Research Paper no. 10 2001-02
The Commonwealth Budget: Process and Presentation
Richard Webb
Economics, Commerce and Industrial Relations Group
19 March 2002
Contents
Glossary Major
Issues
Introduction
1. Overview of the Budget Process
1. 1 Forward Estimates Update
1.2 Senior Ministers' Review
1.3 Portfolio Budget Submissions
1.4 Expenditure Review Committee
1.5 Revenue Committee
1.6 Pre-Budget Review of Estimates
1.7 Budget Documents
1.8 Budget Presentation
1.9 Senate Estimates Committees
1.10 Mid-Year Economic and Fiscal Outlook
1.11 Final Budget Outcome
2. Accrual Accounting and Accrual
Budgeting
2.1 Accrual Accounting and Accrual
Budgeting: What are They?
2.2 Issues
3. Outcomes and Outputs
3.1 The Outcomes and Outputs
Framework
3.2 Issues
3.3 Costing of Outcomes and Outputs
3.4 Functional Classification of Expenses
4. Appropriations
4.1 Annual Appropriation Bills
4.2 Special (or Standing) Appropriations
4.3 Administered and Departmental Items
4.4 Additional Estimates
4.5 Advance to the Finance Minister
5. Budget Documents
5.1 Budget Speech
5.2 Budget Overview
5.3 Budget Papers
5.4 Ministerial Statements and Media Kits
5.5 Portfolio Budget Statements
5.5.1 Content and Format
5.6 Issues
6. Reporting Standards
6.2 Government Finance
Statistics
6.3 Australian Accounting Standard 31
6.4 Accounting Standards Issues
6.5 Treatment of the Goods and Services Tax
7. Agency Financial Statements
7.1 Statement of Financial
Performance
7.1.1 Capital Use Charge
7.2 Statement of Financial Position
7.3 Cash Flows Statement
7.4 Capital Budget Statement
8. Other Financial Information
8.1 Charter of Budget Honesty
8.1.1 Mid-Year Economic and Fiscal
Outlook
8.1.2 Final Budget Outcome
8.1.3 Pre-Election Economic and Fiscal Outlook Report
8.2 Financial Management and Accountability Act 1997
8.2.1 Monthly Reports
8.2.2 Consolidated Financial Statements
8.3 Senate Estimates
8.4 Annual Reports
8.5 Tax Expenditures
8.5.1 Issues
9. Performance Information
9.1 Issues
10. Conclusions
Glossary
The following is adapted from the
Glossary prepared by the Budget Group of the Department of
Finance and Administration.
Accrual
accounting. The system which brings to account
both monetary (for example, salary payments) and other activities
(for example, depreciation of assets and increases in long service
leave liabilities) in the period when they occur. Differs from cash
accounting, which recognises only monetary transactions and only
when such a transaction takes place. Accrual accounting shows
information about revenues, expenses, assets and liabilities that
cannot be obtained by cash accounting.
Accrual
Budget. A comprehensive Budget incorporating
assets, liabilities, expenses and revenues, not just monetary
receipts and payments. Accrual Budgeting extends cash Budgeting by
incorporating all resource implications such as depreciation and
increases in liabilities.
Additional
estimates. Changed circumstances after the Budget
may lead agencies to ask the Government for additional funds.
Approved funding increases are normally incorporated into
Appropriation Bills 3 and 4 and the Appropriation (Parliamentary
Departments) Bill (No. 2), and does not become available until
after Parliament has passed the Bills and they have received royal
assent.
Administered
items. Revenues, expenses, assets and liabilities
that the government controls, but which an agency manages on the
government's behalf. Examples include subsidies, grants and benefit
payments; taxes, fees, fines and excises; and public debt and
related interest.
Advance to the Minister for Finance and
Administration. A provision, authorised by the annual
Appropriation Acts and made available to the Minister as a
contingency fund, to provide urgent funding to agencies. Normally,
the advance is made only if the need is urgent and was unforeseen
or arose because of erroneous omission or understatement.
Agency. When used generally,
encompasses departments, agencies, authorities and non-commercial
companies. For the purposes of the Financial Management and
Accountability Act 1997, agencies are Departments of State,
Departments of Parliament and 'prescribed agencies'. Portfolios
consist of a number of agencies.
Amortisation. The process of
writing off, as an expense, initial expenditure on items such as
research and development costs or lease payments over the over the
period of the lease.
Appropriations. An amount of
public moneys Parliament authorises for spending. An appropriation
authorises the Commonwealth to withdraw moneys, but also restricts
spending to the particular purpose specified by the appropriation.
Parliament appropriates spending under annual Appropriation Bills
and under Special (or Standing) appropriations. The annual
appropriations Bills are Appropriation Bill (No. 1), Appropriation
Bill (No. 2) and Appropriation (Parliamentary Departments) Bill.
The annual Appropriation Bills account for about 25 per cent of
agency expenses and Special (or Standing) appropriations for about
75 per cent.
Australian Accounting Standards
(AAS). Specify accounting practices including how an
entity should present financial information. AAS 31, Financial
Reporting by Governments, is the main standard for government
reporting.
Budget aggregates. Refers to
totals of revenue, expenses and the Budget balance
(surplus/deficit).
Budget balance. The term used
to refer to a Budget outcome, whether a surplus or deficit. The
'fiscal balance' in accrual Budgets is the counterpart of
'underlying cash balance' in cash Budgets. The Budget Papers
contain both the fiscal balance and the underlying cash
balance.
Capital-use charge. A charge
levied on agencies for the cost of capital they use. The charge is
usually based on agencies' net assets at the end of the financial
year. Funding for the charge is included in agencies' departmental
appropriations.
Charter of Budget Honesty. The
Charter of Budget Honesty Act 1998 provides a legislative
framework for the conduct and reporting of fiscal policy. The Act's
aim is to improve fiscal policy by requiring fiscal strategy to be
based on certain principles of fiscal management and by
facilitating public scrutiny of fiscal policy and performance.
Consolidated
Revenue Fund (CRF). Section 81 of
the Constitution requires that all revenue raised or money received
by the Executive Government has to form one consolidated revenue
fund to be appropriated for Commonwealth purposes. The CRF is thus
the principal operating fund where the transactions associated with
the general activities of the government are recorded.
Cost. Expenses an agency incurs
for the delivery of outputs.
Departmental items. Resources
(assets, liabilities, revenues and expenses) that agencies control
directly and use to produce outputs on behalf of government.
Examples are computers and plant and equipment used in providing
goods and services; accruing liabilities for employee entitlements;
revenues from user charges and profits; and employee salaries and
other administrative expenses incurred in providing goods and
services.
Economic
parameters. The values of economic variables-such
as movements in prices, wages, employment, and interest and
exchange rates-on which the Budget and forward years estimates are
based. Parameters are based on the forecasts of the Joint Economic
Forecasting Group.
Effectiveness. The extent to
which outputs and/or administered items make positive contributions
to the specified outcome. Effectiveness indicators are used to
assess the degree of success in achieving outcomes.
Efficiency. The extent to which
the use of inputs is minimised for a given level of outputs, or
outputs are maximised for the given level of inputs.
Estimates. Expected expenses
and revenue of the Commonwealth. Expense estimates are prepared for
each item in the Budget in consultations between the Department of
Finance and Administration and the agency responsible for program
delivery. Treasury prepares tax revenue estimates.
Expenditure
Review Committee (ERC). The
sub-committee of Cabinet that meets over a period of months before
the Budget to consider new policy and savings proposals, and which
recommends to Cabinet proposals to be included in the Budget. The
ERC usually includes the Prime Minister, Treasurer and Minister for
Finance and Administration in addition to relevant portfolio
Ministers.
Expense. Total value of all of
the resources consumed in producing goods and services. Expenses
include cash items such as salary payments as well as expenses that
have been incurred-such as accruing employee entitlements-which
will be paid in the future.
Final Budget outcome. The
actual Budget result. The Charter of Budget Honesty Act
1998 requires the Treasurer to release publicly and table a
final Budget outcome report for each financial year no later than
three months after the end of the financial year. The report
contains Budget sector and general government sector fiscal
outcomes including information on actual revenue, expenses, net
capital investment, Federal financial relations and other
information for the financial year.
Financial Management and Accountability
Act 1997. The main Act governing the financial activities
of agencies including the collection of public money, the
maintenance of accounting records, control and management of public
property, the responsibilities of chief executives, and the power
of the Minister of Finance and Administration to make regulations
and delegate powers.
Fiscal balance. In accrual
Budgets, the difference between government saving and investment.
Measures the government's net call on other sectors of the economy.
A surplus, for example, indicates that the Commonwealth is lending
to other sectors. The fiscal balance is thus an indicator of the
financial impact of the Commonwealth's operations on the rest of
the economy.
Fiscal policy. The use of
government spending and taxation to influence the level of economic
activity. 'Discretionary' fiscal policy seeks to counter cycles in
the economy.
Fiscal risks.
General developments or specific events that may affect the fiscal
outlook. Examples are litigation before the courts and possible
Senate rejection or amendment of Budget measures.
Forward
estimates. Estimates of the revenues and costs of
on-going Government policy after allowing for estimated movements
in parameters. The forward estimates show the minimum cost of
maintaining on-going Government policy because they do not include
provision for new programs or expansion of existing programs that
the Government has not agreed to or programs that are not expected
to continue. Forward estimates are a system of rolling three-year
financial estimates. After the Budget is passed, the first year of
the forward estimates becomes the base for next year's Budget bid,
and another out-year is added to the forward estimates.
General
government sector. Encompasses
agencies that provide public services that are mainly non-market in
nature and are either for the collective consumption of the
community or redistribute income such as social security payments,
and are financed mainly through taxes.
General
purpose payments
(GPPs). Commonwealth payments to the States and
Territories are divided into GPPs and specific purpose payments
(SPPs). GPPs are distinguished from SPPs because GPPs are not
subject to conditions regarding their use. GPPs comprise GST
revenue, Budget balancing assistance, National Competition Policy
payments and Special Revenue Assistance (paid to the Australian
Capital Territory).
Government Finance Statistics
(GFS). The GFS reporting framework is a
specialised statistical system designed to support economic
analysis of the public sector. The GFS used in Australia accord
with the Australian Bureau of Statistics framework, which is
consistent with international statistical standards (the System
of National Accounts 1993 and the draft accrual version of the
International Monetary Fund's A Manual on Government Finance
Statistics).
Inputs. Resources in the forms
of people, materials, energy, facilities and funds that an agency
uses to produce outputs.
Joint Economic Forecasting Group
(JEFG). A group of officials from Treasury, Department of
the Prime Minister and Cabinet, Department of Finance and
Administration, Reserve Bank of Australia and Australian Bureau of
Statistics. The group meets three or four times a year after the
quarterly national accounts are released to review official
economic forecasts. JEFG examines economic forecasts in light of
the economic outlook for the remainder of the Budget year and the
following year.
Mid-Year Economic and Fiscal Outlook
(MYEFO). Essentially an update of the Budget estimates.
The MYEFO takes account of actual spending and revenue in the year
to date and decisions since the Budget. The MYEFO is published
around November.
New policy proposals.
Ministers' proposals to Cabinet recommending the adoption of a new
initiative or change to existing programs. Such proposals are
normally made in the context of the annual Budget process.
Outcomes (actual). The results
or consequences of actions by the Commonwealth and other bodies on
the community. Because actual outcomes reflect all influences, it
is often difficult to disentangle those attributable to
Commonwealth actions.
Outcomes (planned). The results
or consequences for the community that the Government seeks to
achieve.
Outputs. The goods and services
that agencies produce to attain planned outcomes.
Performance. The proficiency of
an agency in acquiring resources economically and using them
efficiently and effectively in achieving planned outcomes.
Performance information.
Evidence about performance that is collected and used
systematically. Evidence may relate to appropriateness,
effectiveness and efficiency. It may be about outcomes, factors
that affect outcomes, and what can be done to improve them.
Agencies specify in their Portfolio Budget Statements the
performance information that they will collect, and use this
information to report in their annual reports how well they have
met planned outcomes.
Portfolio
Budget Statements (PBS).
