3 The Fiscal Strategy

Key Issues

       The 2015-16 Budget and Forward Estimates reflect the ongoing effective implementation of the Government's Fiscal Strategy.

       The Fiscal Strategy is based on enduring principles of strong and sound financial management which should be pursued by government regardless of changes in the financial and economic environment.

       These principles will be incorporated in legislation through proposed amendments to the Charter of Budget Responsibility Act 2007, due to be tabled in the second half of 2015.

       The Fiscal Strategy reflects the Government's commitment to improving public sector efficiency, constraining government expenditure, maintaining tax competitiveness, delivering improved services to the Tasmanian community and maintaining the Government's infrastructure investment.

       A key element of the Fiscal Strategy was the development of a set of important strategic actions that the Government will implement to achieve the established principles.

       Given the risks to the State Budget detailed in this Budget Paper and, in particular, the high level of uncertainty in relation to the level of future GST receipts and Australian Government funding, it is essential that action continues to be taken to ensure the achievement of the Fiscal Strategy over the medium to long-term and the return of the State Budget to a sustainable basis.

 


Fiscal Principles

The focus of the Government's Fiscal Strategy is on the achievement of long-term fiscal principles which reflect responsible financial management and aim to deliver long-term financial sustainability for Tasmania. Long-term fiscal principles are intended to be enduring and applicable across financial and economic cycles. The use of a principles based approach recognises that a government can legitimately depart from short‑term objectives in response to changing circumstances, as long as that departure is necessary, transparent and justifiable. While the Fiscal Strategy has a core focus on the long‑term, shorter‑term objectives and relevant financial and economic statistics are still important in enabling the measurement of the Government's progress against the principles.

The Government has committed to include its announced long-term fiscal principles within legislation. To this end, amendments to the Charter of Budget Responsibility Act are currently being prepared that will see the following principles included in the legislation.

1.         Manage the State's finances responsibly for the wellbeing of all Tasmanians.

2.         Take care of the future for the next generation of Tasmanians.

3.         Manage for the unexpected by building a robust financial position.

4.         Improve services to Tasmanians by building a strong economy and efficiently allocating resources to gain the maximum community benefit.

5.         Formulate spending and taxation policies that ensure a reasonable degree of equity, stability and predictability.

6.         Ensure transparency and accountability in developing, implementing and reporting on fiscal objectives.

Strategic Actions

The Government's Fiscal Strategy includes a number of important strategic actions that are aimed at achieving the principles detailed above. These strategic actions are focussed on the long-term and do not involve the development of specific numerical targets. Furthermore, the strategic actions may change in the longer run in response to a changing budgetary and economic environment, in order to appropriately support the achievement of the fiscal principles.

The strategic actions that are initially being implemented by the Government to support the fiscal principles are detailed below.

1.    Annual growth in General Government operating expenses will be lower than the long-term average growth in revenue.

2.    General Government debt and defined benefit superannuation liabilities will be managed to ensure the combined annual servicing cost is less than six per cent of General Government cash receipts.

3.    A competitive tax environment will be maintained with an objective for state taxes to be efficient, fair, simple, stable and sustainable.

4.    Government businesses will be required to deliver services to Tasmanians at the lowest sustainable cost, while also providing an appropriate financial return to the Government.

5.    Tasmanian Government infrastructure investment will maintain existing assets, respond to economic and population growth and reflect the changing needs of the community.

6.    Public sector efficiency, productivity and financial transparency will be improved.

Fiscal Strategy Progress

Table 3.1 summarises the current progress that has been made by the Government in implementing the strategic actions.

Table 3.1 2015-16 Budget ‑ Fiscal Strategy Progress

Strategic Action

2015-16 Budget Progress

1.      Annual growth in General Government operating expenses will be lower than the long-term average growth in revenue.

         Chart 3.1 summarises recent growth in Budget revenue and expenditure and the projected growth over the 2015-16 Budget and Forward Estimates period.

         Chart 3.2 compares the compound annual growth rates of revenue and expenditure in the period 2005-06 to 2013-14 (actual) and 2014-15 (estimated outcome) to 2018-19 (2015‑16 Budget and Forward Estimates).

         The long-run growth in revenue is approximately 4.6 per cent per annum (1999‑00 to 2013‑14 actual). If the growth in revenue is calculated from the 2014‑15 estimated outcome to the 2018‑19 Forward Estimate, the compound annual growth rate is 2.8 per cent.

         In comparison, if the growth in expenses is calculated from the 2014‑15 estimated outcome to the 2018-19 Forward Estimate, the compound annual rate of growth is 1.1 per cent.

