Budget Review 1996-97

Contents

Introduction

Macro-economic Policy Perspectives

Statistical Overview

Public Policy Context and Outlays Overview

Charter of Budget Honesty

Taxation Issues

Superannuation

Detailed Portfolio Reviews

INTRODUCTION

John Kain

This is the first attempt by the Parliamentary Research Service to produce a detailed review of major Budget initiatives. It is designed to provide Parliamentarians with timely background, analysis and commentary which may be of assistance in their preparation for Budget debates. It has necessarily been prepared in some haste but every effort has been made to ensure its accuracy in the time available.

The main emphasis of the Review is on noteworthy changes flowing from the Budget at the program or sub-program level. It does not aim to provide a comprehensive treatment of every program-specific initiative, nor does it examine in detail the economy-wide, macroeconomic strategies and implications of the Budget.

The Review identifies, on a portfolio basis, those programs most affected from a financial perspective. It also highlights those which will be subject to significant changes in policy direction, even if the financial implications of the Budget are relatively minor.

Where there have been significant changes to program structures reflecting major policy changes since the last Budget, these are explained in the Review. Such changes may involve the creation of new programs or the elimination or merging of other programs; the Review offers some explanation of the nature and rationale for such changes. However, it is not intended that this document should provide an exhaustive guide to all revisions to program and sub-program structures which have accompanied the Budget.

For each selected program or sub-program, the Review summarises the major outlay and revenue variations proposed in the Budget. It also addresses the apparent policy rationale and implications of the Budget initiatives for each of the selected programs. However, it is not the intention of this document to make value judgements about Budget initiatives or to be prescriptive about preferred outcomes.

Thus, in addressing the policy context of Budget initiatives at the program level, the focus of this Review is on:

• the rationale for the Commonwealth's past activities in each particular program area;
• the direction in which the 1996-97 Budget will lead each program area;
• the policy strategies underlying the program directions proposed in the Budget; and
• the possible implications of the Budget proposals including downstream effects on relevant stakeholders.

Although the emphasis of the Review is on Program-level initiatives, its opening sections provide overview perspectives of the Budget strategy. It includes a macroeconomic policy assessment and a statistical review which summarises changes in broad Budget aggregates and portfolio outlays. This is followed by a more detailed precis of outlay changes and a commentary on the Budget from a broader public policy perspective. An accompanying commentary addresses the Charter of Budget Honesty, followed by two overview sections which examine aspects of the Budget which have wide ranging fiscal implications across most activities of Government and of prime concern to households and firms-specifically the Budget's taxation and superannuation policy initiatives.

MACRO-ECONOMIC POLICY PERSPECTIVES

Phil Hanratty

1. Main Aggregate Features of the Budget

This Budget implements a strategy of fiscal contraction (i.e. reduced, and eventually eliminated, budget deficits) based much more upon reductions of public spending than on increases in public revenue raised.

The main policy focus is upon the "underlying" budget deficit (which excludes loan transactions and asset sales) as a better measure of the economic impact of fiscal policy than the "headline" budget deficit. The principal goal of current fiscal policy is to eliminate the underlying Commonwealth budget deficit by 1998-99 and to maintain an underlying budget balance (equality of outlays and revenue in underlying terms), on average, over the course of the economic cycle.

This implies that future Budgets will not, on average, generate any increase to net Commonwealth debt. The level of such public debt has increased substantially in recent years but still remains low compared to most other advanced countries.

Underlying Commonwealth outlays are estimated to increase by 2.9% in nominal (current dollar) terms in 1996-97 and by just 0.1% in real (inflation adjusted) terms. Commonwealth revenue is also estimated to increase by 7.8% in nominal terms and by 4.0% in real terms in 1996-97. Underlying outlays are projected to actually fall by 0.7% in real terms in 1997-98. In comparison, in 1995-96 underlying Commonwealth outlays increased by 3.9% in real terms (and by at least 3.5% real growth in each of the previous four financial years).

The underlying budget deficit is now estimated to be about $5.6 billion, or 1.1% of GDP, in 1996-97 compared to 10.3 billion, or 2.1% of GDP, in 1995-96 and 2.9% in 1994-95. Without any fiscal policy change, the Budget Papers estimate that the underlying budget deficit for 1996-97 would be about $9.6 billion.