Documents that portfolio departments develop and publish explaining
each agency's source and use of funds by outcome. The PBS contain
information on revenue authorised by the Appropriation Bills,
revenue from other sources, information on special appropriations,
other financial information, and performance information. The PBS
consolidate information on all agencies within the portfolio.
Pre-Election Economic and Fiscal Outlook
(PEFO). The Charter of Budget Honesty Act 1998
requires the Secretaries of Treasury and the Department of Finance
and Administration to produce a PEFO report within ten-days after
an election is called. The purpose of the PEFO is to update
information on the economic and fiscal outlook.
Price. The departmental price
of outputs appropriations are the purchase price the government
pays for agencies' outputs.
Purchaser/provider
arrangements. Arrangements whereby an agency enters into
an agreement with another agency to provide goods or services. For
example, in 1999-2000 the Australian Taxation Office (ATO) entered
into purchaser/provider arrangements with the Department of Family
and Community Services and the Department of Health and Aged Care
whereby the ATO undertook to provide services to both to enable
them to achieve their outcomes. Agencies that receive the services
pay the agencies that provide them.
Revenues from other sources.
Include revenues from the sale of goods or provision of services to
other entities (user charges) and profits from the sale of
assets.
Savings measures. Measures that
reduce the cost of programs. To satisfy Department of Finance and
Administration guidelines, savings require either a Cabinet
decision to alter existing policy or represent a discretionary
reordering of priorities by a Minister, reduce expenses below what
they would otherwise have been, and contribute to the achievement
of the Government's fiscal targets.
Sensitivity analysis. Analysis
of the extent to which expense and revenue estimates are subject to
changes in economic parameters.
Special accounts. A mechanism
for recording moneys set aside (hypothecated) for a particular
purpose (for example, a levy collected from an industry and applied
to making grants for the development of that industry) and for
making payments for this purpose.
Special (or Standing)
Appropriation. Money appropriated by a particular Act of
Parliament (for example, the Australian Land Transport
Development Act 1988) for a specific purpose, for example, the
payment of grants to the States for roads. Special appropriations
may be for a specific amount of money, level of benefit or period
of time. Special appropriations do not require annual spending
authorisation by Parliament, as they do not lapse at the end of
each financial year. Special appropriations account for about
75 per cent of agency expenses.
Specific Purpose Payments
(SPPs). Payments to the States and Territories for policy
purposes that relate to particular functions, for example, health
and education. SPPs are made under section 96 of the Constitution,
which states that the Commonwealth Parliament may grant financial
assistance to any State on such terms as it sees fit. Most SPPs are
conditional on policy objectives that the Commonwealth sets or the
achievement of policy objectives agreed between the Commonwealth
and the States.
Tax expenditures. The financial
benefits that individuals and businesses derive from tax
concessions in the forms of exemptions, deductions, rebates or
reduced rates. Concessions reduce or delay the collection of tax
revenue. Governments can use concessions to allocate resources to
different activities in much the same way that they can use direct
spending programs.
Underlying (cash) balance. The
cash Budget counterpart of the fiscal balance in accrual Budgets.
The underlying cash balance is a broad indicator of the
Commonwealth's cash flow requirements. For example, an underlying
cash surplus reflects the extent to which cash is available to the
Commonwealth either to increase its financial assets or decrease
its liabilities (assuming no revaluations and other changes occur).
The underlying balance differs from the 'headline' balance-the
actual cash outcome-by, for example, excluding proceeds from the
privatisation of investments on the grounds that these are one-off
or abnormal items.
Uniform Presentation Framework.
An agreement between the Commonwealth, States and Territories
whereby all jurisdictions are required to publish a common core of
Government Finance Statistics and consistent financial information
in their Budget papers.
Major
Issues
The annual Budget, which is brought down in May,
is perhaps the Government's most important political, economic and
social document. The sheer size of the Budget-estimated outlays in
the 2001-02 Budget were $161 billion dollars or the equivalent of
23 per cent of gross domestic product-attests to its influence
over the size of as well as the allocation of resources within the
economy. The Budget contains information on matters such as its
economic consequences and the provision of goods and services.
While the Budget process changes little, major changes have been
made to the Budget's focus, content, format and reporting in recent
years. These changes include:
-
- the move from cash accounting to accrual accounting and from
cash budgeting to accrual budgeting
-
- the shift in the focus of agency reporting from program
budgeting to planned outcomes
-
- the presentation of financial statements in accordance with two
main accounting standards
-
- the presentation of information to allow assessment of agency
performance, and
-
- the reporting and other requirements of the Financial
Management and Accountability Act 1997 and the Charter of
Budget Honesty Act 1998.
The move to accrual accounting has positive
features. In particular, non-cash expenses such as accruing long
service entitlements and asset depreciation are now included in
expenses along with cash expenses. Cost accounting methods are used
to allocate all expenses to outputs and outcomes. While problems of
cost attribution remain, the cost of providing goods and services
is now measured more fully than under cash accounting.
Under cash budgeting, agencies' annual
appropriations are based on their cash requirements. Under accrual
budgeting, agencies' annual appropriations are based on their
accrual expenses (and capital requirements). Hence agencies are
resourced for all expenses as and when they arise and not just when
they have to be paid. For example, agencies are funded for
increasing long service leave liabilities and the depreciation of
assets before the funds have to be spent on paying out the
liabilities or replacing the asset. Agencies have to manage these
unspent funds until they are needed.
Critics argue that appropriations should be
cash-based with a parallel accrual accounting system on the grounds
that cash budgeting and cash accounting are vital to the
government's information needs. Another criticism of accrual
budgeting is it does not seem sensible to appropriate in the
current year funds that are not needed in that year but will be
spent in future years.
Despite the move to accrual budgeting, most
economic commentators continue to focus on the underlying cash
balance and not the accrual fiscal balance in discussions of Budget
aggregates. One reason is that cash balances have some advantages
for tracking expenditures in a fiscal year and helping to identify
the short-term effects of fiscal policy on the economy. Further,
accrual fiscal balance data are available only from 1996-97,
limiting their use for comparative purposes.
The move from program budgeting to the outcomes
and output framework has been a major shift and, so far, a mixed
one. The purpose of the framework is to encourage agencies to focus
on planned outcomes-the results or consequences for the community
that the government wants to achieve. Under the framework, expenses
are allocated to outputs-the goods and services that agencies
produce to attain outcomes-and thence to planned outcomes. However,
the implementation of the framework has been difficult. Outcomes
reflect administrative arrangements but these often do not coincide
with broader community objectives. Some outcomes are so general
that, as the Senate Finance and Public Administration Legislation
Committee observed, it is hard to see how accountability is
enhanced by reporting against them. It has been difficult to
specify outcomes that do not overlap among and within agencies'
activities.
The trend seems to be for agencies to
consolidate outputs into fewer categories. The desirability of this
trend is questionable on transparency and accountability grounds.
The Senate Finance and Public Administration Legislation
Committee's observation on the generality of outcomes could also be
applied to the consolidation of outputs.
It will be some time before a proper assessment
can be made of the framework's success in encouraging agencies to
focus on outcomes: it has been in place for only three Budgets and
remains under development. The recasting of outputs and outcomes
will make difficult assessment of the framework and comparisons of
data over time because of the lack of continuity in data series.
However, the problem of comparability has to be balanced against
the provision of better information and the issue of
materiality.
In addition to showing expenses classified by
outcomes, the Budget shows them classified by functions such as
health, education, road transport and defence. While this
classification system is not without problems-such as
reclassifications of activities-many readers will find it more
useful than allocations by outcomes.
Contrary to the rhetoric about how accrual
budgeting and the outcomes and outputs framework would increase
transparency and accountability, the availability of information in
the Budget Papers and associated documents that Members of
Parliament commonly seek has generally fallen, although this is
truer of some agencies than others. This is particularly true of
the Portfolio Budget Statements, which are the main source of
information about proposed agency activity. The main complaint
concerning these Statements is the high level of aggregation of
financial data and the lack of detail about agency activities.
Parliamentarians, through various committees, have been among the
strongest critics of aggregation.
The Department of Finance and Administration, in
an appearance before the Joint Committee of Public Accounts and
Audit, has agreed that the aggregation of data in the Portfolio
Budget Statements is an issue. The Department issues guidelines for
the preparation of Portfolio Budget Statements. However, these are
'minimum' guidelines. Agencies have considerable discretion as to
what they present in their Portfolio Budget Statements and in what
format. Where Parliament identifies gaps in the information that
agencies provide in their Portfolio Budget Statements, it can
require them to provide that information, and agencies have
responded to such requests from various Parliamentary committees.
The trend, therefore, is for agencies to provide more
information.
A particular issue is the reporting of special
appropriations, which amount to around three-quarters of total
spending. A welcome development is the reporting by some agencies
of estimated expenses from individual special appropriations. For
example, the Department of Family and Community Services Portfolio
Budget Statement shows that in 2001-02, estimated spending under
administered special appropriations is $52 billion. Of this, more
than $40 billion will be under the Social Security
(Administration) Act 1999. The Department even breaks down
spending under this Act by category, for example, age pension,
disability support pension, youth allowance and so on. However, the
Portfolio Budget Statement does not show to which outcome(s)
spending under this Act contributes. The Department administers 26
Acts and has three outcomes. The provision of such information
would link the legislative authority for spending to planned
outcomes.
Financial information in the Budget Papers is
prepared in accordance with external reporting standards. The two
main standards are the Government Finance Statistics and Australian
Accounting Standard No. 31, Financial Reporting by
Governments (AAS 31). The GFS is designed to allow economic
analysis of the public sector, and major Budget aggregates are
based on the GFS. AAS 31 is adapted from the accounting standards
applying to business. The presentation of data under two standards
is, however, a source of confusion especially since they can yield
quite different results. Some critics argue that having two
accounting systems is a retrograde step and for the use of only the
GFS because it is designed for the public sector.
Agencies are required to prepare statements of
financial performance (profit and loss), financial position
(balance sheet), cash flows, and capital budget for their Portfolio
Budget Statements and annual reports. This requirement has had the
positive effect of increasing transparency and allows assessment of
an agency's financial performance and status. However, the
usefulness of the statements is limited because the concepts on
which they are based are more applicable to business than to the
public sector. Critics argue that business accounting systems
should not be used in the public sector without modification to
reflect the needs of government. For example, equity in a business
is an indicator of its solvency. But the concept of equity has
limited meaning for an agency whose main functions are to provide
policy advice and administer appropriations. The concept has even
less relevance to the government sector as a whole. Depending on
the accounting standard used, general government net worth at 30
June 2001 was negative to the tune of between $41 billion and $46
billion. In the private sector, this would result in the business
being made bankrupt. This is not to say that financial statements
are valueless. Rather, it is to urge caution when interpreting
them.
The Charter of Budget Honesty Act 1998
has increased transparency of reporting. The Act requires, among
other things, that the Government prepare an economic and fiscal
outlook report with each Budget, a mid-year economic and fiscal
outlook report, and a final budget outcome report. The Act thus
imposes an obligation to provide information that has traditionally
been made available. The Act also requires the public release of a
pre-election economic and fiscal outlook (PEFO) report within 10
days of the issue of the writ for a general election. The
publication of the PEFO has helped reduce dispute over the state of
finances that usually surrounds election campaigns. Similarly, the
Financial Management and Accountability Act 1997 requires
the Minister for Finance and Administration to publish monthly
financial statements in a form consistent with the Budget estimates
and annual consolidated financial statements.
Agencies report on how they have performed
against planned outcomes in their annual reports. The usefulness of
performance information is mixed. This is partly because it is
often difficult if not impossible to measure the contribution of
agencies to outcomes. For example, the States are primarily
responsible for funding primary and secondary education. The
Commonwealth also provides funds. Since both State and Commonwealth
funds are lumped together to provide education services, it is not
possible to disentangle the consequences of Commonwealth funding.
The Auditor-General has observed that the development of indicators
has some way to go.
Much attention is focused on the level of
expenditure and revenue in the Budget. However, a large amount of
revenue is foregone through tax concessions called 'tax
expenditures'. The Government can use taxation concessions to
allocate resources to different activities in much the same way
that it can use direct expenditure. But tax expenditures are not
reported like direct expenditure in that tax expenditures are not
added to direct expenditure. This treatment may tempt governments
to 'substitute' tax expenditures for direct expenditure to make
public finances 'look good'. Not adding tax expenditures to direct
expenditure has the effect of 'understating' the size of the
government sector. For example, in 1999-2000, if tax expenditures
of around $27 billion were added to direct expenditure, total
expenditure would rise from $153 billion to $180 billion, an
increase of 18 per cent.
