The underlying budget deficit
For 1997-98, the budget is estimated to be in small underlying deficit, compared to an estimated starting point deficit of $8.7 billion. Measures taken by the Government since the election or announced in this Budget, including the implementation of election commitments have therefore resulted in an improvement in the projected underlying budget deficit in 1997-98 of $7.2 billion or 1.3 per cent of GDP.
The headline measure of the budget balance is expected to show a surplus of $0.5 billion in 1996-97 and $6.6 billion in 1997-98. This compares to a deficit of $5.0 billion in 1995-96. The budget aggregates
Table 1: Summary of Budget Aggregates
The improvement in the underlying budget balance is consistent with the Governments medium term fiscal strategy as announced on 12 March 1996 of taking measures to reduce the underlying budget deficit by $4 billion in 1996-97 and a further $4 billion in 1997-98. The Governments objective in relation to 1996-97 has been met in full and, in addition, the measures announced in this Budget substantially achieve the 1997-98 objective. The improvement in the underlying budget balance means that the Government is well placed to deliver its commitment to achieve underlying surpluses during sustained periods of economic growth.
Table 2 summarises the impact on the underlying deficit of measures taken by the Government since the election or announced in this Budget. Measures aimed at reducing the underlying deficit have a gross impact of $5.8 billion in 1996-97 and $9.8 billion in 1997-98. The emphasis is predominantly on reductions in outlays. The Governments election commitments on additional outlays and tax reductions were fully funded from savings commitments announced in the election with a net contribution to the savings tasks of $1.1 billion in 1996-97 and $0.5 billion in 1997-98.
Table 2: Composition of Reductions in Underlying Deficit
The improvement in the underlying balance of 1.8 per cent of GDP from 1995-96 to 1997-98 will provide a substantial boost to public sector and national saving. The underlying balance measures directly the Commonwealth budget sectors contribution to public sector net lending (i.e. saving less investment), being negative if in deficit and positive if in surplus. The improvement in the underlying budget balance, together with sizeable equity asset sales, will also result in a decline in Commonwealth general government net debt from its current level of around 19 per cent of GDP to 13 per cent by 1999-2000.
Consistent with the Governments announcement of 12 March 1996, the improvement in the underlying budget balance has been achieved primarily through outlays restraint. Table 1 shows that outlays excluding net advances are forecast to decline by 1.7 per cent of GDP over the two years, 1996-97 and 1997-98. By contrast, revenues are forecast to increase by only 0.1 per cent of GDP over the two years.
The substantial level of (negative) net advances in 1996-97 primarily reflects the impact of the proceeds from the sale of the Commonwealth Bank of Australia. Proceeds expected from the partial sale of Telstra contribute to continued levels of (negative) net advances in 1997-98 and 1998-99. These major transactions account for the substantial temporary widening of the gap between the underlying and headline budget balances in 1996-97 and 1997-98 shown in Chart 1.
The focus on the underlying deficit requires the sale, or partial sale, of major Commonwealth assets, such as the Commonwealth Bank of Australia and Telstra, to be viewed in terms of the efficiency and productivity gains expected to result from greater private sector participation in the business, rather than in terms of short-term budgetary benefits. While the proceeds from the sale will improve the headline budget balance and reduce the Governments financing task in the years concerned and hence its net debt it is the underlying balance that measures the impact on public sector saving.
Table 3 provides a reconciliation of budget estimates between those at the time of the 1995-96 Budget, the 12 March 1996 estimates and the 1996-97 Budget estimates in terms of policy decisions and parameter and other variations.
Table 3: Reconciliation of Underlying Budget Balance Estimates
Table 3 shows that between the 1995-96 Budget and the 1996 federal election, total estimates variations of $7 billion in 1996-97 and $10 billion in 1997-98 resulted in a revised underlying budget deficit of $7.6 billion in 1996-97 and $7.3 billion in 1997-98 as was released by the Government on 12 March 1996
Despite little change in the overall economic outlook in the period between the election and the finalisation of the 1996-97 Budget estimates, there was a further deterioration in the starting point estimates for 1996-97 and the out-years. This mainly reflected the larger than expected budget deficit for 1995-96 (some of which flows through into higher starting point deficits for subsequent years).
Without the fiscal consolidation strategy, the underlying budget balance would have remained in substantial deficit over the period by $9.6 billion in 1996-97 and $8.7 billion in 1997-98.
Chart 2 reproduces the Table 3 data in graphical format.
Post-election and 1996-97 Budget outlays measures. The focus in achieving expenditure reductions has been on reassessing existing spending priorities, ensuring greater efficiency and effectiveness in the delivery of public services and enhancing accountability mechanisms. An overriding priority was to ensure that those people in the community less able to look after themselves and their families were protected and assisted.
In June 1996 the National Commission of Audit made wide-ranging recommendations in regard to the operations of Government and the scope of its activities. Box 1 provides a brief summary of the areas covered by the Commissions recommendations. Consistent with the broad thrust of those recommendations, the focus of the Governments expenditure decisions has been on greater efficiency and effectiveness in government programmes and a more rigorous assessment of the need for individual programmes.
Post-election and 1996-97 Budget revenue measures. As foreshadowed in its election commitments, the Government has introduced various tax relief measures in areas such as family assistance and health. Revenue measures have also contributed to the fiscal consolidation task with the introduction of a number of measures aimed at addressing anomalies within the existing tax system and removing opportunities for tax evasion and avoidance. The Government has also moved to reduce the revenue loss associated with some tax expenditures (including the generous taxation treatment of superannuation and research and development expenditure).
|BOX 1: NATIONAL COMMISSION OF AUDIT
The Government established the National Commission of Audit on 12 March 1996 to provide an independent report on the financial position of the Commonwealth. The Commission presented its report to the Government on 21 June 1996.
The Commission makes a broad range of recommendations and findings reflecting the scope of the terms of reference. In particular, the Commission:
The Government has set in train a two-part process for examining the Commissions report. The first has been to act on a number of the recommendations in the 1996-97 Budget context. The second part provides for a longer term examination of the more complex issues raised in the report. This approach allows the Government to consider these findings more thoroughly and to ensure that appropriate outcomes result. Further decisions will be taken once these recommendations have been considered in more detail.