1     The 2018-19 Budget

Key Issues

·       The 2018-19 Budget focuses on building for the future and taking Tasmania to the next level. The implementation of all of the Government’s 2018 State election commitments will support the achievement of the Government’s key priorities of:

-  delivering a stronger economy and more jobs;

-  investing in health, education and Tasmanians in need;

-  keeping Tasmanians safe;

-  building infrastructure for the 21st century;

-  protecting the Tasmanian way of life; and

-  taking action on the cost of living.

·       Over the 2018-19 Budget and Forward Estimates the Government will continue to meet all of its established Fiscal Strategy actions. Net Operating Balance surpluses are expected in each year; Fiscal Balance surpluses are expected to be achieved in the third and fourth years of the Forward Estimates; and General Government Net Debt remains negative (i.e. positive net cash and investments).

·       The Tasmanian economy continues to perform strongly with economic growth of 3½ per cent expected in 2017‑18 which is well above the long-term trend. The outlook for economic growth and employment is also positive. Business confidence is high and the recovery in business investment continues. Employment levels are close to the recent series peak after very large increases in 2017 and the tourism sector continues to go from strength to strength. Population growth is currently above long-term annual trend levels and is expected to remain above trend in 2018-19.

·       Investment in infrastructure by the Government continues to be at historically high levels. The 2018‑19 Budget and Forward Estimates include a record $2.6 billion in funding for infrastructure. This allocation exceeds the Government’s commitment to increase infrastructure investment by more than 20 per cent per annum compared to the long-term expenditure average.

·       It is only through the significant improvement in the Budget position that has been achieved by the Government, together with the strong growth in the Tasmanian economy that has enabled the Government to invest in the major improvement in services to the Tasmanian community that will be delivered through this Budget.

·       To maintain the improvement in the Budget position that has been achieved to date, it is essential that strong regard continues to be paid to the prudent management of Budget risks, including highly variable revenue levels and to constraining future expenditure growth within the levels incorporated in the Budget and Forward Estimates.


The 2018-19 Budget

In the 2018-19 Budget, the Government delivers on the allocation of funding for all of its 2018 State election commitments, while at the same time, continuing to achieve all of the strategic actions encompassed in its well-established Fiscal Strategy.

Over the 2018-19 Budget and Forward Estimates period, Net Operating Balance surpluses are expected in each year; Fiscal Balance surpluses are expected to be achieved in the third and fourth years of the Forward Estimates; and General Government Net Debt remains negative (positive net cash and investments) in each year. Once again, in accordance with the Government’s commitments, there are no new or increased taxes for Tasmanians, expenditure growth is constrained below the levels of long-term revenue growth and the level of expenditure on infrastructure is well above the level of depreciation.

The continuing improvement in the State’s Budget position has been coupled with a similar improvement in the State’s economic environment. Gross state product is estimated to grow at 3½ per cent in 2017‑18 which is the strongest growth since 2007-08. Growth of 2¼ per cent is forecast for 2018-19. Employment growth at the long‑term trend rate is forecast through the year for 2018-19, and is consistent with around 2 300 more persons employed in June 2019 than in June 2018. Business confidence is high and business conditions positive; the tourism sector continues to go from strength to strength; and population growth is currently above long‑term trend levels and is expected to remain above trend in 2018-19.

As important as the improvements in the State’s Budget position and the Tasmanian economy have been, it is the improvement in the services to the Tasmanian community that have been achieved through Government policies, as a consequence of this significant change, that is key to improving the wellbeing of all Tasmanians.

Since 2014, the Government has taken significant steps to lay the foundations for taking Tasmania to the next level and to build for the future. In the 2018-19 Budget, the Government builds on these foundations through the implementation of the policy commitments made during the 2018 State election process and other important new initiatives. These new commitments will provide crucial support in achieving further improvement in service delivery to the Tasmanian community, supporting jobs for Tasmanians, improving vital Government infrastructure such as roads, bridges, schools and hospitals, and easing the impact of cost of living increases.

The improvement in the Budget that the Government has achieved over the past four years has been subject to many challenges. The Government is committed to the continued maintenance of a strong Budget position and a Budget surplus. This will continue to require the ongoing effective management of all Budget challenges as they arise.


 

2018-19 Budget Highlights

Summary information on funding provided for new initiatives over the 2018-19 Budget and Forward Estimates period is provided below. Some 2018-19 Budget initiatives also have funding allocated beyond the current Budget and Forward Estimates period while others will be able to be implemented by agencies within existing resources. Further information on key deliverables for all Government agencies is provided in individual agency chapters of Government Services Budget Paper No 2.

Building Infrastructure for the 21st Century

Funding has been provided over the 2018-19 Budget and Forward Estimates period for new initiatives including:

·       $373.8 million in a major boost to Roads Program expenditure;

·       $121 million for the Bridgewater Bridge;

·       $100 million for the Affordable Housing Strategy II;

·       $96.1 million for the construction of new schools;

·       $70.5 million for the upgrade of hospital infrastructure;

·       $30.8 million for new ambulance service infrastructure;

·       $51 million for the exciting Cradle Mountain Experience; and

·       $45 million towards the cost of a new Northern Prison.

