APPENDIX F: BUDGET RISKS
The annual Budget is framed around government policy and priorities as well as
economic and other parameters for the short- and medium-term.
Any differences between the underlying assumptions and actual outcomes
represent a risk that may vary anticipated Budget outcomes. The risks may be
economic, policy or demand driven and include unforeseen events such as natural
disasters.
Given that the 2010-11 Budget surplus represents less that 1.5 per cent of revenues
and expenses, small variations in either can have a significant apparent impact on
budget outcomes. For example a 0.5 per cent increase in expenses and a
0.5 per cent decrease in revenues will worsen the expected Budget result in
2010-11 from a surplus of $780 million to a surplus of around $200 million.
As such, small movements in the Budget result should be interpreted with caution.
ECONOMIC CONDITIONS
Budget estimates rely on assumptions, forecasts and assessments for the economy
and other factors made when the Budget was prepared. The most significant factor
impacting the budget outcomes is that the state of the economy will be different
from that currently assumed.
The recent unprecedented events in the global economy have introduced more
uncertainty than usual in preparing forecasts.
Downside risks to the economic outlook for 2010-11 and 2011-12 include a more
protracted global recovery than expected and ongoing financial market instability.
Upside risks include a stronger and faster domestic recovery due to higher global
commodity prices and accelerated resource sector activity.
Equity market performance also has an impact on the Budget result through its
impact on financial assets held by the government. The largest components
affected are financial assets held in the Treasury Managed Fund to meet insurance
liabilities and the defined benefits superannuation schemes.
The sensitivity of Budget expenses and revenues to key economic parameters is set
out below.
For detailed discussion of the economic risks, see Chapter 2.
Budget Statement 2010-11
F-1
WAGES GROWTH
Employee-related costs are the largest component of expenses. In 2010-11,
employee-related costs, including superannuation, are budgeted at 48.8 per cent of
total general government expenses. Employee-related costs rise if wages rise,
numbers employed rise or the average grading of employees increases.
The Government’s wage policy, implemented in September 2007, aims to
maintain the real value of wage increases. Accordingly, the Government funds
wage increases and associated costs at 2.5 per cent per year, the mid-point of the
Reserve Bank of Australia’s 2–3 per cent target inflation rate.
This policy permits wage outcomes in excess of 2.5 per cent, funded by
employee-related cost savings. The last round of awards and agreements has
resulted in most employees receiving wage increases at or near 4 per cent with
increases above 2.5 per cent offset by employee-related cost savings.
EFFICIENCY DIVIDENDS
Since 2005-06, the Government has explicitly required general government
agencies to improve efficiency. The aim is to develop a culture where agencies
continue to revisit their operations and activities so that services are delivered in
the most efficient and cost-effective way possible.
As outlined in the Government’s February 2006 Economic and Financial
Statement, an efficiency dividend of approximately $300 million (around 1 per
cent of agency-controllable expenses) has been applied each year. The 2009-10
Budget announced the Government’s Better Services and Value Plan to improve
service delivery and contain expenses growth.
At the same time, the
budget extended efficiency dividends to 2011-12 and 2012-13 and increased the
required savings to 1.5 per cent for these years.
The 2010-11 Budget has further extended the efficiency dividends into 2013-14
but at the long-term rate of 1 per cent. The higher, 1.5 per cent efficiency dividend
for the previous 2 years was driven by the savings expected to be generated from
the agency restructures announced in the 2009-10 Budget.
CONTINGENCIES
The Treasurer’s Advance provides for contingencies for emergencies like natural
disasters and the costs of policy responses that may be required in the Budget year.
A separate Treasurer’s Advance is provided for capital works.
In 2010-11, the Treasurer’s Advance is $300 million for recurrent services,
and $140 million for capital works and services.
F-2
Budget Statement 2010-11
SENSITIVITY OF THE BUDGET TO ECONOMIC PARAMETERS
Table F.1 shows the sensitivity of Budget expenses and revenues to variations in
economic parameters.
The table gives a ‘rule of thumb’ measure of the direct impact on the Budget of a
change in a given parameter. In each case, the analysis presents the estimated
effects of a change in one economic variable, and does not capture the links
between economic variables that characterise changes in the economy. The table
excludes possible policy responses. Changes are assumed to be uniform across the
general government sector and across the Budget year.
Revenues are sensitive to factors affecting revenue bases such as: the value and
volume of property transactions and motor vehicle sales, employment and
earnings, profits of public enterprises, investment returns and household
consumption (and its influence on GST revenue).
The main State taxes – payroll tax and transfer duty, are sensitive to economic
factors. Employment levels and wage rates affect payroll tax collections. Transfer
duty revenue depends on property market activity, with dwelling transactions
accounting for about three-quarters of such revenue.1 Many factors, including
monetary policy, Australian Government tax arrangements, unemployment and
trends in alternative asset markets, contribute to fluctuations in property turnover.
Expenses are less sensitive than revenues to economic parameters. Expenses are
significantly affected by public sector wage outcomes and, to a lesser extent,
by changes in the prices of goods and services purchased by Government.
Lower levels of general government net debt reduce the budget’s exposure to
interest rate fluctuations. The maturity profile of the State’s debt portfolio limits
the immediate impact of interest rate rises.
Net financial liabilities can be affected by accounting adjustments and operating
results. With the introduction of AASB 119 Employee Benefits, superannuation
liabilities must be recalculated at the end of each year using a market-determined
discount rate. This can lead to significant fluctuations in the general government
sector’s unfunded liability position.
1
Non-residential property transactions have far greater variation in size and timing than dwelling transactions.
Due to this lumpiness in non-residential transactions, Table F.1 provides estimates only for the dwellings
component.
Budget Statement 2010-11
F-3
Table F.1:
Sensitivity of Fiscal Aggregates to Changes in
Economic Parameters, 2010-11
Effect of a one per cent increase, unless otherwise indicated
Parameter
Effect on the 2010-11
Budget Result ($m) (a)
A. Factors affecting tax revenue
Dwelling sales (price or volume)
Motor vehicle sales
Private sector employment
31
4
134
Private sector wages
80
Household disposable income
14
B. Factors affecting grant revenue
Household consumption (b)
148
C. Factors affecting expenses
Public sector employee-related expenses
-279
Prices of goods and services
-125
Interest
rates (c), (d)
4
Effect on 30 June 2011
Net Financial Liabilities ($m) (e)
D. Factors affecting Superannuation Liabilities
Public sector wages and salaries
-185
Sydney CPI
-260
Investment return (c)
Discount rate (c)
200
4,900
(a) A positive effect (e.g. from increased dwelling sales) improves the Budget result, while a negative effect
(e.g. from increased public sector wages) weakens the Budget result.
(b) Estimated GST receipts are $14.8 billion for 2010-11.
(c) Effect of a one percentage point increase in the indicated factor (discount rate, interest rate or rate of return).
(d) Excluding the impact of actuarial adjustment to net financial liabilities (NFL).
(e) A positive effect (e.g. improved investment returns) reduces NFL (improves the financial position), while a
negative effect (e.g. higher public sector wages) increases NFL (weakens the financial position).
F-4
Budget Statement 2010-11