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Statement 8: The Public Sector

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Part III: Non-financial Public Sector Cash Surplus

This part reviews trends in Commonwealth and State/local cash measures, such as outlays, revenue and cash surplus. The concepts contained in this part are in line with those used by the ABS in calculating cash GFS data, as detailed in the 1994 edition of Government Finance Statistics: Concepts, Sources and Methods (Cat. No. 5514.0).

Cash Surplus

The cash balance provides a useful indication of a government's need to call on financial markets to meet its budget obligations. Under a cash GFS framework, a government's surplus is calculated as revenue less outlays, adjusted for net increase in provisions. The cash surplus is also recorded under an accrual GFS framework, in the cash flow statement.

Following recent changes to the Australian National Accounts standards, the general government surplus measures in this statement, from 1998-99 onwards, incorporate payments by the Commonwealth general government sector in respect of accumulated PNFC superannuation liabilities. Payments prior to 1998-99 do not incorporate these payments.

The cash surplus is conceptually equivalent under a cash and an accrual framework. However, due to methodological and data-source changes associated with the move to an accrual accounting framework, the surplus figures contained in the cash flow statement are not directly comparable with the surplus measures obtained under the cash GFS. Time series data which encompasses surpluses derived under both cash and accrual accounting should therefore be used with caution.

In this part, cash GFS data are used where available, based on information published in the ABS 1997-98 Government Finance Statistics (Cat. No. 5512.0), and on jurisdictions' 1998-99 budget outcomes documentation and 1999-2000 Mid Year Reports. For those jurisdictions which have moved to accrual budget reporting, cash surplus data from their cash flow statements are used. In these cases, cash revenues are proxied by receipts from operating activities and sales of non-financial assets, and outlays by payments for operating activities and purchases of non-financial assets.

Non-financial Public Sector

The Commonwealth government exerts the major influence on non-financial public sector balances in Australia, largely through its substantial general government sector. The PNFC sector has a smaller effect on the total and tends to be more important at the State/local level, where most PNFCs are concentrated.

Chart 1 shows movements in the consolidated non-financial public sector surplus as a share of GDP, and the relative contributions of the general government and PNFC sectors. Chart 1 illustrates that the non-financial public sector was generally in a deficit position in the late 1980s and across most of the 1990s, apart from a small surplus in 1988-89. The deficit peaked at 4.3 per cent of GDP in 1992-93 before declining to 0.1 per cent in 1996-97. This succession of deficits added significantly to the government's net lending requirements, and hence to Australia's CAD.

However, Chart 1 shows that the non-financial public sector moved into a surplus position in 1997-98. The deficit in 1998-99 is the result of one-off increases in state funding of superannuation liabilities, with further surpluses projected in the period to 2002-03. This improvement largely reflects the fiscal consolidation measures adopted by the Commonwealth.

Chart 1 also shows the declining contribution of PNFCs to the non-financial public sector surplus, in line with the increasing privatisation of government businesses since the late 1980s. The PNFC sector is expected to contribute only modestly to non-financial public sector balances over the projection period.

Chart 1: Consolidated Non-financial Public Sector Cash Surplus by Sector

Chart 1:  Consolidated Non-financial Public Sector Cash Surplus by Sector

Chart 2 disaggregates, by level of government, the surpluses presented in Chart 1. It shows the large contribution of past Commonwealth general government cash deficits to the non-financial public sector cash deficit. It also illustrates the improvement in the Commonwealth general government sector balance since 1992-93.

Chart 2: Cash Surplus by Sector and Level of Government

A: General Government

Chart 2:  Cash Surplus by Sector and Level of Government - A: General Government

B: Public Non-financial Corporations

Chart 2:  Cash Surplus by Sector and Level of Government - B: Public Non-financial Corporations

C: Non-financial Public Sector

Chart 2:  Cash Surplus by Sector and Level of Government - C: Non-financial Public Sector

Chart 2 shows the consolidated PNFC sector is close to balance, and likely to remain so over the forecast period. The State/local general government sector fell into deficit in 1998-99, primarily because of several jurisdictions taking steps to fund previously unfunded superannuation liabilities in this year, but is expected to return to small surpluses in the next few years. The Commonwealth general government sector is the biggest contributor to the expected consolidated non-financial public sector surplus of 0.8 per cent of GDP in 1999-2000, increasing to 1.3 per cent of GDP in 2002-03.

General Government Sector

The general government sector is the appropriate primary focus for an assessment of the impact of the public sector on the national economy. It accounts for over 90 per cent of non-financial public sector revenues and outlays and is the sector through which the national government may seek to affect the level of private sector activity. The increased commercial orientation of the PNFC sector means that it operates more like the private sector. Its contribution to public sector balances in the past decade has been minor.

