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Department of Parliamentary Services Parliament of Australia
2011-12 Budget
Budget Seminar: ‘Understanding the Budget’
Presented by: Garth DayScott Kompo-HarmsRichard Webb
Department of Parliamentary Services Parliament of Australia
The State of the Economy
o Lower real GDP growth estimateso Natural disasterso Patchwork economy
o Higher inflationo Food and petrol
See Budget Paper 1, Statement 1, Table 1 for: real GDP growth and inflation forecasts
Department of Parliamentary Services Parliament of Australia
Exports by destination, % of total
0
10
20
30
0
10
20
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Japan Korea, Republic of China
Department of Parliamentary Services Parliament of Australia
Where to look for information?o The Budget Speecho The Budget Overviewo The Budget Papers
o BP1: Budget Strategy and Outlooko BP2: Budget Measureso BP3: Australia’s Federal Relationso BP4: Agency Resourcing
o Portfolio Budget Statementso Main source of information on proposed agency funding and activities
Department of Parliamentary Services Parliament of Australia
Budget Paper No. 1o BP1 – Budget Strategy and Outlook
o S1: Budget Overviewo S2: Economic Outlooko S3: Fiscal Strategy and Outlooko S4: Special Topico S5: Revenueo S6: Expenses and Net Capital Investmento S7: Assets and Liability Managemento S8: Statement of Riskso S9: Budget Financial Statementso S10: Historical Australian Government Data
Department of Parliamentary Services Parliament of Australia
Budget Papers
o BP2: Budget Measureso Policy decisions in the Budget and since MYEFOo Three sections: revenue, expenses and capital
o BP3: Australia’s Federal Relationso Payments for specific purposes, general revenue assistance, debt
transactions, consolidated non-financial public sector and accountabilities under the Federal Financial Relations Framework.
o BP4: Agency Resourcingo Annual appropriations, Special appropriations and Special accounts
Department of Parliamentary Services Parliament of Australia
Budget Balance Concepts
o The headline ‘cash’ budget balanceo Total receipts - total payments. o Call on financial markets of government activity
o The underlying ‘cash’ budget balanceo Removes net cash flow of investments in financial assets (e.g.
Telstra sale) and Future Fund earningso Measure of public saving (surplus), dis-saving (deficit)
o The fiscal budget balanceo Accrual counterpart to underlying cash balanceo Captures long-term effect of current policy decisions
Department of Parliamentary Services Parliament of Australia
The Budget Aggregates
See Budget Paper 1, Statement 1, Table 2 - cash terms: receipts and payments - accrual terms: revenue and expenses
Department of Parliamentary Services Parliament of Australia
Cash and Accrual Accountingo Gross debt
o Total Liabilities
o Net debto Deposits held, government securities, loans and other borrowing
minus cash and deposits, advances paid, and investments, loans and placements. Peaked at -3.8% in 2007-08
o i.e. Working capital: current assets minus current liabilities
o Net wortho Total assets - total liabilities. Peaked at 6% of GDP in 2007-08
o Net financial worth (used in fiscal strategy)o Financial assets – liabilities. Peaked at -1.5% of GDP in 2007-08
- See BP1 Statement 9: Budget Financial Statement
Department of Parliamentary Services Parliament of Australia
Structural and Cyclical Factorso The structural component of the budget is driven by
policy decisions (termed discretionary fiscal policy).oBudget Paper 2 – Budget Measures: o e.g. CPRS deferral, Flood Levy, MRRT
o The cyclical component of the budget is driven by fluctuations in economic activity impacting:
o Individuals income taxoCompany taxo Indirect taxo Social security & welfare payments
Department of Parliamentary Services Parliament of Australia
Structural FactorsBudget Paper 2: Budget Measures
Department of Parliamentary Services Parliament of Australia
Budget Forecasts of Company Tax
0
20
40
60
80
100
2009-10 2010-11 2011-12
2008-09 2009-10 2010-11 (MYEFO)
Department of Parliamentary Services Parliament of Australia
The Budget & Real GDP Growth
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.019
80-8
1
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
2008
-09
2010
-11(
e)
2012
-13(
p)
Underlying Cash Balance Real GDP Growth
Department of Parliamentary Services Parliament of Australia
The Budget & Interest Payments
-6.0
-4.0
-2.0
0.0
2.0
4.019
80-8
1
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
2008
-09
2010
-11(
e)
2012
-13(
p)
Net Interest Payments Primary Budget BalanceUnderlying Cash Balance
Department of Parliamentary Services Parliament of Australia
The Fiscal Strategyo The 2008-09 budget formally introduced the
Government’s fiscal strategy:1. Achieving budget surpluses, on average, over the
economic cycle;2. Keeping taxation as a share of GDP, on average, below
the level for 2007-08;o Taxation receipts less than 23.6% of GDP, on average
3. Improving the Government’s net financial worth over the medium term.o cyclically-adjusted budget surpluses, accrual basis
Department of Parliamentary Services Parliament of Australia
The Fiscal Strategy – Part II1. Allow cyclical variation in the budget, temporary
targeted stimulus (discretionary policy decisions) and New Policy Proposals (NPPs) to be offset.
