3 The Fiscal Strategy

Key Issues

       Despite the impact of reduced GST receipts and returns from Hydro Tasmania, the 2016‑17 Budget and Forward Estimates reflect the ongoing successful implementation of the Government's Fiscal Strategy.

       The Fiscal Strategy is based on enduring principles of sound financial management which should be pursued by government regardless of changes in the financial and economic environment. Following the passage of the Charter of Budget Responsibility Amendment Act 2015, these principles have now been embedded in the Charter of Budget Responsibility Act 2007.

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

       In accordance with the Government's recent amendments to the Charter of Budget Responsibility Act 2007, the first Tasmanian Government Fiscal Sustainability Report 2016 has been released. The Report assesses the sustainability of the Tasmanian Government's finances by examining a range of possible outcomes under different scenarios. The findings of the Report emphasise the vulnerability of the State to fiscal pressures outside the Government's control and the need for future Tasmanian governments to maintain control over expenditure growth.

       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. This particularly requires an ongoing commitment to the management of expenditure within available revenue levels and ensuring that recurrent expenditure is not committed against one‑off uncertain revenues.

 


Fiscal Principles

The Government's Fiscal Strategy is now well established and provides a strong and effective framework for the Government's ongoing management of the State's financial position. It has a strong focus 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 apply across financial and economic cycles. The use of a principles based approach recognises that a government can, in the short‑term, legitimately depart from fiscal 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.

Following the passage of the Charter of Budget Responsibility Amendment Act 2015, the following long‑term principles have now been embedded in the Charter of Budget Responsibility Act 2007:

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

2.         provide for the future for the next generation of Tasmanians;

3.         prepare for unexpected events 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; and

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: 2016-17 Budget ‑ Fiscal Strategy Progress

Strategic Action

2016-17 Budget Progress

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

       The 2016‑17 Budget and Forward Estimates are consistent with this strategic action.

       Chart 3.1 summarises long‑run growth in General Government revenue and expenditure and the projected growth over the 2016‑17 Budget and Forward Estimates period.

       Chart 3.2 compares the compound annual growth rates of revenue and expenditure in the periods 1999-00 to 2003‑04; 2003‑04 to 2008‑09; 2008‑09 to 2013‑14; and 2014-15 to 2019‑20.

       The long-run growth in revenue is approximately 4.6 per cent per annum (1999‑00 to 2014‑15 actual). If the growth in revenue is calculated from the 2015‑16 estimated outcome to the 2019‑20 Forward Estimate, the compound annual growth rate is 1.1 per cent (2.8 per cent in the 2015‑16 Budget, and 1.9 per cent in the 2014‑15 Budget). This below long‑run growth estimate reflects a reduction in expected GST receipts of over half a billion dollars over the Budget and Forward Estimates as well as a reduction in returns from Hydro Tasmania of $100.3 million from 2016‑17 to 2018‑19.

       In comparison, if the growth in expenses is calculated from the 2015‑16 estimated outcome to the 2019-20 Forward Estimate, the compound annual rate of growth is 0.6 per cent (1.1 per cent in the 2015‑16 Budget, and 0.8 per cent in the 2014‑15 Budget). This low level of annual expenses growth will require ongoing effective expenditure constraint over the Budget and Forward Estimates period.

 


Table 3.1: 2016-17 Budget ‑ Fiscal Strategy Progress (continued)

Strategic Action

2016-17 Budget Progress

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

       A Net Operating Balance surplus is 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. Recent experience has shown that Budget revenues are subject to high levels of variation, much of which is outside of the direct control of the Government. This variability has emphasised the importance of expenditure constraint, in particular ensuring that ongoing expenditure is not allocated against uncertain revenues. Continued successful implementation of the Fiscal Strategy will require careful management of expenditure.

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 2016-17 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.

       While there has been a general deterioration in the estimate of Net Debt since the 2015‑16 Budget, particularly driven by a large reduction in expected GST receipts, it is still expected that the State will remain Net Debt free over the 2016‑17 Budget and Forward Estimates period.

       Net Debt is estimated to be negative $301.3 million by 30 June 2017 (negative $357.8 million in the 2015‑16 Revised Estimates Report), reducing to negative $56.6 million in 2019, then improving to negative $162 million by 30 June 2020.