Another source of under-reporting of the size of
the Commonwealth government sector is the treatment of the goods
and services tax (GST). The Budget generally treats the GST as if
it were not a Commonwealth tax. The Government argues that the
Commonwealth collects the GST as an agent for the States. But the
Australian Bureau of Statistics and the Auditor-General reject this
argument on the grounds that the GST is imposed and administered
under Commonwealth legislation. The consequences of not recognising
the GST as a Commonwealth tax are to understate expenses and
revenue and to overstate net liabilities. In 2000-01, revenues were
understated by $27.5 billion and expenses by $23.8 billion, while
net liabilities were overstated by $3.7 billion. The treatment of
the GST inevitably gives rise to the suspicion that it is intended
to reduce the apparent size of government.
Introduction
The annual May Budget is perhaps the
Government's most important political, economic and social
document. The sheer size of the Budget-estimated outlays in the
2001-02 Budget were $161 billion dollars or the equivalent of 23
per cent of gross domestic product-attests to its influence over
the size of as well as the allocation of resources within the
economy. The Budget contains information on matters such as its
economic consequences, the provision of goods and services, the
Government's social and political priorities and information on how
the Government intends to attain these priorities.
This paper describes the Budget process
beginning with the first steps in the November before the Budget is
brought down through to the presentation of agency annual reports.
The paper also explains key concepts as well as the major changes
to the content and presentation of the Budget Papers and associated
documents that have been made in recent years. The paper further
examines some issues such as the treatment of the goods and
services tax and tax expenditures. This paper is the fourth in a
series and updates a 1993 paper by Mr Denis James(1) to
take account of a number of major changes in recent years. The
changes include:
-
- the move from cash accounting to accrual accounting and from
cash budgeting to accrual budgeting
-
- the shift in the focus of agency reporting from program
budgeting to planned outcomes
-
- the presentation of financial statements in accordance with two
main accounting standards
-
- the presentation of performance information to allow assessment
of agency performance, and
-
- the reporting and other requirements of the Financial
Management and Accountability Act 1997 and the Charter of
Budget Honesty Act 1998.
The following discusses these and other aspects
of the Budget starting with an overview of the Budget process.
1. Overview of the
Budget Process
The highlight of the process is Budget night in
May.(2) However, a 'typical' cycle extends over 21
months, beginning about six months before Budget night and ending
three months after the end of the Budget year on 30 June.
The preparation of a Budget involves a large
number of participants. The Expenditure Review Committee, a Cabinet
committee of senior Ministers chaired by the Prime Minister (see
below) is primarily responsible for developing the Budget. However,
a number of agencies-notably the Department of the Treasury
(together with the Australian Taxation Office), the Department of
Finance and Administration, the Department of the Prime Minister
and Cabinet and line agencies-provide advice and support to the
Expenditure Review Committee. Broadly, the Department of Finance
and Administration coordinates the preparation of the Budget and
forward estimates and is responsible for statements on expenses and
non-tax revenue. Treasury is responsible for assessments of the
economic and fiscal outlook and estimates of tax revenues.
The following outlines the key stages of a
typical Budget process. Definitions of the terms used are in the
Glossary and are explained in more detail throughout this Paper and
by the use of e-links, which are underlined.
1. 1 Forward Estimates Update
A typical Budget process begins around November
when the forward estimates are updated. Forward estimates are
rolling three-year estimates of what would be appropriated assuming
that government policy is on-going. The estimates include decisions
made since the Budget. An example is the decision to send troops to
East Timor. Forward estimates exclude new programs, the expansion
of existing programs that the Government has not agreed to, and
programs that are expected to end. The forward estimates are thus
the base on which current and future year spending estimates are
built. The estimates are updated so that the Expenditure Review
Committee can consider new policy bids based on the most up-to-date
information.
1.2 Senior Ministers' Review
In November or December, a
Senior Ministers' Review is held. This is a meeting of the
Prime Minister, the Treasurer and the Minister for Finance and
Administration, who establish priorities for the coming Budget, set
timetables and deal with other issues. The review considers
Ministers' proposals, new policies and lapsing programs, and
expected major pressures on agency budgets. The Prime Minister
advises agencies of the Government's priorities and targets after
the review.
1.3 Portfolio Budget Submissions
To seek additional funding for new policy
proposals, agencies have to prepare
portfolio budget submissions based on the outcome of the Senior
Ministers' Review. The submissions outline all major proposals and
potential savings. Agencies also send a letter to the Minister for
Finance and Administration outlining all minor proposals, and a
letter to the Secretary of the Department of Finance and
Administration outlining achievements against previous savings
measures. Agencies cost the submissions and agree the costings with
the Department of Finance and Administration. The submissions are
circulated for coordination comments and lodged with the Cabinet
Office, usually by late February.(3)
1.4 Expenditure Review Committee
As noted, the
Expenditure Review Committee (ERC) is primarily responsible for
developing the Budget against the background of the Government's
political, social and economic priorities. The ERC is a Cabinet
committee consisting of senior Ministers. On 13 December 2001, the
Prime Minister announced that the ERC would include himself
(Chair), the Treasurer, and the Ministers for Trade, Environment
and Heritage, Finance and Administration, and
Revenue.(4) The ERC is responsible, among other things,
for framing the spending side of the Budget. The ERC first meets
around March and reviews new policy proposals and on-going spending
as well as savings proposals. The ERC recommends to Cabinet
proposals for inclusion in the Budget. When examining new policy
proposals and savings options, the Committee draws on the Portfolio
Budget Submissions and briefs that the Department of Finance and
Administration prepares.
1.5 Revenue Committee
After the Expenditure Review Committee process,
the Revenue Committee-also a Cabinet Committee-meets to decide the
revenue components of the Budget, which are based on proposals and
options generally formulated or reviewed by Treasury.
1.6 Pre-Budget Review of Estimates
Around March and after Cabinet has agreed to new
policies, agencies update their estimates for the preparation of
the Budget documents and Appropriation Bills.
1.7 Budget Documents
Also around March and concurrent with the
Expenditure Review Committee process, agencies begin to prepare
Budget documents. Agencies prepare three components: the Portfolio
Budget Statements, the Statement
of Risks(5) (which was included in Statement 10 of
Budget Paper No. 1 in 2001-02) and the 'measures' descriptions in
Budget Paper No. 2.
1.8 Budget Presentation
The Budget is usually brought down in May. A
consequence is that the outcome of the Budget for the financial
year before the Budget year can only be estimated. The Government
introduces Appropriation Bills 1 and 2 and the Appropriation
(Parliamentary Departments) Bill when it brings down the Budget,
and presents the Budget Papers and related documents.
1.9 Senate Estimates Committees
After the Budget is tabled, the Senate Estimates
Committees scrutinise the Appropriation Bills and other Budget
documentation. In particular, the Committees scrutinise the
Portfolio Budget Statements, which form the basis for their
inquiries. The basic function of the Committees is to require the
presence of, and seek explanations from Ministers of State who
formulate policy and Departmental officers who implement policy,
regarding proposed spending and revenue. Each of the Estimates
Committees takes responsibility for a number of agencies so that
all spending is scrutinised. For example, one such Committee is the
Employment, Workplace Relations, Small Business and Education
Legislation Committee. The Estimates Committee process is generally
finished in time for Parliament to pass the Appropriation Bills
before the end of June.
1.10 Mid-Year Economic and Fiscal
Outlook
The Charter of Budget Honesty Act 1998
requires the Treasurer to release publicly and table a Mid-Year
Economic and Fiscal Outlook (MYEFO) report by the end of January in
each year or within six months after the last Budget, whichever is
later. In practice, the MYEFO has been released in November. The
MYEFO updates the economic and fiscal outlook and the budgetary
position. In particular, the MYEFO takes account of decisions since
the Budget was brought down that affect expenses and revenues, and
so updates the Budget spending and revenue aggregates.
1.11 Final Budget Outcome
The final stage in the Budget process is in
September when the Final Budget Outcome for the financial year just
ended is tabled. The Charter of Budget Honesty Act 1998
requires the Treasurer to release publicly and table a Final Budget
Outcome report for each financial year no later than three months
after the end of the financial year. The report must contain
Commonwealth budget sector and Commonwealth general government
sector fiscal outcomes for the financial year.
2. Accrual
Accounting and Accrual Budgeting
2.1 Accrual Accounting and Accrual
Budgeting: What are They?
The move from cash accounting and cash budgeting
to accrual accounting and
accrual budgeting in 1999-2000 has been a major change. The
rationale for this move derives from the logic behind accrual
accounting as opposed to cash accounting. Cash accounting
recognises only monetary transactions and only in the period when
money changes hands. Accrual accounting, on the other hand,
recognises financial commitments as well as monetary transactions
and records them in the period when they take place. For example,
under cash accounting, a credit sale is brought to account only
when the purchaser pays the debt. Under accrual accounting, the
sale and the payment are treated as two transactions. In the case
of Public Service superannuation, cash accounting recognises only
payments to superannuants whereas accrual accounting also brings to
account the increase in liabilities for future
payments.(6) In the case of purchases of assets such as
land and buildings, cash accounting recognises only the purchase.
Accrual accounting recognises the purchase by bringing the asset
into the balance sheet and then depreciates it (as an expense) over
its life.
Because cash accounting is a subset of accrual
accounting, it can yield quite different results. This is
illustrated by the Mid-Year Economic and Fiscal Outlook (MYEFO) for
2001-02. The MYEFO reports the forecast Budget balance in both cash
('underlying cash balance') and accrual ('fiscal balance') terms.
The MYEFO shows the underlying cash balance to be in surplus but
the fiscal balance in deficit.
Under cash budgeting, agencies' annual
appropriations are based on their cash requirements. Under accrual
budgeting, agencies' annual appropriations are based on their
accrual expenses (and capital requirements). Hence agencies are
resourced for all expenses as and when they arise and not just when
they have to be paid. For example, agencies are funded for
increasing long service leave liabilities and the depreciation of
assets before the funds have to be spent on reducing the
liabilities or replacing the asset. Agencies have to manage these
unspent funds until they are needed.
The move to accrual accounting means that some
data comparisons may not be possible. In particular, it may not be
possible to compare data up to and including 1998-99 with data for
subsequent years. Further, agencies presented financial statements
in their annual reports on an accrual basis for a number of years
in the run up to the introduction of accrual budgeting.
2.2 Issues
Some argue that instead of being accrual-based,
appropriations should be cash-based with a parallel accrual
accounting system. In a submission to the Joint Committee of Public
Accounts and Audit, Emeritus Professor Alan Barton, formerly
Professor of Accounting at the Australian National University,
argued that cash budgeting and cash accounting are vital to the
government's information needs, and that cash budgets can be run in
parallel with accrual accounting reports.
Another strand of argument relates to the fact
that agencies receive, in a given Budget year, funds that they will
spend in future years and have to manage these funds until such
time as they are spent. In a submission to the same Committee,
Professor Harris, formerly Auditor-General in NSW, questioned the
wisdom of this system of appropriating funds.(7)
Despite the move to accrual budgeting, most
economic commentators continue to focus on the underlying cash
balance and not the accrual fiscal balance in discussions of Budget
aggregates. One reason commentators focus on cash balances is that
they have some advantages for tracking expenditures in a fiscal
year and in helping to identify the short-term effects of fiscal
policy on the economy.(8) Another reason is that accrual
fiscal balance data are available only from 1996-97, limiting their
use for comparative purposes.
3. Outcomes
and Outputs
3.1 The Outcomes and Outputs
Framework
Since 1999-2000, budgets have been presented in
an
outcomes and outputs framework. The framework was introduced at
the same time as accrual budgeting. However, it should be noted
that accrual budgeting and the framework are independent, that is,
it is possible to have accrual budgeting without the framework and
vice versa. The outcomes and outputs framework forms part of a
broader framework of reform of the Public Service and financial
management and reporting. Other reform elements were the devolution
of responsibility to agencies, the repeal of the Audit Act
1901, and the passage of the Financial Management and
Accountability Act 1997. The devolution of responsibility to
agencies has, among other things, given them greater discretion as
to how they report their activities within the outcomes and outputs
framework.
