Budget Review October 2022–23 Index
Adrian Makeham-Kirchner
The budget is the expression of the Australian Government’s
‘fiscal policy’, an overview of how it intends to spend and tax in the context
of prevailing macroeconomic conditions.
Budget October 2022–23 predicts a deficit on the main
measure of the fiscal outcome, the underlying cash balance (UCB), for the 15th
consecutive year, and forecasts continuing deficits over the forward estimates.
These deficits have led to a long-term increase in government debt. The
deficits and debt position are improved relative to the forecasts in the March
2022–23 Budget for the 2022–23 budget year but deteriorate in the forward estimate
years from 2024–25.
It has been common
practice for incoming Australian governments, from both sides of the
political divide, to make claims about previous governments’ budget management.
These claims are expressed through mechanisms like audits, functional and
expenditure reviews, and concepts like ‘budget repair’. Often the outcome is that
the financial position is worse than expected for an incoming government.
The October 2022–23 Budget has been framed against a similar
background. During the election campaign, the then shadow
Treasurer and Finance Minister committed to:
A waste audit to go through the budget line-by-line,
department by department, after nine years of this Government fiddling the
books and stashing money wherever they feel like it for their own political
convenience, and also sensible savings to start that work of budget repair.
This audit has commenced, and is likely to be a feature of
budgets under the Albanese Government, with the Treasurer noting in the Budget
strategy and outlook: budget paper no. 1: October 2022–23:
While this Budget has begun the critical task of budget
repair, further work will be required in future budgets to rebuild fiscal
buffers and manage growing cost pressures. The Government will continue the
task of reviewing programs in future budgets with a focus on enhancing the
quality of spending and ensuring programs are efficient, effective and focused
on national priorities. (p. 7)
This article aims to assist parliament understand the
Albanese government’s fiscal strategy, and understand opportunities and
pressures for budget repair.
Fiscal strategy
The Charter of Budget
Honesty Act 1998 (the Charter) requires the Treasurer to deliver a
fiscal strategy statement. The October 2022–23 Budget reports the first medium
term fiscal strategy statement of the Albanese Government. At the outset, the
strategy points to the high-level expectations for budget management over the
medium term, noting:
Putting the budget on a more sustainable footing will ensure
the Government has the fiscal buffers to withstand economic shocks and better
manage the fiscal pressures from an ageing population and climate change. (Budget
Paper no.1, p. 75)
To understand the strategy, how the Government intends to
achieve a more sustainable footing, and to contrast it against the most recent
version expressed in the March 2022–23 Budget under the Morrison Government,
Table 1 outlines the key points side by side.
Compared to March 2022–23, the October 2022–23 principles
have:
- dropped
a specific tax to gross domestic product (GDP) ratio
- removed
reference to net debt, in favour of gross debt
- removed
reference to a budget balance, in favour of budget repair
- changed
language towards concepts of inclusivity, full employment, sustainability,
inclusion and adding other concepts like climate change into the targeting
- removed
explicit references to the private sector.
The strategy statement provides a lens through which
parliament can measure the Government’s success against its own principles.
Table 1 Comparison of fiscal
strategy March to October
March 2022–23 Budget
|
October
2022–23 Budget
|
Main statement
|
The Government’s Economic and
Fiscal Strategy will drive sustainable, private sector-led growth and job
creation and ensure Australia is well placed to respond to future shocks.
|
The
strategy is focused on the objectives of strong, inclusive and sustainable
economic growth, full employment, growing real wages, ensuring women’s
economic participation and equality, and improving living standards for all
Australians.
|
Principles
|
Stabilising and then reducing
gross and net debt as a share of the economy
|
Limiting
growth in spending until gross debt as a share of GDP is on a downwards
trajectory, while growth prospects are sound and unemployment is low.
|
Targeting a budget balance, on
average, over the course of the economic cycle that is consistent with the
debt objective
|
Allowing
tax receipts and income support to respond in line with changes in the economy
and directing the majority of improvements in tax receipts to budget repair.
|
Controlling expenditure growth,
while maintaining the efficiency and quality of government spending and
guaranteeing the delivery of essential services
|
Improving
the efficiency, quality and sustainability of spending.