         The 2015-16 Budget and Forward Estimates reflect the achievement of this strategic action.

         A Net Operating Balance surplus is now estimated to be achieved in 2016-17, which is three years earlier than the Government's 2014‑15 target of a surplus by 2019-20. The last time a Net Operating Balance surplus was achieved was in 2009-10.

         While this strategic action is being achieved at this time, it is essential that expenditure continues to be constrained over the medium to long-term given the uncertainties in relation to financial transfers from the Australian Government. This includes ongoing constraint in public sector wage outcomes and careful management of public sector employment levels.


 

Table 3.1 2015-16 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2015-16 Budget Progress

2. General Government debt and defined benefit superannuation liabilities will be managed to ensure the combined annual servicing cost is less than six per cent of General Government cash receipts.

         Table 3.2 shows that, over the 2015-16 Budget and Forward Estimates period, borrowing and defined benefit superannuation costs as a percentage of General Government cash receipts remain below the established maximum of six per cent. The figures presented in Table 3.2 represent an improvement on the estimates presented in the 2014-15 Budget due to an increase in the level of General Government cash receipts and a reduction in superannuation costs.

         In addition to the improvement in the measure detailed above, the 2015-16 Budget and Forward Estimates show a significant improvement in the level of General Government Net Debt. General Government Net Debt is now estimated to be negative $252.6 million as at 30 June 2016. This is an improvement of $423.8 million from the estimate for Net Debt as at 30 June 2016 included in the 2013-14 Revised Estimates Report (published in February 2014).

         Due to the projected improvement in the Net Operating and Fiscal Balances, the Government is now not expected to return to a General Government Net Debt position in 2016-17 (as was expected to occur in both the 2014-15 Budget and 2014-15 Revised Estimates Report) and is forecast to remain in an improving Net Debt position over the Forward Estimates period.

3. A competitive tax environment will be maintained with an objective for state taxes to be efficient, fair, simple, stable and sustainable.

         Tasmania needs a competitive tax environment to support business investment and drive economic growth.

         Chart 3.3 shows that, according to the most recent Commonwealth Grants Commission data, Tasmania currently has the lowest taxation severity of all jurisdictions and is well below the national average.

         A competitive tax environment complements other support provided by the Government to business through entities such as the Department of State Growth, the Office of the Coordinator‑General and Tourism Tasmania.

         In this Budget, the Government has announced the extension of the $20 000 First Home Builders Boost payment for a further six months and the allocation of $8 million to support a jobs attraction and population growth initiative.

         As announced in the 2014-15 Budget, the Government has committed to reduce motor tax on light vehicles and duty on Motor Accidents Insurance Board premiums from 2017‑18.


 

Table 3.1 2015-16 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2015-16 Budget Progress

3. A competitive tax environment will be maintained with an objective for state taxes to be efficient, fair, simple, stable and sustainable (continued).

         Reforms arising from Australian Government White Papers on the Reform of Federation and the Reform of Australia's Taxation System may have significant implications for Tasmania. The Government will continue to actively participate in the White Paper development processes. Further information is provided in chapter 5 of this Budget Paper.

4. Government businesses will be required to deliver services to Tasmanians at the lowest sustainable cost, while also providing an appropriate financial return to the Government.

         Throughout 2014-15, the Government implemented a range of measures to enhance the financial transparency of government businesses. This has included: revised remuneration guidelines; new guidelines to enhance opportunities for local businesses to compete for Government business and increase the transparency of Government business procurement activities; and new guidelines to ensure the timely payment of accounts by all Government businesses.

         The Government has also taken a number of steps to improve the efficiency and financial performance of government businesses and their contribution to the Budget, including:

    assessing options to better align the operations of the Tasmanian Ports Corporation Pty Ltd and Tasmanian Railway Pty Ltd and agreeing that both businesses should continue to operate as separate companies and work together to identify ways in which coordination and joint planning between the two businesses can be improved;

    undertaking a review of Forestry Tasmania and starting the process to transition the business to a more financially sustainable model. Further information on the review of Forestry Tasmania is included in chapter 11 of Government Services Budget Paper No. 2;

    continuing to progress a review of Hydro Tasmania's strategy and business model to ensure that the business can provide returns to the State commensurate with its equity in the business;

    considering options for the future operations of the Retirement Benefits Fund, to protect the best interests of its members and reduce risk to Government. Further information on the future role of the Retirement Benefits Fund is included in chapter 11 of Government Services Budget Paper No. 2;

    reallocating equity across the State owned electricity business portfolio; and

    committing to the refurbishment of the Spirit of Tasmania vessels to encourage more tourists on TT-Line's vessels.

