RESEARCH PAPER SERIES, 2020–21              11 September 2020

The Commonwealth Budget: a quick guide

Phillip Hawkins[1]

Economic Policy

The Commonwealth Budget is typically the most important annual policy statement by the Government.

This Quick Guide identifies information and key concepts that are used in the Budget Papers and related materials.

What is the Budget?

The Budget is a series of documents, known as papers, tabled by the Australian Government with the Annual Appropriation Bills. The Budget Papers serve several purposes:

•        They are a statement to the Parliament, and through the Parliament the broader Australian community, of the current and forecast economic and fiscal position (including both revenues and expenditures) of the Commonwealth.

•        They outline the policy priorities of the Australian Government, and are used by the Government to announce new policies and the estimated fiscal impact of those policies.

•        They outline the estimated resourcing of Australian Government departments and agencies, and the costs of the programs they administer.

What occurs on Budget night?

On Budget night the Treasurer tables the annual Appropriation Bills for the forthcoming year in the House of Representatives, and delivers the second reading speech on Appropriation Bill (No. 1). This speech is also referred to as the Budget Speech. In recent years, the second reading speech on Appropriation Bill (No. 1) has commenced at 7.30 pm.

Since 1994 the Appropriation Bills have typically been tabled on the second Tuesday in May.

Along with the Appropriation Bills, the Government also tables the Budget Papers and related materials. The Budget Papers and related materials are made available on the internet at www.budget.gov.au when the Treasurer commences the second reading speech on Appropriation Bill (No. 1).

Increasingly, detailed tables and budget data are also released on data.gov.au shortly after the Budget Papers are tabled.

What is in the Budget Papers and related materials?

The Budget Papers comprise:

•        the Budget Speech

•        the Budget Overview

•        Budget Paper No. 1: Budget Strategy and Outlook

•        Budget Paper No. 2: Budget Measures

•        Budget Paper No. 3: Federal Financial Relations and

•        Budget Paper No. 4: Agency Resourcing.

Additionally, for each portfolio, the Government produces a Portfolio Budget Statement. The Government may also table one or more Ministerial Statements with the Budget Papers.

Budget Speech

The Budget Speech is a copy of the second reading speech for the Appropriation Bill (No. 1). The Treasurer will use the second reading speech to set out the reasons why the annual Appropriation Bills should be passed by the Parliament. Treasurers have used the second reading speech to update the Parliament about the prevailing economic circumstances, and to announce important or major policy decisions that the Government has made.

Budget Overview

The Budget Overview provides a summary of what the Government considers to be the main or most important aspects of the Budget.

Budget Paper No. 1: Budget Strategy and Outlook

Budget Paper No. 1: Budget Strategy and Outlook provides high-level information about the overall economic outlook, and the Commonwealth’s fiscal position. Specifically, it provides:

•        information about the international and domestic economic outlook, including numerical forecasts of key economic parameters such as gross domestic product (GDP) growth, employment and unemployment, and the consumer price index (CPI)

•        a statement of the Government’s fiscal strategy and the fiscal outlook of the Commonwealth

•        estimates of the revenues and expenditures of the Commonwealth, and their composition

•        information on the proposed capital investment of the Commonwealth

•        information on the assets, liabilities—including contingent liabilities, or ‘risks’—and debt held or owed by the Commonwealth and

•        historical information about the Commonwealth’s fiscal and debt position.

Budget Paper No. 1: Budget Strategy and Outlook also contains technical details about the presentation of the financial information of the Commonwealth, including how individual entities are classified for accounting purposes, and the budgeted financial statements for the whole of the Commonwealth Government.

Budget Paper No. 2: Budget Measures

Budget Paper No. 2: Budget Measures contains information about the budget measures—or policies—the Government has decided to pursue. Each budget measure is classified according to what aspect of the Commonwealth’s finances it mostly affects, with:

•        a revenue measure mostly affecting the revenues of the Commonwealth

•        an expense measure mostly affecting expenses of the Commonwealth and

•        a capital measure mostly affecting the capital—or assets—held by the Commonwealth.