|
Supporting revenue growth through
policies that drive earnings and economic growth, while maintaining a tax
burden consistent with a tax-to-GDP ratio at or below 23.9%
|
Delivering
a tax system that funds government services in an efficient, fair and sustainable
way.
|
Using the Government’s balance
sheet to support productivity-enhancing investments that build a stronger
economy, support private investment and create jobs
|
Focusing
new spending on investments and reforms that build the capability of our
people, expand the productive capacity of our economy, and support action on
climate change.
|
Ongoing structural reforms to
boost economic growth.
|
|
Source: Australian Government, ‘Statement 3: Fiscal Strategy and Outlook’, Budget Strategy and Outlook: Budget Paper no. 1:
October 2022–23 (p. 75); ‘Statement 3: Fiscal Strategy and Outlook’, Budget Strategy and Outlook: Budget Paper no. 1:
2022–23 (p. 77).
Budget outcomes: within and between
years
The general government sector (GGS) UCB for 2022–23 is
expected to be in deficit by $44 billion (1.5% of GDP). This is a
$34 billion (1.9% of GDP) improvement compared to the March 2022–23
forecast, due to a combination of windfall gains and new policy decisions
(discussed below). However, compared to the outcome for 2021–22, the result is
$12 billion worse (0.1% of GDP). Over the forward estimates the cumulative
UCB will be $326.7 billion, which is $102 billion worse than expected
at the March 2022–23 Budget.
Figure 1 illustrates the movement in key aggregates between
the March 2022–23 and October 2022–23 budgets. For the budget year, the
improvement of 1.9% compared to GDP is explained by a 0.6% of GDP improvement
in tax receipts, a 0.1% improvement in non-tax receipts and a reduction in
payments of 1.3% of GDP. Over the forward estimates and by 2025–26, when
compared to the March 2022–23 Budget, any improvement in receipts is more than
offset by increased payments. The Government includes a long-term forecast to
2032–33 as well, and on this measure the same pattern of higher payments to
receipts continues, pushing the UCB deficit higher.
Figure 1 Difference in
key aggregates between March and October (% GDP)
Source: Parliamentary Library
calculations based on Australian Government, Final Budget
Outcome 2021–22; Budget
Strategy and Outlook: Budget Paper no. 1: October 2022–23, and Pre-Election
Economic and Fiscal Outlook 2022.
The consequences of the longer term UCB
deterioration are higher debt and net interest payments; however, these are
lower than forecast in March 2022–23. For example, by 2025–26 the March 2022–23
Budget expected net debt to be 33.1% of GDP; however, this was revised down to
28.5% of GDP the October 2022–23 Budget. Figure 2 illustrates these
improvements as a proportion of GDP. Clearly, the relative improvement is
reversed by 2032–33, by which point gross and net debt, and net interest
payments, compared to GDP, are all higher than originally forecast.
More details about debt are provided in the Budget review
article Australian
Government Debt.
Figure 2 Difference in
key balance sheet aggregates between March and October (% GDP)
Source: Parliamentary Library calculations based on Australian
Government, Final
Budget Outcome 2021–22; Budget
Strategy and Outlook: Budget Paper no. 1: October 2022–23, and Pre-Election
Economic and Fiscal Outlook 2022.
Policy and parameter impacts
Budget aggregates are generally moved by two types of
variation. These are policy decisions and economywide parameter variations.
Policy variations are entirely the result of government decisions, whereas
parameter variations are generally beyond the control of government.
The October 2022–23 Budget is framed against a backdrop of
Australia’s recovery from the COVID-19 pandemic, contractionary monetary
policy, a surge in global inflation, significant natural disasters, and an
increasingly tense geopolitical environment.
Despite these issues, the Budget has reported significant short
term windfall growth in receipts compared with earlier forecasts, due primarily
to improvements in the short term macroeconomic outlook. These parameter
gains in receipts are partly offset by ‘automatic stabiliser’ payments that are
linked to parameters like inflation (for example social
security payments).
The parameter variations are also partly offset by new
policy measures introduced to address the Albanese Government election
commitments.
A simple summary of the aggregate shift in the UCB from
these policy and parameter variation is illustrated in Figure 3. In 2022–23,
total parameter variations since the Pre-Election Economic and Fiscal Outlook
(PEFO) have delivered a gain of $42.2 billion to the Government. Between
March 2022–23 and PEFO, a smaller $567 million parameter gain was
recorded. Offsetting this is $1.6 billion in policy variations recorded
since the March 2022–23 Budget.