Table 3.1 2015-16 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2015-16 Budget Progress

4. Government businesses will be required to deliver services to Tasmanians at the lowest sustainable cost, while also providing an appropriate financial return to the Government (continued).

         Over the coming year, the Government will:

    undertake reviews of: Treasurer's Instructions to reduce red tape and simplify administrative processes; Guarantee Fee Guidelines for Tasmanian Government businesses; and current board appointment processes;

    continue to work with Hydro Tasmania to ensure it has an effective strategy and business model to deliver appropriate returns in the future;

    continue to work with Tasracing Pty Ltd to develop an operating model that will allow it to operate sustainably within its annual Government grant funding allocation;

    continue to work with Forestry Tasmania to implement reforms arising from the review of the business, to establish a financially sustainable model to manage and make commercially available Tasmania's production native forest resources;

    undertake a review of board appointment processes, including the arrangements for reviewing board performance and renewing board membership; and

    work with RBF and other parties to implement the Government's preferred reform options for managing public sector superannuation, to improve the delivery of public sector superannuation and minimise financial risks to the Government.

         Chart 3.4 shows actual and expected Government business returns over the period 2009-10 to 2018-19.

5. Tasmanian Government infrastructure investment will maintain existing assets, respond to economic and population growth and reflect the changing needs of the community.

         Infrastructure investment is essential to the delivery of services to the community and is also vital to supporting economic growth.

         Over the Budget and Forward Estimates period, the Government will invest over $1.8 billion in Tasmania's infrastructure to support the Tasmanian community.

         In the 2014-15 Revised Estimates Report, the Government committed an additional $71.9 million to complete the Royal Hobart Hospital Redevelopment Project (total project value of $636.9 million).

 


 

Table 3.1 2015-16 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2015-16 Budget Progress

5. Tasmanian Government infrastructure investment will maintain existing assets, respond to economic and population growth and reflect the changing needs of the community (continued).

         The 2015-16 Budget includes $179 million in additional funding for infrastructure projects over the 2015-16 Budget and Forward Estimates period including $57 million for schools and LINCs, $10 million for health transport infrastructure, $15.3 million for a new Emergency Services Computer Aided Dispatch System, $8 million for parks high priority maintenance and infrastructure and $2 million for police housing.

         The 2015-16 Budget and Forward Estimates also include an allocation of $60 million for the Northern Cities Major Development Initiative.

         Outside of the State Capital Program, the 2015-16 Budget also includes an additional $37.2 million for rail infrastructure.

         Chart 3.5 shows that, over the 2015-16 Budget and Forward Estimates period, investment by the Government in Non‑Financial Assets continues to exceed the value of depreciation. Table 3.3 summarises 2015-16 Budget and Forward Estimates Depreciation and Purchases of Non‑Financial Assets estimates.

6. Public sector efficiency, productivity and financial transparency will be improved.

         The Budget Savings Strategies announced in the 2014-15 Budget are continuing to be implemented by agencies and will assist in improving the productivity and efficiency of the Tasmanian public sector.

         As a result of the 2014-15 Budget Savings Strategies and the additional agency savings required due to unions not agreeing to support a public sector pay pause (with the exception of the Police Association of Tasmania), General Government FTE numbers have reduced by 766 between 30 June 2014 and 31 March 2015.

         Employee costs account for approximately 47 per cent of total General Government operating expenditure. It is essential that, as with all areas of Government expenditure, expenditure on employee costs continues to be constrained. The Government's wages policy provides for the negotiation of maximum wage increases of no greater than two per cent per annum including identified productivity offsets.

         Action is being taken to increase financial transparency through the finalisation of amendments to the Charter of Budget Responsibility Act and finalising new financial management legislation with a view to tabling in the second half of 2015.

Table 3.1 2015-16 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2015-16 Budget Progress

6. Public sector efficiency, productivity and financial transparency will be improved (continued).

         In 2015-16 the Treasurer will release the first report on the long‑run sustainability of the State's finances. Amendments will also be made to the Charter of Budget Responsibility Act to require a report to be released every five years.

Overall 2015-16 Budget Assessment

The 2015-16 Budget represents the continuation of the improvement in the Government's Budget position which commenced in the 2014-15 Budget. This improvement reflects a number of influences including the impact of both expenditure constraint and improvement in GST revenues. As indicated in chapter 1 of this Budget Paper, it is important to recognise that significant expenditure and revenue risks remain for the current Budget and Forward Estimates and in the medium‑term. Furthermore, while the projected return of the Budget to surplus position is an important achievement, the Government has made it clear that its Fiscal Strategy has a long-term focus.

