Bills Digest no. 62 2008–09
Appropriation (Economic Security Strategy) Bill (No. 1)
2008-09
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Date introduced:
11 November 2008
House: House of Representatives
Portfolio: Finance and Deregulation
Commencement:
On Royal
Assent
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
To appropriate
money for the ordinary annual services of government as part of the
government s Economic Security Strategy.
On 14 October 2008, the Rudd Government
announced
its Economic Security Strategy.[1] The context for the announcement is what may be
the most severe downturn in the world economy since the Second
World War. The downturn has inevitably affected Australia, which
faces the prospect of a sharp decline in economic growth if not a
recession. To try to counter the slowdown, the government announced
a discretionary fiscal stimulus package known as the Economic
Security Strategy. The Appropriation (Economic Security Strategy)
Bill (No. 1) 2008-09 (the Bill) seeks funding for those elements of
the Economic Security Strategy which are classified as ordinary
annual services of government. Two related Bills the Appropriation
(Economic Security Strategy) Bill (No. 2) 2008-09 and the Social
Security and Other Legislation Amendment (Economic Security
Strategy) Bill 2008 respectively seek funding for services other
than ordinary annual services and for various social welfare
measures.[2]
The Economic Security Strategy (the Strategy)
is costed at $10.44 billion, and covers the three years beginning
2008-09.[3] The bulk
of the proposed spending $9.65 billion is concentrated in 2008-09.
The Strategy has six components. This Bill seeks to appropriate
$146 million in 2008-09, to be distributed as follows:
- an expansion in the number of places in the Productivity Places
Program, costing approximately $117 million;
- administrative costs of implementing the one-off payments
detailed in the Social Security and Other Legislation Amendment
(Economic Security Strategy) Bill 2008:
- departmental expenses of $16.5 million for the Department of
Families, Housing, Community Services and Indigenous Affairs
(FaHCSIA) and $0.64 million for the Department of Veterans Affairs;
and
- administered expenses of $11.55 million for FaHCSIA to conduct
a public information campaign, to inform eligible recipients of
their entitlements under the Strategy.
Other elements of the Strategy are contained
in the other two Bills currently before the Parliament. The
following measures are contained in the Social Security and Other
Legislation Amendment (Economic Security Strategy) Bill 2008:
- a one-off pension payment;
- a one-off carers payment;
- a one-off seniors payment to holders of Seniors Cards and
eligible Veterans Affairs Gold Cards; and
- a Family Tax Benefit payment of $1000 per eligible child.
The final component of the Strategy is contained
in Appropriation (Economic Security Strategy) Bill (No. 2) 2008-09
which increases subsidies to first home buyers.
Generally, business groups have welcomed the
strategy.
Australian Industry Group:
The Government s $10.4 Billion Economic
Security package provides timely insurance for the local economy
against the risks from the global crisis and equally timely support
against the impacts of flat and weakening domestic economic
activity. These spending measures will complement the recent
interest rate reductions and steps to underwrite confidence in our
banking system.[4]
Business Council of Australia:
This package contains all three ingredients to
have maximum impact. It is well-timed, well-targeted, and temporary
The package is well-timed. It provides fiscal stimulus that will be
delivered when the economy is likely to be at its weakest point,
with the impact of the global slowdown hitting hardest. The package
is well-targeted. It targets the people most likely to spend it,
and most likely to need it that is, lower-income households. And
the package is temporary. This is vital. By providing one-off and
time-limited payments, Australia keeps the capacity to return to
budget surpluses again once this emergency is over. The payments in
this package meet that criteria and avoiding building continuing
obligations into the Budget.[5]
Australian Retailers Association:
Retailers applaud any move to reinvigorate
consumer sentiment and start the upwards trend for consumer
spending in time for the 2008 Christmas season. Prime Minister
Rudd's plans for a Christmas bonus is great news for consumers who
look forward to enjoying the gift giving tradition of Christmas -
and even better news for retailers hard hit by months of reduced
consumer demand.[6]
Australian Chamber of Commerce and
Industry:
However, the Australian Chamber of Commerce
and Industry believes that additional measures are required beyond
those contained in the Strategy:
The Australian Chamber of Commerce and Industry
says that economic measures directed at lifting productivity such
as taxation reform and cutting back on non-productive government
expenditure are still needed to complement [the] economic
stimulus package
Our best response to minimise job losses in an
economic downturn is to take cost pressure off businesses,
including small business, and increase national productivity. This
is unfinished work, which still needs attention. Difficult balances
need to be made between savings and spending in these times.
