3     The Fiscal Strategy

Key Issues

·       Over the term of the 2018-19 Budget and Forward Estimates, the Government will meet the requirements of its established Fiscal Strategy.

·       The Government’s Fiscal Strategy reflects its continuing commitment to: delivering improved services to the Tasmanian community; maintaining the Government’s infrastructure investment; improving public sector efficiency; constraining government expenditure to within long-term average growth in revenue and maintaining tax competitiveness.

·       Successful implementation of the Government’s important Strategic Actions will lead to the achievement of the fiscal principles embedded in the Charter of Budget Responsibility Act 2007.

·       Successful implementation of the Government’s Fiscal Strategy has been a key factor in providing the Budget flexibility to achieve the Government’s policy priorities of jobs and economic growth; health and education and supporting Tasmanians most in need.


Fiscal Principles

Following the 2018 State Election, the Government has reaffirmed its commitment to its Fiscal Strategy that has been in place since it was elected in 2014. The Government’s Fiscal Strategy provides a strong and effective framework for the ongoing management of the State’s budget position. It is focused on the achievement of long-term fiscal principles that reflect responsible financial management and aim to deliver long-term budget sustainability. These long-term fiscal principles are enduring in nature 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 measures and economic statistics are also important in enabling the measurement of the Government’s progress against the principles.

The following long‑term fiscal principles are embedded in the Charter of Budget Responsibility Act:

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 long-term fiscal principles. These strategic actions 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 its Fiscal Strategy strategic actions.

Table 3.1:         2018-19 Budget ‑ Fiscal Strategy Progress

Strategic Action

2018-19 Budget Progress

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

·       Since 2014‑15, the compound annual growth in expenditure over the period 2014‑15 to 2021‑22 is 2.9 per cent. This is below the long-term average revenue growth rate of 3.7 per cent (calculated from 2008‑09 to 2016-17 actual). Net Operating Balance surpluses are also expected over the 2018‑19 Budget and Forward Estimates period.

·       Chart 3.1 highlights General Government revenue and expenditure growth over the period from 1999-00 to 2021-22.

·       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 2021-22.

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 2018-19 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 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 recommendations of the State Actuary.

·       Net Debt remains negative over the Budget and Forward Estimates period. Net Debt is estimated to be negative $329.6 million at 30 June 2019 (negative $349.7 million in the 2017‑18 Revised Estimates Report), reducing to negative $14.8 million at 30 June 2021, then improving to negative $51.6 million by 30 June 2022.


 

Table 3.1:         2018-19 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2018-19 Budget Progress

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

·      Chart 3.3 shows that, according to the most recent Commonwealth Grants Commission data, the 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 third lowest of all jurisdictions and is below the national average.

·      In the 2017‑18 Budget, the Government took action to further improve the tax environment for businesses that pay payroll tax by providing payroll tax rebates for new apprentices, trainees and youth employees aged 15 to 24 recruited from 1 July 2017 to 30 June 2019. The rebate came into effect on 1 July 2017.

·      During 2017‑18, the Government introduced amendments to the Land Tax Act 2000 with effect from 1 July 2017. The amendments provide a fairer, simpler and taxpayer favourable approach to the apportionment of assessed land value between principal residence land and general land. The Government also committed to introduce several taxation initiatives announced in the lead-up to the 2018 State election by 1 July 2018. These initiatives are to:

-       extend the Payroll Tax Rebate Scheme for apprentices and trainees, in areas of skills shortages, to 30 June 2021;

-       introduce a reduced rate of payroll tax for wages between $1.25 million and $2 million;

-       provide a three year payroll tax exemption for wages paid by a business to its employees in regional Tasmania, where the business relocates to Tasmania and establishes its operations in a regional area;

-       provide a 50 per cent duty concession to first home buyers of established homes with a value of up to $400 000, for a twelve month period;

-       provide a 50 per cent duty concession to eligible pensioners that sell their existing home and downsize to a new home or unit at a lower cost, for a twelve month period;


 

Table 3.1:         2018-19 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2018-19 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).

-       implement a Foreign Investor Duty Surcharge of an additional three per cent of the dutiable value for all purchases of residential property by foreign residents and an additional half per cent of the dutiable value for all purchases of primary production land by foreign residents;

-       provide a three year land tax exemption for all newly built housing that is made available for long‑term rental; and

-       a one year land tax exemption for short-stay accommodation properties that are made available for long-term rental accommodation within the Greater Hobart Area.

·       These initiatives are designed to support more apprenticeships and traineeships in Tasmania, create more jobs in regional Tasmania, promote increased employment and economic growth across the State, and improve Tasmania’s rental market and home ownership.

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.

·       During 2017-18, a key focus has been the delivery of affordable energy at predictable prices that are amongst the lowest in Australia, consistent with the Government’s energy strategy.

·       The Government has also ensured that the Government business sector continues to support economic development in the State, through support for major projects such as wind farm developments, the development of irrigation schemes and ensuring infrastructure is available to support further investment by the private sector.

·       Over the coming period, the Government will continue its focus on delivery of affordable energy at predictable prices by:

-       implementing arrangements to cap increases in electricity prices for the next three years;

-       undertaking a review of solar feed-in tariff arrangements;


 

Table 3.1:         2018-19 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2018-19 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).