This "policy-induced" reduction in the budget deficit for 1996-97 from $9.6 billion to $5.6 billion can be disaggregated into reductions due to spending measures and those due to revenue measures. The Budget Papers estimate that about 75% of the deficit reduction is due to spending reductions while only about 25% is due to revenue enhancement measures. Both spending on goods and services and on transfer payments have been subject to significant reductions.

2. Main Macroeconomic Aims of the Budget

The official economic aims of the Budget are:

• to reduce the growth of public debt and public debt interest payments;
• to raise public sector saving and national saving; and thus
• to help reduce the current account deficit (CAD) and the rate of foreign debt accumulation.

Some definitions should be noted here. Public sector saving equals public revenue minus recurrent public spending (capital spending is excluded) while national saving equals the sum of public sector saving and private sector saving (which in turn equals the sum of household saving and company saving). The CAD is, by definition, equal to the level of national investment (public plus private) minus the level of national saving.

The Government's medium term fiscal goal of underlying budget balance, on average over the cycle, will thus make a small, ongoing, positive contribution (in and of itself) to higher national saving; this contrasts with recent experience where the Commonwealth Government has had negative saving (i.e. dissaving).

This turnaround comes about because Commonwealth General Government saving (in gross terms, excluding depreciation provisions for existing capital assets) will now be equal to the level of underlying Commonwealth capital spending since such spending will now be, on average, financed by tax and non-tax revenue rather than by borrowing. For example, in 1996-97 underlying gross Commonwealth General Government capital spending is estimated to be about $3.8 billion, or 0.73% of GDP. This gives an indication of the order of magnitude of the direct contribution to gross national saving which the Government's fiscal strategy implies. In net saving terms this contribution will be reduced somewhat by the subtraction of depreciation on existing Commonwealth General Government assets.

The Budget Papers argue that this reduction in external deficits and debt will allow, over the medium to long term, a higher rate of sustainable economic growth by loosening the "external constraint" (the limit imposed by the external accounts) on economic growth and thus, in the medium to longer term, allow a substantial reduction in unemployment through higher growth.

The Government also clearly believes that the smaller Commonwealth Government sector generated by the spending cuts will, over the medium to longer term, encourage the private sector to grow more strongly and thus to increase total employment and community living standards more quickly. This view underpins this Budget's reliance upon spending cuts rather than revenue increases to reduce the budget deficit.

3. Comparisons with a Previous Episode of Fiscal Contraction

This Budget strategy is reminiscent of the Labor Government's fiscal strategy of the second half of the 1980s. The Budgets of 1987-88 and 1988-89, for example, made even greater use of spending cuts than the current Budget in their efforts to turn around the Commonwealth public sector from deficit to surplus.

Those Budgets generated a substantial fall in Commonwealth net public debt and net interest payments (relative to GDP in both cases), a significant increase in public saving and a smaller but still noteworthy rise in national saving. Output and employment growth remained quite strong throughout the fiscal contraction and until the onset of recession in the early 1990s.

However, the CAD and foreign debt accumulation did not fall much at all. This lack of effect on the CAD and foreign debt accumulation posed a considerable challenge to various formulations of the "twin deficits" theory which predicted a strong link between fiscal policy and the external accounts.

The absence of such a strong link was due to the strong rate of growth of private investment (in both the residential and business sectors), falling private sector saving and the rising exchange rate experienced in this period.

4. Effects of this Budget on Output, Employment and Inflation

The effects of fiscal contraction on output and employment, especially in the first couple of years after implementation, have been the subject of extensive debate in recent times in Australia. One side argues that this Budget strategy might substantially reduce output and employment growth (and probably, in turn, dampen inflationary pressures), at least in the short term, because of its negative effects on aggregate demand (for goods and services, and labour).

Others argue that there will be countervailing effects which might actually mean that this Budget's fiscal contraction encourages aggregate demand and stimulates output and employment growth (and possibly, depending on the magnitude of these effects on output and employment, generate some extra inflationary pressures).

The first set of arguments relies largely upon traditional Keynesian analyses of fiscal policy. Fiscal contraction reduces aggregate household employment and income; public employment levels fall as public spending falls while higher public revenue raising directly reduces disposable household incomes levels. This net reduction in household income will, it is argued, generate a reduction in household spending (especially where households view the fiscal contraction as permanent or relatively long-lasting). This will generate further, second-round, reductions in private output and employment and household income which will in turn generate further reductions in household spending, so that the process continues on iteratively, round after round, in the fashion of a downward spiral.

