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Budgeting in Australia

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Budgeting in Australia ISSN 1608-7143 OECD Journal on Budgeting Volume 8 – No. 2 © OECD 2008 Budgeting in Australia by Jón R. Blöndal, Daniel Bergvall, Ian Hawkesworth and Rex Deighton-Smith* This review of budgeting in Australia concentrates on the national government only. The article first discusses Australia’s recent economic and fiscal performance and then focuses on the budget formulation process. After a discussion of the role of the Parliament, the article reviews various aspects of budget implementation and management. The article concludes with a special section on Australia’s efforts to eliminate “red tape” within government. This review was undertaken in September 2007; following the election of a new government in Australia in November 2007, some new policies are highlighted, encompassing budget formulation, processes, accounting and management. * Jón R. Blöndal and Ian Hawkesworth are, respectively, Deputy Head of Division and Administrator in the Budgeting and Public Expenditures Division of the Public Governance and Territorial Development Directorate, OECD. At the time of writing, Daniel Bergvall was a project manager in the same division. Rex Deighton-Smith, independent consultant, prepared the section on reducing red tape. 1 BUDGETING IN AUSTRALIA Note on terminology The term Department of Finance is used throughout this article. The department is now known formally as the Department of Finance and Deregulation and was previously known as the Department of Finance and Administration. The term national government is used to refer to the Commonwealth or federal government. The term ministry is used to generically describe departments. All amounts are expressed in Australian dollars, unless otherwise mentioned. The term pension is used rather than superannuation. Unless otherwise noted, all fiscal references are to the cash-basis performance. Any references to accrual-basis performance are noted specifically. Australia has two main political parties: the Labor Party and the Coalition. The Coalition is in fact a “permanent” alliance of the Liberal Party and the National Party. The terms budget, estimates, and appropriation bills can be viewed interchangeably for the purposes of this article. 1. Introduction Australia’s economic performance has been exceptional. It has enjoyed over 16 years of continuous economic growth. In the last decade, annual real GDP growth averaged about 3.5% (7.25% in nominal terms; see Figure 1). Output is at present estimated to be very close to potential. Figure 1. GDP growth in Australia (per cent), 2000-08 Nominal GDP Real GDP 10 9 8 7 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 (f) f: Forecast. Source: Australian Government, Budget Paper No. 1, 2008/09. 2 OECD JOURNAL ON BUDGETING – VOLUME 8 – No. 2 – ISSN 1608-7143 – © OECD 2008 BUDGETING IN AUSTRALIA Australia’s outstanding economic performance is attributed to two principal factors: first, structural reforms starting in the mid 1980s, and reinforced subsequently, which transformed the economy; second, a prolonged boom in commodity demand and prices since 2003 – led by China, India and other developing countries – which is currently a major driver of national income growth and investment. The early structural reforms included floating the Australian dollar, abolishing foreign exchange controls and interest rate controls, trade liberalisation – including unilateral reductions in tariffs – and deregulation of successive product markets and industries. Subsequent structural reforms included granting full independence to the Reserve Bank (the central bank) and the introduction of inflation targeting, a much more flexible labour market, tax reform aimed at widening the tax base, lowering marginal tax rates on both business and personal incomes and a greater focus on consumption taxes, and extensive privatisation of government business enterprises.1 Australia is a major commodity producer, including iron ore and metallurgical coal (both for steel), bauxite (for aluminium), thermal coal (for energy), uranium, lead, zinc, gold, silver, copper, crude oil and gas, and industrial diamonds. All together, commodities account for nearly two-thirds of all exports, and their export earnings are forecast to increase by 30% in 2008/09 (ABARE, 2008). The high commodity prices have naturally increased tax receipts. Hand in hand with Australia’s overall economic performance, Australia’s budget has been in surplus for nine of the past ten years. The exception was in 2001/02 when a modest deficit was recorded; that moment coincided with a major tax reform in Australia. Australia’s budget balance as a percentage of GDP is shown in Figure 2. The development of receipts and payments over the same period is