Delivering a Stronger Economy and more Jobs

Funding has been provided over the 2018-19 Budget and Forward Estimates period for new initiatives including:

·       $51 million for the Cradle Mountain Experience (including the contribution from the Australian Government);

·       $16 million for improved statewide visitor infrastructure;

·       $15.5 million to develop TasTAFE infrastructure including $5 million for an Agricultural Centre of Excellence, $3.5 million to extend Drysdale in Claremont and Devonport and $7 million for a Trades and Water Centre of Excellence;

·       $12 million to support additional tourism marketing;

·       $9 million to support the next iconic walk;

·       $7.5 million to support small businesses employ more apprentices and trainees;

·       $7 million to modernise agricultural research farms;

·       $6.8 million to implement the Government’s Taking Hospitality to the Next Level policy;

·       $4 million to establish an Event Attraction Fund;

·       $2 million to launch the Screen Innovation Fund; and

·       the introduction of legislation to give effect to the Government’s suite of tax reform initiatives including: a regional business relocation payroll tax exemption; a new lower payroll tax rate and threshold; the extension of the payroll tax rebate scheme for apprentices and trainees in skill shortage areas; extending the First Home Owner Grant of $20 000 for eligible first home buyers of newly constructed homes, those who have new homes constructed and owner builders, from 1 July 2018 to 30 June 2019 inclusive; and the foreign investor duty surcharge.

Investing in Health, Education and Tasmanians in Need

Funding has been provided over the 2018-19 Budget and Forward Estimates period for new initiatives including:

·       $202.3 million for recurrent and capital funding to support Acute Hospital Services;

·       $100 million for the Affordable Housing Strategy II;

·       $96.1 million for new education infrastructure;

·       $90.2 million for new recurrent and capital funding to support ambulance services;

·       $75.3 million to implement the Government’s Taking Education to the Next Level policy;

·       $46 million in new recurrent and capital funding to support children;

·       $40.2 million to support Statewide and Mental Health Services;

·       $40 million to meet the State’s contribution to the first four years of operation of the Commonwealth Redress Scheme; and

·       $20.1 million to continue the vital actions under the Government Safe Homes, Safe Families Policy.

Keeping Tasmanians Safe

Funding has been provided over the 2018-19 Budget and Forward Estimates period for new initiatives including:

·       $36.8  million for increased front line police officers;

·       $22 million for new police and emergency services infrastructure;

·       $79.3 million for a new Southern Remand Centre;

·       $45 million towards the cost of a new Northern Prison;

·       $16 million in additional funding for corrective services; and

·       $8 million for an upgraded Burnie Court Complex.

Protecting the Tasmanian Way of Life

Funding has been provided over the 2018-19 Budget and Forward Estimates period for new initiatives including:

·       $11.6 million for Regional and Community Election Commitments;

·       $10 million to improve women’s sporting facilities;

·       $10 million for a southern Tasmania indoor multi-sports facility;

·       $8 million to undertake a maintenance boost in our parks and reserves;

·       $7.3 million for an AYDC redevelopment;

·       $6.6 million to boost National Park rangers and frontline staff;

·       $3.6 million for a new Visitor’s Centre at the Royal Tasmanian Botanical Gardens; and

·       $2.2 million to improve boat and trailer parking for recreational fishing.

Taking Action on the Cost of Living

Funding has been provided over the 2018-19 Budget and Forward Estimates period for new initiatives including:

·       $80 million to keep water and sewerage prices lower and accelerate the investment in infrastructure;

·       $10 million to extend the Energy Rebate Scheme;

·       $5.5 million for the Energy on Farms initiative;

·       $3 million for Ticket to Play, supporting sports participation; and

·       $750 000 for on-farm energy and irrigation audits.

2018-19 Budget Estimates Summary

The following sections provide a summary of the key Budget estimates included in the 2018-19 Budget. Further detailed information on these estimates is provided in this Budget Paper and, on an agency basis, within Government Services Budget Paper No 2. As part of the transition of Budget Papers to the presentation requirements of the Financial Management Act 2016, a number of tables in this Budget Paper have been amended to include 2017-18 Budget estimated outcome information. Estimated outcome information is still presented in this Budget Paper in Appendix 3 - Estimated Outcome including March Quarterly Report. The inclusion of this information in a number of tables will improve the comparability of Budget information.

