Robert Dolamore
Introduction
The 2015–16 Budget was introduced into Parliament on
12 May 2015. It is the second Budget of the Coalition Government.
This overview provides a summary of the headline numbers, the economic context,
the Government’s fiscal strategy and broad policy agenda, and how the fiscal
outlook has changed since the Mid-Year Economic and Fiscal Outlook
(MYEFO) 2014–15.
The Budget is the government’s
key economic and fiscal statement each year. However, the policy process
underpinning the Budget is ongoing throughout the year and major policy
announcements can be made at any time. The major influences on the content of
the Budget include past revenue and expenditure decisions, changing economic
conditions, and the government’s fiscal strategy and broader policy agenda.
When assessing the Budget some
useful questions to keep in mind include:
-
what problems is the Budget trying to address and what does it
actually deliver?
-
will the decisions in the Budget improve the wellbeing of current
and future generations?
-
does the Budget support growth and higher future living
standards?
-
what are the distributional effects of the Budget?
-
what are the merits or otherwise of the individual spending and
revenue decisions?
-
what trade-offs have been made?
-
what has been left to another day?
The headline numbers
-
The underlying cash deficit is estimated to be
$41.1 billion (2.6 per cent of gross domestic product (GDP) in
2014–15, $35.1 billion (2.1 per cent of GDP) in 2015–16 falling to a
projected $6.9 billion (0.4 per cent of GDP) in 2018–19.
-
Over the four years to 2018–19 accumulated deficits are
estimated to total $82.3 billion.
-
General government sector receipts are estimated to be
$377.3 billion (23.5 per cent of GDP) in 2014-15,
$398.0 billion (24.0 per cent of GDP) in 2015–16 rising to a projected
$488.2 billion (25.2 per cent of GDP) by 2018–19.
- Tax receipts are estimated to be $351.5 billion
(21.9 per cent of GDP) in 2014–15, $370.1 billion
(22.3 per cent of GDP) in 2015–16 increasing to a projected
$452.5 billion (23.4 per cent of GDP) by 2018–19.
-
General government sector payments are estimated to be
$415 billion (25.9 per cent) in 2014–15, $429.8 billion
(25.9 per cent of GDP) in 2015–16 and increasing to a projected
$491.1 billion (25.3 per cent of GDP) by 2018–19.
-
In terms of total general government receipts and payments, the
revenue side is forecast to make the biggest contribution as a share of GDP to
reducing the size of the Budget deficit over the forward estimates period.
-
General government sector net debt is estimated to be
$250.2 billion (15.6 per cent of GDP) in 2014-15,
$285.8 billion (17.3 per cent of GDP) in 2015–16 increasing to a
projected $325.4 billion (16.8 per cent of GDP) by 2018–19.
-
The face value of Commonwealth Government Securities (CGS)
on issue is expected to increase from $499 billion in 2023–24, as
estimated at the time of MYEFO 2014–15, to $555 billion. By 2025–26 the
face value of CGS on issue is projected to increase to $573 billion.
The
Budget deficit is forecast to gradually fall from $41.1 billion in
2014–15 to $6.9 billion in 2018–19.
Underlying Cash Balance
Year
|
$m
|
% GDP
|
2013–14
|
-48,456
|
-3.1
|
2014–15
|
-41,121
|
-2.6
|
2015–16
|
-35,115
|
-2.1
|
2016–17
|
-25,836
|
-1.5
|
2017–18
|
-14,396
|
-0.8
|
2018–19
|
-6,905
|
-0.4
|
|
Underlying
Cash Balance % GDP
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 1, p. 10–6.
|
Achieving a surplus depends
on closing the gap between payments and receipts...
-
Payments peaked at 26 per cent of GDP in 2009–10 and are
estimated to be 25.9 per cent of GDP in 2015–16 and decline to
25.3 per cent in 2018‑19.
-
Receipts bottomed at 21.5 per cent of GDP in 2010–11 and are
forecast to be 24.0 per cent of GDP in 2015–16 and increase to 25.2 per cent
of GDP in 2018–19.
|
Receipts
and Payments % GDP
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 1, p. 10–6.
|
Net debt is forecast to peak
as a percentage of GDP in 2016–17.
Net
Debt
Year
|
$m
|
%
GDP
|
2013–14
|
202,463
|
12.8
|
2014–15
|
250,234
|
15.6
|
2015–16
|
285,802
|
17.3
|
2016–17
|
313,356
|
18.0
|
2017–18
|
323,723
|
17.6
|
2018–19
|
325,447
|
16.8
|
|
Net
Debt % GDP
Source: Australian
Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 5, p. 10–14.
|
Since
MYEFO, policy measures and parameter variations have on balance worsened the
near-term budget outlook.
Effect on the
Underlying Cash Balance of changes since MYEFO
Year |
Policy measures $m
|
Parameter variations
$m
|
2014–15 |
-578
|
-181
|
2015–16 |
-4,525
|
650
|
2016–17 |
-2,547
|
-2,445
|
2017–18 |
-1,665
|
-1,251
|
|
Effect of policy and
parameter changes
on the Underlying Cash Balance since MYEFO
Source:
Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 3, Table 7, p. 3–17.
|
Where does government spending go
in 2015–16?