Committing so much of the surplus to injecting cash into households
leaves less to finance other necessary structural reforms like
taxation reform that have a more lasting effect on
productivity.
Today s commitment to additional training
places will be welcomed by business and is well targeted to include
a wider range of skills needed by employers.[7]
Seniors groups have also welcomed the package,
particularly the assistance directed to pensioners.
Council on the Ageing (COTA) Over
50s:
Pensioners have been quite rightly identified
as well deserving beneficiaries of the Rudd Government economic
stimulus package designed to shield Australia from the global
financial crisis. We know that financial support to pensioners will
stimulate the local economy. Pensioners spend on basic needs at
their local shops, not on luxury imports.[8]
National Seniors Australia:
[National Seniors Australia are] very
pleased. The government has listened to the concerns of our most
vulnerable older Australians and they ve come to the table. This
means single age pensioners in particular, who usually barely
scrape by, will have little reason to do without this Christmas. In
a real sense, it means being able to buy presents for their
grandchildren, have ham on the table or fix that leaky
roof.[9]
Australian Council of Social
Services:
However, whilst the Australian Council of
Social Services (ACOSS) supports the assistance given to
pensioners and carers, they have criticised the package for not
providing any additional support to the unemployed:
ACOSS welcomes the Government's measures to
assist pensioners, carers and families while also reducing the risk
of a serious economic downturn. Groups such as disability support
pensioners and sole parents, who have previously missed out on
benefits like the Utilities Allowance, will be financially better
off. However, unemployed people, who will be most affected in the
event of an economic downturn, have missed out on financial
assistance.[10]
A number of economists have been quoted on
their thoughts about the Strategy in the Sydney Morning Herald on
14 October 2008. The following comments are relevant to this
Bill:[11]
Shane Oliver, AMP Capital:
It's a 50-50 call whether we'll see [a
recession] or not - the risk is the December quarter or the
first six months of next year. Whether it helps to stop a recession
remains to be seen. There's no doubt it will help minimise the
severity of recession.
Alan Oster, National Australia
Bank:
The current spending initiatives for low income
families and pensioners should provide a significant boost to
household consumption by over one per cent around the end of 2008
and in the first half of 2009 given that the majority is likely to
be spent.
Riki Polygenis, ANZ Bank:
Not only is this package much larger than
earlier speculated, but it has been constructed to get the maximum
economic impact for the dollars spent. It is largely directed to
people who are likely to spend them and the largest impact will be
in the December quarter when the negative effects of the financial
crisis are likely to be greatest.
Wolfgang Munchau (Financial Times,
quoted on www.businessspectator.com.au)
has outlined a theoretical case for fiscal stimulus, not just in
Australia, but globally. He believes that monetary policy will be
ineffective as long as money markets are clogged :
The Bank of England s extraordinary 1.5
percentage point interest rate cut to 3 per cent is scary,
justified and irrelevant. It is scary because it confirms the
British economy may be headed for one of the biggest slumps since
the second world war. It is justified in the sense that falling
inflation rates give central banks sufficient room for manoeuvre.
But unfortunately, it will not make much difference to the
prospects of an economic recovery The reason is that the channels
through which monetary policy affects the real economy are still
clogged. There are several such channels, including ones for bank
lending. But most of them go through the money market, as neither
companies nor households have direct access to central bank money.