2. Allow tax receipts to recover naturally and hold real growth in spending (payments) to 2% p.a. until the budget returns to surplus.
3. Then, maintain growth in spending at 2% p.a., on average, until surpluses are at least 1 per cent of GDP.
Department of Parliamentary Services Parliament of Australia
Fiscal Challenges & Opportunitieso The 2012-13 surplus is a first step to achieving the
Fiscal Strategy, and structural surpluses, on average.o Receipts
o If tax receipts average 23.6% of GDP p.a., consistent with the Fiscal Strategy, $150 billion of additional revenue may be generated, more than offsetting accumulated deficits of $129.2 billion
o Tax policy: maintain incentives to work and invest
o Paymentso If real payments grew, on average, by 2 per cent p.a., consistent
with the Fiscal Strategy, then an additional $74.6 billion of expenditure may be allocated
o Spending policy: well targeted, value for money and social return
Department of Parliamentary Services Parliament of Australia
Structural Budget Estimates
Source: 2009-10 Budget Paper No.1 p4-17, updated by Treasury (2010).
Department of Parliamentary Services Parliament of Australia
Scott Kompo-Harmso The Budget and macroeconomic policy
o Monetary policy (brief description only)
o Fiscal policy (main topic of interest)o Instruments
o Effects
o Economic Forecastingo Background
o Process
o Risk v uncertainty
Department of Parliamentary Services Parliament of Australia
The Budget and macroeconomic policy
o Two main macroeconomic policy ‘levers’o Monetary policy – RBA’s inflation targeting regime
o Inflation target range: 2-3 per cent per annumo RBA varies their cash rate target in response to actual v target
inflation rateso RBA will look through ‘volatility’ – ‘headline’ vs ‘underlying’
inflation
o Fiscal policy – changes in government’s budget settingso Main topic of discussion
Department of Parliamentary Services Parliament of Australia
Monetary policyo In Australia, the RBA has a ‘cash rate target’o Cash rate is the interest rate charged on overnight loans between financial
institutions – this varies with exchange settlement (ES) balances. ES balances are funds held with the RBA to settle obligations daily. The target is announced after each RBA Board meeting.
o The next day, the RBA undertakes ‘open market operations’ – purchase and sale of securities such as government bonds – in order to keep the actual cash rate as close as possible to the target. This enables the RBA to have some influence over the levels of ES balances, which thereby affects the interest rate charged for overnight loans between financial institutions
Department of Parliamentary Services Parliament of Australia
Monetary policyo ‘Conventional’ monetary policy...
o Many different interest rates in the economy – lending over varying time periods (term structure) and for different purposes
o Cash rate is a very important (short-term) one that affects all others to some degree.
o By varying the cash rate, the RBA varies the whole structure of interest rates in the economy – thereby exerting an indirect influence on borrowing and saving. Not an exact science!
o There are also so-called ‘unconventional’ monetary policy methods – as this is a seminar on the budget/fiscal policy these need not concern us here.
