Publications

Budget Review 1998-99

May 1998

Contents

The Public Accounts and the Budget Process

The 1998-99 Budget: its Public Policy Content

Statistical Overview

The Macro-Economic Strategy

The Telstra Sale and its Implications for Commonwealth Debt Levels

Promise of Tax Reform and Other Significant Taxation Measures

Budgeted Tax Revenue, the Cash (or Black or Underground) Economy and the Tax Gap

Year 2000 Compliance Expenditure and Taxation of Software

Superannuation

The Budget and Commonwealth Employment

Australian Health Care Agreements and Funding for Public Hospitals

Budgetary Assistance to Primary Producers

Australia's Contribution to the IMF Packages

Commitments to Women

Immigration Measures

Detailed Portfolio Reviews

Introduction - John Kain

This Review is designed to provide parliamentarians with timely background, analysis and commentary on the 1998-99 Federal Budget to assist 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 comprises two main sections. The first is a collection of feature articles which provide an overview of the Budget and also focus on a selection of some of the key initiatives or issues which may be of interest to parliamentarians in debating the Budget. The second section addresses the impact of Budget measures on a Portfolio basis, identifying those Programs or Sub-programs which would be affected most significantly from a financial perspective. It also highlights activities which will be subject to significant changes in policy direction, even if the financial implications of the Budget are relatively minor.

For each selected Program or Sub-program, the Review summarises the major outlay and/or revenue measures identified in the Budget. It also addresses the policy rationale and implications of Budget measures 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 particular Programs or Sub-programs
• the direction in which the 1998-99 Budget will lead the selected Programs or Sub-programs
• the policy strategies underlying the directions proposed in the Budget, and
• where applicable, the possible implications of the Budget proposals including downstream effects on relevant stakeholders.

The Public Accounts and the Budget Process - Denis James

1. The Commonwealth Public Account

Following the passage of the Financial Management and Accountability Act (FMA Act) in 1997, the Commonwealth Public Account (CPA) currently consists of four funds-the Consolidated Revenue Fund, the Loan Fund, the Reserved Money Fund and the Commercial Activities Fund (the latter two of which actually consist of a number of trust accounts).

All on-budget agencies, that is, those agencies which are not authorised to operate their own bank accounts, operate on the Commonwealth Public Account. This includes all executive and parliamentary departments and a significant number of statutory authorities. Any agency which is authorised to operate its own bank accounts is referred to as an off-budget agency. It should be noted that many of these, e.g. the CSIRO, are still substantially funded through the Budget.

The four funds of the Commonwealth Public Account are:

Consolidated Revenue Fund (CRF): This is the main Fund and is established by s. 81 of the Constitution. Section 81 requires that all monies received by the Commonwealth must be paid into this Fund. This requirement is therefore stated explicitly in s. 18 of the FMA Act.

The CRF is balanced at the end of each financial year. If there is a deficit in the CRF, this is made up by charging certain outlays on the CRF (usually defence outlays(1)) to the Loan fund and/or by transferring borrowings from the Loan Fund to the CRF. In either case, this balancing must be authorised by a Loan Act. If the CRF is in surplus, the surplus funds are paid into the Loan Consolidated and Investment Reserve, a trust account used to redeem Commonwealth debt. Note that a deficit or surplus on the CRF does not necessarily imply a Budget deficit or surplus, although this is usually the case (see section 6 below).

Loan Fund: This Fund is established by s. 19 of the FMA Act. It holds all monies raised by loan upon the public credit of the Commonwealth Government. In former times, funds in the Loan account used to be used principally for capital works, but this has not been the case for a long time. This Fund is principally used today to balance the CRF. Note that borrowings by the Commonwealth are regarded as 'monies received by the Commonwealth' and, as such, are initially paid into the CRF before being appropriated into the Loan Fund.

Reserved Money Fund and the Commercial Activities Fund: Between them, the Reserved Money Fund and the Commercial Activities Fund replace the former Trust Fund. Essentially, the Reserved Money Fund replaces the former Group 1 (monies held in trust by the Commonwealth on behalf of others) and Group 3 (monies held in trust under the authority of the Parliament to meet future payments) trust accounts of the Trust Fund while the Commercial Activities Fund replaces the former Group 2 (working accounts covering various on-budget business units) trust accounts.

The existence of these Funds provides much more flexibility in Government financial operations. For example, when the CRF is closed off each year, any appropriations on it lapse. It is thus often better to appropriate monies into a trust account, so that they can be used when required. Note that many of these trust accounts are subject to 'sunset' provisions in the legislation which establish them. In the case of on-budget business units, the existence of trust accounts enables such units to maintain permanent working accounts similar to normal enterprises.

Reserved Money Fund: The Reserved Money Fund is established by s. 20 of the FMA Act. It consists of many 'components' with each component being credited with receipts and debited with payments related to the specific purposes for which that component was established. Many of these components are established by specific Acts of Parliament, such as the Australian Land Transport Development Act 1988.

Commercial Activities Fund: This Fund is established by s. 21 of the FMA Act. This fund also consists of many components, with each component representing an activity of an agency that the Finance Minister considers should be accounted for as if it were a commercial activity

2. Appropriations

Section 83 of the Constitution requires that no monies can be expended from the treasury of the Commonwealth except through a lawful appropriation. Parliament must therefore approve every proposed appropriation. It does this in three main ways:

Special Appropriations: An individual Act can contain an appropriation. For example, the Social Security Act 1991 contains standing appropriations for a range of social security payments. It is interesting to note that around 80 per cent of all appropriations are special appropriations, although around 60 per cent of these relate to social security payments, general revenue grants to the States and local Government and borrowings and other monies received by the CRF before being paid into the Loan Fund or the various trust accounts.

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-(i) Appropriation Bill No. 1, which appropriates monies for the 'ordinary annual services' of the Government and for defence purposes. Ordinary annual services refers to recurrent services (e.g. running costs) and recurrent expenditures on already established programs. Defence appropriations do not have to be recurrent (they can include major capital items) but are included in this Bill by agreement between the two Chambers; (ii) Appropriation Bill No. 2, which appropriates monies for non-recurrent services (i.e. capital works), payments to the States (i.e. those not covered by special appropriations), and expenditures on new programs; and (iii) Appropriation (Parliamentary Departments) Bill, which, since 1982-83, appropriates monies for the Parliamentary Departments.

Through the year, new Programs may be introduced or there may be cost overruns in existing Programs. In order to lawfully appropriate monies for these purposes, Appropriation Bills Nos. 3 and 4 (corresponding to Appropriation Bills 1 and 2) and an Appropriation (Parliamentary Departments) Bill No. 2 are introduced mid-way through the Budget cycle. These are referred to as the additional estimates.

Annotated Appropriations: Where an agreement is reached between the Minister for Finance and an agency, that agency may retain certain approved receipts. In order to comply with s. 83 of the Constitution, the Appropriation Bills contain provisions to ensure that such receipts are lawfully appropriated for the use of that agency. Authorisation for the Minister for Finance to enter into such agreements is found in s. 31 of the FMA Act, and such receipts are now referred to as annotated appropriations although they are sometimes also referred to as s. 31 receipts. For the most part, such annotated appropriations are used as a component of the agency's running costs.

Since the Commonwealth Government considers that such receipts have been earned using Commonwealth resources, it generally retains most of the benefit of such receipts by reducing the running cost appropriation of the agency concerned. The running cost appropriation for most agencies in Appropriation Bill No. 1 is therefore usually net of these annotated appropriations. If looking at appropriations in Appropriation Bill No. 1, it is important to note whether an appropriation is only a net appropriation (to which an annotated appropriation must be added to derive a gross appropriation) or whether the amount appropriated is already expressed in gross terms.

Advance to the Minister for Finance (AMF): If an urgent and unforseen need for an expenditure arises, payment can be made by drawing upon a special account called the Advance to the Minister for Finance. This is kept topped up by the Appropriation Bills. If the payment is made from the AMF before the additional estimates, the amounts so drawn are appropriated in the additional estimates and restored to the AMF. If the amount is drawn after the additional estimates, that amount remains as a final charge on the AMF. The Minister for Finance tables a statement of all such amounts and this report is examined by the Joint Committee of Public Accounts and Audit, to ensure that all legislative requirements have been met.

Provision for Running Costs Borrowings: The Running Costs Arrangements permit departments and agencies to 'borrow' against their future running costs budgets to meet current financial needs. If an agency requests a borrowing, this may not be easily handled through the AMF, since the request may not be 'urgent and unforseen'. The Provision for Running Costs Borrowings is a fund, similar to the AMF, which has been established to meet this need.

3. Powers of the Senate in Relation to Money Bills

In all respects, the Senate has the same powers as the House of Representatives, except in relation to money bills. Here, there are a number of constraints imposed on the Senate by s. 53 of the Constitution:

• bills appropriating monies or imposing taxation may not originate in the Senate
• the Senate may not amend bills appropriating monies for the ordinary annual services of the Government (i.e. it cannot amend Appropriation Bill No. 1) nor can it amend bills imposing taxation. It can, however, return such bills to the House, requesting that the bill be amended or withdrawn.
• the Senate may not amend any bill so as to increase any charge or burden on the people (i.e. it could not increase an appropriation, since this would require more money to be raised from the population).

4. Revenue

The Commonwealth raises monies from various sources. The major source of revenue is taxation (95.8 per cent of total revenue), comprising income tax (71.5 per cent), customs and excise (12.0 per cent), sales tax (10.5 per cent) and other taxes (1.8 per cent). Non-tax revenue (interest, dividends, industry regulation fees, etc) make up the remaining 4.2 per cent of revenue. Full details of revenue are set out in Statement 5 of Budget Paper No. 1 and Table 5 of Budget Paper No. 4.

Note that the proceeds of asset sales are not treated as receipts, but are treated as a negative outlay.

5. Outlays

The Commonwealth is responsible for a substantial amount of outlays. The most important are defence (7.8 per cent of total outlays), social security and welfare (37.8 per cent), health (15.7 per cent), public debt interest (5.5 per cent) and general purpose payments to the States and local Government (13.0 per cent). Details of outlays can be found in Statement 4 of Budget Paper No. 1.

6. The Budget Accounts

The Budget Accounts are shown in the following diagram:

The headline Budget outcome is the difference between revenue and outlays. All of Budget Paper No. 1 is also expressed in terms of revenue and outlays. Note that these differ from receipts and appropriations. There are a number of reasons why this is the case:

• where receipts are closely related to expenditures (e.g. where 'user pays' receipts are collected in the provision of a service) such receipts may be 'offset against outlays'. They thus do not appear as revenue but are subtracted from the expenditure on the service concerned. The resulting 'outlay' on that service is thus less than the appropriation of funds for that service.
• where a s. 31 agreement is in place, approved receipts which may be retained by an agency are treated as an annotated appropriation, thus adding to total appropriations. However, since they also offset the costs of the agency, they must be subtracted to provide an estimate of outlays by the agency.
• monies may be appropriated for a particular purpose into a trust account but not fully expended from the account. Outlays on that function only reflect the actual expenditure. In this case, outlays would be less than appropriations, the balancing item being an increase in trust account balances. Conversely, more money might be spent out of a trust account than is appropriated into it, in which case the foregoing results are reversed.
• some appropriations are not 'above the line items', are therefore not outlays and thus do not enter the Budget result. For example, monies appropriated for the repayment of debt are a financing item and go below the line.

Note that since appropriations and outlays are not identical, it is possible for funds to be appropriated out of the CRF, thus putting it into deficit, even though the overall budget result (outlays minus revenue) may not be in deficit.

Details of outlays on a Program-by-Program basis are shown in the Portfolio Budget Statements tabled in the Senate by each Government department (and some agencies) following the introduction of Appropriation Bills. A typical program would look as follows -

Some commentators criticise the Budget accounts for not making a clear distinction between the recurrent Budget and the capital Budget. The blurring of this distinction can make interpretation of any Budget outcome somewhat meaningless. Some light can, however, be thrown on the capital/recurrent mix by examining the tables at the end of Statement 4 of Budget Paper No. 1 which show Commonwealth Budget outlays by economic type. It should be noted, however, that all defence expenditure is regarded as recurrent, even though a significant amount of such expenditure might relate to the purchase of military hardware with a long life expectancy. Furthermore, recurrent general revenue payments from the Commonwealth to the States could be used by those States for capital purposes. Hence the figures for capital expenditure in the Commonwealth Budget might be quite understated.

7. Underlying Outlays

It is becoming more usual for the Budget Papers to make reference to underlying outlays and the underlying Budget outcome, which is the headline outcome adjusted to take account of net equity asset sales (i.e. equity asset sales net of government equity injections) and net loans (loans made net of loans repaid).(2) The sum of these two components is generally referred to in the Budget Papers as net advances. The headline outcome provides a view of the Government's actual budgetary position, that is, whether the Government needs to borrow money to balance the Budget or whether it has achieved a surplus, thus creating a provision for the redemption of debt. The underlying outcome is designed to throw light on the sustainability of the underlying budgetary aggregates. It is of little comfort to a Government if it just manages to 'balance the books' by selling assets or receiving repayments of past loans it has made. This cannot be done year after year. A more accurate view of underlying trends can be gained by looking at the Budget outcome after ignoring these 'once-off' windfalls that the Government might have received.

For example, the Government's accounts might look as follows:

Here the headline outlays are $1000 and the headline budget outcome is in balance. However, underlying outlays (i.e. the full costs of providing government services) are actually $1200 and, in the absence of net asset sales and net loans, the underlying budget outcome would be a deficit of $200.

It might be noted that in recent years, the Budget has received a significant amount of funds not only from asset sales but also from the accelerated repayment of loans owed to the Commonwealth by the States and Territories.

While the headline budget outcome provides some indication of the need for a Government to undertake borrowings and hence the effect on its gross debt position, the underlying budget outcome is more relevant in determining the Government's net debt position. Net debt is the difference between the Government's total financial liabilities (gross debt) and its financial assets. If equity assets are sold or if outstanding loans made by the Commonwealth are repaid, this will reduce the financial assets held by the Commonwealth. Thus, even if the headline Budget outcome was in balance, an underlying deficit would imply an increase in net debt.

8. Forward Estimates

The forward estimates process is an integral part of Budget formulation in Australia. At any time, the Government has available to it an estimate of the ongoing costs of its existing policies. This can be a benchmark against which any proposed savings or the cost of any new policy initiative can be assessed. This is the approach adopted by the Expenditure Review Committee of Cabinet in examining policy alternatives. The process reduces the burden of policy formulation, since the Committee is always making assessments at the margin, rather than having to set up the Budget from a zero base each year.

Detailed forward estimates of outlays and brief forward estimates of revenue are published in Budget Paper No. 1. Care must be taken in interpreting such estimates. They will change over the course of any financial year as policies change and as key parameters in the economic environment change (e.g. inflation, unemployment, growth, etc.). Also, the forward estimates relate to ongoing policies. If expenditure on a certain policy terminates next year, such expenditure will drop out of the forward estimates after that year, even though it is likely that a new, replacement program will eventually be put in place.

The actual amounts of the forward estimates are only set out in one place-Statement 4 (Outlays) of Budget Paper No. 1. There you might find something like:

The forward estimates are presented in terms of out-turn prices (current prices in each year). Thus, just because you see roads expenditure rising each year, this could just be due to inflation and not due to a real increase in road funding.

The Budget measures in Budget Paper No. 2 and in the Portfolio Budget Statements show the impact of the measure against the pre-Budget forward estimates. If the figures in the previous table had been the pre-Budget forward estimates, a Budget policy to keep road funding at $850 each year would appear:

Note that looking at the effect of a measure on forward estimates does not necessarily imply anything about actual expenditures. If the initial forward estimates were rising and savings were announced, the new forward estimates might still be rising (but not by as much). Often all that can be said is that 'spending over the four years (budget year and three out-years) will be $xx million less than they would have been without the measure'.

9. Running Costs Budgets

Since the late 1980s, Government departments and agencies have been given more flexibility in the use of their appropriation for running costs. Running costs include the costs of salaries, administration and property operating expenses. The running costs appropriation is now a one-line item, enabling agencies to move funds between the various components of running costs. Agencies can also borrow against future years' running costs, or carry over part of their current running costs budget to future years. This increased flexibility has both advantages and disadvantages for efficient funds management, and these are set out in a Parliamentary Committee Report.(3)

10. Program Budgeting

Departments and agencies are now required to produce Portfolio Budget Statements and Annual Reports on a Program basis. All appropriations relating to a particular Program are brought together so that the entire cost of the Program can be seen at a glance. This makes it easier to assess whether the outcomes delivered by each Program justify the cost. As part of program budgeting, performance indicators need to be developed to demonstrate the extent to which desired outcomes are achieved. This latter task can be quite difficult and can be the Achilles heel of program budgeting.

11. Scrutiny

Parliament gets several chances to scrutinise Government outlays. When legislation containing a special appropriation is introduced, Parliament gets a chance to debate that legislation. Unfortunately, some legislation can set up a standing appropriation year after year and Parliament may not get a chance to review it. This is especially the case where the legislation includes indexation provisions, so payments keep being increased along with inflation without any Parliamentary review. One way to overcome this problem is to include 'sunset' provisions in the legislation so that it eventually lapses and can only be reinstated through the introduction of new legislation.

The Senate scrutinises departmental programs by forwarding the Portfolio Budget Statements to each of the Senate Standing Committees for review and report. These Committees hold estimates hearings at which senior officers of all departments are required to attend for questioning. These hearings are convened whenever Appropriation Bills are introduced into the Senate.

Parliament also has a chance to scrutinise agency activities through the Annual Reports that such agencies are required to table in Parliament. Also tabled are the reports by the Auditor-General on various aspects of agency financial management. Parliamentary Committees can also examine aspects of agency programs. The Joint Committee of Public Accounts and Audit is one such Committee.

12. The Budget Timetable

Australia has had two legislative budget cycles in recent years. For many years, the Budget was brought down in August (during the financial year) and was also brought down in August for the 1996-97 Budget (due to the timing of the 1996 election). However, in all other years since 1994-95, the Budget has been brought down in the May preceding the Budget year. The choice of presentation date has many ramifications.

The August Budget

When the Budget is brought down in August, a problem arises in that all appropriations included in the previous year's Appropriations Bills will have lapsed on 30 June. However, the Budget year's Appropriation Bills are not introduced until August and may take until the end of November before they are passed by both Chambers. In order to ensure that funds are available to the Government from 1 July until November, Supply Bills 1 and 2 and the Supply (Parliamentary Departments) Bill must be introduced in late April or early May to appropriate the required funds. These Bills appropriate around five-twelfths of expected annual appropriations in the next year. Once the actual Appropriation Bills are passed, they subsume any expenditures which have already been made under the Supply Bills.

The 'supply period' from July to November can be nerve racking for agencies who have to ensure that they keep within their financial limits. Any delay to the Appropriation Bills can cause major financial concerns. In fact, it was the failure of the Senate to call on debate of the Appropriation Bills in 1975 which led to the downfall of the Whitlam Government. Many agencies impose precautionary financial constraints on spending during the supply period.

With the Budget being introduced in August, the additional estimates are not introduced until March.

The May Budget

In the case of the May Budget, the Appropriation Bills for the coming Budget year are passed before the beginning of that year. The only other Budget legislation required are the additional estimates, which are introduced in October.

Pros and Cons of the May Budget

Pros: There are three main advantages of bringing down the Budget in May:

• there is less need for legislation in that Supply Bills are not required
• government agencies no longer face financing problems during the supply period and can undertake better forward planning
• by announcing Budget measures in May, the full-year effect of those measures can be achieved since they can be timed to begin on 1 July (or even from Budget night).

Cons: There are also a number of difficulties with a May Budget. These include:

• there is less accurate financial information on the actual outlay and revenue outcomes of the current financial year. Only estimates of these outcomes are available. An attempt is made to rectify this problem in a Final Budget Outcome document issued by the Treasurer in August, but this lacks considerable detail. More detail can be gained from the Annual Reports of individual agencies when these are tabled in late October and November
• forward budget planning must also suffer from the lack of final outcome figures
• there is less time (May to the end of June) to get the Budget through both Houses. This may constrain the review activities of the Senate estimates committees and may enable small parties to apply political pressure on the Government.

13. Mini-Budgets

The Hawke/Keating Government frequently introduced mini-Budgets between the main Budgets. It often brought down Economic Statements in May (hence these were commonly referred to as 'May Statements'. However, other major Statements were also released on an ad hoc basis (e.g. One Nation, Working Nation, etc.). These Statements were used to bring together details of a host of new policy initiatives and/or to change the Government's fiscal policy stance in light of reassessments of the state of the economy. In some years, these Statements were so far-reaching that they overshadowed the main Budget.

14. Budget Documentation

There are currently four main Budget Papers. These are -

Budget Paper No. 1: Budget Strategy and Outlook. This currently comprises seven Statements:

• Statement 1: Fiscal Strategy
• Statement 2: Economic and Fiscal Outlook
• Statement 3: Structural Change
• Statement 4: Outlays
• Statement 5: Revenue
• Statement 6: Budget Funding
• Statement 7: The Public Sector

Budget Paper No. 2: Budget Measures. This comprises two Parts:

• Part 1: Outlay Measure
• Part 2: Revenue Measures

Budget Paper No. 3: Federal Financial Relations: This comprises:

• Recent Developments
• Overview of Commonwealth-State financial relations
• Commonwealth payments to the States and Territories
• Loan Council oversight of Commonwealth and State borrowings

Budget Paper No. 4: The Commonwealth Public Account: This comprises:

• A reconciliation of receipts and appropriations with revenue and outlays
• Statement of transactions on all Funds of the Commonwealth Public Account
• Consolidated revenue fund receipts
• Payments under special appropriations
• Annotated appropriations
• Appropriation (Parliamentary Departments) Bill
• Appropriation Bill No. 1
• Appropriation Bill No. 2
• Transactions on the Reserved Money Fund
• Transactions on the Commercial Activities Fund

15. Identifying Budget Initiatives

The first place to look for major Budget initiatives on both the outlays and revenue side of the Budget is in the Treasurer's Budget Speech.

For information on the running costs and associated staffing levels (measured in terms of ASLs) of departments and 'running costs agencies see Budget Paper No. 1. In the 1998-99 Budget Papers, this information is provided in Table XII (p. 4-140). Note, however, that from 1995-96, it has been decided only to include on-budget agencies in the running costs arrangements. As a result, staffing changes in off-budget agencies, such as the CSIRO and the ABC, will not appear in the table.