This process will be accentuated, it is argued, by a related fall in private investment spending which is viewed as quite responsive to changes in household and public spending.

The aggregate fall in output and employment will be determined both by how responsive household spending is to changes in household income and how responsive private investment is to changes in other types of spending. Aggregate national saving and investment levels will both be lower as a result of these Keynesian processes.

The other side of the debate focuses upon a range of countervailing considerations neglected by the above arguments. First, the rise in public and national saving generated by the fiscal contraction immediately after its implementation will tend to reduce long term interest rates (in both nominal and real, inflation adjusted, terms). The supply of new public debt will fall as the budget deficit falls, and this will tend to increase the price of government securities and thus reduce the interest yield offered on them (price and yield have an inverse relationship).

Since most public debt is of a longer term (fixed interest) nature this reduction in public debt interest rates will tend to reduce interest rates for private sector longer term debt (the former provides a risk-free benchmark for the latter). This reduction in real long term interest rates might stimulate that portion of business and household (residential) investment dependent upon such (fixed interest) rates.

Second, there is also the option of relaxing monetary policy (by reducing official short term interest rates) so that the variable interest rates for home and business lending which are dependent upon such rates can fall, in both nominal and real terms.

This would stimulate that substantial portion of business and residential investment dependent upon such lending.

Fortunately, the Budget Papers already forecast that underlying inflation will fall back into its target 2-3% range during 1996-97 so that monetary policy would seem to be relatively free to be used to bolster output and employment growth if needed. Indeed, monetary policy has already been relaxed in July 1996 in order to encourage higher growth.

Third, reduced interest rates at both the short term and long term ends of the financial spectrum can tend to put downward pressure on the exchange rate (because finance capital will tend to flow out of Australia in search of higher returns overseas). This lower nominal and real (inflation adjusted) exchange rate will help to encourage exports and discourage imports, in real (volume) terms, and the positive effect of both on the balance of trade (exports minus imports) will help to bolster private demand and activity.

Fourth, reduced budget deficits might directly encourage higher household (and possibly business) spending. "Ricardian equivalence" arguments posit that the private sector (both households and businesses) will ratchet down their estimates of future taxation burdens in response to lower current and planned budget deficits (since the resort to future tax rate increases will now seem far less likely and expectations about levels of future public debt and public debt interest payments will also be ratcheted down).

This optimism about lower future taxation, it is argued, may be converted into higher spending by households, and possibly businesses, in the current period.

The Budget Papers forecast a relatively strong outcome for output and employment in 1996-97. These optimistic forecasts seem to imply that the countervailing effects discussed above will substantially negate and offset the contractionary Keynesian effects of the Budget. Private demand growth (through the year) is forecast to accelerate from 4.0% in 1995-96 to 4.5% in 1996-97, while total employment growth (through the year) is forecast to accelerate from 0.9% in 1995-96 to 2% in 1996-97. We must wait and see whether such optimism is fulfilled by economic outcomes.

In contrast, the unemployment rate is forecast to fall hardly at all (to just 8.25% by June 1997), since employment growth is expected to only just cover the growth in labour supply.

The long term effects of fiscal contraction (and fiscal expansion) on output and employment will be largely determined by what happens to national investment over the longer term. Under some of the above scenarios it will be higher than otherwise but under others it will be lower, or could even remain unchanged.

5. Effects of this Budget on the Current Account Deficit and Foreign Debt

It is important to note, especially since it is not widely recognised, that many of the arguments discussed above about fiscal contraction imply some significant tradeoff, in the short to medium term at least, between the maintenance of steady output and employment growth on the one hand, and reductions in the CAD and foreign debt growth on the other. In only one case is it possible to achieve both goals.

First, consider the case of households and businesses reacting to lower current and expected future budget deficits by increasing their spending in the current period. This reaction will clearly tend to reduce private sector saving so that the fall in the latter will tend to negate the rise in public saving. In the extreme, national saving may not rise at all and there will be thus no tendency for higher national saving to reduce the CAD and foreign debt accumulation.

Second, consider the case of fiscal contraction reducing long term and/or short term real interest rates and thus stimulating business and household (residential) investment. Here, national saving may rise but, in the extreme, national investment may rise by a similar amount and the CAD (which equals national investment minus national saving) will be largely unchanged.

