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Statement 3: Fiscal Strategy and Outlook

Statement 3: Fiscal Strategy and Outlook

This Budget seeks to strengthen Australia's finances as the economy continues its transition from the largest mining investment boom in our history to broader‑based growth. It is an instalment in a longer term process where continued discipline will be required to continue to consolidate the budget and return to surplus.

While receipts continue to increase, tax receipts have been impacted by lower than expected nominal GDP which has been weighed down by weaker wages and inflation.

Notwithstanding these pressures, the Government remains fully committed to its fiscal strategy of returning the budget to a sustainable surplus by controlling expenditure growth and redirecting government spending to boost productivity and workforce participation.

The underlying cash balance is expected to improve over the forward estimates and into the medium term. The deficit is expected to fall from $37.1 billion (2.2 per cent of GDP) in 2016‑17 to $6.0 billion (0.3 per cent of GDP) in 2019‑20.

The underlying cash balance is projected to continue to improve over the medium term, reaching a surplus of around 0.2 per cent of GDP by 2020‑21, before peaking at around 0.3 per cent of GDP the following year. It is projected to fall gradually over the rest of the medium term.

The average annual pace of fiscal consolidation across the forward estimates is 0.4 per cent of GDP, consistent with the average pace of consolidation in the 2015‑16 MYEFO.

This Budget demonstrates the Government's fiscal discipline. The overall impact of new policy decisions in this Budget is an improvement to the bottom line of $1.7 billion over four years from 2016‑17 to 2019‑20, with all increases in payments offset by savings in payments, rather than increased taxes or higher debt.

Real payments growth until 2019‑20 is expected to be 1.9 per cent per annum on average, broadly consistent with the 2015‑16 MYEFO.

Payments as a proportion of GDP are forecast to fall to 25.2 per cent by the end of the forward estimates period.

Overview

The 2016‑17 Budget lays the path for a stronger economy with more jobs, growth and prosperity.

The 2016‑17 Budget maintains a steady trajectory towards surplus. The underlying cash balance is expected to improve across the forward estimates period. The deficit is expected to fall from $37.1 billion (2.2 per cent of GDP) in 2016‑17 to $6.0 billion (0.3 per cent of GDP) in 2019‑20. Likewise, the fiscal balance is expected to improve from $37.1 billion (2.2 per cent of GDP) in 2016‑17 to $2.1 billion (0.1 per cent of GDP) in 2019‑20, as shown in Table 1.

Table 1: Budget aggregates
  Actual   Estimates   Projections    
  2014‑15   2015‑16 2016‑17 2017‑18   2018-19 2019-20   Total(a)
Underlying cash balance ($b)(b) -37.9   -39.9 -37.1 -26.1   -15.4 -6.0   -84.6
Per cent of GDP -2.4   -2.4 -2.2 -1.4   -0.8 -0.3    
Fiscal balance ($b) -39.9   -39.4 -37.1 -18.7   -9.8 -2.1   -67.7
Per cent of GDP -2.5   -2.4 -2.2 -1.0   -0.5 -0.1    

(a) Total is equal to the sum of amounts from 2016‑17 to 2019‑20.

(b) Excludes net Future Fund earnings.

Government receipts continue to be impacted by weaker nominal GDP, weighed down by weaker wages and inflation.

Downwards revisions to forecast tax receipts since the 2015‑16 MYEFO are $13.5 billion over the four years to 2018‑19, excluding new policy. These revisions have been primarily driven by lower taxes from individuals and superannuation funds, partly offset by upward revisions to indirect taxes such as the GST.

As a result, compared with the 2015‑16 MYEFO the underlying cash balance has deteriorated by $3.4 billion in 2016‑17.

The average annual pace of fiscal consolidation across the forward estimates is 0.4 per cent of GDP. This is consistent with the average pace of consolidation in the 2015‑16 MYEFO. Given weaker nominal GDP growth in 2015‑16, the contribution to consolidation from revenue is less than previously expected.

Government payments as a share of GDP are forecast to decline from 25.8 per cent of GDP in 2016‑17, consistent with the 2015‑16 MYEFO, to 25.2 per cent of GDP in 2019‑20, above their long‑run average level of 24.9 per cent.

Tax receipts as a share of GDP will return to their 30‑year average in 2017‑18. The overall tax burden in this Budget is not being increased as a result of policy changes taken by the Government. Excluding tax integrity measures the Government is reducing the tax burden by around $1.9 billion over the forward estimates.

Net debt as a share of GDP is expected to peak in 2017‑18 and then decline over the remainder of the forward estimates and the medium term.