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Statement 8: The Public Sector

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Part IV: Non-financial Public Sector Liabilities

Non-financial Public Sector Liabilities

This part examines trends in non-financial public sector net debt, net worth and net interest and dividend flows.

Trends in Non-financial Public Sector Net Debt

The concept of net debt is the same under cash and accrual-based financial reporting. Net debt comprises the stock of selected gross financial liabilities less financial assets. The stock of net debt is a common measure used to help judge the overall strength of a jurisdiction's fiscal position. High levels of net debt impose a call on future revenue flows to service that debt.

The net debt measure is limited in that it does not include accrued employee liabilities or outstanding claims associated with insurance type activities, which can be substantial. In addition, net debt does not provide information on whether this debt has been incurred to finance fixed asset accumulation or current expenditure. This additional information is important in gauging the strength of a government's fiscal position as well as issues of the sustainability of fiscal policy.

Despite these limitations, net debt still provides useful information for examining the soundness of a government's fiscal position.

In this part, net debt data prior to 1994-95 are sourced from the ABS 1998 Public Sector Financial Assets and Liabilities publication (ABS Cat. No. 5513.0), and data from 1994-95 to 1997-98 are from the ABS 1999-2000 Government Financial Estimates publication (ABS Cat. No. 5501.0). Net debt numbers after 1997-98 are derived from jurisdictions' 1998-99 budget outcomes documentation, and 1999-2000 mid year reports.

Chart 4 shows non-financial public sector net debt as a percentage of GDP, and the contribution of the general government and PNFC sectors, since the late 1980s.

Charts 1 and 4 together indicate the broad relationship between deficits and net debt levels.

Chart 4 shows the increase in general government net debt as a share of GDP following the last recession. This increase reflected the financing of Commonwealth cash budget deficits that continued into the cyclical upturn. Also evident from Chart 4 is the decline in PNFC sector net debt as a share of GDP since the late 1980s, reflecting lower levels of capital expenditure, improved efficiency and privatisations. This decline moderated the increase in non-financial public sector net debt as a share of GDP in the first half of the 1990s.

The subsequent improvement in total net debt mainly reflects lower net borrowing requirements for the Commonwealth and the application of privatisation proceeds to debt retirement at both the Commonwealth and State/local levels.

Chart 4: Consolidated Government Non-financial Public Sector
Net Debt by Sector (as at end of financial year)

General government net debt as a share of GDP is expected to decline further over the projection period. PNFC sector net debt as a share of GDP is projected to decline slowly, in line with the expected pattern of small PNFC sector cash surpluses. Consolidated non-financial public sector net debt is projected to be only 6.2 per cent of GDP in 2002-03, compared with the most recent peak of 34.7 per cent in 1994-95.

Chart 5 shows trends in net debt by sector and level of government. Most Commonwealth net debt is owned by the general government sector whereas more than half of State/local net debt is owned by the PNFC sector.

As shown in Panel A of Chart 5 Commonwealth general government net debt as a share of GDP grew from low levels in the late 1980s to a peak of 18.9 per cent in 1995-96, with large increases in the first half of the 1990s.

Chart 5: Non-financial Public Sector Net Debt by Level of Government
and Sector (outstanding stock as at end of financial year)

A: Commonwealth

Chart 5:  Non-financial Public Sector Net Debt by Level of Government and Sector (outsanding stock as at end of financial year) - A: Commonwealth

B: State/local

Chart 5:  Non-financial Public Sector Net Debt by Level of Government and Sector (outsanding stock as at end of financial year) - B: State/local

C: Consolidated Non-financial Public Sector(a)

Chart 5:  Non-financial Public Sector Net Debt by Level of Government and Sector (outsanding stock as at end of financial year) - C: Consolidated Non-financial Sector

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

The projections for the Commonwealth in Panel A of Chart 5 include the expected impact of measures announced in this Budget. These projections show that Commonwealth general government sector net debt is projected to decline from a peak in 1995-96 to around 7.1 per cent in 2000-01, consistent with the Government's announced aim of halving the net debt to GDP ratio over this period.

In contrast, State/local general government net debt grew only modestly in the early 1990s, and has since declined from a peak of 10.3 per cent in 1992-93 to around 2.7 per cent in 1998-99, as shown in Panel B. This improvement within the State/local general government sector reflects both the impact of asset sales, and fiscal consolidation during the second half of the 1990s.

State/local general government net debt as a share of GDP should continue to fall in line with the debt reduction programmes being pursued by the States as part of their medium term fiscal strategies. State/local general government net debt is expected to be close to zero by the end of the projection period. However, some individual States continue to face substantial net debt burdens (see Budget Paper No. 3 - Federal Financial Relations for more information).