It is really only in the case of a lower nominal and real exchange rate arising from fiscal contraction that steady output and employment growth and a lower CAD are both possible. Here, any contraction in domestic spending on Australian goods and services (e.g. where investment is not very responsive to lower real interest rates) is counterbalanced by higher net exports and an improved balance of trade so that steady aggregate output and employment growth can be maintained while the improved balance of trade (made possible by the lower real exchange rate) will strongly contribute to a lower CAD.

On the other hand, it should be noted that a lower nominal exchange rate will tend to increase the interest costs of servicing some existing foreign debt (because a substantial portion of this debt is contracted in foreign currencies) and this will negate some of the effects on the CAD of the better balance of trade. As well, a lower nominal exchange rate will also raise the Australian-dollar value of that existing foreign debt which has been contracted in foreign currencies.

The Budget Papers forecast that the CAD will remain at about $20 billion in 1996-97, as it was in 1995-96, but that this will constitute about 4% of GDP in 1996-97 compared to about 4.2% in 1995-96.

This lack of change in the CAD despite substantial fiscal contraction seems to be due to expectations of quite strong business investment growth, recovery in residential investment, some small fall in private sector saving and an ongoing rise in the exchange rate. It will be recalled that these factors were also present in the economic and fiscal experience of Australia in the latter 1980s.

It is forecast that business investment will increase by 13% (through the year) this financial year and that the Trade Weighted Index of the Australian dollar will rise to an average of 58 in 1996-97 compared to an average of 54.8 in 1995-96.

This expected appreciation of the exchange rate seems to be bound up with the upward trajectory of world commodity prices, and possibly with ongoing international interest rate differentials and general "confidence" effects of the Budget. Net exports (the balance of trade) are expected to fall in real terms.

Even if the Budget does not produce much reduction in the CAD or foreign debt accumulation, it is not clear how much of a concern this will really be to the Government and its economic advisers. There is an influential point of view, amongst both academic and bureaucratic economists, which argues that if the "economic fundamentals" are properly in place (such as the tight control of budget deficits and public debt and the maintenance of low inflation) then any CAD and foreign debt accumulation occurring in this context is not of any great concern.

That is, on this view, there are "good" and "bad" forms of the CAD and foreign debt. The occurrence of "good" forms does not threaten our national economic interests.

STATISTICAL OVERVIEW

Stephen Barber

This statistical overview is, in keeping with the purpose of this document, not meant to be a comprehensive coverage of the statistical information that is available from the Budget. Rather, it provides a quick reference to Portfolio outlays and the major Budget aggregates of revenue, outlays and balance.

Portfolio Outlays

Portfolio outlays are the aggregation of outlays according to the Ministry which has the administrative responsibility for them. Table 1 shows the actual outlays for each portfolio for 1995-96 along with estimates for 1996-97 and the ensuing three years. Each estimate is expressed in the expected price levels of the year to which it refers - also known as current prices. The percentage changes in outlays between 1995-96 and 1996-97 are also shown. In some cases a percentage change is not able to be calculated or is not meaningful and where this occurs "na" (not applicable) is substituted. Care should be exercised when assessing some of the percentage changes between 1995-96 and 1996-97 as the portfolio outlays figures may be significantly smaller than the corresponding total appropriations because of adjustments. Adjustments can comprise three categories of receipts: Section 35 receipts, repayments of advances (loans and equity) and proceeds from the sale of assets.

Table 1: Outlays by Portfolio, current prices

In Table 2 the data from Table 1 are converted to constant 1995-96 prices, also known as expressing the data in real terms, using the gross non-farm product deflator. The gross non-farm product deflator is estimated by the Treasurer to increase by 2.75% in 1996-97 and 1997-98 and 3% in each of the later years. Calculating values in real terms means that the effect of rising prices, or inflation, is removed from them. For example, if outlays are increased by 2% but inflation is greater than 2% then the real movement in outlays is a decrease.

Table 2: Outlays by Portfolio, constant 1995-96 prices

Budget Aggregates

The Budget aggregates are revenue, outlays and balance, however, in this Budget there has been a change in definition of outlays and balance. The 'headline' balance, as used in previous years, which is revenue less outlays has been superseded by the 'underlying' balance which is revenue less outlays excluding net advances. (Net advances include such items as asset sales and repayment of State debt.) The reason for the change in focus is that the underlying balance aligns with the national accounts concept of net lending and therefore gives a measure of the contribution of the Budget sector to the current account deficit (through its contribution to national savings).

Table 3 presents a time series of the Budget aggregates from 1960-61 to 1995-96 and estimates and projections for future years. Both measures of outlays and balance have been included to show the differences and the data are expressed as percentages of GDP to allow meaningful comparisons to be made over time.