The focus of the framework is planned outcomes.
They are the results or consequences for the community that the
Government seeks to achieve. Ministers approve the outcomes for
their portfolios. An example of a planned outcome is the Department
of Immigration and Multicultural and Indigenous Affairs outcome 1,
namely, the 'lawful and orderly entry and stay of people' in
Australia. Outputs are the goods and services that agencies produce
that contribute to the attainment of outcomes. The Department of
Immigration and Multicultural and Indigenous Affairs has four
outputs which contribute to outcome 1, namely, 'non-humanitarian
entry and stay', 'refugee and humanitarian entry and stay',
'enforcement of immigration law', and 'safe haven'. The Department
of the Parliamentary Library has one outcome, namely, 'To
contribute to a more informed Parliament and, through it, to the
Australian community'. The two outputs that contribute to this
outcome are 'the provision of commissioned information services and
policy advice and analysis to Senators, Members, Parliamentary
committees and Parliamentary departments' and the 'provision of
self-help information services for Senators, Members, Parliamentary
committees and Parliamentary departments'.
The framework was introduced to encourage
agencies to focus on ends and not means. Program budgeting, which
preceded the outcomes and output framework, grouped outlays into
identifiable programs. For example, the Attorney-General's
portfolio had six programs in 1998-99. One was 'administration of
justice' which encompassed the activities of the courts and
tribunals. Another program was 'maintenance of law, order and
safety'. A criticism of program budgeting was that it focused too
much on inputs and outputs and not enough on the reasons for
producing outputs. For example, under program budgeting, there was
a tendency to focus on the cost of information technology rather
than on its uses to which it was put.
3.2 Issues
The outcomes and outputs framework has
encountered conceptual and implementation difficulties. The
framework's success depends crucially on how well outcomes are
specified. One issue is the overlapping of outcomes across agencies
and portfolios. Outcomes reflect administrative arrangements. But
these arrangements often do not coincide with broader objectives.
For example, it could be argued that some functions of the
Department of Foreign Affairs and Trade contribute indirectly to
Australia's defence and therefore to the Department of Defence
outcome: 'the defence of Australia and its national interests'. The
Department of Transport and Regional Services has one outcome: 'a
better transport system for Australia and greater recognition and
opportunities for local, regional and territory communities'. But
the Department provides only some regional services. Equitable
access to services in regional areas involves agencies funding
health, education and other services. The need for effective
coordination between departments and across all levels of
government and the social support network was a theme of the
Reference Group on Welfare Reform.(9)
Another issue is overlapping outcomes within a
portfolio or agency. The framework implicitly assumes that outcomes
can be specified discretely. Professor Harris cites as examples of
what he believes to be overlapping outcomes those of the
Commonwealth Department of Health and Ageing portfolio and the NSW
Police Service. He notes that overlapping outcomes create problems
of accountability since agencies have discretion as to how they
classify an activity.(10) This, in turn, raises issues
of agencies' reporting on their contributions to outcomes.
Reporting of performance is discussed in section nine of this
paper.
Another issue is the level of specificity of
outcomes: some are highly abstract while others are more specific.
An example of a general outcome is outcome one of the Environment
and Heritage portfolio. This is 'the environment, especially those
aspects that are matters of national environmental significance, is
protected and conserved'. The Senate Finance and Public
Administration Legislation Committee, in its 1999 report The
Format of the Portfolio Budget Statements-Second Report,
expressed concern over the widely differing levels of specificity.
The Committee stated that some outcomes are so general that it is
hard to see how accountability can be enhanced in reporting against
them.
The Committee also criticised the absorption of
agencies and functions into broader frameworks so that these
agencies were no longer separately identifiable in terms of their
funding and performance. For example, in 1999-2000, the Office of
the Status of Women and the Australian Geological Survey
Organisation (AGSO) were absorbed into broader frameworks. Possibly
in response to such criticism, the subsequent trend has been to
show agencies separately. For example, AGSO is now shown separately
in the Portfolio Budget Statements of the Industry, Tourism and
Resources portfolio. The Committee also noted that the amounts
allocated to outcomes ranged from $271 000 to more than $17.5
billion.
A major problem associated with the framework to
which the Committee drew attention is the paucity of information
especially in the Portfolio Budget Statements. Contrary to the
rhetoric about how accrual budgeting and the outcomes and output
framework would increase transparency and accountability, the
availability of information in the Budget Papers and documentation,
especially the Portfolio Budget Statements, has fallen sharply. The
main complaint is excessive aggregation of financial data and the
lack of detail about agency activities. The extent of aggregation
can be seen by comparing the 1995-96 Portfolio Budget Statement for
the Department of Employment, Education and Training with that of
the Department of Employment, Workplace Relations and Small
Business for 2001-02. This issue is discussed in section 5.5, which
deals with the Portfolio Budget Statements.
It will be some time before a proper assessment
can be made of whether the benefits of the outcomes and outputs
framework justify its cost. Agencies have, at considerable expense,
restructured their accounting and costing systems to conform to the
framework. The framework has been in place for three Budgets and is
still being developed. Some recasting of outcomes and outputs has
already occurred with the trend apparently towards fewer of both.
For example, in 2001-02, the Department
of Environment and Heritage changed its outputs structure
substantially. Further recasting is likely.
The recasting of outcomes and outputs will make
assessment of the success or otherwise of the framework difficult.
Recasting will also make time series comparisons of expenses
difficult because of the lack of continuity in data series.
However, the problem of comparability has to be balanced against
the provision of better information and the issue of
materiality.
The trend seems to be for agencies to
consolidate outputs into fewer categories. The desirability of this
is questionable on transparency and accountability grounds. The
Senate Finance and Public Administration Legislation Committee's
observation about the generality of some outcomes and
accountability, could also be applied to the consolidation of
outputs.
3.3 Costing of Outcomes and
Outputs
Outcomes and outputs are costed by attributing
all costs to outputs and thence to outcomes. The objective is to
measure as accurately as possible the cost of producing outputs and
outcomes. The trend is for improved costing of activities.
Still, problems remain. For example, it is
difficult to allocate some costs-for example, 'overheads' such as
electricity and rent-which cannot be attributed directly to a
particular output or which contribute to more than one output. The
Auditor-General has noted:
During the 2000-2001 financial statement audit
process, the attribution issue was considered. At this time, not
all entities are able to attribute accurately all costs to relevant
outcomes/output groups ... There is scope for many entities to
develop comprehensive allocation models which are able to attribute
more reliably expenses to outputs.(11)
The Productivity Commission's inquiry into cost
recovery arrangements by Commonwealth regulatory, administrative
and information agencies should result in further improvement in
costing of activities.(12)
3.4 Functional Classification of
Expenses
Under the outcomes and output framework, it is
usually not possible to determine how much is spent on functions
such as health, education, road transport and
defence(13). However, expenses are classified by
function in Statement 6 of Budget Paper No. 1 for 2001-02 and in
other documents such as the Final Budget Outcome. The Department of
Finance and Administration notes:
The function classification is a code used to
classify expense transactions by the purpose they serve (e.g.
health, education). It is based upon the Australian Bureau of
Statistics GPC (government purpose classification) which in turn is
based upon the United Nation's Classification of the Functions
of Government (COFOG), which is also applied in the IMF
Government Finance Statistics system.
The function allows trends in government
expenditure on particular functions to be analysed over time. This
is helpful in forecasting future expenditures. It can also be used
to isolate government expenditures on functions of interest for
specific economic or social studies. (14)
For example, the 'education' function
covers:
-
- expenses on the provision, management and support of all levels
of educational services at the preschool, school and tertiary level
(through both the higher and technical and further education
systems)
-
- expenses relating to allowances to students at all levels,
educational programs designed specifically for the benefit of
special groups, expenses on non-vocational adult education courses,
regulation and some research activities (with other research
funding being classified to General Research), and general
administration relating to education but
-
- excludes expenses on military colleges classified to Defence.
(15)
Note that the classification of activities to
functions can change. The changes are noted at the end of the
tables. For example, expenses for assistance to the aged were
reclassified from 'health' to 'social security and welfare' in
Table 3 of Statement 6 in Budget Paper No. 1 for 2001-02.
4.
Appropriations
Section 83 of the Constitution
states:
No money shall be drawn from the Treasury of the
Commonwealth except under appropriation made by law.
There are two broad categories of
appropriations:
-
- annual appropriations and
-
- special (or standing) appropriations.
4.1 Annual Appropriation Bills
Annual appropriations are contained in the three
Appropriation Bills:
-
- Appropriation Bill (No. 1)
-
- Appropriation Bill (No. 2 ), and
-
- Appropriation (Parliamentary Departments) Bill.
These Bills are contained in Budget Paper No.
4.
The Bills authorise the payment of specified
amounts for particular purposes. Appropriation Bill (No. 1)
provides for the appropriation of money from the Consolidated
Revenue Fund for the ordinary annual services of government.
Appropriation Bill (No. 2) provides for the appropriation of money
from the Consolidated Revenue Fund for purposes other than the
ordinary services of government. The division of items between the
two Bills accords with the 1965 'compact' between the House of
Representatives and the Senate.(16)
Appropriation Bill (No. 1) sets out agency
appropriations by outcome and distinguishes between administered
and departmental expenses. The data in Appropriation Bill (No. 1)
are highly aggregated and additional information is contained in
Portfolio Budget Statements. Items in Appropriation Bill (No. 2)
include:
-
- expenses in relation to grants to the States under section 96
of the Constitution (Specific Purpose Payments) and for payments to
the Northern Territory and the Australian Capital Territory
-
- administered expenses for new agency outcomes, and
-
- departmental capital-in the forms of equity injections, loans
and carryovers-and administered capital.
The Parliamentary Departments have a separate
Appropriation Bill because Parliament is constitutionally separate
and independent of the Executive and because the Departments are
administered under their own legislation separate from the
Public Service Act 1999.
4.2 Special (or Standing)
Appropriations
Annual appropriations account for around only 25
per cent of agency expenses. The remaining 75 per cent are funded
under special (or standing) appropriations-the terms are often used
interchangeably-and receipts from independent
sources.(17) Authority for special appropriations (the
term generally used to refer to either special or standing
appropriations) derives from various Acts. For example, the
authority for spending on roads is three Acts: the Australian
Land Transport Development Act 1988, the Roads to Recovery
Act 2000, and the Local Government (Financial Assistance)
Act 1995. Standing appropriations are 'open-ended' in that the
amount appropriated for a particular purpose is determined by the
eligibility and other provisions in the relevant Act. An example is
age pensions paid under the Social Security (Administration)
Act 1999. Special appropriations are payments of a specific
amount over a specific period of time.
This highlights a number of differences between
the annual and special appropriations. Whereas the Appropriation
Bills are for specific amounts, the amounts in the Budget for
special appropriations are estimated spending under the various
Acts. Further, whereas spending under the Appropriation Bills is
subject to annual review and approval by Parliament, this is not
the case for special appropriations in the sense that Parliament
does not legislate annually for special appropriations. Information
on the estimated payments under special appropriations can be found
in Portfolio Budget Statements.
Revenues from independent sources include
proceeds from the sale of goods and charges for the provision of
services, and profits from the sale of assets. The amount that
Parliament appropriates for an outcome is the difference between
the 'price of outputs' (the full cost of the good or service) and
revenue from other sources. For example, in 2001-02, the Department
of Finance and Administration outcome 1 (sustainable government
finances) has a price of outputs of $37.628 million, which will be
funded by $36.257 million in Appropriation Bill (No. 1) and $1.371
million in revenue from other sources. To the Department's credit,
receipts from independent sources are listed in some detail in an
appendix.
A welcome development is the reporting by some
agencies of estimated expenses from individual special
appropriations in their Portfolio Budget Statements. For example,
in 2001-02, the Department of Family and Community Services and the
Department of Finance and Administration reported such information
in an appendix. In the case of the Department of Family and
Community Services, it can be seen that estimated spending under
administered (see section 4.3) special appropriations is $52
billion. Of this, more than $40 billion will be under the
Social Security (Administration) Act 1999. The Department
of Family and Community Services goes even further and breaks down
spending under this Act by category, for example, age pension,
disability support pension, youth allowance and so on.
