Publications

Budget Features 1999-2000

Contents

Feature Articles:

• The Accrual Budgeting Framework


• Budget Presentation


• The 1999-2000 Budget: its Public Policy Context


• Economic Strategy Behind the 1999-2000 Budget


• Government Surpluses and Debt


• Taxation Measures


• Identifying Transactions and Incomes of Persons-Tax Reform or Privacy Issues


• Do the Primary Financial Statements Comply with Accounting Standards?


• Statistical Overview

Glossary of Budget Terms

Accrual accounting A system of accounting that recognises costs, revenues, lending and borrowing when they occur. Accrual accounting differs from cash accounting-the traditional basis used by the Commonwealth-which records transactions only when a payment or receipt is made. Thus the timing of the recording of transactions can differ under accrual accounting and cash accounting. Accrual accounting also includes non-cash costs-such as depreciation-and costs which, while incurred, have not yet been paid (e.g. accruing superannuation entitlements). Accrual accounting thus seeks to measure the full cost of providing goods and services in a given period. The 1999-2000 Budget is the first to be presented in an accrual framework.

Accrual budgeting A comprehensive budget incorporating assets, liabilities, expenses and revenues, including cash receipts and expenditures. Under accrual budgeting, agencies are funded for the full cost of their functions, including non-cash costs (e.g. depreciation). Thus the amount an agency is appropriated under accrual budgeting in any one year may exceed its cash costs (although the amount appropriated covers its full costs). Any unspent amount is accumulated for use in future years when required (e.g. accumulated depreciation to replace buildings and equipment).

Additional estimates Extra spending requirements (e.g. for cost overruns in existing programs or for new programs) not foreseen when the Budget was presented. Additional estimates are contained in Appropriation Bills Nos. 3 and 4 and the Appropriation (Parliamentary Departments) Bill No. 2.

Administered expenses Items that agencies administer on behalf of the Commonwealth (e.g. social security payments to eligible recipients). Administered expenses include grants, subsidies and benefits.

Advance to the Minister for Finance Contingency funds, appropriated in Appropriation Acts Nos. 1 and 2, to cover urgent expenditure not foreseen when the relevant Bill was drawn up (e.g. natural disasters) or for which funding provision was inadequate. The advance may also be used to implement changes in priorities, by enabling 'transfers' from the purpose for which they were originally appropriated to another purpose, pending specific appropriation.

Amortisation Refers to the writing off of the value of an asset over its lifetime. The term is usually applied to the writing off of 'intangible' assets such as goodwill or expenditure on software. The term is sometimes used as a synonym for depreciation. (See also depreciation).

Appropriation Refers to the authorisation by Parliament of expenditure of public moneys from the Consolidated Revenue Fund (CRF) for a particular purpose. Annual appropriations under Appropriation Bills Nos. 1 and 2 account for about only 25 per cent of total appropriations (the balance is accounted for by Special Appropriations). A major difference between the 1998-99 and 1999-2000 Budgets is that under the accrual accounting framework used in the 1999-2000 Budget, moneys appropriated for accrued expenses will remain in the CRF until they are required to be spent in future years. In the past, moneys appropriated but not spent lapsed at 30 June.

Appropriation Bill (No. 1) A Bill to appropriate moneys from the Consolidated Revenue Fund for the ordinary annual services of government i.e. recurrent services (e.g. running costs) and recurrent expenditures on already established programs.

Appropriation Bill (No. 2) A Bill to appropriate moneys from the Consolidated Revenue Fund for purposes other than the ordinary annual services of government e.g. payments to the States (i.e. those not covered by special appropriations), and spending on new programs.

Appropriation Bills (No. 3 and No. 4) When funds required exceed the approved appropriations contained in Appropriation Acts 1 or 2 because of spending overruns, the government may seek additional appropriations in Appropriation Bills Nos. 3 and 4. The government may also seek appropriations for new spending in these Bills (see 'additional estimates').

Appropriation (Parliamentary Departments) Bills (No. 1 and No. 2) Bills to appropriate moneys from the Consolidated Revenue Fund for the Parliamentary Departments. Bill No. 2 covers additional appropriations (see 'additional estimates').

Change in net assets In an accrual system, the net change in accumulated assets and liabilities. This measure equals the operating balance plus asset revaluations. Thus a positive operating balance-akin to the profit in a business-will increase net assets. Changes in net assets should be interpreted cautiously. On the one hand, increased asset values may indicate the ability to retire debt through asset sales. On the other hand, capital gains may also reflect higher costs of replacing assets in the future and the corresponding need for higher revenue.

Commonwealth Financial Transactions A monthly statement, in economic type/functional format, of revenue and outlays, the deficit or surplus, and the ways in which the deficit has been financed or the surplus invested. It compares transactions to date with budgeted revenue and outlays and the previous year's figures. Sometimes referred to as the Niemeyer Statement.

Commonwealth Public Account (CPA) The main bank account of the Commonwealth, maintained at the Reserve Bank, through which the day-to-day operations of the budget sector are conducted. It holds the moneys of the Consolidated Revenue Fund. Bodies (e.g. CSIRO) that receive budget funding but maintain their own bank accounts, operate outside the CPA. However, the distinction will become less clear as more agencies operate their own bank accounts.

Consolidated Revenue Fund (CRF) The Fund established by section 81 of the Constitution, which requires that all monies received by the Commonwealth must be paid into this Fund, and so is the main working fund. Section 83 of the Constitution requires an appropriation of moneys by the Parliament before any payment can be made from the CRF. The Financial Management and Accountability Act 1997 (FMA Act) established four funds-the Consolidated Revenue Fund, the Loan Fund, the Reserved Money Fund and the Commercial Activities Fund (the latter two consist of a number of trust accounts) in the Commonwealth Public Account (CPA).

Depreciation Refers to the reduction in the value of an asset though wear an tear. The term is usually applied to physical assets such as plant and equipment. See also amortisation.

Forward estimates When a Budget is brought down, 'rolling' forward estimates are presented for the three years following the Budget year. These estimates assume no further policy decisions (i.e. they are based on existing policies), and are based on estimates of key economic parameters such as inflation and unemployment. Forward estimates are the starting point for budgetary deliberations, since all new policy or savings proposals constitute variations to the forward estimates.

General revenue assistance Grants paid by the Commonwealth to the States and Territories to assist in meeting recurrent outlays. They are the main form of assistance to the States and are 'untied' (i.e. there are no conditions on their expenditure). The Commonwealth Government proposes to replace general revenue assistance (but not Specific Purpose Payments) with the revenue from the GST. In 1998-99, general revenue grants comprised Financial Assistance Grants, Special Revenue Assistance ('transitional allowances' and 'special fiscal needs' grants to the Australian Capital territory), and National Competition Payments.

Horizontal fiscal equalisation The principle underlying the Commonwealth Grants Commission's assessments of per capita relativities, which are the basis for the interstate distribution of general revenue grants. Under this principle, grants are distributed to provide each State and Territory with the capacity to provide public services at an average standard and level of efficiency, for comparable revenue effort.

Inputs Resources in the forms of people, materials, energy, facilities and funds that an agency uses in activities to produce outputs.

Net assets In an accrual system, equal total assets less total liabilities. Net assets take account of both non-debt liabilities (such as accrued superannuation), non-financial assets (such as land and buildings) and equity in public trading and financial enterprises. Net assets in an accrual system thus provide a more comprehensive picture of the government's financial position at a point in time than the cash framework measure of net debt-the difference between gross debt and financial assets. However, the valuation of some assets is highly problematic.

Operating balance In an accrual system, is revenues less expenses. It excludes spending on capital assets but includes non-cash costs (such as depreciation) and costs which, while incurred, have not yet been paid (e.g. accruing superannuation liabilities). The operatingbalance thus reflects the full cost of providing goods and services.

Outcomes The results, and consequences of actions by the government on the community. Planned outcomes are the results or consequences that government wants to achieve for the community. Actual outcomes are the results or consequences actually achieved.

Outputs The goods and services agencies produce on behalf of government for external organisations or individuals. Outputs include goods and services produced for other areas of government external to the agency.

Performance measures Measures to assess the extent of success in achieving outcomes. Performance measures relate to outcomes, outputs, third party outputs and administered items. They are used when there is a direct casual link between an action and a change in performance. Performance measures are a more precise measure than indicators.

Price The amount the government pays for the delivery of agreed outputs.

Real Adjusted for inflation. For example, grossdomestic product (GDP) is the nominal (current price) value of GDP adjusted for inflation to yield real (constant price) GDP values. This process (deflating) is to a range of other data. For example, real growth in outlays is measured by deflating nominal outlays by the GDP deflator, a measure of price changes throughout the entire economy.

Seignorage The net revenue derived by any money-issuing body e.g. a note-issuing authority. The difference between the face value of coins and the cost of their minting is an example of seignorage.

Special (or Standing) appropriation Moneys appropriated by a specific Act for a specific purpose (e.g. unemployment benefits, and grants to the States for schools). Special Appropriations do not require annual authorisation by the Parliament, as they do not lapse at the end of each financial year; rather, Special appropriations continue until their authorising legislation is either amended or otherwise lapses. They may or may not be for a specific amount of money or particular period of time. A distinction is sometimes drawn between Standing and Special Appropriations. Standing Appropriations refer to an open-ended appropriation of the Consolidated Revenue Fund by the enabling Act of a legislatively-based program. The amount appropriated will depend on the demand for payments by claimants who have satisfied program eligibility criteria as specified in the legislation. Special Appropriations can be regarded as somewhere between Standing and Annual Appropriations. While a specified amount is provided, it is included in a separate Bill authorising the particular program, and can be specified for any number of years. Special Appropriations account for around 75 per cent of underlying outlays.

Specific Purpose Payments Commonwealth payments to the States and Territories for designated purposes e.g. for housing under the Commonwealth-State Housing Agreement, legal aid, and government schools. SPPs comprise current and capital grants, and are classified into three categories: SPPs paid to the States; those paid through the States for on-passing to local government, other bodies (e.g. universities) and individuals; and a small number of SPPs made directly to local government.

Tax Expenditures Concessions in the tax system, which reduce the tax liabilities of particular groups of taxpayers. The concessions reduce or delay collection of taxation revenue, and constitute a call on the Budget similar to outlays. Superannuation concessions are the single largest tax expenditure.

References

This glossary draws on those on the Department of Finance and Administration web site. The 'Guide to the Commonwealth Budget Papers 1999-2000 ' issued with the Budget Papers contains a glossary at page 22.

Introduction

John Kain

Since the 1996-97 Budget, the Department of the Parliamentary Library (DPL) has endeavoured to complement the official Budget documentation by providing Senators and Members with a Budget Review brief produced from the independent perspective of the Department's own research specialists. Budget Review was designed to provide parliamentarians with timely background and selective Budget analysis and commentary with a focus on those Budget measures that were thought to be of particular policy significance.

This publication, Budget Features 1999-2000, has a similar general purpose to the earlier Budget Reviews but is necessarily different in style to respond to the major changes in Budget reporting methods being introduced in the current Budget. It is emphasised that while being selective in the focus given to individual elements of the broad array of the Budget measures, it is not the intention of this brief to make value judgements about the public interest implications of individual Budget initiatives or to aim to provide a comprehensive treatment of the Budget.

In essence, these changes in reporting methodology stem from the Government's April 1997 decision to implement an accrual based financial management framework for the Commonwealth. It is the Government's stated intention that the new framework should give Commonwealth finances a more 'business like' focus and discipline by accounting for the full cost of service delivery, incorporating a 'whole of government' approach to budgeting and by directly linking expenditures to outputs produced and outcomes achieved.

Because of the central significance of the new accrual reporting regime to the overall Budget presentation and the bottom-line Budget results, this edition of Budget Features contains some in depth explanation and commentary on the accrual framework of public accounts aimed at the lay reader and with a particular emphasis on its implications for Budget reporting and presentation. It begins with an explanation of the Accrual Budget framework.

It should be noted that the former system of Budgetary analysis which addressed the effects of specific Budget Measures on individual Programs and Sub Programs is no longer feasible under the new reporting arrangements as individual Programs may not necessarily equate with the new Output measures which underpin the accrual reporting system. Thus, it may be that any single Program may now be split across a number of Portfolio Output measures; as a result the sort of information on Program effects of Budget measures is no longer so readily discernible notwithstanding the objective of achieving greater transparency under the new reporting framework.

Indeed, in its reporting of expenses (as distinct from outputs) the new accounting framework would appear to be less transparent than the former reporting arrangements, particularly at the more disaggregate levels. In the case of some portfolio activities, the aggregation of data into such broad outcomes prevents any meaningful analysis at the functional program level. In compiling this publication, difficulties have been encountered in tracing program data in the official Budget Statements, even when referred to in Ministerial media releases. Complications such as these have necessarily influenced the scope and character of the analysis contained in this publication and the degree of consistency of analytical presentation across portfolio activities.

Quite apart from the change to accrual reporting, the 1999-2000 Budget embraced another major policy initiative of the Government in the form of the ANTS (A New Tax System) (1) package. The impact of ANTS is pervasive throughout the forward estimate elements of the Budget and a number of the feature articles contained in this publication address some of the major macroeconomic issues arising in this context. However no attempt is made to analyse the individual ANTS initiatives as these have already been dealt with very extensively in other recent DPL publications.

This publication consists of three main elements:

• Feature articles which provide Budgetary overviews and analysis and also deal in a more detailed fashion with some discrete policy issues arising from Budget initiatives. They address some of the fundamental facets and underpinning methodology behind the Budget and as such are of special policy significance and warrant more detailed assessment. The articles include a layperson's introduction to the accrual reporting framework, commentary on the public policy and economic context of the Budget, a searching analysis of Budget surpluses and debt issues from the longer term perspective, discussion of the Budget's tax measures and associated policy issues and a concluding article providing a statistical overview of the Budget.
• Portfolio directions commentaries are of a more descriptive nature and address Budget directions from the individual portfolio perspective.
• Selective analyses of particular Budget measures follow each portfolio overview, providing short, succinct commentaries cover revenue, expense and capital measures where there is a substantial financial impact and/or where there are significant policy implications.

Budget Features 1999-2000 has necessarily been prepared in some haste with a view to making it available to parliamentarians as soon as possible after the handing down of the Budget. As noted above, the task of interpreting the Budget and compiling this publication was a major challenge this year because of the very substantial restructuring of the Budget reporting framework and because of differences in the level of detailed numerical information and reporting practices apparent between the Portfolio Budget Statements of the various portfolios. Nevertheless every effort has been made to ensure its accuracy in the time available.

1. Address for Bills Digest page together with full list of relevant Bills Digests

Feature Articles

The Accrual Budgeting Framework

Richard Webb

The 1999-2000 Budget differs from previous budgets in two main ways. First, the Budget and associated documentation are presented in an outcomes and outputs framework. Previous budgets were based on a program approach. Second, the budget uses an accrual budgeting framework. Previous budgets used a cash framework. This article reviews the reasons for introducing accrual accounting and budgeting and the outcomes/output framework, their advantages and limitations, and experience elsewhere of accrual budgeting.

Outcomes

The program approach was criticised as being excessively focussed on the inputs that departments devote to programs, and that departments tended to see programs as ends in themselves rather than as means to ends. Consequently, it was argued, insufficient attention has been given to the objectives that the programs seek to achieve. By specifying desired outcomes in the budget documents-the results or impacts on the community or the environment that the government intends to achieve-it is hoped that departments will focus their attention more on the attainment of objectives and better ways of attaining them. The Department of Finance and Administration, for example, has three outcomes: sustainable government finances; improved and more efficient government operations; and efficiently functioning Parliament.