The description of each measure will have a costing attached to it.

A costing is an estimate of the impact of the proposed policy on the fiscal position, or ‘budget balance’, of the Commonwealth over the forward estimates period.

For revenue measures:

•        a positive costing reflects an increase in revenue from the policy measure (a positive impact on the Budget balance) and

•        a negative costing reflects a decrease in revenue from the policy measure (a negative impact on the Budget balance).

For expense measures:

•        a positive costing reflects an increase in expenditure from the policy measure (a negative impact on the Budget balance) and

•        a negative number reflects a decrease in expenditure from the policy measure (a positive impact on the Budget balance).

For capital measures:

•        a positive number reflects an increase in the assets of the Commonwealth and

•        a negative number reflects a decrease in the assets of the Commonwealth.

Example: If the Government announces a measure to build a new computer system, because the computer system will—once completed—be an asset for the Commonwealth, the measure will be classified as a capital measure. The measure will have a positive costing associated with it as the decision will result in an increase in the assets held by the Commonwealth.

Some policy measures cannot be accurately costed by the government, or may not have any financial implications. The Budget papers, therefore, may also identify some measures’ costing as:

•        a nil effect, denoted by ‘–’

•        a small effect that is close to zero, denoted by ‘...’ or

•        an uncertain or unquantifiable effect, denoted by ‘*’.

Costings are generally only presented for the four-year forward estimates period.

Budget Paper No. 3: Federal Financial Relations

Budget Paper No. 3: Federal Financial Relations contains information about grants of financial assistance made by the Commonwealth to the states and territories. There are two categories of financial assistance that the Commonwealth may make:

•        Specific purpose payments are monies provided by the Commonwealth on the condition that the states and territories spend those monies on specified purposes such as health, education, or roads, or use them to fund local governments. These are sometimes called ‘tied grants’.

•        General revenue assistance is money provided by the Commonwealth to the states or territories without any conditions on how it may be spent. Assistance of this type is sometimes called an ‘untied grant’.

The main type of general revenue assistance is the revenue from the Goods and Services Tax (GST). Budget Paper No. 3: Federal Financial Relations provides estimates of the amount of GST revenue that will be collected, and estimates of how much each state and territory will receive from the GST.

A supplement to Budget Paper No. 3 that is only available online sets out where any conditions that attach to grants of financial assistance to the states and territories may be found or obtained, and how monies provided to the states and territories are to be appropriated by the Parliament.

Budget Paper No. 4: Agency Resourcing

Budget Paper No. 4: Agency Resourcing deals with the various types of appropriations that are used by the Government to fund entities and activities. Budget Paper No. 4: Agency Resourcing shows:

•        for each entity, and for each outcome of each entity, the amounts and types of appropriation that are expected to be utilised in the forthcoming year

•        for each piece of legislation that provides for a special appropriation, the amount of money expected to be drawn against that appropriation in the forthcoming year and

•        for each special account, the expected transactions on that special account, and the expected balance of that special account at the beginning and end of the forthcoming year.

Budget Paper No. 4: Agency Resourcing also shows the expected level of staffing for each entity.

Portfolio Budget Statements

A Portfolio Budget Statement is a statement that is tabled by the relevant portfolio minister in support of the appropriation for that portfolio proposed in the Budget Papers. Portfolio Budget Statements are made available on departments’ websites at the same time as the Budget Papers are released.

A Portfolio Budget Statement provides more detail on the proposed activities and expenditures of each entity in the portfolio for the Budget year and the forward estimate years. A Portfolio Budget Statement contains an overview of the portfolio, with separate sections for each Commonwealth entity within that portfolio.

Example: The Australian Tax Office is an entity within the Treasury Portfolio. Therefore, the Treasury Portfolio Budget Statement will include a section relating to the Australian Tax Office.