4.3 Administered and Departmental
Items
Appropriations are classified as either
administered or departmental. The distinction is based on the
concept of 'control' as outlined in Australian Accounting Standard
(AAS) 29 'Financial Reporting by Departments'.
Departmental items are the resources that
agencies control and use to produce outputs. Examples are
equipment, liabilities for employee entitlements, revenues from
user charges, and employee and other administrative expenses.
Administered items are revenues, expenses, assets and liabilities
that the government controls and which an agency manages on the
government's behalf. Administered items include expenses such as
subsidies, grants and benefit payments; revenues from taxes, fees,
and fines; liabilities relating to public debt and employee
superannuation; and assets relating to tax amounts receivable,
loans to other governments and investments in controlled entities.
An example of an administered expense is the road grants the
Commonwealth makes to the States under the Australian Land
Transport Development Act 1988. Spending by some Departments,
for example, Family and Community Services, is overwhelmingly
administered because most of its spending is authorised by various
legislative enactments such as those pertaining to pensions, family
assistance and various allowances.
The distinction between administered and
departmental items is not clear cut. The Senate Finance and Public
Administration Legislation Committee, in its third
report on the format of the PBS observed:
3.22 It became evident, during the 2000-01
budget estimates hearings, that a number of activities had been
reclassified from 'administered' to 'departmental' and hence their
funding could be varied at agency discretion. For example, a range
of programs in the Department of Environment and Heritage,
including grant schemes, became 'departmental' and were listed as
such in the PBS. The distinction, and its implications, was not the
subject of particular questioning on this occasion.
3.23 The committee could find no examples of
reclassifications in the other direction. The committee concedes
that the concept of 'control' is at times a matter of judgement; it
also notes that reclassifications cannot be done unilaterally by
agencies but the approval of DOFA must be sought. Representatives
of a number of agencies stressed that funding flexibility was
needed to meet changing priorities and to deal with the unexpected.
While accepting this argument, the committee is nevertheless
concerned that any such reclassifications not be used to thwart
accountability.
4.4 Additional Estimates
Funding requirements often change after the
Budget is brought down. Governments make new policy commitments
which have to be funded. Agencies reassess their requirements and,
if necessary, submit requests for additional funding. The
Government may agree to additional funding if the amounts in the
Appropriation Acts are inadequate. The process whereby additional
funds are provided is called
additional estimates, and begins around November. The approved
additional estimates are normally incorporated into
Appropriation Bills 3 and 4 and Appropriations (Parliamentary
Departments) Bill No. 2. These Bills are the counterparts of
Appropriation Bills No. 1 and 2 and Appropriations (Parliamentary
Departments) Bill No. 1 respectively.
Portfolio Additional Estimates Statements are
the additional estimates counterparts of Portfolio Budget
Statements and contain explanations of Appropriation Bills 3 and 4
and Appropriations (Parliamentary Departments) Bill No 2. The
Senate Estimates Committees also scrutinise Appropriation Bills 3
and 4. Parliament usually passes the additional estimates Bills
around April.
4.5 Advance to the Finance
Minister
The
Advance to the Finance Minister (AFM) provides flexibility to
the system of appropriating funds. The AFM is a contingency fund
from which the Minister for Finance and Administration can spend
for emergency or unforeseen circumstances. Authority for payments
derives from section 11 of the annual Appropriation Acts. According
to Department of Finance and Administration guidelines, funding is
available only if agencies meet two tests:
-
- the need for funding must be urgent, and
-
- the need was unforeseen or arose because of erroneous omission
or understatement.
Section 11 of the Appropriation Acts also
requires the Minister to account to Parliament for spending from
the AFM, which the Minister does by tabling monthly and annual
statements. These reports are, however, not terribly enlightening
since they allocate payments by outcome and do not provide details
of what the payments were for.
5. Budget
Documents
As noted, the Government releases the
Budget Papers and Documentation on Budget night. Ministers also
issue media releases and hard copy information kits. The Budget
Papers and documents consist of:
-
- the Budget Speech
-
- Budget Overview
-
- four Budget Papers
-
- Portfolio Budget Statements, and
-
- Ministerial Statements.
5.1 Budget Speech
The Budget Speech is the printed version of the
speech that the Treasurer delivers on Budget night. The speech
contains Budget highlights and details of the Government's
priorities. As is the case with the other Budget Papers, the Speech
is loaded onto the Parliamentary computing network on Budget night
or very soon thereafter.
5.2 Budget Overview
As its name suggests, the Budget Overview is a
document of about 30 pages that summarises key features of the
Budget with an emphasis on graphical and tabular presentation. In
2001-02, the Overview contained a Budget overview, a review of the
Australian economy, and appendices containing Budget aggregates,
spending initiatives, economic forecasts and historical data going
back to 1974-75.
5.3 Budget Papers
There are four Budget Papers. Each is discussed
in turn.
5.3.1 Budget Paper No. 1
Budget Paper No. 1 is the most important
explanatory document. Budget Paper No. 1 for 2001-02 contained
eleven Statements dealing, among other things, with fiscal policy,
the outlook for the economy, assumptions underlying the projections
of growth, unemployment, revenue and expenses and other matters.
Budget Paper No. 1 is prepared in accordance with the Charter
of Budget Honesty Act 1998, which requires that the government
provide, among other things, a statement of its fiscal strategy and
a report on the economic and fiscal outlook as well as risks to the
outlook. It should be noted that the precise content and statement
number can vary from year to year. The following is based on the
2001-02 Budget.
Statement 1 - Fiscal Strategy and Budget
Priorities. This contains sections dealing with the fiscal
and economic outlooks, fiscal strategy and the Government's
priorities in areas such as welfare, health, education and
transport.
Statement 2 - Fiscal Outlook.
This statement contains sections dealing with the fiscal
aggregates, variations to expense and revenue estimates and their
consequences for the fiscal balance, the Commonwealth's net debt
and worth positions, and cash flows. An appendix deals with the
sensitivity of fiscal aggregates to economic developments.
Statement 3 - Economic Outlook.
This Statement discusses developments in the domestic and
international economies, and uncertainties in the outlooks for
both.
Statement 4 - A More Productive
Australia - Policy and Technology. This Statement is one
of a series in recent Budgets, which discuss various aspects of the
economy. In the 2000-01 Budget, the topic was tax reform.
Statement 5 - Revenue. This
contains an overview and discussion of Budget and forward year
revenue estimates. The Appendices contain useful information
including details of revenue measures and revenue statistics going
back to 1990-91.
Statement 6 - Expenses and Net Capital
Investment. This contains information on the spending side
of the Budget including on expenses, which are often the focus of
Budget discussions. Expenses are divided on a functional basis, for
example, defence, education, health, and social security and
welfare. Part II deals with general government net capital
investment. The appendices contain useful data including expense
measures by agency, and expenses statistics by function for the
Budget and out years.
Statement 7 - Budget Funding.
This contains details of the Commonwealth's recent and prospective
net funding requirements and borrowing programs.
Statement 8 - Trends in
Public Sector Finances. This contains and discusses data
on trends in public sector finances including fiscal balance and
net debt and net worth. The Appendices contain data on the size of
the public sector and other information.
Statement 9 -
Government Finance Statistics Statements. As
discussed later, accrual financial data are presented in two ways.
One is known as Government Finance Statistics (GFS). Statement 9
presents data on a GFS basis for 2001-02 and the three following
('out') years. The financial statements include the general
government operating statement, balance sheet, cash flow statement,
and statement of taxation revenue by source.
Statement 10 - Australian Accounting
Standard No. 31 Budget Financial Statements. The second
way of presenting financial data is in accordance with Australian
Accounting Standard No. 31. The data in Statement 10 accord with
this Standard. Statement 10 contains data on general government
sector revenue and expenses, balance sheet, and cash flows, as well
as Notes containing information, for example, on interest and
dividends and income tax.
Statement 11 - Budget Concepts and
Historical Data. This Statement explains and discusses key
Budget concepts such as fiscal balance, the underlying cash balance
and the headline cash balance, and the GFS and Australian
Accounting Standard No. 31. Statement 11 also contains a
reconciliation of these two standards. Part II of this Statement is
one of the most important-but often overlooked-sources of
historical data. For example, Part II contains data on revenues,
outlays, surplus/deficit, and net debt on a cash basis going back
to the early 1970s.
5.3.2 Budget Paper No. 2
Budget Paper No. 2 titled 'Budget Measures'
summarises the various measures the Government is proposing, such
as changes to tax rates and new spending initiatives. Budget Paper
No. 2 brings together in the one document all the intended measures
involving individual agencies and so is a quick way of finding
information. It contains details of the changes to
expenses, revenues and capital items by portfolio, and summarises
revenue and expense measures since and up to the Mid-Year Economic
and Fiscal Outlook. Each measure is described briefly.
5.3.3 Budget Paper No. 3
Budget Paper No. 3 deals with Commonwealth
payments to the States and Territories and local government. Budget
Paper No. 3 contains estimates of GST payments and Specific Purpose
Payments (SPPs) to the States and Territories classified by
function such as education, health, and transport and
communications. Given that so much of Commonwealth spending takes
the form of SPPs, which are authorised by specific Acts, Budget
Paper No. 3 contains much useful information.
5.3.4 Budget Paper No. 4
As noted, Budget Paper No. 4 contains
Appropriation Bills No. 1 and No. 2 and the Appropriation Bill for
the Parliamentary departments. The introduction to Budget Paper No.
4 contains a useful overview of the annual appropriations
system.
5.4 Ministerial Statements and Media
Kits
Some Ministers issue Ministerial Statements
(otherwise known as the 'blue books') on Budget night. For example,
when the 2001-02 Budget was brought down, the Minister for
Agriculture, Fisheries and Forestry issued a Statement titled
'Safeguarding Our Rural Resources'. Another Statement dealt with
regional Australia. These Statements often contain information not
readily obtainable elsewhere. Ministers usually release media kits
and press releases. However, it should be remembered that
Ministerial Statements, media kits and press releases are political
documents which sometimes 'stretch' the definition of what their
titles suggest they contain. Media releases are usually available
on Ministers' web sites soon after the Budget is brought down.
5.5 Portfolio Budget Statements
The
Portfolio Budget Statements (PBS) are one of the most important
Budget documents. They are the main source of information on
proposed agency activities and contain information in support of
spending proposed by the Appropriation Bills. Ministers prepare the
PBS for the Senate Estimates Committees' examination of proposed
appropriations. The PBS are made available with the Budget or soon
after on-line.
5.5.1 Content and
Format
The information in the PBS falls into two broad
categories: agency resourcing and performance assessment. The
former contains information on how agencies will be funded, the use
to which the funds will be put as defined by planned outcomes, and
budgeted financial statements. The PBS also contain details of
performance information that agencies will collect to assess their
performance against planned outcomes. The assessments are presented
in their annual reports. Performance information is discussed in
section 9.
The Department of Finance and Administration has
guidelines for the format of the PBS. As a result, the structure of
the PBS is broadly similar across agencies. However, agencies have
discretion to present their PBS in a format that presents
information clearly so that the format differs somewhat across
agencies. An example of a structure is the following taken from the
Department of Finance and Administration PBS for 2001-02.
-
- Part A: User Guide: provides an introduction explaining the
purpose of the PBS as well as information in relation to the styles
and conventions used.
-
- Part B: Portfolio Overview: provides an overview of the
portfolio. The structure of the portfolio outcomes is depicted in a
chart that outlines the structure of the outcomes to which the
portfolio contributes.
-
- Part C: Agency Budget Statements: for each agency within the
portfolio, statements are presented under the agency's name.
-
- Section 1: Agency overview, appropriations, and budget measures
summary. This section details the link between the resources
appropriated and their application to the outputs which contribute
to the achievement of outcomes.
-
- Section 2: Outcomes and outputs information. This section
details planned outcomes and the contributing administered items
and agency outputs.
-
- Section 3: Budgeted Financial Statements. This section contains
the four budgeted financial statements in accrual format covering
the Budget year, previous year and the three out-years for each
agency.
-
- Section 4: Purchaser/provider arrangements. This section is
presented for those agencies that have entered into
purchaser/provider arrangements with other agencies.