Departments will be required to report in their annual reports on how successful they were in achieving desired outcomes. That is, departments will report actual outcomes-the results, impacts or consequences of actions by the Commonwealth on the community-against desired outcomes, and be required to explain why actual outcomes diverged from desired outcomes. It should be noted that actual outcomes include the consequences of all factors, not just those under the influence of the Commonwealth Government.

A limitation of formulating outcomes at a portfolio or agency level is that the outcomes cannot take account of activities undertaken for similar or related purposes by other portfolios. For example, the provision of regional services includes not just some of the services provided under the Transport and Regional Services portfolio but under other portfolios such as communications and health. The Ministerial Statements (e.g. 'Regional Australia: Meeting the Challenges') identify related cross-portfolio activities. A criticism of the outcomes as they have actually been formulated in the budget papers is that some are very general, thus limiting their usefulness in enhancing the accountability of departments and agencies. In some cases, the general nature of the outcomes seems to reflect the disparate nature of portfolio activities.

Outputs

Outputs are the goods and services produced by agencies on behalf of government for external organisations or individuals, that contribute to achieving outcomes. Outputs include goods and services produced for other areas of government external to the agency. The provision of policy advice is an output of a number of departments. More than one output can contribute to an outcome. For example, in the Department of Finance and Administration, the public sector financial management output group, the property and contract management output group, and the government information output group jointly contribute to the 'improved and more efficient government operations' outcome.

Accrual Accounting

Historically, departmental financial accounts-like the budget-were prepared on a cash accounting basis. Under cash accounting, transactions are recorded only when there is a transfer of funds. Cash accounting has the merit of being simple to apply and understand. Cash accounting, however, can be misleading when it misstates the cost of providing goods and services by assigning costs to the wrong time period or activity.

Commonwealth departments have for a number of years prepared their financial statements on an accrual accounting basis to provide more accurate estimates of the cost of providing services than under cash accounting. Accrual accounting is a system that recognises costs, revenues, lending and borrowing when they occur. Thus the timing of the recording of transactions can differ under accrual accounting and cash accounting. Accrual accounting also includes non-cash costs-such as depreciation-and costs which, while incurred, have not yet been paid (e.g. accruing superannuation entitlements). Accrual accounting thus seeks to measure the full cost of providing goods and services in a given year.

But accrual accounting's limitations must also be borne in mind. First, there is the problem of asset valuation. This can be problematic when there are no clear indicators of how assets should be valued. The valuation of assets will also affect the value of depreciation of those assets allocated to different years. A second problem arises in the attribution of costs to different activities. Some costs can be directly allocated to activities where the costs are directly related to those activities. However, there is often no clear basis for assigning costs, especially those costs that do not vary greatly with the level of service provision or cannot be closely identified with a particular activity. The allocation of these 'fixed' or 'overhead' costs can be quite arbitrary. Third, while accrual accounting takes account of the 'stock' of assets and liabilities at a point in time and the 'flow' of revenues and outlays during a period of time, it cannot take account of all future outlays and revenues. Nonetheless, on balance, accrual accounting generally provides better estimates of the costs of service provision within a given year and for particular activities than does cash accounting.

Financial Statements

The Budget Papers contain four standard accounting statements-the operating statement, the balance sheet, the cash flow statement and the capital budget. These have parallels with the financial statements that commercial companies prepare. However, it should be noted that there are important differences between the budget accounting statements and those prepared by companies, and so caution should be exercised when drawing these parallels. Most obviously, 'revenue' in a business comes from the sale of goods and services whereas sales account for only a small proportion of much departmental revenue, the bulk coming from appropriations. Nevertheless, it may be useful to think of the operating statement as akin to the profit and loss statement of a business. A departmental balance sheet is akin to the balance sheet of a business. However, the difference between assets and liabilities in a company balance sheet represents shareholder equity, whereas 'equity' in departmental balance sheets is best though of as the 'residual interest in assets after deduction of liabilities'. The cash flow statement shows the source and disposition of cash during the year.

The balance sheet under accrual accounting provides a more 'realistic' reporting of privatisation. That's because revenue from the sale of assets is offset by a decline in the value of net public assets. For example, the sale of a financial asset (e.g. equity in a government corporation) results initially in an increase in cash holdings, which offsets the value of the investment (assuming that the sale proceeds equal the book value of the investment). The fall in the value of financial assets was not reported under the cash accounting system. If the proceeds of the sale are used to reduce public debt, there is an equal reduction in both assets and liabilities, with net equity unchanged.

Accrual Budgeting

Whereas accrual accounting measures the full cost of providing services within a given year, accrual budgeting provides the finances for that cost. Accrual budgeting thus 'aligns' the budget with departmental financial accounts prepared on an accrual accounting basis. Differences will arise in any one year between the funds appropriated under accrual budgeting and the cash departments spend. For example, funds will be appropriated to cover the cost of the depreciation of assets such as plant and equipment. However, these funds will only be spent as cash when the asset is replaced. In effect, accrual budgeting 'sets aside' funds for asset replacement. Similarly, the increase in superannuation obligations to public servants will be recognised as an expense incurred, and funds will be appropriated for that purpose, even though the cash payment of these obligations will not occur for future years. In some years therefore, cash outlays will exceed accruals outlays but in other years will be less.

Experience Elsewhere

Most OECD countries present their budgets in cash terms. While a number have shown interest in accrual accounting, this has been mainly in the context of ex post financial statements rather than for ex ante budgetary purposes. The Netherlands proposes to introduce accrual accounting and budgeting in all government services where it is deemed useful, but at the aggregate level, will continue the cash system of budgeting and reporting. The United Kingdom has indicated that it intends to move away from a purely cash basis of reporting. Only New Zealand and Iceland have adopted accrual budgeting for their whole-of-government financial statements and budgets. The experience of both countries is that accrual accounting has increased their focus on longer-term issues. For example, New Zealand values highways and other infrastructure, and includes them as assets in the balance sheet. This has led to increased attention to the management of these assets and their maintenance. Iceland's decision to include future civil service pension obligations as liabilities in the balance sheet has led to increased awareness of their implications.

The Australian States have produced, or are in the process of producing, accrual budgets. In New South Wales, under the provisions of the General Government Debt Elimination Act 1995, the 1998-99 Budget included for the first time, financial statements for each General Government Sector agency and for the Sector as a whole, prepared on an accrual accounting basis. In South Australia, the 1999-2000 Budget to be presented on 29 May 1999 will be the first to be presented in an accrual/output format. In Tasmania, the outcomes/output methodology was fully adopted for the 1996-97 Budget. In Western Australia, the 1997-98 Budget reported agencies' key outcomes and outputs, while the 1998-99 Budget linked outputs to outcomes, and output costs were presented on an accrual basis. In Queensland, the outcomes framework will be implemented from 1 July 1999.

Appropriation Bills

There are also three 'omnibus' bills which seek Parliamentary approval for a large number of appropriations. These are presented on Budget night and form the basis of the Budget debates in both Chambers. These are first, Appropriation Bill No. 1, which appropriates monies for the 'ordinary annual services' of the Government and for defence purposes. Ordinary annual services refer to recurrent services (e.g. running costs) and recurrent expenditures on already established activities. Appropriation Bill No. 2, appropriates monies for non-recurrent services, payments to the States (i.e. those not covered by special appropriations), and expenditures on new programs. The Appropriation (Parliamentary Departments) Bill has, since 1982-83, appropriated monies for the Parliamentary Departments. The allocation of items between Appropriation Bills 1 and 2 is largely unchanged under the new framework. However, amounts for asset replacement have been moved to Appropriation Bill  No. 1 while new capital acquisitions have been moved to Appropriation Bill No. 2.

Budget Presentation

Richard Webb

This article looks at some features of the new budget format from a user's perspective with a particular focus on the availability of information that Parliamentarians often seek.

The presentation of the 1999-2000 Budget Papers and associated documentation differs considerably from previous years because of the adoption of accrual accounting, and the move from the program structure to the outcomes and outputs framework. While implemented simultaneously, there is no necessary link between accrual accounting and the outcomes/output framework. Nonetheless, they share the goal of making government more accountable by increasing the transparency of departmental activities. The main two sources of information on the Budget remain the Budget Papers themselves and the Portfolio Budget Statements (PBS). The main features of the budget documents and the relationships among the Budget Papers and the Portfolio Budget Statements (PBS) are contained in the Guide to the Commonwealth Budget Papers 1999-2000. While Budget Paper No. 1 contains information at the aggregate level on portfolio activities, more detailed information at the portfolio and outcomes and outputs levels is mostly contained in Budget Papers Nos 2 and 4. They respectively contain information on budget measures (also contained in the PBS), and activities funded by Appropriation Bills Nos 1 and 2. The PBS also contain information on administered expenses which, on average, account for 75 per cent of expenses and are appropriated mainly under special (or standing) appropriations.

While providing information at the outcomes and outputs levels, the new format necessarily entails some loss of information. One is information on expenses on a functional basis. For example, it is not possible to derive spending for manufacturing industry as a whole as was contained previously in Budget Paper No. 1. A second example is where an agency pays for new computer equipment to be used agency-wide (i.e. across several outcomes). This has hitherto been identified separately but now cannot now be, as it is spread across different outcomes. Nor is it possible to identify separately the activities of particular organisations such as the Australian Geological Survey Organisation. Indeed, unless an agency has a separate appropriation, it is often difficult to find information on its activities, which are subsumed within the outcomes/output framework.

One of the major deficiencies of the new presentation relates to administered expenses. In the PBS, details of estimated expenses for 1998-99 are listed-including by the Acts under which special appropriations are paid-but no such listing is available for 1999-2000. Rather, the PBS show a total of estimated administered expenses. For example, DoFA's third outcome is an 'efficiently functioning Parliament'. The PBS contain details of estimated expenses for 1998-99 of $221.9 million. But the PBS do not contain similar information for 1999-2000; not even expenses incurred under six authorising Acts are shown. Rather, all that is shown is the estimated total of $221 million for 1999-2000. This lack of detailed information is a particular deficiency in the case of portfolios where administered expenses account for virtually all of their activities and spending.

The 1999-2000 Budget: its Public Policy Context

John Kain

This article is a synthesis of and commentary on some of the key public policy priorities and directions identified in the Budget Strategy. It is primarily concerned with the aggregate public finance parameters consistent with the nature of the Budget Strategy as set out in Budget Paper No. 1, Budget Strategy and Outlook 1999-2000.

The Economic Growth Objective

The 1999-2000 Budget maintains the Howard Government's long standing strategic objective of striving for maximum possible economic growth and the maximum possible rise in measured living standards taking account of key economic parameters bearing on growth, in particular, the rate of inflation and the size of the current account deficit (CAD). The achievement of such economic growth is seen as the key to further substantial reduction in the rate of unemployment.

The Budget implicitly recognises that some inflation is almost inevitable, if not desirable and that given existing private sector savings and investment patterns, a sizeable current account deficit is likely to remain a feature of Australia's economic outcomes for the foreseeable future. The Government's economic strategy outlined in the Budget emphasises that 'achieving the goals of strong economic growth and minimal inflation will require ongoing policy attention to ensure that inflation and current account pressures do not constrain the economy's capacity for growth. Policy must maintain discipline on inflation and public saving, consistent with the medium-term frameworks for monetary and fiscal policy, taking account of the need to maintain adequate demand growth'.(1)

Addressing the Current Account Deficit

How does the Budget address the current account deficit? In the past, a range of Government policy responses have been implemented in response to a growing CAD. At various times in the 1980s, the Commonwealth sought to dampen domestic demand as a means of easing the demand for imports which in turn would take the pressure off the CAD. But measures aimed at easing the level of activity in the domestic economy through increases in interest rates have tended to increase foreign capital inflow in response to the higher Australian interest rate regime.(2)

This Budget and the forward Budget Strategy does not seek to ease domestic demand across the board but rather, to focus on reducing public sector borrowing so that ultimately the CAD will reflect only private sector saving and investment decisions rather than government borrowing. This will require achieving the Government's medium term fiscal goal which it refers to as 'fiscal balance', on average, over the course of the economic cycle.

Implications of Achieving 'Fiscal Balance'

In practical terms, a fiscal balance strategy implies that relatively large surpluses are budgeted for in years of robust economic growth while in those parts of the economic cycle when economic growth is subdued or negative, budget surpluses may be more modest or that a budget deficit may be appropriate. This caveat on the continued attainment of budget surpluses is made quite clear in the Budget Strategy where it is stated that ' ... It [the 1999-2000 Budget] delivers on the Government's commitment to maintain budget surpluses while economic growth prospects remain sound' [italics added].(3)

Quite apart from containing the size of the CAD, the Government maintains that restoring the Commonwealth Budget to surplus has played a very important role in retaining the confidence of financial markets and in sustaining a low interest rates environment. The Budget Strategy also observes that improvements in the fiscal balance as a result of the Government's program of fiscal consolidation have been associated with increases in Commonwealth general government saving and public sector saving which have in turn helped maintain overall national saving during a period of declining private saving.

Nurturing Private Investment

The Budget Strategy suggests a rather benign attitude on the part of the Government towards the efficacy of private sector investment and savings decisions. Although the economic history of modern economic states often reveals instances where private investment decisions were not always soundly based or necessarily consistent with public national interest, the Budget Strategy implies a degree of confidence in private investment decisions-even where such decisions may increase the CAD and/or imply further downward pressure on government outlays in order to accommodate a higher level of private 'disssaving'.

The Budget Strategy suggests that in the contemporary Australian economy which is bearing the fruits of past structural reforms, the private sector is now in a better position to make well informed investment judgements; specifically it observes that:

And even where private investment decisions may cause a blow out in the CAD (if only because of the inadequacy of private sector saving levels) the resultant growth in Australia's external debt is not necessarily seen as a problem:

The Government's confidence in the efficacy of private sector investment decisions is repeated elsewhere in the Budget Strategy where it is implied that even where such investment can only be sustained by borrowing from foreigners, 'private investment should generally produce benefits in terms of higher future incomes that justify the costs of servicing external borrowing'.(6)

Notwithstanding this, it is apparent that the Government feels strongly motivated to contain the size of Australia's current account deficit as far as it can without adversely affecting the private sector. No doubt it is very much aware that the Asian countries that suffered most following the 1997 Asian all had high current account deficits. Yet Thailand, where the crisis first hit, was running government surpluses as were other badly affected Asian countries. The Australian Government has gone out of its way to insist that Australia is different, chiefly because reforms mean that the current account deficit better reflects private outcomes with full knowledge of the economic environment. Joseph Stiglitz, chief economist with the World Bank has challenged the view that more or better knowledge, reform etc. could have prevented the Asian crisis.(7) There is, however, some evidence that Australia's exchange rate arrangements and management have served to insulate Australia from the adverse consequences of occasionally high current account deficits.

Encouraging Private Savings

Nevertheless the Budget Strategy is mindful of Australia's relatively low level of overall national saving and that private saving levels (relative to GDP) having been declining in recent times. It observes however that:

Quite possibly this reflects the usual tendency for both public and private savings to move pro-cyclically. In short, the Government believes that if it leads the private sector by raising its savings levels, then the private sector is likely to 'follow by example'. It is not clear from the Budget Strategy as to what mechanisms would promote such a response from the private sector.

The Supplementary Fiscal Targets

The strategy outlines a number of Supplementary Fiscal Targets as follows:

• maintaining fiscal surpluses over the forward estimates period while economic growth prospects remain sound
• halving the ratio of Commonwealth general government net debt to GDP from almost 20 per cent in 1995-96 to 10 per cent by 2000-01
• directing sufficient resources to high priority areas, while significantly reducing the ratio of expenses to GDP through to the turn of the century
• no increase in the overall tax burden, and
• improving the Commonwealth's net assets position over the medium to long term.

It observes that substantial progress has already been achieved on the second and third of these targets, while tax revenue as a percentage of GDP has remained below the 1996-97 ratio.Of course the definition of what constitutes Commonwealth taxation revenue has a central bearing on this outcome, an issue which is discussed in some detail in the accompanying article in this publication, Economic Strategy Behind the 1999-2000 Budget.