Details of Government initiatives on the outlays side of the Budget are shown in Part 1 of Budget Paper No. 2. It will be noted that the outlays measures in Part 1 are classified by Portfolio. Any policy initiatives which will have an impact upon outlays in the Budget year and/or out-years are listed in the tables. These will include the impact of any new initiatives or the impact of any change to existing policies. The figures set out in the tables show the amounts by which those policy decisions will cause a variation from the pre-Budget forward estimates (which are formulated on a no-policy-change basis). The figures therefore give a good picture of the magnitude (in financial terms) of government policy decisions.

Details of Government initiatives on the revenue side of the Budget are shown in Part 2 of Budget Paper No. 2. The tables show the financial impact of any revenue measures in the Budget year and/or out-years. Not only are all revenue measures listed, but Part II gives a good description of the nature and effect of each of the these measures.

Although it can be time consuming, a lot of information can be found at the Portfolio level by looking at the Appropriation Bills and Special Appropriations (found in Table 6) in Budget Paper No. 4. By comparing the appropriations for particular Portfolio items with actual expenditures on those items in the previous year, it is possible to see where there have been significant changes in funding. One problem with this approach, however, is that a reduction in (or the cessation of funding for) a particular activity may simply represent the 'planned' ending of that activity rather than the result of a 'new' Government decision.

It can be useful to pay particular attention to Appropriation Bill No. 2. In that Bill, the Other Services Division shows, for each Portfolio, appropriations for any new Government policy initiatives (this can easily be seen, since for these items there are no figures showing appropriations or expenditures for the previous year).

Another useful source of information, which is generally available on Budget night, are the Budget packs which most Departments issue. These packs contain press releases and other summary information relating to Government initiatives. Such packs are available through Ministers' offices but it also seems likely that they will be available on the Internet (see, for example, the Government Information Page on the Library website, at http://wopablue/library/intguide/index.htm).

The Portfolio Budget Statements appear within a few days of the Budget presentation. These statements show appropriations and outlays on a Program-by-Program basis as well as the staffing levels associated with each Program. A comparison can be made with the corresponding outcomes for the previous year. For each program, details are also given of any Budget measures which will have an impact on that program.

Other useful information may be found in Budget-related Press Releases, newspaper comment, etc. These can usefully supplement the information available through the Budget documentation.

Endnotes

1. Defence outlays are chosen, since the Commonwealth does not require Loan Council approval to borrow for defence purposes.
2. That is, loans made as a result of government policy decisions rather than debt transactions associated with financing the Budget. These latter transactions are financing items and are placed 'below the line'.
3. See House of Representatives Standing Committee on Banking, Finance and Public Administration, Keeping the Customer Satisfied. Inquiry into the Devolution of Running Costs Flexibilities, Appendix 4: Potential Benefits and Costs of Devolution, AGPS, Canberra, October 1995.

The 1998-99 Budget: its Public Policy Content - John Kain

This article is a synthesis of some of the key public policy priorities and directions identified in the Budget strategy. Although it draws heavily on the official Budget Statements it is not intended to be an exhaustive review.

The Overriding Objective-Maximum Sustainable Growth

The Government's Budget strategy outlined in Budget Paper No 1(1) indicates that Commonwealth Budget priorities continue to be developed within a framework that takes account of the Government's broader economic and social objectives. It specifies as its overriding policy priority the achievement of maximum sustainable rates of economic growth and rising living standards including via reductions in unemployment.(2)

The Government identifies a range of significant public policy strategies being directed towards the achievement of this goal. These strategies include:

• the maintenance of the current medium-term macroeconomic policy framework
• pressing ahead with its program of microeconomic change
• including initiatives directed at restructuring the taxation system, the labour market, corporate law and the financial system
• improving the levels of national saving and reducing Government debt
• ensuring that taxes are used by the Government as efficiently and effectively as possible, particularly through the ongoing assessment and review of public expenditure priorities and programs, and
• minimising the tax burden on Australians, while ensuring that the integrity of the taxation base is preserved and that all taxpayers bear an equitable burden of taxes.

The following schedule summarises Australia's economic growth and total business investment growth in recent years and also indicates the Budget forecast for 1998-99.

Schedule 1: National Economic and Business Investment Growth 1993-94 to 1998-99 (%)

Note: * denotes annual average figures

The Budget observes that while the pace of Australian economic growth will be slower in 1998-99 compared with 1997-98, Australia is still expected to be one of the fastest growing OECD economies.(3) This is qualified with a note of caution that 'the uncertain nature of international events, including the pace of recovery in Japan, poses considerable risks to the outlook'.(4)

The Social Objectives-Supplying Essential Public Goods and a Social Safety Net

The public policy strategy underpinning the Budget recognises the important social obligations which are accepted as the responsibility of the Commonwealth Government and which extend beyond the immediate scope of national economic management. The Budget priorities identify the need for the Commonwealth to fulfil its social obligations through:

• the supply of essential public goods and services, and
• the provision and maintenance of a fair and effective social safety net that supports those in the community most in need.

The strategy states that since coming to office, the Government has consistently focussed on a number of key areas including families, the elderly, small business, employment and regional Australia. Some of the key social initiatives highlighted in the strategy are summarised in Schedule 2.

Schedule 2: Key Social Initiatives

It is recognised that many of the social priorities and strategies are interlinked with broader economic and public administrative restructuring initiatives with the stated aims of achieving greater efficiency, effectiveness and economy in their delivery-changes to the labour market employment services sector and farm assistance programs being examples of these.

The Fiscal Objective-Increased Public Savings and Reduced Net Public Sector Debt

The Budget strategy observes that low levels of private saving in Australia relative to other OECD countries underscore the importance of ensuring that public finances-and associated levels of public indebtedness-remain sound. Because the propensity of Australians to accumulate private savings is relatively low, the Government considers that a more concerted effort is needed to raise the level of public savings so that overall national savings are at an acceptable level.

Thus the Government's medium-term fiscal objective is to achieve underlying Budget balance, on average, over the course of the economic cycle. Consistent with this medium-term objective, the fiscal strategy adopted by the Government in framing its 1998-99 Budget is centred on returning the underlying Budget to surplus in the life of this Parliament. It is noteworthy that the fiscal strategy also seeks 'to maintain surpluses over the forward estimates period while economic growth prospects remain sound'(5) (italics added). This aim is directed at halving the ratio of Commonwealth general government net debt to GDP from 20 per cent in 1995-96 to 10 per cent by the turn of the century.(6)

The Government argues that reductions in general government net debt are an important public policy goal for a number of reasons:

• Reductions in net debt levels are seen as beneficial because they help reduce Australia's vulnerability to economic shocks-such as those posed by recent developments in Asia. The Government considers that its fiscal strategy and the strength of the fiscal outlook have been important in sustaining financial market confidence and shielding Australia from the instability experienced in some Asian countries.
• Reduced public net debt is seen as important in ensuring that the economy is better placed to cope with emerging pressures on the fiscal position such as ageing of the population.
• Reducing public indebtedness should also help ensure that the burden of the cost of services enjoyed by the current generation is not transferred to future generations.
• By repaying the debts of the past, the reduced burden of interest payments on public debt will allow lower taxes and the provision of new and better services and rising living standards(7).

The 1998-99 Budget strategy emphasises that improving national saving and reducing net debt remain key Budget priorities; as with the 1996-97 and 1997-98 Budgets, it is intended to provide a substantial boost to public saving and, over time, national saving. The savings from fiscal consolidation(8) efforts-together with the proceeds from equity asset sales-are being used to reduce net debt.

The Budget strategy observes that as a result of improvements in both the Commonwealth and State/local net debt positions, total general government net debt for Australia compares favourably with that of other OECD countries and is well below the OECD average. However some other countries have the benefit of strong private sector saving offsetting the weakness in their public saving. In this respect the Government has introduced a savings rebate to be implemented from 1 July 1998, which is aimed at assisting private saving.

The Charter of Budget Honesty

It is noteworthy that the 1998-99 Budget has been prepared within the framework laid out in the Charter of Budget Honesty which has recently passed through the Commonwealth Parliament. The Charter has important implications for the fiscal strategy underpinning the Budget and these are identified in the Box below which has been drawn from the 'Budget Strategy and Outlook 1998-99', Budget Paper No. 1. The Strategy document also reports on a range of factors which may influence the actual Budget outcome in future years; the Charter requires that these be disclosed in a Statement of Risks in each Budget in order to increase the transparency of the fiscal projections. These are dealt with at some length in Appendix A: Statement of Risks which accompanies the Fiscal Outlook section of Budget Statement No. 2 in the 'Budget Strategy and Outlook', Budget Paper No. 1.

BOX 1: THE CHARTER OF BUDGET HONESTY The Charter of Budget Honesty, which has recently passed through the Parliament, aims to improve fiscal outcomes by enhancing the transparency of, and accountability for, fiscal policy. In particular, it requires governments to set out their medium-term fiscal strategy in each budget, along with their shorter-term fiscal objectives and targets. It also provides for full economic and fiscal outlook reports at the time of the budget, at mid-year, and prior to elections. In addition, the Charter sets out arrangements for the costing of election commitments by the Government and the Opposition. Under the terms of the Charter, the fiscal strategy must be based on principles of sound fiscal management which require governments to: ensure that fiscal policy contributes to achieving adequate national saving and to moderating cyclical fluctuations in economic activity, as appropriate, taking account of the economic risks facing the nation and the impact of those risks on governments' fiscal positions; manage financial risks faced by the Commonwealth prudently, having regard to economic circumstances, including by maintaining Commonwealth general government debt at prudent levels; pursue spending and taxing policies that are consistent with a reasonable degree of stability and predictability in the level of the tax burden; maintain the integrity of the tax system; and ensure that policy decisions have regard to their financial effects on future generations. The Government's fiscal objectives and targets accord with these requirements.

Endnotes

1. 'Budget Strategy and Outlook', Budget Paper No. 1, 1998-99.
2. 'Statement No. 1, Part II: Economic Framework', Budget Paper No. 1, pp. 1-8.
3. ibid.
4. Recent independent research released shortly after the Budget suggests that over the longer term horizon to the year 2025, Australia's growth rates may quickly be overtaken again by those of Asian economies; the research points to the prospect of per capita incomes in Singapore, South Korea and Taiwan surpassing those in Australia in purchasing parity terms. The report argues that Australia must do more to develop its human capital if it is to compete with Asia in the next century. Committee for the Economic Development of Australia, Australia and Asia: A Study of Comparative Economic Performance, Asian Economics Centre, University of Melbourne, 1998.
5. Budget Paper No. 1, pp. 1-9.
6. The degree to which this debt reduction target can be achieved will depend on the extent of realisation of the Budget's economic growth projections and the successful prosecution of the Telstra sale. A recent Westpac research study suggest that underlying the Federal Budget surplus in 2001-02 may be considerably smaller than that forecast by the Government because the Budget projections are based on optimistic growth projections. See 'Risk of $21.5 billion Black Hole: Westpac', Australian Financial Review, 26 May 1998, p. 4.
7. Budget Speech 1998-99, p. 2.
8. Some observers have made the point that a substantial element of the Budget surplus may be attributable to the effect of rising money incomes pushing people into higher tax brackets-so call 'bracket creep'. Indeed, one writer has calculated that bracket creep windfalls to Government revenue during the Howard Governments' period in office exceed the size of the surplus. 'The Folly of Overkill', Peter Walsh, Australian Financial Review, 26 May 1998, p. 21.

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 portfolio outlays, revenue estimates, historical Budget aggregates and Government economic forecasts.

Portfolio Outlays

The Budget presentation is in terms of underlying outlays which are defined as total headline outlays less net advances. See Table 3 for headline outlays data.

Underlying outlays provide a more reliable guide to overall trends in Commonwealth finances than headline outlays as they exclude transactions which simply involve the transfer or exchange of financial assets. In recent years, underlying outlays have mainly reflected the removal from headline outlays of major equity sales and repayments by the States of Commonwealth loans.

Portfolio outlays are the aggregation of outlays according to the Ministry which has the administrative responsibility for them. Table 1 shows the underlying outlays for each portfolio for 1997-98 along with estimates for 1998-99 and the ensuing three years.

Table 1: Underlying Outlays by Portfolio

The ratio of underlying outlays to gross domestic product (GDP) is an indicator of the share of national resources devoted to Commonwealth Budget Programs (see Chart 1). The ratio largely tracks the economic cycle. It is also affected by discretionary policy decisions which alter the structural budgetary position. Following policy decisions made in this and the previous two Budgets, outlays as a proportion of GDP are expected to decline through the Budget and forward years.

Revenue Estimates

Table 2 compares revised revenue estimates for 1997-98 with the 1998-99 Budget estimates. It shows that in 1998-99 total revenue is expected to increase by 6.5 per cent over estimated revenue in 1997-98. Total tax revenue is expected to grow by 5.6 per cent. As a proportion of GDP, however, total revenue is expected to increase only slightly from 24.9 to 25.0 per cent while tax revenue is expected to fall marginally from 24.1 to 24.0 per cent over the period.

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 8.4 per cent in 1998-99 in response to two factors-forecast growth in average earnings which increases both the tax base and the proportion of people in higher income tax categories (i.e. 'bracket creep') and growth in wage and salary employment.

Table 2. Revenue by Source

Historical Budget Aggregates and Net Debt Data

The Budget aggregates are revenue, outlays and balance. Table 3 presents the Budget aggregates from 1960-61 to 1996-97 and estimates and projections for future years to 2001-02. Although underlying outlays are considered more appropriate for financial analysis, the table also shows headline outlays. The underlying balance and headline balance are also shown. The data are also expressed as percentages of GDP to allow meaningful comparisons to be made over time.

In the period from 1960-61 to 1997-98 there have been six headline Budget surpluses, all of which occurred after 1986-87 and 20 underlying Budget surpluses. The number of underlying surpluses exceeds the number of headline surpluses due to the fact that in the period to 1986-87 asset sales were not significant and the Commonwealth was a net lender to the States. This kept the underlying balance greater than the headline balance over this period-the reverse being true from 1987-88.

Table 3. Budget Aggregates, 1960-61 to 2001-02

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 peaked at $95.8 billion or 19.5 per cent of GDP in 1995-96. It has since fallen, both in absolute and in relative terms, and is projected to fall to $9.6 billion or 1.4 per cent of GDP by 2001-02 (Table 4).

Table 4. Commonwealth General Government Net Debt

Government Economic Forecasts

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

• Economic growth of 3 per cent is forecast for 1998-99, following estimated growth of 33/4 per cent in 1997-98.(1)
• The current account deficit is forecast to blow out from $17.7 billion in 1996-97 to $31 billion in 1998-99, or an increase from 3.4 to 51/4 per cent of GDP.
• Employment growth is expected to remain firm with further reductions in the unemployment rate from an annual average of 8.7 per cent in 1996-97 to 81/4 per cent in 1997-98 to 8 per cent in 1998-99.
• The underlying rate of inflation is expected to remain low but will increase somewhat from an estimated 11/2 per cent in 1997-98 to 21/2 per cent in 1998-99.
• The household savings ratio, or household saving as a proportion of household disposable income, is expected to continue its long term downward trend to 23/4 per cent in 1998-99.
• Business investment is forecast to grow by 6 per cent in 1998-99. This is considerably below the 17.4 per cent growth rate recorded in 1996-97.
• A marked slow down is expected in the volume of exports. Exports of goods and services grew by 10.1 per cent in 1996-97 but this is expected to fall to 31/2 per cent in 1997-98 and 21/2 per cent in 1998-99.
• Australia's terms of trade, or the relationship between Australia's export prices and its import prices, are expected to deteriorate over the period to 1998-99.

Table 5. Domestic Economy Forecasts

To put some of the main economic forecasts into perspective, the graphs above show for four indicators-economic growth, current account deficit, unemployment and inflation-Australia's actual economic performance over the past 5 years, estimates for 1997-98 and forecasts for 1998-99.

Endnotes

1. Percentage changes in economic indicators are expressed as either whole numbers followed by a decimal (for actual outcomes) or whole numbers plus a fraction (for estimates and forecasts). Fractions are preferred when figures are tentative, as they do not imply the same level of accuracy as decimals.

The Macro Economic Strategy - David Richardson

The 1998-99 Budget was announced with an underlying surplus of $2.7 billion, up from a deficit of $1.2 billion in 1997-98. The Budget continues with the fiscal consolidation program announced at the time of the 1996-97 Budget. That Budget also introduced the concept of the underlying budget balance as the main performance indicator for fiscal policy. By abstracting from asset sales and loan transactions the underlying budget balance is the preferred measure of the effect of the Budget on the economy.

The ordinary or usual Budget measure of the deficit or surplus has been referred to since 1996 as the 'headline' deficit (or surplus as the case may be). However, as a consequence of the new measure the ordinary Budget Balance has barely made the headlines since the 1996 Budget. For the record, the ordinary Budget Balance is estimated to be a surplus of $18.7 billion in 1998-99, up from an expected surplus of $12.8 billion in 1997-98.

The underlying surplus of $2.7 billion has been obtained despite new policy measures announced in the Budget that included expenditures being increased by $1.95 billion, being only slightly offset by revenue increases of $33 million.(1) In the absence of these policy changes the 1998-99 surplus would have been $4.6 billion in 1998-99.

Expressing all of these changes relative to GDP, the underlying surplus for 1998-99 is now forecast at 0.5 per cent of GDP, following an underlying deficit of 0.2 per cent of GDP in 1997-98. Since the starting point in the 1996-97 Budget of an anticipated deficit of $10 billion the move to an underlying surplus of $2.7 billion has been achieved through a combination of policy changes in both outlays and revenues. The rest is the effect of economic growth and higher price levels in the intervening years. The following table gives estimates of changes in the underlying deficit since the underlying deficit estimate of $9 970 million being the starting point for the 1996-97 Budget.

Underlying Budget Balance - $ million

(Positive figures indicate a movement towards surplus, negative figures, a movement towards deficit)

Source: 1998-99 (and earlier years) Budget Paper No 1: Budget Strategy and Outlook 1998-99.

In the table where the 2000-01 forecast is beyond the scope of the Budget forecasts for the year in question, the latest forecast year is used as an estimate of the long run effect.

From the table we can quickly appreciate that the move from a $10 billion deficit in 1996-97 to the $2.7 billion surplus forecast for 1998-99 is due to a $6.4 billion increase in the balance resulting from the 1996-97 Budget, a $0.9 billion improvement coming from the 1997-98 Budget and, finally, a $1.8 billion reduction in the balance coming from the 1998-99 Budget itself. All up policy measures accounted for a movement of $5.4 billion. The rest, an improved balance of $7.3 billion, has been due to changes in the economic environment, especially economic growth and price increases. The latter give rise to fiscal drag as a source of revenue. Alternative estimates by Econtech ascribe $5.8 billion to policy, $7.2 billion to the economic environment, of which fiscal drag is put at $5.0 billion and recovery at $2.2 billion.(2)

Looking further into the forecast period, the 2000-01 projected surplus of $8.6 billion represents an $18.9 billion swing around on the 1995-96 outcome. However, on the assumptions employed here the policy changes have contributed $3.4 billion to the swing around in the Budget. That means $15.5 billion of the projected turn around is the result of economic growth and fiscal drag.

When talking about the Budget figures for 1999-2000 through to 2001-02 it needs to be stressed that Treasury refers to these as projections and not forecasts. Among other things they are based on continuing growth in those years of 3.5 per cent, employment growth of 2.25 per cent, wages growing by 3.5 per cent and inflation at 2.5 per cent.(3)

Before leaving this section a few comments on the pattern of policy measures may be in order. In 1943 the Polish economist, Michael Kalecki, drew attention to the likelihood that Keynesian fiscal policy would be used to generate a political cycle of spending and contraction based on electoral considerations. It has since been common for governments to cut back on spending and increase revenue in their first year and increase spending and cut taxes towards the end of their terms. That is certainly apparent in the last three Budgets. The figures in the last column of the table give an indication of the sustained effects of the last three Budgets.

Economic Forecasts

The Budget Papers contain the usual economic forecasts. However, this year they are hedged with cautions such as suggesting that the 'uncertain nature of the international economy, particularly the state of the Japanese economy, poses a considerable risk to the outlook for the Australian economy in 1998-99 and beyond.'(4) The Asian crisis has had a major effect on the outlook for Australia. However, apart from the uncertain outlook for Japan, the official view seems to be that the worst has already happened and there is not much left to come through that might affect Australia. For example, the Budget Papers suggest that the situation in the affected Asian countries has stabilised and that a pick up should be apparent in 1999, except possibly in the case of Indonesia.(5)

The Budget Papers estimate economic growth of 3.75 per cent for the present financial year and down to 3 per cent in 1998-99. This mainly reflects the downturn in exports, blowing out the current account deficit (CAD) so that the fall in net exports has a large negative effect on growth. The CAD was $17.7 billion or 3.4 per cent of GDP in 1996-97. It is expected to be $25 billion or 4.25 per cent of GDP in 1997-98 and forecast at $31 billion or 5.25 per cent of GDP in 1998-99.

The rate of unemployment is expected to average 8 per cent in 1998-99 and fall to 7.75 per cent in June 1999 as a result of employment growing at 1.75 per cent both on a through year basis and in year on year terms. The employment and growth forecasts together imply productivity will grow by only 1.25 per cent in 1998-99. That compares with productivity growth of 2.5 per cent estimated for 1997-98 and the actual value of 2.1 experienced in 1996-97. The justification for the forecast slowing down in productivity is the statement that 'employment growth responds with a lag to the easing in output growth'.(6) In other words the slowdown expected in 1998-99 will cause the employment growth to slow but after 1998-99. Note that normally we would expect productivity growth at 2 per cent and labour market growth at around 1.5 per cent so that economic growth would need to be around 3.5 per cent just to hold the line on unemployment. Special conditions have to be assumed to make growth lower than about 3.5 per cent consistent with a reduction in unemployment.

If the forecast slowdown in productivity growth does not eventuate then in June 1999 unemployment is more likely to be up around or just below 9 per cent. A higher than forecast level of unemployment would also come about if the estimated economic growth rate is not realised. Some of the private forecasters seem to be of that opinion. For this financial year, other private forecasters had been forecasting around 4 per cent before the Asian crisis hit. However, those forecasts are being reduced by 0.5 to one per cent. Econtech, for example, has revised its 1997-98 estimate down to 3.5 per cent and has published an estimate of 3 per cent for 1998-99.(7) Mr Alan Oster, chief economist with the National Australia Bank, is reported to have said that growth is more likely to be 2.5 per cent.(8)

One of the reasons the National Australia Bank thinks growth will be below official forecasts is the suggestion the Government has underestimated the Asian impact on the CAD. However, even with the official estimates the effect of the change in net exports will reduce GDP by 2.25 percentage points in 1997-98 and a further 1.75 percentage points in 1998-99. Even if only half of the widening of net exports can be put down to the Asian crisis, it still means GDP in 1998-99 will be 2 percentage points below where we would be if we could re-run history without the Asian crisis.