-
- Styles and conventions used.
The appropriations and revenue summary
distinguishes between departmental and administered spending, and
allocates spending in these two categories across outcomes. The
summary also shows the amounts appropriated under Appropriation
Bills 1 and 2, special appropriations, and total
appropriations.
5.6 Issues
There has been considerable criticism of the
format and content of the Budget Papers and associated documents
since the introduction of accrual accounting and the outcomes and
outputs framework. The 1999-2000 Budget marked a low point in that
it was one of the least informative ever.
Subsequent Budgets have progressively provided
more information. But much of the information that Members of
Parliament frequently require, and which was available before
1999-2000, is still not available. The paucity of information has
also meant that it is now necessary to contact agencies more
frequently than before to obtain information. That is certainly the
experience of staff in the Department of the Parliamentary Library,
whom Members of Parliament call upon to find information in Budget
documents. The lack of information has probably increased the
importance of the Senate Estimates Committees process as a means of
obtaining information and releasing it into the public domain.
The PBS have come under particular criticism. A
major complaint is excessive aggregation and the lack of detail
about agency activities. The amount of detail that agencies provide
varies considerably. Some agencies such as the Department of
Transport and Regional Services continue to provide a considerable
amount of detailed information.
Aggregation in the PBS has been at two levels.
First, compared with the program budgeting format, the number of
items has been compressed into fewer outputs and even fewer
outcomes. The result is a loss of information about individual
programs. Second, agency budgeted financial statements are also
highly aggregated. For example, the Department of the Environment
and Heritage's administered expenses are broken down into three
categories (suppliers, grants, and other). The figure of $333.192
million for grants is not broken down.
The Senate Finance and Public Administration
Legislation Committee in its report titled The
Format of the Portfolio Budget Statements - Second Report,
criticised the aggregation of financial information. The Committee
stated:
The committee notes a clear preference on the
part of senators for a more detailed breakdown of financial
information. The committee is mindful of the tight timeframes in
which the PBS are finalised, a fact attested to by the numerous and
extensive corrigenda tabled to the 1999-2000 PBS. It makes the
following recommendations cautiously, and would be prepared to
accept the later provision of the disaggregated information, if
agencies required additional time to provide it accurately. With
the above provisos, the committee recommends
(2) the disaggregation of appropriations to output
level; it recommends (3) the
itemising of administered items; and it further recommends
(4) the inclusion of forward estimates for outcomes and
outputs. It expects that [the Department of Finance and
Administration] and agencies will monitor the accuracy of the
disaggregated information and if after a reasonable period of time
it becomes apparent that the figures are so imprecise as to be
meaningless, the committee will review its recommendation.
(18)
In its
response, the Government agreed to the majority of the
Committee's recommendations but rejected the recommendation that
forward estimates for outcomes and outputs should be itemised on
the grounds that Budget Paper No. 1 already provides adequate
information. However, the Committee, in its third
report on the format of the PBS, rejected the Government's
response based partly on the fact that some agencies have done what
the Committee recommended. Concern with aggregation is also a major
theme in the hearings of the Joint Committee of Public Accounts and
Audit's
Review of the Accrual Budget Documentation held on 22 June
2001.
Mr Bartos, a senior executive in the Department
of Finance and Administration has acknowledged that the level of
aggregation is a problem.(19) The Department of Finance
and Administration issues
Guidelines for the Preparation of Portfolio Budget Statements.
However, these are 'minimum' guidelines. Agencies have considerable
discretion as to what they present in their PBS and in what format.
Where Parliament identifies gaps in the information the PBS, it can
require agencies to provide that information. Agencies have
responded to requests from various Parliamentary committees by
including additional information in PBS. The trend, therefore, is
for agencies to provide more information.
Another criticism of the PBS is that it is not
possible to see how much is to be spent under individual special
appropriations. As noted in section 4.2, a welcome development is
the reporting by some agencies of estimated expenses from
individual special appropriations in their PBS. The example cited
is estimated spending by the Department of Family and Community
Services under the Social Security (Administration) Act
1999. But even in this case, there is no link in the PBS
between spending under special appropriations and outputs and
outcomes. The Department of Family and Community Services
administers 26 Acts and has three outcomes but there is nothing to
show to which outcome(s) the Social Security (Administration)
Act 1999 contributes. Given that 75 per cent of expenses are
funded from special appropriations and that authority for special
appropriations is the Acts that Parliament has passed, it seems
appropriate that agencies should show estimated spending under each
Act and the outcome(s) which the Act contributes. The provision of
such information would link the legislative authority for spending
to planned outcomes.
6. Reporting
Standards
Information in the Budget papers is prepared in
accordance with a number of requirements. One is the Uniform
Presentation Framework, which is an agreement among the
Commonwealth, States and Territories whereby all jurisdictions must
publish common core aggregate budgetary and fiscal information for
external purposes.
The Charter of Budget Honesty Act 1998
requires that the Budget be presented on the basis of external
reporting standards. There are two main standards: the Government
Finance Statistics framework of the Australian Bureau of
Statistics, and the public sector accounting standards developed by
the Public Sector Accounting Standards Board (PSASB). The PSASB
standard for government is Australian Accounting Standard No. 31,
Financial Reporting by Governments (AAS
31).(20)
6.2 Government Finance Statistics
The Government Finance Statistics (GFS)
reporting framework is a statistical system designed to allow
economic analysis of the public sector, especially of the effects
of government spending and revenue on the economy. Major Budget
aggregates (including the fiscal and underlying cash balances) are
based on the GFS framework. The data required under the Uniform
Presentation Framework are also on a GFS basis.
6.3 Australian Accounting Standard
31
AAS 31 is a comprehensive standard that
specifies a range of accounting practices and how agencies should
present financial information. Reporting under AAS 31 is intended
to provide an overview of the government's financial performance
and position, including financing and investing activities. AAS 31
is adapted from the accounting standards developed for the private
sector.
6.4 Accounting Standards Issues
GFS and AAS 31 standards can yield quite
different results. For example, in 2000-01, the general government
sector operating surplus was $4.8 billion on a GFS basis while the
operating surplus was $1.53 billion on the AAS 31 basis. At 30 June
2001, general government sector net worth was minus $41.1 billion
on a GFS basis but minus $46.3 billion on the AAS 31
basis.(21) The differences between the two systems are
described in the Budget Papers.(22) By way of
illustration, AAS 31 includes profits from the sale of assets in
the operating statement; GFS treats such profits as revaluations
and excludes them from the operating statement. Under AAS 31, the
Department of Defence brings specialist capital equipment into the
balance sheet and depreciates it. The GFS treat all defence
spending as if it were an expense.
The use of the two standards is a source of
confusion. This raises the issue of what accounting standards
should apply to the Budget documents. In particular, it raises the
issue of the usefulness of accounting standards developed for the
private sector in a public sector context.
The usefulness of AAS 31 in a public sector
context is limited. This is especially true of non-commercial
government agencies. For example, whereas equity in a business is
an indicator of its solvency, creditworthiness, and net worth,
these concepts have limited meaning for an agency whose main
functions are to provide policy advice and administer
appropriations.(23) Similarly, an agency statement of
financial performance does not have the same purpose or meaning as
that of a company operating for profit. The purpose of business is
to earn profits for its owners. The function of many government
agencies is to provide goods and services for the non-market sector
(public goods) and to redistribute income through transfer payments
such as old age pensions, which do not entail any reciprocal
provision of goods and services. None of this is to say that
financial statements using private sector concepts are valueless
and should not be prepared. Rather, it is to note that caution
should be used when interpreting statements.
One commentator, critical of the decision to use
AAS 31 in Budget documents, said:
Merely having two accounting systems is a
serious retrograde step in Australia. Prior to the introduction of
accrual accounting in Australia, there has been huge progress
towards the standardisation of government budget accounting, based
upon the cash accounting version of GFS. Why two systems? AAS 31 is
driven by the idea that government accounting should operate just
like private sector accounting, whereas GFS is tailor-made for
public sector policy purposes. This means that AAS 31 incorporates
accounting policies which do not necessarily make a great deal of
sense in a government context.(24)
Professor Barton, in evidence to the Joint
Committee of Public Accounts and Audit, argued that private sector
accounting standards should be modified for public sector
purposes:
... I argue strongly that the accrual accounting
system appropriate for the government is not the accrual accounting
system used by business. The accrual accounting systems used by
business are designed to suit the specific market environment of
business operations...When we move to the public sector...the
government is concerned with providing those goods and services
which the market cannot conveniently provide... I believe the
accrual accounting systems developed for business are not readily
transportable to the public sector without significant
modifications for some areas of activity. These include the
provision of all these types of public goods, the accounting for
the cultural and heritage assets such as the National Gallery, the
National Library and the Australian War Memorial; all of the land
under public roads, a lot of our infrastructure and so on. The
present business accounting standards do not readily cover these
types of situations because they were never intended for
application to them, so we need accrual accounting-but it has to be
modified.(25)
6.5 Treatment of the Goods and Services
Tax
The Budget Papers generally treat the goods and
services tax (GST) as if it were not a Commonwealth tax. With one
exception (noted below), the GST is not shown as Commonwealth
revenue or spending in Budget Paper No. 1. The Government's
argument for this treatment-the 'agency' argument-is that the
intent of the Intergovernmental Agreement on Commonwealth-State
Financial Arrangement-which governs Commonwealth-State
financial relations-is that the GST is collected by the
Commonwealth as an agent for the States and Territories and
appropriated to them.
The alternative 'constitutional' argument is
that whatever the intent of the Intergovernmental
Agreement, constitutionally, the GST is a Commonwealth tax
because the GST is imposed and administered under Commonwealth
legislation. The Australian Bureau of Statistics (ABS) has rejected
the agency argument and classifies GST revenue as a Commonwealth
tax in the Government Finance Statistics.(26) The
Auditor-General also rejects the agency argument (see discussion
under Consolidated Financial Statements).
The tables in Statement 9 of Budget Paper No. 1
for 2001-02 are consistent with ABS standards on the Uniform
Presentation Framework reporting basis, and show GST as
revenue in and expenses out.
A consequence of not recognising the GST as a
Commonwealth tax is to understate expenses and revenue. In 2000-01,
revenues were understated by $27.5 billion and expenses by $23.8
billion. The suspicion inevitably arises that the 'agency'
treatment of the GST is intended to show the Commonwealth
government sector as smaller than it really is.(27)
7. Agency
Financial Statements
The move to accrual
accounting has entailed wide-reaching changes to the presentation
of financial information. The requirement that agencies produce
financial statements has had the positive effect of increasing
transparency. For example, under cash accounting, receipts include
diverse items such as taxation revenue and proceeds from the
privatisation of assets while cash outlays include purchases of
assets such as plant and equipment and current expenses such as
advertising. Accrual accounting, on the other hand, brings assets
into the balance sheet and treats advertising as an expense.
Accrual accounting thus distinguishes between the activities that
affect operating activities and those that affect the balance
sheet.
Agencies are required to prepare four financial
statements for their Portfolio Budget Statements and annual
reports. They are statements of financial performance, financial
position, cash flows, and capital budget. The statements show
departmental and administered items separately.
7.1 Statement of Financial
Performance
The statement of financial performance can be
thought of as the counterpart of what used to be called a business
profit and loss statement, albeit with obvious differences in the
functions of government agencies and their sources of revenue
compared to businesses. The statement allows assessment of
agencies' financial performance. Typically, the statement shows
revenues from ordinary activities, the total cost (expenses) of
these activities, borrowing cost expense (discussed in section
7.1.1), and the net surplus or deficit from ordinary activities.
Revenues include revenue from government, sales of goods and
services, interest and dividends, net gains from sales of assets
and other revenue. Expenses include payments to employees,
suppliers, grants, write-down of assets, and depreciation and
amortisation.
It is important to understand that items that
affect the statement of financial performance also affect the
Budget surplus or deficit.
7.1.1 Capital Use
Charge
A particular item in the statement of financial
performance that requires explanation is the capital use charge
(CUC). As its name suggests, it is a charge that agencies pay for
their use of capital. The argument for the CUC is that capital is
not a free resource. Agencies do not, however, pay explicitly for
the capital they use so that the cost of their activities is
understated. Agencies should therefore bear a charge for the
implicit cost of capital used. Funding for the CUC is included in
agencies' departmental appropriations.