What is particularly interesting in the context of the move to accrual reporting is the last-mentioned target, ie the goal of improving the Commonwealth's net assets position over the medium to longer term. Net assets refers to all the physical and financial assets and liabilities of the Commonwealth. The improvement in the Commonwealth's net assets from year-to-year would appear to be a new public policy objective which has been formally facilitated through the new financial accounting framework. In effect, the goal of improving the Commonwealth's net assets along with the goal of improving the Commonwealth's net debt position amounts to a strengthening in the Commonwealth's balance sheet. This in turn is seen by the Government as enhancing Australia's capacity to withstand economic shocks by reducing the adverse swings in financial market confidence.Critics of this rationale might point to the prospect that by 'taxing more than you need to', there will be an accumulation of public assets at the expense of private assets.

Improving the Commonwealth's Net Assets

Apart from the benefits of a strengthened Commonwealth balance sheet in terms of enhancing the national economy's capacity to withstand external economic shocks, the Budget Strategy outlines other sound reasons to keep tab of the Commonwealth's net assets position over time.

In particular, it notes that tracking the Commonwealth's net assets will provide:

In addition, it may be that a comprehensive assets tracking system at the Commonwealth level will assist in making more informed assessments of the public benefits and costs of undertaking public asset privatisation initiatives.

In this context, the Budget strategy refers to the expected improvement in the level of net assets as a percentage of GDP over the forward estimates period; this would arise in part from the proposed sale of the remainder of the Government's equity in Telstra. The Budget Strategy observes that in line with accounting standards, Telstra is currently recorded in the Commonwealth's balance sheet at book value, which is significantly below its expected market value. That is, the estimate of the Government's current net asset position is, in fact, distorted by this valuation issue. As Telstra is sold, however, this undervaluation is undone, contributing to the significant improvement in the measure of net assets.

Of course the book value of the Commonwealth's equity in Telstra is significantly below the market value of those shares. Contemporary accounting standards would only allow the Commonwealth to value its equity according to share price once the Commonwealth owned less than one half of the company.

This distortion introduced by what some economists would see as quite arbitrary accounting standards (essentially developed around private sector conventions and requirements) serves to highlight the potential shortfalls in the use of the net assets concept for public sector decision making purposes. It may well be that more appropriate public sector accounting standards may evolve over time to assist in making better informed public decisions.

Implications of the 'Fiscal Balance Objective'

A practical implication of this objective is that over the medium term the Commonwealth will withdraw from the capital market as a net borrower. In short, it would seem that in future, public investment outlays in any one year would be financed out of the Budget surpluses accruing in the year that the investment is undertaken (or otherwise within a very short time from when the public investment is undertaken).

This approach is quite at variance to long standing approaches to public investment where in the past, it has been accepted practice to undertake borrowings to finance capital works which will yield benefits not only in the year in question or to the current generation of taxpayers, but to future generations as well. Ideally, the period of repayment of such loans would roughly approximate the period over which taxpayers and the general public would benefit from the particular investment. Such approaches have been considered as appropriate and fair from an inter-generational point of view and is in accordance with commercial business practices as well.

The notion that governments should finance all of the public infrastructure requirement from currently generated budget surpluses would appear to be quite a radical departure from past Australian approaches to public investment; to the extent that other objectives dictate that governments will put a cap on the overall national tax burden (relative to GDP), the 'fiscal balance' approach would seem to dictate a very severe contraction in levels of public investment in the future. It would also imply that in future, public investment would onlybe undertaken within the permissible limits set by the 'fiscal balance' objective, regardless of the economic worth of potential capital works which cannot be accommodated because of the pre-determined fiscal limits.(10) Such a constraint on public investment could of course be overcome by providing appropriate machinery (e.g. tax concessions) for the private sector to undertake the investments instead. But of course such a transfer of investment responsibility would not of itself reduce national debt levels arising from infrastructure investment requirements - it simply transfers it from the public to the private sector. A related issue is whether or not the private sector will necessarily choose to take up such investment opportunities and, to the extent they do select such opportunities, whether the private sector will necessarily select the investments which yield the highest return to the community or accord with national (public interest) priorities.

The 'fiscal balance' approach also has some noteworthy inter-generational equity implications. For one thing, the current generation would not only be meeting the full costs of long term investments whose benefits stream will extend to future generations, but in addition the current generation will continue to bear the costs of investments undertaken by past generations, at least for the immediate future until all Commonwealth debt has been eliminated. This means that the present generation bears the transition costs of moving to the 'fiscal balance' approach.

Finally it should be noted that the 'fiscal balance' approach is not something which is intrinsic to accrual accounting; indeed, in some respects it would appear to be the antithesis of what might be expected under an accrual financial management approach. Certainly it does anything but mimic private business practice-indeed, if a private firm consciously determined that its investment strategies should be wholly funded by and limited to the size of current day profits, it would almost certainly have a very short life expectancy.

Concluding Comments: The Broader Public Policy Context of the Budget

Although the Budget Strategy is predominantly concerned with aggregate public finance considerations, the Government emphasises that it has been developed within a framework which takes into account its broader economic and social objectives. In this respect, the Government states that the Budget responds to the following broad priorities:

• delivering on its election commitments
• building a modern, fair and efficient taxation system
• promoting an economic climate conducive to high levels of sustainable economic and employment growth
• fulfilling Government social obligations through supplying essential public goods and services and providing a social safety net for those in need
• and ensuring that government resources are used as effectively and efficiently as possible.

The manner in which the Budget proposes to implement government measures responding to these priorities is the subject of further discussion and analysis in the following sections of this Budget Features brief. 

1. 'Budget Strategy and Outlook', Budget Paper No. 1, 1999-2000, p. 1-7.
2. Such measures also deterred actual investment which might have assisted in boosting net exports and delayed price adjustments that would otherwise have taken place through exchange rate changes.
3. 'Budget Strategy and Outlook', Budget Paper No. 1, 1999-2000, p. 1-15.
4. 'Budget Strategy and Outlook', Budget Paper No. 1, 1999-2000, p. 1-17.
5. 'Budget Strategy and Outlook', Budget Paper No. 1, 1999-2000, p. 1-8.
6. ibid., p. 1-16.
7. J. Furman and J. E. Stiglitz, 'Economic crises: Evidence and insights from East Asia,' Brookings Papers on Economic Activity, 1998, vol. 2, pp. 1-135.
8. ibid., p. 1-16.
9. ibid., p. 1-19.
10. Proponents of public investment might argue that a government that fails to ensure that investment is undertaken in projects with net economic welfare benefits could be seen as abrogating its responsibility for promoting growth and rising living standards

Economic Strategy Behind the 1999-2000 Budget

David Richardson

The 1999-2000 Budget provides for a solid surplus of revenues over 'expenses' (the new term for 'outlays'). Future projections are discussed as well as how they are affected by fiscal policy, including those government plans that may not be achieved. The general state of the economy is also discussed as well a closer look at two particular topics, the savings behaviour of households and the current account deficit on the balance of payments.

Introduction

Underlying the 1999-2000 Budget are the Government's plans for a goods and services tax (GST) and the proposed sale of the government's remaining share in Telstra. While doubts have emerged that these will now be achieved in their entirety and, in that case, some of the current budget figuring is going to have to be altered, this article is written assuming the Government manages to achieve its plans.

Main Features

This Budget provides for a surplus of $5.4 billion in 1999-2000, or 0.9 per cent of Gross Domestic Product (GDP), following an estimated surplus of $3.1 billion in 1998-99, or 0.5 per cent of GDP. In future years the surplus is forecast to reach $7.2 billion in 2000-01 and $5.2 billion in 2001-02. That keeps the surplus hovering around one per cent of GDP for the next few years. Behind these estimates are a forecast growth rate of 3 per cent in 1999-2000 and a projected growth rate of 3.5 per cent in 2000-01 and thereafter. Note that for 2000-01 and beyond the projected 3.5 per cent growth rate is chosen because it represents Australia's historic average. In this sense there are no real estimates after 1999-2000, just projections that do not reflect any assessment of likely economic conditions at that time.

In 1997-98 Commonwealth revenues were 26.2 per cent of GDP. Revenues are estimated to fall slightly to 25.9 per cent of GDP in 1998-99 and 25.3 per cent in 1999-2000. With the new budget reporting formats we are no longer able to look at precisely where the estimates differ from the forecasts made at the time of the last budget. However, the differences appear to be dominated by 'parameter variations' or the effects of higher than expected economic growth. This has shown up in higher individual and other income taxes. On the outlays side unemployment numbers were lower than expected while the lower than expected inflation meant savings in expected adjustments to pensions and benefits. Expenses (formerly 'outlays' on a cash only basis) were 27.4 per cent of GDP in 1997-98 falling to 25.4 per cent estimated for 1998-99 and virtually remaining constant at 25.3 per cent of GDP in 1999-2000.

In 2000-01 revenue is projected to drop suddenly form 26.3 per cent of GDP to a projected 22.9 per cent of GDP. Likewise expenses fall from 25.3 per cent of GDP to 21.9 per cent of GDP. This reflects the effects of the change in mixes of taxes and payments to the States and Territories following the GST which is planned to be introduced on 1 July 2000. In 2000-01 the Commonwealth expects to collect GST worth $27.409 billion and make matching payments to the States and Territories. The Budget Papers record the GST receipts but also nullify the effect of the GST by recording an equal 'negative tax' being the 'transfers to the States and Territories in relation to GST revenue.' In this way the GST revenue and the matching outlays are removed from the aggregates. This is justified in the following terms:

The effect of adding back the GST to revenues is to increase revenue to 27.1 per cent in 2000-01, up from 26.3 per cent in 1999-2000. Adding back the payments to the States and Territories increases expenses to 26.1 per cent of GDP in 2000-01, up from 25.3 per cent in 1999-00. Depending on one's judgement of the issues involved there is a great difference in the perceptions of the Budget. Either revenues and outlays are still on a downward trend as a share of GDP if we exclude the GST or they have reversed the trend and are increasing with the GST in the measures.

Fiscal Policy

Some commentators have said that there is too much stimulus in the Budget while others have congratulated the Government for producing surpluses. Here we show how those two apparently conflicting views can both be correct. This is done by decomposing the 1999-2000 budget fiscal balance estimates into the components due to policy changes and the components due to parameter changes. In this way we can also examine how the fiscal balance would have behaved in the future without any policy changes since the last budget.

Table 1: Budget Estimates-the Effects of Policy and Parameter Changes

There are some major features that stand out in table 1. First, there is a powerful fiscal stimulus associated with the policy changes since the 1998-99 Budget. This is shown in the line of negative figures in the row for 'total policy changes'. A stimulus of $871 million in 1998-99 rises to $6920 million in 2001-02. The second main feature is the 1999-2000 surplus figure in which the stimulus just mentioned is more than offset by parameter changes, mainly stronger than expected economic growth resulting in higher tax receipts and lower social security payments. Without that the 1999-2000 surplus would almost disappear.

The final row in table 1 gives the no policy change estimates of the fiscal balance. This row shows that were it not for the decisions in, and leading up to, the 1999-2000 Budget Australia was set to produce very substantial surpluses in future years.

Economic Context

Since 1991-92 growth has been consistently above 3 per cent but has stayed below 5 per cent (on a year on year basis). Despite the Asian crisis in the September quarter 1997, growth in every quarter since then has remained above 4 per cent on an annualised basis. Consistent with economic growth, employment has been growing while unemployment has been on a strong downward trend since the early 1990s. The growth performance has permitted unemployment to fall from an annual average of 11.0 per cent in 1992-93 to 7.4 per cent for March 1999. Total employment increased from an annual figure of 7.634 million in 1992-93 to 8.703 million in March 1999. The US economy has been referred to as the 'Goldilocks economy', because it is not growing too strongly, or too slowly, its just right. Australia could also be said to be enjoying Goldilocks growth.

There are some notable features of the last two years. First, GDP growth has been particularly strong but the bulk of that growth came from consumption expenditure, especially private consumption but also government consumption expenditures in the most recent period. The strength of private consumption is also reflected in new low levels of household savings at 1.3 per cent for the December 1998 quarter.

By contrast with consumption, capital formation has slowed down and is contributing almost nothing to growth. The other noteworthy feature of the table is the contribution of the external sector. Exports have had a positive impact taking the two years together. This is significant given that they are only around 20 per cent of GDP. It is likely that the reduction in the value of the $A has stimulated some additional export activity. However, it is also possible that the increase reflects higher mineral exports from new facilities that are now coming on stream but reflect decisions made when commodity prices were much higher.

In real terms the export sector has been a source of growth, however, that is offset by the increase in imports that tends to detract from growth. (Growth would have been higher had the spending been directed at local goods and services.) The negative entry for imports in Table 2 indicates that an increase in Australian spending has gone on imports and so detracted from GDP growth in Australia.

The following table looks at the contributions to growth over the last two calendar years.

Table 2: Contributions to Growth: Selected Items, % change

Outlook

For the last couple of years Treasury has been forecasting slowdowns in the economy, but more gentle slowdowns than forecast by the private sector. According to the latter we should have experienced a severe decline in GDP growth and significantly higher unemployment. For example, the last Budget forecast GDP growth of three per cent for 1998-99. That compares with the estimated outcome of 4.25 per cent. At the time of last year's Budget forecasts, ratings agency Standard and Poor's pointed out that the Government's forecasts were higher than those of most financial market economists and that the Government's 'forecasts remain at the more optimistic end of the general range of expectations amongst economic forecasters.'(2) As it has happened, while Treasury's estimates have erred on the under side, its performance has been much better than the private forecasts. This year the Treasury has again forecast growth of three per cent only this time the private forecasters seem to have converged around Treasury's estimates. Chris Caton, chief economist with Bankers Trust, is reported to have said 'private sector economists should disagree with Treasury forecasts at their own peril. Last year there were mumblings about their forecasts being too high, but they turned out more accurate than most.'(3) For what it is worth the April National Australia Bank survey of business continues to show a strong economy with strong sales and profits.(4) Likewise, the latest Westpac/Melbourne Institute index of consumer sentiment rose 1.7 per cent in April suggesting a very positive outlook for consumer spending in particular.

Based on past experience more than 3 per cent growth is required to make serious inroads into unemployment. The 4.25 per cent growth for 1998-99 meant 2.25 per cent employment growth that was consistent with unemployment falling from 8.3 to 7.75 per cent (June to June). This is not a strong conversion of growth into reductions in unemployment, mainly because of the 2 per cent productivity growth. In 1997-98 the conversion was even worse when 4.6 per cent growth produced 1.4 per cent employment growth and unemployment only fell from 8.7 to 8.3 per cent. In that year productivity growth was 3.2 per cent.

This year's three per cent growth forecast is forecast to produce an employment increase of 1.75 per cent which is, by recent standards, a very good rate of conversion of growth into employment. It assumes productivity growth of only 1.25 per cent. Unfortunately the forecast rate of employment growth is not enough to lift unemployment above present levels and an unemployment rate of 7.5 is forecast for June 2000. For the moment though there are still positive signs for employment/unemployment. On the day the Budget was delivered, the latest ANZ job survey figures were also released showing job vacancies up 1.6 per cent for the month to the best levels since the 1990s recession. Saul Eslake, the ANZ chief economist, has said that the growth in vacancies was enough to reduce unemployment to 7.25 per cent by July.(5)

On the inflation front, over the last couple of years we have consistently come in below the Reserve Bank's (RBA) inflation target of two to three per cent. Now Treasury is forecasting that inflation will move into the RBA's target range with a year average CPI increase of 2 per cent and 2.25 June to June. Part of the reason for the upward movement in inflation is the fall in productivity that is supposed to prevent higher unemployment. However, the expected fall in productivity means that more of each wage increase is translated into per unit cost increases for price setters. The best outcome would again be that Treasury has underestimated growth so that it comes in sufficiently high to maintain a low inflation economy but with jobs growth out pacing the growth in the labour force.