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's ratio of revenue the State actually raised from its tax sources to the revenue it could have raised had it applied the Australian average level of effort to its available revenue base, is the second lowest of all jurisdictions and is well below the national average.

 

 

 

 

Table 3.1: 2016-17 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2016-17 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).

       The Government has released its Red Tape Reduction Audit Report, which includes two amendments to the Duties Act 2001. The first will grant a duty exemption for an internal reconstruction or consolidation of a corporate group, bringing Tasmania in line with other jurisdictions. The second amendment will broaden the permitted use of the current duty exemption for demonstrator vehicles to reflect more contemporary business practises for new motor vehicle dealerships.

       Tasmania will continue to actively participate in national taxation policy reform discussions.

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.

       The Government has significant capital invested in its portfolio of government businesses. As at 30 June 2015, the Government's estimated total equity invested was $4.4 billion. The return on equity forecast over the 2016‑17 Budget and Forward Estimates period ranges from 0.4 to 4.0 per cent, which compares with the risk free rate of return of approximately 2.7 per cent. The expected dividend yield over the 2016‑17 Budget and Forward Estimates period ranges from 2.4 to 3.8 per cent.

       During 2015‑16, the Government has implemented a number of measures to improve the governance and efficiency of government businesses, including:

    issuing revised guidelines for the appointment of directors to government businesses to ensure ongoing board renewal;

    establishing a database for interested persons to register interest for potential Government board positions;

 

 

 

 

 

 

 

 

 

 

Table 3.1: 2016-17 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2016-17 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).

    the successful refurbishment of the Spirit of Tasmania vessels;

    continuing the transition of Forestry Tasmania to a more sustainable financial model, including undertaking the southern residues tender and commencing the plantation sale process; and

    progressing the Retirements Benefit Fund reforms to facilitate the transfer of accumulation scheme members to Tasplan including the introduction of enabling legislation into Parliament.

       Over the coming period, the Government will:

    review the Capital Investment guidelines and Government business board governance (including sizing, gender diversity and remuneration);

    establish a legislated vessel replacement fund to facilitate the accumulation of funds to assist with replacing the Spirit of Tasmania vessels when required;

    assist Metro Tasmania Pty Ltd with its bus fleet renewal strategy;

    continue to progress the transition of Forestry Tasmania by implementing the southern residues solution, finalising the planation sale and establishing a sustainable business model; and

    continue to progress the RBF reforms, including the successor fund transfer and the transition of the administration of the defined benefits schemes into Treasury.

 

 

 

 

 

 

 

 

 

Table 3.1: 2016-17 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2016-17 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.

       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 continue to invest over $1.8 billion in Tasmania's infrastructure to support the Tasmanian community. This continuing high level of infrastructure investment reflects the progress of the Royal Hobart Hospital Redevelopment into major construction, with a total of over $500 million in Australian Government and State funding expected to be invested in infrastructure projects in 2016‑17.

       The 2016-17 Budget includes $180.4 million in additional funding for infrastructure projects over the 2016-17 Budget and Forward Estimates period including: $50 million for schools and TasTAFE infrastructure; $60 million for Tasmania's Affordable Housing Action Plan; and an additional $30 million for the Northern Cities Major Development Initiative.

       Chart 3.4 shows that, over the 2016-17 Budget and Forward Estimates period, investment by the Government in Non‑Financial Assets continues to exceed the value of depreciation. Table 3.3 summarises 2016-17 Budget and Forward Estimates Depreciation and Purchases of Non‑Financial Assets estimates.

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

       Employee costs remain a significant expenditure risk for the Budget and account for 47 per cent of total General Government operational expenditure. Whilst agencies have continued to implement 2014‑15 Budget Savings Strategies, FTE levels will require careful management over the Forward Estimates to ensure that FTE increases are supported with additional recurrent funding, such as the Students First initiative.

       The Government is committed to ensuring negotiated wage outcomes are sustainable and affordable. The wages policy establishes parameters which ensure that the total cost of salary increases, allowances and any other employment conditions for all industrial agreements is limited to two per cent per annum.