The Government is therefore committed to the ongoing implementation of all aspects of its Fiscal Strategy and to ensuring that its financial management decisions reflect an appropriate balance between the requirements of the Budget position, the potential impact of the external financial and economic environment and the needs of the Tasmanian community.

Fiscal Strategy Data

Chart 3.1: General Government Revenues and Expenses, 1999-00 to 2018-191

Title: Chart 3.1: General Government Revenues and Expenses, 1999 00 to 2018 19 - Description: Contains total General Government Revenues and Expenses for each year from 1999 00 to 2018 19, showing the actual data for 1999 00 to 2013 14, the Estimated Outcome for 2014 15, and the Budget and Forward Estimates for 2015 16 to 2018 19.
The chart shows the historical growth in both General Government Revenues and Expenses, with revenue expected to grow faster than expenses over the 2015 16 Budget and Forward Estimates.

 

Note:

1.   This Chart is based on actual data for the period 1999-00 to 2013-14, the Estimated Outcome for 2014-15 and the Budget and Forward Estimates for 2015-16 to 2018-19.

Chart 3.2: Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 2005‑06 to 2018-19

Title: Chart 3.2: Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 2005 06 to 2018 19 - Description: Compares the Compound Annual Growth rates of General Government Revenue and Expenditure for the period 2005 06 to 2013 14 and 2014 15 to 2018 19.
The chart shows that the compound annual growth rate of revenue calculated from the 2014 15 estimated outcome to the 2018 19 Forward Estimate is 2.8 per cent, which is greater than the compound annual growth rate of expenses of 1.1 per cent. This compares to the period 2005-06 to 2013-14 when expenditure growth exceeded revenue growth.

Table 3.2: General Government Borrowing and Defined Benefit Superannuation Costs, 2015-16 to 2018-19

 

2015-16

2016-17

2017-18

2018-19

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Superannuation ‑ defined benefit schemes

260.0

272.6

285.2

300.8

Borrowing costs

10.9

10.4

10.0

9.9

Total borrowing and defined benefit scheme costs

270.9

283.0

295.2

310.7

 

 

 

 

Borrowing and defined benefit costs as a percentage of General Government cash receipts

4.9%

5.1%

5.2%

5.3%

 

 

 

 

 

 


 

Chart 3.3: Taxation Severity, 2013-14

Title: Chart 3.3: Taxation Severity, 2013 14 - Description: Contains taxation severity data for all states and territories for 2013 14.
The chart shows that Tasmania currently has the lowest taxation severity of all jurisdictions and is well below the national average.

Source: Commonwealth Grants Commission 2015 Report on GST Revenue Sharing Relativities

Chart 3.4: Government Business Returns, 2009-10 to 2018-191

Title: Chart 3.4: Government Business Returns, 2009 10 to 2018 19 - Description: Contains actual and expected Government business returns over the period 2009 10 to 2018 19, showing the return on equity and ordinary dividends as a percentage of equity in each year, and the risk free rate from 2009 10 to 2014 15.
This chart shows actual and expected Government business returns over the period 2009-10 to 2018-19, demonstrating that returns on equity and ordinary dividend measures will increase across the 2015-16 Budget and Forward Estimates.

Notes:

1. The Chart includes ordinary dividend returns from Government Business Enterprises and State‑owned Companies. It should be noted that dividends are paid by entities in the year following the financial year to which they relate. For example, returns in 2013-14 reflect the profitability of entities in 2012-13.

2.   Return on equity is calculated as the total for all government businesses of net profit divided by equity.

3.   The increase in dividends in 2013-14 and 2014-15 was assisted by the increase in Hydro Tasmania's returns as a result of the carbon tax.

4.   The risk free rate is calculated as the average yearly yield on Australian Government 10 year bonds.

Table 3.3: Purchases of Non-Financial Assets in Excess of Depreciation, 2015-16 to 2018-19

 

2015-16

2016-17

2017-18

2018-19

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Purchases of Non-Financial Assets

414.0

552.1

449.1

424.9

Depreciation

285.3

294.1

312.5

319.6

Surplus

128.7

257.9

136.6

105.2

 

 

 

 

 

 

Chart 3.5: Purchases of Non-Financial Assets and Depreciation, 2005-06 to 2018-19

Title: Chart 3.5: Purchases of Non-Financial Assets and Depreciation, 2005 06 to 2018 19 - Description: Contains purchases of non-financial assets compared to the depreciation of non-financial assets from 2005 06 to 2018 19.
This chart shows that, over the 2015-16 Budget and Forward Estimates period, investment by the Government in Purchases of Non-Financial Assets exceeds the value of depreciation.