Over recent years Australia has shared in the low inflation high growth economy enjoyed by the US. There are signs that the low inflation part of the equation may be coming to an end in the US. On Friday 14 May the US consumer price index was published and showed inflation was 0.7 per cent in April 1999 following a 0.2 per cent increase in March (the US inflation figures are published monthly rather than quarterly as in Australia). The 'core' inflation measure that leaves out food and energy costs also rose from 0.1 per cent to 0.4 per cent. The markets are now worried that these are the first signs that inflation is back as a serious issue.(6) So far the increase in inflation seems to be mainly associated with higher oil and other commodity prices. As a result of the latter the Australian share market has seen a substantial increase in the value of resource stocks. Since we have followed the US lead in recent times the present experience must be a concern.

Consumption and Savings

Private consumption is 59 per cent of income (1997-98 figure) so its behaviour is the dominant influence on the state of the economy as a whole. Treasury forecasts household consumption to increase by 3.75 per cent in 1999-00 which underpins the three per cent growth in GDP. The importance of capital gains for consumption expenditures was mentioned earlier. The Reserve Bank also notes the importance of new financial instruments such as home equity lines of credit that enable consumers to have greater access to their own wealth through borrowing against the home.(7) Clyde Cameron, when talking about capital gains taxation, once said 'you can't eat your capital accretions.' The banks may have found a way to let their customers do almost that. Certainly customers are now able to more finely tune their desired debt equity ratios. Whatever the reason, consumption expenditures have held up very well.

Strong growth in consumption implies falling levels of savings and we do indeed find that household savings are now down to new lows at 1.3 per cent of household disposable income.(8) Household savings in the US have just turned negative for the first time. This does not mean people are necessarily spending more than they are earning. They are likely to be spending out of their capital gains which do not show up in the national accounts. That is also likely to be the case in Australia. Profits from the property and share market, including on the Telstra float and the AMP demutualisation, are financing consumption expenditures.

Household disposable income does not include accretions in wealth through the capital gains that have been implicated in the healthy consumption expenditures. In 1997-98 household gross income was $491.975 billion (ABS cat no 5206.0). over the same period the total assets of the household sector grew by $162 billion from $2044.6 billion to $2206.6 billion(9). Adding in capital gains implies savings rates of around 26 per cent.

At 26 per cent the savings rate out of income plus capital gains appears to be a healthy savings effort on the part of households. If we re-work savings rates for the total economy by adjusting for capital gains then gross savings increases from 19.9 per cent of GDP to 37.4 per cent of the expanded definition of income.(10) Such figures appear to put us in the ranks of countries such as Hong Kong, Singapore and Japan. However, while showing the effect of adding in capital gains helps to rationalise Australia's otherwise low savings rate, it does not really provide much comfort. As traditionally measured in the national accounts the concept of savings indicates the ability to provide resources for investment out of current production. Capital gains cannot provide any real production potential that might be allocated towards the investment effort. By contrast savings out of income, or more correctly, the difference between income and consumption, does genuinely free productive effort for use in making capital goods (or exports that might be exchanged for capital goods).

If we were to suddenly increase the level of savings there would necessarily be a simultaneous reduction in consumption expenditures. That would free up resources that might be applied in making capital goods. However, the problem for macroeconomic management is that the reduction in consumption is likely to cause a fall in sales leading to a fall in production and so lower incomes. The resources freed for use in making capital goods may simply be wasted in idleness. We certainly know that a lower level of consumption over the last few years would not have given us the jobs growth we did in fact experience. Hence for policy purposes we have to regard the issue of savings as double edged sword. As a long term strategy it is desirable to increase the savings/investment levels. On the other hand, going about it in the wrong way puts current economic prosperity at risk.

Current Account Deficit

The Treasurer has made the point many times that the budget deficit is linked to the current account deficit (CAD)on the balance of payments. As Treasurer, Hon. P. Costello, said to the Press Club the day after the Budget:

It therefore appears policy is based on the belief that there is a direct link between domestic savings, including the budget surplus, and the CAD with cause and effect running from savings to the balance of payments. This of course harks back to the old twin deficit thesis that said that an increase in the budget surplus produces an equivalent improvement in the deficit on the CAD.

When we turn to Budget Statement No 2: Economic Outlook there is an important section called 'net exports and the current account balance.' This section discusses the various influences on the current account balance-the Asian crisis, commodity prices, the Australian demand for imports and so on. Obviously all of those factors are important. Interestingly there is not one word about the influence of the budget balance or total Australian savings on the CAD. From a policy perspective this is extremely important.

Let us accept that the section on net exports and the CAD is an accurate diagnosis of the problems. There is a case for sitting out the commodity downturn and waiting for the world recovery that would restore the current account balance back to more normal levels. In addition it would appear that initiatives from the industry and trade ministers could contribute towards reducing the current account deficit. In other words, to address these balance of payments issues, policy should address the structural factors that lie behind the items that go to make up the balance of payments.

Increases in the budget surplus are analogous to increasing household savings. The previous section showed that an increase in savings/reduction in consumption may reduce income and employment. Higher budget surpluses may reduce the CAD, but that really only follows if the effect of the budget surplus is to reduce economic activity which in turn lowers imports (and encourages Australian producers to sell product in overseas markets).

1. Budget Strategy and Outlook, 1999-2000: Budget Paper No 1, p. 4-12.
2. The Australian Financial Review, 15 May 1998.
3. ibid., 13 May 1999.
4. ibid., 11 May 1999.
5. Ibid., 11 May 1999.
6. BBC News, 14 May 1999, at http://www.bbc.co.uk
7. Reserve Bank of Australia, Semi-Annual Statement on Monetary Policy, May 1999.
8. ABS, Australian National Accounts: National Income, Expenditure and Product, Cat No 5206.0, December Quarter 1998, 3 March 1998. The figure in the text is a trend estimate. The seasonally adjusted figure for the December Quarter is actually 0.8 per cent.
9. ABS, Australian National Accounts National Balance Sheet, Cat No 5241.0.40.001, 1997-98, 28 April 1999.
10. Capital gains estimates are based on the increase in total assets between June 1997 and 1998. Now this figure, the difference between the two totals, will be equal to capital gains plus net savings. Since net savings is already included in the gross savings figure given in the text, it is deducted from gross savings so as to avoid double counting in presenting the final figure for savings.
11. Hon. P. Costello, Address to the National Press Club, Wednesday 12 May 1999, Transcript No. 99/38.

Government Surpluses and Debt

David Richardson

This article addresses some of the issues that arise out of the large government surplus budgeted for 1999-2000 and projected into future years. Part of the Government's objective is to reduce net government debt to zero when the planned sale of Telstra is included. Fairly soon, when there is no more debt that can be retired, the Government may have to address the issue of how to invest the surplus (the opposite of how to fund a deficit). That prospect raises important issues.

Introduction

An important part of the fiscal objective under the Howard Government has been the achievement and maintenance of a budget surplus. In the present financial year, 1998-99 the surplus should come in at $3.1 billion or 0.5 per cent of Gross Domestic Product (GDP). The estimate for 1999-2000 is a surplus of $5.4 billion or 0.9 per cent of GDP. In cash terms and taking asset sales into consideration, the headline cash balance is a surplus of $8.4 billion in 1998-99 rising to $23.0 billion in 1999-2000.

To the extent that there has been any criticism of the surpluses, it has related to using them to fund reductions in overall tax burdens on the one hand or the potential for using the surplus in the interests of particular lobby groups on the other. There has not been much discussion of the intrinsic merit in running surpluses. Government surpluses raise two main issues that need to be addressed:

• How should governments use the funds they accumulate as a result of running surpluses?
• Should governments raise more in taxes than they need to spend on providing government surpluses?

The Budget Papers are ambiguous on the long-term aim of fiscal balance versus surpluses. Instead the objective of achieving budget surpluses is put in terms of Australia's present position in the economic cycle. The Budget Papers say:

This passage suggests that over the cycle the intention is to err on the side of achieving surpluses rather than balance. It is likely that the size of the surplus will be taken by the markets and the media as an indication of the Government's commitment to fiscal discipline. Markets are likely to applaud surpluses and decry any movements towards deficits. The alternative objective is to aim for fiscal balance on average over the economic cycle.

We begin by examining how the government debt is likely to behave in the foreseeable future.

Commonwealth Debt

Government surpluses are seen as a valuable measure to increase national savings as well as retire outstanding government debt. This was one of the main stated objectives of the Government. In his Budget speech the Treasurer, Hon. P. Costello, foreshadowed that by the year 2002-03 the Commonwealth Government should be debt free.(2) The Treasurer said:

The following table gives the estimates for the level of outstanding Commonwealth debt over coming years.

Table 1: Commonwealth Debt

The numbers reported in the second column of the table clearly show the quick reduction in debt that is expected to occur in the next five years.

The reduction in net debt includes the debt retired as a result of the planned sale of the remaining Commonwealth shareholding in Telstra. The published figures are not sufficiently transparent to provide an estimate of how much the debt reduction is expected to result from the reduction of the surplus compared with the proposed sale of Telstra. (It is not possible, either, to find in the Budget Papers for this and earlier years the actual proceeds of the one-third sale of Telstra that has already taken place.) What we do know is that at current market prices, the remaining 8.577 billion shares in Telstra would be worth around $64 billion (based on 12 May closing prices and allowing for a five per cent selling cost.). By the time any sale could take place it would more than wipe out the remaining Commonwealth debt on present values.

Table 1 above the final column provides an estimate of the debt that would be outstanding if debt were to be reduced by the cash surplus alone. Allowances have to be made for the difference between accrual and cash accounting and various other complications. Bearing those in mind the table above would suggest that the Budget Papers are likely to be factoring in estimates for selling Telstra at about $50 billion spread over the next few years. To state the obvious, the pattern of debt would look markedly different if the Government were not able to sell Telstra.

Paradoxically, as debt is trending towards zero, the 1999-2000 Budget makes provision for the establishment of the proposed Australian Office of Financial Management (AOFM). This is intended to be a specialist agency that 'will significantly enhance the Commonwealth's capacity to manage its net debt portfolio, offering the prospect of savings in debt service costs and an improvement in balance sheet net worth over time.'(4)

The reason for this is that it is envisaged that the government bonds on issue will not be reduced to the full extent warranted by the projected surpluses. Instead the Budget Papers say:

Among other things the Government is saying that the financial markets need to have a good quantity of government bonds on issue. Government bonds are the best and most risk-free financial security in the market and it is these that the market uses as the benchmarks against which other financial assets are judged. It is important for the smooth operation of the financial markets that there continues to be a good depth in government securities of various maturity structures.

This must mean that the funds flowing into the government as a result of the surpluses will be used to invest in other financial assets instead of retiring government debt as is the intention expressed in the Budget Papers. 'Retiring debt' should be thought of in a net sense when it is mentioned by government officials.

In a lot of the commentary it seems to be taken as an article of faith that lower government debt is an unambiguously bad thing. Government debt can be a useful devise for financing large project/s so that some of the burden of the cost of the projects is borne by later generations that benefit from them. However, most of Australia's current debt has accumulated over the early 1980s and early 1990s when the economy needed the fiscal stimulus implied by government deficits-even if that only amounted the automatic stabilising effects resulting from the tendency towards deficits in recessions. It would have been very painful if we had tried to keep the budget in balance during these periods and the result may have been to push the economy further into recession. Carrying debt is a natural consequence of wanting to smooth out fluctuations in the business cycle. The average level of debt over the cycle is going to reflect, among other things, the extent to which the economy has required fiscal pump priming.

It is useful to compare Australia's position with some of the other main industrial countries. The following table pulls together figures for countries' fiscal balances and their net government debt.

Table 2: Fiscal Balance and Net Debt in Australia and Selected Industrial Countries.

Source: International Monetary Fund, World Economic Outlook, 20 April 1999 and Budget Strategy and Outlook 1999-2000, Budget Paper No 1, 11 May 1999.

The international comparisons show a diversity of experience expected as far as a the fiscal balance is concerned. However, Australia is strikingly different in relation to its net debt position. Of the countries chosen, Australia is the only one with anywhere near zero net debt.

What to Invest in?

Before we continue it is important to be clear on the implications of a government surplus. The obvious implication is that with a surplus the government will be receiving more cheques than it is issuing. If no offsetting action is taken the outstanding cash (and reserves in the banking system) will be reduced. Before long there would be a major liquidity crisis. The total cash in the system is approximately $25 billion.(6) That would be all but wiped out by the projected cash deficit of $23 billion for the year 1999-2000. Nobody, including the banks would be able to honour their debts or pay for potential purchases.

Before that happened the government or the Reserve Bank would be forced to respond by buying up second hand government debt or buying up other things in order to restore liquidity. Otherwise the government would simply be sucking liquidity out of the economy with the effect that nobody would be able to back any commitment with cash. The economy would soon grind to a halt. Under continuing surpluses the objective for the Government has to be to do something to return to the private sector the liquidity that is being drained by the government surplus.

If there is a government deficit the government will normally sell debt to the private sector while the private sector accumulates financial claims on the government. Equally, a government surplus means that, eventually, after the outstanding government debt is retired, the private sector sells debt to the government. Put differently the government purchases financial claims on the private sector. It is clear from the earlier discussion that the Government intends to purchase financial claims on the private sector before the outstanding government debt is retired. So on the issue of investing future surpluses it appears the Government is not going to wait until the debt is completely paid off but will start investing surpluses before that point.

There has been no debate on the type of financial assets the government should be buying as a result of its surplus. All assets have some risk factor associated with them and there is, no doubt, a genuine concern that tax-payers' funds are not put at risk. In one form or another there will have to be some guidelines developed. There will inevitably be calls for the government to provide funds for all manner of undertakings that would be undesirable. High risk but socially desirable are investments in corporations heavily engaged in research and development activities. Lately large corporations have been issuing debt with similar characteristics to government debt. These assets may be suitable for parking government surpluses. However, there will inevitably be some heavy criticism of government investment in the private sector, not least by those who cannot obtain any.

There has been a suggestion that the government could use the surplus to buy up foreign government assets such as US Treasury bonds. Reports in The Australian Financial Review claimed there was a general view in the market that the AOFM will buy offshore assets while The Australian also put the view that it would buy US Treasury bonds.(7) That sounds superficially attractive. However, the main reason for using the surplus to buy other financial assets is to avoid the surplus acting as a mechanism to suck liquidity out of the Australian economy. If the surplus was used to buy foreign assets there would be no injection of liquidity into the Australian economy. The Reserve Bank would then have to step in and provide liquidity by itself purchasing domestic private sector assets. If Treasury is not prepared to buy domestic financial assets the Reserve Bank would have to.(8)

In the US there has been a healthy debate on the deployment of the Federal Government surplus well in anticipation of the actual surplus expected for fiscal 1999. President Clinton has developed a plan that would put the surplus towards meeting the looming social security shortfall.(9) Part of the plan involves purchasing equity investments on the share market and putting those investments into the superannuation pool. That met a good deal of criticism from conservative critics.

We cannot yet know how the AOFM will operate, however, there will inevitably be critics that claim its investment strategies and decisions are politically motivated. Similar criticism has been levelled at President Clinton's plan to invest some of the Social Security Trust Fund in equities. Of course the same would also be true if the Reserve Bank was the agency that had to buy assets from the private sector. In addition to the charge of political bias, there would also inevitably be some judgements made about the commercial soundness and prospects of potential investments. The market would certainly follow the government's (implicit) assessments with a good deal of interest. Just the suggestion that the government is about to buy something is bound to affect the market's judgement. All of this would have to be very carefully managed.