Chart 3 shows trends in general government cash outlays and revenue at the Commonwealth and State/local levels. Panel A shows the countercylical relationship between the Commonwealth's outlays and cash revenues. Generally, during economic downturns, such as in the early 1990s, outlays on transfer payments rise and taxation revenues fall, with the reverse happening during periods of strong economic growth. However, during the cyclical upturn in the first half of the 1990s, Commonwealth outlays were maintained at a high level of GDP while the low inflation environment depressed the growth in revenue receipts, resulting in significant deficits.

As shown in Panel A of Chart 2, the Commonwealth general government sector is expected to move from a cash deficit of 4.0 per cent of GDP in 1992-93 to a cash surplus of 1.2 per cent of GDP in 1999-2000, with continuing surpluses out to 2002-03. Commonwealth outlays and revenue estimates in Chart 3 are net of GST revenue, and show a decline in 2000-01 with the introduction of The New Tax System.

State/local revenue and outlays are less sensitive to the economic cycle than Commonwealth finances. Panel A of Chart 2 shows the sustained improvement in the State/local general government balances achieved over the period 1991-92 to 1996-97, from a deficit of 1.0 per cent of GDP to a cash surplus of 0.6 per cent of GDP. As shown in Panel B of Chart 3, this improvement has largely reflected outlays restraint, helped by lower debt servicing charges, with State/local revenue broadly stable as a share of GDP.

Chart 3: General Government Revenue and Cash Outlays
by Level of Government

A: Commonwealth

Chart 3:  General Government Revenue and Cash Outlays by Level of Government - A: Commonwealth

B: State/local

Chart 3:  General Government Revenue and Cash Outlays by Level of Government - B: State/local

C: Consolidated General Government(a)

Chart 3:  General Government Revenue and Cash Outlays by Level of Government - C: Consolidated General Government

(a) Consolidated government includes Commonwealth and State/local governments, and universities.

However, in 1998-99 the State/local general government sector cash balance reversed its recent series of small surpluses and moved to a deficit of 0.5 per cent of GDP. This sharp turnaround in 1998-99 reflected the allocation by New South Wales (NSW) and Victoria of an additional $3.3 billion and $2.6 billion, respectively, to meeting their unfunded superannuation liabilities. These augmented superannuation contributions increased the States' levels of current expenditure (and thus decreased their budget surpluses for the year) by a corresponding amount. Without these one-off superannuation payments, the State/local general government cash balance for 1998-99 would have been a surplus of around 0.5 per cent of GDP.

Small State/local general government cash surpluses are expected to continue over the projection period. As shown in Panel B of Chart 3, outlays are projected to decline as a share of GDP. This is due mainly to restraint in current outlays resulting from improvements in public sector efficiency and interest savings associated with declining net debt.

All States and Territories have in place medium-term fiscal strategies aimed at improving their fiscal positions over the medium term. These are discussed further in Budget Paper No. 3 - Federal Financial Relations. While there remain significant fiscal and economic disparities between the States, any movement towards increased State/local general government cash surpluses will reinforce the positive effect of fiscal consolidation at the Commonwealth level, contributing to a lower CAD.

Public Non-financial Corporations

The PNFC sector is an important provider of economic infrastructure and contributes significant revenue to general government, mainly in the form of dividends (as discussed in Part IV). Whereas the Commonwealth dominates the general government sector, State/local government activity is more significant within the PNFC sector. State/local PNFC outlays are around 60 per cent greater than Commonwealth PNFC outlays. This reflects State responsibility for infrastructure and service provision in areas such as electricity, gas and water and public transport.

During the 1980s, the PNFC sector engaged in high levels of capital accumulation (particularly the publicly-owned power providers), with associated growth in debt levels and interest costs. This added significantly to public sector deficits over this period. However, since the late 1980s, with the introduction of corporatisation and privatisation policies, the PNFC sector has recorded a series of small cash surpluses. There has been greater emphasis on PNFC operating efficiency, profitability and market orientation, often as a precursor to privatisation, and governments have re-evaluated the appropriateness of continued public ownership of many business enterprises.

PNFC privatisations over the last decade have occurred in two main sectors - electricity and gas (for example Victoria's electricity assets), and transport and communications (for example Qantas and the partial sale of Telstra). Proceeds of asset sales have been used largely to reduce, or contain the growth of, government net debt, resulting in ongoing savings in public debt interest.

As shown in Chart 1, the PNFC sector has maintained a cash surplus position through much of the 1990s. Following small cash deficits, as a share of GDP, in 1998-99 and 1999-2000, projections indicate that the sector will run a series of small deficits over the remainder of the outlook period.

The 1998-99 PNFC sector cash deficit of 0.4 per cent of GDP was substantially attributable to the privatisation of the gas industry in the Victorian PNFC sector in 1998-99, proceeds from which went to the general government sector to retire debt and reduce the state's unfunded superannuation liability. This effectively created a once-off increase in the sector's expenses, pushing up the deficit.

The 0.7 per cent PNFC cash deficit in 1999-2000 is partly the result of a special dividend payment by Telstra, which pushed the Commonwealth's PNFC sector into deficit for the year.

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