Table 1.1:         Key Budget and Forward Estimate Aggregates

 

2017-18)

2017-18

2018-19)

2019-20)

2020-21)

2021-22)

 

 

Estimated

 

Forward)

Forward)

Forward)

 

Budget)

Outcome

Budget)

Estimate)

Estimate)

Estimate)

 

$m)

$m

$m)

$m)

$m)

$m)

General Government Sector

 

 

 

 

 

 

Revenue

5 874.0)

6 035.8  

6 217.3

6 249.2 

6 353.1 

6 556.5 

Expenses

5 819.8)

5 960.5 

6 055.4

6 135.5 

6 204.8 

6 360.0 

Net Operating Surplus/(Deficit)

54.3)

75.3 

161.9

113.7 

148.3 

196.4 

 

 

 

 

 

 

 

Fiscal Surplus/(Deficit)

(253.9)

(140.7)

(284.6)

(252.4)

5.3 

52.9 

 

 

 

 

 

 

 

Net Debt at 30 June

(451.8)

(622.4)

(329.6)

(23.3)

(14.8)

(51.6)

 

 

 

 

 

 

 

Infrastructure Investment

657.0)

535.9

752.4

731.6

538.6

536.1

 

 

 

 

 

 

 

Net Operating Balance

The Net Operating Balance is estimated to be a surplus of $161.9 million in 2018-19. Net Operating Balance surpluses are expected to be achieved across the Forward Estimates period.

Chart 1.1 highlights the change in the Net Operating Balance that has occurred since 2007-08 and the current projections for the 2018-19 Budget and Forward Estimates period.

Chart 1.1:        Net Operating Balance, 2007-08 to 2021-221

Title: Net Operating Balance, 2007 08 to 2021-22 - Description: This chart shows that Net Operating Balance Surpluses will be achieved over the Budget and Forward Estimates period.

Note:

1.   The Net Operating Balance Actual for 2016-17 is presented net of the one-off Australian Government payment of $730 million related to the Mersey Community Hospital. The Net Operating Balance including this payment is $804 million.

 

It should be noted that the receipt of Australian Government funding for capital programs, particularly one‑off major projects, has the effect of improving the Net Operating Balance outcome. Given the nature of the Net Operating Balance measure, it reflects the receipt of revenue from the Australian Government but does not factor in the expenditure of these funds on infrastructure projects. The Underlying Net Operating Balance has been used for a number of years as a measure that removes the distorting impact of one-off Australian Government funding for specific capital projects. The Underlying Net Operating Balance is generally derived by excluding non-operational capital related funding received from the Australian Government from the Net Operating Balance.

 


 

Table 1.2 below provides information on the Underlying Net Operating Balance for the 2017-18 Estimated Outcome and 2018-19 Budget and Forward Estimates period.

Table 1.2:         Underlying Net Operating Balance, 2017-18 to 2021-22

 

 

2017-18

2018-19

2019-20

2020-21

2021-22

 

 

Estimated

 

Forward

Forward

Forward

 

 

 Outcome

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

$m

Net Operating Balance

  75.3

  161.9

  113.7

  148.3

  196.4

 

 

 

 

 

 

Less One-off Australian Government Funding

Bridgewater Bridge

....

(5.0)

(25.0)

(30.0)

(40.0)

City Deal - Tamar

....

....

(8.8)

(8.8)

(10.3)

Cradle Mountain Experience

....

(2.0)

(8.0)

(10.0)

(10.0)

Pest and Disease Preparedness and Response

(20.0)

....

....

....

....

Roads and Rail Funding (Nation Building)

(116.1)

(97.4)

(109.2)

(89.8)

(75.0)

Roads of Strategic Importance

....

(10.0)

(20.0)

(20.0)

(50.0)

Royal Hobart Hospital Redevelopment

(18.0)

(17.5)

(10.0)

....

....

Sustainable Rural Water Use and Infrastructure Program

(17.9)

(34.5)

(15.3)

....

....    

(172.0)

(166.4)

(196.3)

(158.6)

(185.3)

 

 

 

 

 

 

 

Underlying Net Operating Balance

(96.7)

(4.5)

(82.6)

(10.3)

  11.1

 

 

 

 

 

 

 

 


 

Fiscal Balance

A Fiscal Balance deficit of $284.6 million is estimated for 2018-19 with the outcome improving over the Forward Estimates period to an estimated surplus of $52.9 million in 2021-22. The improvement in the Fiscal Balance reflects both the expected Net Operating Balance outcome and the impact of capital expenditure over the Budget and Forward Estimates period.

Chart 1.2 illustrates the Fiscal Balance since 2007-08.

Chart 1.2:        Fiscal Balance, 2007-08 to 2021-221

Title: Fiscal Balance, 2007-08 to 2021-22 - Description: This chart illustrates the improvement in the Fiscal Balance that is expected to occur over the Budget and Forward Estimates, with a return to a positive Fiscal Balance projected in 2020 21.Note:

1.   The Fiscal Balance for 2016-17 is presented net of the one-off Australian Government payment of $730 million for the Mersey Community Hospital for presentation purposes. The Fiscal Balance including this payment is $677 million.


 

Net Debt

Net Debt represents Borrowings less the sum of Cash and deposits and Investments. The reference to ‘negative’ Net Debt means that Cash and deposits and Investments exceeds Borrowings. This can also be referred to as Net Cash and Investments.