Table 3: Budget Aggregates, 1960-61 to 1999-2000

The information in Table 3 is also displayed graphically in Charts 1 and 2. From these charts the differences between the two measures of outlays and between the two balances can more easily be seen.

Chart 1: Budget Revenue and Outlays

Chart 2: Budget Balances

PUBLIC POLICY CONTEXT AND OUTLAYS OVERVIEW

John Kain

This section is primarily descriptive and draws heavily on the various Budget statements contained within Budget Paper Number 1. Its purpose is to provide a broad overview of the Budget from a public policy standpoint and to highlight some of its key directions.

Public Policy Objectives

The Government considers that there are two important structural weaknesses in the Australian economy which limit its ability to sustain strong economic growth. These are a high structural current account deficit and impediments in the labour market which, it argues, are responsible for the high structural unemployment which has been evident in Australia since the mid 1970s.

The Government believes that the policies announced in the Budget and in the Workplace Relations and Other Legislation Amendment Bill 1996, once they are implemented, will address these structural weaknesses. In particular, the Government argues that its fiscal consolidation program combined with its labour market policies and broad ranging microeconomic reform strategies should contribute significantly to its core economic policy goal of creating a competitive, dynamic and flexible economy which will provide higher living standards and greater employment opportunities.

The Budget in Context

The 1996-97 Budget is seen as a step towards addressing the first of these weaknesses. The Government maintains that remedying these structural concerns within a comprehensive policy framework will provide the basis for stronger and sustainable economic growth and lower unemployment over the medium term.

The decline in the rate of national saving is seen as the essential cause of the structural deterioration in the current account deficit. While there has been a marked decline in the rate of private savings in Australia and many comparable western economies over the past 2 decades, the extent of the decline has been particularly significant in Australia. Likewise, over the past 20 years, the Commonwealth budget has exerted a leakage from national saving although by international standards, Australian Government indebtedness relative to GDP is relatively modest.

Nevertheless, the Commonwealth has chosen to use its direct control over public fiscal policy (particularly on the outlays side) as the primary tool for raising the level of national savings. It stresses that its objective of keeping the Commonwealth budget in underlying balance, on average, over the economic cycle is underpinned by the expectation that such budget outcomes will make a significant contribution to addressing the structural weakness in the current account deficit. The Charter of Budget Honesty is seen as a means of providing legislative backing to prudent fiscal principles and ensuring that fiscal strategies are set and assessed against those principles.

The Government has emphasised that its Budget strategy alone will not resolve the structural weaknesses of the economy. It maintains that broad ranging microeconomic reform, including its proposed labour market changes, are also essential and are now the immediate priority. Such reforms are seen as offering the prospect of lowering structural unemployment and providing the basis for faster economic growth and lower inflation over the medium term as well as improvement in the current account deficit.

Although the Budget papers appropriately do not address the microeconomic reform agenda in detail, they identify a range of shortcomings with the current industrial relations system including impediments to enterprise bargaining, restrictions on workplace flexibility attributable to awards, inhibitions on labour market competition and inappropriate employment protection provisions.¹ They also describe the Government's proposed industrial relations system and its plans for revamping labour market assistance and case management arrangements. As is evident in the discussion below, the latter are expected to contribute significantly to reductions in Government outlays.

Overview of Outlays Initiatives

As noted in the Macroeconomic Policy Perspectives section of this review, approximately three quarters of the fiscal policy tightening in the Budget is attributable to reductions in prospective outlays with the remainder stemming from revenue initiatives. The Budget strategy has been formulated against the Government's announced intention to achieve an underlying budget balance with a fiscal consolidation program over 1996-97 and 1997-98.

In aggregate terms for 1996-97:

• underlying outlays (ie outlays excluding net advances) are expected to increase by 2.9 per cent in nominal terms and not to change in real terms;
• measures taken between the 1995-96 Budget and the March 1996 Federal Election increased estimated underlying outlays by about a net $550 million; and
• measures taken between the Federal Election and the 1996-97 Budget decreased estimated underlying outlays by around a net $2810 million.

In aggregate, over the forward years (1997-98 to 1999-2000 inclusive):

• underlying outlays are expected to rise by 6.2 per cent in nominal terms and 1.5 per cent in real terms;
• the major sources of real growth in underlying outlays are expected to be in the Social Security and Welfare and Health functions; and
• increases in these functions are partially offset by real declines in some other functions, most notably Public Debt Interest and Labour and Employment Affairs.

