Policy costings often make reference to common terms that arise in the context of budget updates published either outside of the caretaker period or in the PEFO. This Appendix seeks to aid understanding of these terms.
Measures are defined as decisions of the Government that have a real or potential impact on the fiscal and underlying cash balances in the current year, forward estimates period, or beyond. Measures can comprise:
- new policy decisions;
- changes to, or the extension of, existing policy; and
- alterations to eligibility criteria or assistance rates (other than by legislated indexation).
Measures are classified as expense, capital or revenue, and can include both spending and saving components.
The Contingency Reserve (CR) is an allowance, included in aggregate expenses, principally to reflect anticipated events that cannot be assigned to individual programmes in the preparation of the budget estimates. The CR is designed to ensure that aggregate budget estimates are based on the best information available, and are as close as possible to expected outcomes at the time of the release of an economic and fiscal outlook. The CR is not a general policy reserve.
Allowances included in the CR are not appropriated and can only be drawn upon once the relevant appropriation legislation has been passed by Parliament. These allowances are removed from the CR and allocated to specific entities for appropriation closer to the time when the anticipated events eventuate.
In addition to allowances for anticipated events, the CR may also include: measures that reflect decisions taken but not yet announced by the Government, Government decisions that were either made too late in the estimates process for inclusion against individual entity estimates, or are commercial-in-confidence or national-security-in-confidence and therefore cannot be disclosed explicitly in portfolio estimates.
Conservative Bias Allowance
One of the largest components of the CR is the conservative bias allowance (CBA). This is an allowance for the tendency for estimates of expenses for existing Government policy to be revised upwards over time. This is of particular importance for demand driven programmes where precise cost estimates are difficult.
The allowance is set as a percentage of total general government sector expenses (excluding GST payments to the States). The rates applied across the Budget and forward estimates are reviewed periodically by Treasury and Finance. The CBA is reduced for earlier forward estimate years as programme estimates are progressively updated, thereby decreasing the bias.
Drawdowns (which are reflected as reductions) of the conservative bias allowance are treated as parameter variations and are consistent with long standing practice. Such adjustments do not realise any actual budgetary savings, nor offset Government spending measures, as the CBA is always reduced to zero prior to the commencement of the budget year. That is, the CBA does not affect the accrual level of government spending — it is only a device to improve the accuracy of the forward estimates.
Other allowances that may be included in the CR
Allowances may also be made for other anticipated events including for:
- underspends in the current financial year reflecting the tendency of budgeted expenses for some bodies or functions not to be met;
- programmes that are yet to be renegotiated with State and Territory governments;
- economic parameter revisions on the budget and forward estimates received too late in the process to be allocated to individual entities or functions; and
- events and pressures that are reasonably expected to affect the budget estimates.