Structural budget balance estimates are useful tools for assessing fiscal sustainability over time, if considered in conjunction with a range of other fiscal indicators. Different insights on fiscal sustainability are provided by balance sheet indicators, projections of the fiscal impacts of demographic change and assessments of contingent liabilities, as well as the underlying budget balance.
While structural budget balance estimates are conceptually appealing, they are sensitive to the assumptions and parameters underpinning them. This cautions against an overreliance on point estimates of the structural budget balance. Instead, ranges for the structural budget balance based on plausible assumptions are more useful than point estimates.
This Working Paper presents updated estimates of the structural budget balance using the preferred approach in McDonald et al (2010) under a range of plausible assumptions over the medium term.
The results suggest that the structural budget balance deteriorated from the mid-2000s and fell further with the onset of the GFC, due to temporary fiscal stimulus measures deployed by the Australian Government at the time and some of the factors that have led to the significant reduction in the tax to GDP ratio. The fiscal stimulus measures have since been unwound; however, the factors that have reduced the tax share of GDP continue to weigh on the structural budget position.
The estimates over the forward estimates and the projection periods suggest a steady improvement in the structural balance over time, reflecting over the forward estimates, the Government’s structural savings measures and, over the medium term, its commitments to limit real spending growth and allow tax receipts to recover naturally.