Fiscal outlook

Date



The underlying cash balance is estimated to be a deficit of $37.1 billion (2.2 per cent of GDP) in 2016-17, improving to a deficit of $5.9 billion (0.3 per cent of GDP) in 2019-20.

Table 3 provides a summary of the major budget aggregates.

Table 3: Australian Government general government sector budget aggregates
  Estimates   Projections    
  2015-16 2016-17 2017-18   2018-19 2019-20   Total(a)
  $b $b $b   $b $b   $b
Receipts 387.9 411.3 437.4   469.9 500.7   1,819.3
Per cent of GDP 23.5 23.9 24.2   24.8 25.1    
Payments(b) 425.0 445.0 459.9   481.5 502.6   1,889.0
Per cent of GDP 25.8 25.8 25.5   25.4 25.2    
Net Future Fund earnings 3.0 3.3 3.6   3.8 4.1   14.9
Underlying cash balance(c) -40.0 -37.1 -26.1   -15.4 -5.9   -84.6
Per cent of GDP -2.4 -2.2 -1.4   -0.8 -0.3    
Revenue 396.3 416.9 449.5   484.4 515.1   1,865.8
Per cent of GDP 24.0 24.2 24.9   25.5 25.9    
Expenses 431.5 450.6 464.8   489.3 511.6   1,916.3
Per cent of GDP 26.1 26.2 25.7   25.8 25.7    
Net operating balance -35.1 -33.7 -15.3   -5.0 3.5   -50.5
Net capital investment 4.4 3.4 3.4   4.9 5.5   17.2
Fiscal balance -39.5 -37.1 -18.7   -9.8 -2.1   -67.7
Per cent of GDP -2.4 -2.2 -1.0   -0.5 -0.1    
Memorandum item:                
Headline cash balance -51.6 -53.5 -34.3   -24.0 -14.4   -126.2

(a) Total is equal to the sum of amounts from 2016-17 to 2019-20.

(b) Equivalent to cash payments for operating activities, purchases of non-financial assets and net acquisition of assets under finance leases.

(c) Excludes net Future Fund earnings.

Underlying cash balance estimates

Table 4 provides a reconciliation of the underlying cash balance estimates from the 2016-17 Budget to the 2016 PEFO.

Table 4: Reconciliation of underlying cash balance estimates
  Estimates   Projections    
  2015-16 2016-17 2017-18   2018-19 2019-20   Total(a)
  $m $m $m   $m $m   $m
2016-17 Budget underlying cash balance(b) -39,946 -37,081 -26,123   -15,406 -5,955   -84,565
Per cent of GDP -2.4 -2.2 -1.4   -0.8 -0.3    
Changes from 2016-17 Budget to                
2016 PEFO                
Effect of policy decisions(c)(d)                
Receipts 0 0 0   0 0   0
Payments 0 2 0   -3 -6   -7
Total policy decisions impact on underlying cash balance 0
-2 0   3 6   7
Effect of parameter and other variations(d)                
Receipts -103 0 0   0 0   0
Payments 0 0 0   0 0   0
less Net Future Fund earnings 0 0 0   0 0   0
Total parameter and other variations impact on underlying cash balance -103 0 0   0 0   0
2016 PEFO underlying cash balance(b) -40,049 -37,083 -26,123   -15,403 -5,949   -84,558
Per cent of GDP -2.4 -2.2 -1.4   -0.8 -0.3    

(a) Total is equal to the sum of amounts from 2016-17 to 2019-20.

(b) Excludes expected net Future Fund earnings.

(c) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

(d) A positive number for receipts indicates an increase in the underlying cash balance, while a positive number for payments indicates a decrease in the underlying cash balance.

Consistent with the Charter of Budget Honesty, the PEFO takes into account to the fullest extent possible, all Government decisions and other circumstances that may have a material effect on the fiscal and economic outlook and were made, or were in existence, before the issue of the writs for the general election on Monday 16 May 2016. The PEFO does not include the impact of election commitments that do not constitute decisions of government and that are costed separately during the election campaign.

Since the 2016-17 Budget, parameter and other variations have resulted in a negative impact on the underlying cash balance of $103 million in 2015-16, reflecting a reduction in expected receipts from Unclaimed Superannuation Monies. This change primarily reflects lower than expected unclaimed superannuation amounts for former temporary residents and small lost member accounts reported by superannuation funds after the finalisation of the 2016-17 Budget.

Economic parameters are unchanged from those presented in the 2016-17 Budget. More detail is provided in the Economic Outlook.

Forecasts for tax receipts are unchanged since the 2016-17 Budget, consistent with the unchanged economic projections. As reflected in the 2016-17 Budget, tax collections in 2015-16 have been weaker than expected at the time of the 2015-16 Budget and the 2015-16 MYEFO. There is a risk that tax collections will again be lower than expected in the coming months, with implications for the 2015-16 receipts estimates.