Department of Parliamentary Services Parliament of Australia
Fiscal Policyo Government Budget settings – various instruments availableo Digression - What is ‘government’?o Total public sector is comprised of:
o General Government Sector (GGS) – this is the most commonly discussed sector
o Public Non-Financial Corporations (PNFCs)o Public Financial Corporations (PFCs)o GGS + PNFCs sometimes referred to as ‘Non-Financial Public Sector’ or
NFPS – Cash flow/operating statements and balance sheets for GGS, PNFCs and NFPS
Department of Parliamentary Services Parliament of Australia
Fiscal Policy
Department of Parliamentary Services Parliament of Australia
Fiscal Policy – Instruments o Revenue measures (see BP#1, Statement 5)
1. Introducing, removing or altering various taxes2. ‘Tax expenditures’ – summary only provided in the Budget – Tax
Expenditures Statement (released in January of the next year)3. Non-tax revenue changes
o Various types of taxeso Discretionary (policy changes) vs cyclical (also referred to as
‘automatic stabilisers’)o Some revenue measures are designed with more than
just macroeconomic goals in mind –designed to have an impact in some way on behaviour
Department of Parliamentary Services Parliament of Australia
Fiscal Policy – Receipts
Department of Parliamentary Services Parliament of Australia
Fiscal Policy – Instrumentso Expenditure measures
(see BP#1, Statement 6)o Various types of government expenditure – can be broadly categorised
in different ways, depending on the context:1. By function – education, health, defence, etc.2. Discretionary vs cyclical3. Administered vs departmental expenses – Richard Webb will have more to say
about this distinction
Department of Parliamentary Services Parliament of Australia
Fiscal Policy – Instrumentso Other measures
o Contingent liabilities – e.g. government guarantees of deposits and wholesale funding – Some limited information available in BP#1, Statement 8 – Statement of Risks
o Use of the Government Balance sheet - purchase or sale of financial and non-financial assets – Some limited information on the second is available in BP#1, Statement 9 – Budget Financial Statements
Department of Parliamentary Services Parliament of Australia
Fiscal policy - Effectso Concept of multiplierso Many considerations will impact on the effects of a particular action. Here
are but a few:o Time frame under consideration – SR v LRo Exchange rate regime in place- fixed or floatingo Openness to trade – exports + imports as % of GDPo Individual national action or synchronised global actiono Type of action taken:
1. Expenditure measures – ‘Productive’ vs ‘unproductive’ government spending vs transfer payments
2. Revenue measures – Direct vs indirect taxation, differences in treatment across sectors, taxing wages vs capital vs natural resources
o Don’t forget automatic stabilisers...
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – Background
o Macroeconomic forecasts form the basis around which the overall Budget is builto Tax revenues/receipts are closely linked to nominal GDPo Some significant expenses/payments are closely linked to real GDP
and employment – especially unemployment benefitso Prices, wages, interest rates and exchange rates all affect various
spending componentso Economists cannot predict the future, but the government needs
something upon which to estimate the evolution of budget variables into the future
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – Background
o Some common terminology:o Each budget is done on a financial year basis and contains estimates of
economic and fiscal variables for the current year, the budget year, the next year and projections for the next two years
o ‘Forward estimates’ period includes the budget year and three years aheado Two major forecasting rounds – Budget (May) and MYEFO (around November)
o Domestic Economy forecasts are presented in detail in BP #1 Statement 2, Economic Outlook
Department of Parliamentary Services Parliament of Australia
Economic Forecasting - Process1. Business liaison2. Release of latest National Accounts data3. International Economy Division – world outlook4. Domestic Economy Division – econometric modelling (single
equation sectoral and economy-wide), leading indicators, other domestic data/forecasts
5. Quality Assurance – Internal (senior management) and external (Joint Economic Forecasting Group)
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – Budget cycle
o Several documents released over the full Budget cycle1. Budget papers #1-4 and Portfolio Budget Statements (May)2. Final Budget Outcome (end-September)3. MYEFO (November)
o Charter of Budget Honesty requires a PEFO to be released prior to elections
o Additional Budget documents can be released at the discretion of the Government (e.g. UEFO in Feb 2009; ES in Jul 2010)
o Department of Finance and Deregulation also releases monthly budget statements
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – risk vs uncertainty
o Forecasters necessarily have to deal with risk and uncertainty – difference between the two is whether the forecaster can identify the underlying probabilities of known possible set of outcomes or not.
o The former can be quantified whilst the second cannoto Dealing with both risk and uncertainty involves the use of ‘sensitivity
analysis’ o For this reason, budget forecasts are unlikely to come to fruition exactly
as predictedo REMEMBER – Budget is merely a statement of the Government’s
expectations NOT reality!