It is estimated that General Government Net Cash and Investments will be $329.6 million as at 30 June 2019. General Government Net Cash and Investments is estimated to remain positive over the Forward Estimates period and be $51.6 million as at 30 June 2022.

Chart 1.3 illustrates Net Debt since 2008.

Chart 1.3:        Net Debt, 2008 to 2022

Title: Net Debt, 2008 to 2022 - Description: This chart shows that General Government Net Debt is currently estimated to remain negative (that is positive net cash and investments) over the Budget and Forward Estimates period.


 

Sources of Revenue

In 2018-19, General Government Sector total revenue is estimated to be $6 217.3 million. This represents an increase of $343.3 million on the 2017-18 Budget Estimate of $5 874 million.

Chart 1.4 provides information on the major sources of General Government Sector Revenue in 2018-19. Chapter 5 of this Budget Paper provides a detailed explanation of the major revenue items included in the 2018-19 Budget and over the Forward Estimates period.

Chart 1.4:        Sources of General Government Revenue, 2018-19

Title: Sources of General Government Revenue, 2018 19 - Description: This chart provides information on the major sources of General Government Sector Revenue in 2018-19, showing that the major revenue item is Grants, followed by Taxation and then Sales of Goods and Services.

Purposes of Expenditure

In 2018-19, General Government Sector total expenditure is estimated to be $6 055.4 million. This represents an increase of $235.6 million on the 2017-18 Budget Estimate of $5 819.8 million.

Chart 1.5 provides information on the major purposes of General Government Sector Expenditure in 2018‑19. This Chart reflects the detailed information provided in Table A1.16 in appendix 1 of this Budget Paper. Chapter 4 of this Budget Paper provides a detailed explanation of the major expense variations included in the 2018-19 Budget and over the Forward Estimates period.

Chart 1.5:        General Government Expenses by Purpose, 2018-19

Title: General Government Expenses by Purpose, 2018-19 - Description: This chart provides a breakdown of General Government Expenses by purpose, with the largest items being Health followed by Education.Note:

1.   Other includes: Economic Affairs $295.7 million (4.9%); Environmental Protection $95.4 million (1.6%); General public services $291.9 million (4.8%); and Recreation, culture and religion $149.7 million (2.5%).


 

Infrastructure Investment

Over the 2018‑19 Budget and Forward Estimates period, the Government will invest a record $2.6 billion in vital community infrastructure projects, including:

·       roads and bridges ($1.1 billion);

·       hospitals and health ($475.6 million);

·       human services and housing ($205.3 million);

·       schools and education ($192.2 million);

·       law and order ($169.7 million);

·       tourism, recreation and culture ($142.2 million);

·       ICT to support service delivery ($54.2 million); and

·       other infrastructure ($21 million).

This record investment in infrastructure, over a four year period, is significant and above long‑term historical infrastructure investment levels. Most importantly, this level of investment is $1 billion above the infrastructure investment of $1.6 billion that the Government budgeted for in the 2014-15 Budget. The Government’s infrastructure program represents a significant forward pipeline of infrastructure investment that will provide certainty to Tasmanian businesses and industry to plan for the long‑term, and that will stimulate economic activity and jobs growth across the State.

This significant increase in the Government’s infrastructure program has been made possible due to its commitment to strong fiscal management and the significant improvement in the Budget position. It is essential that a strong Budget position is maintained in order to facilitate the funding of infrastructure investment on a sustainable basis. The infrastructure program has been formulated having regard to the Government’s Fiscal Principles contained in its Fiscal Strategy and will deliver on Strategic Action 5, namely, infrastructure investment will maintain existing assets, respond to economic and population growth and reflect the changing needs of the community.

The $2.6 billion General Government Sector infrastructure investment program includes State funding for co‑funded (Australian and State Government) roads projects that are reflected in the Government’s Roads for Our Future Program. In accordance with established Budget management practice, a provision of $180 million has been included for additional Australian Government roads funding (pending finalisation of the next five year agreement). This is based on Australian Government roads funding over recent years and provides a more accurate estimate of the likely level of infrastructure expenditure that will occur over the Forward Estimates period.

In recent Budgets, funding has been allocated to a provision for future infrastructure investment. In this Budget, as identified during the 2018 State Election, the Government will implement election commitments by utilising this provision, providing increased certainty on the projects that will receive funding over the 2018‑19 Budget and Forward Estimates period.


 

Chart 1.6 provides details of infrastructure investment expenditure for 2018-19 by classification. Chapter 6 of this Budget Paper provides a detailed explanation of the Government’s investment in infrastructure over the 2018-19 Budget and Forward Estimates period.

Chart 1.6:        Infrastructure Investment by Classification, 2018-19

Title: Infrastructure Investment by Classification, 2018-19 - Description: This chart shows that the largest area of infrastructure investment in 2018-19 is Roads and bridges (42.2%), followed by Hospitals and Health (28.3%) and Schools and Education (8%).