Estimates
of Expenses by function
|
$b
|
%
|
Social
security & welfare
|
154.0
|
35.4
|
Health
|
69.4
|
16.0
|
Education
|
31.9
|
7.3
|
Defence
|
26.3
|
6.1
|
General
public services
|
22.2
|
5.1
|
All
other functions
|
45.0
|
10.4
|
Other
purposes
|
85.7
|
19.7
|
Total
|
434.5
|
100.0
|
|
Expenses by
function in 2015–16
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 5, Table 3, p. 5–8.
|
Where does the revenue come
from
in 2015–16?
|
$b
|
%
|
Individuals
income tax
|
194.3
|
47.9
|
Company
& resource rent taxes
|
71.2
|
17.6
|
Sales
tax (incl. the GST)
|
61.6
|
15.2
|
Fuels
excise
|
17.9
|
4.4
|
Other
taxes
|
35.1
|
8.7
|
Non-tax
revenue
|
25.3
|
6.2
|
Total
|
405.4
|
100.0
|
|
Revenue in 2015–16
Source: Australian
Government, Overview,
Appendix B, p. 30.
|
|
|
|
The economic context
The domestic economic outlook
Over the past year the near-term outlook for the Australian
economy has become more subdued with both Treasury and the Reserve Bank of
Australia (RBA) revising down their growth forecasts (Table 1).[1]
Reflecting the softer outlook the RBA Board has reduced the cash rate by 50
basis points since the beginning of 2015 to further support domestic demand.[2] The forecasts
suggest Treasury is slightly more optimistic about the growth outlook for
2015–16. However, both are forecasting growth to be back around the long–term
average of 3.2 per cent over the course of 2016–17. Beyond that,
Treasury is projecting growth will accelerate in the final two years of the
forward estimates to 3.5 per cent.
The more subdued outlook for 2015–16 reflects the balancing out
of a number of countervailing forces. The factors supporting stronger GDP growth
include strong growth in resources exports and dwelling investment, and solid
growth in household consumption. The lift in household spending is being
supported by low interest rates, rising household wealth (due to rising house
prices) and lower petrol prices. The depreciation of the Australian dollar over
the past year will benefit trade-exposed industries such as tourism, higher
education services and manufacturing. The Government is expecting exports from
these industries to increase at a solid rate over the next couple of years.[3]
Table 1:
Treasury and the Reserve Bank of Australia’s near-term growth forecasts (real
GDP, per cent)
|
2014–15
|
2015–16
|
2016–17
|
Treasury
|
Budget 2014-15
|
2.5
|
3.0
|
3.5
|
Budget 2015-16
|
2.5
|
2.75
|
3.25
|
The
Reserve Bank of Australia
|
SMP* May 2014
|
2.25–3.25
|
2.5–4.0
|
...
|
SMP May 2015
|
2.25
|
2.0–3.0
|
2.5–4.0
|
*Statement on Monetary Policy.
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2014–15, Statement 1, Table 2, p. 1-7;
Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 1, Table 1, p. 1-7; Reserve
Bank of Australia, Statement on Monetary Policy, May 2014, Table 6.1, p. 63; Reserve Bank of
Australia, Statement on Monetary Policy, May 2015, Table 6.1, p. 65.
However, a number of factors are inhibiting growth including
large declines in mining investment and Australia’s terms of trade. Mining
investment peaked in mid-2012 and is expected to fall significantly over
the next few years as existing large-scale projects are completed and fewer new
projects are added to the investment pipeline. Treasury is forecasting mining
investment will fall by 15.5 per cent in 2014–15,
25.5 per cent in 2015–16 and 30.5 per cent in 2016–17.[4] The fall in
mining investment in 2015–16 and 2016–17 is expected to subtract around
4 percentage points from GDP over the three years to 2016–17.[5]
With reference to the sharp fall in the terms of trade,
Treasury is forecasting the terms of trade will decline by
12.25 per cent in 2014–15 and 8.5 per cent in 2015–16. Declining
commodity prices are weighing heavily on Australia’s terms of trade. The 2014–15
Budget forecasts were based on an iron ore price of $US96 per tonne. This was
revised down to $US60 per tonne FOB in MYEFO 2014–15 and to
$US48 per tonne in this year’s Budget. The fall in the terms of trade
is having a significant dampening effect on incomes and government revenue.
In recent times the factors supporting growth have not been
sufficiently strong to keep the economy growing at its long-run average. One
consequence of this is a degree of spare capacity in the labour market, with
the unemployment rate at its highest level since the early 2000s. Treasury is
forecasting the unemployment rate will peak in 2015–16 at
6.5 per cent before declining thereafter to reach
5.75 per cent by 2018–19.[6]
Reflecting the more subdued near-term outlook for product
and labour markets, inflationary pressures are well contained. Treasury is
forecasting inflation to remain around the middle of the RBA’s target band at
2.5 per cent through the year to the June quarter 2015 and 2016.[7]
If the Australian economy does get back to its long-run
average growth rate by 2016–17 this will be a remarkably benign result given
the magnitude of the economic adjustment needed as the mining investment boom
recedes.
Australia’s growth rate is taking
longer to get back to its long-term average
As reflected in the revisions to Treasury’s and the RBA’s
forecasts, the Australian economy is taking a little longer to get back to its
long-term average growth rate than previously thought. In part this reflects the
fact that non-mining business investment is still to kick in. A lift in
non-mining business investment is crucial to supporting structural change in
the economy by underpinning improved productivity and enhanced competitiveness.
As Professor Ross Garnaut recently observed:
To avoid a long period of weak
employment and sagging real incomes and the possibility of deep recession, we
need to restore strong investment and output growth in trade-exposed
industries outside resources.[8]
Many of the pre-conditions for a lift in non-mining
investment are in place. In its latest Statement on Monetary Policy the
RBA argued:
Finance is readily available
at low cost and business credit growth has increased over the past year or
more. Domestic demand growth has picked up and is likely to be supported in the
period ahead by relatively strong population growth, low interest rates, low
oil prices and the exchange rate depreciation. The Bank’s liaison suggests that
a sustained pick-up in demand is required to spur growth in business
investment.[9]
Treasury and the RBA have similar expectations as to how the
rebalancing of growth will play out. In the near term, stronger dwelling
investment, household consumption and exports are expected to boost demand. In
time, non-mining investment is expected to respond to stronger demand. Also
working in that direction are the health of business balance sheets and the
need for some catch-up investment after a period of relatively subdued
growth in the non-mining sector capital stock.
Treasury is forecasting non-mining business investment to
increase by 4 per cent in 2015–16 and 7.5 per cent in 2016–17.