Figure 3 Policy and
parameter variations impacting the October 2022–23 UCB ($m, nominal)
Source: Parliamentary Library calculations based on Australian
Government, ‘Statement 3: Fiscal Strategy and Outlook’, ‘Statement
4: Revenue’, and ‘Statement
5: Expenses and Net Capital Investment’, Budget
Strategy and Outlook: Budget Paper no. 1: 2022–23, and Pre-Election
Economic and Fiscal Outlook 2022.
To understand the types of variation that can occur within a
year, Figure 4 reconciles the March 2022–23 expected UCB to the October 2022–23
UCB. This illustrates that tax receipt parameter gains are the key driver of
the improved outcome, and the negative impacts from major payment parameter variations
– unemployment benefits, prices and wages, interest and exchange rates, GST
payments to the states, interest payments and program specific variations.
Figure 4 Reconciling March
to October 2022–23 UCB ($m, nominal)
Source: Parliamentary Library calculations based on Australian
Government, ‘Statement 3: Fiscal Strategy and Outlook’, ‘Statement
4: Revenue’, and ‘Statement
5: Expenses and Net Capital Investment’, Budget
Strategy and Outlook: Budget Paper no. 1: 2022–23; Budget
Strategy and Outlook: Budget Paper no. 1: October 2022–23; and Pre-Election
Economic and Fiscal Outlook 2022.
Over the forward estimates the Budget has factored in less
parameter variation, and additional policy variations. Policy variations are based
on the announced budget
measures. The parameter estimates will vary despite what the October 2022–23
Budget forecasts, due to forecasting challenges. The fiscal
strategy, and statements from the Treasurer, suggest more banking of any
parameter variations, with the Treasurer noting
during Budget lock-up:
We are returning to the Budget, 99 per cent of that [upgrade
to revenue] over the course of the next two years, when the inflation challenge
is at its most serious, but more than 90 per cent over the forward estimates.
And that is quite a substantial change when you compare it to recent practice
in Budgets. That is a big part of what we're trying to achieve here, that
spending restraint, particularly when it comes to those temporary boosts in
revenue.
To achieve an improved budget outcome using policy decisions,
where receipts and payments tend towards balance, would require a sustained
reduction in payments, an increase in receipts, or a combination of both. The
next sections look at the receipts and payments picture, in the context of the
budget repair narrative.
Receipts
Total receipts for 2022–23 in the October
2022–23 Budget are expected to be $607.2 billion (24.5% of GDP). Of
this $562.9 billion is tax receipts (22.7% of GDP), and $44.4 billion
is non-tax receipts (1.8% of GDP). Non-tax receipts include sales of goods and
services, interest received and dividends. Total receipts are $59.6 billion
higher than expected for 2022–23 in the March 2022–23 Budget. Compared to the
outcome for 2021–22, total receipts are $22.8 billion higher in October
2022–23.
Over the period from 2022–23 to 2032–33, receipts are
expected to grow to 26% of GDP, of which tax receipts will be 24.1% of GDP and
non-taxation receipts will be 1.9% of GDP. The total will increase as a
proportion of GDP by 0.2%, compared to the forecast in March 2022–23. The March
2022–23 proportion was capped at 23.9% of GDP by the former government.
A time series of major receipts is available in the Revenue
and expenditure article in this Budget review.
With persistent deficits on the horizon, it is instructive
to assess how revenue policy might contribute to budget
repair.[1] For example, a balanced
budget could be achieved with an approximate improvement in receipts of 0.7% of
GDP, all else being equal.
Policy options to improve revenue include:
- increasing
collections of revenues like personal income taxation, corporations’ taxation,
and excise duties, whether by increasing the base or rates that apply to those
revenues; alternatively, additional taxes may be added
- reducing
or removing tax measures and variations, or ‘tax expenditures’, like
concessional tax rates, deductions, offsets and tax exemptions that apply to
activities or classes of taxpayer to lower tax liabilities compared to what would
otherwise be the case
- reducing
the taxation gap, an estimate of the difference between the amount of tax
collected and what would have been collected if every taxpayer were fully
compliant with tax law.