-       undertaking a review of irrigation electricity tariffs; and

-       commencing the process to delink the Tasmanian regulated wholesale electricity pricing mechanism from volatility in the Victorian wholesale market.

·       The Government is implementing legislative changes to enable Metro Tasmania Pty Ltd to operate public ferry services and providing funding to assist with establishment of this service.

·       The Government will implement a number of measures to improve the governance and efficiency of government businesses, including:

-  taking opportunities to harmonise the governance arrangements for Government businesses; and

-       continue to review and update various governance documents including:

o  Government business guidelines and Treasurer’s Instructions;

o  the ministerial charters for Government Business Enterprises; and

o  the members statements of expectation for State-owned Companies.

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

·       The 2018-19 Budget continues the Government’s significant investment in infrastructure with new commitments totalling $1.1 billion included in the Budget. Infrastructure expenditure over the Budget and Forward Estimates period now totals $2.6 billion. This is a material increase on the over $2 billion allocated over the 2017‑18 Budget and Forward Estimates period.

·       The Government’s investment in infrastructure is strongly focused on its high priority policy areas of improving education and health services, jobs and economic growth as well as supporting law and order.


Table 3.1:         2018-19 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2018-19 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).

·       Significant new and existing funding is also being provided by the Government to support other entities to undertake major infrastructure projects including $200 million over ten years to enable the acceleration of TasWater’s capital program;  $119.8 million for rail infrastructure, $70 million for Tranche 3 irrigation projects, and $18 million to Metro Tasmania Pty Ltd.

·       Chart 3.4 shows that, over the 2018-19 Budget and Forward Estimates period, investment by the Government in Non‑Financial Assets continues to exceed the value of depreciation. Table 3.3 summarises 2018-19 Budget and Forward Estimates for Depreciation and Purchases of non‑financial assets.

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

·       Since 2014, the Government has undertaken important financial management reforms that strengthen the State’s financial management framework and help improve transparency. These include:

-  amendments to the Charter of Budget Responsibility Act;

-  the new Financial Management Act 2016 (to be implemented on 1 July 2019); and

-  the publication of the First Tasmanian Government Fiscal Sustainability Report in April 2016.

·       In the 2017-18 Budget, significant funding was allocated to undertake a number of significant digital transformation projects. This includes projects being undertaken by the Departments of Health; Justice; Police, Fire and Emergency Management; Premier and Cabinet; and Treasury and Finance. Not only will these projects ultimately result in the provision of improved services to the community but they are also expected to deliver public sector efficiency and productivity benefits.

·       The Government is committed to ensuring negotiated wage outcomes are sustainable and affordable. The wages policy limits wage outcomes to two per cent per annum.

 

Fiscal Strategy Data

Chart 3.1:        General Government Revenues and Expenses, 1999-00 to 2021-221

Title: General Government Revenues and Expenses, 1999 00 to 2021-22 - Description: The chart shows the historical growth in both General Government Revenues and Expenses. Over the period from 2014 15 to the end of the current Forward Estimates, revenue growth is 2.7% compared to expenditure growth of 2.4%.

Note:

1.    This Chart is based on actual data for the period 1999‑00 to 2016‑17 (excluding the impact of the significant one‑off payment for the Mersey Hospital of $730.4 million), the Estimated Outcome for 2017‑18 and the Budget and Forward Estimates for 2018‑19 to 2021‑22.

Chart 3.2:        Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 1999‑00 to 2021-22

Title: Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 1999 00 to 2021 22 - Description: The chart shows that revenue and expenditure growth over the period 2014 15 to 2021 22 is expected to be significantly below the growth rates over 1999 00 to 2003 04 and 2003 04 to 2008 09.

Table 3.2:         General Government Borrowing and Defined Benefit Superannuation Costs, 2018-19 to 2021-22

 

2018-19

2019-20

2020-21

2021-22

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

 

 

 

 

 

Superannuation ‑ defined benefit schemes

284.5

299.0

311.4

322.7

Borrowing costs

9.5

9.3

8.8

8.3

Total borrowing and defined benefit scheme costs

294.0

308.3

320.2

331.0

 

 

 

 

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

4.6%

4.8%

4.9%

4.9%

 

 

 

 

 

Chart 3.3:        Ratio of Actual to Assessed Revenue, 2016-171

Title: Ratio of Actual to Assessed Revenue, 2016 17 - Description: The chart shows that Tasmania currently has the third lowest ratio of actual to assessed revenue of all jurisdictions.Source: Commonwealth Grants Commission 2018 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, 2018-19 to 2021-22

 

2018-19

2019-20

2020-21

2021-22

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Purchases of non-financial assets

741.0

719.6

532.4

523.8

Depreciation

264.1

322.7

337.8

348.2

Surplus

476.9

396.9

194.6

175.6

 

 

 

 

 

 

Chart 3.4:        Purchases of Non-Financial Assets and Depreciation, 2006-07 to 2021-22

Title: Purchases of Non-Financial Assets and Depreciation, 2006 07 to 2021 22 - Description: This chart shows that, over the 2018-19 Budget and Forward Estimates period, investment by the Government in Purchases of Non-Financial Assets exceeds the value of depreciation.