Much hinges on these forecasts because it is stronger non-mining business
investment which is expected to drive the increase in Australia’s growth to
3.25 per cent in 2016–17.[10]
Risks
On the domestic front there are two key sources of risk for the
economic outlook. First, there is uncertainty about the extent to which
households will feel inclined to save less and spend more. Treasury is
forecasting household consumption to rise by 3 per cent in 2015–16
and 3.25 per cent in 2016–17. This is consistent with a gradual
decline in the savings ratio. On the upside, it could be that household
consumption turns out to be stronger than currently forecast if households are
inclined to spend more as an effect of rising wealth from the housing market. However,
it is also possible that low wages growth, rising unemployment and high levels
of household debt will make households wary about increasing spending in the
near-term.
Second, there is considerable uncertainty about the recovery
in non-mining business investment. It is possible that if household spending
surprises on the upside then the recovery in non-mining investment may happen
earlier and be stronger than currently forecast. Against this is the
possibility that demand and confidence fail to lift and the recovery in
non-mining business investment gets pushed further out.
For its part the RBA has pushed out the recovery in
non-mining business investment until later in 2016 and considers the risks to
this outlook are roughly balanced.[11]
The Australian dollar remains something of a ‘wildcard’ for
the outlook for non-mining investment. Professor Garnaut has argued for some
time that non-mining business investment will only really increase after there
has been a significant and sustained real depreciation in the Australian
dollar.[12] Even an exchange rate of
$US0.75 may be at the upper bound of the adjustment that is needed.[13]
If this is the case and the dollar remains above this level for longer than
currently forecast, the recovery in non-mining business investment may be
delayed.
Australia is undoubtedly at a challenging juncture as the
positive effects of the mining investment boom recede and need for structural
adjustment becomes more pressing. Arguably, at this stage the risks remain tilted
on the downside.
The global economic outlook
In the last few years global economic growth has stabilised
at a moderate pace of around 3.4 per cent, which is a bit below the
long-term average of 3.7 per cent. Forecasts suggest that global
growth will be little changed in 2015 at around 3.5 per cent
(Table 2). The global outlook matters for Australia because as an open
economy Australia is affected by developments overseas through financial, trade
and investment linkages and confidence and wealth effects.
In its latest update, the International Monetary Fund (IMF)
argued that the global outlook is being shaped by a range of complex forces
including: many countries still struggling with significant debt burdens; lower
oil prices; and a strengthening US dollar.[14]
The global recovery continues to be uneven with some countries having markedly
better near-term growth prospects than others. The IMF is expecting global
growth in 2015 to be driven by a rebound in the advanced economies, which are
forecast to grow by 2.4 per cent in 2015 up from
1.8 per cent in 2014. Emerging market and developing economies are
forecast to slow slightly with growth decreasing to 4.3 per cent in
2015 from 4.6 per cent in 2014.[15]
A number of factors are expected to drive a modest
acceleration in global growth in 2016. Lower oil prices are expected to be a
net positive for the global economy. In advanced economies lower oil prices
have a stimulatory effect by raising the real incomes of households and
reducing costs for firms. This positive effect on global growth is expected to
more than offset the dampening effect that lower oil prices have on the growth
prospects of oil producers.
The forecast pick-up in global growth in 2016 is also
expected to be supported by the further widespread easing of monetary policy
that has occurred over the last six months by a number of central banks.
Arguably the most significant of these decisions was that of the European
Central Bank (ECB), which announced on 22 January 2015 it would be
significantly expanding its asset purchase program to include bonds issued by Euro
area central governments, agencies and European institutions.[16] Asset purchases support
demand by improving liquidity and lowering borrowing costs. Monthly asset purchases
amount to €60 billion and will run at least until September 2016.
Treasury’s growth forecasts for the global economy are
broadly in line with those of the IMF (Table 2). However, their near-term
forecasts for the United States and China are arguably a touch more optimistic.
Forecasts from Oxford Economics, a private global advisory firm, are provided in
Table 2 as a point of comparison. The summary below draws on all three
sources.
Table 2: Treasury, IMF and Oxford
Economics international growth forecasts (per cent)
|
2014
|
2015
|
2016
|
2017
|
United States
|
|
|
|
|
Treasury
|
2.4
|
3.25
|
3.25
|
3.0
|
IMF
|
2.4
|
3.1
|
3.1
|
2.7
|
Oxford Economics
|
2.4
|
2.3
|
2.8
|
2.7
|
Euro area
|
|
|
|
|
Treasury
|
0.9
|
1.75
|
1.75
|
1.75
|
IMF
|
0.9
|
1.5
|
1.6
|
1.6
|
Oxford Economics
|
0.9
|
1.7
|
1.8
|
1.7
|
China
|
|
|
|
|
Treasury
|
7.4
|
6.75
|
6.5
|
6.25
|
IMF
|
7.4
|
6.8
|
6.3
|
6.0
|
Oxford Economics
|
7.4
|
6.6
|
6.1
|
5.7
|
Japan
|
|
|
|
|
Treasury
|
0.0
|
1.0
|
1.0
|
0.5
|
IMF
|
-0.1
|
1.0
|
1.2
|
0.4
|
Oxford Economics
|
-0.1
|
0.8
|
1.8
|
0.8
|
India
|
|
|
|
|
Treasury
|
7.2
|
7.5
|
7.5
|
7.5
|
IMF
|
7.2
|
7.5
|
7.5
|
7.6
|
Oxford Economics
|
7.2
|
7.5
|
7.5
|
7.0
|
World
|
|
|
|
|
Treasury
|
3.4
|
3.5
|
3.75
|
3.75
|
IMF
|
3.4
|
3.5
|
3.8
|
3.8
|
Oxford Economics
|
3.3
|
3.2
|
3.8
|
3.9
|
Source:
Australian Government,
Budget strategy and outlook: budget paper no. 1:
2015–16, Statement 2,
Table 2, p. 2-6; International Monetary Fund,
World economic outlook: uneven growth short- and
long-term factors, April 2015; Table 1.1,
p. 2.; Oxford Economics,
World Monthly Review: The China Syndrome,
12 May 2015.
- United States: The US economy is expected to grow at a
solid pace in 2015 and 2016. Although the US economy slowed more sharply than
expected in the first quarter of 2015, this was mainly due to severe weather
conditions and the effects of industrial disruption at west coast ports. Growth
is being supported by lower oil prices, more moderate fiscal adjustment,
strengthened balance sheets and an improving housing market. These factors are
expected to more than offset the negative effects of a stronger US dollar,
which will affect US exports.
