Budget Review 2014–15 Index

Daniel Weight

In his Budget Speech, the Treasurer Mr Hockey declared that ‘[t]he days of borrow and spend must come to an end’.[1] He went on to announce a range of expenditure cuts and new and increased taxes. On the Wednesday following the Treasurer Mr Hockey’s presentation of the 2014–15 Budget, Australia’s most widely read newspaper, the Melbourne Herald Sun, picked up on this theme. Its front page was adorned with a banner announcing ‘Tough love to slay the budget monster’, and its headline of the same day read ‘Tax! Axe! Fix!’[2]

This headline generally reflected the immediate reactions to the 2014–15 Budget. While there were differing views of the merits of the 2014–15 Budget overall, most observers considered the Budget to have represented a significant fiscal tightening relative to recent trends.

But was the 2014–15 Budget that tough?

The headline results

One measure of the extent of the fiscal consolidation is the relative contribution of the Government’s policy decisions to the forecast budget outcome when compared with the variations caused by factors outside the government’s control, known as parameter variations. Table 1 shows the net effect of policy decisions and parameter variations in the 2014–15 Budget.

Table 1: Movements in Underlying Cash Balance, 2013–14 to 2016–17

	2013–14	2014–15	2015–16	2016–17	Total
	$’m	$’m	$’m	$’m
2013–14 MYEFO underlying cash balance	-46,989	-33,907	-24,083	-17,668	-122,647
Net effect of policy decisions	-514	1,718	5,934	10,414	17,552
Net effect of parameter variations	-2,352	2,416	1,065	-3,309	-2,180
Total movement in Underling Cash Balance	-2,866	4,134	6,999	7,105	15,372
2014–15 Budget underlying cash balance	-49,855	-29,773	-17,084	-10,562	-107,275

Source: Australian Government, Budget strategy and outlook, budget paper no. 1: 2014–15, 2014, table 5, page 3–21, accessed 27 May 2014.

The starting position as at 2013–14 MYEFO was for a $47.0 billion deficit in 2013–14, declining to a $17.7 billion deficit in 2016–17. This improvement mostly reflected forecasted increases in tax receipts.

The fiscal position of the Commonwealth is forecast to improve by $15.3 billion over the four years from 2013–14 to 2016–17, when compared with the projections in MYEFO. This improvement is attributable to $17.6 billion of policy decisions of the government, the effect of which is reduced by $2.2 billion of parameter variations.

Table 2 shows the effect of policy decisions on payments and receipts. Of the policy decisions, a relatively small proportion, $5.4 billion, is attributable to decisions that increase receipts, while the remaining $12.2 billion is attributable to decisions that reduce payments.

Table 2: Effect of policy decisions on Underlying Cash Balance, 2013–14 to 2016–17

	2013–14	2014–15	2015–16	2016–17	Total
	$’m	$’m	$’m	$’m
Net effect of policy decisions	-514	1,718	5,934	10,414	17,552
Comprising:
Changes to receipts	-2	673	1,916	2,786	5,373
Changes to payments	512	-1,045	-4,018	-7,628	-12,180

Source: Australian Government, Budget strategy and outlook, budget paper no. 1: 2014–15, 2014, table 5, page 3–21, accessed 27 May 2014.

This shows the Government’s expenditure reduction efforts are the dominant factor influencing the improvement in the Budget compared with the MYEFO forecasts.

Receipts and payments as a percentage of GDP

Another possible measure of the level of fiscal consolidation is movements in receipts and payments as a percentage of GDP. Table 3 shows the actual and forecast receipts, payments, and underlying cash balance for the Commonwealth as a percentage of GDP from 2010–11 to 2017–18.

Table 3: Payments, receipts and underlying cash balance as a percentage of GDP

	2010–11	2011–12	2012–13	2013–14	2014–15	2015–16	2016–17	2017–18
	% GDP	% GDP	% GDP	% GDP	% GDP	% GDP	% GDP	% GDP
Receipts	21.5	22.2	23.1	23.0	23.6	24.0	24.4	24.9
	20 year average = 24.1
Payments	24.6	25.0	24.1	25.9	25.3	24.8	24.7	24.8
	20 year average = 24.6
Underlying cash Balance	-3.4	-2.9	-1.2	-3.1	-1.8	-1.0	-0.6	-0.2

Source: Australian Government, Budget strategy and outlook, budget paper no. 1: 2014–15, 2014, table 1, page 10–6, accessed 27 May 2014.