Government Finance Statistics Net Worth

The net worth, or net assets, measure provides a more comprehensive picture of a government's overall financial position than the net debt measure. Net worth incorporates a government's non-financial assets such as land, other fixed assets etc, which may be sold and used to repay debt, as well as certain financial assets and liabilities not captured by the net debt measure, most notably accrued employee superannuation liabilities.

The sale of physical assets decreases net debt, with proceeds from sales increasing financial assets. Net worth incorporates both sides of the story, showing the increase in financial assets and how the sale decreases the stock of non-financial assets.

With many jurisdictions yet to move to accrual accounting, net worth data for all Australian governments are currently only available on a general government sector basis, with just one year's figures obtainable for the State/local and Consolidated levels of government. Table 2 shows general government net worth by level of government.

Table 2: General Government GFS Net Worth by Level of Government as a Percentage of GDP (as at end of financial year)(a)

(a) State/local data are sourced from the ABS 1999-2000 Government Financial Estimates publication. Commonwealth and Consolidated data are Treasury estimates, utilising information contained in the ABS GFE.
(b) Consolidated government includes Commonwealth and State/local governments, and universities.
(e) Estimates.
(p) Projections.
na Data not available.

All State general governments have a positive net worth, ranging from 24 to 60 per cent of their gross state product. Local governments and universities also maintain a positive net worth. However, the Commonwealth general government has historically recorded negative net worth. The major difference between the levels of government lies in their stocks of land and fixed assets. At the State/local level, (as at 30 June 1999) general government land and fixed assets have an estimated value of $305 billion, easily exceeding total liabilities of $117 billion. At the Commonwealth level, general government land and fixed assets are valued at $52 billion, as against total liabilities of $187 billion. Part of this difference reflects the significant funding provided by the Commonwealth to the States for capital works, with the resultant assets recorded in the States' balance sheets. More information on capital grants to the States is available in Budget Paper 3.

Table 2 shows that the Commonwealth government is meeting its fiscal objective of improving the general government net asset position over the medium to long term. For more information on changes in the Commonwealth's net worth (net asset) position, refer to Statement 1 and Statement 4.

Net Interest and Dividend Flows

Net interest outlays are defined as interest payments on gross debt less interest received on loans and advances, and are affected by the volume of net debt on issue and by interest rates.

Chart 6 shows the trend in general government net interest payments by level of government. As shown in Chart 6, total general government net interest outlays peaked in 1995-96 at 2.2 per cent of GDP. High net interest outlays during the mid-1990s climate of relatively lower interest rates, reflected ongoing Commonwealth budget cash deficits during the expansionary phase of the economic cycle.

Chart 6: General Government Net Interest Outlays(a)

(a) Data to 1997-98 is derived from 1997-98 ABS Government Finance Statistics (Cat. No. 5512.0), data for 1998-99 and 1999-2000 is from the 1999-2000 ABS Government Financial Estimates (Cat. No. 5501.0).
(b) Consolidated government includes Commonwealth and State/local governments, and universities.

The contribution of the PNFC sector to non-financial public sector net interest outlays has decreased significantly over the last decade and a half, as reduced capital outlays, improved PNFC performance and privatisations have reduced PNFC sector net debt as a share of GDP.

The PNFC sector provides the general government sector (particularly at the State/local level) with significant revenue in the form of dividends and interest payments. Dividends correspond to general government equity holdings while interest payments reflect the stock of general government loans to the PNFC sector.

Chart 7 shows the effect of PNFC restructuring on these revenue sources. As PNFCs have become more commercial in focus, and less directly controlled by government, they have refinanced general government advances in the market and adopted capital structures and dividend policies more comparable with those applying in the private sector.

Notwithstanding the impact of privatisations, in recent years the PNFC sector has paid increasing dividends to its general government owners due to improved profitability and the adoption of commercial dividend policies. Income transferred to general government by PNFCs has increased from 0.4 per cent of general government revenue in 1988-89 to 2.9 per cent in 1998-99. There has been a corresponding decrease in interest paid by PNFCs to general government over the same period, but the magnitudes of the payments have been much smaller.

Chart 7: Income and Interest Transferred from PNFCs to
General Government Sector(a)

Chart 7:  Income and Interest Transferred from PNFCs to General Government Sector

(a) Data to 1997-98 is derived from 1997-98 ABS Government Finance Statistics (Cat. No. 5512.0), data for 1998-99 and 1999-2000 is from the 1999-2000 ABS Government Financial Estimates (Cat. No. 5501.0).

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