Policy decisions taken since the 2016-17 Budget have worsened the underlying cash balance by around $1.8 million in 2016-17. Over the four years to 2019-20, policy decisions have improved the underlying cash balance by around $7 million.

Details of all policy decisions not previously published in the 2016-17 Budget are provided at Appendix B.

In line with normal practice, the forward estimates in the PEFO do not incorporate funding beyond 2016-17 for some items that are considered on a year by year basis, including defence operations and any potential listings of new drugs recommended by the Pharmaceutical Benefits Advisory Committee. Payments to partly reimburse States and Territories for any future natural disasters under the Natural Disaster Relief and Recovery Arrangements are also not included in the forward estimates until any such disasters occur.

Contingency Reserve

The Contingency Reserve provision in the 2016 PEFO is unchanged since the 2016-17 Budget except for the inclusion of new policy decisions taken since the 2016-17 Budget.

The Contingency Reserve provision reduces expenses by $1.1 billion in 2016-17 and increases expenses by $412 million in 2017-18, $1.9 billion in 2018-19 and $6.2 billion in 2019-20. As noted in the 2016-17 Budget, the largest components of this are:

  • the ‘conservative bias allowance’, which makes provision for the tendency for estimates of expenses for existing Government policy to be revised upwards in the forward years ($2.0 billion in 2017-18, $4.2 billion in 2018-19 and $8.7 billion in 2019-20);
  • a provision of $729 million over four years to 2019-20 for a number of items, including continuation of some expiring National Partnerships and possible by-election and redistribution costs for the Australian Electoral Commission;
  • a provision to reflect the effects of economic parameter revisions received too late in the 2016-17 Budget process for inclusion in entity estimates;
  • an underspend provision in 2015-16 that reflects the tendency for budgeted expenses for some entities or functions not to be met; and
  • estimates for measures where the measures have been announced but they cannot yet be included in entity estimates, usually because they are subject to negotiations or there is some uncertainty as to their final cost and/or outcome.

The Contingency Reserve also includes decisions taken but not yet announced (DTBNYA) reported in the 2016-17 Budget. Significant DTBNYA items in the 2016-17 Budget included the Same Sex Marriage Plebiscite and Indigenous Recognition Referendum decisions.

Further information about DTBNYA items included in the 2016-17 Budget and in prior rounds is available at Appendix B. Consistent with past practice, the DTBNYA lines in Budget Paper No. 2, Budget Measures 2016-17 included the reversal of some DTBNYA items from previous Budget rounds. As such, these items were removed from the Contingency Reserve at the time of the 2016-17 Budget.

The remaining items in the Contingency Reserve cannot be disclosed for commercial-in-confidence or national security reasons.

Medium-term fiscal outlook

The medium-term outlook is unchanged since the 2016-17 Budget and outlines the broad trajectory of the fiscal position under current policy settings. The underlying cash balance is projected to continue to improve over the medium term, reaching a surplus of around 0.2 per cent of GDP in 2020-21, before peaking at around 0.3 per cent of GDP the following year (Chart 1). It is projected to fall slightly over the rest of the medium term, to be around 0.2 per cent of GDP by 2026-27. These are unchanged from the projections at the 2016-17 Budget. From 2021-22, payments are projected to grow broadly in line with receipts.

Chart 1: Underlying cash balance projected to 2026-27

This chart shows the projected underlying cash balance (UCB) from 2015-16 to 2026-27. The underlying cash balance is projected to reach a surplus of around 0.2 per cent of GDP in 2020-21, before peaking at around 0.3 per cent of GDP in 2021-22. By 2026-27, the underlying cash balance is projected to be around 0.2 per cent of GDP.

View chart data

Note: A tax-to-GDP cap of 23.9 per cent is applied to these projections from 2021-22. Net Future Fund earnings are included in projections of the underlying cash balance from 2020-21 when drawdowns from the Future Fund commence.

Source: Treasury projections.

Medium-term projections outline the broad trajectory of the fiscal position under current policy settings. Changes to underlying assumptions, for example, around the economy or future government policy can have large impacts on projections of the underlying cash balance.

In particular, the projections assume no policy change and are based on economic projections underpinned by a medium-term methodology and some key assumptions such as productivity growing in line with average rates over recent decades. The modest projected surpluses beyond 2020-21 are subject to considerable uncertainty. Decisions that increase payments or reduce receipts as a proportion of GDP would detract from the medium-term fiscal position. Equally, revisions to economic parameters which affect projected receipts or payments could compromise the return to an underlying cash surplus over the medium-term projection period.

