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Appendix B: Sensitivity of Financial Aggregates
to Economic Developments
Table B1 provides a guide to the sensitivity of the forward estimates of expenses and revenue to variations in economic parameters in 2000-01. It is important to recognise that such guides provide only a `rule of thumb' indication of the impact on the budget of changes in prices, wages and other parameters.
Table B1: Sensitivity of Financial Aggregates to Changes in Economic Parameters
On the expenses side, the sensitivity analysis of the estimates considers the following changes to four broad groups of parameters:
- prices - all price deflators are assumed to change by one percentage point at the start of the September quarter 2000, with wage deflators left unchanged;
- wages - all wage and salary rates are assumed to change by one percentage point from the beginning of the September quarter 2000, with price deflators left unchanged;
- unemployment benefit recipients (includes Newstart Allowance and unemployed Youth Allowance recipients) - the total number of recipients is assumed to change by 5 per cent from the beginning of the September quarter 2000; and
- Safety Net Adjustment - the Safety Net Adjustment (SNA) determined by the Australian Industrial Relations Commission (AIRC) is assumed to change by $2 per week in each of the budget and forward years from the beginning of the financial year. The SNA is used in the calculation of Wage Costs Indexes used in the indexation of a range of Commonwealth expenses.
For expenses, an increase in any of the above parameters will lead to an increase in expenses, and similarly, a decrease in any of the parameters will lead to a reduction in expenses.
Projected expenses respond to changes in economic parameters through a variety of mechanisms. For example, the Government's decision to maintain pensions at 25 per cent of Male Total Average Weekly Earnings (MTAWE) means that projected spending on pensions will depend not just on changes to the CPI, by which pensions have been indexed for some time, but also on expected changes in the level of MTAWE.
In addition, about $40 billion of expenses, comprising agency departmental expenses, other Commonwealth Own Purpose Expenses and Specific Purpose Payments to the States of a departmental expense nature, are indexed to weighted averages of movements in inflation and the Safety Net Adjustment (SNA) determined by the AIRC.
The number of unemployment benefit recipients, and therefore the total spending on benefits, are affected by economic growth and employment growth. However, the relationship between GDP growth and unemployment benefit recipients is highly variable and difficult to quantify. For this reason, Table B1 only includes the impact of changes in the number of unemployment benefit recipients (that is, Newstart Allowance and unemployed Youth Allowance recipients) on the estimates.
The profile of the prices sensitivity has changed when compared to previous years' analysis due to an increase in the scope of the analysis. This year, a greater number of expense items have been included in the analysis, with the affect of increasing the total reported sensitivity of a change in the price deflators.
The assumptions underlying the sensitivity of the revenue estimates to changes in prices and wages are similar to those used for expenses. In each case, the analysis presents the estimated effects of a change in one economic variable only, and does not attempt to capture the linkages between economic variables that characterise changes in the economy more broadly.
The revenue effects of changes in employment and private final demand show the effect of the following assumptions:
- employment - the level of employment is assumed to change by one percentage point from the beginning of the September quarter 2000, with no change in the composition of demand; and
- private final demand (consumption plus investment) - the level of private final demand is assumed to change by one percentage point from the beginning of the September quarter 2000, with no change in the composition of demand.
For the purposes of this analysis:
- changes in prices affect revenue primarily through changes in excise revenue;
- changes in wages and employment feed through into tax revenue largely through increases in PAYG Withholding tax collections; and
- changes in private final demand affect revenue predominantly through changes in excise and customs collections.
An increase in any of the parameters considered will lead to an increase in revenue, and a decrease in any of the parameters will lead to a reduction in revenue.