For each Commonwealth entity, a Portfolio Budget Statement will include:

•        a statement that shows the financial resources proposed to be made available to that entity from all sources

•        a reconciliation showing the expected impact of the Government’s announced measures on that entity

•        the outcomes that the Government intends that entity to pursue

•        a description of the programs that will contribute to each of the entity’s outcomes, an estimate of the expenses expected to be incurred in delivering each program, and performance indicators against which the Government intends the performance of each program to be measured and

•        the budgeted financial statements of that entity.

Where it is relevant to the activities of an entity, a Portfolio Budget Statement will also include other material, such as information about the balances of, and transactions on, any special accounts within an entity.

If additional Appropriation Bills are introduced during the year, the Government will release a Portfolio Additional Estimates Statement or a Portfolio Supplementary Additional Estimates Statement for each portfolio that has its appropriation changed. These statements will update the information in the most recent Portfolio Budget Statement.

Ministerial Statements

The Government may also table one or more Ministerial Statements. Typically, Ministerial Statements released with the Budget group together information related to one theme or issue.

Example: If the Government wants to show how much it is doing to assist regional or remote parts of Australia, it may release a Ministerial Statement that brings together activities across all portfolios that the Government believes assist regional and remote areas.

What occurs after Budget night?

On the Thursday immediately following Budget night, a second reading speech on annual Appropriation Bill (No. 1) is delivered by the Leader of the Opposition. The speech is often referred to as the Leader of the Opposition’s Budget reply speech.

The details of the expenditure proposed in the Budget are referred by the House of Representatives to the Senate for consideration by the Senate. This enables the Senate to commence its scrutiny of the Budget through the Senate Estimates process, despite the Senate having not yet received the annual Appropriation Bills from the House of Representatives.

Legislation relating to the financial management of the Commonwealth

Charter of Budget Honesty

The Charter of Budget Honesty is a set of rules that establish how the Commonwealth is to manage and report on its fiscal performance. It is a schedule to the Charter of Budget Honesty Act 1998.

Public Governance, Performance and Accountability Act 2013

The Public Governance, Performance and Accountability Act 2013 is the main Act that provides for the financial management of the Commonwealth. The Act allows certain matters to be dealt with via delegated legislation, known as Rules.

Other Budget-related reports not released on Budget night

Additional reports must be publicly released and tabled in Parliament from time to time.

Mid-year Economic and Fiscal Outlook

Under the Charter of Budget Honesty, the Treasurer must release the Mid-Year Economic and Fiscal Outlook within six months of the Budget, or by the end of January in a given year, whichever is later. The Mid-Year Economic and Fiscal Outlook must update any information that has changed since the Budget.

Final Budget Outcome

Under the Charter of Budget Honesty, the Treasurer must produce a Final Budget Outcome within three months of the end of each financial year. The Final Budget Outcome must contain the fiscal outcomes for the Commonwealth for the relevant year.

Intergenerational Report

Under the Charter of Budget Honesty, every five years the Treasurer must release and table in Parliament an Intergenerational Report. The Intergenerational Report must assess the sustainability of current Government policies over the next 40 years.

Pre-election Economic and Fiscal Outlook

Under the Charter of Budget Honesty, within 10 days of the calling of a general election, the Secretaries of the Department of Finance and the Treasury must release a Pre-Election Economic and Fiscal Outlook. The report must update any information that has changed from the last budget update.

Post-election Report

Under the Parliamentary Service Act 1999, within 30 days of the end of the caretaker period for a general election, the Parliamentary Budget Officer must release a Post-election Report that sets out the Parliamentary Budget Officer’s estimates of the costings of the election commitments made by political parties during the preceding election campaign.

Tax Benchmark and Variations Statement

The Tax Benchmarks and Variations Statement (previously referred to as the Tax Expenditure Statement) is a report published annually by the Treasury that outlines the impact of a range of tax expenditures on the revenues of the Commonwealth. This publication is required by clause 12 of the Charter of Budget Honesty. A tax benchmark is a standard tax treatment that applies to similar taxpayers or similar types of activity. A tax benchmark variation (or tax expenditure) is a deviation from this standard treatment that results in a difference in revenue.