shown in Figure 3. Receipts as a share of GDP have remained relatively stable in recent years, while payments have declined as a proportion of GDP. Due to the strong growth in Australia’s GDP, especially in nominal terms, annual government receipts grew significantly in real and nominal terms over the period but, as a share of GDP, this growth was offset by very substantial income tax cuts. Payments also grew significantly but, for most of the period, growth in receipts outpaced the growth in payments (see Figure 4). Figure 2. Budget balance (as a percentage of GDP), 1997-2009 2.5 2.0 1.5 1.0 0.5 0 -0.5 f) f) 03 ( 0/01 1/02 3/04 6/07 0 05/06 00 002/ 1997/98 1998/99 2 200 2 20 2004/05 20 200 08/09 ( 1999/2000 2007/08 20 f: Forecast. Source: Australian Government, Budget Paper No. 1, 2008/09. OECD JOURNAL ON BUDGETING – VOLUME 8 – No. 2 – ISSN 1608-7143 – © OECD 2008 3 BUDGETING IN AUSTRALIA Figure 3. 27 Total receipts and payments (as a percentage of GDP), 1997-2009 26 25 24 Total receipts Total payments 23 22 f: Forecast. 1997/98 Source: Australian Government,1998/99 Figure 4. 350 000 1999/2000 300 000 Annual growth in receipts and payments (in AUD millions), 1997-2009 2000/01 250 000 Budget Paper No. 1 200 000 2001/02 150 000 2002/03 100 000 , 2008/09. 2003/04 50 000 Receipts 2004/05 0 f: Forecast. 2005/06 Source: 1997/98 2006/07 Australian Government, 1998/99 payments, arising from the elimination of net debt over the same period. The concomitant This situation, however, does not reflect an important change in the composition of reduction in net interest payments, from over AUD 8 billion in 1997/98 to net interest 2007/08 (f) 1999/2000 receipts of around AUD 2.2 billion in 2008/09 Payments than would otherwise have been the case. Ta 2008/09 (f) reported revenue – grew rapidly as well. In just the five 2years000/01 from 2003/04 to 2007/08, tax expenditures grew by over AUD 20 billion. Budget Paper No. 1 in government expenditure on both the spending and revenue sides of20 the01/02 budget. 4 2002/03 , 2008/09. 2003/04 2004/05 2005/06 , allowed stronger growth in other payments 2006/07 x expenditures – which reduce the level of 2 This further highlights the underlying growth 2007/08 (f) 2008/09 (f) OECD JOURNAL ON BUDGETING – VOLUME 8 – No. 2 – ISSN 1608-7143 – © OECD 2008 BUDGETING IN AUSTRALIA The government used the budget surpluses and especially the proceeds of the sale of assets, including privatisation of government business enterprises, to pay down debt. As of 2005/06, Australia had no net debt (see Figure 5). Figure 5. Net debt (as a percentage of GDP), 1997-2009 20 15 10 5 0 -5 4 6 7 ) /02 0 /0 2/03 3/ 5/0 9 (f 0 06 /0 1997/98 1998/99 2000/01 2001 200 200 2004/05 20 20 08 1999/2000 2007/08 (f) 20 f: Forecast. Source: Australian Government, Budget Paper No. 1, 2008/09. Figure 5 shows a more rapid drop in net debt than the budget balances (Figure 2) in the respective years. This is due to the treatment of the proceeds of sales of assets. The government’s privatisation programme commenced in earnest with the sale of the first tranche of Commonwealth Bank in 1991 and included the sale of Qantas Airways in 1995/96, the sale of the first tranche of Telstra (telecommunications company) starting in 1997/98 – the largest single sale – the sale of airports, culminating with the sale of Sydney Airport in 2002, and the sale of the final tranche of Telstra in 2006. The accounting treatment for the sale of assets changed over the period, which meant that significant amounts were treated “below the line” and therefore not reflected in the budget balance. This reduction – and eventual elimination – of net debt created a virtuous impact on net interest payments, with the position turning to net receipts in 2007/08 (see Figure 6). With net debt eliminated – and to ensure that the government meets its pension liabilities – the government announced the creation of the Future Fund in 2004, and established it in 2006, with budget surpluses being transferred to the Fund.3 The purpose of the Fund is to accumulate financial assets and invest them to address the government’s unfunded civil service and military pension liability. This liability is not included in the concept of “net debt”. The Fund is fully quarantined from the budget, and its returns are explicitly excluded from the calculation of the budget balance. As of May 2008, the unfunded civil service and military pension liability stood at around AUD 103 billion and is expected to grow to around AUD 150 billion by 2020. In response to these pressures, the Future Fund is to have sufficient assets in 2020 to offset the liability. As of June 2008, the Future Fund had AUD 65 billion in assets, and it is expected that the Fund will have sufficient assets to meet the 2020 target without further substantial injections of cash.
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