To the extent that the money markets are not working properly,
monetary policy is correspondingly ineffective.[12]
Institute of Public Affairs:
Alan Moran of the Institute of Public Affairs
disagrees with the need for both monetary and fiscal stimulus,
saying that instead of being encouraged to spend, households need
to repair their balance sheets.
Simply reducing interest rates does not solve
the problem, which is that assets are overvalued - and some
financial businesses that have highly leveraged loans are holding
some assets that are worthless. Nor are cash handouts or other such
measures in the Government's $10.4 billion program a solution. As
ever, the problem is not a shortage of demand. It is that people
have become overextended and, with assets overvalued, they have to
repair their real levels of savings. Disposing of the budget
surplus in a spending spree means releasing funds that previously
were locked up in forced savings by taxpayers.
If pushing $10.4 billion into the economy to
promote consumer spending was going to do the trick why not
increase the largesse tenfold? There is no documented case of
handouts averting a recession. Unless the productive potential is
there, more money will not bring increased output. And Australia's
productive potential has been diminished in recent years by
wasteful investments and by regulatory impediments. While we should
release funds that have been taken from the community in
over-taxation, we must simultaneously remove many other
inflexibilities that have diverted savings from productive venues.
Above all, we must recognise that assets are not worth as much as
we thought they were. Having done so, we have to allow asset prices
to fall to their underlying market value.[13]
The Bill proposes additional expenditure of
$146,054,000 for the ordinary annual services of government in
2008-09.
Monetary policy has moved into an aggressive
easing cycle, with the RBA s cash rate target (the cash rate )
being dramatically cut by two full percentage points since the cash
rate peaked at 7.25 per cent prior to the September 2008 RBA Board
meeting (after the 12 rises of 25 basis points each that occurred
from May 2002 to March 2008). The cash rate is now at the same
level it was between December 2003 and March 2005. Clearly,
interest rates have recently been cut to expansionary levels and
this looks set to continue for the immediate future. Thus, monetary
policy is moving in the same direction as the Economic Security
Strategy.
Quite obviously, as discussed by others above
(and assuming successful passage of this Bill), a significant
fiscal stimulus will be introduced into the economy by the
Commonwealth. The magnitude of the stimulus package is roughly 1
per cent of real Gross Domestic Product (GDP). The extent to which
this actually feeds into real GDP growth depends on the
propensities of each of the groups that are being targeted with the
Strategy to consume their present income. In terms of the one-off
payments to pensioners, carers, seniors and families, the first
three of these four demographic groups would be likely to spend a
considerable portion of the bonus payments they receive. With the
fourth group, the effect is uncertain. Individual households all
face different financial circumstances and so the impact on both
immediate and long-term consumption from a temporary
increase in income is ambiguous.
The key factors in determining the marginal
propensities to consume out of current income are:
- whether a household is a net borrower or saver and their
current levels of financial wealth [14]
- access to credit markets
- percentage of income spent on essential items, like food,
shelter, energy and transport, and
- the amount of debt/savings relative to present income.
If households are neither savers nor borrowers
(nor have any significant holdings of assets) and are unable to
borrow money at similar rates to the interest they would receive on
highly liquid assets, such as savings deposits (i.e. they face
liquidity constraints ), then it may be optimal for them to consume
all of the windfall change to their current income and not smooth
their consumption over their lifetime. It is likely that a
significant percentage of the groups that are targeted in the
Strategy would be liquidity-constrained, so these measures are more
likely to induce additional consumption than, say a lump-sum
subsidy to all households or income tax cuts.
As the payments are lump-sum in nature, the
percentage increase in current income for households will vary by
their existing income levels. Low-income households will see a
larger percentage change to their income than high-income
households. Given that low-income earners are more likely to spend
the extra income on essentials, rather than spend it on luxuries or
save it, it is probable that low-income households will spend the
bulk of their additional payments as a result of the Strategy.
