-taking Institutions (ADIs), APRA, 17 December 2010, viewed 20 May 2011, http://www.apra.gov.au/ADI/upload/20101217-Ltr-to-all-ADIs-re-Basel-III-package.pdf

[28].      The review panel consisted of officials from Treasury, the AOFM, the Reserve Bank of Australia (RBA), APRA, the NSW Treasury Corporation, the Treasury Corporation of Victoria and a number of private sector CGS market participants.

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