Example: The benchmark treatment of the GST is that it applies to all supplies of goods and services. However, there are a range of goods and services to which GST does not apply, such as certain types of food, healthcare and education services. These exceptions are benchmark tax variations which result in foregone revenue to the Commonwealth.

Other useful sources of Budget and related information

Flipchart of Commonwealth entities and companies

The Department of finance flipchart of Commonwealth entities is a reference document that lists all Commonwealth entities and companies by portfolio. It provides summary information on the entities’ legal and Governance structure. 

Australian Government Organisations Register

The Australian Government Organisations Register (AGOR) is a larger register of Australian government entities and bodies.  It includes information on all Commonwealth entities and companies, and in addition, information on secondary Australian Government entities such as advisory councils, non-statutory authorities and Ministerial Councils, as well as subsidiaries of Commonwealth entities and companies. At the time of publication, the AGOR includes information on 1,304 entities.

Chart of Special Accounts

The Chart of Special Accounts is a register of all special accounts made under the Public Governance, Performance and Accountability Act by portfolio, including special accounts made under legislation (with reference to the specific legal provision) and by ministerial determination.

Chart of Special Appropriations

The Chart of Special Appropriations is a register of all special appropriations authorised by legislation made by Parliament, excluding special accounts, presented by portfolio. It provides details of the legislative provision that establishes the appropriation as well as a broad indication of the limits of the appropriation. 

Annual reports

Annual reports are published by Australian Government departments, agencies and corporate entities every year and tabled in Parliament. They provide information to the Parliament and the public on the activities, outcomes and performance of the entities during the year in addition to financial information.

Online Budget Glossary

The Online Budget Glossary is an online resource prepared by the Parliamentary Budget Office that provides explanations of key Budget terms and related concepts.

Key concepts used in the Budget Papers

Several key concepts are useful for understanding the Budget Papers. Additional Budget terminology is also explained in the Parliamentary Budget Office’s Online Budget Glossary.

Accrual accounting and cash accounting

The Budget Papers present figures on both an accrual and cash accounting basis.

Accrual accounting is a method of accounting that records income when it is earned and costs when they are incurred, regardless of when any cash is received or paid. Under accrual accounting, the Commonwealth’s recognised costs are referred to as expenses or expenditures and its income (including from taxes) is referred to as revenue.

Cash accounting is a method of accounting that records receipts and payments of cash when they occur. Under cash accounting, the costs paid out by the Commonwealth are referred to as payments and its income received is referred to as receipts.

Example: The decline in value of an asset as it wears out—known as depreciation—is recognised as an expense for an entity as it occurs, even though no cash payment is required at that time.

Example: A department purchasing a service from a supplier may be invoiced for those services, but have 30 days to pay for them. The purchase would be recognised on an accrual basis when the supply is invoiced, and be recognised on a cash basis when the invoice is actually paid. 

Costings of Budget measures are presented on an accrual accounting basis.

Timeframes and terminology

The Budget is predominantly a forward looking document.

Information contained in the Budget Papers is generally presented for a five year period, namely:

•        the current financial year

•        the Budget year and

•        the three financial years following the Budget year (the forward estimates period).

Particularly for economic information, the Budget Papers will also contain forecasts or projections for at least the three years of the forward estimates period. 

There are subtle differences between forecasts and projections:

•        A forecast indicates that the Government expects an economic parameter to occur.

•        A projection indicates that the Government has based its planning on an assumption of an economic parameter occurring, but has not formed a view about whether that parameter will occur. 

Projections are sometimes called planning assumptions. 

Net operating balance, fiscal balance and underlying cash balance

The net operating balance (NOB) is an accrual accounting measure of the difference between the revenues and the expenses of the Commonwealth. It excludes investments in capital made by the Commonwealth and as such can be considered an estimate of the ability of the Government to meet the recurrent expenditures of Government with its revenues in any one year.

The fiscal balance is equal to the NOB adjusted for net capital investments made by the Commonwealth. It can be considered an indicator of the Government’s total borrowing requirements.