What are Taxes for?

The possibility of persistent surpluses raises important philosophical issues. Taxation itself is legitimised by the need to raise finance to fund the routine services of government. However, the move to persistent surpluses and the rhetoric on savings suggests that there is another purpose in raising tax revenue, to meet savings objectives by compulsorily raising funds through the tax powers.

If part of our taxes go towards an increase in national savings then there are many similarities with the compulsory superannuation paid on behalf of wage and salary earners. That amounts to a type of 'tax' on an employee's income but with one major difference. The 'tax' element of superannuation gives the 'taxpayer' an entitlement to the pool of funds created in that way. By contrast, paying taxes to contribute to savings has the same macroeconomic effect but without establishing any title to the funds 'saved.' The taxpayer does, however, have the knowledge that future tax needs will be lower since the net interest bill on government debt will fall as the outstanding net debt falls.

There would at least be some comfort if we could be sure that the 'savings' we undertake now with the surplus will be available in the future when we might need to spend more. This, of course, is one of the main motives of private savings. The very fact that Australia has had government deficits and debt in the past shows that prior 'savings' through the accumulation of surpluses is unnecessary. Indeed, suppose Australia had already eliminated its net debt after a recent history of budget surpluses. On that assumption is it likely that the Government would have gone for a deficit in the present budget? Alternatively, if we experience a downturn in the near future which calls for a stimulatory approach, is it the case that the size of the stimulus would be chosen differently depending on whether or not Australia had eliminated its debt? Suppose Australia achieves surpluses now with the aim of providing for the wave of older people in retirement and causing other strains on the public purse in future years. In the year 2030 we may be running a $20 billion deficit to cater for the aged population, and we justify that on the grounds that we have accumulated surpluses worth many times that amount. However, the macroeconomic impact is going to be the same as if there was no prior accumulation of funds through the history or surpluses.

Reflecting on these questions may cause us to wonder why we would ever want government surpluses. The fund built up does not really mean you can run a more 'harmless' budget deficit some time in the future. Moreover, the surplus may not always meet the needs of the economy. In the US, where this topic has received a good deal more attention, there were six periods during which the government ran surpluses and significantly reduced the government debt. In each case a depression followed (1819, 1837, 1857, 1873, 1893 and 1929).

1. Budget Strategy and Outlook: 1999-2000, Budget Paper No. 1, p. 3-23.
2. Hon. P. Costello, Treasurer, Budget Speech 1999-2000, Australia, House of Representatives, Debates, 11 May 1999.
3. ibid., p. 2.
4. Portfolio Budget Statements 1999-2000: Treasury Portfolio, Budget Related Paper No. 1.16, 11 May 1999, p. 16
5. Budget Strategy and Outlook: 1999-2000, Budget Paper No. 1, p. 8-4.
6. Cash is notes plus non-callable deposits of banks with the Reserve Bank of Australia. The figure in the text comes from the Reserve Bank of Australia Bulletin, April 1999.
7. The Australian, 12 May 1999 and The Australian Financial Review, 12 May 1999.
8. Recall that the surplus means that the government is receiving more cheques than it is issuing. To reverse that flow it would have to buy something else so it can issue more cheques. If instead the government merely kept the surplus cheques in the Reserve Bank, the latter would have to issue cheques and buy assets from the domestic private sector.
9. In the US the social security system is a contributory system with the contributed funds paid into an investment pool. The system also includes a defined benefit arrangement whereby entitlements are based on previous contributions, salaries, length of service and the like. (There is a parallel welfare system that is more like the social security system we are used to.) Any deficit in the social security system has to be met by the government. At the moment, there is a looming unfunded liability on the part of the social security system-it is that unfunded liability that President Clinton wishes to address.

Taxation Measures

Simon Lang

This article canvasses firstly, the measures introduced in the 1999-2000 Federal Budget relating to the Pooled Development Fund program and those relating to binding oral advice given by the Australian Taxation Office. Secondly, a brief summary of a number of measures introduced since the 1998-1999 Federal Budget is provided.

Introduction

On 13 August 1998 the Government announced its taxation reform package, Tax Reform: not a new tax, a new tax system (the ANTS Tax Reform Plan). As stated in Budget Paper No. 1,(1) the reforms encompass both expense and revenue measures and the forward estimates fully incorporate the revenue effects of the Tax Reform Plan.

To the extent that the implementation of the Tax Reform Plan varies from that announced, there may be an impact on future revenue collections. Details of the fiscal risks to revenue relating to tax reform appear in the 1999-2000 Budget Paper No. 1 at pages 4-23.

As details of the Tax Reform Plan have been, and continue to be, the subject of substantial consideration and debate outside the context of the 1999-2000 Federal Budget, issues relating thereto are not canvassed here to any substantial extent.

Measures Introduced in the 1999-2000 Budget

Pooled Development Funds

The Pooled Development Fund (PDF) program is designed to increase the supply of equity capital for growing Australian small and medium sized enterprises (SMEs) through the use of pooled development funds.

PDFs are private companies, established under the Pooled Development Funds Act 1992 (PDF Act), that raise capital from investors and use it to acquire equity in Australian SMEs. In return PDFs and their shareholders are taxed at a lower rate on income generated through PDF activities. The PDF program provides opportunities for venture capitalists, SMEs and investors.

PDFs must invest in new equity in small to medium sized companies with total assets of less than $50 million that will establish a new business, substantially expand production capacity or services, or expand or develop markets. They are not, however, permitted to invest in companies whose primary activities are retail operations or property development.

Australian companies which have not previously carried on business may apply at any time to the PDF Registration Board to obtain PDF registration. A PDF's activities are subject to the PDF Act. Briefly a PDF must invest:

• in Australian firms that will establish a new business, substantially expand production/supply capacity, or expand/develop markets
• in newly issued ordinary shares or other kinds of newly issued shares approved by the PDF Board. The PDF Board can approve the purchase of pre-owned shares
• in at least 10per cent of the investee businesses' paid up capital. The Board can approve investments of less than 10 per cent
• at least 65 per cent of its capital within 5 years.

A PDF cannot invest:

• in another PDF
• retail sale or property development
• in companies whose total assets exceed $50 million
• more than 30 per cent of its capital in any one business. The Board can approve investments of more than 30 per cent
• cannot allow an investor to hold greater than a 30 per cent of its shares; other than a bank or life office. The PDF Board can approve variations to this.

PDF shareholders receive their income by way of concessionally taxed dividends or tax-free capital gains on disposal of their PDF shares. The extent of the concession on dividends paid to PDF shareholders is dependent upon a number of factors such as the source of the PDF income, the standard rate of tax applicable to the shareholder, and the extent of franking on any dividend paid by the PDF.

Background to Proposed Changes

In 1998 the PDF program was reviewed. The review recommended that the PDF program be extended, that its objectives be modified to better reflect its rationale and that some of its operational parameters be enhanced.

In keeping with the findings of the review, the Government's 1998 election commitment, announced in the industry policy statement Making Industry Stronger, provided that it would permit:

• Australian superannuation funds and similar overseas pension funds and limited partnerships of such funds to wholly own a PDF
• PDFs to buy back their own shares and allow PDFs to return capital to their shareholders
• PDFs to make loans to equity investees subject to a maximum 20 per cent of the value of each PDF's capital base
• the merger of PDFs.

To give effect to these changes the PDF Act will need to be amended. A further review of the PDF program is proposed to be conducted in 2002-03 and funding to the Department of Industry, Science and Resources to administer the PDF program will continue until that time. Further details of the specific measures to be introduced are set out in the 1999-2000 Budget Paper No. 2 at pages 6-7.

Comment

The Australian Financial Review reported(2) some measure of praise for the proposed enhancements by some in the venture capital markets. However, reforms to the capital gains tax system was seen as even more crucial if overseas investment is to be attracted to Australia.

Deloitte Touche Tohmatsu's Budget Analysis stated(3) that they feel the proposed measures do not directly address the principal reasons why foreign pension funds are unwilling to invest in PDFs. In summary, they suggest that if the Government wants foreign pension funds to invest in Australia, it will need to address the following issues:

• a concessional rate of 15 per cent tax remains a significant disincentive
• the franked dividend rules put PDFs at a disadvantage compared to complying superannuation funds
• SME asset maximum of $50 million is too small
• PDF investment limit of 30 per cent of its funds in a single SME restrict flexiblity
• current rules restrict PDFs use in raising funds for management and other leveraged buyouts.

Binding Oral Advice by the Australian Taxation Office

As foreshadowed in the Tax Reform Plan, the Government has decided that oral advice provided by the Australian Taxation Office (ATO) to taxpayers with simple tax affairs should be binding on the ATO. Funding will be provided to the ATO to meet the additional administrative costs of this measure.

Comment

Deloitte Touche Tohmatsu(4) questions whether the ATO will continue to provide 'free advice' given that very few tax matters are now simple.

Deloitte's concern is that the new measures may substantially impede the free flow of information that currently exists between ATO advisers and both taxpayers and practitioners for fear of incurring liability for giving incorrect advice. The result may ultimately place additional pressure on the private rulings system.

Deloitte's also raise concerns about the practicality of the measure given the lack of operational guidelines at present.

Measures Introduced up to the 1999-2000 Budget

A brief summary of the measures introduced up to the 1999-2000 Federal Budget is set out below. Further details of all but the last two measures appear at pages 15 to 19 of the 1999-2000 Budget Paper No. 2.

Taxation of Collective Investment Vehicles

On 22 February 1999, the Treasurer announced(5) that cash management trusts would be subject to 'flow-through' taxation under the new business entity tax regime outlined in the Tax Reform Plan.

Tax Relief for Post-judgment Interest Awards in Personal Injury Compensation Cases

On 24 March 1999, the Assistant Treasurer announced(6) amendments to the income tax law to provide tax relief on the amount of tax payable on post-judgment interest received in awards for damages in personal injury compensation cases.

The announcement follows the Government's consideration of the decision by the Full Federal Court in Whitaker v Federal Commissioner of Taxation 98 ATC 4285.

Taxation Measures to Encourage Philanthropy

On 26 March 1999, the Prime Minister, Treasurer and Minister for Family and Community Services announced(7) a package of measures to promote corporate and individual philanthropy.

Deductability of Gifts

From 1 March 1999, tax deductable gifts and donations of $2 or more can be made to the Stolen Children's Support Fund and the Sir William Tyree Foundation of the Australian Industry Group.(8)

Software Expenditure

On 14 December 1998, the Assistant Treasurer announced(9) several minor legislative changes to the proposed rules allowing expenditure on systems and application software to be amortised(10) at 40 per cent per year (i.e. over two and a half years). The Taxation Laws Amendment (Software Depreciation) Bill 1999, introduced on 11 February 1999, proposes to implement these rules, as modified by the changes announced on 14 December 1998.

Superannuation Contribution Surcharge-Abolition of Advance Instalment

On 23 March 1999, the Assistant Treasurer announced(11) that the advance instalment requirement applying to the superannuation contribution surcharge would be removed, effective from the date of the announcement.

New Investment Rules for Superannuation Funds

In the 1998-99 Federal Budget, the Government announced changes to the investment rules that apply to superannuation funds. An exposure draft of the Superannuation Legislation Amendment Bill (No. 4) 1999, which will give effect to the new rules, was released for public comment on 22 April 1999. Further transitional measures were also announced at that time.(12)

Luxury Car Tax

Legislation introducing the luxury car tax announced in the Tax Reform Plan was introduced on 24 March 1999.(13) On a minor point, page 18 of the 1999-2000 Budget Paper No. 2 refers to a 'GST-exclusive retail price', which should read 'GST-inclusive retail price'.(14)

Reduction in the 32 per cent Wholesale Sales Tax Rate: Date of Effect

The proposed phasing down of the 32 per cent wholesale sales tax (WST) rate was to apply from the date of Royal Assent of the A New Tax System (Goods and Services Tax Transition) Bill 1998. However, to allow businesses to plan for this change, this measure will now apply from the twenty first day following the date of Royal Assent.

The Government made a request for this amendment, along with many others to various goods and services tax (GST) related bills, on 22 April 1999. The amendments were moved in the Senate, which for constitutional reasons could only be made as requests for amendments.

Defer Start Date for 'Opting Out' of the Superannuation Guarantee System

Details of the arrangements enabling employees receiving monthly salaries of $450 to $900 to 'opt out' of the Superannuation Guarantee system was announced in the 1996-97 Federal Budget. The proposal was originally intended to commence on 1 July 1998, but has been extended to 1 July 1999.(15)

Taxation Treatment on Disposal of Mining Property

On 3 December 1998, the Treasurer announced(16) a legislative response to the Full Federal Court decision in Esso Australia Resources Ltd v Federal Commissioner of Taxation 98 ATC 4768 to ensure that the tax treatment on disposal of mining property continues to operate as previously applied.

Prior to the Full Federal Court decision on 22 July 1998, the reference to capital expenditure for the purpose of determining balancing adjustments was confined to capital expenditure which is deductible under the mining provisions. 

1. 1999-2000 Budget Paper No. 1, p. 4-23.
2. B. Clegg, and J. Boyle, 'PDF move praised as "attractive"', Australian Financial Review, 13 May 1999, p. 10.
3. Deloitte Touche Tohmatsu, Federal Budget Analysis 1999, p. 2, Internet Website: http://www.deloitte.com.au/budget99/
4. Deloitte Touche Tohmatsu, Press Release, 12 May 1999, ATO Quality Control-Will It Erode Service?
5. Treasurer, Press Release No. 9, 22 February 1999.
6. Assistant Treasurer, Press Release No. 13, 24 March 1999.
7. Prime Minister, Treasurer and Minister for Family and Community Services, Joint Press Release, 26 March 1999; Minister for Communications, Information Technology and the Arts and the Minister for the Arts and the Centenary of Federation, Joint Media Release No.36/99, 26 March 1999.
8. Assistant Treasurer, Press Release No. 7, 1 March 1999.
9. Assistant Treasurer, Press Release No.AT/48, 14 December 1998.
10. The term is used as a synonym for depreciation. Depreciation is the reduction in value of an asset through wear and tear. An allowance for the depreciation on a company's assets is always made before the calculation of profit on the grounds that the consumption of capital assets is one of those costs of earning the revenues of the business and is allowed as such, according to special rules, by the taxation authorities. Bannock, Baxter and Davis, The Penguin Dictionary of Economics, Fourth Edition, Penguin Books, p. 109.
11. Assistant Treasurer, Press Release No. 12, 23 March 1999.
12. Assistant Treasurer, Press Release No.19, 22 April 1999.
13. Six Bills introduced the luxury car tax, namely:
14. A New Tax System (Luxury Car Tax Imposition-General) Bill 1999
15. A New Tax System (Luxury Car Tax Imposition-Customs) Bill 1999
16. A New Tax System (Luxury Car Tax Imposition-Excise) Bill 1999
17. A New Tax System (Luxury Car Tax) Bill 1999
18. A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999
19. A New Tax System (Indirect Tax Administration) Bill 1999
20. See the definitions of luxury car tax threshold and luxury car tax value in clause 27-1 of the A New Tax System (Luxury Car Tax) Bill 1999, a Bills Digest for which is available (Bills Digest No. 159 1998-99).
21. Assistant Treasurer, Press Release No. AT/18, 13 May 1988.
22. Treasurer, Press Release No. 120, 3 December 1998.

Identifying Transactions and Incomes of Persons-Tax Reform or Privacy Issues?

Bernard Pulle

This article reviews the possible taxation and privacy outcomes of the Budget expense measures which are intended to enhance the integrity of the TFN system, install the ABN system and facilitate the Tax Reform process with the anticipated introduction of the goods and services tax (GST) with effect from 1 July 2000.

