2011-12 Budget Budget Seminar: ‘ Understanding the Budget’

Department of Parliamentary Services Parliament of Australia

2011-12 Budget

Budget Seminar: ‘Understanding the Budget’

Presented by: Garth DayScott Kompo-HarmsRichard Webb


The State of the Economy

o Lower real GDP growth estimateso Natural disasterso Patchwork economy

o Higher inflationo Food and petrol

See Budget Paper 1, Statement 1, Table 1 for: real GDP growth and inflation forecasts


Exports by destination, % of total

0

10

20

30

0

10

20

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Japan Korea, Republic of China


Where to look for information?o The Budget Speecho The Budget Overviewo The Budget Papers

o BP1: Budget Strategy and Outlooko BP2: Budget Measureso BP3: Australia’s Federal Relationso BP4: Agency Resourcing

o Portfolio Budget Statementso Main source of information on proposed agency funding and activities


Budget Paper No. 1o BP1 – Budget Strategy and Outlook

o S1: Budget Overviewo S2: Economic Outlooko S3: Fiscal Strategy and Outlooko S4: Special Topico S5: Revenueo S6: Expenses and Net Capital Investmento S7: Assets and Liability Managemento S8: Statement of Riskso S9: Budget Financial Statementso S10: Historical Australian Government Data


Budget Papers

o BP2: Budget Measureso Policy decisions in the Budget and since MYEFOo Three sections: revenue, expenses and capital

o BP3: Australia’s Federal Relationso Payments for specific purposes, general revenue assistance, debt

transactions, consolidated non-financial public sector and accountabilities under the Federal Financial Relations Framework.

o BP4: Agency Resourcingo Annual appropriations, Special appropriations and Special accounts


Budget Balance Concepts

o The headline ‘cash’ budget balanceo Total receipts - total payments. o Call on financial markets of government activity

o The underlying ‘cash’ budget balanceo Removes net cash flow of investments in financial assets (e.g.

Telstra sale) and Future Fund earningso Measure of public saving (surplus), dis-saving (deficit)

o The fiscal budget balanceo Accrual counterpart to underlying cash balanceo Captures long-term effect of current policy decisions


The Budget Aggregates

See Budget Paper 1, Statement 1, Table 2 - cash terms: receipts and payments - accrual terms: revenue and expenses


Cash and Accrual Accountingo Gross debt

o Total Liabilities

o Net debto Deposits held, government securities, loans and other borrowing

minus cash and deposits, advances paid, and investments, loans and placements. Peaked at -3.8% in 2007-08

o i.e. Working capital: current assets minus current liabilities

o Net wortho Total assets - total liabilities. Peaked at 6% of GDP in 2007-08

o Net financial worth (used in fiscal strategy)o Financial assets – liabilities. Peaked at -1.5% of GDP in 2007-08

- See BP1 Statement 9: Budget Financial Statement


Structural and Cyclical Factorso The structural component of the budget is driven by

policy decisions (termed discretionary fiscal policy).oBudget Paper 2 – Budget Measures: o e.g. CPRS deferral, Flood Levy, MRRT

o The cyclical component of the budget is driven by fluctuations in economic activity impacting:

o Individuals income taxoCompany taxo Indirect taxo Social security & welfare payments


Structural FactorsBudget Paper 2: Budget Measures


Budget Forecasts of Company Tax

0

20

40

60

80

100

2009-10 2010-11 2011-12

2008-09 2009-10 2010-11 (MYEFO)


The Budget & Real GDP Growth

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.019

80-8

1

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

2010

-11(

e)

2012

-13(

p)

Underlying Cash Balance Real GDP Growth


The Budget & Interest Payments

-6.0

-4.0

-2.0

0.0

2.0

4.019

80-8

1

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

2010

-11(

e)

2012

-13(

p)

Net Interest Payments Primary Budget BalanceUnderlying Cash Balance


The Fiscal Strategyo The 2008-09 budget formally introduced the

Government’s fiscal strategy:1. Achieving budget surpluses, on average, over the

economic cycle;2. Keeping taxation as a share of GDP, on average, below

the level for 2007-08;o Taxation receipts less than 23.6% of GDP, on average

3. Improving the Government’s net financial worth over the medium term.o cyclically-adjusted budget surpluses, accrual basis


The Fiscal Strategy – Part II1. Allow cyclical variation in the budget, temporary

targeted stimulus (discretionary policy decisions) and New Policy Proposals (NPPs) to be offset.

2. Allow tax receipts to recover naturally and hold real growth in spending (payments) to 2% p.a. until the budget returns to surplus.