The impact of the Asian crisis on the economy has been cushioned by the growth in private consumption, which is estimated to grow 5 per cent in 1997-98, and 4 per cent forecast in 1998-99. The 1998-99 forecast assumes that once again consumption will grow faster than real household disposable income, which is expected to grow at 3.5 per cent. This also occurred in 1997-98 but is rather unusual. The justification for consumption growing faster than household income seems to depend on the demutualisation of the AMP.(9) Of course, any increase in interest rates in the near future could have the opposite effect as increased mortgage interest payments eat into household disposable income. Clearly the further out we go the less confidence we can have in any forecasts. Nevertheless, the official forecasts of 3 per cent growth need to be compared with the 'overriding aim of an annual growth rate of over 4 per cent on average during the decade to 2010'.(10)

Uncertainties on the future of East Asia mean that Australian forecasts are likely to be more hazardous than usual. The forecasts should be taken as the central point of a range of possibilities and the range has just grown significantly as a result of the Asian financial crisis.

The Westpac/Melbourne Institute index of consumer confidence fell to a three year low in March.(11) This puts a question mark over demand in 1998. Consumer demand, including demand for cars, has been an important feature of the strong growth that has saved us from the Asian financial crisis. Private consumption is 62 per cent of GDP, so any downturn in consumer spending has significance for the economy as a whole.

Before leaving this section some further comments on the forecasts are in order. Many commentators are cynical about the Budget forecasts. The following table would suggest there is good reason to question the current forecasts given the errors in previous Budgets. This table compares the actual outcome for economic growth with the Budget time forecast. These estimates are made just before or just into the year being forecast.

Economic growth, outcomes versus forecasts

Sources: Budget Paper No 1, 1998-99, ABS, National Income, Expenditure and Product, December Quarter 1997, Cat No 5206.0

From the table it is apparent that the forecast errors can be quite substantial. However, there is no suggestion of bias. The average error is only 0.23 percentage points, close enough to zero. However, the average deviation in absolute terms (that is ignoring the sign of the error) is 0.80 percentage points. A recent study of HM Treasury's forecasting record showed that only 50 per cent of the deviations in UK outcomes after 12 months were explicable by the forecasts. Moreover, for a specific GDP forecast, 90 per cent of the time the actual would be expected to lie within plus or minus 2.1 percentage points. Hence a forecast growth of 2 per cent should be taken to mean we can be 90 per cent sure the outcome would lie within the range of -0.1 to 4.2 per cent.(12) A similar conclusion would most likely apply to the Australian Treasury forecasts.

Policy considerations

There seems to be fairly universal agreement that inflation is no longer a concern for policy makers. Inflation is forecast to be 2.5 per cent in 1998-99 and projected to continue at the same rate in the following two years. That figure is firmly within the Reserve Bank's target range of 2 to 3 per cent.

Unemployment remains a concern. However, the forecasts above suggest that Australia will achieve a further small reduction in unemployment, on average, over the course of 1998-99. If the forecasts are achieved then there may be a case for saying that Australia is doing fairly well on the employment/unemployment front given the impact of the Asian crisis. Some forecasters also no doubt believe that we have reached close to the equilibrium level or natural rate of unemployment. Beyond that rate, according to the argument, further reductions in unemployment are best pursued through policies that directly address labour market issues. Note that the table at the end of this article shows that various countries have a range of experiences with unemployment at the moment with Japan (still), the Netherlands, Switzerland and the United States all below 5 per cent unemployment. There would appear to be a long way to go before Australia reaches best practice on this particular economic indicator.

The main remaining issues are the CAD and the level of foreign debt. As we saw, the official view is that the CAD will be $25 billion in 1997-98 and $31 billion in 1998-99. Most of the CAD goes straight onto foreign debt. In December 1997 foreign debt was $222 billion or 42 per cent of GDP. With a CAD running at an annual rate of $31 billion, foreign debt could reach $253 billion by December 1998, even without any valuation effects through exchange rate movements. Incidentally, those figures imply that foreign debt will increase by 14 per cent per annum. Given a growth in GDP of around 3 per cent and inflation at around 2.5 per cent, nominal GDP (i.e. GDP before adjusting for inflation) is growing at around 5.5 per cent. That means the foreign debt to GDP ratio is likely to climb from 42 per cent in December 1997 to over 45 per cent by the end of 1998, again, assuming no valuation effects. If the present settings remain, namely nominal GDP growing at 5.5 per cent and a CAD of 5.25 per cent, then foreign debt as a proportion of GDP will keep growing until it reaches 95 per cent.(13)

The Budget Papers seem fairly complacent about the blow out in the CAD. To take a few examples

These quotations reveal some important features in the policy thinking at the moment. They can be expressed in the following propositions:

1. An increase in the CAD is inevitable but it is likely to be temporary.
2. It is not the CAD itself that matters - just the perception foreign investors have about the overall policy context.
3. Problems should not reappear in the absence of inflationary pressures, and
4. With balanced budgets the twin deficit thesis will reassert itself and eliminate the CAD.

Each of these propositions can be questioned. Proposition 4 is perhaps the most serious. The twin deficit thesis asserts that the CAD equals the Budget balance. According to this view, a bigger Government deficit simply means a bigger CAD. The strict twin deficit thesis can be ridiculed by pointing to the fact that across all countries the CAD must sum to zero. Compared with that, government deficits across all countries can take on a large range of values. Certainly in the aggregate across countries the twin deficit will not normally apply. However, a weak twin deficits thesis might be put along the lines that an increase in government spending, or any spending for that matter, is likely to increase aggregate demand which tends to spill over into imports. Certainly over the last decade or so there have been occasions when Governments used demand management policies to tackle large CADs.

If we interpret the Budget Papers as referring to a weak twin deficit thesis, then it amounts to saying that demand management can be used to tackle the CAD and the Budget deficit/surplus is the best indicator of the stance of macroeconomic policy. Proposition 1 suggests there should not be too much concern about the present CAD which is expected to be temporary. That is important. Normally when confronted with a CAD blow out it might be expected that contractionary fiscal changes would be introduced, following the (weak) twin deficit thesis. However, as was seen above, discretionary policy changes in the 1998-99 Budget amounted to an additional stimulus of $1.95 billion.

The use of aggregate demand management may be regarded as a fairly blunt instrument against the CAD. Reducing aggregate demand reduces the demand for both imports and domestic goods and services. While there are specific measures to assist exporters in the Budget Papers, there is nothing in the policy discussions on the desirability of 'expenditure switching policies.' Expenditure switching policies refer to those policies aimed at encouraging Australians and the rest of the world to purchase more Australian product while discouraging the purchase of foreign product. The $A has devalued against the $US in recent times. The headlines seem to be constantly reminding us of that. However, the $A has been fairly stable against the Trade Weighted Index (TWI). While the Budget Papers remind us that exports to the US and other destinations are picking up, perhaps in response to the $A/$US devaluation, there may well be a case for further devaluation against the TWI. Even if on balance it was decided against expenditure switching policies it would be useful to see the reasoning.

Proposition 2 above suggests the size of the CAD is not relevant for the perception of Australia by foreigners. We would hardly expect Treasury to say otherwise. It would be completely irresponsible for the Treasury to even hint that there might be episodes of speculation against the $A as a result of the widening of the CAD-or anything else for that matter. However, it is worth observing here that there seems to be a sense of unrealism for the Budget Papers to suggest that Australia can escape any contagion from Asia and all will be fine, irrespective of the CAD, provided the major imbalances are kept under control.

So far the policy considerations have been examined from the perspective of Australian goals alone. A global response to the Asian crisis that involved other countries contracting would not assist the global recovery from the Asian crisis. The badly affected Asian countries need an outlet for their products to assist their recovery. Once recovery in those countries is under way they can then begin to import again and provide a market for Australian exporters as well as exporters from other countries. The Asian crisis has forced Asian imports to fall a lot more than their exports. That throws the rest of the world further into CADs on average. If the rest of the world responded with contractionary policies the crisis countries would be denied assistance and growth would slow even further in the rest of the world. There is nothing in the Budget Papers to suggest that Australia is deliberately adopting a good regional neighbour policy in letting the CAD run out temporarily. However, that may be a valid position to advocate in international fora.

International Comparisons

In thinking about the Budget and economic policy generally it is useful to have in mind the performance of other countries. The following table provides some useful comparisons between our performance and the performance of some other OECD countries.

Economic Indicators

Source: The Economist, 16 May 1998.

Endnotes

1. These figures include all changes since the previous Budget; not just the measures announced in the Budget itself.
2. Prof I Harper, presentation to KPMG Budget Breakfast, Melbourne, 14 May 1998.
3. Budget Paper No 1, 1998-99, pp. 2-29.
4. ibid., pp. 2-4.
5. ibid., pp. 2-6 to 2-7.
6. ibid., pp. 2-25.
7. Econtech, Australian Economic Outlook, 13 March 1998.
8. AAP Report, 13 May 1998.
9. Budget Paper No 1, 1998-99, p. 2-18.
10. Hon. P. Costello MP, Treasurer, and Hon. J. Fahey MP, Minister for Finance and Administration, Mid-Year Economic and Fiscal Outlook, 1997-98, p. 15.
11. The Australian, 12 March 1998.
12. C. Melliss and R. Whittaker, 'The Treasury forecasting record: Some new results', National Institute Economic Review, No 164, April 1998, pp. 65-78.
13. It can be shown that the asymptotic value for the foreign debt to GDP ratio is given by the CAD as a share of GDP divided by the growth in GDP. This is analogous to the Maastricht Treaty rule that aims to reduce EU member country government deficits to 3 per cent of GDP and government debt to GDP at 60 per cent of GDP. Those are consistent given the likely growth in nominal GDP of around 5 per cent. With those figures, 3 divided by 5 is 60 per cent.
14. Budget Paper No 1, 1998-99, pp. 3-3, 3-6 and 3-9.

The Telstra Sale and its Implications for Commonwealth Debt Levels - David Richardson

Introduction

The Budget Papers do not attempt to put a figure on the proceeds of selling the remaining two thirds of Telstra. However, an estimate of Treasury's figure can be obtained in the following manner. This year and last year the Budget Papers included future estimates and projections of net advances-the main component of which is asset sales. Telstra is the only major new asset sale identified in Budget Paper No 1.(1) Hence if for a future year we deduct the net advances contained in the 1997-98 Budget from the figures in the 1998-99 Budget, an approximation to the sales receipts from Telstra is obtained. In this way we obtain sales receipts of $10.8 billion in 1998-99; $18.4 billion in 1999-2000; and $12.5 billion in 2000-01. That gives a total of $41.7 billion and this seems consistent with the estimates elsewhere. As an independent check, Telstra shares are worth $3.80 at closing on 15 May 98. Individual shareholders also have to pay $1.35 in November, so two thirds of Telstra would be valued at around $43.7 billion.

Implications for Government Debt/Asset Management

The Budget Papers make it clear that the proceeds of selling Telstra should be applied to reducing debt and so would not affect the underlying Budget deficit, after deducting selling costs. There would however be consequential effects through the lower interest payments on outstanding Government debt and lower dividend receipts.

It seems unlikely that the Government would be able to reduce the gross debt on issue in line with the headline Budget surplus. The Budget Papers explicitly say that it is not envisaged that government securities will be reduced by the full extent of the reduction in net debt. First, not all holders of bonds will want to sell. Second, the Government wants to maintain a liquid market in government debt. That means not reducing debt as much as net debt. In turn that means building up financial assets by investing the surplus. The Australian Financial Review reported that the Government is looking at investing the surplus in financial assets such as foreign government debt, mortgage-backed securities, and other highly rated securities.(2) A simpler option would be depositing funds in commercial banks.

In this context, despite the run down in net debt from 18.3 per cent at the end of 1997 to 1.4 per cent of GDP by the end of 2002, gross interest payments for the Commonwealth are only projected to fall from $7.8 billion in 1998-99 to $5.4 billion in 2001-02. Those figures suggest something a bit over 30 per cent as the reduction in Commonwealth debt over the period in question. However, if debt is not being run down, there will be an offsetting build up in assets. But there is no clear indication of any additional revenue to be earned on those assets in the Budget Papers.

Some of the above is necessarily somewhat speculative. There is not sufficient information in the Budget Papers to work out exactly what is envisaged. None the less, if there is not to be a reduction in debt to near zero then the Commonwealth simply has to start buying financial assets. If it bought real assets (as opposed to financial assets) such as real estate, factories and similar items, those would be classified as outlays and so the surplus would disappear. Commitment to the surplus means the Government must accumulate financial assets if government debt cannot be retired. Under the scenario suggested in the Budget Papers the Government might find itself with a financial portfolio worth tens of billions of dollars a few years down the track.

We should take seriously the suggestion above that some of the surplus might be used to increase the holdings of foreign assets. At first sight it may seem reasonable that the Government would want to hold the debt of other national governments, such as US Treasury bonds. However, there can be other considerations that need to be examined. The holding of the debt of foreign Governments implies Australia would be using excess government revenue to fund the deficit spending of another government. More importantly, spending $A on foreign assets at the moment would put downward pressure on the exchange rate. Keeping the funds in Australia may not be that simple either. The Budget Papers suggest that the Government sector 'is expected to become a significant net lender to the private sector in the outyears'.(3) The purchase of domestic assets may well give rise to concerns that the Government is tainting the market in, for example, mortgage backed securities, corporate debt and other financial instruments the Government may decide to purchase.(4) There is bound to be calls for directing the surplus towards 'socially desirable' investments at concessional rates, such as the debt of innovative small business, speculative R&D companies, farmers and other 'deserving' entrepreneurs. No doubt there would also be calls to make financial investments in infrastructure of various kinds.

Essentially, there is a good deal of accumulated experience with the Government as a debtor to the private sector. By contrast there is little experience of Government as creditor.

Interest savings versus dividends foregone

An important issue in the debate over selling the rest of Telstra is the whether the earnings foregone from Telstra outweighs, or will outweigh the interest savings. This year the Budget Papers contain a table that gives the budgetary effects of selling the rest of Telstra.

Table 1. Budgetary Impact of Sale of Two Thirds of Telstra

There is no discussion of the assumptions behind the figures in the above table other than to say the net income row refers to the interest outlays savings less the dividend stream foregone. However, it would appear that Treasury has been rather conservative on the basis of the figure for 2001-02, the year after all the remaining shares have been sold. The Telstra prospectus forecasts a dividend of 13 cents a share in 1998. That dividend could reasonably be expected to grow to 14 cents in 2001-02 implying a dividend on the Commonwealth's two thirds equal to $1201 million. Against that the figure in the table suggests interest savings would have to be $1800 million to produce the net income of $699 million expected in 2001-02. At an average interest of 5 per cent on the market value of the retired debt, interest savings of $1800 million imply debt worth $36 billion would need to be retired. Five per cent is taken as the interest rate for purposes of illustrating the argument here and in the following discussion.

A 5 per cent interest rate in above example values Telstra shares at $4.20. Compared with that, the Telstra instalment receipt at the close of trading on 15 May 1998 was $3.80 with the remaining $1.35 payable by 'loyal' shareholders in November 1998. Notice that a price of $4.20 may well be reasonable given the need to discount to attract purchases from existing shareholders and similar strategies that may be involved.

Selling Telstra and reducing debt lowers the future interest obligations by a certain amount each year. However, the dividend stream from Telstra is likely to continue growing into the future and, as a result, it could be expected to eventually exceed the value of ongoing interest savings referred to above.

Retiring Government debt worth $40 billion could save annual interest payments of $2 billion at an average interest rate of 5 per cent. That compares with a dividend on two thirds of Telstra equal to $1.115 billion in 1998. Because the dividends can be expected to grow in the future we are not comparing like with like. Eventually the value of the annual dividend stream will exceed the value of annual interest savings, so long as the dividend stream continues to grow at some positive rate.

As the Telstra prospectus notes, there are risks inherent in Telstra's operating environment. The market is a mature market in which future growth is unlikely to be strong, unless there is price discounting or similar activity that would work against Telstra's earnings. Also Telstra is likely to suffer further inroads through competition for the relatively slowly growing market. That implies that growth in earnings into the future cannot be guaranteed at 10 per cent indefinitely.

Given everything, we might use four per cent as a reasonable estimate of the long-term growth in Telstra's earnings. That is about the long run rate of growth in the Australian economy. But note that even then, there is a certain amount of risk that attaches to forecasts for a particular year. The prospectus shows that there has been a degree of volatility in Telstra's historic earnings. Estimates of 10 per cent growth may be reasonable in the near future, but seem very optimistic for the long run.

Using four per cent as the assumed growth in earnings, the Government's dividend will reach $2.01 billion in the year 2013 to approximate the ongoing interest savings. Of course that time frame is sensitive to the particular growth rate assumed to apply to Telstra's dividends and earnings. Using a higher assumed dividend growth rate of 10 per cent, the figure used for the next few years, means that the target of $2 billion would be met around the year 2005.

Valuing Two Thirds of Telstra Remaining in Government Hands

The fact that the dividends increase over time and eventually catch up with the annual interest savings does not really tell us a great deal. It just says that the annual effect on the Budget is positive at first and negative after some period of time. What we need is some measure that indicates whether there are overall net positive benefits or losses through the sale of the two thirds of Telstra. To provide that measure the present value of the dividend stream needs to be compared with the sales value of two thirds of Telstra. The present value of the future dividend stream can be calculated by discounting back into present values the dividends expected to be paid in the future.

Following the earlier discussion Telstra is taken to have a market worth of $40 billion at current prices. The question now is, what is a dividend stream of $1.115 billion growing at four per cent per annum worth? If, as a first approximation, we considered that the dividend stream should be valued at the 10 year bond rate of 5.69 per cent(5) then the answer is given by adding the series:

As it happens, the above series is equal to $1.115 billion times [1-(1.04/1.0569)]^-1 using Taylor's theorem.(6) That puts a value of $67.759 billion on Telstra which, it must be stressed, is based on discounting the expected dividend stream at the 10 year bond rate. It could be argued that the appropriate discount rate to apply to the expected dividend steam needs to be adjusted for the risk involved. Obviously some adjustment should be made to the 10 year bond rate if it is going to be used to discount a relatively risky income stream. However, there is no practical guidance on how we might calculate that. What we can do is show how the valuation of the discounted dividend stream varies as the risk premium is varied. Those calculations have been performed to derive the estimates given in the following table.

Table 2. Valuing Telstra's expected dividend stream

Estimates of the value of two thirds of Telstra assuming a dividend of $1.115 billion for 1998 which grows at 4 per cent thereafter and discounting the dividend by the 10 year bond rate adjusted for risk premia.

$67.75 billion using no risk premium

$47.42 billion using a risk premium of 50 basis points

$38.95 billion using a risk premium of 100 basis points

$31.12 billion using a risk premium of 200 basis points

$25.57 billion using a risk premium of 300 basis points

$$21.32 billion using a risk premium of 400 basis points

The clear implication of the figures in Table 2 is that the growing dividend stream we expect from Telstra is likely to be valued at more than the interest savings made possible by selling Telstra, the lower is the premium we place on the risk associated with Telstra's uncertain income. The risk refers to the volatility of the dividend Telstra is likely to generate, including the remote possibility that it may not provide a dividend in some years. Therefore, if we decide that 200 basis points should be added to the discount rate over the bond rate to reflect the risk and volatility of the dividend stream, then we would value two thirds of Telstra's dividends at $32.5 billion.

It has also been argued that Telstra should be valued not by its dividend yield but by its earnings. When companies refrain from paying dividends but instead plough profits back into the company, they nevertheless create wealth for their shareholders by increasing the net worth of the company. Hence earnings in the company, whether retained or distributed, can be regarded as the appropriate income stream which should be used to value a company. However, it may well be that retained earnings represent higher risk to shareholders than distributed income, simply reflecting the possible difficulties in realising the locked up value in a company at a later date. Part of that just reflects the market fluctuations that can upset market valuations of a company. For those reason the valuations of the earnings below look at a wider range of possible risk premia than the valuations of the income stream.

Using earnings as the income stream to be valued we obtain the estimates in the following table.

Table 3. Valuing Telstra's earnings stream

On the assumptions so far, and on the basis of the above reasoning, if we use a risk premium of 300 basis points or below, then Telstra's expected future earnings stream from two thirds ownership is worth more than the market price of two thirds of Telstra. Above 400 basis points two thirds of Telstra is worth more when sold. Within the range 300 to 400 the result is probably too close to call given the sensitivity of the results to the assumptions being used.

It is worth pointing out that the techniques used here can be used to find the implicit risk premium the market is using in its valuation of Telstra. The present market price of Telstra is $3.80 (at the end of trading on 15 May). Given the second installment due in November that values a share in Telstra at approximately $5.10. Using the prospectus forecast earnings per share of 21.8 cent in 1998, and assuming the earnings per share is expected to grow by 4 per cent thereafter, the current market price implies a risk premium of around 300 basis points is being used by the market to discount Telstra's current and prospective earnings.(7) Of course, if Telstra's dividend stream were also to be valued using the market's implied risk premium, its value would be the same as the estimated sales price.

All of the estimates presented here are extremely sensitive to the assumptions being used. We have discussed at length how the risk premium influences valuations. So too will changes in the market price of Telstra or the achievable sales price, the long bond rate, the value of and expected growth in Telstra's earnings and dividends.  

Endnotes

1. Budget Paper No. 1 1998-99, pp. 4-122.
2. Australian Financial Review, 13 May 1998.
3. Budget Paper No 1 1998-99, pp. 1-5.
4. The Government could outsource the funds management role and so put a buffer between the Government and the investment decisions.
5. This figure is the closing value on 15 May 1998.
6. In words, Taylor's theorem says that the sum of a geometric series is the first term by one over one minus the common ratio.
7. The formula is given by P = E/[1 - (1 + g)/(1 + R)], where P is the market price of a Telstra share, E is earnings per share, g is the expected future growth in E, and R is the implied discount factor. Having found R we can deduct the long-term bond rate and so find the implied risk premium.

Promise of the Tax Reform and other Significant Taxation Measures - Simon Lang and Bernard Pulle

Tax Reform Foreshadowed

In the 1998 Budget Speech the Treasurer referred to the Government's commitment to fundamental reform of the Australian taxation system as announced by the Prime Minister in August 1997. He added:

Although the Treasurer did not refer to a change in the tax mix and the replacement of the Wholesale Sales Tax (WST) with a Goods and Services Tax (GST), it is apparent that the need for reform indicated by the Treasurer points to reform which may include a GST and a change in the tax mix. It is also clear that incentives for work could take the form of a reduction in the current income tax rates and fairness could be achieved by a crackdown on tax evasion and tax minimisation practices. Speaking at the National Press Club on 14 May 1998, the Treasurer was more specific when he strongly advocated shifting the burden of tax away from salary and wages to goods and services. He added: There is nothing immutable about the current tax mix. These are not sacrosancts that were drawn up as some conscious Plan - they just got there out of the most confused tax system which is designed for the 1930s and is still going on.(2)

The Budget Outlays include a sum of $24.2 million in the Treasury Portfolio for funding to develop systems for implementing tax reform in 1998-99. The Government has also set aside $9.5 million in each of the years 1998-99 and 1999-2000 for the continuation of the work of the High Wealth Individuals Task Force, which is dealt with in detail in the Treasury Portfolio Review 16.4.1 of this Budget Review.