Introduction

The Budget Measures 1999-2000 include several initiatives with a view to improve data-matching with the use of the Tax File Number (TFN). On 29 April 1999 the Australian National Audit Office (ANAO) presented to the Parliament a report titled Management of Tax File Numbers (TFN Report) which is on the ANAO's Homepage http://www.anao.gov.au.(1) The purpose of the audit was to ascertain and report to the Parliament on how efficiently and effectively the Australian Taxation Office (ATO) administers the TFN System and to identify opportunities for improvement of that system.

In addition, the Budget has measures to implement the Australian Business Number (ABN) system proposed in Tax Reform-Not A New Tax-A New Tax System (ANTS). (2)

Budget Expense Measures

Funding of Enhanced Data Matching with the TFN

The first three expense measures are for undertaking feasibility studies to determine the cost-effectiveness of:

• improving the integrity of Centrelink Family Allowance payments
• data matching the ASX Clearing House Electronic Sub-register System (CHESS) to improve the integrity of Centrelink payments, and
• improving payment integrity by data matching with State and Territory Superannuation Administration Authorities (SAA), respectively.

The fourth item is to undertake increased data matching of Centrelink records and payee declaration form records held on the ATO Prescribed Payment System.

Potential for reducing social security fraud and overpayments by enhanced TFN

On 13 May 1999, the Minister for Community Services tabled in the Parliament the half-yearly report on social security compliance activity to December 1998. This report indicated the significant role played by data matching in effecting savings in future outlays and in identifying debts.

The report revealed that:

• there were 448 485 reviews from data matching resulting in 33 302 cancellations and 13 407 rate reductions to payment. Savings to future outlays from these matches totalled almost $6.19 million a fortnight, and $111.2 million in debts were also identified for recovery action.
• within the above overall figures there were 276 878 reviews from the matching of ATO Employment Declaration Forms with Centrelink customer data resulting in 17 390 cancellations or reductions to payment. Savings to future outlays from these matches totalled almost $1.6 million a week, and $54.9 million in debts were also identified for recovery action. The data matching program which matches ATO income data with customer income statements held on Centrelink's records identified debts worth $44.7 million.
• there were in total 173 897 debts to the value of $137.6 million identified during the half-year and 161 047 (92.6 per cent) debts to the value of $111.2 million (80.8 per cent) were attributed to data matching.(7)

It is clear that from the point of effecting savings to benefit payments, enhancing the role of data matching with an outlay of $29.8 million over four years may be expected to reduce the cost of social security fraud and overpayments to taxpayers.

Why retain the legislative restrictions on the wider use of the TFN?

Apart from funding feasibility studies of the cost-effectiveness of TFN enhancement, there is scope for reviewing the legislative restrictions on the wider use of the TFN. Such a review which might result in a TFN reform would not only have an impact on social security payments but also on tax evasion.

The TFN legislation was first enacted in 1988 on the failure to implement the Australia Card proposal. Privacy considerations dominated the legislation which limited the use of the TFN as a unique numeric identifier for all financial transactions having taxation and social security implications. Parliament has since extended the use of the TFN and there are 13 Acts of Parliament that regulate the purpose and use of TFNs(8).

The TFN Report points out that since 1990 legislation has ensured that the TFN plays a key role in minimising fraud on the part of income support claimants but there has been no comparable legislation for the use of TFN for taxation transactions:

Further, the TFN reportpoints out that:

The disclosures of a mandatory and voluntary nature under the current TFN legislation have been summarised in Appendix 5 of the ANAO Report which is set out below.(11)

In view of the ANAO observation in paragraph 4.70 that Australia lacks a compulsory regime which is causing additional administrative problems for the ATO, apart from loss of revenue, the question arises why the TFN system should not be reformed to move towards a compulsory regime as in other OECD countries. In fact in paragraph 4.76 of the TFN Report the following suggestions are made for extending the compulsory disclosure of TFNs:

• Include all tax relevant transactions within the TFN system, and
• Improve the quality of the ATO's data to specified standards (and that of sources external to the ATO).

The TFN Report estimates that by implementing these measures there could be improved financial benefits for the Commonwealth estimated at $460 million per year. This amount is calculated as follows:(12)

• Additional revenue from the inclusion of certain transactions in the TFN withholding arrangements-$250 million
• Additional revenue from ATO/ Health Insurance Commission data matching-$180 million
• Expenditure savings on income support payments from the use of the TFN in Employment Declaration Forms (EDF), Prescribed Payment System (PPS) and Reportable Payments System (RPS) data matching with Centrelink-$28 million.
• Expenditure savings on ATO administrative expenses from the maximisation of Year 9 registrations in Schools Education Program (SEP)-$2 million.

Does the TFN legislation give scope for non-identification of beneficiaries of trusts?

The TFN Report cites the case of trust returns for very low voluntary compliance with the disclosure of TFNs. The tax returns for Trusts require the quotation of TFNs of the people listed as beneficiaries. As will be seen from Table 7 of Appendix 9 of the ANAO Report set out below, in 1997, 45 per cent of the 430 572 Trust taxation returns did not include a list of TFNs of the beneficiaries of trust distributions. In previous years the incidence was 49 per cent.

Trust Returns without a Complete List of the TFN's of all Beneficiaries

Source: ATO

As will be seen from Table 8 of Appendix 9 of the ANAO Report set out below, in 1997, TFNs were not provided for 18 per cent of the 2 064,830 beneficiaries of trust distributions and this percentage has been consistent over previous years.

Trust beneficiaries without TFN's

Source: ATO

The TFN Report adds that the examination for the reasons for the non quotation of TFNs in relation to trusts was outside the scope of the audit. It states that the ATO advised the ANAO that the absence of TFNs on Trust returns makes more difficult the correct assessment of income tax for those individuals for whom a TFN has not been provided.(13)

The proposal in ANTS to apply the company tax regime (currently 36 per cent) to trusts will be equivalent to imposing a withholding tax on trust distributions, but it would be no substitute to imposing a withholding tax at the maximum marginal rate of tax including Medicare levy at 48.5 per cent if the TFNs of beneficiaries are not disclosed on a compulsory basis backed by legislation.

The following Bills which were introduced into the House of Representatives on 13 May 1999 will assist to achieve this objective.

• A New Tax System (Closely Held Trusts) Bill 1999
• A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999
• A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999.

The A New Tax System (Closely Held Trusts) Bill 1999 amends the Income Tax Assessment Act 1936 and other taxing laws, to require the trustee of a closely held trust with a trustee beneficiary to disclose to the Commissioner of Taxation the identity of the ultimate beneficiaries of certain net income and tax-preferred amounts of the trust within a specified period after the end of the year of income. Proposed paragraph 102UG(3) to the Income Tax Assessment Act 1936 requires the disclosure of the names and TFNs of resident ultimate beneficiaries.

Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within the specified period the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999 imposes taxation, on that part of the net income of the trust attributable to the ultimate beneficiaries who have not been identified, at the top marginal rate plus Medicare levy of 48.5 per cent.

Where there are no ultimate beneficiaries of net income of a closely held trust, the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999 imposes taxation of that part of the net income of the trust for which there are no ultimate beneficiaries at the top marginal rate plus Medicare levy of 48.5 per cent.

Previous Budget Reviews have highlighted budget measures to establish a High Wealth Individuals Task Force to prevent tax minimisation and possibly tax evasion by high wealth individuals by the use of complex structures. The ATO claimed that the trust structure played a major role in tax minimisation.(14) The measures in the three Bills referred to above would assist to reduce loss of revenue by tax minimisation practices involving the use of trusts.

Proposal for the Australian Business Number

The Bills to implement the Australian Business Number Scheme

The A New Tax System (Australian Business Number ) Bill 1998 (ABN Bill) and its companion A New Tax System (Australian Business Number Consequential Amendments ) Bill 1998 (the ABN(CA) Bill) are two of a package of 34 Bills(15) now before Parliament to implement the ABN system. The reader is referred to the Bills Digest on these two Bills for details of the measures as well as the taxation and privacy issues that may arise from the establishment of the ABN system(16).

Briefly, an Australian Business Register (ABR) will be established to which the public will have access. The ABN scheme is central to the administration of the goods and services tax (GST) as well as improving tax compliance within the Commonwealth tax system generally. The term 'business' is given a wide meaning and includes any profession, trade, employment, vocation or calling, but not including occupation as an employee. The term entity is also given a very wide meaning and covers all kinds of legal persons as well as groups of legal persons and other things that in practice are treated as having a separate identity as a legal person does. The ABR will therefore be a register with unique identifying numbers of all entities whether individuals or otherwise, engaged in any enterprise in Australia. Individuals whose only occupation is that of employees will not be included in the ABR. The ABR will be administered by the Registrar who will be the Commissioner of Taxation.

Budget Measures to establish the Australian Business Number Scheme

The following funding arrangements in the Budget are to enable the ATO to meet the administrative costs associated with the introduction of the ABN scheme.

The ABN scheme will:

• make it easier for businesses to conduct their dealings with the Commonwealth Government so that they can identify themselves reliably by quoting the ABN:

• allow businesses to identify themselves reliably for the purposes of Commonwealth taxation laws, and
• reduce the number of government registration and reporting requirements by making the system available to State, Territory and local government regulatory bodies. This will be facilitated by allowing anybody to access the information on the Australian Business Register.

The laws implementing the GST, being a multi-staged tax on goods and services, with a system which includes the requirement to include the ABN on all tax invoices is the one Commonwealth taxation law where the ABN has significant impact on transactions between business entities. The Explanatory Memorandum to the two Bills implementing the ABN Scheme indicates the pivotal role of the ABN, when it states that it will:

• be the public registration number for the GST, and
• the introduction of an ABN will improve tax compliance by allowing business, in their dealings with one another and the Australian Taxation Office (ATO), to identify themselves reliably and report regularly for the purposes of taxation laws. (19)

The mandatory nature of the use of the ABN is a feature that is lacking in the use of the TFN.

The role of the Australian Business Number in administering the GST and reducing tax avoidance and evasion

ANTS aims to reduce tax avoidance and the growth of the cash economy. It is anticipated that the ABN will play a significant role in matching information in the administration of the GST which is a multistaged tax requiring reports from more taxpayers than under the existing wholesale sales tax (WST) regime.(20)

Contract workers in particular and those who do not provide an ABN on invoices are to be targeted by a withholding tax arrangement.

Withholding where no ABN is quoted

A reporting system based on tax invoices carrying an ABN is envisaged and should be a powerful instrument to tracking down tax evaders in the tax system as a whole and not only of the GST.

Is there scope to develop the ABN system to the numbering system proposed for entities under the Australia Card proposal?

The previous attempt by a Commonwealth Government to develop a comprehensive numbering system for identifying entities was one that was tied up with the proposal for the issue of the Australia Card for identifying individuals and the establishment of a Register of Births, Deaths and Marriages (the BDM Register). It was referred to as the companion numbering system. The Australia Card Bill 1986(22) included measures for the establishment of the Australia Card Register and the Births, Deaths and Marriages Register (BDM Register). It made it clear that the proposed identification system was intended to facilitate the administration and execution of Commonwealth laws relating to taxation, social security, hospital and medical benefits and immigration, and to prevent the obtaining of certain Commonwealth benefits falsely.(23)

The ABN Bill and the ABN(CA) Bill do not have measures as far reaching as the Australia Card Bill 1986, to create a central register of identification details for individuals. However, there is potential that the measures in the two Bills may assist the Registrar to build a database for identifying individuals associated with entities with the information obtained in the course of administering the ABN Act. This will depend on the sorts of information the Registrar will require on the form of application for an ABN to be approved by him or her under proposed paragraph 9(2)(a) of the ABN Bill. There is no requirement that the form approved by the Commissioner must be the subject of regulations under proposed clause 31 of the ABN Bill and the form will therefore not be subject to the disallowance provisions in section 46 of the Acts Interpretation Act 1901.

The outlays in the Budget for Data Matching with the Registrars-General Birth Records referred to in paragraph 2.1 above are intended to undertake a feasibility study using birth records from the Registrars-General Offices (RGO) to detect cases where family allowances have been paid for children with fraudulent identities. The cooperation of the States and Territories will be required to progress the study and thereafter develop an identification system. Given that the entire GST income is to be distributed to the States and Territories and the role of the ABN in maximising that revenue, the cooperation of the States and Territories may be expected.

What is the interaction between the TFN and ABN:

Proposed paragraph 9(3)(b)of the ABN Bill provides that the Registrar may not compel the quotation of an entity's TFN or that of an associate. The measures in the Bill require the Registrar to be satisfied about the identity of a person before issuing an ABN. The inference that may be drawn from the apparent lack of compulsion in this provision for the quotation of the TFN is that the Registrar may not be totally dependent on the TFN before being satisfied about the identity of an entity applying for an ABN. Nor is the Registrar dependent on the facilities available to the Registrar who is also the Commissioner of Taxation under the Data-Matching Program (Assistance and Tax) Act 1990 for matching data through the Data-Matching Authority (DMA). It may therefore be the case that the ABN will be a stand alone business identification number with linkages to associates and ultimately to the individuals behind entities

The Australian Business Number and Privacy Legislation

Under the measures in the ABN Bill an ABN will be available to all businesses in Australia. An ABN will also be available to all other entities that need to deal with Government, such as charities and religious organisations. The Australian Business Register will include the ABNs issued to various entities and associates. It will be a register to which the public will have access. The ABR will also include other details in relation to an entity as referred to in proposed paragraph 11(3)(d) of the ABN Bill. It is not clear what these other details are and whether these other details will be accessible to the public. The new tax system (Goods and Services Tax) Bill 1998 requires every entity making a taxable supply to indicate its ABN on the tax invoice and adjustment note relating to that taxable supply. The Explanatory Memorandum also states that the ABN will improve tax compliance by allowing businesses in their dealings with one another and the ATO to identify themselves reliably.(24)

The ABNs will therefore enhance the capacity of even the smallest of businesses to collect and analyse detailed information about identifiable customers and individuals. The ABR will be an addition to other public registers such as the business names register, company registers, electoral rolls. etc. with information that can be accessed by the public. Privacy concerns already exist that the ability to match data in public registers will enable profiles to be produced and used for purposes which go beyond the use intended for any one register.(25) The ABR and ABNs may add to these concerns and also assist in building profiles of the commercial activities of entities and their associates.

The Privacy Act 1988 (Cwlth) does not apply to public registers that are accessible to the public given the definition of 'records' in section 6 nor does it apply to private registers that can be established from information gathered from public registers. The proposed ABR should therefore add to the pressure for privacy legislation to cover both the private and public sectors that conforms with international privacy principles. There were concerns that without national privacy legislation that conformed to European Union guidelines, Australia might be blacklisted and isolated in cyberspace.(26) The Government has announced that Australia will have private sector self-regulation and uniform privacy legislation within 12 months. It expects to establish a light touch legislative regime based on the Privacy Commissioner's National Principles for the Fair Handling of Personal Information. The scheme will be based on industry codes and apply a legislative framework only where industry codes are not adopted.(27)

The Budget Measures 1999-2000 listed above seek to achieve the above mentioned objectives.

Identifying Transactions and Incomes of Persons-Tax Reform or Privacy Issues?

The TFN Report concludes that further gains in the effectiveness and efficiency of the TFN system are achievable by extending the TFN withholding arrangements to certain tax relevant financial transactions currently outside these arrangements. The TFN Report records that the ATO has advised that the initiatives it has taken, or may in the future take, in the administration of the TFN system has to be tempered, in its view, by several factors. These factors include the sensitivities that came to the fore at the time the TFN reforms were first introduced. The legislative development of the TFN reflects the tension between maintaining individual privacy while improving the efficiency and effectiveness of public administration.(31)

Tax Reform requires that the ABN which applies to business entities essentially will not attract the sensitivities that have prevented the development of a more efficient and effective TFN system.

