The underlying cash balance (UCB) is the difference between the government's receipts and its payments. It is one of several indicators known as 'budget aggregates' that measure the impact of the government's budget on the economy. When the government or the media say the budget is in surplus or deficit, they are generally referring to the underlying cash balance, or sometimes the net operating balance or fiscal balance.
The underlying cash balance is equal to the government's receipts (for example from tax collections) minus its payments from providing services (such as Medicare) and support (such as the age pension). The types of receipts and payments used in the calculation include those from buying and selling non‑financial assets, such as buildings or equipment. If receipts are larger than payments in a given year, the government has an underlying cash balance surplus, and if payments are larger than receipts, the underlying cash balance is in deficit.
If the underlying cash balance is in deficit, the government has to borrow money because it does not have sufficient cash to fund its day‑to‑day operations and the net purchases of assets, like the equipment it uses to deliver goods and services.
The term 'underlying' is used because it excludes some cash transactions that are captured in a broader, but less commonly used, measure of the budget balance using the cash accounting method called the headline cash balance. If the headline cash balance is in deficit, the government has to borrow to fund its overall operations, including its financial investments, such as government loans.
Both the underlying cash balance and headline cash balance for a given financial year record the cash that is actually received or paid out by the government, regardless of when these amounts are incurred. For example, these balances record company tax paid to the government in a financial year even though the amount may relate to a company's earnings from a previous financial year. This accounting method is called cash accounting and differs from the method used for the fiscal balance, which is calculated on an accrual accounting basis, and records revenue when it is earned and expenses when they are incurred.
The government publishes a breakdown of the underlying cash balance at each budget update. It also shows the difference between the fiscal and underlying cash balances. Examples of this can be seen in Table 3.2 in Statement 3: Fiscal Strategy and Outlook of Budget Paper No. 1 in the 2021‑22 Budget and Table 3.2 in Part 3: Fiscal strategy and outlook of the 2020‑21 Mid‑Year Economic and Fiscal Outlook.
The budget papers also distinguish between changes to the underlying cash balance over time that are due to 'parameter and other variations' that are outside the government's direct control, and changes due to policy decisions that the government has made. Parameter variations mainly occur because of changes in the economy, composition of the population or outcomes from policy decisions (for example where costs are higher or lower than that expected in the previous budget update). Examples are in Table 3.5 in Statement 3: Fiscal Strategy and Outlook of Budget Paper No. 1 in the 2021-22 Budget and Table 3.4 in Part 3: Fiscal strategy and outlook of the 2020‑21 Mid‑Year Economic and Fiscal Outlook.
Related terms in the PBO glossary: accrual accounting, budget, budget aggregates, budget paper, cash accounting, expense, financial year, fiscal balance, headline cash balance, net, net operating balance, non-financial asset, parameter, payment, receipt, revenue