- China: The Chinese economy is forecast to slow through to
2017 as it continues to transition to a broader-based model of growth. This
slowdown reflects the impact of the ongoing property-market correction and the
negative flow-on effects this is having for upstream industries. The Chinese
authorities are allowing growth to slow in a controlled manner and pursuing the
structural reforms needed to strengthen consumer-driven demand. The moderation
of Chinese growth is expected to have important regional implications, impacting
on the growth of other Asian economies.
- Japan: The Japanese economy is expected to recover in 2015
after growth stalled last year following an increase in the consumption tax
rate. The recovery is being supported by accommodative fiscal and monetary
policy settings, improving labour market conditions, lower oil and commodity
prices and a weaker yen. Nevertheless, Japanese growth is still quite weak.
- India: India’s growth is expected to strengthen from
7.2 per cent in 2014 to around 7.5 per cent in 2015 and
2016. Business investment has been recovering as confidence has picked up
reflecting reduced political uncertainty and the Indian Government’s economic
reform agenda. As a major oil importer India is also benefitting from lower oil
prices which have reduced firms’ operating costs and benefited consumers.
- Euro area: Recent news from the Euro area has been
positive with growth expected to strengthen moderately, supported by lower oil
prices, low interest rates and a weaker euro. Export and investment growth is
expected to gradually build momentum. This improved outlook has reduced
concerns of the euro area experiencing a protracted period of excessively low
inflation. While the outlook is more positive for the Euro area as a whole, growth
remains quite uneven.
- Other East Asian economies:[17]
Treasury reports that economic growth of this group of economies is expected to
increase from 4.1 per cent in 2014 to 4.75 per cent in 2015 and 2016.[18]
These economies are benefiting from lower commodity prices. The IMF reports
that growth among the ASEAN-5 economies is expected to continue to diverge this
year with Malaysia forecast to slow in 2015 while growth in Thailand and the
Philippines is expected to pick up.[19]
Both Treasury and the RBA are forecasting that growth for
Australia’s major trading partners will exceed 4 per cent in 2015 and 2016.
Risks
The risks to the global outlook have become more balanced in
recent months but in the IMF’s view are still tilted on the downside.[20]
Potentially, the price of oil is both an upside and downside
risk for the global economy. It is possible that lower oil prices could give a
stronger boost to demand than currently forecast, particularly for the advanced
economies. Alternatively, if the price of oil rebounds more quickly than
expected this would likely have a dampening effect on global growth.
For Australia a key risk is the outlook for China. It may
turn out that Chinese authorities are not able to manage the slowdown in the
economy as well as hoped. Since the onset of the Global Financial Crisis (GFC)
China’s debt burden has increased significantly, much of it related to real
estate. The authorities continue to face the daunting task of striking the
right balance between reducing economic vulnerabilities, supporting growth and
implementing structural reforms. It is possible the Chinese economy could slow
by more than currently forecast particularly if investment is weaker than
expected due to the ongoing real estate correction and more constrained local
government spending. This could be expected to negatively impact on Australia
through weaker demand for our commodity exports and indirectly through the
flow-on effects lower Chinese growth would have for other Asian economies.
Emerging market and developing economies potentially face a
triple hit from: a strengthening US dollar (which could have a significant
impact on the financial systems of emerging market economies because many banks
and companies have increased their borrowing in dollars over the past five
years); higher global interest rates; and more volatile capital flows.
There is also a range of geopolitical risks that include
developments in the Ukraine, the Middle East and parts of Africa. If these
risks were to crystallise they have the potential to disrupt global trade,
financial and investment flows, which would weigh on growth. Even if not
realised, heightened tensions potentially add to uncertainty and undermine
confidence.
In its recent update the IMF warned that in addition to these
near-term risks, both advanced and emerging market economies face lower
medium-term growth prospects than prior to the GFC.[21]
In part this reflects the effects of population ageing as well as the lingering
impact of the GFC (such as markedly lower growth in the capital stock). The IMF
took the opportunity to once again urge governments around the world to take
decisive policy action to boost actual and potential growth, including by
pursuing much needed structural reforms.
Australia’s longer-term economic outlook
An important part of the context for any budget is the
longer-term challenges and opportunities Australia faces, encompassing the
economic, social and environmental dimensions of community wellbeing.
Generally, these change little from year to year but nonetheless over time have
the potential to have a large cumulative impact on Australia’s economic
prosperity and future living standards.
For Australia the list of challenges and opportunities that
are likely to shape Australia’s longer-term outlook include:
-
an ageing population
-
the economic rise of Asia
-
new knowledge and technologies
-
climate change
-
changing patterns of global demand and
-
natural resource depletion.
Of a different nature but also important is the risk of
external shocks to the Australian economy. They are hard to predict but
nevertheless occur not infrequently.
The budget provides an important mechanism through which
governments can try to manage the effects of longer-term influences. For
example, through patient long-term investment governments can build the
capabilities needed to make the most of expected future opportunities and the
flexibility and resilience needed in the face of less favourable long-term
trends.
Last year’s Budget Strategy and Outlook: Budget Paper
No. 1: 2014–15 included a narrative ‘Sustaining strong growth in
living standards’.[22]
This focused on income as one of the most important determinants of living
standards. The main drivers of income growth are productivity growth, changes
in the terms of trade, changes in output from increased labour utilisation and
growth in net foreign income. The statement discussed the challenges Australia
faces in terms of its recent productivity performance, changes in the terms of
trade and the changes in workforce participation associated with population
ageing.