A feature article in the 1998-99 Budget Review titled-Budgeted Tax Revenue, the Cash (or Black or Underground) Economy and the Tax Gap-deals with issues concerning the cash economy and tax evasion which are appropriate in any tax reform agenda. It indicates that transparency in dealing with these issues could contribute towards making the community aware of the efforts made by the Government and the taxation administration to ensure that all parts of the community pay a fair share of tax.

Another significant Budget Measure was the decision to allow immediate deductibility for tax purposes of expenses in detecting and remedying software problems associated with the year 2000 millennium bug. A feature article titled Year 2000 compliance expenditure and taxation of software appears later in this Budget Review and deals with the impact of this measure.

Other significant taxation measures proposed in the 1998 Budget are dealt with in this article.

Donations to Political Parties and Independents

The Government will amend the Income Tax Assessment Act 1997 so that deductions up to a maximum of $1500 annually will be allowable for:

• contributions, including membership subscriptions, of $2 or more to registered political parties
• Gifts of $2 or more to independent candidates and members.

The deduction will be available to companies as well as non-corporate taxpayers. Currently, deductions are allowed for contributions by non-corporate taxpayers to registered political parties only, with the total deduction limited to $100 in an income year. The amendments will be effective from 1 July 1998.

The donations to independent candidates and members will only be deductible if the donations are made during the period commencing from when the person's nomination as a candidate at an election is declared and ending:

• if a person is elected, when he or she ceases to be a member of the particular Parliament or Legislative Assembly, or
• if a person is an unsuccessful candidate, when the outcome of the particular seat is officially declared.

Demutualisation of Non-Insurance Organisations

The Income Tax Assessment Act 1936 will be amended to provide a generic framework for the demutualisation of non-insurance organisations such as friendly societies, credit unions and clubs. This framework was originally announced in the 1997-98 Budget and further developed in a discussion paper issued jointly by the Australian Taxation Office (ATO) and the Treasurer in May 1997.

The proposed rules are similar to those applying to the demutualisation of life and general insurance companies, although there are some notable differences.

The proposed framework will only apply if there is a broad continuity of the beneficial ownership of the organisation both before and after demutualisation and shares are offered to all members of the demutualising organisation. It is not clear whether the offer must be made to all members on the demutualisation date or on some other date, such as the date the demutualisation is announced.

Under the proposed rules no capital gains tax (CGT) liability will arise to the member until the shares are subsequently sold. The cost base of the shares will depend on whether the member had a pre or post CGT interest in the demutualising organisation.

In the case of a pre CGT interest, the cost base will be equal to the member's share of the market value of the organisation immediately before demutualisation, less the member's share of any franking account surplus at that time.

Where a member acquired the interest in the demutualising organisation post CGT, the cost base of the shares will be equal to the non-deductible costs of acquiring and maintaining membership.

This differs markedly from the demutualisation of insurance companies whereby the cost base is equal to what is effectively the market value of the organisation irrespective of when the membership commenced.

Non-insurance organisations which demutualise are permitted to retain the balance of their franking accounts, although the cost base of shares for pre CGT interests in the demutualising organisation will be reduced by the respective share of the franking credits. Accordingly, the value of franking credits should be included in the initial assessment of market value.

Sales Tax: Property Owned by Exempt Persons

A pre-Budget measure introduced from 2 April 1998 restricted existing exemptions available on goods for 'always exempt persons'. Item 192 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 allows the private sector to purchase goods free of sales tax, provided the goods become an integral part of property which was owned or leased to an 'always exempt person' or the Government of a foreign country.

The amendment in April excluded certain types of property such as hotels, apartment blocks, shopping centres and casinos on the basis that the Government felt that item 192 was providing windfall gains and unfair competitive benefits for sales tax payers in specific circumstances. The Budget has identified that additional sales tax savings from the amendment will be $50 million each year over the next four years.

Beneficiary Tax Rebate for CDEP Participants

The Government will be introducing amendments to allow Community Development Employment Projects (CDEP) participants to claim the beneficiary tax rebate from 1 July 1998. This will bring the tax treatment of CDEP participants into line with that of participants in equivalent labour market programs. Under the CDEP scheme, Aboriginal and Torres Strait Islander people forego their entitlements to unemployment benefits and work in community-based activities for wages.

This measure follows recommendations released in December 1997 by the Government initiated Independent Review of the CDEP Scheme, the Spicer Review.

Provisional Tax

Provisional taxpayers can expect cash flow savings through reduction in the tax uplift factor from 6 per cent to 5 per cent for the 1998-99 tax year. The uplift factor was determined by reference to the nominal increase in Gross Domestic Product in 1997 over 1996. The Treasurer said this would save businesses and individuals $75 million in provisional tax instalments in 1998-99, and that the rate had been halved since 1990.

Capital Gains Tax

Majority underlying interests held by public entities

A significant announcement in the 1998 Budget was the proposal that all public entities (listed public companies, publicly traded unit trusts and mutual insurance organisations) will be taken to have had a change in majority underlying interests at 30 June 1999 for capital gains tax (CGT) purposes, unless they have satisfied the Commissioner that they have maintained continuity of majority underlying interest. A public entity that satisfies this test will nevertheless be taken to have had a change in majority underlying interests after every five years thereafter, unless the Commissioner is satisfied that it actually maintained continuity in majority underlying interests in its assets.

If continuity is lost, assets acquired by taxpayers before 20 September 1985 will be treated as post-CGT assets acquired at test time at their market value. For the purposes of the 30 June 1999 test certain concessional tracing rules in Division 20 of Part 111A will be removed. The practical impact of this measure is to bring within the CGT net more assets owned by public entities and therefore widen the CGT base. This measure is not expected to have any financial impact until the year 2001-02 when the contribution to revenue is estimated at $5 million. (3)

Extension of Prescribed Payments System

The Prescribed Payments System (PPS) is a withholding system for income tax collection, similar to the PAYE system, which applies to independent contractors. At present, the PPS only applies to nine listed in Income Tax Regulations. It has been decided to extend the PPS to allow payers in non-PPS industries to apply to the Commissioner of Taxation to be included in the PPS where the payer and payee have agreed that the payments will be covered by the PPS.

The Government has decided on this measure to be implemented by relevant regulations in response to representations from members of other industries. As agreement of payer and payee are required for this measure to have wide application, it remains to be seen whether there will be wide voluntary compliance. This measure is expected to be revenue neutral.(4)

New Tax Penalty Arrangements

These measures proposed in the Budget follow a review of the existing penalty arrangements by the Australian Taxation Office as a response by Government to the recommendations of the Small Business Deregulation Task Force. These measures are expected to be revenue neutral overall and the question arises whether the new penalty arrangements will act as a greater deterrent to non-compliance than the ones they replace.

'Interest on Outstanding Balance' Charge

The Government has decided to replace the disparate late penalty arrangements in legislation administered by the Commissioner of Taxation with an 'Interest on Outstanding Balance' (IOB) charge. The IOB will reflect market interest rates and will be the weighted average yield of the 13-week Treasury note topped up with an eight percentage point uplift factor. This uplift factor will take the charge above commercial interest rates and will be a deterrent to taxpayers using taxation debts as a form of business finance. The charge will be calculated on a compounding basis and based on the relevant 13 week Treasury note yield, the current IOB charge will be in the order of 13 per cent. The existing penalties carry simple interest at rates between 16 and 20 per cent depending on the type of tax. The new interest charge will apply from 1 January 1999 and transitional arrangements will provide for late payment penalties across all taxes to a simple effective rate of 13.5 per cent.

'Failure to Notify' Penalty

Source deduction withholders and sales tax payers who fail to correctly notify the Commissioner of Taxation when an amount is due will be required to pay a 'Failure to Notify' penalty. The penalty will be calculated at the rate of 8 per cent per annum and will replace the current flat rate culpability penalties, ranging from 20 per cent to 200 per cent for failure to remit deductions by the due date.

Penalty for failure to lodge annual source deduction reconciliations

A penalty will be imposed of $10 per week for each week annual reconciliations are not lodged by withholders of source deductions. The maximum penalty will be $200 and will apply where documents are 20 weeks or more late.(5)

Company Law Review Bill-Taxation Response

Schedule 5 of the company Law Review Bill 1998 will amend the Corporations Law to abolish par value for shares and court confirmation for capital reductions. These changes will make it easier for companies to make distributions of capital to shareholders and result in a significant loss to revenue. On 13 November 1997, the Government announced its decision to amend the Income Tax Assessment Act 1936 in response to prevent the loss of revenue following the proposed changes to the Corporations Law. The Taxation Laws Amendment (Company Law Review) Bill 1998 will make amendments to the taxation laws consequential upon these amendments. These amendments are designed to prevent companies distributing profits to shareholders that are preferentially-taxed capital rather than as dividends. This is another instance where measures to prevent the erosion of the revenue base may not bring the full commercial benefits which the reform of the Corporations Law was directed at.(6)

Infrastructure Borrowing Tax Offsets Scheme

The scheme will provide a rebate of tax on interest derived by a lender to an approved road or rail infrastructure project. This measure was announced in the 1997-98 Budget and will be funded by an allocation of $75 million annually in 1998-99 and subsequent years.

Resident lenders to new public road and rail infrastructure projects, which are approved by the Minister for Transport and Regional Development against specified criteria, may qualify for a tax rebate on their interest income at the general company rate of tax. To the extent that the lender's interest is rebateable, the project borrower will be denied a deduction in respect of interest payable on the borrowing. The rebate applies only for the first five years of an eligible project's borrowings.

As a transitional measure, the rebate scheme is also open to infrastructure projects which were eligible under the infrastructure borrowings tax concession which terminated on 14 February 1997. Projects which had applied to the Development Allowance Authority by 14 February 1997, and extensions of projects which had received certification, may qualify under the transitional rule. In addition, projects certified after the cessation of the previous concession may apply for approval.

Endnotes

1. Budget Speech 1998-99, pp. 9-10.
2. Australian Financial Review ; 14 May 1998; p. 1
3. 'Budget Measures 1998-99'; Budget Paper No. 2; pp. 2-16 to 2-1.
4. ibid., pp. 2-12.
5. ibid., pp. 2-9 to 2-10.
6. ibid., pp. 2-30 to 2-31

Budgeted Tax Revenue, the Cash (or Black or Underground) Economy and the Tax Gap - Bernard Pulle

Summary

There are various assumptions underlying the 1998 Budget, which shows an underlying surplus of $2.7 billion for the year 1998-99. Among these are the assumptions that total revenue of the order of $144.258 billion for 1998-99 will be 25 per cent of Gross Domestic Product (GDP) and that revenues in subsequent years will remain stable at around 25 per cent of GDP.(1) The projected GDP for 1998-99 will be of the order of $580 billion.

The Australian Bureau of Statistics (ABS) provides estimates of the GDP at current prices derived from the production, income and expenditure approaches. In practice in Australia, GDP is estimated mainly using the income and expenditure approaches. The Gross Operating Surplus (GOS) component required for the income approach is based on information obtained from Taxation Statistics and other information available to the ABS. Taxation Statistics published by the Australian Taxation Office (ATO) are based on information provided in tax returns which suffer from a deficiency because they will not include income understated in those returns and income of persons who do not file tax returns.

The 'cash economy' can be defined as 'income that is not recorded in the books from which tax returns are prepared'. It is also referred to as the 'black economy' or the 'underground economy'. The 'revenue gap' can be simply defined as the difference between the revenue due to the Commonwealth from taxation and other laws and the revenue in fact collected by Commonwealth agencies such as the ATO and Customs. The 'tax gap' can similarly be defined as the difference between the taxation revenues due to the Commonwealth from taxation laws administered by the ATO and the tax in fact collected by the ATO. The tax gap may in fact be taken to be the amount of tax evaded, and will be the major component of the revenue gap.

The ABS states that it makes allowance for the existence of the cash economy in providing estimates of GDP but has not published these cash economy estimates as its counterpart Statistics Canada. The Treasury last published figures of tax evaded for the Tax Summit in 1985. The Internal Revenue Service in the US periodically publishes estimates of the tax gap and these are subject to the scrutiny of the US Congress.

This article makes the case that due to the significance of estimates of the cash economy and the tax gap to the preparation of national accounts and budgets as well as the continuing tax reform process, the resources of the Commonwealth (such as the ABS, ATO and the Treasury) should be used to periodically publish estimates of the cash economy and the tax gap. Academic studies have estimated that the cash economy could range from 3.5 per cent to 13.4 per cent of GDP. In 1998-99 the cash economy could therefore range from $ 20.3 billion and $77.7 billion. On the basis of revenue expectations in the 1998 Budget, the revenue lost to the Commonwealth would range from $5.1 billion to $19.4 billion in 1998-99.

The Commonwealth has provided $24.2 million in the 1998-99 Treasury outlays as funding to develop systems for implementing tax reform. It would be appropriate for Parliament and the general public to have before them official estimates of the cash economy and the current tax gap in considering the tax reform package to be released shortly. An informed decision could also be made as to the extent to which the proposals for reform of the tax system may assist in reducing the tax gap. The Charter of Budget Honesty, which has recently passed through the Parliament, requires transparency of, and accountability, for fiscal policy. These objectives will be achieved by the publication of the estimates suggested in this paper. There is justification for the provision of additional funding, if necessary, for the preparation and publication of estimates of the cash economy and the tax gap, as part of the tax reform process.

The Cash Economy Task Force

In November 1996 the Commissioner of Taxation established the Cash Economy Task Force (the Task Force) to examine the nature of the cash economy, to determine what the likely compliance issues are and to develop a view of the additional steps that the Australian Taxation Office should take to address evasion in the cash economy. The Task Force presented its first report in May 1997 where it suggested that the ATO needs to work with tax practitioners, industry and community groups to develop effective solutions. The Commissioner of Taxation responded to this report by announcing the implementation of a range of initiatives which included the redeployment of field resources, by increasing ATO's staff presence in cash industries and developing Task Force initiatives. The ATO has endorsed national projects relating to the cash economy in the following industries: Building and Construction; Clothing; Fruit and Vegetables; Prescribed Computer Goods; Restaurants and Cafes; Road Transport; and Taxis.

In its second report titled Improving Tax Compliance in the Cash Economy published in April 1998, the Task Force notes that the ATO has increased its field presence three fold in businesses with significant cash dealings, including those to which the Prescribed Payments System (PPS) and the Reportable Payments System (RPS) apply. This report also records that an ATO Corporate Survey of taxpayer attitudes to the taxation system, which is conducted every six months through AC Nielsen-McNair, showed that there is widespread acceptance in the community that not paying tax on cash income is OK.

The Task Force has defined the 'cash economy' as 'income that is not recorded in the books from which the tax return is prepared'. This definition is wide enough to include a wide range of practices such as barter, electronic commerce or misdescribed expenses. However, the Task Force has decided to focus its attention initially on cash income derived from business and employment, whether legal or illegal in nature.

Size of the Cash Economy and Impact on Revenue

The second report notes that the nature of the activities undertaken in the cash economy makes it difficult to quantify its size and impact on revenue. It records that academic studies estimate the cash economy to be between 3.5 and 13.4 per cent of the GDP.(2) The 1998 Budget assumes a GDP of the order of $580 billion for 1998-99 and estimates of the cash economy, on the basis of the reported academic studies, would range from $20.3 billion to $77.7 billion. An underlying assumption of the Budget is that revenues are expected to be around 25 percent of GDP and on the basis that the GDP attributable to the cash economy is not accounted for in arriving at the GDP, the revenue lost would be in the range $5.1 billion to $19.4 billion in 1998-99.

In Australian National Accounts - Concepts, Sources and Methods(3), GDP is formally defined as: the total market value of goods produced in Australia after deducting the cost of goods and services used up in the process of production (intermediate consumption), but before deducting consumption of fixed capital.

In Australian National Accounts - Concepts, Sources and Methods the difficulties of estimating Gross Operating Surplus (GOS) for private corporate trading enterprises and unincorporated enterprises are highlighted. ABS relies on data in Taxation Statistics published by the ATO from information provided in tax returns. This basic information is supplemented by information from ABS and other sources to derive GOS. It states:

The ABS is understood to include an allowance of about $6 billion for the cash economy in respect of undisclosed legal sources only in estimating GDP for recent financial years. If the academic work places the cash economy between $ 20.3 billion and $77.7 billion then the allowance made by the ABS for the cash economy would be considerably low, or the academic work has not made the allowances that the ABS has made for the factors listed above.

The only conclusion that may be drawn is that as estimating the cash economy and the extent of tax evasion is significant for the national accounts as well as the credibility and integrity of the tax system, the resources available to the Treasury, the ATO and the ABS should be combined to make available for public scrutiny the official estimate of the cash economy and tax evaded, at least periodically, as is carried out in the United States.

The Need to Estimate the 'Tax Gap'

The 'tax gap' is the estimate of the amount of Commonwealth tax revenue which is legally due but which has not been collected by the ATO, due to tax evasion and other breaches of taxation laws. The Draft White paper, Reform of the Australian Tax System, of June 1985 stated in paragraph 3.12:

This was the last occasion that the Treasury published an estimate of tax evasion.

The Auditor-General had in the audit reports on the ATO for the years ended 30 June 1989, 30 June 1990 and 30 June 1991 drawn attention to the failure of the ATO to estimate the 'tax gap' and bring it into account or disclose it by way of a note to its Financial Statements. The Auditor-General had qualified the Financial Statements of the ATO for the years ended 30 June 1992 and 30 June 1993 on the grounds that the amount represented by the 'tax gap' has not been brought into account. In his audit report dated 8 November 1993 he stated:

It is significant that the Auditor-General did not qualify the Financial Statements of the ATO for the year ended 30 June 1994 on the basis that the further information provided by the ATO to the Australian National Audit Office (ANAO) showed that the records and levels of controls in 1992-93 and thereafter were reasonable. The Audit Report of 7 October 1994 stated:

The inference to be drawn from the audit report of 7 October 1994 and the subsequent unqualified audit reports on the ATO financial statements is that that there could be no major impact of tax evaded on tax collected for the Commonwealth. However, the underlying reason for the earlier audit qualifications remains valid in view of the prevalence of tax evasion and is reinforced by the inferences that could be made of the size of the cash economy and the extent of tax evasion from information in the second report of the Cash Economy Task Force.

Further, the view taken by the ANAO in qualifying the financial statements of the ATO for the years ended 30 June 1992 and 30 June 1993 would be more in accordance with approved accounting standard AASB 1031. The accounting standard on Materiality (AASB 1031) issued by Australian Accounting Standard Board (AASB) requires amounts that are material to a significant aspect of the financial statements to be recognised, measured or disclosed. The standard states that information is material if its omission, misstatement or non-disclosure has the potential to adversely affect: (a) decisions about the allocation of scarce resources made by users of the financial report; or (b) the discharge of accountability by the management or governing body of the entity. The amount of tax evaded and not collected would certainly satisfy both criteria of materiality, in view of its significance to the integrity of the tax system as well as to the efficiency of the administration charged with the collection of taxes. The official estimation and publication of the tax gap periodically, to which reference could be made in the financial statements of the ATO, will ensure that the financial statements will meet the requirement of this accounting standard.

Experience in Canada

In 1997 the Fraser Institute of Canada published a collection of papers on the underground economy in Canada and a number of other countries, including the United States and Britain under the title: The Underground Economy-Global Evidence of its Size and Impact.(7) Section One set out to measure Canada's underground economic activity and assesses the impact that tax changes have on its size.

It concludes:

Experience in the United States

The US Government produces two measures that are cited as indicators of underground activity. The Bureau of Economic Analysis (BEA) calculates the difference between adjusted gross income (AGI) as reported to the Internal Revenue Service (IRS) and an independent estimate of AGI derived from National Income and Product (NIPA) estimates of personal income. The difference in these figures is referred to as the AGI gap. While the AGI gap is not officially recognised as a measure of the underground economy, it is interpreted as a lower bound measure of non-compliance in the reporting of taxable income. The latest government figures show that the AGI gap had risen to US$500 billion in 1992.(9)

The IRS has hitherto prepared an alternative discrepancy measure for unreported income using data from the Taxpayer Compliance Measurement Program (TCMP). The IRS estimated that unreported legal and illegal source income in 1992 was US$673 billion.(10)

Endnotes

1. 'Budget Strategy and Outlook 1998-99', Budget Paper No. 1 1998-99, p. 1-15 & Table 8- p. 2-36.
2. Mr Glen Hepburn of the Department of Economics , University of Melbourne had in an article titled Estimates of Cash-based Income Tax Evasion in Australia which appeared in the Australian Economic Review, 2^nd Quarter 1992, estimated the tax loss on cash-based income tax evasion at $6.2 billion for 1989-90.
3. ABS Catalogue No. 5216.0 (1990); paragraph 2.15 p. 6.
4. ibid., p. 77.
5. Commissioner of Taxation, Annual Report 1992-93, p. 241.
6. Commissioner of Taxation, Annual Report 1993-94, p. 175.
7. The Underground Economy-Global Evidence of its Size and Impact, Edited by Owen Lippert and Michael Walker, Fraser Institute, Canada, 1997.
8. ibid., pp. 33-34.
9. ibid., pp. 158-159.
10. ibid., p. 162.

Year 2000 Compliance Expenditure and Taxation of Software - Simon Lang

This measure is of particular importance from a number of perspectives. Not only is it commercially imperative for Australian commerce and industry to ensure their computer systems become year 2000 compliant, it is vital for the economy as well as for the safety of the entire population.

Although the cost to revenue is significant, this measure should provide some incentive for business to take appropriate action, as well as provide certainty in relation to the taxation consequences of any necessary expenditure.

Financial Implications(1)

Year 2000 Computer Related Expenses

A welcome measure is the decision to allow immediate tax deductions for most costs relating to year 2000 or 'Millennium Bug' compliance issues. Previously there had been great uncertainty about the tax consequences of these costs.