The ratio of underlying outlays to GDP is estimated to decline by 2.0 percentage points over the period to 1999-2000; which brings it to 24.3 per cent, well below the average ratio of 26.6 per cent for the ten years to 1995-96.

The following table summarises the outlays side of the Budget and includes estimated aggregated outlays for the Commonwealth budget sector through to the year 1999-2000.

Table 1: Summary of Outlays

Underlying Outlays are Outlays less Net Advances. Net Advances predominantly consists of equity asset sales (returns from the sale of government enterprises) and the repayment of public policy loans to the Commonwealth from various sources including State Governments.

Major outlay initiatives (entailing positive or negative outlay changes in excess of $50 million for 1996-97) are as follows:

• Rationalisation of DAS commercial businesses $53 million
• Implementation of the National Firearms Program $500 million
• Reduction in Labour Market Programs funding -$578 million
• Reduction in discretionary funding for universities -$85 million
• Foreign Aid Program savings -$65 million
• Abolition of DIFF -$94 million
• Hospital Funding Grants to States -$74 million
• Diesel Fuel Rebate Scheme Revamp -$60 million
• Rural adjustment Scheme: Additional Funding $89 million
• ATSIC Programs savings -$77 million
• Tightening Job Search/Newstart & Pensions Advances Schemes -$56 million
• Family Tax Initiative $248 million
• Labour market funds adjustments $185 million
• Reduction in National Highway System funding -$113 million
• Abolition of Regional Development Program -$53 million
• Additional savings from Building Better Cities Program Part II -$65 million
• State fiscal contributions (payments to and from the States) -$619 million
• Across the board 2% portfolio funding reduction -$187 million (see discussion below)
• Savings from cash balances held by Statutory Bodies -$301 million
• Application of efficiency dividend to Commonwealth own purpose outlays and specific purpose payments of a running cost nature -$75 million

Commonwealth Departments and Agencies: Running Cost Changes

Running costs are the recurrent and minor capital costs incurred by a budget department or agency in providing the government services for which it is responsible. They include salary costs, administrative expenses and property operating expenses, as well as payments to ComSuper to reflect the employer cost of Commonwealth public sector superannuation schemes. They are formulated on the basis of existing policy and do not include any provision for new programmes or expansion of existing programs that have not been agreed by the Government or for programs that are not expected to continue.

The Budget provides for running costs for departments and agencies to be reduced by 2 per cent from 1996-97. This reduction is in addition to the existing annual 1 per cent efficiency dividend which is applied to running costs. The operating expenses component of budget funding for statutory bodies that do not operate on the Public Account has also been reduced by 2 per cent from 1996-97. Bodies are expected to make the reduction in their operating costs rather than in other expenditure. In addition, the Government has decided to cease supplementation for new applications under the Movement to Award Wages program with effect from 20 August 1996 with appropriate transitional arrangements where matters are well advanced.

The excess cash balances of a number of statutory authorities will be run down by reducing 1996-97 Budget appropriations, where the cash balances are surplus to immediate need.

An efficiency dividend equivalent to that being applied to running costs has generally been applied to Commonwealth Own Purpose Outlays (COPOs) and Specific Purpose Payments (SPPs) which are of a running costs type nature, but which have not previously been required to provide an efficiency dividend. In addition the 2 per cent reduction applied to running costs in 1996-97 is also being applied to these SPPs and COPOs in 1996-97. This applies the same efficiency incentives to these elements of outlays as have been applied to other operating costs expenditure.

Approximately $300 million was carried forward from 1995-96 running costs budgets into 1996-97. It is anticipated that much of this will be used to fund redundancy payments (severance and accrued entitlements) needed to achieve reductions in staff costs in future years. This carry forward is partly offset by the allowance for carryovers from 1996-97 to the next financial year included in the Contingency Reserve, which has been estimated at $150 million.

Workload changes have added about $200 million to 1996-97 running costs. These are the result of increases in client numbers expected in the Social Security, Employment, Education, Training and Youth Affairs, and Immigration and Multicultural Affairs portfolios, and in the Child Support Agency of the Australian Taxation Office.