There was no comparable standalone narrative about the
longer-term outlook in this year’s budget papers. However, earlier this year
the Government released an updated Intergenerational Report, which
assesses the long-term sustainability of current Government policies and how
changes to Australia’s population size and age profile may impact on economic
growth, workforce and public finances over the next 40 years.[23]
The implications of the economic
outlook for the Budget
Generally, the economic context is reflected in the budget
in a number of ways including:
-
the parameters that underpin Treasury’s estimates and projections
of revenue and expenditure items
-
the government’s fiscal strategy including judgements about what
the appropriate ‘bottom line’ is given the economic outlook and other
macroeconomic policy settings and
-
the government’s decisions about the nature, size and timing of individual
policy measures which will in part reflect how favourable the economic outlook
is.
Treasury’s assessment of the economic outlook is reflected
in the key economic parameters used to estimate and project revenue and
expenditure items. Treasury provides forecasts of the key macroeconomic
parameters for the budget year and the following financial year and projections
of these parameters for the following two financial years.
Table 3 shows that the forecasts for a number of key economic
parameters for 2015–16 have been revised down over the past year, including those
for real GDP growth, nominal GDP growth and the terms of trade.
The fiscal estimates and projections are sensitive to
changes in the economic parameters. For example, since last year’s Budget, the
price of iron ore has fallen rapidly and this and other changes have been
reflected in the revisions to the forecasts for Australia’s terms of trade and
nominal GDP growth for 2014–15 and 2015–16 (Table 3). As a result of the
fall in the price of iron ore, tax receipts have been written down by around
$20 billion over the four years to 2017–18.[24] As Stephen Koukoulas
recently observed:
Such is the power of the economy in delivering (and
hindering) the budget revenue and spending outcomes. A few dollars difference
in the global iron ore price, a small change in employment growth or a swing in
GDP growth can have a huge impact on the budget bottom line.[25]
This year Budget Paper No. 1 includes
Statement 7 ‘Forecasting performance and scenario analysis’, which builds
on the information provided in Appendices A and B of Statement 3 in last
year’s Budget Paper No. 1. Statement 7 provides useful
information about how accurate the forecasts of real and nominal GDP and
estimates of government receipts have been. It also presents a number of
scenarios to illustrate the sensitivity of fiscal estimates to changes in the
economic parameters. The Budget Review includes an article Assessing
forecasting risks and uncertainty, which looks at these issues in more
detail.
The economic outlook is also reflected in some of the key
decisions taken in this year’s budget. At an overarching level the Government
has decided to only partially offset the negative effect of falling commodity
prices on the budget bottom-line. Given the more subdued near-term economic
outlook this decision provides some additional support to the economy at a
challenging time, without seeming to delay the projected return to an
underlying cash surplus in 2019–20.
In Statement 3 of Budget Paper No. 1
the Government sets out how the decisions in the Budget respond to Australia’s
economic outlook. For example, the Government states that it is deliberately
redirecting spending to investments which it considers will boost productivity
including: the Jobs and Small Business Package; the Families Package; the
Northern Australia Infrastructure Facility; and improving Fairness in Tax and Benefits.
Separate detailed briefs on many of the budget measures have been prepared as
part of this year’s Budget Review.
Table 3: Treasury forecasts of
major economic parameters (per cent)
|
2013–14
|
2014–15
|
2015–16
|
2016–17
|
2017–18
|
2018–19
|
Real GDP
|
|
|
|
|
|
|
Budget
2014–15
|
2.75
|
2.5
|
3.0
|
3.5
|
3.5
|
|
MYEFO
2014–15
|
2.5
|
2.5
|
3.0
|
3.5
|
3.5
|
|
Budget 2015–16
|
2.5
|
2.5
|
2.75
|
3.25
|
3.5
|
3.5
|
Employment
|
|
|
|
|
|
|
Budget
2014–15
|
0.75
|
1.5
|
1.5
|
2.25
|
2.0
|
|
MYEFO 2014–15
|
0.8
|
1.0
|
1.75
|
2.0
|
2.25
|
|
Budget 2015–16
|
0.7
|
1.5
|
1.5
|
2.0
|
2.0
|
2.0
|
Unemployment Rate
|
|
|
|
|
|
|
Budget 2014–15
|
6.0
|
6.25
|
6.25
|
6.0
|
5.75
|
|
MYEFO 2014–15
|
6.0
|
6.5
|
6.5
|
6.0
|
5.75
|
|
Budget 2015–16
|
5.9
|
6.25
|
6.5
|
6.25
|
6.0
|
5.75
|
Consumer price index
|
|
|
|
|
|
|
Budget 2014–15
|
3.25
|
2.25
|
2.5
|
2.5
|
2.5
|
|
MYEFO 2014–15
|
3.0
|
2.5
|
2.5
|
2.5
|
2.5
|
|
Budget 2015–16
|
3.0
|
1.75
|
2.5
|
2.5
|
2.5
|
2.5
|
Nominal GDP
|
|
|
|
|
|
|
Budget 2014–15
|
4.0
|
3.0
|
4.75
|
5.0
|
5.0
|
|
MYEFO 2014–15
|
4.0
|
1.5
|
4.5
|
5.25
|
5.25
|
|
Budget 2015–16
|
4.0
|
1.5
|
3.25
|
5.5
|
5.25
|
5.5
|
Terms of trade
|
|
|
|
|
|
|
Budget 2014–15
|
-5.0
|
-6.75
|
-1.75
|
|
|
|
MYEFO 2014–15
|
-3.7
|
-13.5
|
-3.75
|
|
|
|
Budget 2014–15
|
-3.7
|
-12.25
|
-8.5
|
0.75
|
|
|
Source:
Australian Government,
Budget strategy and outlook: budget papers no. 1: 2014–15, Statement 1, Table 2, p. 1-7;
Statement 2, Table 1, p. 2-5; Australian Government,
Mid-year economic and fiscal outlook 2014–15, Table 1.2, p. 3; Table 2.3,
p. 16; Australian Government,
Budget strategy and outlook: budget paper no. 1:
2015–16, Statement 1; Table 2,
p. 1-7; Statement 2, Table 1, p. 2-5.