Current Budget Risks and Sensitivities

The achievement of Net Operating Balance surpluses of between $100 million and $200 million over the 2018-19 Budget and Forward Estimates period represents a significant achievement for the Government and provides a prudent financial buffer for the Government to manage unexpected events.

Notwithstanding the positive outcomes that have been achieved, the Government understands that in the context of annual General Government revenues and expenditures of over $6 billion, Net Operating Balance surplus estimates (together with estimates of other key fiscal measures such as the Fiscal Balance and Net Debt) can be very sensitive to relatively small movements in revenues and expenditures. This includes the impact of Budget risks and sensitivities that are unable to be effectively quantified at the present time. The effective management of these risks, as and when they arise, will be essential to the achievement of the estimates presented in this Budget Paper and the achievement of a sustainable Budget position over the medium-term.

A number of current significant Budget risks and sensitivities are summarised below. Due to the changing nature of the budgetary and economic environment, other risks and sensitivities may arise during the course of the coming financial year or existing risks and sensitivities may assume greater importance.

Grants

Goods and Services Tax Revenue

On 30 April 2017, the Australian Treasurer, Hon Scott Morrison MP, announced an inquiry by the Productivity Commission into the economic impact of horizontal fiscal equalisation. The PC provided a final report to the Australian Government in May 2018. It is expected that this report will be released before the end of July. Should the Australian Government change the current long established system of equalisation any impact will depend on what model is adopted, when it is implemented and how it is transitioned.

In addition to the PC inquiry, the Commonwealth Grants Commission is currently undertaking a five‑yearly review of the methodology it uses to distribute GST to the states and territories. The risk for Tasmania is that methodology changes could result in lower GST revenue for the State from 2020‑21. This risk could also coincide with the possible implementation of the PC’s recommendations.

More immediately, the risks to Tasmania’s GST revenue estimates are linked directly to the State’s share of the national population; the size of the GST revenue pool; and Tasmania’s relativity factor which is currently forecast to fall over the Forward Estimates. GST revenue collections are highly sensitive to changes in national consumer spending patterns, as has been evidenced by a recent increase in the national pool forecasts in the Australian Government’s 2018‑19 Budget.

There is a one-to-one relationship between variations in the size of the national pool of GST available for distribution to the states and variations in GST revenue to Tasmania. For example, a one per cent variation in the GST pool would result in a $24.3 million variation in Tasmania’s GST revenue in 2018‑19, assuming that the State’s population share and assessed relativity remained constant.

Other Australian Government Funding and Agreements

Australian Government - State funding arrangements are linked directly to arrangements under the Intergovernmental Agreement on Federal Financial Relations agreed by the Council of Australian Governments in November 2008. The ongoing uncertainty around the direction and/or durability of recent Australian Government funding reforms, together with the trend towards cessation or short-term renewal of critical core National Partnership Agreements, highlight the volatility and uncertainty faced by Tasmania.

There has also been an increasing trend towards more prescriptive agreements that include requirements for matched funding, greater risk sharing arrangements, and more onerous reporting and input controls. This trend is contrary to agreed principles for national funding agreements under the IGAFFR and imposes additional funding risks on the State.

Australian Government funding presents a further risk in that the CGC assesses the level of total funding available to each state in determining its relative financial needs and GST requirements. Where Tasmania receives a level of Australian Government funding above the national average, or where it is the only recipient, the State’s GST revenue share decreases. This is explained further in the Guide to the Budget document that is available on the Department of Treasury and Finance website.

These payments fall into a number of different categories.

Specific Purpose Payments

There are currently three Specific Purpose Payments in operation: the National Affordable Housing Agreement (which will be replaced by the National Housing and Homelessness Agreement from 1 July 2018), the National Skills and Workforce Development SPP and the National Disability Services SPP.

Under the IGAFFR, SPPs are indexed so that the level of funding moves broadly in line with changes in the costs of providing services. This provides states with some certainty as to future receipts of SPP funding. However, because SPP indexation is based on certain economic and other parameters (such as cost indices), estimates of SPP revenue to Tasmania are sensitive to assumptions underlying these parameters. SPP estimates for the 2018-19 Budget and Forward Estimates period will change marginally once the actual parameters are known. Indexation accounts for only a small proportion of total SPP funding and, as such, this funding is generally low risk. While funding risks from changes in indexation are considered low, a more significant risk is a unilateral change to SPP funding arrangements by the Australian Government as occurred in the 2014-15 Budget.

National Health Reform funding under the National Health Reform Agreement

The National Health Reform Agreement is due to expire on 30 June 2020. The current Agreement is expected to deliver around $428.4 million in 2018‑19.

Tasmania has signed the Heads of Agreement between the Australian Government and the states and territories on public hospital funding and health reform. This will form the basis of negotiations for a new National Health Agreement for the period 1 July 2020 to 30 June 2025.