Price and wage adjustments ($345 million) since the last budget include the effect of supplementation for salary increases agreed under the Enterprise Agreement: Continuous Improvement in the APS, 1995-96 and the equivalent Australian Defence Force agreement. The Agreement adopts a service-wide approach under which standard salary increases in the Agreement are payable to all APS staff from common operative dates. Such increases under the Agreement are fully funded from the Budget in all agencies other than commercial bodies. An allowance for the prospective salary increase was included in the Contingency Reserve in the 1995-96 Budget.

Policy decisions since the 1995-96 Budget have added some $58 million in running costs in 1996-97. Decisions prior to the March 1996 Federal election added $91.7 million. Decisions since then have resulted in savings of $33.3 million.

Running costs savings agreed in the 1996-97 Budget include a 2 per cent reduction in the running costs of departments and agencies. For Defence, running cost savings have been redirected to fund capability enhancements. There have also been significant reductions in the running costs of some portfolios as a result of specific savings measures. The largest reductions in portfolio running costs are in the Departments of Industrial Relations and Transport and Regional Development, the latter in part reflecting changes to regional development priorities and programs.

Portfolios or agencies with large increases in running costs and the major activities contributing to these increases are as follows:

• Social Security: Largely attributable to the labour intensive nature of implementing activity testing, debt and fraud control measures and changes in client numbers.
• Industry, Science and Tourism: Largely stem from the carryover of 1995-96 running costs to 1996-97.
• The Australian Bureau of Statistics: To finance the 1996 Census of Population and Housing.
• The Australian Taxation Office / Department of the Treasury: For new policy initiatives and running costs carryover and borrowing provisions.

Forward Estimates of Outlays

Running costs are estimated to decline substantially in real terms from 1996-97 to 1997-98 with a total decrease of 11.5 per cent in real terms over the forward estimates to 1999-2000.

Reasons for the decrease in the forward years include:

• savings and efficiency measures implemented in this Budget;
• initial implementation costs for a number of savings measures in the Social Security portfolio in 1996-97 and 1997-98, which will decline from 1998-99;
• reduced costs in the Department of Social Security as a result of expected efficiency savings from the establishment of the new shopfront agency;
• phasing out of resources for major employment initiatives introduced since 1992;
• the peak in outlays for the Australian Bureau of Statistics in 1996-97 associated with the 1996 Census of Population and Housing; and
• reduced outlays in the Australian Taxation Office following the completion of the modernisation program.

Running costs agencies, excepting the Department of Defence, are required to pay an annual 1 per cent efficiency dividend to reflect public sector productivity improvement over time. The cumulative effect of the efficiency dividend is reflected in the forward estimates. The total efficiency dividend paid in 1996-97 is around $72 million.

Portfolio Staffing Levels

The 1996-97 Budget Papers include data on average staffing levels (ASL) for the budget year based on figures provided by portfolios. The total average staffing level (ASL) in running costs agencies is forecast to decline by 1737 in 1996-97 as compared to 1995-96. This is reflected in Table 2 below.

No staffing targets have been set by the Government, with staffing levels being addressed by the relevant portfolios in the context of resources made available under running costs arrangements. Some agencies staffed under the Public Service Act such as the Department of Administrative Services commercial bodies are not subject to running costs arrangements, and are therefore excluded from the portfolio estimates. Based on figures provided by Public Service Act agencies to the Public Service Merit and Protection Commission, it is expected that the total number of people employed (full-time and part-time permanent and temporary staff) under the Public Service Act will decline by some 10 500 between 30 June 1996 and 30 June 1997.

ASL figures are the most relevant for funding purposes, but do not indicate the reduction in total staff numbers that could occur by the end of the financial year. ASL is the average number of employees receiving salary or wages over the financial year, with adjustments for casual and part-time employees to show the full-time equivalent. This measure of employment allows for comparison between average employment in particular financial years, rather than reflecting the actual number of staff being employed at the end of financial years or at other specific points in time. If, as appears evident from the overall figures, a significant proportion of staff separations occur late in the financial year, the ASL reduction will be significantly lower than the corresponding reduction in total staff numbers between June 1996 and June 1997.

Table 2: Total Running Costs Budgets by Portfolio and Average Staffing Levels

Data for the Department of Defence aligns with data in the Appropriation Bills in Budget Paper No. 2 (1996-97). As such it includes Military Personnel costs and excludes property operating expenses appropriated under Sub Division 182-02 of the Bills. Defence operates under global budget funding arrangements and is not subject to most running cost operating arrangements.

While ASL has declined to some extent in most agencies, this has been partially offset as a result of initiatives such as those in the Department of Social Security and the Australian Bureau of Statistics.