As the Budget was being delivered, the Commissioner of Taxation released a new ruling, Draft Taxation Ruling TR 98/D5. Under the new ruling:

• Immediate deductions will be available for the costs of initial diagnosis work on software to determine year 2000 compliance as well as modifying and testing the software to make it compliant. This is regardless of when the costs are incurred.
• However, those costs that relate to making software compliant which also involve substantial improvements not related to compliance will need to be apportioned between immediately deductible year 2000 costs, and costs that are to be treated as normal software costs.
• Costs that involve the replacement of the whole or most of a unit of hardware or equipment containing a computer chip or firmware are to be treated as being of a capital nature and not immediately deductible.

The Government will also legislate to provide immediate deductions for the costs of acquiring or substantially rebuilding current software with the main purpose of ensuring year 2000 compliance, provided these costs are incurred before 1 January 2000. This seems to provide some further concessions as it extends the Commissioner's view of immediately deductible costs. A number of tax planning issues therefore need to be addressed by taxpayers. In particular it will be vital to:

• Ensure that those year 2000 costs which are immediately deductible are clearly identified and segregated from other costs. This may necessitate separate invoicing or costing arrangements.
• Ensure that, to the extent possible, costs related to acquiring or substantially rebuilding current software are incurred prior to the 1 January 2000 deadline.

Year 2000 Research & Development Claims

Companies may further benefit from the tax changes for year 2000 compliance costs. Costs incurred in relation to the following activities may attract the 125 per cent tax concession for R&D:

• undertaking initial diagnosis work
• modifying, testing and making minor improvements to software
• modifying or improving hardware or computer operated equipment
• rebuilding or developing software.

Software Costs in General

The Government proposes to introduce statutory rules governing the deductibility of general software costs. This follows the withdrawal of an Australian Taxation Office (ATO) ruling on this topic, Taxation Ruling IT 26. The new regime is clearly not intended to be a concession.

From 10am AEST, 11 May 1998 the costs of systems and application software will be amortised at 40 per cent per year equivalent to a 2.5 year write off. Previously, these costs were usually immediately deductible in the case of applications software, or otherwise depreciated with computer hardware, in the case of systems software.

In addition:

• if the non-renewable software licence period is less than 2.5 years, the amortisation period can be shorter
• an immediate deduction will be available if the taxpayer stops using the software, equal to the remaining unamortised expenditure
• software purchases up to $300 will be immediately deductable. However, bulk purchases of software packages of more than $300, although individually valued at up to $300, will be caught by the new amortisation rules
• in-house costs of developing software will initially be capitalised until completed. When completed, the amortisation provisions will apply. Should the commissioned or developed software be disbanded, capitalised costs will be immediately deductible
• broadly, costs of enhancing the functional capacity of computer software should be treated as capital costs and amortised accordingly.

Non-enhancement costs such as maintenance, testing, code reviews and minor alterations will continue to be on revenue account and immediately deductible.

The proposed arrangements are broadly more generous than those applying in comparable overseas taxation jurisdictions. For example, New Zealand allows software purchases to be depreciated at 30 per cent straight line or 40 per cent diminishing value, equivalent to 3.3 years write off, while the UK provides depreciation of 25 per cent diminishing value, equivalent to a 6 year write off. In Canada, systems software receives either a 5 or 8 year write off period, depending on the industry it is used in. Application software is depreciated at 100 per cent, which effectively results in a 2 year write off period due to Canada's 'half year rule'. The US provides a 3 year write off for newly purchased software, unless the taxpayer can show a shorter write off is appropriate.

However, David Hastings of accounting firm, Deloitte Touche Tohmatsu, commented(2) that while the changes to tax deductibility for software are said to be a concession and cost the Government about $1 billion in revenue over the next 4 years, the withdrawal by the ATO of the prior ruling for deductibility of software will cost business the same amount or more immediately.

Endnotes

1. 'Budget Measures 1998-99', Budget Paper No. 2 1998-99, p. 2-4.

2. The Australian Financial Review, 13 May 1998, p. A5.

Superannuation - Simon Lang

The most significant development in superannuation policy since the last Budget is that which ensures that superannuation fund members are provided with a choice as in to which fund their assets are to be invested.

The measures introduced in the 1998-99 Budget tightening investment restrictions are also of importance, especially to small, self-managed superannuation funds, and have already elicited criticism.

Other significant measures, including changes to the early release of benefits, new penalty provisions and a new regulatory environment are also canvassed below.

Measures Introduced in the 1998-99 Budget

Tightened Investment Restrictions

Legislation will be introduced to tighten investment restrictions for all superannuation funds. For 'existing investments' funds, they will need to comply by 30 June 2001. The rules will apply immediately for investments made following introduction of the legislation.

• Investments in associated parties, including trusts.
• Investments involving associated parties, such as assets leased to members or employer-sponsors. Exceptions will apply on a basis consistent with the current rules relating to acquisition of real property used in the business.
• Investments in certain non-associated parties which invest directly or indirectly in the employer-sponsor or its associates. Exceptions will apply for certain specified investments such as widely held unit trusts.

Penalties for Breaches of Superannuation Law

Currently, the only available taxation penalty for breaches of the superannuation legislation is the removal of complying status from the fund. This penalty is rarely applied. A new penalty regime will apply to all funds, under which 'penalties will be calculated in accordance with the severity of any breach of the rules'.

The New Regulatory Environment

Under legislation recently introduced, the prudential supervisory role of the Insurance and Superannuation Commission (ISC) is to be assumed by the Australian Prudential Regulation Authority (APRA) from 1 July 1998.

The Government has now announced that self-managed funds, as defined below, are to be regulated with effect from 1 July 1999 by the Australian Taxation Office (ATO). Currently, self-managed funds are regulated, along with larger funds, by the ISC. This change is consistent with the recommendations of the Wallis Financial Systems Inquiry.

Where an existing excluded fund does not meet the definition of 'self-managed fund', it has the option of restructuring so as to meet the definition, or using an 'approved trustee' which will fall under the regulation of APRA.

Self-managed (Excluded) Funds: New Definition

The definition of 'self-managed fund' is to apply to superannuation funds with less than five members, where all members are trustees and there are no other trustees. Where such funds have two or more members, those members must be partners, directors or trustees of the employer-sponsor, or family relatives of such members.

The definition is intended to ensure that all members of self managed superannuation funds are in a position to protect their own interests, minimising the need for an external body to oversee and protect their interests.

Superannuation Supervisory Levy

The Superannuation Supervisory Levy is intended to fund the regulation of superannuation funds. The Government has announced changes in the structure of the Levy to more accurately reflect the true regulatory costs for self-managed and other funds.

For self-managed funds, the levy will be reduced from $200 to below $50 per fund. The level for funds other than self-managed funds will be determined by APRA with the objective of recovering regulatory costs.

Access Denied to Superannuation for Housing

The Government has closed the door on any scheme to permit access to superannuation savings to assist in purchasing a home.

Measures Introduced up to the 1998-99 Budget

Member Choice of Superannuation Funds

Taxation Laws Amendment Bill (No.7) 1997 was introduced on 4 December 1997 and among other things, proposes amendments to the Superannuation Guarantee (Administration) Act 1992 (SGA Act) to implement the choice of fund requirements, as foreshadowed in the 1997-98 Budget, but with some modifications.

Under proposed Part 3A of the SGA Act, employers will have to provide employees with a choice of funds as to where compulsory employer superannuation contributions for the employees are made. An employer may meet the choice of fund obligations by:

• offering employees a limited choice, i.e. a minimum of four complying superannuation funds or Retirement Savings Accounts (RSA) must be offered to each employee, or
• providing employees unlimited choice, ie the employee may select any complying superannuation fund or RSA as his or her chosen fund.

Employers may also comply with their obligations if the superannuation support for the employee is provided in accordance with formal or informal workplace agreements or State industrial awards, or is made to an unfunded public sector scheme or made before certain dates.

An employer who makes superannuation contributions to a fund or RSA (including notional contributions to a defined benefit scheme) in respect of an employee that does not comply with the choice of fund requirements will incur an increase in superannuation guarantee (SG) shortfall for that employee, based on 25 per cent of the shortfall that would apply if the contributions had not been made.

The amendments apply from the date of assent to the Bill. To avoid incurring an increase in SG charge, employers will have to comply with the choice of fund requirements from 1 July 1998(3) for new employees (i.e. those who commenced employment on or after that date) and from 1 July 2000 for existing employees (i.e. those who were employed immediately before 1 July 1998 and continue to be employed).

The Bill also makes consequential amendments to the Retirement Savings Accounts Act 1997 and Superannuation Industry (Supervision) Act 1993.

When Must a Choice of Funds be Offered?

An employer must offer a choice of funds to an employee within 28 days of:

• the employee commencing employment with the employer
• the employee making a written request, although an employer is not required to offer a choice if the employee's request is made within 12 months of the last offer made by the employer, or
• the employer becoming aware that it is unable to contribute to a chosen fund or a default fund.

An employer may also offer a choice of funds at any time.

An employee may at any time propose a fund as a chosen fund and, if that fund is accepted, the employer is not required to proceed with an offer of choice of funds.

How Must a Choice be Offered?

An employer who is required to offer an employee a choice of funds may use one of two options, being either a limited choice offer or an unlimited choice offer. As this requirement applies in respect of each employee, an employer may use one option for all employees or one option for some employees and the other option for other employees.

The choice of fund requirements must also be met separately by each employer of an employee. Therefore an employee's choice of fund under an offer made by an employer will not be the employee's chosen fund in respect of another employer.

• at least one public offer superannuation fund
• at least one RSA or capital guaranteed fund
• if there is one or more standard employer-sponsored funds of which the employer is a standard employer-sponsor and the employee is eligible to be a member, at least one of those funds
• if there is one or more 'industry-based superannuation funds' of which the member is eligible to be a member, at least one of those funds.

• the offer must be in writing and dated
• a limited choice offer must state the names of the funds offered and contain prescribed information about each fund
• employees have 28 days from the offer date in which to make their choice. A choice made after 28 days is not effective unless the employer agrees to accept it. If an employee receives a limited choice offer, the chosen fund must be one of the funds offered
• the offer must state the name of the default fund if the employee does not make a choice within 28 days of the offer, and contain prescribed information about the default fund.

Changes to Early Release of Superannuation Benefits

The Government modified aspects of its 1997-98 Budget proposals regarding the early release of superannuation benefits. The changes were announced in November 1997 and have been implemented by amendments to the Superannuation Industry (Supervision) Regulations and the Retirement Savings Accounts Regulations.

Preservation Threshold

The amendments insert a new condition of release enabling a preserved benefit which is less than $200 to be accessed on termination of employment on or after 1 July 1997. The previous threshold of $500 had been removed from 1 July 1997 so that all preserved balances would remain in the superannuation system.

'Severe financial hardship'

The regulations amend the objective test for 'severe financial hardship'. A person will be taken to be in 'severe financial hardship' if the person is in receipt of Commonwealth income support for a continuous period of 26 weeks and satisfies a subjective test of 'severe financial hardship' to be administered by the fund trustee. The fund trustee must be satisfied that the person is unable to meet reasonable and immediate family living expenses.

In addition, persons aged 55 years and 39 weeks or over are taken to be in 'severe financial hardship' if they have received Commonwealth income support for a cumulative period of 39 weeks after turning 55 and they are not gainfully employed (full or part-time) when applying.

The regulations are also amended so that the maximum amount that can be released on the ground of 'severe financial hardship' in any year is reduced from $15 000 to $10 000.

Compassionate grounds

More flexibility is introduced in the arrangements for the release of benefits on compassionate grounds by allowing the Insurance and Superannuation Commissioner a qualified discretion to approve cases that are consistent with the objective criteria introduced in July 1997.

These criteria replace the current broad discretion of the Insurance and Superannuation Commissioner to release superannuation benefits on compassionate grounds, with certain defined criteria which must be satisfied. 'Compassionate' grounds cover payments:

• to treat life-threatening illnesses
• to prevent foreclosure by a mortgagee or the exercise of an express or statutory power of sale over the family home
• for medical transport
• for home and vehicle modifications to accommodate the special needs of a severely disabled person or dependant
• for palliative care, funeral and burial expenses.

Permanent departure from Australia

The regulations provide a transitional period where preserved superannuation can be accessed on the ground of permanent departure from Australia. Fund trustees can release an amount on the ground of permanent departure in respect of members who apply for release of their benefits and permanently depart overseas before 1 July 1998.

Endnotes

1. The Australian Financial Review, 21 May 1998, p. 12.
2. The Australian Financial Review, 14 May 1998, p. 40.
3. On 13 May 1998 the Assistant Treasurer, Senator Rod Kemp, announced that the choice of superannuation fund regime will now commence on 1 July 1999.

The Budget and Commonwealth Employment - Jennifer Curtin and Ben Ryland

According to the Australian Bureau of Statistics, Commonwealth Government employees are defined as:

While the Commonwealth Budget can be expected to have an impact on employment by all such bodies, it only directly affects employment levels in those agencies and departments which receive their funding through the Commonwealth Public Account (see Table XII of Statement 4, Budget Paper No. 1). This excludes all those Australian Public Service (APS) agencies funded by other means, many of which (for example the Health Commission) are significant employers, but includes serving military personnel who are not counted under the Public Service Act 1922 as reported in the Statistical Bulletin.(2) Total average staffing levels (ASL) reported in the Budget Papers are higher than the APS numbers reported in the Bulletin because the number of serving military personnel exceeds the number of Australian Public servants not paid through the Commonwealth Public Account.

The Commonwealth public sector has been shrinking in employment terms since the mid-1980s. The level of overall Commonwealth public sector employment stood at 434 400 in 1985 and had declined to 225 500 by 1995. Of this total, the number of Commonwealth public servants (that is those covered by the Public Service Act), declined from 173 700 in 1985 to 146 200 in 1995.(3)

Immediately following the 1996 Election, the Howard Government committed itself to cut 2 per cent from expenditure totalling approximately $8 billion over the following two year period. In its first Budget, the Government announced that it expected the number of people employed under the Public Service Act would decline by 10 500. In the 1997-98 Budget it was then predicted that there would be cuts of 16 500 in the number of Commonwealth public servants. Actual figures were different to those predicted. Between 1996-97, there was a reduction of 11 200, slightly more than expected, while in the 1997-98 period, the decline of 12 200 was less than estimated.

This year the Government is forecasting a decline of 8984, with the most significant reductions occurring in Department of Employment, Education, Training and Youth Affairs and Defence, more about which is discussed below. It should be noted that the Government, through the Budget process, allocates running costs to departments and agencies but does not set staffing targets. Departments and agencies determine their own staffing levels subject to resourcing constraints.

The remainder of this article focuses on the direct effects of the 1998-99 Budget on changes in Australian Public Service employment in those bodies funded under running cost arrangements. The statistics used in the Budget Papers to express changes in staffing arrangements are reviewed, followed by a table which outlines in more detail the shifts in staffing levels over time. The final section provides a closer look at the programs where these reductions are concentrated.

Average Staffing Levels (ASL)

The Budget Papers use two statistics for reporting on staffing changes in the Commonwealth Public Service for the Budget year. These include Point-in-time estimates (provided by the Public Service and Merrit Protection Commission) of the actual number of people employed at specific points in time, and estimates provided by running costs agencies of the average staffing level (ASL) for the current and Budget year. ASL figures are the most appropriate for funding purposes, but do not necessarily indicate the change in total staff numbers that occurs from the end of one financial year to the next in the APS.

As ASL figures reflect the average number of staff receiving salary or wages over the financial year, the timing of staff reductions significantly impacts on ASL figures as compared to Point-in-time figures. If the staff reductions are expected to occur early in the Budget year then the Average Staffing Level estimate will be lower for that year compared to Point-in-time estimates).

On the other hand, when the separations occur at the end of the financial year the ASL will be higher compared to the Point-in-time estimate of actual staff numbers and consequently there would appear to be little or no reduction in ASL in that financial year.

While we are primarily interested in the numbers of people the Commonwealth employs by agency/department, the Budget Papers focus on ASL because of their primary concern with comparing staffing levels with the running cost appropriations. Estimates of likely changes in staff numbers over the financial year are only provided at the aggregate level. Whereas departments and agencies supply the data on which these aggregate estimates are based, it is provided on a commercial-in-confidence basis and is therefore not publicly available. In addition to the differences between ASL and Point-in-time estimates of staffing levels already mentioned, comparisons are further complicated because ASL refers to equivalent full-time staff and staff numbers include part-time staff. To cap it off, the total Point-in-time estimates published in the Budget Papers cover the whole of the Australian Public Service, not just those paid through the Commonwealth Public Account.

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 employment in particular financial years, rather than reflecting the actual number of staff being employed at the end of the successive financial years or at specific points in time. ASL numbers are the most significant for funding purposes but do not reflect the total change in staff numbers from the end of one financial year to the next in the Australian Public Service. Movements in ASL as compared to point-in-time figures vary due to the difference in the coverage of the two series (particularly in the Defence portfolio where all staff are covered in ASL figures but only civilian staff are covered in point-in-time figures). Comparisons between the two series are also made difficult because of the partial ASL effect of staffing changes during the financial year (for example with the establishment of Employment National on 1 May 1998), the amalgamations of agencies and variations in contracted employment.

Changes to Average Staffing Levels 1997-98 to 1998-99

Estimates of ASL for 1997-98 and 1998-99, ranked in order of change

(derived from Table XII, Statement 4, Budget Paper No. 1)

Implications for DEETYA, Defence and Finance and Administration.

The Department of Employment, Education, Training and Youth Affairs is estimated to incur the largest decrease in ASL over the next twelve months (4353). The majority of these cuts are in the Employment Services and Targeted Assistance sub-programs as a result of the closure of the Commonwealth Employment Service (CES) and the establishment of the Job Network. Staff years have been reduced from 3993.0 to 860.5 in Employment Services and from 1556.6 to 681.3 in Targeted Assistance. With respect to redundancies the amount of $25 million was originally provided in the 1997-98 Budget round as part of an interim allocation of $180.5 million over two years for the capitalisation of Employment National Limited. However, because of a lower than anticipated number of staff transfers from the CES to Employment National, the sub-program has been attributed with $25 million in this Budget Round to help fund increased redundancy costs.

The Department of Defence ASL is expected to decline by 1795 in the next twelve months. This decrease is primarily a result of the Defence Reform Program. It is expected that the Permanent Defence Force average funded strength for 1998-99 will decline by 1713, while it is planned that total civilian personnel will decrease by 447. A $60 million per annum provision has been programmed in each year of the Budget and Forward Estimates (1999-2002) for Defence Reform Program implementation costs. The major component of this is the expected cost of voluntary redundancies.

In October 1997, the Department of Finance merged with the Department of Administrative Services to become the Department of Finance and Administration. At the time of the merger some fears were expressed as to the number of potential job losses which, combined with the ongoing outsourcing of corporate services, might have been over 200.(4) However, the estimated ASL for the 1998-99 period is only 155 less than the ASL estimate for the 1997-98 period.

It is noted in the new Budget measures that the efficiencies gained from the restructuring have realised the following ongoing savings.

1998-99 ($m)	1999-2000 ($m)	2000-01 ($m)	2001-02 ($m)
-3.0	-25.4	-25.9	-26.3

Conclusion

The reductions in Australian Public Service employment were alluded to by the Howard Government early in 1996. This decline appears to be part of an overall reduction that has occurred over the last decade in Australia and reflects a general trend which is evident. In other English-speaking countries. The extent to which further cuts can be made remains somewhat dependent on the extent to which contracting out is taken up by the Federal Government.

Endnotes

1. Australian Bureau of Statistics, 'Wages and Salary Earners', (6248.0).
2. 'State of the Service', Australian Public Service Statistical Bulletin 1996-97.
3. Geoff Winter, Whither Public Sector Employment?, Research Note No. 17, Department of the Parliamentary Library, 1997-98.
4. Canberra Times, 14 October 1997 p. 1.

Australian Health Care Agreements and Funding for Public Hospitals - Paul Mackey

The current funding arrangements for public hospitals under the 1993-98 Medicare Agreements cease on 30 June 1998. The Government has proposed new Australian Health Care Agreements for 1998-2003 and, although only Queensland and the ACT have reached agreement in principle with the Commonwealth, estimates of funding for the first four years of the agreements are included in the 1998-99 Budget. This article provides background on the public hospital funding arrangements together with an analysis of key issues in the dispute between the different levels of government. The likely scenario after 30 June 1998 is also explored.

Background

Expenditure on health is a significant issue in Australia, as in many other countries. In 1996-97, Australia spent $43.2 billion on health, which represented 8.5 per cent of GDP. While health services do account for an increasing proportion of the expenditure of Commonwealth, State and Territory governments, health insurance funds and individuals, it is important to realise that Australia's total expenditure on health has been kept within acceptable levels and has remained around 8.5 per cent of GDP since 1991-92.(1) Australia spends around the average of OECD countries on its health services; the United Kingdom, New Zealand and Japan spend slightly less, while Canada, Germany and the United States spend more.

Health issues are also of increasing significance to the electorate. For example, a recent public opinion poll found that 34 per cent of those surveyed stated that health issues would have a 'significant influence' on their voting intention at the next Federal election, while 52 per cent of those surveyed indicated that 'their concerns about the public hospital system have increased since the last election'(2).

In 1996-97, the Commonwealth Government funded 45.5 per cent of total health expenditure, State and local governments funded 23.2 per cent and the non-government sector (mainly private health insurance funds and out-of-pocket costs for individuals) funded 31.3 per cent. Public hospitals receive a significant proportion of total health expenditure, accounting for 27 per cent of such expenditure in 1995-96(3).

Funding for public hospitals is provided by both the Commonwealth and State and Territory governments. The Commonwealth's funding to the States and Territories for their public hospitals is underpinned by five-year Medicare Agreements, which articulate the principles of Medicare and detail the roles and responsibilities of each level of government. The current Medicare Agreements between the Commonwealth and each State and Territory will expire on 30 June 1998. The Minister for Health and Family Services, Dr Wooldridge, announced last year that the new agreements are to be renamed the Australian Health Care Agreements. This renaming reflects the intention to broaden the scope of the agreements beyond their current coverage.

As was the case in 1993, negotiations between the Commonwealth and the States and Territories on the new agreements have been bedevilled by politics but the situation appears to be worse on this occasion, with both levels of government engaging in claim and counter claim about their respective efforts under the current agreements and on the quantum of 'new' funding available under the new agreements. To date, only Queensland and the ACT have agreed in principle to the funding and terms of the Australian Health Care Agreements. A brief chronology of events since negotiations began on the new agreements is included as an appendix to this paper.

Australian Health Care Agreements: Budget Funding

Despite only Queensland and the ACT reaching agreement in principle with the Commonwealth to date, the 1998-99 Budget provides for the appropriation of funding for the provision of public hospital services in all States and Territories. A discussion of the likely situation if agreement is not reached with the other States and the Northern Territory together with an explanation of the Commonwealth's powers in this area of Specific Purpose Payments to the States appear later in this paper.