Households with large debts, all else being
equal, are more likely to save, rather than consume their windfall
gain. One would suspect that eligible recipients of the family
payments would be more likely to be paying a mortgage than the
other targeted groups (given that a lot of people who are currently
raising children are at an earlier stage of the lifecycle than most
pensioners and seniors) and so there is a greater chance that this
group would, as a whole, have a lower marginal propensity to
consume than the other groups targeted by the Strategy.
Another key factor in determining the total
effect of the Strategy is the degree to which consumption is
directed to Australian-made goods and services, rather than
imports. Whilst there will still be some stimulus to the domestic
economy (as a result of the value being added by the retail
industry), all else being equal, the greater the proportion spent
on imports, the lower the stimulus to the domestic economy.
Finally, the degree to which state and
territory finances deteriorate, and the choices made by state and
territory governments to deal with that situation will also have a
bearing on the effectiveness of the strategy. Any fiscal stimulus
from the Commonwealth could be offset by fiscal tightening at the
state and territory level.
Therefore, one can conclude that in broad
terms, fiscal and monetary policy are both moving in an
expansionary direction, although the precise effect of the fiscal
stimulus package is uncertain.
For the most part, the Bill s provisions are
identical to those in Appropriation Act (No. 1) 2008-09, which
appropriates funds for ordinary annual services. The Bill differs
from Appropriation Act (No. 1) 2008-09 in that certain
provisions in Appropriation Act (No. 1) 2008-09 are not
relevant to the Bill (for example, those relating to the advance to
the Finance Minister) or have been rendered redundant by subsequent
legislation (for example, those relating to section 31
agreements).
Clause 3 contains
definitions. Most definitions are identical to those in
Appropriation Act (No. 1) 2008-09. However, clause
3 expands the definition of Portfolio Budget Statements to
mean not only the Portfolio Budget Statements for the Bill but also
the Portfolio Budget Statements for Appropriation Act (No. 1)
2008-09 and Appropriation Act (No. 2) 2008-09.
Clause 3 defines Portfolio
Supplementary Estimates Statements to mean the Portfolio
Supplementary Estimates Statements that were tabled in the Senate
or the House of Representatives in relation to the Bill for this
Act and the Bill for the Appropriation (Economic Security
Strategy) Act (No. 2) 2008-2009.
Clause 4 deals with portfolio
statements . Clause 4 provides that the Portfolio
Budget Statements and Portfolio Supplementary Estimates Statements
are relevant documents for the purposes of section 15AB of the
Acts Interpretation Act 1901.[15]
Clause 6 Summary of
appropriations states the total of the items specified in
Schedule 1 is $146,054,000. Schedule
1 lists all the agencies that are to be funded, the amount
of funding, and whether the item is departmental or
administered.
Clause 8 deals with
administered items . In essence, these are the costs of programs
such as aged and disability pensions.[16] Clause 8 is
identical to that in Appropriation Act (No. 1) 2008-09
except that subclause 8(2) includes the additional
words or Portfolio Supplementary Estimates Statements .
Subclause 8(1) confirms that if an amount is
specified as an administered item for an outcome, then money can be
expended to achieve that outcome. Subclause 8(2)
provides that where the Portfolio Budget Statements or Portfolio
Supplementary Estimates Statements indicate an activity is for an
outcome, the amount in the administered item is taken to contribute
towards the achievement of that outcome.
Clause 9 deals with CAC Act
body payments. A CAC Act body is a Commonwealth authority or
company within the meaning of the Commonwealth Authorities and
Companies Act 1997 (the CAC Act). Clause 9
deals with a CAC Act body payment item . This is the total amount
set out in Schedule 1 of the Bill in relation to a
CAC Act body under the heading Administered Expenses . For example,
for the Defence portfolio, Schedule 1 shows a
payment to the Australian War Memorial a CAC Act body of almost $39
million.