The Heads of Agreement provides for a continuation of the existing public hospital funding arrangements as outlined in the current National Health Reform Agreement, with the Australian Government contributing 45 per cent of the efficient growth in activity and block grants until 2024‑25. The Heads of Agreement provides a level of certainty of the Australian Government’s contribution to public hospital funding over the Budget and Forward Estimates. However, there is an underlying risk to the Budget and Forward Estimates that demand for health services in the State may grow at a faster rate than the Australian Government’s funding contribution.

Quality Schools, Quality Outcomes

The Australian Government amended the Australian Education Act 2013 in June 2017 to impose new school funding arrangements on the states. As the first stage of a process of negotiating a long-term agreement, Tasmania has signed up to the Australian Government’s education reform principles for the 2018 school year, with a commitment to negotiate post-2018 funding arrangements over the next 12 months.

Tasmania is continuing to negotiate post-2018 funding arrangements with the Australian Government, although a number of the requirements are set out in legislation. The amendments to the Australian Education Act, and in particular amendments negotiated in the Australian Government Senate, could require the Tasmanian Government to increase school funding significantly over the Budget and Forward Estimates period, with significant additional impacts beyond the Forward Estimates period.

All jurisdictions have expressed concerns in respect of the Australian Government Senate’s amendments and the Australian Government’s Quality Schools, Quality Outcomes funding reforms present a substantial risk to the State Budget.

National Partnership Payments

National Partnership Payments are provided to each state through time-limited National Partnership Agreements and Project Agreements, with the specifics of each payment generally written into the agreement itself. The level of risk associated with these agreements is generally related to the nature of the payments provided and the difficulties agencies face adjusting expenditure levels when they cease.

Future funding arrangements in relation to expiring NPPs are an ongoing risk exposure for all states and territories, particularly where these NPPs are funding critical core service delivery functions.

National Disability Insurance Scheme Funding

The Bilateral Agreement between the Australian Government and Tasmania on Transition to a National Disability Insurance Scheme was signed in December 2015. It establishes the agreed transition profile of clients anticipated to come into the scheme between 2016 and 2019 and the respective cost‑shares to be borne by the State and Australian Government over this transition period.

Variations to anticipated client inflows in transition have the potential to impact the timing and size of the State’s financial contribution and, as such, represent a potential risk to the Budget. This risk is expected to increase in 2018-19 as a significant number of clients are projected to transition to the NDIS prior to the commencement of the full scheme.

From 1 July 2019, the full scheme will commence in Tasmania and the National Disability SPP will cease. Under a Heads of Agreement between the Australian and Tasmanian Governments signed in May 2013, when full scheme arrangements commence, Tasmania agreed to pay a capped annual contribution to the NDIS, set at $232 million in 2019-20, then escalated at 3.5 per cent per annum.

It is expected that Tasmania’s full scheme bilateral agreement will be negotiated in 2018-19, in readiness for the commencement of the full scheme in 2019-20. The outcomes of these negotiations have the potential to impact on the Budget and Forward Estimates.

Further risks arise from the lack of an agreement for the allocation of funds provided for under the DisabilityCare Australia Fund (refer below).

DisabilityCare Australia Fund

The DisabilityCare Australia Fund was established by the Australian Government to provide funding for the NDIS through a half percentage point increase in the Medicare Levy which commenced on 1 July 2014.

Under the DisabilityCare Australia Fund Act 2013 a portion of the Fund is allocated to the states and territories over a period of ten years until 2023‑24 to assist with meeting the costs of implementing the NDIS. Tasmania’s allocation is forecast to be approximately $223 million over the ten year term.

Tasmania has not received any funding to date as no agreement has been reached with the Australian Government around the terms and conditions under which these funds are to be dispersed. This presents a significant risk to the Budget. The DCAF estimates included in the 2018-19 Budget and Forward Estimates reflect the most recent offer from the Australian Government. This Agreement will be negotiated alongside the full scheme NDIS bilateral agreement.

Commonwealth Redress Scheme

In response to the Royal Commission into Institutional Child Sexual Abuse, the Australian Government has introduced legislation to establish a Commonwealth Redress Scheme for survivors of institutional child sexual abuse.

The Scheme is scheduled to commence on 1 July 2018 and all states and territories have been invited to opt into the Scheme. Tasmania committed to opt into the Scheme on 22 May 2018. It is difficult to accurately forecast the costs to the State due to the unknown nature of some of the variables, with the average level of compensation and the number of claimants having the largest impact on the quantum of total costs.

Funding of $40 million has been included in the Budget and Forward Estimates which is broadly consistent with estimates of the cost to the State over the initial years of the Scheme. Total funding of $70 million has been committed over 10 years. The number of claimants and average level of compensation included in this estimate are in line with the Australian Government’s most recent modelling.  However, as noted in the 2017-18 Revised Estimates Report, costs in excess of $120 million may eventuate over the 10 years of the Scheme, if these variables are significantly higher.