The government’s fiscal strategy
and broader policy agenda
The fiscal strategy
Consistent with the requirements of theCharter of Budget
Honesty Act 1998, the Government has set out in the Budget its medium-term
fiscal strategy. The objective of the Government’s fiscal strategy is to ‘achieve
budget surpluses, on average, over the course of the economic cycle’. The
details of the fiscal strategy can be found in Statement 3 of Budget
Paper No. 1 (see box 1 on page 3-7).
The Budget projections show that since MYEFO 2014–15, the
outlook for underlying cash balance has worsened by about $12.5 billion
over the four years to 2017–18, although it is still projected to return to
surplus in 2019–20. Beyond that point modest surpluses of less than one per
cent of GDP are projected out to 2025–26. Of course, given the difficulty of
forecasting beyond the forward estimates period there is considerable
uncertainty around the medium-term projections.
The average annual pace of fiscal consolidation to 2018–19
of 0.5 per cent of GDP is broadly consistent with the 2014–15 Budget.
Complementing its medium term fiscal strategy, the
Government has set itself a budget repair strategy. This strategy sets a clear
objective around when a strong budget surplus will be achieved, which is consistent
with the medium-term fiscal strategy. The Government’s goal is to deliver
budget surpluses building to at least 1 per cent of GDP by 2023–24.
The details of the budget repair strategy are also set out in Box 1 in
Statement 3 of Budget Paper No. 1 (see page 3-7).
As the Government acknowledges, the projected underlying
cash surpluses from 2019–20 do not meet its budget repair target.[26] As a
consequence further fiscal adjustment will be needed in future budgets. In part
the size of the fiscal adjustment needed to achieve the Government’s target
will depend on how strongly the economy grows from here. If growth surprises on
the upside, the size of the fiscal adjustment needed would be smaller than
currently projected. If, however, growth disappoints then the size of the
fiscal adjustment needed in future budgets will be larger.
A key element of the Government’s budget repair strategy is
a commitment to more than offset new spending measures by reductions elsewhere
in the Budget. The Government’s decision not to proceed with the Paid Parental
Leave Scheme has allowed it to use the money allocated to the scheme to more
than offset the cost of policy decisions taken since MYEFO 2014–15.
Consequently, the budget position is better off by $1.6 billion over the
five years to 2018–19.
On the other hand, the Government’s decision not to proceed
with certain measures from the 2014–15 Budget plus the cost to the budget of
delays in passing legislation since MYEFO 2014–15, has worsened the budget
position by $5.2 billion over the five years to 2018–19.
The government’s broader policy
agenda
The Budget has also been framed around the Government’s
broader policy agenda. This year the major policy themes in the Budget include:
Building a stronger economy: Jobs, growth and opportunity—the
Jobs and Small Business Package; the Northern Australia Infrastructure
Facility; and additional support for farmers through the extension of drought
relief loan schemes and social and community support measures.
Supporting Australian families—increased support for
child care assistance including a new Child Care Subsidy and a two year pilot
program for in-home care by nannies; increased funding for the Immunise
Australia programme; and new and amended listings on the Pharmaceutical
Benefits Scheme, including for more effective cancer treatments.
A fairer Australia—strengthening the integrity of the
tax system; strengthening the integrity and sustainability of the welfare
system; and strengthening Australia’s foreign investment framework.
Protecting Australia—new funding for national
security measures and additional funding to extend and expand Australia’s
military operations in Afghanistan, Iraq and the Middle East.
As part of this year’s Budget Review, the Parliamentary
Library’s research specialists have prepared briefs on the major policy
decisions taken in the Budget.
The fiscal outlook
The Budget forecasts an underlying cash deficit of $35.1 billion
(2.1 per cent of GDP) in 2015–16, improving to a projected deficit of
$6.9 billion (0.4 per cent of GDP) in 2018–19 (Table 4).
The size of the projected fiscal consolidation between 2015–16
and 2018–19 is around 1.7 per cent of GDP. By way of comparison, at
the time of MYEFO 2014–15, the size of the projected fiscal consolidation
between 2014–15 and 2017–18 was around 1.9 per cent of GDP.
The pace of fiscal consolidation is relatively even across
the forward estimates period: around 0.6 per cent of GDP between 2015–16
and 2016–17; 0.7 per cent of GDP between 2016–17 and 2017–18; and 0.4
per cent of GDP between 2017–18 and 2018–19.
The revenue side accounts for most of the projected fiscal
consolidation between 2015–16 and 2018–19, with general government sector
receipts estimated to increase by around 1.2 per cent of GDP over the
period. Taxation receipts are expected to increase by around
1.1 per cent of GDP and non-taxation receipts by around
0.1 per cent of GDP.
Table 4: The underlying cash
balance
|
2013–14
|
2014–15
|
2015–16
|
2016–17
|
2017–18
|
2018–19
|
Underlying cash balance
($m)
|
-48,456
|
-41,121
|
-35,115
|
-25,836
|
-14,396
|
-6,905
|
Per cent of GDP
|
-3.1
|
-2.6
|
-2.1
|
-1.5
|
-0.8
|
-0.4
|
Source:
Australian Government,
Budget strategy and outlook: budget paper no. 1:
2015–16, Statement 10,
Table 1, p.10-7.
General government sector payments are expected to fall by
around 0.6 per cent of GDP between 2015-16 and 2018–19.
Given the Budget relies heavily on stronger taxation
receipts over the next four years to substantially reduce the underlying cash
deficit, much would appear to hinge on economic growth getting back to its long
term average of around 3.2 per cent in 2016–17. In the wake of the GFC,
Australian growth has averaged just 2.5 per cent a year between 2008
and 2014. If growth disappoints then tax receipts may not grow strongly enough
to keep the Government’s planned fiscal consolidation on track. This would make
achieving the Government’s goal of reaching a budget surplus of at least
1 per cent of GDP by 2023–24 harder and would require larger future
fiscal consolidation measures.