According to the Portfolio Budget Statements of the Health and Family Services Portfolio, outlays under the Australian Health Care Agreements in 1998-99 are estimated to be some $5.3 billion. This compares with an estimated outcome under the final year of the Medicare Agreements in 1997-98 of $4.9 billion(4). Taking account of savings in the Medicare benefits Sub-program and increased funding in other Sub-programs, the Portfolio Budget Statements estimate that total increased funding under the Australian Health Care Agreements will be as follows:

Australian Health Care Agreements: Increased funding for provision of designated health services to public patients

Source: Health and Family Services Portfolio, Portfolio Budget Statements 1998-99: 283

Australian Health Care Agreements: issues in the dispute

The key issue in this dispute between the Commonwealth and the majority of States and Territories relates to funding. Dissatisfaction of both levels of government with the current Medicare Agreements has exacerbated negotiations on the new agreements. For example, both the present and previous Commonwealth governments have alleged that the States and Territories have engaged in cost shifting, against the spirit of the agreements. For their part, the States argue that the Commonwealth has not fulfilled its obligations under the agreements with regard to the falling level of private health insurance because, while three reviews of its effect have been conducted, no extra funds have flowed to the States.

The Prime Minister has described the Commonwealth's offer under the Australian Health Care Agreements as a 'very generous increase of 15 per cent, in real terms, in health funding to the States over the next five years'(5). However, in their submission to the Senate Community Affairs Legislation Committee, the Health Ministers of New South Wales, Victoria, Western Australia, South Australia, Tasmania and the Northern Territory argued that 'the Commonwealth's claims about its funding offer do not stand up to close scrutiny'(6). This dispute essentially revolves around a definition of 'new' funding. The States and the Northern Territory claim, for example, that funding under the Australian Health Care Agreements for palliative care and mental health was also included under the current Medicare Agreements and therefore cannot be regarded as 'new' funding, but rather, as funding for ongoing programs. The Commonwealth, for its part, argues that the funding for mental health under the current agreements was for the implementation of the National Mental Health Strategy, including innovative projects and to assist States in the reform of their psychiatric hospitals, while the palliative care funding was for a limited term:

In addition to this dispute over the quantum of 'new' funding, the States and Territories are seeking an increase of $1.1 billion per year in the base level of Commonwealth funding under the new agreements.

Several factors complicate any analysis of the adequacy of current and proposed levels of funding for public hospitals. It is very difficult to ascertain the actual amount of funding provided for public hospitals by the Commonwealth and each of the States and Territories. This is the case under the current Medicare Agreements and appears likely to continue to be the case under the Australian Health Care Agreements. Although funding figures are available from various sources, no single set of figures provides the complete picture. For example, the Commonwealth maintains that funding for each jurisdiction via the specific purpose health care grants for hospitals cannot be considered in isolation and that Financial Assistance Grants and the effect of the application of equalisation relativities by the Commonwealth Grants Commission also need to be taken into account. Trying to calculate exactly what a particular state actually spends on its public hospitals from its 'own source' outlays (i.e. discounting the effect of Commonwealth grants) is similarly difficult. Hence the Commonwealth and the States and Territories have been able to use different sets of figures when promoting the merits of their respective positions.

Another factor is the impact of cost shifting which is alleged to occur at both levels of government. Measuring the extent and effect of cost shifting to date has proven difficult, if not impossible. Accurately measuring the impact on public hospitals of falling levels of coverage of private health insurance is another factor. While many assertions have been made by interested players and three reviews have been conducted by Commonwealth and State officials, little agreement has ensued on the actual effect on public hospitals of different levels of private health insurance coverage. A further factor, and perhaps the most problematic, is that it is not known what level of funding is necessary to maintain or improve the health of the population(8). Similarly, it is not known what level of funding is necessary to offer public hospital services equitably and efficiently to the Australian population.

What if the Australian Health Care Agreements are not signed by all States and Territories by 30 June 1998? What if the Health Legislation Amendment (Health Care Agreements) Bill 1998 is rejected by the Senate?

The Health Legislation Amendment (Health Care Agreements) Bill 1998:

The Bill has passed through the House of Representatives and has been referred by the Senate for consideration by the Senate Community Affairs Legislation Committee. The Committee invited submissions and held a public hearing on 5 May 1998. The Committee is due to present its report on the Bill by 1 June 1998.

If the Health Legislation Amendment (Health Care Agreements) Bill 1998 does not pass the Senate, separate legislation will be required to appropriate public hospital funding grants. This legislation will be required to be introduced before 30 June 1998. In the event that any State has not reached agreement with the Commonwealth on the Australian Health Care Agreements by 2 June 1998 (which appears likely), separate legislation will be required to appropriate hospital funding grants for that State. This legislation will be required to be introduced before 30 June 1998.

The Minister for Health and Family Services, Dr Wooldridge, has stated that funding by the Commonwealth for the provision of public hospital services will continue to be via Specific Purpose Payments (SPPs) and that 'in the case of any governments which have not signed an agreement by this date, the SPPs will require the relevant government to meet the health care principles of free public hospital care, admission on the basis of clinical need and equity of access'(10).

The power of the Commonwealth to grant monies to the States is set out in section 96 of the Constitution. Specific Purpose Payments (SPPs) are made under section 96 which provides that the Commonwealth Parliament may grant financial assistance to any state on such terms and conditions as it sees fit. In a submission to the Joint Committee of Public Accounts and Audit, the Treasury noted that:

The Commonwealth has considerable power under section 96 of the Constitution to attach conditions to SPPs. Acceptance by a state of SPP funding for public hospital services will require the state to abide by any conditions imposed by the Commonwealth. In an article(12) detailing the powers of the Commonwealth and the States in health policy, the following points are made about the significance of section 96 of the Constitution:

The potential for a State to ignore the wishes of the Commonwealth has already been canvassed by the Tasmanian Minister for Community and Health Services, Mr McKay, who was reported recently as stating that consideration would be given to imposing fees in public hospitals following the expiry of the current Medicare Agreement, if agreement had not been reached on the Australian Health Care Agreement. In the recent public hearing on the Health Legislation Amendment (Health Care Agreements) Bill 1998, Mr McKay acknowledged that the Tasmanian Government had not sought legal advice on this issue but stated that 'if there is no Medicare agreement, then states, depending on their own individual legislation, would be able to make that decision (charging fees) in light of trying to maintain a viable public hospital system'(13). For his part, the Commonwealth Minister for Health and Family Services, Dr Wooldridge, replied to his Tasmanian counterpart in the following terms:

However, there are political limitations on the positions which the Commonwealth and the States may take over funding by the Commonwealth for public hospital services following the expiry of the current Medicare Agreements. For example, a state which refuses to accept SPP funding for public hospital services from the Commonwealth has limited options to raise alternative funding for its hospital services. The Commonwealth Government, particularly prior to the next election, is likely to find it difficult to penalise a State government which refused to abide by conditions imposed by the Commonwealth for the receipt of SPP funding for public hospital services.

If the current impasse between the Commonwealth and a State continues beyond 30 June 1999 and agreement is not reached over the Australian Health Care Agreements, a Bill will be required each year to appropriate public hospital funding grants for that State. Should there be a change of government at the Commonwealth and/or State level, the new Government will not be bound by any ongoing (ie beyond that year) agreement for the funding and provision of public hospital services.

Conclusion

There is little consensus apparent on the future requirements for funding of Australia's public hospitals. This should perhaps not be surprising given the unsatisfactory and counter-productive split of roles and responsibilities of the different levels of government. It now appears likely that Australian Health Care Agreements will not be signed between the Commonwealth and each State and Territory prior to the expiry of the current Medicare Agreements on 30 June 1998. In addition, it is not yet clear whether the Health Legislation Amendment (Health Care Agreements) Bill 1998 will pass the Senate. As a result of all these factors, the attention of the electorate is likely to remain focussed on health issues in general, and public hospitals in particular, in the lead-up to the next Federal election.

APPENDIX: Australian Health Care Agreements: a Brief Chronology of Events

23 May 1997: Commonwealth, State and Territory Health Ministers agree on five principles to underpin negotiations of new agreement. Ministers also agree that their officials should develop papers addressing a range of issues relevant to the new agreements. These papers to be considered by Ministers at their next meeting on 1 August 1997.

1 August 1997: Health Ministers reaffirm vision and principles agreed at 23 May meeting and agree to a set of four 'building blocks' for the new agreements. Ministers also agreed to further discussions on outstanding issues and proposals and agreed to meet again in November 1997.

19 December 1997: Discussions held between the Commonwealth, State and Territory Health Ministers to consider an offer from the Commonwealth which would reportedly increase funding by $1.7 billion over the five years of the agreements. States reject the Commonwealth's offer.

15 January 1998: The Commonwealth Minister for Health and Family Services offers an incentive payment of $100 million to help the States and Territories reduce elective surgery waiting lists, if agreement is reached on the Australian Health Care Agreements by 16 March 1998. The ACT is the only jurisdiction to agree in principle to the Commonwealth's offer.

19 February 1998: The States and the Northern Territory reject a new offer from the Commonwealth which increased the $100 million incentive payment by a further $20 million.

10 March 1998: Commonwealth increases its original base funding offer to the States and Territories by a further $1.1 billion to $2.9 billion over the five years of the agreements. This offer was rejected by the States and the Northern Territory. Further consideration of the issue to be pursued at the Premiers' Conference.

12 March 1998: Health Legislation Amendment (Health Care Agreements) Bill 1998 introduced into the House of Representatives.

13 March 1998: Prime Minister accuses State and Territory governments of reducing their hospital funding in the early years of the current Medicare Agreements (1993-94 and 1994-95).

21 March 1998: Premiers' Conference to discuss amongst other issues, health funding and the Australian Health Care Agreements. Premiers and Chief Ministers vote to adjourn the meeting after 90 minutes.

26 March 1998: Health Legislation Amendment (Health Care Agreements) Bill 1998 passes the House of Representatives.

il 1998: Senate refers the Bill to the Senate Community Affairs Legislation Committee. The committee is due to present its report on 1 June 1998.

27 April 1998: Queensland and Commonwealth governments reach agreement in principle on the Australian Health Care Agreement.

5 May 1998: Senate Community Affairs Legislation Committee holds a Public Hearing on the Health Legislation Amendment (Health Care Agreements) Bill 1998. Evidence given by Health Ministers from New South Wales, Victoria, Western Australia, South Australia, Tasmania and officials of the Commonwealth Department of Health and Family Services.

Endnotes

1. Australian Institute of Health and Welfare, '1996-97 health expenditure figures', Media Release, 27 April 1998.
2. 'New Morgan poll shows health concerns shaping up as major election issue', News Release, Medical Benefits Fund of Australia limited, 23 February 1998.
3. Australian Institute of Health and Welfare, op cit.
4. Health and Family Services Portfolio, Portfolio Budget Statements 1998-99, Budget Related Paper No. 1.8: 110.
5. 'Transcript of the Prime Minister the Hon. John Howard MP Press Conference, Prime Minister's Courtyard, Parliament House', Press Release, Prime Minister, 20 March 1998.
6. Senate Community Affairs Legislation Committee, 'Submission Number 10: States and Northern Territory Governments (joint submission)', Health Legislation Amendment (Health Care Agreements) Bill 1998: 4.
7. Senate Community Affairs Legislation Committee, Reference: Health Legislation Amendment (Health Care Agreements) Bill 1998, Proof Committee Hansard, 5 May 1998: CA84.
8. Australian Institute of Health and Welfare, Australia's Health 1996, AGPS, Canberra, 1996, p. 124.
9. House of Representatives, Debates, 12 March 1998.
10. 'Health Care Agreements Legislation, the Senate and Labor', Press Release, Minister for Health and Family Services, 22 April 1998.
11. Department of the Treasury, Submission to the Joint Committee of Public Accounts and Audit Inquiry into the Administration of Commonwealth-State Agreements for Specific Purpose Payments.
12. K. Wheelwright, 'Commonwealth and State Powers in Health: a Constitutional Diagnosis', Monash University Law Review, v. 21, no. 1 1995, pp. 53-83.
13. Senate Community Affairs Legislation Committee, Reference: Health Legislation Amendment (Health Care Agreements) Bill 1998, Proof Committee Hansard, 5 May 1998, p. CA79.
14. 'States will be required to observe Medicare principles', Media Release, Minister for Health and Family Services, Hon. Dr M Wooldridge MP, 26 April 1998.

Budgetary Assistance to Primary Producers - Peter Hicks

Introduction

By international standards Australia's rural industries receive comparatively little assistance from government. According to the Industry Commission (IC) the main form of assistance to the rural sector continues to be domestic marketing arrangements, with tariffs and budgetary measures accounting for smaller shares of the total assistance. Budgetary measures which assist farm businesses include Commonwealth contributions to research and development (R&D) funding, adjustment assistance, and, tax concessions and expenditures. In addition there are welfare support programs specifically targeted at farm households.

This article discusses the nature of Commonwealth budgetary outlays to the rural sector, trends in those outlays and recent policy developments involving Commonwealth outlays to agriculture including the landcare tax rebate announced in the 1998-99 Budget. The adjacent table shows the main categories of Commonwealth outlays to agriculture, forestry and fishing and the level of these outlays since the late 1980s. Revenue items which offset these outlays are also shown.

Outlays to Agriculture, Forestry and Fishing

Industry Specific Outlays

The large bulk of these outlays comprise the proceeds of levies on primary producers (see line 13 in the table) and are used to fund the various statutory marketing and R&D organisations that characterise Australian agriculture. For most industries the Commonwealth also provides a matching contribution for R&D of up to 0.5 per cent of the gross value of production.

In the case of wool, outlays include payments to Wool International to manage the disposal of the wool stockpile which accumulated in the early 1990s and repay the associated debt. A major component of the outlays for the dairy industry, is the assistance provided through the industry Domestic Market Support Scheme which is due to terminate in June 2000. For both the wool and dairy industries these particular payments are also funded from producer levies.

General Assistance

This comprises a range of measures which are not targeted to any particular primary industry. However, in the case of the Diesel Fuel Rebate Scheme (DFRS), which is easily the largest single form of budgetary assistance to primary production, it is likely that the cropping industries are the major beneficiaries.

Under the DFRS, which is also the major item of budgetary assistance to the mining sector, a rebate of excise or customs duty is available on diesel fuel used for eligible activities. The DFRS recognises that while the excise on diesel fuel is intended to raise funds from road usage for the purposes of road funding, a considerable amount of diesel fuel is used as a business input in offroad activities. For 1998-99 there are budgeted DFRS outlays of $636 million and $866 million for primary production and mining respectively.

The other major item of general assistance is the outlay for quarantine and inspection services for the export and import animals, animal products, plants and plant products as well as the quarantine surveillance of arriving vessels, persons and goods. Offsetting these outlays is the revenue from the primary industry charges (see line 12 in the table).

The Commonwealth's rural adjustment and Agriculture Advancing Australia programs are also included under general assistance. These are discussed further later in this article.

Natural Resources Development and Management

These outlays refer to the water, land and forest management programs primarily within the Department of Primary Industries and Energy (DPIE), and include the Commonwealth's contribution towards the Murray-Darling Basin Initiative.

General Administration

This category of outlays comprises running costs for DPIE.

Trends in Outlays

The relevant measure for assessing the 'true' level of Commonwealth Government budgetary assistance to farmers is the net outlays figure as shown in the table. This takes account of those outlays which are funded by way of primary producer levies and charges. In fact, earlier Budget statements reported the net outlays for specific sectors.

The table also shows that while there has been an upward trend in net outlays, this is largely explained by the increased outlays for the DFRS and, for the last two years shown, increased funding for natural resources programs. The main reason for the increase in DFRS outlays-in 1996-97 they were almost double that of 1988-89-is the increase in the rate of diesel excise levied. The excise on diesel was 21.53 c/ltr on 1 August 1988 but had reached 34.697 c/ltr as at 1 February 1997-an increase of over 60 per cent.

Although primary production only accounts for a small share of total Budget outlays, this share has been gradually declining. In 1998-89 gross outlays for agriculture, forestry and fishing accounted for 1.9 per cent of total underlying outlays and by 1998-99 this share had fallen to 1.5 per cent.

Recent Policy Developments

In the 1997-98 Budget the Government formally announced funding for its Integrated Rural Policy Package (IRRP). It also announced termination of the long standing Rural Adjustment Scheme (RAS) with the savings redirected towards the IRRP. The Government also advised that details of the IRRP would be announced later in the year.

Development of the IRRP had already been underway for some time through a series of reviews including the Mid-Term Review of the RAS, the National Rural Finance Summit Activating Committee Report, the Special Rural Task Force, the Review of the Special Rural Taskforce and the Review of the Rural Communities Access Program.

The most significant of these reviews in terms of both funding and policy measures was the Mid-Term Review of the RAS, also known as the McColl Review. Rural adjustment assistance has been provided since 1935 through a range of schemes. A single scheme for rural adjustment (RAS) was established on 1 January 1977. The main assistance mechanisms were loans at concessional interest rates, loans (convertible to grants) for non-viable farmers leaving the industry and welfare assistance for non-viable farmers considering leaving the land. In 1985 interest subsidies replaced concessional loans as the major form of adjustment assistance.

The McColl Review found that the RAS was ineffective and recommended a major directional change for Government involvement in the farm adjustment process. It concluded that the RAS was not appropriate to the current and expected adjustment needs of Australian agriculture. Retention of interest rate subsidies was considered not justifiable partly because they were only reaching a small band of farmers with the great majority of farmers unable to access them and hence not beneficiaries. While individual enterprises may have benefited, there has been no marked impact on the rural sector's competitiveness.

Thus the replacement of RAS was a major policy objective in the Government's IRRP which was launched in September 1997 by the Prime Minister and titled 'Agriculture - Advancing Australia' (AAA). The total value of AAA as announced was $518 million with the majority of AAA measures to be funded for four years.

The aim of the Government's AAA package is to promote a self-reliant, productive rural sector supported by targeted measures to:

• help individual farm businesses profit from change
• ensure farm sector access to an adequate safety net
• provide positive incentives for ongoing farm adjustment, and
• encourage social and economic development in rural areas.

In terms of Budget outlays, the major allocations announced by the Prime Minister for AAA measures were:

Farm Family Restart Scheme (FFRS) - $120 million for welfare support and adjustment assistance to farmers who wish to leave the industry. This scheme commenced operation on 1 December 1997. Farmers can receive income support for up to one year and, whilst they are not obliged to put their farm on the market, they must seek professional business advice. Access to a re-establishment grant of up to $45 000 is also available and is also subject to an assets test.

RAS Transitional Funding - $116 million to meet existing commitments for interest rate subsidies, re-establishment and ongoing training and advice.

Retiring Farmer Assistance - $78 million to allow older farmers to transfer ownership of the farm to a younger generation, retire and have immediate access to the age pension.

Farm Business Improvement Program (FarmBis) - $50 million to develop farm business management skills. Activities to be supported include skills development, farm business and financial planning and advice, farm performance benchmarking, quality assurance, marketing, risk management, rural leadership development and natural resource management.

Another component of the AAA package is the Farm Management Deposit (FMD) Scheme. This amalgamates the present Income Equalisation Deposits Scheme and the Farm Management Bond Scheme. FMD is worth $60 million but this item is a cost to revenue not an outlay.

As a result of the prolonged drought in Eastern Australia, including the emergence of serious drought in the South-East, exceptional circumstances expenditure for drought relief was greater than expected in 1997-98 with a similar outcome anticipated for 1998-99. Overall, the value of the AAA package is now put at $525 million.

Landcare tax rebate

In the 1998-99 Budget Speech the Treasurer announced details of a new rebate for expenditure on landcare works. The rebate will be available to primary producers and businesses using rural land for works such as fencing to exclude animals from an area affected by land degradation, levee or contour banks to control soil erosion, drainage works to control salinity of damage and the eradication of plant or animal pests.

There will be an annual limit of $5000 on the eligible expenditures under each of the two relevant subdivisions of the Income Tax Assessment Act 1997 giving a maximum $10 000 in eligible landcare expenditure. The rebate will be limited to taxpayers with taxable incomes of up to $20 700 a year from primary production. This represents about 70 per cent of farmers. The targeting of the rebate is in response to the problem of the inability of farmers on low incomes to fund major expenditures of this nature.

The Government will shortly be introducing legislation to give effect to the scheme and ensure the rebate is available for the 1997-98 financial year. The allocation of $80 million for a system of Landcare tax rebates/credits was an election commitment of the Government. The Treasurer has advised that $80 million has been set aside from the Natural Heritage Trust to fund the rebate.

Australia's Contribution to the IMF Packages - David Richardson and Krysti Guest

Introduction

Following the financial crisis in East Asia, Australia has agreed to join in the assistance packages negotiated since mid-1997 by the International Monetary Fund (IMF). The current assistance packages for Thailand, Indonesia and South Korea are additional to the standard membership contribution provided by Australia to the IMF. Currently, Australia contributes to the IMF capital base, which provides two mechanisms for lending funds to member countries facing emergencies-the 'general arrangements to borrow' and the 'new arrangements to borrow'. This article sets out the background to the crisis and the packages for the three countries that sought IMF assistance. Some additional background is also provided on the IMF itself in the appendix.

The crisis and the affected countries

The Asian financial crisis started in Thailand in mid-1997, and quickly spread to other Asian countries, most noticeably the Philippines, Malaysia, Indonesia, and South Korea. Ultimately the Asian financial crisis led to the largest ever one-day point loss on Wall Street on 27 October 1997. The IMF arranged for 'rescue packages' for the three countries facing what appeared to be the most severe crises-Thailand, Indonesia and South Korea in that order.

Thailand

In mid-1997 Thailand was facing ever increasing capital outflows. These were putting intolerable pressures on the value of the baht and so the Thai Government called in the IMF for assistance. From mid-1996 Thailand had been experiencing a sharp downturn in exports and slowdown in growth, difficulties in the property markets, a sharp fall in the stock market and weakening of the fiscal position. That was followed by a series of increasingly serious attacks on the baht.