3. Then, maintain growth in spending at 2% p.a., on average, until surpluses are at least 1 per cent of GDP.


Fiscal Challenges & Opportunitieso The 2012-13 surplus is a first step to achieving the

Fiscal Strategy, and structural surpluses, on average.o Receipts

o If tax receipts average 23.6% of GDP p.a., consistent with the Fiscal Strategy, $150 billion of additional revenue may be generated, more than offsetting accumulated deficits of $129.2 billion

o Tax policy: maintain incentives to work and invest

o Paymentso If real payments grew, on average, by 2 per cent p.a., consistent

with the Fiscal Strategy, then an additional $74.6 billion of expenditure may be allocated

o Spending policy: well targeted, value for money and social return


Structural Budget Estimates

Source: 2009-10 Budget Paper No.1 p4-17, updated by Treasury (2010).


Scott Kompo-Harmso The Budget and macroeconomic policy

o Monetary policy (brief description only)

o Fiscal policy (main topic of interest)o Instruments

o Effects

o Economic Forecastingo Background

o Process

o Risk v uncertainty


The Budget and macroeconomic policy

o Two main macroeconomic policy ‘levers’o Monetary policy – RBA’s inflation targeting regime

o Inflation target range: 2-3 per cent per annumo RBA varies their cash rate target in response to actual v target

inflation rateso RBA will look through ‘volatility’ – ‘headline’ vs ‘underlying’

inflation

o Fiscal policy – changes in government’s budget settingso Main topic of discussion


Monetary policyo In Australia, the RBA has a ‘cash rate target’o Cash rate is the interest rate charged on overnight loans between financial

institutions – this varies with exchange settlement (ES) balances. ES balances are funds held with the RBA to settle obligations daily. The target is announced after each RBA Board meeting.

o The next day, the RBA undertakes ‘open market operations’ – purchase and sale of securities such as government bonds – in order to keep the actual cash rate as close as possible to the target. This enables the RBA to have some influence over the levels of ES balances, which thereby affects the interest rate charged for overnight loans between financial institutions


Monetary policyo ‘Conventional’ monetary policy...

o Many different interest rates in the economy – lending over varying time periods (term structure) and for different purposes

o Cash rate is a very important (short-term) one that affects all others to some degree.

o By varying the cash rate, the RBA varies the whole structure of interest rates in the economy – thereby exerting an indirect influence on borrowing and saving. Not an exact science!

o There are also so-called ‘unconventional’ monetary policy methods – as this is a seminar on the budget/fiscal policy these need not concern us here.


Fiscal Policyo Government Budget settings – various instruments availableo Digression - What is ‘government’?o Total public sector is comprised of:

o General Government Sector (GGS) – this is the most commonly discussed sector

o Public Non-Financial Corporations (PNFCs)o Public Financial Corporations (PFCs)o GGS + PNFCs sometimes referred to as ‘Non-Financial Public Sector’ or

NFPS – Cash flow/operating statements and balance sheets for GGS, PNFCs and NFPS


Fiscal Policy


Fiscal Policy – Instruments o Revenue measures (see BP#1, Statement 5)

1. Introducing, removing or altering various taxes2. ‘Tax expenditures’ – summary only provided in the Budget – Tax

Expenditures Statement (released in January of the next year)3. Non-tax revenue changes

o Various types of taxeso Discretionary (policy changes) vs cyclical (also referred to as

‘automatic stabilisers’)o Some revenue measures are designed with more than

just macroeconomic goals in mind –designed to have an impact in some way on behaviour


Fiscal Policy – Receipts


Fiscal Policy – Instrumentso Expenditure measures

(see BP#1, Statement 6)o Various types of government expenditure – can be broadly categorised

in different ways, depending on the context:1. By function – education, health, defence, etc.2. Discretionary vs cyclical3. Administered vs departmental expenses – Richard Webb will have more to say

about this distinction


Fiscal Policy – Instrumentso Other measures

o Contingent liabilities – e.g. government guarantees of deposits and wholesale funding – Some limited information available in BP#1, Statement 8 – Statement of Risks

o Use of the Government Balance sheet - purchase or sale of financial and non-financial assets – Some limited information on the second is available in BP#1, Statement 9 – Budget Financial Statements


Fiscal policy - Effectso Concept of multiplierso Many considerations will impact on the effects of a particular action. Here

are but a few:o Time frame under consideration – SR v LRo Exchange rate regime in place- fixed or floatingo Openness to trade – exports + imports as % of GDPo Individual national action or synchronised global actiono Type of action taken:

1. Expenditure measures – ‘Productive’ vs ‘unproductive’ government spending vs transfer payments

2. Revenue measures – Direct vs indirect taxation, differences in treatment across sectors, taxing wages vs capital vs natural resources

o Don’t forget automatic stabilisers...