There is also risk on the expenditure side. Real expenditure
growth between 2015–16 and 2018–19 is forecast to average just
1.8 per cent per year. This compares with average real growth between
1980–81 and 2014–15 of around 3.3 per cent per year. The Government
will need to maintain considerable fiscal discipline over the next few years if
it is to reduce expenditure by around 0.6 per cent of GDP between 2015–16
and 2018–19.
The structural budget balance
In Statement 3 of Budget Paper No. 1 the
Government reports on the structural budget balance.[27] Estimates of the structural
budget balance remove the temporary changes to revenues and expenditures, due
to fluctuations in commodity prices for example, and the extent to which
economic output deviates from its potential level due to the economic cycle. As
the Government notes, when considered in conjunction with other measures,
estimates of the structural budget balance can provide insights into the
sustainability of current fiscal settings.
The structural budget balance is estimated to improve from a
deficit of around 1.25 per cent of GDP in 2015–16 to modest surpluses
from 2018–19 through to the end of the projections period in 2025–26. This
outlook is largely unchanged from the forecasts in MYEFO 2014–15.
How has the short-term fiscal
outlook changed?
Figure 1 provides a snapshot of how the outlook for the
underlying cash balance has changed since the 2014–15 Budget. Over the four
years to 2017–18, it has worsened since last year’s budget. While the forecasts
and projections still show a consistent pattern of gradually declining cash
deficits, in dollar terms the deficit in 2017–18 is now projected to be around
5 times larger than was the case at the time of last year’s budget.
At the time of the 2014–15 Budget the size of the
accumulated budget deficits over the four years to 2017–18 was
$60.2 billion. This figure was revised up in MYEFO 2014–15 to
$103.9 billion and in this year’s Budget to $116.5 billion. This
suggests that since last year’s Budget there has been slippage over the four
years to 2017–18 of $56.3 billion.
The bulk of this slippage is due to parameter and other
variations (Table 5). The cumulative impact of parameter and other
variations over the four years to 2017–18 has been to worsen the fiscal outlook
by around $42.8 billion (76 per cent of the overall slippage). The
cumulative impact of policy changes over the same period has been to worsen the
fiscal outlook by around $13.4 billion (24 per cent of the overall
slippage).
Focusing just on developments since MYEFO 2014–15, the
fiscal outlook over the four years to 2017–18 has worsened by around
$12.5 billion. Policy changes account for $9.3 billion
(74 per cent) and parameter and other variations for
$3.2 billion (26 per cent) of the overall slippage.
Figure 1: Revisions to the
underlying cash balance ($m)
Source: Australia Government, Budget strategy and outlook: budget paper no. 1:
2015–16, Statement 1,
Table 1, p. 1, Statement 3, Table 7, p. 3-17.
-
Since MYEFO 2014–15 policy decisions have increased payments by
around $10.1 billion over the four years to 2017–18, which has been
partially offset by decisions which have increased receipts by around
$0.8 billion over the same period.
-
Since MYEFO 2014–15 parameter and other variations have reduced
payments by around $17.4 billion and increased Net Future Fund earnings by
an estimated $0.7 billion. Against this, parameter and other variations
have reduced receipts by around $21.3 billion.
Statement 3 of Budget Paper No. 1 includes
a detailed reconciliation of the changes to the projected cash balance since
the 2014–15 Budget.
Table 5: The effect of policy and
parameter variations on the underlying cash balance
|
Changes
from 2014–15 Budget to
2014–15 MYEFO
$m
|
Changes
from
2014–15 MYEF to
Budget 2015–16
$m
|
|
Policy
decisions
|
Parameter
changes
|
Policy
decisions
|
Parameter
changes
|
2014-15
|
-2,314
|
-8,275
|
-578
|
-181
|
2015-16
|
-2,195
|
-11,960
|
-4,525
|
650
|
2016-17
|
-501
|
-9,781
|
-2,547
|
-2,445
|
2017-18
|
950
|
-9,606
|
-1,665
|
-1,251
|
Total
|
-4,059
|
-39,622
|
-9,315
|
-3,227
|
Source:
Australian Government,
Budget strategy and outlook: budget paper no. 1:
2015–16, Statement 3,
Table 7, p. 3-17.
The Commonwealth’s balance sheet
The deterioration in Australia’s short-term fiscal outlook
is reflected in the Commonwealth’s balance sheet (see Table 6). In broad
terms, larger projected cash deficits over the four years to 2017–18 mean that
the Australian Government faces a larger financing requirement and will need to
borrow more.
Net financial worth
The primary indicator of fiscal sustainability articulated
in the Government’s medium-term fiscal strategy is net financial worth (that
is, total financial assets minus total financial liabilities). It provides a
broad measure of the Government’s assets and liabilities as it includes both
the assets of the Future Fund and the superannuation liability the Future Fund
is intended to offset. One of the goals of the Government’s medium-term fiscal
strategy is to strengthen the Government’s balance sheet by improving net
financial worth over time.
-
The short-term outlook for the Commonwealth’s net financial worth
has deteriorated over the past year. It was projected to be
-$352.7 billion (18.7 per cent of GDP) in 2017–18 at the time of Budget
2014–15; this declined to -$398.7 billion (21.5 per cent of GDP) at
the time of MYEFO 2014–15; and declined further to -$415.2 billion
(22.6 per cent of GDP) in this year’s Budget.
General government sector net debt
Australian Government general government sector net debt is
equal to the sum of deposits held, government securities (at market value),
loans and other borrowings, minus the sum of cash and deposits, advances paid
and investments, loans and placements.
-
At the time of last year’s Budget net debt was forecast to be
$264.2 billion by 2017–18 (14 per cent of GDP). This projection
was revised up in MYEFO 2014–15 to $315.8 million (17 per cent of GDP) and
to $323.7 billion (17.6 per cent of GDP) in this year’s Budget.
-
Net debt as a percentage of GDP is still projected to peak in
2016–17 but at a higher level. The Budget has net debt as a percentage of GDP
peaking at 18 per cent of GDP in 2016–17 compared with 17.2 per cent of
GDP at the time of MYEFO 2014–15 and 14.6 per cent of GDP at the time of last
year’s Budget.