The ASL numbers show a small percentage decline while running costs will remain constant in real terms in 1996-97. This arises because the running costs estimates for 1996-97 include factors which do not add to ASL numbers such as large carryovers for redundancy payments and other purposes and funding for increased salary levels resulting from decisions made prior to the Federal Election.

Endnotes

CHARTER OF BUDGET HONESTY

Bernard Pulle

In the 1996-97 Budget Speech, the Treasurer announced that the Government will enact a Charter of Budget Honesty. He outlined three roles for the Charter.

• It will require the Government of the day to publish a budget update signed off by the Secretaries to the Treasury and the Department of Finance at the commencement of each Federal Election campaign.
• It will require any future government to set out its fiscal strategy and report against it.
• It will require the Government to commit itself to responsible and accountable fiscal policy.

This announcement is in accordance with the Government's election commitment to introduce legislation to ensure greater fiscal discipline and enhanced reporting. The National Commission of Audit (NCOA) which presented its report to the Government on 21 June 1996 addressed the implementation of the Charter of Budget Honesty. The NCOA distinguished between fiscal reporting that is mainly concerned with the internal management of government agencies and the financial reporting that is a requirement of the Australian Audit Act 1901 or the New Zealand Public Finance Act 1989 and the more general fiscal reporting that is concerned with macroeconomic effects of government fiscal actions as under the New Zealand Fiscal Responsibility Act 1994. In the view of the NCOA, the Charter of Budget Honesty should be concerned more with the latter than the former.¹

Budget Paper No. 1 states that the Government will introduce legislation in the Budget sittings of Parliament to establish a new fiscal framework and it will incorporate many of the recommendations of the National Commission of Audit.²

The main features of the proposed fiscal framework will cover Fiscal Policy Formulation, Fiscal Reporting and Costing of Election Commitments.

Fiscal policy will be required to be formulated against a set of principles of sound fiscal management to be specified in the legislation. The principles will 'require a government to give consideration to the impact of fiscal policy on: government debt and managing fiscal risks, national saving, the stability and integrity of the tax base, and equity between generations'. It must be appreciated that these principles enshrined in legislation can only serve as guidelines and it is debateable whether such principles would in any way curtail the flexibility of the Executive Government of the day to act in a manner that might give varying weight to one or more of these principles in discharging its fiscal responsibilities depending on the needs of a particular time. Where fiscal policy impacts on the stability and integrity of the tax base there are constitutional restraints on the Commonwealth in extending its tax base to the detriment of the tax base of the States given the federal nature of the Commonwealth Constitution. The Budget Papers recognise the limitation of such legislation to prevent the Government or Parliament pursuing non-fiscal objectives which may call for a sacrifice of some of these principles in varying degrees at various times.

Fiscal Strategy Statement

The Charter of Budget Honesty will require the Government to present a Fiscal Strategy Statement each year to assist public evaluation of fiscal policy and will comprise three segments. The Statement will:

• outline short and longer term fiscal objectives and strategic priorities;
• specify expected fiscal outcomes or targets and specify key fiscal indicators against which fiscal policy will be set and assessed; and
• identify fiscal measures that are temporary in nature and adopted for the purpose of dampening economic downturns, and indicate the process for their reversal.

Given that fiscal and monetary policies impact on the economy as a whole, it is doubtful whether the impact of fiscal strategies can be isolated from the impact of monetary strategies. Economic downturns may be a result of a combination of factors and their reversal may call for a mix of appropriate fiscal and or monetary strategies. It may be argued that if the third segment of an annual Fiscal Strategy Statement is to be comprehensive, there may be a case for a corresponding Monetary Strategy Statement to enable a public evaluation of the impact on the economy of monetary policy in dampening downturns and achieving reversals. As monetary policy is generally accepted to be in the domain of the Reserve Bank whose independence it is stated Government policy to maintain, it may be reasonable to expect that the legislation establishing the Charter of Budget Honesty might give recognition to the Bank's independence. Alternatively if the legislation does not ensure the independence of the Reserve Bank to independently pursue monetary policy when the Charter is enacted, then this might imply that the Government could act under the legislation establishing the Charter to influence the Reserve Bank's pursuit of monetary policy.

On the other hand, the Charter of Budget Policy seems to be proposing to evaluate fiscal policy, not against the broad performance of the economy, but against a more narrow range of indicators such as public debt, the tax bas