Reform to the system of taxation is potentially
on the cards, but is not considered in this article.
The Parliamentary Budget Office provides a useful
infographic of revenue by type over time in its 2022–23
October Budget snapshot. Tax expenditures are less transparent than other
spending, however the
Charter of Budget Honesty requires the Treasurer provide information
about them in budget documentation. The Australian Taxation Office also provides
some insights
into the tax gap.
The Parliamentary Library has analysed recent available
sources for these components, and illustrates the actual and potential revenue
position as a proportion of GDP in Figure 3. Based on the analysis, for 2022–23
for example, in addition to expected revenue collections of 25.2% of GDP,
reported tax expenditures are equivalent to 8.1% of GDP. Also, assuming the tax
gap remains at around 7% of taxation revenue, this would account for an
additional 1.6% of GDP in extra revenue if the gap were completely removed.
Figure 5 Actual revenue,
tax expenditures and the tax gap (% of GDP)
Note: The GDP baseline for comparison is drawn from historical
data for revenue. The tax gap existed prior to 2015-16 however the data is not
in the ATO source, while projections are estimated based on an assumption that
the net tax gap remains 7% of taxation revenue forecast in the Budget.
Source: Parliamentary Library calculations based on Australian
Taxation Office (ATO), Annual
Report: 2020–21, (Canberra: ATO, 2022), p. 65; Department of the
Treasury (Treasury), Tax Benchmarks and Variations Statement, (Canberra:
Treasury), various years (2021,
2020,
2019,
2018,
2017);
Australian Government, ‘Statement
5: Expenses and Net Capital Investment’, Budget
Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table
A.1, pp. 169–170; ‘Statement
11: Historical Australian Government Data’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23,
Table 11.8, p. 387.
With additional revenue of up to 9.8% of GDP in tax
expenditures and the tax gap, considering reforms to these categories would
support the budget repair strategy and improve the budget outcome.
Payments
Total payments for 2022–23 are budgeted at $644.1 billion (25.9% of GDP) in the October 2022–23
Budget. This is $18.5 billion higher than expected for the same period in
the March 2022–23 Budget. Compared to the outcome for 2021–22, the 2022–23
level is $27.8 billion higher.
Like revenues, there is a range of ways expenditure policies
might contribute to budget repair, including:
- changing,
restraining, or removing functions from the government’s expenditure base
- changing
the settings of programs to reduce coverage, restrain growth or increase
contributions from participants; for example, debate has intensified over the
future costs of the National Disability Insurance Scheme (NDIS with the
Minister for the NDIS being quoted
as prioritising ‘curbing growth, but not cost-cutting’, including seeking
more financial support from the states
- increasing
the efficiency of expenditures, by reducing input costs.
‘Statement
6: Expenses and Net Capital Investment’ in Budget paper no. 1 provides
insights into expenditure aggregates based on the functions of government.[2]
Functional expenditures provide one way to understand which types of major
expenditure groupings drive total expenditure, and act as a signal about the Government’s
expenditure preferences.
A time series of major functional expenses is available in
the ‘Revenue
and expenditure’ article of this Budget review.
In Figure 6, the budget for each functional expenditure category
for 2022–23 is ranked based on its percentage of GDP, individually and
cumulatively. The top 5 functions – social
security and welfare, ‘other purposes’, health,
education, and defence – account for around 85% of payments, and 22.2 % of GDP.
‘Other purposes’ include interest, superannuation, goods and services tax
payments for the states, local government assistance, natural disaster relief,
and the contingency reserve.
Figure 6 Functional
expenditures (% of GDP) and cumulative distribution (%)
Note: The GDP baseline for comparison is drawn from historical
data for expenses.
Source: Parliamentary Library calculations based on Australian
Government, ‘Statement
6: Expenses and Net Capital Investment’, Budget
Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table
6.3, p. 177; ‘Statement
11: Historical Australian Government Data’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table
11.6, pp. 384–385.
Another way to look at expenditures is based on programmatic
spending, and Budget
paper no. 1 provides a list of the ‘top 20 programs’ (p. 180). These
programs when combined account for 70% of total expenditure.