General government sector net
interest payments
Australian Government general government sector net interest
payments are equal to the difference between interest paid and interest
receipts.
-
In dollar terms, net interest payments are now projected to be
marginally lower in 2017–18 than was the case in last year’s Budget, but
unchanged as a percentage of GDP.
Table 6: Net financial worth,
net debt and net interest payments ($b and %)
|
2014–15
|
2015–16
|
2016–17
|
2017–18
|
2018–19
|
|
Net
financial worth
|
Budget 2014–15 ($b)
|
-329.2
|
-342.4
|
-351.0
|
-352.7
|
|
Budget 2014–15 (% GDP)
|
-20.2
|
-20.0
|
-19.6
|
-18.7
|
|
MYEFO 2014–15 ($b)
|
-347.9
|
-374.8
|
-392.7
|
-398.7
|
|
MYEFO 2014–15 (% GDP)
|
-21.6
|
-22.3
|
-22.2
|
-21.5
|
|
Budget 2015–16 ($b)
|
-350.1
|
-383.5
|
-406.0
|
-415.2
|
-417.8
|
Budget 2015–16 (% GDP)
|
-21.8
|
-23.2
|
-23.3
|
-22.6
|
-21.6
|
|
Net
debt
|
Budget 2014–15 ($b)
|
226.4
|
246.4
|
261.3
|
264.2
|
|
Budget 2014–15 (% GDP)
|
13.9
|
14.4
|
14.6
|
14.0
|
|
MYEFO 2014–15 ($b)
|
244.8
|
279.6
|
304.4
|
315.8
|
|
MYEFO 2014–15 (% GDP)
|
15.2
|
16.7
|
17.2
|
17.0
|
|
Budget 2015–16 ($b)
|
250.2
|
285.8
|
313.4
|
323.7
|
325.4
|
Budget 2015–16 (% GDP)
|
15.6
|
17.3
|
18.0
|
17.6
|
16.8
|
|
Net
interest payments
|
Budget 2014–15 ($b)
|
10.5
|
11.5
|
12.2
|
12.9
|
|
Budget 2014–15 (% GDP)
|
0.6
|
0.7
|
0.7
|
0.7
|
|
MYEFO 2014–15 ($b)
|
10.8
|
11.3
|
12.1
|
12.7
|
|
MYEFO 2014–15 (% GDP)
|
0.7
|
0.7
|
0.7
|
0.7
|
|
Budget 2015–16 ($b)
|
10.9
|
11.6
|
11.9
|
12.3
|
13.0
|
Budget 2015–16 (% GDP)
|
0.7
|
0.7
|
0.7
|
0.7
|
0.7
|
Source:
Australian Government,
Budget strategy and outlook: budget papers no. 1: 2014–15, Statement 10, Table 5, p.10-11, Table 8,
p. 10-14; Australian Government,
Mid-year economic and fiscal outlook 2014–15, Appendix D, Table D6, p. 273, Table D9,
p. 277; Australian Government,
Budget strategy and outlook: budget paper no. 1:
2015–16, Statement 10, Table 4,
p. 10-12, Table 8, p. 10-19.
-
The Budget assumes that the weighted average cost of borrowing
for the future issuance of Treasury Bonds in the forward estimates period will
be slightly lower than was the case in last year’s Budget and MYEFO 2014–15.
Statement 6 of
Budget Paper No. 1 includes
a detailed reconciliation of the changes in the Commonwealth’s balance sheet
since the time of MYEFO 2014–15.
[1].
The budget figures in this article have been taken from the following
document unless otherwise sources: Australian Government, Budget
strategy and outlook: budget paper no. 1: 2015–16.
[2].
Reserve Bank of Australia, Statement
on Monetary Policy, May 2015, p. 4.
[3].
Australian Government, Budget
strategy and outlook: budget paper no. 1: 2015–16,
Statement 2, Box 2, pp. 2–13–2–14.
[4].
Ibid., Statement 2, Table 1, p. 2–5.
[5].
Ibid., p. 2–16.
[6].
Ibid., Statement 1, Table 2, p. 1–7.
[7].
Ibid., p. 2-18.
[8].
R Garnaut, ‘We
need a plan to revive the economy’, Australian Financial Review, 8
April 2015, p. 8.
[9].
Statement on Monetary Policy, May 2015, op. cit., p. 39.
[10].
Budget strategy and outlook: budget paper no. 1: 2015–16, op.
cit., p. 2–3.
[11].
Statement on Monetary Policy, May 2015, op. cit., pp. 68–69.
[12].
R Garnaut, Dog days: Australia after the boom, Redback,
Collingwood, Vic, 2013.
[13].
R Garnaut, ‘We need a plan to revive the economy’, op. cit.
[14].
International Monetary Fund, World
Economic Outlook: uneven growth: short- and long-term factors, April
2015, pp. 68–69.
[15].
Ibid., p. 2.
[16].
European Central Bank, ECB
announces expanded asset purchase programme, media release, 22 January
2015.
[17].
Other East Asian economies comprises the newly industrialised economies
of Hong Kong, South Korea, Singapore and Taiwan and the Association of South
East Asian Nations group of five (ASEAN 5): Indonesia, Malaysia, the Philippines,
Thailand and Vietnam.
[18].
Budget strategy and outlook: budget paper no. 1: 2015–16, op.
cit., p. 2–6.
[19].
World Economic Outlook: Uneven growth: Short- and long-term factors,
op. cit., p. 15.
[20].
Ibid., p. 18.
[21].
Ibid., see Chapter 3.
[22].
Australian Government, Budget
strategy and outlook: budget paper no. 1: 2014–15,
Statement 4.
[23].
Australian Government, 2015
Intergenerational Report: Australia in 2055, March 2015.
[24].
Budget strategy and outlook: budget paper no. 1: 2015–16, op.
cit., p. 3-5.
[25].
S Koukoulas, Budget
2015: surplus could be sooner than we think, ABC website, 13 May 2015.
[26].
Ibid.
[27].
Ibid., p. 3-12–3-13.
All online articles accessed May 2015.
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