State Taxation

State Taxation revenue estimates are sensitive to changes in a range of economic parameters, such as employment, wages growth and inflation, as well as prevailing economic conditions in Tasmania more generally. These parameters can result in either more or less State Taxation revenue being collected.

For example, it is estimated that a one per cent variation in the number of people employed within the Tasmanian economy would result in a variation of 0.8 per cent in Tasmania’s Payroll Tax revenue in 2018‑19. Furthermore it is estimated that a one per cent variation in property prices would lead to a 1.1 per cent variation in Conveyance Duty revenue in 2018-19.

Other factors that influence state taxes include business and consumer confidence, access to capital and the availability of labour, housing supply, interest rates and the lending policies of financial institutions.

Other Risks

Commitments subject to other funding sources

The Government has announced its support for a number of initiatives where the provision of that support was either dependent on the finalisation of other funding contributions (eg. Pembroke Park and Flinders Island harbour) or the quantum of that support remained to be finalised as a result of being in final stage negotiations (eg. Mona Foma in Launceston). Given that such funding is yet to be included in the Budget and Forwards Estimates, it represents a risk to the Budget position.


 

Funding Requirements Beyond the Forward Estimates Period

Expenditure estimates presented in this Budget Paper are based on the standard Budget and Forward Estimates period of four years. As such, expenditure levels beyond this period are not identified. As is established practice, such impacts are taken into account in the ongoing development and management of the Budget.

General Agency Cost Pressures

While all agencies are expected to deliver services within their allocated Budget and Forward Estimates, there continues to be a range of Budget pressures which agencies need to manage, including:

·       Full Time Equivalent staffing levels ‑ taking into account the allocation of additional funding to agencies to reflect such factors as Government initiatives and changes to Australian Government funding, it will be important that agencies continue to closely manage FTE levels;

·       general increases in the cost of inputs; and

·       increasing demand for a range of services.

Health Expenditure

Improving health services in Tasmania is a high priority for the Government and this continues to be reflected in the level of additional funding that is provided for health services, including in this Budget. Notwithstanding the provision of this important additional funding, the delivery of services to the Tasmanian community within this allocated funding continues to be a significant challenge, as it is across all Australian jurisdictions. The potential for future health services over-expenditure materially impacting on the broader Budget position, therefore, remains a significant risk particularly given that health expenditure comprises approximately 30 per cent of total Budget expenditure.

Justice Services

Funding risks currently associated with Justice portfolio services include:

·       Tasmanian Prison Service - Important work has been undertaken in corrective services, over a number of years, to improve its operation and its efficiency and, in this Budget, the Government has allocated significant additional funding to support the development of future prison infrastructure and to meet increased operating costs. It is expected, however, that demand issues and changing requirements for program delivery will continue and the management of costs within this environment will be an ongoing challenge; and

·       Corrective Services Package (Suspended Sentences) - The 2018-19 Budget and Forward Estimates include funding to meet the cost of the implementation of Tranche 1 of the Government’s sentencing reforms. Budget estimates are based on modelling undertaken by the Department of Justice and, as such, actual costs may vary when changes are implemented in practice.


 

Natural Disaster Relief and Recovery Arrangement Receipts

During 2016, the State met significant additional costs as a result of major bushfire and flood events. More recently, Hobart has experienced an extreme weather event which also caused significant property damage. Under Natural Disaster Relief and Recovery Arrangements, the State is able to seek reimbursement from the Australian Government for a significant portion of the costs that have been incurred by the State and local government. For the purpose of Budget estimates, assumptions have been made in relation to the level of future funds to be received and the timing of the receipt of those funds. Any variation from these assumptions will result in an impact on the current Budget estimates. No provision has yet been made in relation to the recent Hobart extreme weather event.

Public Sector Wages 

The Government’s established Wages Policy provides for the total cost of salary increases, allowances and any other employment conditions for all industrial agreements to be no greater than two per cent per annum. Consistent with this policy, the 2018-19 Budget and Forward Estimates provide for wage indexation of two per cent per annum. Given the level of cost of living increases in Tasmania, the level of increases being provided in other jurisdictions, the current level of public sector wages and other wage increments available to many public servants; a wages policy based on a two per cent increase, in the absence of productivity increases, is considered reasonable. Employee costs (including superannuation) represent approximately 47 per cent of total operating expenditure, any wage outcomes over and above this level will have a significant negative impact on the Budget outcome. For example, a one per cent increase in employee costs across all employee areas, over and above that provided for, will (assuming no other changes) have a negative impact on the Budget position in excess of $25 million per annum.

Returns from Government Businesses

Government businesses are subject to a wide range of influences that can significantly impact the level of returns to the Government, both positively and negatively. These include market conditions, infrastructure investment requirements, changes in capital structures of businesses and the implementation of major reform programs. In addition, implementation of some of the Government’s election commitments that impact on the Government business sector may also impact upon the Budget through increased costs or reduced returns from the Government businesses. This includes the proposed new Hobart ferry services and the energy related commitments, such as the de-linking of Tasmanian wholesale electricity contract prices from mainland pricing and the reviews of irrigation tariffs and the solar feed-in tariff. The detailed outcomes of these initiatives will not be known until the associated processes have been completed and, therefore, it has not been possible to quantify their potential impact at this time.