Agencies pay the CUC on their estimated
departmental equity (assets less liabilities) at the end of the
financial year; in some cases, funding is based on opening equity.
The CUC does not apply to administered equity. The CUC rate is set
annually. In 2000-01, the rate was 12 per cent.
The CUC is shown in the statement of financial
performance. The CUC appears 'below the line', that is, after net
operating profit (revenues less expenses) along with abnormal and
extraordinary items. How the CUC operates is illustrated in the
Department of Defence Portfolio Budget Statement for 2001-02. This
shows that the Department is projected to run a net operating
surplus of more than $5 billion in 2001-02. The CUC is projected to
offset the surplus exactly.
7.2 Statement of Financial
Position
The statement of financial position sets out the
agency's assets, liabilities and equity (assets less liabilities)
at a point in time (stock). The statement is the counterpart of a
business balance sheet and allows assessment of an agency's
financial position over time. Assets are divided between financial
assets such as cash, receivables and investments, and non-financial
assets such as plant and equipment and inventories. Liabilities are
divided between debt such as loans and leases, and provisions and
payables such as amounts owed to employees and suppliers. Equity is
divided among capital contributions, reserves and accumulated
surpluses or deficits.
Items that affect the statement of financial
position only do not affect the budget surplus or deficit.
For example, asset sales such as the sale of the Commonwealth's
equity in Telstra are generally reflected only in the statement of
financial position. In this case, the sale is a change in the type
of asset (from financial investment to cash) with no change in the
Commonwealth's net equity position. Similarly, using the proceeds
of asset sales to reduce debt does not change the Commonwealth's
net equity position since the reduction in debt is matched by an
equal reduction in cash.
Such a transaction will, however, also usually
also affect the statement of financial performance-through changes
to dividends and public debt interest-and hence the Budget surplus
or deficit.
Under Australian Accounting Standard 31, any
profit or loss on the sale of an asset has to be brought into the
operating statement and hence would affect the Budget deficit or
surplus. However, in practice, it seems that some assets are
revalued (reflected in an increase in equity) to the sale price so
that no profit is recognised in the statement of financial
performance.
7.3 Cash Flows Statement
The cash flows statement shows the sources and
uses of cash (flows) including the cash balance at the end of the
year (stock). The statement distinguishes among cash received and
used in operating, investing and financing activities. Operating
activities include, for example, cash received from appropriations
and payments to employees. Investing activities include proceeds
from sales of property and repayments of loans, and cash used to
make loans and buy property. Financing activities include equity
contributions and proceeds from loans and cash used to repay
debt.
7.4 Capital Budget Statement
The capital budget statement shows how agencies
fund capital activities and how they use those funds. Agencies fund
capital activities from their own resources and from additional
capital that the government provides in the forms of loans and
equity injections. The capital statement also shows how the capital
is used, that is, to buy new assets or reduce liabilities.
8.
Other Financial Information
In addition to the documents presented on Budget
night, there are other documents containing Budget-related
financial information. In particular, the Charter of Budget
Honesty Act 1998 and the Financial Management and
Accountability Act 1997 require the preparation of a number of
reports.
8.1 Charter of Budget Honesty
The Charter
of Budget Honesty Act 1998 is a framework for the conduct
and reporting of fiscal policy. The Act has two broad purposes: to
improve fiscal policy by requiring policy to be based on principles
of sound fiscal management, and to require the government to
explain and account for its actions. The Act obliges the government
to present three reports annually. They are:
-
- a Budget Economic and Fiscal Outlook Report (sections 10 to 13
inclusive)
-
- a Mid-Year Economic and Fiscal Outlook report (sections 14 to
17 inclusive), and
-
- a Final Budget Outcome report (sections 18 and 19).
The Budget report is contained in Budget Paper
No. 1.
8.1.1 Mid-Year Economic and Fiscal
Outlook
Section 14 of the Charter of Budget Honesty
Act 1998 requires the Treasurer is to release publicly and
table a
Mid-Year Economic and Fiscal Outlook (MYEFO) report by the end
of January in each year, or within six months after the last
Budget, whichever is later. In practice, the MYEFO has been brought
down in October or November in recent years.The required contents
of the MYEFO are set out in section 16. The main requirement is an
update (the 'budget report') of the economic and fiscal
outlook.
The MYEFO updates the economic and fiscal
outlooks and the budgetary position. In particular, the MYEFO takes
account of all decisions affecting expenses and revenues and so
revises Budget aggregates.
8.1.2 Final Budget
Outcome
Section 18 of the Charter of Budget Honesty
Act 1998 requires the Treasurer to release publicly and table
a Final
Budget Outcome (FBO) report for each financial year no later
than three months after the end of the financial year. Section 19
deals with the contents of the FBO and states:
A final budget outcome report is to contain
Commonwealth budget sector and Commonwealth general government
sector fiscal outcomes for the financial year.
Much of the data in the FBO are aggregated and
so are of limited use. However, the FBO contains a comprehensive
section dealing with payments to the States and Territories.
As noted, one problem associated with the
presentation of Budgets in May is that financial outcomes for the
year preceding the Budget year can only be estimated. However,
information on actual outcomes for the financial year just ended
can sometimes be found in the Portfolio Additional Estimates
Statements.
8.1.3 Pre-Election Economic and
Fiscal Outlook Report
Part 7 (sections 22 to 28) of the Charter of
Budget Honesty Act 1998 deals with the preparation of the
Pre-Election Economic and Fiscal Outlook Report
(PEFO).(28) The purpose of the PEFO is to update
information on the economic and fiscal outlook before an election.
Section 22 requires that the PEFO be released publicly within 10
days of the issue of the writ for a general election. The PEFO must
contain spending and revenue estimates for the current and
following three financial years, the assumptions underlying the
estimates, the sensitivity of the estimates to changes in the
assumptions, and risks that might change the fiscal outlook
materially. Only two PEFOs have been prepared: one before the 1998
election and the other before the 2001 election. In 2001, the
Government published the MYEFO and the PEFO within a day of each
other and the two documents were virtually identical.
The financial position that an incoming
government is likely to face is usually an election issue. The
requirement that a PEFO be prepared is a positive step towards
transparency in that it shows the likely state of finances. The
fact that the Secretaries of the Treasury and the Department of
Finance and Administration are responsible for preparing the
PEFO-albeit on the basis of information that Ministers provide-adds
to its credibility. The PEFO has therefore taken some of the heat
out of election campaigns, which were often typified by claims and
counter-claims about the true state of finances.
8.2 Financial Management and
Accountability Act 1997
8.2.1 Monthly
Reports
The Financial Management and Accountability
Act 1997 requires the Minister for Finance and Administration
to publish monthly financial statements in a form consistent with
the Budget estimates, as soon as practicable after the end of each
month.
Monthly financial statements can be found on the Department's
web site. These show, among other things, monthly and cumulative
data including the fiscal balance, the underlying cash balance and
the net operating result for the Commonwealth general government
sector.
8.2.2 Consolidated Financial
Statements
Section 55 of the Financial Management and
Accountability Act 1997 requires the Minister for Finance and
Administration to prepare annually
consolidated financial statements (CFS) for the Commonwealth.
The statements contain consolidated results for all
Commonwealth-controlled entities, and disaggregated information on
all three Commonwealth sectors: general government, public
non-financial corporations and public financial corporations. It is
not possible to compare the CFS directly with the Final Budget
Outcome because the the CFS are prepared on the basis of Australian
Accounting Standards including AAS31 whereas data in the Final
Budget Outcome are on a GFS basis.
8.2.2.1 Issues
The Auditor-General has qualified the CFS in
respect of their treatment of taxation revenue and the GST. The CFS
treat the GST as a tax that the Commonwealth collects in an agency
capacity on behalf of the States. For the year ended 30 June 2001,
in respect of the treatment of the GST, the Auditor-General
found:
This accounting policy does not accord with
Australian Accounting Standard AAS 31 Financial Reporting by
Governments which requires that all of the Government's
assets, liabilities, revenues and expenses be recognised in its
financial statements.
The policy also differs from the policies
adopted by the Australian Taxation Office and the Department of the
Treasury in their financial statements for the year ended 30 June
2001 whereby, respectively, the GST is recognised as a Commonwealth
revenue when the tax is imposed, and the associated amounts payable
to the States and Territories are recognised as grant expenses for
the period.
The financial effects of not recognising the GST
as a Commonwealth tax are to understate the result for the period
and to overstate net liabilities as at period end. These effects,
calculated by reference to the amounts that would have been
recognised had all other tax revenue been recognised on an accrual
basis (refer to first mentioned qualification paragraph), are:
an understatement of revenues by $27.5 billion,
expenses by $23.8 billion and hence the overall result by $3.7
billion;
an understatement of accrued revenues by $3.8
billion and liabilities by $0.1 billion, and hence an overstatement
of net liabilities by $3.7 billion; and
total operating cash inflows and outflows are
each understated by $19.2 billion (a difference which takes account
of GST-related cash flows within the Commonwealth
Government).(29)
8.3 Senate Estimates
As discussed, the eight Senate Estimates
Committees such as the Rural and Regional Affairs and Transport
Legislation Committee and the Employment, Workplace Relations,
Small Business and Education Legislation Committee, examine agency
estimates after the Budget is presented. The Committees also
examine additional estimates. The Committees require the presence
of Ministers (although not always the portfolio Minister) and
agency officers, and provide Senators with the opportunity to
question them about programs and policy implementation. Although
there is a delay in their release, the Committee reports contain
valuable information not available elsewhere.
Hansards of Estimates proceedings are available on the Senate
website and Parlinfo.
8.4 Annual Reports
Most agencies table their annual reports by the
end of October in the year after the Budget is introduced, that is,
18 months after the Budget to which they relate is introduced.
Agencies provide a wide range of non-financial and financial
information in their annual reports.
A feature of the changes that were introduced in
the 1999-2000 Budget is greater consistency between Portfolio
Budget Statements and annual reports. Annual reports contain
information on how agencies performed against planned outcomes
using the performance information measures set out in the Portfolio
Budget Statements. The presentation of financial statements in
annual reports is on the same basis as the budgeted financial
statements in the Portfolio Budget Statements, allowing comparisons
of budgeted and actual financial outcomes. Unfortunately, like the
Portfolio Budget Statements, annual reports have also dispensed
with some of the financial data they used to contain.
8.5 Tax Expenditures
Much attention is focused on the level of
spending and revenue shown in the Budget. But a large amount of
revenue is foregone through tax concessions. 'Tax expenditures' are
estimates of the financial benefits derived by the recipients of
these concessions. Concessions take the forms of tax exemptions,
deductions and rebates, and reduced tax rates. Concessions lower
the tax burden on the beneficiary by either reducing the amount of,
or delaying the collection of, taxation revenue. The concessions
raise the burden of taxation on non-beneficiaries who have to pay
more to raise the amount of taxation revenue the government
wants.
Appendix D of Statement 5 in Budget Paper No. 1
in the 2001-02 Budget contains a statement of tax expenditures.
Treasury publishes a more comprehensive 'Tax Expenditures
Statement'. The statement issued in December 2001 shows that the
single largest tax expenditure is related to the concessional
treatment of superannuation contributions, fund income and benefits
paid. The total benefit of this concession is estimated at $9.5
billion in 1999-2000. The aggregate cost of tax expenditures for
which estimates were prepared is around $27.3 billion in 1999-2000.
This compares with taxation revenue (on a Government Finance
Statistics basis) of $152.6 billion.(30)
8.5.1 Issues
Tax expenditures are not reported like direct
expenditure in that tax expenditures are not added to direct
expenditure. This treatment may tempt governments to 'substitute'
tax expenditures for direct expenditure to make public finances
'look good'. Not adding tax expenditures to direct expenditure has
the effect of 'understating' the size of the government sector. For
example, in 1999-2000, if tax expenditures of around $27 billion
were added to direct expenditure, total expenditure would rise from
$153 billion to $180 billion, an increase of 18 per cent.