Receipts are forecast to exceed their long–run average of 24.1 per cent of GDP only by 2016–17, while payments are forecast to exceed their long run average of 24.6 per cent of GDP over the forecast period until 2017–18. On this measure, the fiscal outlook in the 2014–15 Budget still shows high expenditures and low receipts, relative to long-run averages.

Rate of forecast consolidation

Another measure of the level of fiscal consolidation anticipated by the 2014–15 Budget is the contraction in the deficit as a percentage of GDP. The 2014–15 Budget forecasts that the underlying cash balance will improve over the four years from 2013–14 to 2016–17 by 2.5 per cent of GDP. This target compares relatively well with other fiscal consolidations, such as the four years to 1988–89 (3.5 per cent), the four years to 1999–2000 (3.1 per cent), and the four years to 2012–13 (3.0 per cent).

Chart 1: Periods of significant fiscal consolidation, underlying cash balance as a percentage of GDP

Source: Australian Government, Budget strategy and outlook, budget paper no. 1: 2014–15, 2014, table 1, page 10–6, accessed 27  May 2014.

These previous consolidations are what was actually achieved. However, the 2014–15 Budget figure is only a target and may not be achieved especially if some of the Government’s policy measures are not adopted in full.

For example, the 2012–13 Budget forecast a consolidation in one year of 3.1 per cent but the actual outcome was 1.7 per cent which—while being significant—was well short of the target.[3]

Specific areas of expenditure

While there is a reasonable contraction in spending overall, the 2014–15 Budget shows an apparent reprioritisation in expenditure across functions, relative to the 2013–14 Budget. As table 3 shows, reductions in expenditure (relative to the 2013–14 Budget) are forecast over the four years to 2016–17 in areas including education, health, and housing and community amenities.

However, there are increases in social security and welfare, and transport and communications. General public services has increased, mostly due to the decision of the Government to make an $8.8 billion grant to the Reserve Bank of Australia.[4] Other purposes, which include the contingency reserve, has also increased: that may be attributable to the Government’s Paid Parental Leave Scheme, which is currently provided for in the contingency reserve.[5]

Table 4: Change in expenditures by function, 2013–14 Budget to 2014–15 Budget

	2013–14	2014–15	2015–16	2016–17	Total
	$m	$m	$m	$m	$m
General public services	11,128	-52	-1,004	-2,180	7,892
Defence	795	852	155	-115	1,687
Public order and safety	174	257	11	6	448
Education	-35	-833	-1,584	-2,164	-4,616
Health	-125	-1,189	-3,394	-3,696	-8,404
Social security and welfare	2,424	1,752	-642	-109	3,425
Housing and community amenities	-392	-4,095	-1,606	-2,568	-8,661
Recreation and culture	29	-39	-73	-83	-166
Fuel and energy	-539	-499	-529	-135	-1,702
Agriculture, forestry and fishing	-25	43	-179	-60	-221
Mining, manufacturing and construction	708	6	-12	267	969
Transport and communication	2,042	731	3,692	5,548	12,013
Other economic affairs	-20	185	12	-253	-76
Other purposes	828	2,062	5,256	4,599	12,745
Total expenses	16,993	-818	103	-941	15,337

Source: Budget strategy and outlook, budget paper no. 1: 2014–15, table 3, p. 6–7; Budget strategy and outlook, budget paper no. 1: 2013–14, table 3, p. 6–7, accessed 27 May 2014.

Conclusions

The 2014–15 Budget forecasts a modest improvement in the underlying cash balance over the forward estimates. The improvement is mostly attributable to a reduction in payments, rather than increases in receipts. However, expenses as a percentage of GDP will remain above their long run average for all years until 2017–18.

The forecast turnaround in the underlying cash balance of around 3 per cent of GDP is less ambitions than prior exercises in fiscal consolidation, and—as it is only a forecast—this fiscal consolidation may not actually be achieved.

 

For copyright reasons some linked items are only available to Members of Parliament.

---

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.