The underlying cash balance is a cash accounting measure of the balance between the receipts and payments of the Commonwealth, including payments associated with capital expenditures. It is the Government’s preferred measure of showing the surplus or deficit of the Commonwealth in any one year.

Parameter variations and policy decisions

In places in the Budget Papers, a distinction is made between changes to the Commonwealth’s finances that occur because of parameter variations, and changes that occur because of policy decisions.

A parameter variation is a change to the finances of the Commonwealth that is outside the direct control of the Government. Parameter variations occur because of changes in the broader Australian or international economy or to the composition or demographics of the Australian population that in turn effect the demand for Government programs or the amount of taxes received.

Example: Companies pay tax on their profits. If, in a given year, company profits are lower than previously anticipated, Commonwealth tax receipts from companies are also likely to be lower.

Such a reduction in company tax receipts would be recorded as a parameter variation in the Commonwealth Budget.

Parameter variations may affect both the receipts and payments of the Commonwealth.

Example: Unemployment benefits are available to any person who is unemployed within the meaning of the Social Security Act 1991. If there are more people unemployed in a given year, payments of unemployment benefits will be greater.

The reasons for, and magnitude of, parameter variations are mostly set out in the economic and financial information contained in Budget Paper No. 1: Budget Strategy and Outlook.

The term policy decision denotes the cumulative effect of all changes to the finances of the Commonwealth that arise because of the budget measures—or actions—of the Government. Each budget measure is set out in Budget Paper No. 2: Budget Measures. The magnitude of the cumulative effect of the Government’s policy decisions is set out in the financial information contained in Budget Paper No. 1: Budget Strategy and Outlook.

Outcomes and programs

An outcome is the purpose for which monies are appropriated to a Commonwealth entity.

A program is an activity that is undertaken by a Commonwealth entity to achieve an outcome. For each outcome, there may be one or more programs.

Administered and departmental items

An administered item is an item that a Commonwealth entity administers on behalf of the Commonwealth as a whole. An administered item may be expenditure, revenue, or an asset.
A Commonwealth entity does not have discretion about what it can do with an administered item, and must use that item in the way the Government or legislation directs. Administered items mostly relate to outcomes and programs that are managed by an entity.

Departmental items are expenditures, revenues, or assets over which a Commonwealth entity has discretion about how they may be used. Departmental items are mostly used for the running of entities, such as for paying and accommodating staff.

General Government Sector entities, Public Non-financial Corporations and Public Financial Corporations

Commonwealth entities are classified according to their activities and objectives into one of three sectors.

Most Commonwealth entities do not seek to make a profit, and are classified as General Government Sector entities. Where a Commonwealth entity provides goods and services and seeks to make a profit, it will be classified as either a Public Non-financial Corporation or a Public Financial Corporation, depending upon whether or not it provides financial services. 

Example: If the Government established a corporation that had the purpose of providing loans for a certain purpose on commercial terms, and the Government expected that entity to make a profit, the corporation would be classified as a Public Financial Corporation (PFC) in the Budget. An existing example of a PFC is the Export Finance and Insurance Corporation.

Most material in the Budget Papers relates to the activities of entities in the general government sector only.

Consolidated Revenue Fund and appropriations

The Consolidated Revenue Fund is established by section 81 of the Constitution. All monies received by the Commonwealth must be paid into the Consolidated Revenue Fund. It is a constitutional requirement that, before the Government may spend any monies, an Act of the Parliament providing for an appropriation must authorise the release of the monies from the Consolidated Revenue Fund.

A Bill that proposes an appropriation may take two general forms, namely:

•        an annual Appropriation Bill or

•        a Bill that proposes a special appropriation.

Each year, annual Appropriation Bills provide for about 20 per cent of the Commonwealth’s expenditure and special appropriations provide for about 80 per cent of the Commonwealth’s expenditure.