On 20 August 1997, as part of an overall package of reform, the IMF approved stand-by credit for Thailand of up to $US3.9 billion, with $US1.6 billion available immediately and the rest subject to performance targets and program review. The package of measures under the program included:

• a new exchange rate regime based on floating of the baht
• fiscal policy designed to produce a surplus
• ending the support for insolvent financial institutions
• strengthened financial regulation and supervision
• accelerated privatisation, and
• increased emphasis on secondary education and training.(1)

Following a review of the Thai program the IMF has relaxed some of the fiscal austerity implied in the original package, such as the easing of the target for the Budget balance.(2)

In discussions leading up to the announcement of the package Australia, along with China, Hong Kong, Malaysia and Singapore each pledged $US1 billion while Japan pledged $US4 billion. Brunei, Indonesia and South Korea pledged $US0.5 billion each while the World Bank and Asian Development Bank agreed to contribute $US1.5 and $US1.2 billions respectively. The Australian pledge to Thailand involves a currency swap arrangement between the Reserve Bank of Australia (RBA) and the Bank of Thailand. Under this arrangement the RBA provided $US to the Bank of Thailand in exchange for Thai baht; the RBA will earn interest at the US Treasury bond rate; and the deal is to be unwound at the initial exchange rate.(3)

Indonesia

Indonesia has been hardest hit by the Asian financial crisis with massive falls in the exchange rate, stock prices and massive falls in the people's living standards. The IMF believed that Indonesia's structural weaknesses made it especially vulnerable to adverse external developments. It cited domestic trade regulations, import monopolies, lack of transparency and data deficiencies in the business environment, a weak banking system ill-prepared to withstand the financial turmoil in South East Asia, and high levels of corporate overseas debt taken out after a history of stable exchange rates which proved unsustainable.(4)

On 5 November 1997 the IMF announced a package including stand-by credit of $US10.14 billion for Indonesia. The rest of the package includes:

• fiscal measures designed to maintain the surplus
• tight monetary policy
• closing unviable banks
• liberalising foreign trade and investment
• dismantling domestic monopolies
• private sector participation in infrastructure
• expanding the privatisation program and
• increasing the transparency of public sector activities to enhance the quality of governance.

In addition to the IMF credits, the World Bank has pledged $US4.5 billion and the Asian Development Bank $US3.5 billion. Indonesia's own external assets, which are estimated at equivalent to 6 months imports, are committed to the package. In addition, Australia, as well as China, Hong Kong, Japan, Malaysia, Singapore and the US have indicated they would be prepared to consider supplementary finance to support the program in the event the IMF credit arrangements proved insufficient. Australia's commitment is up to $US1 billion.

Recently the IMF and Indonesia had been at something of a stand off and the situation was fluid. Indonesia has been slow to introduce the reforms from the IMF package. For its part, the IMF delayed making payments, but finally agreed to disburse 2.2 billion SDR on 4 May, and equal instalments later following further reviews in May and June.(5)

Following the deterioration in the political situation and civil unrest the IMF postponed a meeting planned for 4 June 1998 to review progress. A further disbursement of $US1 billion from IMF funds was to be conditional on that meeting. The civil and political problems have meant that it is no longer possible for the IMF to review the program so that future disbursements are effectively suspended.(6) Australia was due to disburse $US300 million before 30 June as a result of the 4 May agreement with the IMF. There may now be some doubt about that payment going ahead.

South Korea

South Korea's problems emerged early in 1997 as a number of highly leveraged conglomerates or chaebols became bankrupt as a result of over-investment in steel and cars, and weakened profitability with the cyclical downturn. The bankruptcies weakened the financial system with non-performing loans reaching 7.5 per cent of GDP. The decline in stock prices further reduced the value of bank equity. All of this led to a sharp fall in external finance.(7)

On 4 December 1997 the IMF announced a package including a $US21 billion stand-by credit for South Korea. The package of measures agreed by South Korea includes:

• tight monetary policy with high interest rates to stabilise money and currency markets
• tight fiscal policy
• strengthening the financial system through a firm exit policy for failing companies, market and supervisory discipline and increased competition
• further trade liberalisation
• easing restrictions on foreign ownership, and
• making it easier to dismiss workers.

In addition to the IMF funding, the World Bank has indicated it will provide $US10 billion to support specific structural reform. The Asian Development Bank has promised another $US4 billion. As a second line of defence, Australia along with Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and US have indicated they are prepared, in the event that there is a need for additional resources, to consider supplemental financing. This 'second line of defence' is expected to be in excess of $US20 billion,(8) and was activated over Christmas with the Treasurer, the Hon. Mr Peter Costello MP, announcing an early drawing of $US8 billion on the supplemental support arrangements. Australia's share of the early drawing was expected to be $US330 million.

Financial Impact of Proposed Australian Assistance

Australia has already made some payment to Thailand and is committed to payments to Indonesia and South Korea. For each of the country packages Australia's commitment is up to a maximum of $US1 billion, yet there are no outlays shown in the Budget Papers to reflect those payments. Essentially these are treated as 'off budget' items. Off budget items include financing transactions which may change the nature of the Government's financial assets and liabilities but without influencing the totality of the Government's net financial position.

Suppose there are a million dollars in 10-year bonds that mature. To pay them out the Government decides to borrow another million dollars in the market. The net effect is that there is no outlay or receipt which involves a real transfer of resources between the Government and the private sectors. Hence the Budget Papers would simply classify that as a financing transaction which takes place below the line rather than above the line where ordinary outlays and receipts are recorded. Government to government loans are treated in the same way.

The Australian pledge to Thailand involved a currency swap arrangement between the Reserve Bank of Australia and the Bank of Thailand. This arrangement between the two central banks should have no impact on the Australian Budget. The only exception would be in the unlikely event that the Bank of Thailand was to default on its agreement. In that case the Reserve Bank of Australia would carry a capital loss, which would be reflected in a lower annual dividend being paid to the Australian Government.

While the arrangements with Indonesia and South Korea are also currency swaps, the swaps are government to government rather than central bank to central bank. No funds had been provided to Indonesia or South Korea at the time of the Budget. It had been expected that $US 300 million would be drawn by Indonesia in 1997-98 and $US330 million by South Korea in 1998-99. Each of these loans also carries a risk of default by the participating foreign governments. The civil and political problems in Indonesia may delay disbursement until beyond 1997-98.

Because of the risk of default on these arrangements the Budget Papers mention all three packages in the section headed 'Details of fiscal risks and contingent liabilities'. There is always the risk that one day they may have to be written off and so brought to account as budget outlays, or in the case of the Thailand deal, brought to account through a lower annual dividend from the Reserve Bank of Australia. While the Budget Papers suggest $US1 billion is at risk in each package,(9) in fact it is only the amount actually drawn down that can truly be seen as being at risk at the moment.

Appendix: The International Monetary Fund: Background and Critics

The IMF, along with the International Bank for Reconstruction and Development (the World Bank) and the General Agreement on Trade and Tariffs (GATT), was established at the 1944 meetings at Bretton Woods between non-Communist allied countries. The aim of the meetings was to construct the institutional framework for a post-world war international economic system founded on free trade principles. Key aspects were to establish a system of fixed exchange rates, institute policies that would avoid 'beggar-thy-neighbour' protectionism and provide mechanisms to supply capital for post-war reconstruction.

The key role of the IMF was to provide balance of payment support for countries experiencing temporary balance of payments difficulties. In exchange, the IMF has traditionally required monetary and fiscal austerity designed to overcome balance of payment problems. The IMF also managed the fixed exchange rate system (which since the 1970s has been defunct) and maintains a supervisory role to support a coordinated approach to national and international economic policies.

In addition to purely country support, the IMF has become involved in international strategies and broader themes. For example, the 1970s oil crises meant not only expensive oil for the west, but also a sudden massive flow of funds to the Middle East countries in particular. To offset the outward flow of funds from the oil importing countries, the IMF became involved in 'recycling' the so-called 'petro-dollars' to mainly third world countries suffering as a result of massive increases in the value of their energy imports. The significant loans made during this era are partially responsible for the very significant foreign debt which has plagued many third world countries for the past two decades, and which the IMF has sought to remedy through structural adjustment programs.(10)

The IMF is 'owned' by its members, where control and voting power are directly related to the amount of money each member contributes. The quota is determined in accordance with each country's national income, trade and other economic indicators. This system ensures that the priorities of wealthier countries (the top OECD countries known as the Group of 10) can heavily influence the direction of the Fund. The US is by far the largest quota holder, with 18 per cent of the total vote. As IMF decision-making generally operates according to the '85 per cent' rule, the 18 per cent vote gives the US an effective veto over key IMF decisions.(11) Loan requests go through a 24 strong Executive Board, with representatives from the US, UK, France, Germany, Japan, China, Russia and Saudi Arabia and with other countries represented by voting blocs. Under an agreement, the Executive Director is always a European national (currently Michel Camdessus of France), and the Executive Board is accountable to a Board of Governors, comprised of a representative of each member country.

Member countries are allowed to borrow up to 25 per cent of their quota without any conditions. Beyond this, drawing rights are subject to the imposition of conditions as part of the loan arrangement. Although these conditions can be flexible in accordance with a country's particular situation, since the 1980s most conditions are modelled on variations of what the IMF terms 'structural adjustment programs' or austerity measures. The basic goal of structural adjustment programs is to increase revenue and reduce expenditure. The most frequently imposed elements of an adjustment program include:

• devaluation of the currency and ceilings on domestic credit and other monetary aggregates
• privatisation of government enterprises such as electricity, water and transportation
• reduction in other government expenditure, such as social spending on health, education, and social security systems and a concomitant pressure to privatise such systems, and
• elimination of price controls and other regulatory controls over trade and commerce and elimination of food and other consumption subsidies.

An important point to note is that although the IMF's operation reflects Member country interests, key beneficiaries of IMF policies include private financial institutions. Structural adjustment programs usually have the result of guaranteeing repayment of private bank debt by private and public debtors in a Member State. As a former senior official at the World Bank has stated:

Of course, while IMF programs inevitably 'hurt' the host country, the IMF may also play the convenient scapegoat when there is no alternative to unpopular austerity measures.

Significant criticisms have been levelled at the operation of the IMF from a wide range of sources, both in relation to the Asian crisis and more generally. A common thread in this criticism is that as IMF action is primarily directed at ensuring repayment of debt contracted to private banks, other social and political goals are often marginalised. The Minister for Foreign Affairs and Trade, the Hon. Alexander Downer MP, has raised concerns about the social and political impact of the IMF adjustment program in Indonesia.(13) The Governor of the Reserve Bank of Australia, Mr Ian Macfarlane, has also been critical of the IMF. His concerns are that the IMF should be speedily arranging balance of payments support to cope with the balance of payments crises. It does not help reach a speedy conclusion if the IMF wants to include in the negotiations a range of matters not directly affecting the balance of payments, matters such as the clove monopoly.(14) Arguably the economic downturn would have been less severe if the IMF had not tried to bring about long term structural changes as part of the agreement. The comprehensive and politically sensitive nature of the IMF package made it difficult to reach an early agreement and thereby stabilise the currency.

Professor Robert Wade, an influential commentator on Asian economics, and Frank Veneroso, have argued that the Asian crisis is partly the result of excessive financial deregulation and a willingness of international financiers to lend significant amounts to private firms with no government regulation, resulting in a run on local currency and domestic assets when the economy showed strain. Wade and Veneroso argue that, as the IMF 'rescue packages' are premised on further financial sector deregulation and trade liberalisation in general, this strategy will serve to further entrench key conditions which led to the crisis. They note that:

In attempting to answer why the IMF would adopt such an apparently risky strategy, Wade and Veneroso consider who are the beneficiaries of the IMF adjustment programs. They note that 'there is no doubt that western and Japanese corporations and the multilateral economic and financial institutions are the big winners.' Contrary to the perception that the IMF simply donates funds to struggling countries, Wade and Veneroso suggest that the transfer of wealth is, in fact, ultimately from those countries to certain economic institutions in the North:

The second key criticism of IMF structural adjustment programs is their effect on the structures, or possible structures, of popular sovereignty, substantive democracy and human rights. Anne Orford, an expert in international trade law at the Australian National University, has argued that the key aims of adjustment programs of curbing government expenditure on social services, labour market deregulation, privatisation of government services and full trade liberalisation have significantly constrained:

These areas, which are considered crucial to popular sovereignty, substantive democracy and civil and political rights 'are now treated as legitimately within the province of economists in institutions such as the IMF and the World Bank.'(18) Similarly, Martin Feldstein, President of the National Bureau of Economic Research has criticised the political impact on democracy of adjustment policies, noting that:

In relation to economic and social human rights, many commentators have persistently pointed out that the priorities of adjustment programs have resulted in increasing income disparity and swelling poverty, social dislocation and human rights abuses.(20)

Stanley Fischer, the First Deputy Managing Director of the IMF, has recently responded that 'the answer to the critics is that monetary policy has to be kept tight to restore confidence in the currency and that fiscal policy [in Asian countries] was tightened appropriately but not excessively.' Commenting on the structural changes in the packages, Mr Fischer continued:

Endnotes

1. 'IMF approves Stand-by credit for Thailand', IMF Press Release no. 97/37, 20 August 1997.
2. 'IMF Executive Board completes second review of Thailand's economic program', IMF News Brief, 4 March 1998.
3. 'Australia's participation in support arrangements for East Asian adjustment programs', Treasury Economic Round Up, Summer 1998.
4. 'IMF approves stand-by credit for Indonesia', IMF Press Release no. 97/50, 5 November 1997.
5. 'IMF Executive Board completes first review of Indonesia's economic program', IMF Press Release no 98/11, 4 May 1998.
6. AAP, 21 May 1998.
7. 'IMF approves SDR 15.5 billion stand-by credit for Korea', IMF Press Release no. 97/55, 4 December 1997.
8. 'IMF approves SDR 15.5 billion stand-by credit for Korea', IMF Press Release no. 97/55, 4 December 1997.
9. Budget Paper No 1 1998-99, pp. 2-49.
10. For a discussion of this process, see Susan George, A Fate Worse Than Debt, Penguin, London, 1988, pp. 11-73.
11. Ibid., 55.
12. Jennifer Hewitt, op.cit., 4s.
13. Geoffrey Barker, 'Secret Report Damns Indonesia', Australian Financial Review, 20 March 1998, p. 1, p. 4.
14. The Australian, 12 March 1998.
15. R. Wade and F Veneroso, 'The Asian crisis: the high debt model vs the Wall Street-Treasury-IMF complex', New Left Review, March-April, 1998.
16. Ibid^.
17. Anne Orford, 'Locating the International: Military and Monetary Interventions After the Cold War', (1997) 38(2) Harvard International Law Journal 443 at 465.
18. Ibid., p. 470.
19. Martin Feldstein, 'Refocussing the IMF', Foreign Affairs, March/April, 1998, p. 27.
20. For example, see Waldon Bello, Dark Victory: The United States, Structural Adjustment and Global Poverty, Pluto Press, London, 1990; Anne Orford, op.cit.; Vandana Shiva, Biopiracy: The Plunder of Nature and Knowledge, South End Press, Boston, 1997.
21. Stanley Fischer, 'The IMF and the Asian Crisis', Unpublished speech, Los Angeles, March 20, 1998 (available at www.imf.org).

Commitments to Women - Jennifer Curtin, Krysti Guest and Jackie Ohlin

This article discusses several measures relating to women's organisations, industrial relations, superannuation, social policy and law and justice in the context of a 'whole of government' approach to women's issues.

A 'Whole-of-Government' Approach to Women

With the election of the Howard Government in 1996, there has been an increased focus on taking a 'whole-of-government' or 'mainstreaming' approach to policy initiatives that have an impact on women. The Government views the whole-of-government approach to women's services as 'looking beyond the Office of the Status of Women to all government areas for assistance in advancing the role of women-ensuring that all government agencies take into account the concerns of women'.(1) This means that responsibility for initiatives addressing the needs of women is devolved to the departmental level.

To some extent this has always been the role of the Office of the Status of Women (OSW), that is, to coordinate and audit gender policies developed across portfolios, although in the past women's units also existed within departments. The more recent explicit shift to mainstreaming reflects the ongoing debate about all issues being women's issues and what might be the best way to ensure that women's issues are not peripheral to the mainstream policy-making environment.

The role of OSW under the present Government is primarily to provide policy advice to the Prime Minister and the Minister for the Status of Women on a range of issues including paid and unpaid work, women in public life, violence against women, law and justice and women in business. In designing policy, emphasis is placed on the need to 'gender blend' since separating women from men is 'not productive and not profitable'.(2)

This gender neutral, whole-of-government approach is evident throughout the Hon. Judi Moylan's statement released on Budget night entitled Maintaining our Commitment to Women. New Budget measures for OSW itself were limited to an increase in program funding of $1.056 million to cover domestic violence strategies, discussed in more detail below.(3) As such, the document offers few new initiatives for consideration. Instead the document highlights the legislative and policy initiatives previously developed or announced in a range of portfolios over the last three years and discusses what implications they have for women.

This article discusses several ongoing measures relating to women's organisations, industrial relations, superannuation, social policy and law and justice and concludes by examining some possible implications of adopting a 'whole-of-government' approach to women's issues.

Non Government Organisations (NGOs)

The Government's official policy in relation to the funding of women's organisations is that the majority should seek funding from individual departments, statutory authorities and commonwealth agencies. In relation to the 1997-98 Budget funding round, OSW did not fund organisations that were deemed eligible to apply to other departments for funding. This policy has continued for the 1998-99 Budget round.

The Office of the Status of Women has a continuing role in funding the operational costs of women's NGOs that are considered to be truly national organisations capable of representing the broad issues of concern to Australian women at Commonwealth, State and Community levels.(4) The figure of $500 000 per financial year, with a maximum of $50 000 per group has been allocated for the next 2 years (until 2001). Organisations which received funding under this category in the 1997-98 financial year included the YWCA, Women's Electoral Lobby, Older Women's Network, National Council of Women, Women's Action Alliance, Muslim Women's National Network, Catholic Women's League and Business and Professional Women.(5) Successful applicants for the 1998-99 year have yet to be decided.

In the 1997-98 financial year, OSW reported that $305 000 was allocated to other women's NGOs through mainstream funding from various portfolios. Under the mainstreaming approach, there is no obligation for other portfolios to report to OSW regarding decisions taken on funding of women's NGOs.

A further initiative in this area, originally announced in 1997, has been to fund the Network Exchange of Women's Services (NEWS). This is an interactive website, developed by Families at Work, which has been granted $76 135 for implementing and maintaining the service for the next 12 months.(6) Such information channels between NGOs and the Government are important in providing Government with information on the issues of concern to women in the community.

Women and Work

Working Women's Centres (Sub-program 10.1.1)

The 1997-98 Budget brought with it changes to the funding arrangements of these centres, which had previously been provided with grants under the Working Women's Centre program. The Department of Workplace Relations and Small Business has undertaken fee-for-service contracts with the Centres, whereby the Centres provide industrial relations services for women. Funding was transferred from program funds to running costs and with this change, future funding is no longer guaranteed, but has become subject to the efficiency dividend imposed on the portfolio generally, which is assessed annually. The Department of Workplace Relations and Small Business is continuing to monitor the operation of the Centres to ensure they remain efficient and relevant to the needs of women in the community.

Funding in 1997-98 was $887 078 compared to $915 000 provided the year before.(7) The allocation of funds for the centres for the 1998-99 financial year is still being negotiated. Working Women's Centres play a critical role in informing particularly non-unionised women of conditions, legal requirements and government policies and programs relating to the workplace in both state and federal jurisdictions. Arguably these centres are increasingly important in the new industrial relations environment and may reach women workers who might not be found through the advertising campaigns of the Office of the Employment Advocate. Early research seems to suggest that the call for services has increased significantly since 1996.(8)

Outworker compliance campaign/Information leaflets (sub-program 10.1.1)

In June 1998, the Department of Workplace Relations, in conjunction with the Office of the Employment Advocate and the Department of Industry, Science and Tourism, will begin a three month campaign to assist manufacturers and outworkers to better understand their rights and responsibilities. The campaign is focused on educational seminars, publications, information for employers and a telephone hot-line. The campaign is being funded by the Department for Workplace Relations and Small Business from current portfolio running costs. In its response to the Report on Outworking in the Clothing Industry, the Government indicated it would support a broad education project.(9)

In 1997, the Department of Workplace Relations produced and distributed four leaflets on Women and Workplace Agreements. Funding for this initiative came from running costs of the Workplace Relations Policy Group, where the Equal Pay and Workplace Relations Section is located. Both these measures are in line with the overall advertising campaign being undertaken by the Office of the Employment Advocate regarding Australian Workplace Agreements.

Affirmative Action Agency (Sub-program 10.1.3)

In 1992, the Affirmative Action Act was amended to give the Agency the discretion to waive certain reporting requirements. Implementation of the waiver was introduced by the Howard Government in 1996, whereby those organisations that have achieved successful affirmative action programs (that is those which have a Level Four or Five assessment) will no longer be required to submit reports to the Agency every year. It was argued this would reduce unnecessary paper work for many businesses.(10) The underlying outlays of the Agency were reduced from $2.205 million estimated for 1997-98 to $1.972 million budgeted for 1998-99.

In 1997, 323 organisations, (approximately 11 per cent of the organisations that reported to the Agency) were implementing best practice affirmative action programs.

Data collected over the three years before this suggests steady improvement in the number of organisations implementing affirmative action policies and practices. Organisations that did not comply with the Act were listed in the Annual Report tabled in Parliament at the end of 1997.(11)

Since 1996, the focus of the Agency has been altered to become less focused on sanctions and more focused on encouraging and assisting business to put effective affirmative action programs in place culminating in the Best Affirmative Action Employer Awards. When comparing the Portfolio Budget Statement(12) for 1998-99 with the 1997 Annual Report for the Agency, considerably less emphasis is now given to monitoring the lodging of reports and evaluating the effectiveness of affirmative action programs.

In addition, the future role of the Agency is presently under review in line with the Government's commitment to review all legislation that may restrict competition and impose costs on Australian business. The Head of OSW has argued that pursuing equal opportunity and remuneration for women would be the most effective means of ensuring Australia's competitiveness, for discrimination costs economic actors.(13) However, what role the Affirmative Action Agency in particular and legislation in general, has in ensuring that business continues to implement best practice remains to be seen.

Superannuation and Divorce

The Office of the Status of Women, along with the Treasury and the Attorney-General's Department, has been involved in the drafting of a position paper highlighted in the statement on women. The paper, Superannuation and Family Law was launched on 19 May 1998. While there are no explicit Budget measures relating to this policy (program funding covers the policy advice provided by OSW) it does nevertheless warrant a brief discussion based on its importance to women's future incomes.

The Government's new position is that superannuation settlement should remain separate from property settlement but that it be undertaken in such a way that allows for an equal split between partners. This can occur either through transference of the non-contributing spouse's share to another fund or, with the case of defined benefit schemes, a variety of measures be applied to calculate both the vested and unvested values. If an equal division means the sale of the family home or business, or if there are already two separate super funds, an alternative adjustment in property settlement can be made.