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – sensitivity analysis
o Sensitivity analysis is the use of alternative assumptions to establish how sensitive the predicted outcomes are to changes in assumptions. Scenarios encompass the budget year and the next year
o BP#1 (Statement 3 Appendix A) usually contains two scenarios:1. A permanent fall in non-rural commodity prices equivalent to a fall in
nominal GDP of 1 per cent2. A permanent rise in real GDP of 1 per cent, arising from an equal ongoing
rise in both labour productivity and labour force participation o They show impacts on key economic variables and fiscal outcomes –
deviation from baseline forecasts o They are ‘partial’ analyses rather than ‘general’, i.e. They do not include
‘feedbacks’, such as exchange rate movements or likely monetary/fiscal policy responses – see next slides
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – scenario 1
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Economic Forecasting – scenario 2
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Economic Forecasting – feedbacks and other factors
o In scenario 1, we would expect the following:o The exchange rate would fall, dampening the economic and fiscal
effects, ando A temporary shock would have a more subdued impact than a
permanent fall
o In scenario 2, we would expect the following:o As above, a temporary shock would have a more subdued impact than
a permanent fall, ando A larger relative contribution to real GDP increases from productivity
rather than participation would mean a higher increase in wages and lower gain in employment growth. The reverse would also apply.
Department of Parliamentary Services Parliament of Australia
Economic Forecasting – sensitivity analysis
o A couple of things to note:o Scenarios are broadly symmetric – that is, they apply (roughly) to
moves in either direction o However- the effects are not likely to be linear. In other words , in
the event of large changes (for example, a 5 per cent fall in nominal GDP – a five-fold increase in the first illustrative scenario), we should not expect that the predicted reactions will also be five times as large, even in the absence of any ‘feedbacks’.
o In the event of large shocks, we should not expect the ceteris paribus assumption to hold – all else is rarely equal...
Department of Parliamentary Services Parliament of Australia
Final commentso Cannot emphasise enough – Budget forecasts are not ‘reality’ and
economic forecasters are not infallible o There is much judgement applied in economic forecasting and policy
analysis – assumptions have to be made about the future and these can and frequently do turn out to be wrong
o Quite often (but not always!) discussion about ‘black holes’ in budgets or ‘flawed’ costings revolves around differences of opinion about assumptions – the important thing is to make sure appropriate analytical techniques and sound logic are applied. It is perfectly valid to apply different judgements
o Criticisms of ‘inaccuracies’ (which are usually identified only with the benefit of hindsight) are valid only if an unsuitable analytical technique has been applied, logic is flawed or incomplete/incorrect data are used ex ante
Department of Parliamentary Services Parliament of Australia
Richard Webb
UNDERSTANDING:
PORTFOLIO BUDGET STATEMENTS (PBS)
Department of Parliamentary Services Parliament of Australia
Department of Resources, Energy and Tourism Budget Statements
Department of Parliamentary Services Parliament of Australia
Program 2 Expenses
('000)2009-10
Revised budget2010-11 Budget
2011-12 Forward year 1
2012-13 Forward year 2
2013-14 Forward year 3
Annual administered expenses:
- Ethanol Production Subsidy 154.556 183,300 - - -- Establishment of the National Offshore Petroleum Regulatory Authority 1,047 7,298 1,048 - -- Global Carbon Capture and Storage Institute 100,000 100,000 100,000 100,000 -
-Radioactive Waste Management 6,483 4,443 3,097 - -
-Rum Jungle 39 40 25 16 -
-Syntroleum Depreciation 1,000 1,000 1.000 1,000 1.000
Special account expenses:
Clean Energy Initiative Special Account: 1
- Carbon Capture and Storage Flagships 135,000 82,798 209,599 208,160 98,731
- National Low Emissions Coal Initiative 87,621 102,850 74,900 34,800 17,630
Annual departmental expenses:
- Program support 29.992 26,923 27,594 23,669 20,841
Total program expenses 515,738 508,652 417,263 367,645 138,202
1. The expenses from this special account are funded by administered appropriations from RET.
Department of Parliamentary Services Parliament of Australia
Department of Resources, Energy and Tourism Resource Statement –
Budget Estimates for 2010-11 as at Budget May 2010
Department of Parliamentary Services Parliament of Australia
Table 1.1: Department of Resources, Energy and Tourism Resource Statement - Budget Estimates for 2010-11 as at Budget May 2010
Estimate of prior 4 year amounts
available in 2010-11
$'000
Proposed at Budget =
2010-11 $'000
Total
2010-11 $'000
Actual available appropriation
2009-10 $'000
Ordinary annual services 1
Departmental appropriation
Prior year departmental appropriation 2 - 3.472 3,472 -
Departmental appropriation 19.957 81,252 101,209 83,062
s31 Relevant agency receipts 3 - -
Expenses not requiring appropriation - 210 210 -
Total 19,957 84,934 104,891 83,062
Administered expenses
Outcome 1 800.051 800,051 675,530
Payments to CAC Act bodies 122.920 122,920 141,622
Total 922,971 922,971 817,152
Total ordinary annual services A 19,957 1,007,905 1,027,862 900,214
Other services"
Departmental non-operating
Equity Injections - 928 928 -
Previous years outputs - - - 2.330
Total - 928 928 2,330
Administered non-operating
Payments to CAC Act bodies - non-operating - 13,181 13181 -
Total - 13,181 13,181 2,330
Total other services B - 14,109 14,109 2,330
Total available annual appropriations 19,957 1,022,014 1,041,971 902,544
Department of Parliamentary Services Parliament of Australia
Table 1.1: Department of Resources, Energy and Tourism Resource Statement - Budget Estimates for 2010-11 as at Budget May 2010 (continued)
Estimate of prior 4 year amounts
available in 2010-11
$'000
Proposed at Budget =
2010-11 $'000
Total estimate
2010-11 S'000
Actual available appropriation
2009-10 S'000
Special appropriations
- Offshore Petroleum and Greenhouse Gas Storage Act 2006 - Ashmore and Cartier Islands - 1,500 1,500 1,500
- Offshore Petroleum and Greenhouse Gas Storage Act 2006 - Offshore Petroleum Fees - 15,000 15,000 20,000
- Offshore Minerals Act 1994 - Offshore Minerals Act (Fees) - 60 60 60
Total special appropriations C - 16,560 16,560 21,560
Total appropriations excluding Special Accounts 19,957 1,038,574 1,058,531 924,104
Special Accounts
Opening balance 5 63,921 63,921 60,322
Appropriation receipts 6 485,977 485,977 393.347
Appropriation receipts - other agencies 7 3.915 3,915 4,065
Non-appropriation receipts to Special Accounts 8,434 8,434 7,532
Total Special Account D 63,921 498,326 562,247 465,266
Total resourcing
A+B+C+D 83,878 1,536,900 1,620,778 1,389,370
Less appropriations drawn from annual or special appropriations above and credited to special accounts and/or CAC Act bodies through annual appropriations
- (622,078) (622,078) (534.97)
Total net resourcing for RET 83,878 914,822 998,700 854,401
Department of Parliamentary Services Parliament of Australia
FOOTNOTES to TABLE 1.1:
1. Appropriation Bill (No 1) 2010-11
2. Estimated adjusted balance carried from previous year for annual appropriations
3. s31 Relevant Agency receipts - estimate
4. Appropriation Bill (No.2) 2010-11
5. Estimated opening balance for special accounts (less 'Special Public Money' held in accounts like Other Trust Monies (OTM) and Services for other Government and Non-agency Bodies (SOG) accounts). For further information on special accounts see Table 3.1.2.
6. Appropriation receipts from RET's annual and special appropriations for 2009-10 included above.
7. Appropriation receipts from other agencies credited to RET's special accounts
Reader note: All figures are GST exclusive.
Department of Parliamentary Services Parliament of Australia
Thank you for your attendance
Contact Details:
Garth6277 2464
[email protected] Scott
6277 [email protected]
Richard6277 2460
Upcoming Parliamentary Library Publication: The 2011-12 Budget Review
Further information: www.budget.gov.au/