Departmental items do not automatically lapse
if they are not spent. A process exists whereby unspent and
unwanted departmental items can be abolished. Clause 10
Reducing departmental items, contains this process.
Subclause 10(1) specifies who can request
reductions in departmental expenses. Paragraph
10(1)(a) enables the Minister for an agency to ask the
Finance Minister to reduce a departmental item for that agency,
while paragraph 10(1)(b) enables the Chief
Executive of an agency, for which the Finance Minister is
responsible, to ask the Finance Minister to reduce a departmental
item for that agency. Subclause 10(2) specifies
that the Finance Minister may make a determination reducing a
departmental item by the amount in the request. Subclause
10(3) provides that the determination will be null and
void if its effect is to reduce the departmental item below
nil.
There is also a process for reducing
administered items. This process differs from that for departmental
items. Clause 11 Reducing administered items
contains the process for administered items. Subclause
11(1) provides that if the amount shown in the financial
statements of an agency s annual report shows that the expensed
amount of an administered item is less than the amount appropriated
for that item, then the amount of the reduction is the difference
between the appropriated amount and the amount in the annual
report. Subclause 11(2) enables the Finance
Minister to determine that an amount, published in the financial
statements of an agency, is taken to be the amount specified in his
or her determination, while paragraph 11(2)(b)
ensures that the amount published in the annual report can be
corrected. Subclause 11(3) provides that the
Finance Minister s determination, made under subclause
11(2), is a legislative instrument, that section 42
(relating to disallowance) of the
Legislative Instruments Act 2003 applies to the
determination, but that Part 6 (relating to sunsetting provisions)
of the Legislative Instruments Act 2003 does not apply to
the determination. In brief, this means that the Minister s
determinations are disallowable by Parliament, but once made, will
not expire.
Clause 12 contains the
process for reducing CAC Act body payments. This is almost
identical to that for departmental items. One difference is that
whereas paragraph 10(1)(b) enables the Chief
Executive of an agency, for which the Finance Minister is
responsible, to ask the Finance Minister to reduce a departmental
item for that agency, paragraph 12(1)(b) enables
the Secretary of the Department for which the Finance Minister is
responsible to request a reduction for a CAC Act body. The reason
the Secretary of the Department is empowered to request a reduction
follows from the fact that payments to CAC Act bodies are
channelled through the relevant portfolio departments.
Subclause 12(2) empowers the Finance Minister to
make a determination reducing a CAC Act body payment by the amount
requested. Subclause 12(5) provides that proposed
subsection 9(2) does not limit the reduction of a
CAC Act body payment under this section.
Concluding comments
This Bill contains provisions for the Finance
Minister to appropriate funds for an increase of
56 000 training places under the Productivity Places
Program. The Bill also contains provisions to appropriate funds in
order to implement other elements of the Economic Security
Strategy, such as one-off payments to pensioners, carers and
seniors (the funds for these payments are to be appropriated under
the Social Security and Other Legislation Amendment (Economic
Security Strategy) Bill 2008) and an increase in subsidies for
first home buyers (these funds are to be appropriated under the
Appropriation (Economic Security Strategy) Bill (No. 2)
2008‑09.
If this Bill is passed, the Finance Minister
will appropriate $117 million to fund the additional 56 000
training places under the Productivity Places Program, administered
by the Department of Education, Employment and Workplace Relations.
The Finance Minister will also appropriate $16.5 million for the
Department of Families, Housing Community Services and Indigenous
Affairs; and $0.64 million for the Department of Veterans Affairs
for administrative costs associated with implementing the payments
to pensioners, families, carers and seniors. Finally, the
Department of Families, Housing Community Services and Indigenous
Affairs will also receive $11.55 million to conduct a public
information campaign to ensure eligible recipients under the
Strategy are aware of their entitlements. The total financial
impact of this Bill is estimated to be $146 million.
Scott Kompo-Harms and Richard Webb
24 November 2008
Bills Digest Service
Parliamentary Library
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