Other Tax Reform Related Budget Measures

The following measures are provided for in the Budget and various aspects of these measures have been extensively dealt with in Bills Digests on the ANTS Bills to which reference should be made for the background to these measures.

Fringe benefits tax reform(32)

Expense ($m)

Business taxation reform(33)

Expense ($m)

Tax reform and Australian Taxation Office efficiencies(34)

Expense ($m)

Tax Reform price exploitation(35)

Expense ($m)

Additional funding for taxation reform(36)

Expense ($m)

Savings Bonus for Older Australians(37)

Expense ($m)

1. 'Management of Tax File Numbers'; The Auditor-General Audit, Report No. 37 1998-99.
2. The Howard Government's Plan for a New Tax System; Circulated by the Treasurer of the Commonwealth of Australia (13 August 1998) (ANTS).
3. Budget Measures 1999-2000, p. 96.
4. ibid., p. 97.
5. ibid., p. 97.
6. ibid., p. 98.
7. 1998-99 Social Security Compliance Activity in Centrelink, Half yearly report, Table 1 and Highlights.
8. The following thirteen acts of the Commonwealth Parliament now regulate the purpose and use of the TFNs:

Income Tax Assessment Act 1936 (ITAA)

Tax Administration Act 1953 (TAA)

Privacy Act 1988

Data-matching Program (Assistance and Tax) Act 1990

Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Act 1991

Social Security Act 1991

Veterans' Entitlements (Rewrite) Transition Act 1991

Higher Education Funding Act 1988

Superannuation Industry (Supervision) Act 1993

Small Superannuation Accounts Act 1995

Tax Laws Amendment Act (No. 2) 1996

Retirement Savings Accounts Act 1997, and

Superannuation Contributions Tax (Assessment and Collections) Act 1997.

9. Auditor-General, 'Management of Tax File Numbers', Audit Report No. 37, 1998-99, p. 30.
10. ibid., paragraph 4.70; p. 94.
11. ibid., p. 106.
12. ibid., paragraphs 4.76 and 4.77.
13. ibid., paragraph 4.63, p. 92.
14. Budget Review 1998-99; Department of the Parliamentary Library, Treasury Sub Program 16.4.1.
15. See the Introduction for a list of Bills.
16. Bills Digest No. 96 and 98, 1998-99.
17. Budget Measures 1999-2000, pp. 154-155.
18. ibid., pp. 155-156.
19. Explanatory Memorandum to the A New Tax System (Australian Business Number) Bill 1998 and A New Tax System (Australian Business Number Consequential Amendments ) Bill 1998, paragraphs 1.7 and 1.8.
20. ANTS, p. 150.
21. ibid., p. 145.
22. The Australia Card Bill 1986, introduced into the House of Representatives on 22 October 1986, was rejected by the Senate on 10 December 1986. The Australia Card Bill 1986 (No. 2) was rejected by the Senate on 2 April 1987. The Australia Card Bill 1986 (No. 3) was laid aside in the Senate on 9 October 1987. The three Bills were identical.
23. Australia Card Bill 1986, Parts II and III.
24. Explanatory Memorandum to the A New Tax System (Australian Business Number) Bill 1998 and A New Tax System (Australian Business Number Consequential Amendments ) Bill 1998; paragraphs 1.7 and 1.8, p. 4.
25. Moira Paterson, 'Privacy Protection in Australia: The Need for an Effective Private Sector Regime', Federal Law Review; vol. 26(2), October 29, 1998, p. 371.
26. Ed Day, 'Private end of a non-war', The Australian, 1 December 1998.
27. Joint Press Release by Senator the Hon. Richard Alston, Minister for Communications, the Information Economy and the Arts, and the Hon. Daryl Williams AM QC MP, Attorney-General, 16 December 1998.
28. Budget Measures 1999-2000, pp. 49-50.
29. ibid.
30. ibid., p. 191.
31. Auditor-General, 'Management of Tax File Numbers', op. cit., paragraphs 8-11.
32. Budget Measures 1999-2000, p. 156, Law and Bills Digest Group, Department of the Parliamentary Library, Bills Digest No. 87 1998-99.
33. Budget Measures 1999-2000, p. 157
34. ibid.
35. Budget Measures 1999-2000, p. 158, Law and Bills Digest Group, Department of the Parliamentary Library, Bills Digest No. 81 1998-99.
36. Budget Measures 1999-2000, p. 159.
37. Budget Measures 1999-2000, p. 160, Law and Bills Digest Group, Department of the Parliamentary Library, Bills Digest No. 92 and 93 1998-99.

Do the Primary Financial Statements Comply with Accounting Standards?

Bernard Pulle

In this article it is proposed to consider how AAS 31 and other applicable accounting standards have been complied with in preparing the Primary Financial Statements(1) comprising:

• Statement of Revenue and Expenses for the Commonwealth General Government Sector (Operating Statement) (2)
• Balance Sheet for the Commonwealth General Government Sector (Statement of Financial Position), (3)and
• Statement of Cash Flows for the Commonwealth General Government Sector (Statement of Cash Flows).(4)

Introduction

The 1999-2000 Budget financial statements have been prepared on an accrual basis for the first time. There are two accrual standards against which the Government has reported in this Budget:

• The ABS's accrual Government Finance Statistics (GFS) standard which is explained in Statement 9 of Budget Paper No. 1, and
• Australian Accounting Standard: AAS 31 - Financial Reporting by Governments which is explained in Statement 4 of Budget Paper No. 1. This accounting standard was prepared by the Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and issued in June 1998.

The Notes set out in Appendix A: Statistics, Concepts and Notes to the Financial Statements are an integral part of the Financial Statements.(5) These will make a major contribution in explaining whether the transparency expected of the Financial Statements of the Commonwealth by applicable accounting standards have been achieved.

The Consolidated Financial Statements of the Commonwealth Government of Australia are required by section 55 of the Financial Management and Accountability Act 1997. The consolidated financial statements prepared on accrual-based accounting for the year ended 30 June 1998 were tabled in Parliament in March 1999. In a preface to the consolidated financial statements the Minister for Finance and Administration stated that the 1999-2000 Commonwealth Budget which will be brought down on an accrual basis will give both the Government and managers financial and performance information on which to make sound decisions.(6)

The sensitivity of the forward estimates of expenses and revenue to variations in economic parameters in 1999-2000 are dealt with in Appendix B: Sensitivity of Fiscal Aggregates to Economic Developments.

The process of making estimates and projections involves the incorporation of assumptions and judgements based on information available at the time of publication. Appendix C: Statement of Risks(7) sets out events which could affect fiscal outcomes such as changes in economic and other parameters, fiscal risks and contingent liabilities. The Charter of Budget Honesty Act 1998 requires a Statement of Risks to be included in each Economic and Fiscal Outlook Report to improve the transparency of fiscal projections and Appendix C complies with that requirement.

Comments on the information in Appendix B and C are dealt with in another feature article in this Budget Features.

Purpose of Accounting Standard AAS31

The purpose of AAS 31 is to set standards for general purpose financial reporting by the Commonwealth Government, the governments of New South Wales, Queensland, South Australia, Tasmania, Victoria, Western Australia, the Australian Capital Territory and the Northern Territory. The Commonwealth, State and Territory Governments are referred to as reporting entities in AAS 31. The standard requires the reporting entities to prepare general purpose financial reports because there are users who depend on the financial information contained in them for making and evaluating decisions about the allocation of resources. The users of the general purpose financial reports of governments include parliamentarians, the public, providers of finance, the media and other analysts.(8)

Requirement to prepare Accrual-based general purpose financial reports

AAS 31 requires governments to prepare accrual-based general purpose financial reports which include:

• the assets they control
• the liabilities they have incurred, and
• their revenues and expenses.

Accrual accounting is where assets, liabilities, equity, revenues and expenses are recognised in the reporting periods to which they relate, regardless of when cash is received or paid. In contrast, the cash basis of accounting records the effect of financial activity only when cash is received or paid.

Accrual based financial reports prepared by governments will differ significantly from cash based financial reports covering the same period. Thus the following information is evident in accrual based financial reports but not in cash based financial reports.(9)

• non-cash assets such as land, buildings, motor vehicles and their depreciation
• the value of 'receivables' (such as the amount owing to governments from others but not yet received) and the value of 'payables' (such as amounts owed by governments for goods that have been purchased but not yet paid for):
• liabilities, including those relating to employee entitlements which have not yet been paid and long-term contractual obligations
• the changing value of a government's financial assets and liabilities, such as changes to amounts owed to overseas lenders resulting from exchange-rate movements, and
• the full cost of government activities for the period, the revenues generated for the period, and any differences therein.

Do the Primary Financial Statements cover the Whole-of-Government?

As indicated above, AAS 31 requires financial reporting be in respect of the Whole-of-Government (that is, the Commonwealth Public Sector comprising the General Government Sector, the Public Trading Enterprises (PTEs) and the Public Financial Enterprises (PFEs). Thus the consolidated financial statements of a reporting entity must include the assets and liabilities of the Commonwealth Government and its PFEs and PTEs at the end of the financial year and the revenues and expenses of the Commonwealth Government and its PFEs and PTEs during that year. However, Note 1 of Appendix 1 states that the 1900-2000 financial estimates cover the General Government Sector only although it confirms that the scope for financial reporting recommended in AAS 31 is the Whole-of-Government.(10)

The primary function of the general government sector is to provide public services which are mainly non-market in nature, are mainly for the collective consumption of the community, involve the transfer or redistribution of income and are financed mainly through taxes and other compulsory levies.(11)

The Consolidated Financial Statements for the year ended 30 June 1998 covers the General Government Sector, Public Trading Enterprises (PTEs) and Public Financial Enterprises (PFEs),(12) which is a consolidation of the whole-of government prepared under AAS 31.

The Consolidated Financial Statements required by section 55 of the Financial Management and Accountability Act 1997 is not merely an accounting document relating to the Whole-of Government but an instrument of accountability to the general public of how the economy has been managed by the Government. Performance can be measured by comparing Budget Estimates for a year with the Consolidated Financial Statements of that year. If the Budget Estimates are not prepared on a Whole-of-Government basis under AAS 31, comparison with the Consolidated Financial Statements prepared on the Whole-of-Government approach to measure performance will not be easy to make without adjustments.

Revenues

Tax Revenues 1999-2000

According to AAS 31 tax revenues should be recognised when the underlying transaction or event which gives rise to the government's right to collect the tax arises and can be measured. However, the standard appreciates that in some cases an inability to reliably measure tax revenues when the underlying transactions or events occur means that they may need to be recognised at a later time. For this reason, the standard states that the disclosure of policies adopted for recognising tax revenues will enhance the understandability and comparability of information relating to them.(13)

Budget Statement No. 4 states that the Commonwealth does not consider its revenues can be reliably forecast on the basis required in AAS 31 and it states that Revenue in the budget is recognised at the time the relevant law indicates the existence of a requirement to pay an amount in tax or when a tax assessment is raised by the Australian Taxation Office (ATO) and the Australian Customs Service (ACS).(14) It adds that the method used in forecasting taxation revenue differs from the method used for recording taxation revenue in previous accrual outcome reports. The details of the Revenue estimates on the accruals basis are given in Table 1 of Statement 6(15) and the details on a cash basis are given in Table C1 of Statement 6.(16) These are summarised in the following Table.

Revenue Estimates 1999-2000

In the estimates on the accrual basis the fringe benefits tax in the amount of $3286 million has been included in the figure for Other Taxes, Fees and Fines.(17)

A point to note is that while the Operating Statement shows the forecast taxes, fees and fines for 1999-2000 at $147.779 billion, the Cash Flow Statement for the same year shows the cash received from taxes, fees and fines at $145.411 billion. The difference of $2.368 billion may be attributed to timing differences as a result of taxes accrued in the previous years being received in the year 1999-2000 and taxes accrued in 1999-2000 not received in the same year as well as credit amendments to taxes.

In view of the significance of the total taxation revenue to the Operating Statement (90.8 per cent of Total Revenue) and the materiality of the difference of $2.368 billion referred to above to the Budget operating result of $5.717 billion, it would have been of assistance in understanding the figures in the Financial Statements if a reconciliation statement of receivables and accrued revenue was provided as a Note to the Financial Statements.

Are the GST Revenues recorded in the Budget Estimates?

Budget Paper No. 1 states that as the Commonwealth will play an agency role in the collection of the proposed GST, the accrued revenues and associated payments to the States and Territories are not recorded in the Budget Estimates. Note 2 to the Primary Financial Statements dealing with Indirect Taxes treats the GST revenue as shown in the following Table .(18)

The non-recording of the GST in the projections is contrary to the requirement in AAS 31 and other accounting standards covering the recognition of revenue in financial statements of reporting entities. Budget Paper No. 1 accepts that the treatment in the Budget Estimates of the GST and other Revenue Replacement Taxes which replaced business franchise fees is contrary to applicable accounting standards:

The argument that the Commonwealth is an agent of the States and Territories in relation to the imposition and collection of the GST does not warrant off-financial statement accounting. Thus when the Consolidated Financial Statements for the year ended 30 June 2001 come to be prepared the GST revenue will have to be included in Revenue and the payments of the entire GST revenue to the States and Territories will have to be included in Grants. If this is not done the Auditor-General will have no option but to qualify the consolidated Financial Statements for non-compliance with applicable accounting stands.

Division 1 of Part 3 of the A New Tax System (Commonwealth-State Financial Arrangements) Bill 1998 deals with GST grants to the States and the GST is imposed by three imposition Bills:

• A New Tax System (Goods and Services Tax Imposition-Customs) Bill 1999
• A New Tax System (Goods and Services Tax Imposition-Excise) Bill 1999
• A New Tax System (Goods and Services Tax Imposition-General) Bill 1999.

The three Bills recognise that the GST will be a customs duty when imposed on imports and in other cases may even be a duty of excise or a tax. The States are precluded from imposing a customs duty or a duty of excise under sections 90 of the Constitution. In view of that constitutional position, the States cannot be principals and the Commonwealth the agent for the imposition and collection of the GST where it is a duty of customs or a duty of excise.

In agency arrangements a principal cannot delegate to an agent a power which the principal does not possess. Reference is also invited to the Bills Digest on the A New Tax System (Commonwealth-State Financial Arrangements) Bill 1998 which makes the case that the provisions in Part 2 which require the agreement of the States to change the rate of GST in certain circumstances may be unconstitutional.(20) In these circumstances the GST is revenue that will be raised by the Commonwealth under its revenue raising power and must be accounted for in its own financial statements as revenue. The disbursements to the States and Territories of the entire GST must be included with expenses.

It is relevant to note that the Consolidated Financial Statements of the Commonwealth for the year ended 30 June 1998 would appear to include the safety net surcharges on tobacco, petroleum and alcohol products with revenue and the Revenue Replacement Payments with expense items in the operating statement.(21) A similar treatment will be required of the GST revenue and disbursements in the Consolidated Financial Statements for the year ended 30 June 2001.

The comparability of the Budget Estimates with the Consolidated Financial Statements will be made difficult by following the accounting treatment of GST revenues and disbursements proposed in Budget Paper No.1. In addition such treatment is contrary to the requirements of AAS 31 and other accounting standards. Further, such accounting treatment would not reflect the division of revenue raising constitutional powers between the Commonwealth and the States.

Operating Result and the Fiscal Balance 1999-2000

The operating result on the basis of accrual accounting using AAS 31 is $5.717 billion. The fiscal balance using GFS is the accrual equivalent of the underlying cash balance and is $5.426 billion, details of which are in Statement 9. This is the Budget Surplus and the focus of Government's fiscal policy. The fiscal balance measures the extent to which the Government is adding to, or drawing down on, the private savings pool.

The fiscal balance can also be calculated through several adjustments to the accounting standard operating result as indicated in Table 5 of Statement 1.(22) These adjustments fall into two main categories-revaluations and capital.