Economic Forecasting – Background

o Macroeconomic forecasts form the basis around which the overall Budget is builto Tax revenues/receipts are closely linked to nominal GDPo Some significant expenses/payments are closely linked to real GDP

and employment – especially unemployment benefitso Prices, wages, interest rates and exchange rates all affect various

spending componentso Economists cannot predict the future, but the government needs

something upon which to estimate the evolution of budget variables into the future


Economic Forecasting – Background

o Some common terminology:o Each budget is done on a financial year basis and contains estimates of

economic and fiscal variables for the current year, the budget year, the next year and projections for the next two years

o ‘Forward estimates’ period includes the budget year and three years aheado Two major forecasting rounds – Budget (May) and MYEFO (around November)

o Domestic Economy forecasts are presented in detail in BP #1 Statement 2, Economic Outlook


Economic Forecasting - Process1. Business liaison2. Release of latest National Accounts data3. International Economy Division – world outlook4. Domestic Economy Division – econometric modelling (single

equation sectoral and economy-wide), leading indicators, other domestic data/forecasts

5. Quality Assurance – Internal (senior management) and external (Joint Economic Forecasting Group)


Economic Forecasting – Budget cycle

o Several documents released over the full Budget cycle1. Budget papers #1-4 and Portfolio Budget Statements (May)2. Final Budget Outcome (end-September)3. MYEFO (November)

o Charter of Budget Honesty requires a PEFO to be released prior to elections

o Additional Budget documents can be released at the discretion of the Government (e.g. UEFO in Feb 2009; ES in Jul 2010)

o Department of Finance and Deregulation also releases monthly budget statements


Economic Forecasting – risk vs uncertainty

o Forecasters necessarily have to deal with risk and uncertainty – difference between the two is whether the forecaster can identify the underlying probabilities of known possible set of outcomes or not.

o The former can be quantified whilst the second cannoto Dealing with both risk and uncertainty involves the use of ‘sensitivity

analysis’ o For this reason, budget forecasts are unlikely to come to fruition exactly

as predictedo REMEMBER – Budget is merely a statement of the Government’s

expectations NOT reality!


Economic Forecasting – sensitivity analysis

o Sensitivity analysis is the use of alternative assumptions to establish how sensitive the predicted outcomes are to changes in assumptions. Scenarios encompass the budget year and the next year

o BP#1 (Statement 3 Appendix A) usually contains two scenarios:1. A permanent fall in non-rural commodity prices equivalent to a fall in

nominal GDP of 1 per cent2. A permanent rise in real GDP of 1 per cent, arising from an equal ongoing

rise in both labour productivity and labour force participation o They show impacts on key economic variables and fiscal outcomes –

deviation from baseline forecasts o They are ‘partial’ analyses rather than ‘general’, i.e. They do not include

‘feedbacks’, such as exchange rate movements or likely monetary/fiscal policy responses – see next slides


Economic Forecasting – scenario 1


Economic Forecasting – scenario 2


Economic Forecasting – feedbacks and other factors

o In scenario 1, we would expect the following:o The exchange rate would fall, dampening the economic and fiscal

effects, ando A temporary shock would have a more subdued impact than a

permanent fall

o In scenario 2, we would expect the following:o As above, a temporary shock would have a more subdued impact than

a permanent fall, ando A larger relative contribution to real GDP increases from productivity

rather than participation would mean a higher increase in wages and lower gain in employment growth. The reverse would also apply.


Economic Forecasting – sensitivity analysis

o A couple of things to note:o Scenarios are broadly symmetric – that is, they apply (roughly) to

moves in either direction o However- the effects are not likely to be linear. In other words , in

the event of large changes (for example, a 5 per cent fall in nominal GDP – a five-fold increase in the first illustrative scenario), we should not expect that the predicted reactions will also be five times as large, even in the absence of any ‘feedbacks’.

o In the event of large shocks, we should not expect the ceteris paribus assumption to hold – all else is rarely equal...


Final commentso Cannot emphasise enough – Budget forecasts are not ‘reality’ and

economic forecasters are not infallible o There is much judgement applied in economic forecasting and policy

analysis – assumptions have to be made about the future and these can and frequently do turn out to be wrong

o Quite often (but not always!) discussion about ‘black holes’ in budgets or ‘flawed’ costings revolves around differences of opinion about assumptions – the important thing is to make sure appropriate analytical techniques and sound logic are applied. It is perfectly valid to apply different judgements

o Criticisms of ‘inaccuracies’ (which are usually identified only with the benefit of hindsight) are valid only if an unsuitable analytical technique has been applied, logic is flawed or incomplete/incorrect data are used ex ante


Richard Webb

UNDERSTANDING:

PORTFOLIO BUDGET STATEMENTS (PBS)


Department of Resources, Energy and Tourism Budget Statements


Program 2 Expenses

('000)2009-10

Revised budget2010-11 Budget

2011-12 Forward year 1



Annual administered expenses:

- Ethanol Production Subsidy 154.556 183,300 - - -- Establishment of the National Offshore Petroleum Regulatory Authority 1,047 7,298 1,048 - -- Global Carbon Capture and Storage Institute 100,000 100,000 100,000 100,000 -

-Radioactive Waste Management 6,483 4,443 3,097 - -

-Rum Jungle 39 40 25 16 -

-Syntroleum Depreciation 1,000 1,000 1.000 1,000 1.000

Special account expenses:

Clean Energy Initiative Special Account: 1

- Carbon Capture and Storage Flagships 135,000 82,798 209,599 208,160 98,731

- National Low Emissions Coal Initiative 87,621 102,850 74,900 34,800 17,630

Annual departmental expenses:

- Program support 29.992 26,923 27,594 23,669 20,841

Total program expenses 515,738 508,652 417,263 367,645 138,202

1. The expenses from this special account are funded by administered appropriations from RET.


Department of Resources, Energy and Tourism Resource Statement –

Budget Estimates for 2010-11 as at Budget May 2010


Table 1.1: Department of Resources, Energy and Tourism Resource Statement - Budget Estimates for 2010-11 as at Budget May 2010

Estimate of prior 4 year amounts

available in 2010-11

$'000

Proposed at Budget =

2010-11 $'000

Total

2010-11 $'000

Actual available appropriation

2009-10 $'000

Ordinary annual services 1

Departmental appropriation

Prior year departmental appropriation 2 - 3.472 3,472 -

Departmental appropriation 19.957 81,252 101,209 83,062

s31 Relevant agency receipts 3 - -

Expenses not requiring appropriation - 210 210 -

Total 19,957 84,934 104,891 83,062

Administered expenses

Outcome 1 800.051 800,051 675,530

Payments to CAC Act bodies 122.920 122,920 141,622

Total 922,971 922,971 817,152

Total ordinary annual services A 19,957 1,007,905 1,027,862 900,214

Other services"

Departmental non-operating

Equity Injections - 928 928 -

Previous years outputs - - - 2.330

Total - 928 928 2,330

Administered non-operating

Payments to CAC Act bodies - non-operating - 13,181 13181 -

Total - 13,181 13,181 2,330

Total other services B - 14,109 14,109 2,330

Total available annual appropriations 19,957 1,022,014 1,041,971 902,544


Table 1.1: Department of Resources, Energy and Tourism Resource Statement - Budget Estimates for 2010-11 as at Budget May 2010 (continued)

Estimate of prior 4 year amounts

available in 2010-11

$'000

Proposed at Budget =

2010-11 $'000

Total estimate

2010-11 S'000

Actual available appropriation

2009-10 S'000

Special appropriations

- Offshore Petroleum and Greenhouse Gas Storage Act 2006 - Ashmore and Cartier Islands - 1,500 1,500 1,500

- Offshore Petroleum and Greenhouse Gas Storage Act 2006 - Offshore Petroleum Fees - 15,000 15,000 20,000

- Offshore Minerals Act 1994 - Offshore Minerals Act (Fees) - 60 60 60

Total special appropriations C - 16,560 16,560 21,560

Total appropriations excluding Special Accounts 19,957 1,038,574 1,058,531 924,104

Special Accounts

Opening balance 5 63,921 63,921 60,322

Appropriation receipts 6 485,977 485,977 393.347

Appropriation receipts - other agencies 7 3.915 3,915 4,065

Non-appropriation receipts to Special Accounts 8,434 8,434 7,532

Total Special Account D 63,921 498,326 562,247 465,266

Total resourcing

A+B+C+D 83,878 1,536,900 1,620,778 1,389,370

Less appropriations drawn from annual or special appropriations above and credited to special accounts and/or CAC Act bodies through annual appropriations

- (622,078) (622,078) (534.97)

Total net resourcing for RET 83,878 914,822 998,700 854,401


FOOTNOTES to TABLE 1.1:

1. Appropriation Bill (No 1) 2010-11

2. Estimated adjusted balance carried from previous year for annual appropriations

3. s31 Relevant Agency receipts - estimate

4. Appropriation Bill (No.2) 2010-11

5. Estimated opening balance for special accounts (less 'Special Public Money' held in accounts like Other Trust Monies (OTM) and Services for other Government and Non-agency Bodies (SOG) accounts). For further information on special accounts see Table 3.1.2.

6. Appropriation receipts from RET's annual and special appropriations for 2009-10 included above.

7. Appropriation receipts from other agencies credited to RET's special accounts

Reader note: All figures are GST exclusive.


Thank you for your attendance

Contact Details:

Garth6277 2464

[email protected] Scott

6277 [email protected]

Richard6277 2460

[email protected]

Upcoming Parliamentary Library Publication: The 2011-12 Budget Review

Further information: www.budget.gov.au/

2011-12 Budget Budget Seminar: ‘ Understanding the Budget’

Documents

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