Roads Funding

The existing five-year roads funding agreement with the Australian Government expires at the end of 2018‑19. Negotiation of a new five-year agreement between the State and Australian Government has been ongoing. Until an agreement is finalised, the level of funding to be provided by the Australian Government and what subsequent level of matching funding is required from the State remains uncertain.


 

Royal Hobart Hospital Redevelopment

The Royal Hobart Hospital Redevelopment is one of the largest public infrastructure projects ever undertaken in Tasmania. Whilst the project is being carefully managed, there is potential for unanticipated costs to occur as a consequence of changes in scope, latent site conditions or other variations. To the extent additional costs cannot be managed within the Project’s contingency budget, there is potential for there to be an adverse impact on the General Government Sector. There is also the potential for the costs incurred in a particular Budget year to vary depending on project progress. This may impact Fiscal Balance outcomes in a particular Budget year.

Superannuation Funding

The Government recognises that superannuation is a significant liability and will continue to ensure that it manages this critical ongoing funding task in the most prudent way and in accordance with the funding recommendations of the State Actuary.

The major superannuation schemes currently operating in the General Government Sector that have an unfunded liability are those established under the Public Sector Superannuation Reform Act 2016, the former Parliamentary Superannuation Act 1973, the former Parliamentary Retiring Benefits Act 1985 and the Judges’ Contributory Pensions Act 1968. While these schemes have been closed to new members for some time, because of the long‑term nature of superannuation benefits, the superannuation liability continues to increase as existing members accrue additional years of service as they approach retirement age. The liability is projected to increase until 2023‑24 and then gradually decline over the following five or six decades.

Currently, the emerging cash cost of defined benefit superannuation payments is met from the Consolidated Fund, funded partly by agency contributions and by a Reserved by Law contribution, which comprises the balance of the Government’s share of pension and lump sum benefit costs.

A key budget risk is that the cost to the Budget will increase significantly in coming years, increasing by 53.9 per cent over the next 14 years and peaking in 2032‑33. The estimated cost to the Budget is based on the most recent actuarial estimates. The change from the projections in the 2017-18 Budget reflects a 1.1 per cent decrease in the expected peak cost to $437.8 million ($442.6 million in the 2017‑18 Budget).

In 2018‑19, defined benefit superannuation costs are estimated to be 4.4 per cent of Cash receipts from operating activities in the General Government Sector. Defined benefit superannuation costs, as a percentage of General Government cash receipts, is estimated to peak at 5 per cent in nine years (2027‑28), followed by a decrease to 4.3 per cent in 15 years (2033-34) and 3.5 per cent in 20 years (2038-39).

 Further information on the superannuation liability is provided in chapter 7 of this Budget Paper.

Support to Grow the Tasmanian Economy

Growing the Tasmanian economy continues to be a major focus of the Government. The Government works closely with the private sector to support investment and jobs across Tasmania. This may result in the allocation of additional funding, providing guarantees or the foregoing of revenue over the Budget and Forward Estimates period. In some instances, there have been offers of support made by the Government that may be taken up if certain conditions are satisfied, such as the $25 million assistance package available to Copper Mines of Tasmania if mining is resumed at the Mt Lyell copper mine.

Tasmania Irrigation - Tranche 3 Irrigation Program

The Government has committed an additional $70 million over four years, from 2019-20, for the construction of a number of potential new irrigation projects across the State as part of a Tranche 3 irrigation program being undertaken by Tasmania Irrigation Pty Ltd. Tranches 1 and 2, were funded approximately 25 per cent from the State Government, 25 per cent from participating farmers and 50 per cent from the Australian Government. While the Australian Government has provided funding for Tranche 3 feasibility studies, it is yet to commit to funding for the Tranche 3 construction program. If the Australian Government does not agree to fund Tranche 3 projects on a similar basis, the State would need to commit additional funding in order to construct the full range of projects envisaged.


 

Appendix 1.1   Credit Status of the State Public Sector

The current credit ratings and outlook for long‑term domestic debt of the states and the territories by the rating agencies, Moody’s Investors Service (Moody’s) and Standard & Poor’s (S&P), are detailed in Table 1.3.

Table 1.3:         Government Ratings

 

Moody's

Standard & Poor's

 

 

 

New South Wales

Aaa (Stable)

AAA (Negative)

Victoria

Aaa (Stable)

AAA (Negative)

Queensland

Aa1 (Stable)

AA+ (Stable)

Western Australia

Aa2 (Stable)

AA+ (Negative)

South Australia

Aa1 (Stable)

AA (Positive)

Tasmania

Aa2 (Stable)

AA+ (Stable)

Northern Territory

Aa2 (Stable)

na

Australian Capital Territory

na

AAA (Negative)