Revaluations reflect changes in the value of assets and liabilities. As they do not relate to actual transactions they do not affect the fiscal balance. Further they do not involve a change in the Government's resource position. Thus an actuarial reassessment of the Government's superannuation liability leads to a more accurate value of the liability being recorded in the balance sheet but does not affect the Government's current resource position and hence will not affect the fiscal balance. Any provision to meet this future liability will affect the Operating Result but not the Fiscal Balance.

The treatment of capital expenditure is the other major difference between the accounting Operating Result and the Fiscal Balance. Net capital expenditure in any year affects the Fiscal Balance whereas capital use or depreciation affects the Operating Result. In deriving the Fiscal Balance from the Operating Result depreciation charged in the Operating Statement is added back to the Operating Result and capital expenditure deducted.

The impact of depreciation and the provision for superannuation liability will be considered in the following paragraphs.

Depreciation

Accrual accounting records capital use which is depreciation of assets, whereas cash accounting records capital expenditure. Note 7 to the Primary Financial Statements gives the breakdown of the amount of $2.477 billion charged in respect of depreciation and amortisation. For the year 1999-2000 the major component is depreciation of specialist military equipment of $1.124 billion. The rates of depreciation charged on various assets are not indicated in the Notes to the financial statements. The Consolidated Financial Statements for the year ended 30 June 1998 in Note 31 indicate the rates of depreciation and amortisation of various assets and presumably these rates have been used in arriving at the depreciation charged in the Primary Financial Statements.

The value of assets which are depreciated determine the use of the assets in any given year and the amount of depreciation charged. Note 1.35 to the Consolidated Financial Statements for the year ended 30 June 1998 which sets out the policy on asset valuation states that non-financial assets are stated at historical cost or valuation. Assets at valuation are valued on the following basis:

• land and buildings-market value
• infrastructure, plant and equipment-replacement cost, and
• intangibles-replacement cost.

The Note indicates that the majority of Commonwealth entities are required to progressively value non-financial assets in accordance with the deprival method of valuation by 1 July 1999, then progressively revalued on that basis every three years.

The total of non-financial assets at 30 June 1999 as indicated in the Commonwealth General Government Sector Balance Sheet is $53.520 billion. The depreciation charge of $2.477 billion represents 4.6 per cent of the balance sheet value of the assets and should a revaluation result in a higher value the annual depreciation charge would also increase with a corresponding decrease in the Operating result.

Provision for Superannuation

The Commonwealth's superannuation expense for the year 1999-2000 is shown at $2.801 billion in Note 5 to the Primary Financial Statements. A Footnote adds that the amounts in respect of superannuation in Note 5 do not reflect the Commonwealth's total superannuation expense. It also adds that this can be obtained from the GFS operating statement in Statement 9 of Budget paper No.1.

Table D2 in Statement 9 includes an additional amount of $2.428 billion as superannuation interest expense in the GFS General Government Operating Statement for 1999-2000 thus making a total of $5.229 billion as superannuation expense. Note 5 also shows under 'Other' expenses for employees a sum of $2.428 billion which would appear to be the superannuation interest expense. It would have been helpful to a reader of the Primary Financial Statements if there was some classification of this expenditure of $2.428 billion which is a material amount in relation to the Operating Result of $5.717 billion. It would also have been of assistance in forming a view whether the total provision for superannuation of $5.229 billion in 1999-2000 was adequate against the total superannuation liability to the employees in the General Government Sector estimated to be outstanding at $69.088 billion at 30 June 1999 shown by Note 10.

The Consolidated Financial Statement of the Commonwealth Government of Australia for the year ended 30 June 1998 includes in Note 11 an amount of $6.990 billion as superannuation expense which would include the provisions made by the PTEs and PFEs as well. Measured against this provision the question arises whether the provision of $5.229 billion is adequate in the financial statements for 1999-2000. There is no Note to explain the lack of compatibility of the provisions.

One approach to testing the adequacy of the provision to observe that Note 10 to the Primary Financial Statements shows the total liability of the Commonwealth to the superannuation of the past and present employees of the General Government Sector as well as those of PTEs and PFEs for which it may be still liable is expected to be $69.088 billion at 30 June 1999. Note 24 to the Consolidated Financial Statements at 30 June 1998 shows the outstanding liability for superannuation at $68.5 billion for all past and present employees of the Commonwealth General Government Sector, PTEs and PFEs. If a provision of $6.990 billion was necessary in the year ended 30 June 1998 against a total outstanding superannuation liability of $68.5 billion, it may be concluded that a provision of $5.229 billion in 1999-2000 is inadequate against an outstanding liability of $69.088 billion for the Commonwealth General Government Sector.

The difference in estimated provisions is $1.761 billion and is material against the Operating Result of $5.717 billion for 1999-2000.

To comply with the disclosure requirements of accounting standards it would have been necessary to classify the amount of $2.428 billion included in Note 5 as 'Other' commitment to employees. Further a Note to the Primary Financial Statement should have indicated the basis of making provisions to meet the superannuation liabilities of past and present employees for which the Commonwealth General Government Sector is responsible. Greater transparency of the Primary Financial Statements would have been achieved by such disclosures under one Note to the Primary Financial Statements titled Provision for Superannuation.

Contribution of dividends from PTEs and PFEs to the operating result of $5.7 billion

As mentioned above the estimates in the financial statements presented in the 1999-2000 Budget Papers covers only the General Government Sector and includes estimates of dividends anticipated from PTEs and PFEs totalling $6.1 billion compared with $4.3 billion estimated in 1998-1999.(23)

Considering that the achievement of the dividends target of $6.1 billion will have a significant impact on the operating result of $5.7 billion greater transparency of the estimates may have been achieved by a breakdown of the anticipated dividends. However, the requirements of commercial confidentiality of such information in relation to PTEs and PFEs is a factor which has always been a restraint on the disclosure of such details in Budget Papers.

The dividends for the projected years 2000-01, 2001-02 and 2002-03 are $2.9 billion, $2.8 billion and $2.4 billion respectively and likely reflect the impact of the proposed sale of two thirds of Telstra discussed below.

Abnormal and Extraordinary Items referable to the projected sale of the Commonwealth's interest in Telstra

The Operating Statement for 1999-2000 shows abnormal and extraordinary items of $10.99 billion. The projections for 2001-2002 and 2002-2003 show corresponding figures of $13.293 billion and $15.131 billion respectively. There is no Note in Appendix A to explain how these abnormal and extraordinary items have been estimated.

However, Budget Statement 1 refers to the proposed sale of the Commonwealth's holding in Telstra and adds that in line with accounting standards, the Commonwealth balance sheet records two thirds of Telstra's 'net assets' as a Commonwealth asset. It adds that this is significantly below the equivalent of two thirds of Telstra's shares and in line with accounting standards the Commonwealth will only be able to value the Telstra investment according to its share price once the Commonwealth owns less than 50 per cent of Telstra.(24)

Materiality and Disclosures

Australian Accounting Standard-AAS 5 'Materiality' governs the detail to be disclosed in financial statements under other Australian Accounting Standards where information required is material. Information is material if its omission, misstatement or non-disclosure has the potential to adversely affect:

• decisions about the allocation of scarce resources made by users of the financial report, or
• the discharge of accountability by the management of the entity.

AAS 5 states that in deciding whether an item or an aggregate of items is material, the nature and amount of items usually need to be evaluated together. In particular circumstances either the nature or the amount of an item or an aggregate of items could be the determining factor. AAS 5 states that in the context of an item in relation to the Operating Statement the amount of the item is to be compared with the operating result/profit or loss. Thus the difference of $2.368 billion between the total tax revenue in the Operating Statement and the taxation revenue in the Cash Flow Statement referred to in the paragraph 5.1 is material against the figure of the Operating Result of $5.717 billion. AAS 5 would therefore have required the disclosure by way of a Note of a reconciliation statement of accrued taxation revenues at the beginning and end of the 1999-2000 year. Note 13 falls short of this requirement as there is no explanation in Budget Paper No. 1 of how the total figure for taxes, fines and fees of $152.530 billion included in the opening line of Note 13 has been derived.

Some other material amounts where disclosure may have been required to comply with AAS 5 are as follows:

• Other taxes fees and fines-$5.849 billion

• Net write down of assets - $1.431 billion

1. Budget Paper No. 1, Budget Strategy and Outlook 1999-2000, pp. 4-7 to 4-16.
2. ibid., p. 4-7.
3. ibid., p. 4-8.
4. ibid., pp. 4-9 to 4-10.
5. Appendix A, Statistics, Concepts and Notes to the Financial Statements pp. 4-11 to 4-16.
6. Consolidated Financial Statements for the year ended 30 June 1998 of the Commonwealth Government of Australia, Circulated by the Minister for Finance and Administration (March 1999).
7. Budget Paper No. 1, Budget Strategy and Outlook 1999-2000, Appendix A, Note 3, p. 4-13.
8. AAS 31, Financial Reporting by Governments, paragraph 3.
9. ibid., paragraph 3.2.3.
10. Budget Paper No. 1, Budget Strategy and Outlook 1999-2000, Note 1 of Appendix A, p.4-11, fourth paragraph.
11. Budget Statement No. 9, p. 9-3.
12. Consolidated Financial Statements for the year ended 30 June 1998 of the Commonwealth Government of Australia, Note 42, pp. 94-96 gives details of the entities in the General Government Sector, Public Financial Enterprises and Public Trading Enterprises at 30 June 1998.
13. AAS 31, Financial Reporting by Governments, paragraph 15.2.1.
14. Budget Paper No. 1, Budget Strategy and Outlook 1999-2000, Note 1, p. 4-11.
15. ibid., pp.6-3 to 6-26.
16. ibid., pp. 6-23 and 6-24.
17. ibid., Note 5, pp. 6-11
18. ibid., pp. 4-12.
19. ibid., pp. 4-11 and 4-12.
20. Law and Bills Digest Group, Department of the Parliamentary Library, Bills Digest No. 164 1998-99.
21. Consolidated Financial Statements for the year ended 30 June 1998 of the Commonwealth Government of Australia, p. 8.
22. ibid., p. 1-31.
23. Budget Paper No. 1, Budget Strategy and Outlook 1999-2000, Note 3, p. 4-1.3
24. ibid., p. 1-20.

Statistical Overview

Tony Kryger

This statistical overview is not meant to be a comprehensive coverage of the statistical information that is available from the Budget. Rather, it provides a quick reference to general government expenses, revenue estimates, historical Budget aggregates and Government economic forecasts.

Note that the change from a cash to an accruals basis for accounting has meant that the historical Budget aggregates are not available on an accruals basis. They are shown therefore on a cash basis.

Note also that many of the estimates presented here are conditional upon the successful implementation of the tax reform package and the sale of Telstra.

General Government Expenses

Expenses represent the full cost of an activity. This is in contrast with previous budget presentations which referred simply to outlays or direct cash costs. Expenses reflect more accurately the full cost of achieving Government objectives and eliminate distortions caused by the timing of certain payments.

The general government sector provides public services that are mainly non-market in nature, are mainly for consumption by the community, involve the transfer or redistribution of income, and are generally financed through taxes and other compulsory levies.

The level of expenses incurred largely reflects the economic cycle and the effect of discretionary policy decisions. The table below shows expenses incurred or estimated to be incurred by economic type. The very large increase in expenses incurred on personal benefits-up 23 per cent in 2002-03 compared with the Budget year-is attributed to the progressive implementation of the tax reform package.

Table 1: Expenses by Type ($m)

Revenue Estimates

Table 2 compares revised revenue estimates for 1998-99 with the 1999-2000 Budget estimates. It shows that in 1999-2000 total revenue is expected to increase by 6.2 per cent over estimated revenue in 1998-99. Total tax revenue is expected to grow by 4.9 per cent. As a proportion of GDP, however, total revenue is expected to increase only slightly from 25.9 to 26.3 per cent while tax revenue is expected to remain unchanged at 23.8 per cent of GDP.

The largest single source of revenue in the Budget is the income tax paid by wage and salary earners on a pay-as-you-earn basis. Although income tax rates have not changed, gross PAYE collections are expected to rise by 6.9 per cent in 1999-2000 in response to forecast growth in average earnings and growth in wage and salary employment.

Table 2. Revenue by Source

Historical Budget Aggregates (Cash Basis) and Net Debt Data

For historical purposes, the Budget aggregates-underlying outlays, revenue and balance-are available on a cash but not an accruals basis (see Table 3). Actual Budget aggregates are shown from 1962-63 to 1997-98 with estimates to 2002-03. The data are also expressed as percentages of GDP to allow meaningful comparisons to be made over time.

The period from 1962-63 to 1974-75 were years in which the underlying balance was constantly in surplus. This is in contrast with the 12 years that followed when there was only one (1981-82) surplus. Except for the period 1991-92 to 1996-97, the underlying balance in all other years has been in surplus and this is forecast to continue at least to 2002-03.

Table 3. Budget Aggregates (Cash Basis), 1962-63 to 2002-03

Budget revenue and underlying outlays as a proportion of GDP are also displayed in the chart below. The difference between the two series is the underlying Budget balance.

Net debt (liabilities less financial assets) of the Commonwealth General Government sector reached $96.3 billion or 18.1 per cent of GDP in 1996-97. It has since fallen, in absolute and in relative terms, and a small negative net debt figure is projected for 2002-03. (Table 4.) Note that debt estimates assume the sale of Telstra and use of the proceeds to retire debt.

Table 4. Commonwealth General Government Net Debt

Government Economic Forecasts

The major economic forecasts by the Government (Table 5) are summarised below:

• The current account deficit (CAD) is forecast to grow from $23.3 billion in 1997-98 to $32 billion in 1999-2000, or an increase from 4.1 to 51/4 per cent of GDP. The increase in the CAD primarily reflects a deterioration in the balance of trade, coming from continued weak net exports and weaker terms of trade.
• Employment growth is expected to moderate over the next two years in response to slower growth in the domestic economy. The unemployment rate is expected to average around 71/2 per cent in 1999-00, down from 8.3 per cent in 1997-98. The participation rate is expected to drift up a little from recent levels to average around 631/4 per cent.
• The rate of inflation is expected to remain low but will increase from zero per cent in 1997-98 to 11/4 per cent in 1998-99 and 2 per cent in 1999-2000. The forecast rise in inflation in 1999-2000 partly reflects higher unit labour costs. Some lessening in the downward pressure on the world prices of Australia's imports is also expected in 1999-2000. Acting in the opposite direction will be the moderating effect of some easing in domestic demand pressures as activity slows.
• The household savings ratio is expected to continue its long term downward trend with household saving falling to 1 per cent of household disposable income in 1999-2000.
• After six years of strong growth in business investment (excluding net second hand asset sales from the public to the private sector), only modest growth is expected in 1998-99. In 1999-2000 growth in business investment is expected to be flat (running at about the same level in 1998-99), reflecting the impact of continuing below trend world growth, the maturity of the current investment cycle and some deferral of investment spending ahead of the tax reform package. Business investment in 1999-2000 is nonetheless expected to be around its long-run average share of GDP.
• Net exports are expected to detract from GDP growth in 1998-99 but to contribute slightly to growth (1/4 of a percentage point) in 1999-2000 as exports pick-up in line with the gradual strengthening in the world economy.

Table 5. Domestic Economy Forecasts

(Percentage change on previous year unless otherwise indicated)

To put some of the main economic forecasts into perspective, the following graphs show for four indicators-economic growth, current account deficit, unemployment and inflation-Australia's actual economic performance over the past 5 years, estimates for 1998-99 and forecasts for 1999-2000.

Comments to: web.library@aph.gov.au
Last reviewed 13 August 2001 by the Parliamentary Library Web Manager
© Commonwealth of Australia
Parliament of Australia Web Site Privacy Statement
Images courtesy of AUSPIC