The impact on the projected medium-term underlying cash balance of alternative economic scenarios was presented in Statement 7 of Budget Paper No. 1, Budget Strategy and Outlook 2016-17. The impact on the projected underlying cash balance of alternative assumptions relating to taxation receipts and payments growth in the medium term was presented in Box 3 of Statement 3 of Budget Paper No. 1, Budget Strategy and Outlook 2016-17.

These scenarios underline the uncertainties in the medium term and the need for action to ensure Australia’s fiscal position is as strong as possible so that any challenges can be better managed.

Fiscal balance estimates

The fiscal balance deficit is expected to be $37.1 billion (2.2 per cent of GDP) in 2016-17, improving to a deficit of $2.1 billion (0.1 per cent of GDP) in 2019-20.

Movements in accrual revenue and expenses over the forward estimates are broadly consistent with the movements in cash receipts and payments.

Table 5 provides a reconciliation of the fiscal balance estimates.

Table 5: Reconciliation of fiscal balance estimates
  Estimates   Projections    
  2015-16 2016-17 2017-18   2018-19 2019-20   Total(a)
  $m $m $m   $m $m   $m
2016-17 Budget fiscal balance -39,429 -37,129 -18,675   -9,839 -2,059   -67,701
Per cent of GDP -2.4 -2.2 -1.0   -0.5 -0.1    
Changes from 2016-17 Budget to                
2016 PEFO                
Effect of policy decisions(b)(c)                
Revenue 0 0 0   0 0   0
Expenses 0 1 -1   -3 -6   -9
Net capital investment 0 1 1   0 0   2
Total policy decisions impact on fiscal balance 0 -2 0   3 6   7
Effect of parameter and other variations(c)                
Revenue -69 0 0   0 0   0
Expenses -3 0 0   0 0   0
Net capital investment 0 0 0   0 0   0
Total parameter and other variations impact on fiscal balance -66 0 0   0 0   0
2016 PEFO fiscal balance -39,495 -37,130 -18,675   -9,836 -2,053   -67,694
Per cent of GDP -2.4 -2.2 -1.0   -0.5 -0.1    

(a) Total is equal to the sum of amounts from 2016-17 to 2019-20.

(b) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

(c) A positive number for revenue indicates an increase in the fiscal balance, while a positive number for expenses and net capital investment indicates a decrease in the fiscal balance.

Net debt, net financial worth, net worth and net interest payments

Net debt, net financial worth, net worth and net interest payments are essentially the same as published at the 2016-17 Budget. In 2016-17, net debt for the Australian Government general government sector is expected to be $326
.1 billion (18.9 per cent of GDP). Net financial worth is estimated to be -$427.2 billion and net worth is estimated to be -$301.0 billion.

Net interest payments are estimated to be $12.6 billion in 2016-17 (0.7 per cent of GDP). Interest payments largely relate to the public debt interest on government securities, based on the interest rates on the existing stock of Commonwealth Government Securities (CGS) and the prevailing market interest rates across the yield curve for future issuance of CGS. This PEFO assumes a weighted average cost of borrowing of around 2.5 per cent for future issuance of Treasury Bonds in the forward estimates period, the same as the assumed market yields used in the 2016-17 Budget. Yields are volatile and could vary from those assumed in the Budget. Recent movements in interest rates, if maintained, would lower the government cost of borrowing, reducing interest payments and expenses over the forward estimates. It would also reduce interest receipts earned on assets.

Table 6 provides a summary of the Australian Government general government sector net worth, net financial worth, net debt and net interest payments.

Table 6: Australian Government general government sector net worth, net financial worth, net debt and net interest payments
    Estimates     Projections
  2015-16 2016-17 2017-18   2018-19 2019-20
  $b $b $b   $b $b
Financial assets 342.4 383.3 413.9   432.1 453.3
Non-financial assets 122.9 126.2 130.6   134.9 139.7
Total assets 465.3 509.5 544.4   567.1 593.0
Total liabilities 730.4 810.5 859.1   886.5 909.1
Net worth -265.1 -301.0 -314.7   -319.5 -316.2
Net financial worth(a) -388.0 -427.2 -445.3   -454.4 -455.8
Per cent of GDP -23.5 -24.8 -24.6   -24.0 -22.9
Net debt(b) 285.8 326.1 347.1   356.7 355.4
Per cent of GDP 17.3 18.9 19.2   18.8 17.8
Net interest payments 12.0 12.6 13.4   14.2 14.2
Per cent of GDP 0.7 0.7 0.7   0.8 0.7

(a) Net financial worth equals total financial assets minus total liabilities.

(b) Net debt equals the sum of deposits held, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid and investments, loans and placements.