In Figure 7, the average annual rates of growth in these top
20 programs are illustrated, comparing the growth rate from 2017–18 to 2022–23,
and then the forecast growth rate from 2022–23 to 2025–26.
Figure 7 Average annual
growth rates in top 20 programs
Note: The growth rates are calculated as compound annual growth
rates and do not account for inflation.
Source: Parliamentary Library calculations based on Australian
Government, ‘Statement
6: Expenses and Net Capital Investment’, Budget
Strategy and Outlook: Budget Paper no. 1: October 2022–23,
Table 6.3.1, p. 180.
In the fiscal strategy, the Government noted that ‘real
payments growth is expected to average 0.3 per cent over the forward estimates’
(Budget
paper no.1, p. 76). With a simple average inflation rate of 4% between
2021–22 and forecast 2025–26, this suggests an average nominal growth rate of
less than 4.5%.
Across the top 20, the average annual nominal growth was
7.1% between 2017–18 and 2022–23 and is expected to be 5.8% over the forward
estimates. Of the top 20 programs, 12 have a higher than average growth rate
over the forward estimates including:
- Interest
on Commonwealth Government’s behalf (12.6% pa)
- Support
for seniors (5.9% pa)
- Family
tax benefit/assistance (6% pa)
- Medical
benefits (4.6% pa)
- Income
support for people with disability (4.9% pa)
- Financial
support for carers (6.6% pa)
- Fuel
tax credits scheme (13.3% pa)
- Assistance
to the states for healthcare services or public hospitals (6.4% pa)
- Government
schools national support (4.8% pa)
- Childcare
fee assistance or subsidy (9.9% pa)
- National
Disability Insurance Scheme (13.4% pa)
- Aged
care services (8.6% pa).
The final way expenditures can be compared is using economic
expenditure categories – items such as payments to staff, purchases of
services, grants, and interest payments. Figure 8 illustrates the distribution
of these categories, as a per cent of GDP, for 2022–23. Where the functional
and top 20 expenditures take an outcome view of expenditure, the economic
categories present an input view.
The largest share is accounted for by current grants and
subsidies combined, which includes grants to individuals, states and local
governments, representing 8.6% of GDP (32% of expenditure). Combined, the
payment of public sector staff, and the purchases they make, account for 8.4%
of GDP (32% of expenditure). Personal benefits payments collectively account
for 7.9% of GDP (23% of expenditure). The remainder accounts for 3.3% of GDP
(13% of total expenditure). With 55% of expenditures accounted for in current
grants, subsidies and benefit payments, marginal reforms to these payments
would also contribute to budget repair.
Figure 8 Economic
category expenditure profile for 2022–23 (% of GDP)
Source: Parliamentary Library calculations based on Australian
Government, ‘Statement
10: Australian Government Budget Financial Statements’, Budget Strategy and Outlook: Budget Paper no. 1: October
2022–23, 321.
Relatively marginal restraint in the level or rates of
growth in any of the major functions, the top 20 programs, or in the inputs,
will contribute to the budget repair strategy.
The challenge ahead
To address long term fiscal deterioration, the Albanese
Government has taken some initial steps. It has banked a higher proportion of
windfall gains than historically. On the receipts front, it has started with measures
to reduce the tax gap. Describing expenditure decisions, the Finance
Minister announced
that the Government spending audit had begun, and:
The Albanese Labor Government’s first budget will deliver $22
billion in spending reductions and reprioritisations, beginning the hard task
of budget repair and reversing the damage done by the former government over
the last decade.
These reductions are over several years and are relatively
small compared to the $644 billion annual payments base.
Compared to a repair task of around 0.7% of GDP per year
($44 billion in 2022–23), there appears to be much more restraint needed
over the medium term to achieve the fiscal strategy goal that ‘ … gross debt as
a share of GDP is on a downwards trajectory’ (see Table 1), unless there are
additional windfall parameter gains.
[1]
Receipts (cash) are used in general discussion as they impact the
underlying cash balance. Revenue (accrual) are used for the analysis to ensure
comparability with a range of sources. There are slight variations between cash
and accrual measurements in the Budget.
[2].
Payments (cash) are used in general discussion as they impact the
underlying cash balance. Expenditure (accrual) is used for analysis to ensure
comparability with a range of sources. There are slight variations between cash
and accrual measurements in the Budget.
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