Annual Appropriation Bills

An annual Appropriation Bill will typically propose the appropriation of a finite amount of money, but that money will be provided to a broad range of entities and outcomes. The finite nature of such appropriations means that the Executive Government must return to the Parliament periodically and request that the Parliament appropriate further monies for those entities and outcomes.

Each year, there are at least three annual Appropriation Bills. Appropriation Bill (No. 1) for a given year will propose to appropriate monies for activities that are part of the ‘ordinary annual services’ of the Executive Government. Appropriation Bill (No. 2) in a given year will propose to appropriate monies for the ‘other’ annual services of the Executive. The Senate enjoys different powers over Appropriation Bills for the ‘ordinary annual services’ of the Executive Government and Appropriation Bills for the ‘other’ annual services of the Executive Government. The difference between the two types of Appropriation Bill, and powers of the Senate over each, are explained in more detail in Odgers’ Senate Practice.

The appropriation of monies for the operation of the Parliament for a given year is proposed in a separate Appropriation (Parliamentary Departments) Bill, reflecting that the Parliament is distinct from the Executive Government.

Often the Government will require further monies during the year, and will introduce additional Appropriation Bills. Additional Appropriation Bills will be numbered consecutively.

If, in a given year, the Government does not intend to table and pass through the Parliament a full Budget before the start of the financial year, the Government may introduce Supply Bills that propose to appropriate a small amount of money to ensure the continued operation of the Government until a full Budget can be prepared.

Example: The 2020–21 Budget was delayed from May 2020 to October 2020. As a result, the Parliament passed Supply Bill (No. 1) 2020–21 and Supply Bill (No. 2) 2020–21 to provide sufficient appropriations to cover the first seven months of the 2020–21 Budget year.

Special appropriations

A Bill may also propose to appropriate an unlimited amount of money, but only make it available for a specific purpose or in specific circumstances. Such an appropriation is known as a special appropriation. Almost all of the Commonwealth’s substantial expenditure programs are now provided for by special appropriations, with monies being automatically released from the Consolidated Revenue Fund where the criteria applying to that appropriation are met.

Example: Medicare is established under the Health Insurance Act 1973. Section 125 of that Act appropriates from the Consolidated Revenue Fund any amount of money required for the payment of Medicare benefits.

To change the amount of money that will be provided by a special appropriation, the criteria that must be met to use the special appropriation need to be changed. Where those criteria are set out in legislation, the Parliament must pass an amendment to that legislation.

Example: The Paid Parental Leave Act 2010 provides the circumstances under which a person is entitled to parental leave pay. To change the amount that is paid under that Act, an amendment to that Act is needed to change the eligibility criteria for parental leave pay.

Retained revenue receipts

Section 74 of the Public Governance, Performance and Accountability Act provides a mechanism under which certain amounts received by entities may be retained by those entities. The categories of revenues mostly relate to amounts likely to be received by an entity to defray the cost of providing a good or service. Examples may include application or processing fees.

The exact categories of monies that agencies are able to retain are set out in the Rules made under that Act.

Special Accounts

A special account is an amount of money that is held in the Consolidated Revenue Fund and is earmarked for a specific purpose, and which may only be released when the criteria for release are satisfied.

Special accounts are mostly used to provide transparency about how much the Government is providing to a specific purpose or activity, or to quarantine amounts for specific purposes or activities. They are often used when dealing with entities outside of the Commonwealth Government as a way to account for funds.

A special account may be established through legislation enacted by the Parliament or by a determination made by the Minister for Finance under section 78 of the Public Governance, Performance and Accountability Act. Ministerial determinations that establish special accounts are disallowable legislative instruments.

Example: The Early Years Quality Fund Special Account Act 2013 established the Early Years Quality Fund Special Account. Section 6 of this Act outlines the amounts to be credited to the special account from consolidated revenue and section 7 of the Act outlines the purposes for which this funding can be used; in this case, to pay the remuneration and other employment costs of certain employees in the early childhood education and care sector.

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[1].               The Parliamentary Library acknowledges the work of Daniel Weight, who provided substantial input to prior versions of this Quick Guide.