The position paper was launched with an emphasis on fairness for both parties and on the benefits for both men and women. However, at face value, these reforms, if implemented, have the potential to provide substantial benefit to women, who are more likely to suffer poverty post-divorce. While coverage is similar for both women and men, because of the compulsory nature of superannuation, women are more likely to earn lower wages, hold lower status positions, predominate in part-time work and so make smaller contributions to superannuation funds. Furthermore, superannuation has become an increasingly important component in the salary structure of many professional employees (most of whom are men).(14)

Social Policy and Women

Child Care Affordability and Choice

Over the past two years, the Commonwealth Government has implemented a range of measures designed to make child care assistance fairer by targeting services and subsidies. The National Planning System, introduced in April 1998, will see new childcare places located in the areas of greatest need. This is a move which has been generally welcomed by the non-government sector (representing service recipients) and service providers alike.

However, indications are that one of the measures, the removal of operational subsidies from community-based child care centres, has had a direct effect on the affordability of child care. Numerous submissions to the Senate Community Affairs References Committee on Child Care Funding have cited the loss of operational subsidy as a factor in driving up centre fees. But the rise in fees, generally, appears to have affected affordability in spite of Commonwealth Government subsidies paid directly to parents, largely because per capita funding is reduced. This, in turn, is causing concern about the quality of care and parental choices (including employment choices for women, reportedly unable to remain in the workforce). The forward estimates show that the Commonwealth Government will spend $100 million less on child care assistance and cash rebates. WETTANK, the Women's Economic Think Tank, suggests that this may be a result of families 'dropping out of the system', and is thus of concern.

The National Association of Community Based Children's Services, and the Brotherhood of St Laurence, in separate studies, have gathered evidence that families are opting out of formal child care because they cannot afford to meet the gap in fees. The Brotherhood of St Laurence study cited an instance of one woman, faced with the prospect of paying 40 per cent of her income for child care, in order to complete a student placement, being forced to withdraw from child care, thus making completion of her diploma course difficult. In another instance, a married couple, where the male partner worked full-time and the female partner worked a four-day week were paying over 30 per cent of the family's disposable income in child care fees. The female partner opted to remove the children from care and herself from the workforce, thus diminishing the family's capacity to improve its economic situation, and putting the female partner's career 'on hold'.(15)

A further potential effect, as yet unquantified, relates to concern that a significant shift in the numbers of children moving from long day care to family day care or informal care, may be forcing down the wages of an already low-waged (predominantly female) sector of the workforce.

'Staying at Home' Package (discussed at Sub-program 8.5.1)

The 'Staying at Home' Package announced by the Prime Minister on 2 April 1998 provides $280m over four years to allow older Australians to remain in their homes for as long as possible and to provide better support for carers. The additional assistance provided by the carer's allowance under this package and under the Home and Community Care Program (which received a 5 per cent increase in this Budget) will be important for carers, two-thirds of whom are women caring for older people or people with disabilities.

There is, however, a need for ongoing policy discussion about the extent of unmet need within the Package and the Program, given longer-term projections about the ageing of the population, and given concerns that the needs of younger people with disabilities (and their carers) often appear to be overshadowed by the bigger (in overall numbers) issue of the care of older Australians. Further, policy analysts viewing these measures from a feminist perspective are suggesting that there needs to be a policy discussion about our society's expectations of women as carers. For example, are these measures truncating women's choices? What are the longer term implications for women as carers if the links beyond home care to institutional care are seen to be profoundly fraught in economic and emotional terms? The focus upon the 'Staying at Home' Package in this Budget, important as it is, would seem to heighten the need for a discussion in a wider context about the future of carers.

Multipurpose Services Network (discussed at Sub-program 8.5.3)

The announcement of funding for an additional 30 Multipurpose Services Networks delivering health and family services to rural and remote Australia, will be a welcome boost for families (and women) in rural Australia. Twenty-eight such centres are already established, including two services run by Aboriginal and Torres Strait Islander organisations. The centres have been generally well received by people in rural and remote Australia.

In a recent Department of Primary Industries and Energy study on the social and economic contributions of women in rural Australia, women reported on the tremendous number of hours they spend 'on the road', running errands, taking family members to appointments, accessing services, and providing informal care. In this regard, measures which co-locate health and family services should provide welcome assistance - and indeed the National Rural Health Alliance has already supported this extension of the 'best working model there is'.(16) Given the demographic concentration of older women in rural towns, they are also likely to be beneficiaries of Multipurpose Services Networks.

The real challenge in the implementation of the Network will be in ensuring systematic local community involvement in its planning and establishment. Currently, only Commonwealth and State politicians and bureaucrats are involved in policy and planning, a step which would appear to forego the strategic opportunity of drawing on the expertise of representative bodies from Local Government and the non-government sector.

Broadbanded National Health Programs

The proposal to broadband eight separate public health programs offers State Governments the opportunity to allocate resources between separate programs, within an overall package. The programs are the National Women's Health Program, Alternative Birthing Services Program, National Education Program on Female Genital Mutilation, Breast Screen Australia Agreement, National Cervical Cancer Screening Program, Immunise Australia Program, AIDS Matching Funding Program and the National Drug Strategy. On the face of it, this move provides welcome flexibility for States with different demographic or epidemiological patterns to focus resources in areas of greatest need. However, there are indications that in negotiations towards the signing of the Agreements with the Commonwealth (only South Australia has signed to date) two States are seeking exemptions from the requirement to provide some key performance indicators. Such a move is of concern for transparency of accountability and for long-term monitoring of health outcomes.

Law and Justice

Domestic Violence Initiatives

The Minister for the Status of Women, the Hon. Judi Moylan MP, has noted that the initiatives in the 1998-99 Budget with specific relevance to women include, among other things, 'a particular focus on domestic violence'.(17) There is only one specific outlay in the Budget concerning domestic violence, although several important initiatives have been announced since last year's Budget.

The only specific Budget outlay in relation to domestic violence is the initiative concerning a one-off, crisis payment administered through social security payments and equivalent to one week's benefit (therefore around $150). The measure is not exclusively targeted at women subjected to domestic violence, but is provided for people:

• released from prison
• forced to establish a new home due to extreme circumstances, such as fleeing domestic violence or household fire.

Approximately $5.1 million has been forecast over 4 years for this measure. The Minister has noted that approximately 11 000 women subjected to domestic violence will access the payment.(18) Consequently approximately $1.650 million, or one third of the crisis payment money, is forecast to be spent on those subjected to domestic violence.

Another key measure noted by the Minister concerning domestic violence is the package of approximately $25 million for Partnerships Against Domestic Violence, which relate to a range of cross-portfolio Commonwealth/State and Territory initiatives. This money is not strictly a budget measure as it was provided in additional estimates last year after the 1997-98 budget. The outlay measures are summarised in the first part of Budget Paper No. 2, under specific portfolios participating in the projects. The money is divided into two packages. The first is $12 million over three years for co-operative work between the Commonwealth, States and Territories primarily focussed on developing best practice models. This money is appropriated to the Office of the Status of Women, and accounts for $1.1m increase in the Prime Minister and Cabinet Portfolio Statement regarding women's program money.(19) The second package is $13.3 million for new Commonwealth projects, developed in consultation with the States and Territories. This money is divided between the Attorney-General's Department, Aboriginal and Torres Strait Islander Commission (included in Prime Minister and Cabinet estimates), Department of Education, Employment, Training and Youth Affairs, Department of Health and Family Services, Department of Immigration and Multicultural Affairs and Department of Primary Industry and Energy.

The Partnerships Against Domestic Violence package was announced at the Federal Government's summit on domestic violence on 7 November 1997. The summit was held as an hour long discussion during a Council of Australian Governments meeting. The Prime Minister noted that the summit was 'the first time in Australia's experience that the heads of all governments had come together to express their combined rejection of ...domestic violence.'(20) Representatives from the States and Territories criticised both the short length given to the 'summit' and the amount of money provided, with the Chief Minister for the ACT, Ms Kate Carnell, noting that the new money provided to the State and Territories amounted to only an additional $1.78 a year for each victim of domestic violence.(21)

Another measure announced by the Federal Government since the 1997-98 Budget concerning domestic violence is the Business Against Domestic Violence strategy launched on 12 November 1997. The Prime Minister is the patron of the initiative and two notable business representatives, Robert de Crespigny of Normandy Mining and Paula Gerber, a corporate lawyer, are co-chairs. The initiative has no significant budgetary implications for the Office of the Status of Women. However, it is relatively novel in that it aims to encourage business to participate in preventing and responding to domestic violence by, for example, developing measures to support employees subject to violence. Perhaps more significantly, the initiative develops the notion of corporate philanthropy as the Government has announced its intention to provide tax deductible status to donations made to the 'Business Against Domestic Violence Reserve' fund.(22) As noted by commentators, the new emphasis on corporate philanthropy comes at a time public finances are being withdrawn from areas of social welfare.(23) Therefore, to some degree, an emphasis on corporate philanthropy shifts public responsibility for social justice matters, such as women's human rights, to the private sector.

Human Rights and Equal Opportunity Commission (HREOC)

The Government has introduced the Human Rights Legislation Amendment Bill (No. 2) 1988 which proposes to abolish HREOC's five specialist commissioners, including the Sex Discrimination Commissioner, in favour of three Deputy Presidents with specific portfolio responsibilities, one of which is sex discrimination and equal opportunity. The Deputy Presidents will have a significantly reduced role as compared to the current Commissioners and will primarily focus on research and education. This hybrid proposal of Deputy Presidents with specific responsibilities differs from the initial Government's position of establishing purely generalist commissioners, and was developed following community concern at the abolition of a specific Sex Discrimination Commissioner.(24) In Maintaining Our Commitment to Women,(25) the Hon. Judi Moylan MP notes that the Government's restructure of the Commission maintains the Government's commitment to women by promoting effective and equitable protection of human rights.

Concerns have been raised that a more generic Deputy President with narrower powers may result in a loss of expertise on, and public visibility of, sex discrimination matters.(26) The proposed focus on research, education and information dissemination may assist in addressing systemic discrimination. Between 1997-99, HREOC's budget was decreased from $19.3 million to $12.3 million, a two-year decrease of over 36 per cent.(27) These cuts will affect the possible scope and effectiveness of the Deputy Presidents. As there is a statutory obligation on HREOC to process discrimination complaints, HREOC will be required to allocate a sufficient budget to these responsibilities. Accordingly, the pool of money left for Deputy President work on education, research and information dissemination will be small.

Australia's Obligations under the United Nations Convention on the Elimination of All Forms of Discrimination Against Women

Pursuant to the United Nations Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW), Australia is required to submit periodic reports to the Committee on the Elimination of Discrimination Against Women (CEDAW Committee) which oversees the international implementation of CEDAW.

In July 1997, Australia appeared before the CEDAW Committee to discuss its third period report. In Maintaining Our Commitment to Women, the Hon. Judi Moylan MP states that the third report 'was well received'.(28)

Whilst the CEDAW Committee acknowledged Australia's past successes on implementing women's human rights, particularly in the areas of violence against women and legislative and administrative structures to promote women's rights (such as the Sex Discrimination Act 1984), the Committee also made significant criticisms of Australia's recent human rights performance.(29)

• The Committee noted concern about the Government's apparent shift in attention and commitment to the human rights of women and the achievement of gender equality.
• Whilst commending increased efforts as gender mainstreaming into all sectoral areas it was concerned about the weakened role of national machinery in providing policy advice on equality issues and in monitoring the effective implementation of such policies.
• The Committee was alarmed by policy changes that apparently slowed down, or reversed, Australia's progress in achieving equality between women and men, such as in housing and childcare programs.
• The Committee was concerned about the delay in appointing a Sex Discrimination Commissioner and expressed its concern that at a time of fiscal constraint, resources for programs and policies benefiting women or aimed at overcoming discrimination might be subject to disproportionate budget cuts.
• The Committee also noted concern at the continuing adverse situation of indigenous women and noted the absence of data concerning violence against indigenous women specifically.

Conclusion

Both overseas and in New South Wales, the mainstreaming approach to women's policy has often been accompanied by strategies that seek to monitor and analyse the extent to which other departments are gender inclusive in their policy design and implementation. These functions are undertaken by a Department or Ministry for Women's Affairs.(30) Mainstreaming women's policy also brings with it a heightened need to ensure coordination between Commonwealth Departments on the effects of all policy initiatives on women, to guard against the danger of a focus on women's needs simply being 'lost' in the face of other imperatives.

When cross-portfolio initiatives are undertaken, then issues of accountability come into play. Of course this is not just an issue for women's policy but for all areas where a whole-of-government approach is applied. At present it is not clear though, what accountability mechanisms are being put in place to ensure that women's issues will necessarily be picked up by other departments and what role OSW might play in this regard. While mainstreaming suggests an eventual removal of a central women's agency, there are nevertheless reasons for its retention, including providing an incentive to departments to commit resources to the process of gender audit. Certainly some monitoring will have to be undertaken if Australia is to continue meeting its reporting requirements to the United Nations Committee on the Elimination of all Forms of Discrimination Against Women.

Endnotes

1. Pru Goward, 'What's the rule of women's policy in a government committed to family values', Speech, IPAA Coopers and Lybrand Seminar Series, 10 June 1997.
2. Ibid.
3. This amount is not noted in the Minister's statement but is available from OSW.
4. Our Commitment to Women, Statement by Senator the Hon. Jocelyn Newman, 13 May 1997.
5. Senator the Hon. Jocelyn Newman, Press Statement, 7 July 1997.
6. Weekly House Hansard, 3 March 1998, p. 281.
7. Department of Industrial Relations, Annual Report, 1996-97, p. 7.
8. S. Bartells et. al., 'Representing Women at the End of the Century-Challenges for Unions?' Paper presented to the Third International Conference on Emerging Union Structures 1-3 December 1997.
9. Government Response to the Report from the Senate Economics References Committee on Outworking in the Garment Industry, October, 1997. The Report itself was tabled in December 1996.
10. Hon. Peter Reith MP, Press Statement, 29 October 1996.
11. Affirmative Action Agency, Annual Report, October 1997.
12. Portfolio Budget Statement for the Department of Workplace Relations and Small Business, 1998-99.
13. Pru Goward, 'Women in the Post-Industrial Society' Speech to the Sydney Institute, 5 April 1998.
14. see S. Shaver, 'Poverty, Gender and Sole Parenthood', in Fincher and Nieuwenhuysen, Australian Poverty then and now, Melbourne University Press, Melbourne, 1998.
15. Brotherhood of St Laurence and Community Child Care, Is child care affordable? Pressures on families and their use of formal long day care, April 1998.
16. National Rural Health Alliance, Budget 98: Three Welcome Health Developments for Rural People, Media Release, 13 May 1998.
17. Hon. Judi Moylan MP (Minister for the Status of Women), Press Release, 14 May 1998.
18. Maintaining Our Commitment to Women, Statement by the Hon. Judi Moylan MP, Minister for the Status of Women, 12 May 1998, p. 18.
19. Portfolio Budget Statement for the Department of the Prime Minister and Cabinet, 1998-99, p. 21.
20. Canberra Times, 8 November 1997.
21. Canberra Times, 8 November 1997.
22. Senator the Hon. Rod Kemp (Assistant Treasurer), Press Release, No. AT/106, 23 April 1998.
23. Australian Financial Review, 19 May 1998.
24. Sydney Morning Herald, 16 September 1997.
25. Maintaining Our Commitment to Women, Statement by the Hon. Judi Moylan MP, Minister for the Status of Women, 12 May 1998, p. 19.
26. Sydney Morning Herald, 16 September 1997.
27. Portfolio Budget Statement of the Attorney-General's Department, p. 116.
28. Maintaining Our Commitment to Women, Statement by the Hon. Judi Moylan MP, Minister for the Status of Women, 12 May 1998, p. 24.
29. Committee on the Elimination of Discrimination Against Women, Consideration of Third Periodic Report of Australia, 22 July 1997.
30. Department for Women, NSW, homepage http://www.women.nsw.gov.au ; Ministry of Women's Affairs, The Full Picture. Guidelines for Gender Analysis, Wellington, 1996.

Immigration Measures - Adrienne Millbank

The most significant Budget measure in the Immigration Portfolio is the introduction of a $50 charge, from 1 July 1998, for visitors from non-Electronic Travel Authority (ETA) countries. This represents a departure from the past, whereby while all short-stay visitors or tourists have been required to obtain a visa to enter Australia, this has been free of charge. The measure is expected to raise $39.9 million in 1998-99, and $166.9 million over 4 years. About a third of this-$51.6 million over 4 years-is to be redirected to strengthening border control and entry management, especially related to 'high-risk' countries, in a range of measures which form the focus of the Portfolio's Budget outlays.

Significant among measures which pursue established Government policy of shifting the balance of the immigration program from family and towards the economic categories, thereby producing a more positive Budget impact, are changes to parent visa charges, and further measures to manage skilled migration and to facilitate business entry.

$50 visa charge for non-ETA countries

About 3 million visitors and tourists currently enter Australia each year, a doubling of numbers over the past seven years. By the year 2000, the figure is expected to approach 7 million. The ETA system, which has been introduced progressively since 1996, performs on-line checks of Department of Immigration and Multicultural Affairs (DIMA) warning records. It issues authority to enter Australia within seconds, while travel arrangements are being made through travel agents or airlines. Currently 26 countries, representing about 70 per cent of visitors, participate in the ETA system. They include the more affluent developed countries whose nationals are at low risk of overstay: Western Europe, the USA, the UK, and in our region, South Korea, Japan, Singapore, Brunei and Malaysia. Non-ETA countries include Indonesia, Thailand, Vietnam, Cambodia, the Philippines, India, China, Samoa, Tonga, Lebanon, Syria and Turkey. The Immigration Minister has justified the measure on the grounds of the greater cost and effort involved in checking visitor 'bona-fides' in non-ETA countries, and has pointed to generally higher charges in comparable countries, including the USA, Canada and New Zealand.

Besides being poorer, and the source of visitors who are more likely to attempt to stay in Australia by whatever means, non-ETA countries are the source of our more recent migrants and newer ethnic communities. They are also the sources of our newer and emerging tourist markets. The Chairman of the Federation of Ethnic Communities Council of Australia, Randolph Alwis, has condemned the introduction of the $50 visitor visa charge for non-ETA nationals as 'cultural and racial stereotyping'. The reaction of tourism bodies, which have long campaigned for the abolition of visas altogether, has been similarly predictable. The Inbound Tourism Organisation, arguing that Australia is already seen as an unwelcoming destination because of its insistence on visas, has claimed that the measure will put the growth potential of some of our most promising tourism markets, specifically India and China, at risk. The Tourism Forecasting Council has criticised the measure as untimely, in light of a predicted 5 per cent drop in international arrivals in 1997-98, including a drop of 26 per cent from Asian countries.

Border management and entry control

The current 'stock' number of overstayers in Australia is about 45 000. Nearly 60 per cent have been in Australia for 5 years or longer. Of the approximately 10 000 overstayers located in 1996-97, 21 per cent admitted that they had been working; in 1995, about 64 per cent of overstayers were estimated to have been illegally working in Australia. Considerable costs, in the order of millions of dollars per year, are associated with fraudulent claims on health and social security services, and with locating and removing overstayers from Australia.

The vast majority of 'illegals' in Australia are people who have overstayed valid visitor visas; as at 5 February 1998, the number of unauthorised boat arrivals (excluding births) who have arrived since November 1989 was under 3000. The number of people who arrive unauthorised by air, while also relatively small, has increased dramatically in recent years: by 127 per cent in a year to 1350 in 1996-97. Unauthorised arrivals by air are currently running at 1700 per year.

Countries whose nationals are at high risk of unauthorised entry or overstay include China, Indonesia, Syria, Bangladesh, Western Samoa, Tonga, Cambodia, Pakistan, Vietnam, Turkey and Lebanon.

The Budget allocates $19.4 million in 1998-99, and $51.6 million over 4 years, to a range of measures to strengthen border and entry control, including:

• more rigorous screening of visa applicants from high risk countries through the employment of additional staff, especially in non-ETA overseas posts where significant tourism growth is projected
• the upgrading of the Movement Alert List (MAL), a computer database of persons of immigration concern, for character (criminal) or health reasons
• increased immigration staff at airports, to identify passengers of immigration concern
• increased surveillance of the Torres Strait Protected Zone by DIMA's Movement Monitoring Officers.

Shifting the balance of the immigration program

Since 1996, the Government has reduced both the overall size of the immigration program and, within a reduced program, the proportion of the family category. Of the 1998-99 planning level of 68 000, the family stream is to be held at 30 500 places.

$1.5 million in 1998-99, rising to $3.8 million over 4 years has been allocated in the Budget to cover additional administrative costs associated with the pursuit of skilled entry targets and the dampening of family migration. Additional funding of $0.9 million a year for 4 years has also been announced to continue initiatives (including through special business centres in the States and Territory offices of DIMA, and a Business Advisory Panel) to facilitate business migration.

Measures to reduce demand for family migration, including stricter 'bona-fides' testing of fiance(e) and spouse applicants, and the two year waiting period for social security benefits, have dampened applicant numbers. However, the most radical measures, and consequent reduction of numbers, have been in the parent category. Parent entry was capped at 1000 places in 1997-98, and will be capped at 2500 in 1998-99. From 1 November 1998 only non-working age parents will be able to be sponsored; sponsors will have to demonstrate that they have the financial means to support a parent; and there will be a stricter balance of family test whereby most, rather than half of a sponsored parent's children will have to be in Australia.

The Assurance of Support bond will increase from $3500 to $4000 for the principal parent applicant, and from $1500 to $2000 for each additional applicant. The health service charge-the second instalment visa charge-will increase from $940 per person to $5000. This means that the up-front cost of bringing in one parent will be $9000, and the cost of bringing in two will be $16 000. The increased parent visa charges, together with changes in application rates in other categories, is projected to bring in revenue of $2.1 million in 1998-99, and $37.1 million over 4 years.

Parents are the only category of migrants for whom costs to the taxpayer increase over time rather than decrease. While the increase in the health service charge-the second instalment parent visa charge-seems significant, $5000 represents less that 20 per cent of the average cost of health services (not including nursing home services) incurred by people over 65. The increased visa charges, along with other measures to curb demand for permanent parent visas, will clearly have a positive long-term effect on the Budget. They will also clearly make it more difficult for members of Australia's newer and poorer ethnic communities to sponsor their parents to join them in Australia. Together with stricter scrutiny and 'bona-fides' testing of non-ETA visitor applicants, these measures could make it more difficult for these people to maintain contact with their parents.

Other measures

$35 million has been allocated in 1998-99 for the redevelopment of the immigration detention centre in Villawood, in Sydney's inner west, a measure that was announced in the 1996-97 Budget.

Endnotes

1. Facts and figures in this feature article are taken from the Budget Papers, Budget 1998 Portfolio media releases, Departmental fact sheets, and Ministerial speeches and media releases. Views of the ethnic communities and tourist bodies are taken from post-Budget press releases and press articles.

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