9. Performance
Information
In their Portfolio Budget Statements, agencies
set out the performance indicators they will use to assess their
performance in terms of efficiency and effectiveness against
planned outcomes. Using the information collected under the
indicators, agencies report on how well they actually performed
against the planned outcomes in their annual reports. Agencies
report against indicators such as quantity, quality and timeliness.
The purpose in requiring performance assessments is to increase
agency accountability.
9.1 Issues
The usefulness of performance information has
been criticised as limited. This is partly because it is often
difficult if not impossible to measure the contribution of agencies
to outcomes. Actual outcomes are the consequences of Commonwealth
government actions and those of other agents in the community. As a
result, the consequences of Commonwealth actions cannot be
disentangled, qualitatively or quantitatively, from other
influences. For example, the States are primarily responsible for
funding primary and secondary education. The Commonwealth also
provides funds but this is at the margin. Since both State and
Commonwealth funds are lumped together to provide education
services, it is not possible to disentangle the consequences of
Commonwealth funding.
The Senate Finance and Public Administration
Legislation Committee, in its third
report on the format of the PBS concluded:
Reporting on progress towards outcomes is at
present a weakness of the new system. Few of the narrative
'effectiveness indicators' proffered to date are particularly
robust and many agencies have indicated that they have work to do
in this area. Given that funding is now directed to outcomes, the
importance of assessing progress towards outcomes is of paramount
importance. When and if this is done well, senators may indeed
begin to scrutinise outcomes.(31)
Such criticism suggests that scope exists for
Parliament to give agencies feedback and require them to provide
more useful information. The Senate Finance and Public
Administration References Committee, in its
Second Report on the Format of the Portfolio Budget Statements,
was mildly critical of Senate Standing Committees in this
regard:
Performance reporting per se is not new, but its
presence in annual reports has not attracted a great deal of
systematic scrutiny from senators. As the committee has noted in
its previous reports on the PBS and their predecessors, to make
sense of specific performance information, an adequate knowledge
base is required and the vagaries of political life frequently work
against the acquisition of such knowledge. While individual
senators may develop expertise in a given subject area, it is a
random process.(32)
The Australian National Audit Office (ANAO) has
undertaken a performance audit of how well agencies are reporting
performance information. The ANAO concluded that :
... overall, performance information in the PBS
should be improved to enable agencies to establish and demonstrate
the links between outcomes, outputs and performance indicators.
Agencies had placed considerable emphasis on developing useful
performance information. The latter remains a priority given the
importance of using performance information for target setting,
performance measurement and for accountability purposes.
A common limitation in the performance
information in all 10 audited agencies' PBS and annual reports
related to effectiveness indicators which did not actually measure
outcome performance. In particular, outcome effectiveness
indicators were often influenced by factors beyond the agencies'
control to a degree that may mask any direct effect that agency
performance had on actual achievements. In this context it is
important to track overall outcomes achieved across the layers of
government and through various partnerships with other agencies,
including non-government bodies, as well as the particular
contribution made by the specific Commonwealth agency to the
outcome to the most practicable extent possible.
The ANAO also concluded that it would be
difficult for Parliament and other stakeholders to assess agency
performance with reasonable assurance. This was because the PBS
performance information did not always include targets, or the
targets that were provided were often vague and/or ambiguous.
As well as these general themes, the ANAO
identified and informed agencies of agency-specific issues early in
the audit. The latter were dealt with by the relevant agencies
during the audit fieldwork. For example, this included Department
of Transport and Regional Services making extensive revisions to
its outcome and outputs and performance information for the 2001-02
PBS. As well, Defence was advancing the development of new
agency-wide performance information arrangements for the 2002-03
Defence PBS.
All 10 agencies audited complied with PM&C
requirements for annual reports in that the performance information
identified in their PBS was reported in their annual report.
However, problems with the performance information in the 1999-2000
PBS, identified by this audit, made it difficult for agencies to
reach an informed judgement in relation to their performance in the
related annual report.
Agencies generally had adequate organisational
arrangements to support the PBS performance information and
reporting. Quality assurance for PBS data (for example, relating to
data validity, reliability and accuracy) relied on operational
areas that, typically, had embedded procedural arrangements such as
range and consistency checks. However, in many cases, the current
performance information arrangements were developed for internal
operational purposes without consideration of the higher
accountability PBS requirements. Therefore, minimum PBS data
quality standards should be established and monitored to ensure the
data supplied to Parliament are valid, reliable and
accurate.(33)
As noted, agencies table their annual reports 18
months after the Budget to which they relate. The Senate Finance
and Public Administration Legislation Committee noted that a major
defect of this arrangement is the 18-month time lapse between the
setting of the indicators and reporting against them. The Committee
suggested that agencies provide in their PBS part-year performance
information for quantifiable indicators or which information is
readily available. Performance information would also benefit from
disaggregation of indicators. This point is related to the trend
for agencies to consolidate the number of outputs.
10.
Conclusions
The Budget is the foremost statement of the
Government's priorities, which are reflected in the resources
allocated to particular activities. With outlays equivalent to
almost a quarter of gross domestic product, the Budget is also a
major influence over the economy generally and particular
activities.
Given this, it is desirable that the Government
should be accountable to voters through their representatives in
the Parliament, not least because voters' taxes fund spending.
Recent changes to the format and content of the Budget Papers and
related document are aimed at enhancing accountability. These
changes include the move from cash to accrual accounting; from cash
budgeting to accrual budgeting; agency reporting in terms of
planned outcomes; the presentation of financial statements in
accordance with two main accounting standards; the presentation of
information to allow assessment of agency performance; and the
reporting and other requirements of the Financial Management
and Accountability Act 1997 and the Charter of Budget
Honesty Act 1998.
The move from cash to accrual accounting has
improved accountability because all costs are now taken into
account and allocated to outcomes. However, caution should be used
when interpreting accrual financial statements because their
usefulness in a public sector context is limited. For example,
general government net worth is negative to the tune of more than
$40 billion. A business valued at this amount would immediately be
made bankrupt. The desirability of the move from cash to accrual
budgeting is subject to debate, with some arguing that it would be
preferable to retain cash budgeting along with accrual accounting.
Most economic commentators continue to focus on cash rather than
accrual outcomes.
It is difficult to assess the success or
otherwise of the outcomes and outputs framework in encouraging
agencies to focus on ends and not means. Implementing the framework
has encountered conceptual and practical difficulties. Moreover,
the associated sharp decline in information in Portfolio Budget
Statements has been a source of frustration to users including
Members of Parliament. In response to criticism, more information
is now being provided in the Budget Papers and Portfolio Budget
Statements but room for improvement remains. The lack of
information in the Portfolio Budget Statements has probably
increased the importance of Senate Estimates Committees in
ferreting out information.
The use of two accounting standards to present
financial data is a source of confusion to non-specialist readers.
While the Budget Papers explain the differences between the two
main standards, critics have argued that it would be sensible to
use the Government Finance Statistics system that is designed
specifically for the public sector. However, a case can also be
made for aspects of Australian Accounting Standard 31.
The Budget generally treats the GST as if it
were not a Commonwealth tax. This has the effect of understating
expenses and revenues. The rationale for this treatment is
questionable and both the Australian Bureau of Statistics and the
Auditor-General have rejected it. The treatment of the GST
inevitably gives rise to the suspicion that it is intended to show
the Commonwealth government sector as smaller than it really is.
Similarly, the treatment of 'tax expenditures' which are not added
to direct Budget expenditure also has the effect of 'understating'
the size of government.
Endnotes
-
- Denis James, 'An Overview of the Commonwealth Budgetary Process
(Third Edition)', Department of the Parliamentary Library,
Background Paper No. 30, 18 November 1993.
- Budget night typically occurs around mid-May and on the first
night of the Budget sittings of Parliament. This sitting normally
runs until late June when Parliament adjourns.
- For a description of Cabinet processes, see Department of the
Prime Minister and Cabinet, 'Cabinet Handbook' at http://www.dpmc.gov.au/docs/cabinet_index.cfm#pubs
- Hon. John Howard, MP, 'Cabinet Committees', Media
Release, 13 December 2001, at
http://www.pm.gov.au/news/media_releases/2001/media_release1462.htm
- The statement of risks discusses matters such as changes to
economic parameters and contingent liabilities that can affect the
forward estimates of expenses and revenues.
- Payments are recognised as an expense (debit in accounting
terms) and in the balance sheet as a reduction in money balances
(credit). The increase in the liability is recognised as an expense
(debit) and in the balance sheet as an increase in liabilities
(credit).
- Official Committee Hansard, Joint Committee of Public Accounts
and Audit, 'Review of the accrual budget documentation', 22 June
2001, pp. 14-15 at http://www.aph.gov.au/hansard/joint/commttee/j4854.pdf
- Budget Paper No. 1, 1999-2000, p. 1-5.
- For background to the report and the Government's response, see
http://www.facs.gov.au/internet/facsinternet.nsf/whatsnew/welfare_reform_background.htm.
- Official Committee Hansard, op. cit., pp. 15 and 16.
- Australian National Audit Office, 'Audits of the Financial
Statements of Commonwealth Entities for the Period Ended 30 June
2001', Audit Report No. 29, 2001-02, 21 December 2001, p.
16.
- See draft report at http://www.pc.gov.au/inquiry/costrecovery/index.html
- National security considerations limit scrutiny of the defence
budget including in Budget Cabinet.
- Department of Finance and Administration website at
http://www.finance.gov.au/budgetgroup/other%5Fguidance%5Fnotes/functions.html
- Department of Finance and Administration website at
http://www.finance.gov.au/budgetgroup/other%5Fguidance%5Fnotes/functions.html
- See Chapter 13 of Senate Practice, which deals with
financial legislation, at
http://search.aph.gov.au/search/ParlInfo.ASP?action=view&item=18&resultsID=1rLMQg
- In practice, either term is used to refer to appropriations not
made under the annual Appropriation Bills. To confuse matters
further, the terms are used interchangeably. This paper uses
special appropriations to mean either special or standing
appropriations.
- Official Committee Hansard, Joint Committee of Public Accounts
and Audit, 22 June 2001, pp. 14 and 15
- ibid., p. 9.
- AAS 31 is a general framework for accrual budgeting and
financial reporting for governments. However, compliance with all
other applicable accounting standards is required. Exceptions to
this rule are explicitly stated in AAS 31.
- Final Budget Outcome 2000-01, pp. 16-17 and 32-33.
- A summary of selected differences and a reconciliation of GFS
and AAS 31 data can be found in Final Budget Outcome
2000-01, pp.72-6.
- Marc Robinson, 'Public Sector Net Worth: Is It Worth
Measuring?', Research Paper No. 26, 1995-96, Department of
the Parliamentary Library.
- Marc Robinson, 'Accrual Accounting and the Public Sector',
Economic Papers, volume 20 No. 2, June 2001, pp.
57-66.
- Official Committee Hansard, Joint Committee of Public Accounts
and Audit, 'Review of the accrual budget documentation', 22 June
2001, pp. 13-14.
- Australian Bureau of Statistics, Accruals-based Government
Finance Statistics, Information Paper 5517.0, 13 March 2000.
- It is interesting to note that when the States handed their
income tax powers to the Commonwealth, the Commonwealth treated the
revenue as if it were its own revenue even though, in a sense, the
Commonwealth was acting as an agent for the States. For a time, the
Commonwealth used to describe money it gave to the States as 'tax
reimbursements to the States'.
- For a fuller description of the provisions relating to the
PEFO, see 'Charter of Budget Honesty: Pre-election Provisions',
Research Note 10, Department of the Parliamentary Library,
28 September 2001 at http://www.aph.gov.au/library/pubs/rn/2001-02/02RN10.htm
- Australian National Audit Office, 'Audits of the Financial
Statements of Commonwealth Entities for the Period Ended 30 June
2001', Audit Report No. 29, 2001-02, 21 December 2001, pp.
27-8.
- Final Budget Outcome 1999-2000, p. 34.
- Senate Finance and Public Administration Legislative Committee,
'The Format of the Portfolio Budget Statements: Third Report',
November 2000, p. 41.
- Senate Finance and Public Administration Legislative Committee,
'The Format of the Portfolio Budget Statements: Second Report',
October 1999, chapter 5.
- Australian National Audit Office, 'Performance Information in
Portfolio Budget Statements', Audit Report No. 18,
2001-02, 1 November 2001, pp. 14-15.