 


 

Table 3.1: 2016-17 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2016-17 Budget Progress

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

       Increased financial transparency has been achieved through the passage of the Charter of Budget Responsibility Amendment Act 2015. This Act has embedded a range of long‑term fiscal principles in the Charter of Budget Responsibility Act 2007 and also established a requirement for a report to be prepared on the sustainability of the State finances once every five years. The Act requires the report to have 'specific regard to the policies of the Government and the financial impact of anticipated changes to the demographics of Tasmania'.

       The first Tasmanian Government Fiscal Sustainability Report was released on 27 April 2016. The Report presents four scenarios to examine the level of fiscal pressure the State may face under different economic and fiscal conditions. The scenarios are not presented as extreme cases but have been selected to provide a guide to the range of possible outcomes for the State's finances. The Report contains a range of results and findings designed to provide information to readers to assist them in developing their own views as to how future State governments in Tasmania may address the fiscal challenges they face.

       The results reveal that future governments will face increasing fiscal pressure in the decades ahead. This is largely due to health service costs, based on past expenditure growth continuing into the future.

       The Report also found that the State's capacity to respond to fiscal pressure by materially increasing its revenue was limited. In order to ensure the State's finances remain sustainable, future Tasmanian governments need to keep in check the forces that can result in strong expenditure growth.

 


Table 3.1: 2016-17 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2016-17 Budget Progress

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

       The Financial Management Bill 2015 was passed by the House of Assembly on 24 September 2015 and is expected to be further considered by the Legislative Council in mid-2016. The implementation date for the Financial Management Bill is 1 July 2018 to provide sufficient time to implement any required changes for the 2018‑19 Budget and to align with the implementation of Treasury's new Budget Information Management System.

Fiscal Strategy Data

Chart 3.1: General Government Revenues and Expenses, 1999-00 to 2019-201

Title: General Government Revenues and Expenses, 1999-00 to 2019-20 - Description: The chart shows the historical growth in both General Government Revenues and Expenses, with revenue expected to grow at the rate of 1.1% per annum and expenditure expected to grow at 0.6% per annum.

Note:

1.   This Chart is based on actual data for the period 1999-00 to 2014-15, the Estimated Outcome for 2015-16 and the Budget and Forward Estimates for 2016-17 to 2019-20.

Chart 3.2: Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 1999‑00 to 2019‑20

Title: Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 1999-00 to 2019-20 - Description: The chart shows that revenue and expenditure growth over the period 2014 15 to 2019 20 is expected to be significantly below the growth rates over 1999 00 to 2003 04, 2003 04 to 200 09 and 2008 09 to 2013 14.

Table 3.2: General Government Borrowing and Defined Benefit Superannuation Costs, 2016-17 to 2019-20

 

2016-17

2017-18

2018-19

2019-20

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Superannuation ‑ defined benefit schemes

271.0

283.6

297.1

309.5

Borrowing costs

10.4

10.0

9.8

9.5

Total borrowing and defined benefit scheme costs

281.4

293.6

306.9

319.0

 

 

 

 

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

4.9%

5.2%

5.4%

5.6%

 

 

 

 

 

 

Chart 3.3: Ratio of Actual to Assessed Revenue, 2014-15

Title: Ratio of Actual to Assessed Revenue, 2014-15 - Description: The chart shows that Tasmania currently has the second lowest ratio of actual to assessed revenue of all jurisdictions

Source: Commonwealth Grants Commission 2016 Update Report on GST Revenue Sharing Relativities

Note:

1.   The ratio of actual to assessed revenue compares the revenue a state actually raised from its tax sources to the revenue it could have raised had it applied the Australian average level of effort to its available revenue base.

Table 3.3: Purchases of Non-Financial Assets in Excess of Depreciation, 2016-17 to 2019-20

2016-17

2017-18

2018-19

2019-20

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Purchases of Non-Financial Assets

530.8

503.2

395.2

301.5

Depreciation

264.6

270.0

262.4

271.7

Surplus

266.2

233.2

132.9

29.8

 

 

 

 

 

Chart 3.4: Purchases of Non-Financial Assets and Depreciation, 2005-06 to 2019-20

Title: Ratio of Actual to Assessed Revenue, 2014-15 - Description: The chart shows that Tasmania currently has the second lowest ratio of actual to assessed revenue of all jurisdictions.