3 The Fiscal Strategy

Key Issues

· Over the term of the 2019-20 Budget and Forward Estimates the Government will achieve all Fiscal Strategy Strategic Actions.

· Successful implementation of the Government’s Fiscal Strategy 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.

· Given the significant reduction in GST and Conveyance Duty receipts that have been faced in the development of the 2019-20 Budget, revenue growth over the 2019-20 Budget and Forward Estimates period is expected to be well below long-term average annual revenue growth levels. This will require the implementation of ongoing expenditure constraint.

The Government’s Fiscal Strategy

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.

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.

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: 2019-20 Budget - Fiscal Strategy Progress

Strategic Action

2019-20 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 expenses over the period to 2022-23 is 2.9 per cent. This is below the long-term average revenue growth rate of 4 per cent (calculated from 2008‑09 to 2017‑18 actual).

· Over the period from the 2018-19 Estimated Outcome to the end of the current Forward Estimates period (2022-23) revenue growth is only estimated to be 1.6 per cent which is well below the average long-term growth rate. Constraining expenses to the levels reflected in the 2019-20 Budget and Forward Estimates will, therefore, be important.

· Chart 3.1 highlights General Government revenue and expenditure growth over the period from 1999-00 to 2022-23.

· Chart 3.2 compares the 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 2022-23.

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 2019-20 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.

· Over the 2019-20 Budget and Forward Estimates period General Government Net Debt will increase to $1.1 billion (which includes $274.3 million of lease liabilities due to the implementation of the new Australian Accounting Standard AASB 16 Leases) in 2022-23. This Net Debt position reflects the impact of the Government’s commitment to total infrastructure funding of $3.6 billion over the Budget and Forward Estimates period; additional expenditure commitments and significant negative revenue impacts.

Table 3.1: 2019-20 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2019-20 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 second lowest of all jurisdictions and is below the national average.

· In 2018‑19, the Government implemented a range of taxation measures designed to promote increased employment and economic growth across the State, support more apprenticeships and traineeships in Tasmania and improve Tasmania’s rental market and home ownership.

· In 2019‑20, the Government will be:

- extending the land tax exemption for short-stay accommodation properties that are made available for long-term rental, to 30 June 2023;

- extending the land tax exemption for all newly built housing that is made available for long-term rental, to 30 June 2023;

- extending the eligible period for the duty concession for first home buyers of established homes, to 30 June 2020;

- extending the eligible period for the duty concession for eligible pensioners that downsize their home, to 30 June 2020;

- increasing the Foreign Investor Duty Surcharge for acquisitions by foreign persons of residential land, from three per cent to seven per cent, and of primary production land, from half a per cent to 1.5 per cent from 1 January 2020;

- developing a land tax surcharge to apply to foreign ownership of residential and primary production land to apply from 1 July 2020; and

- introducing a point of consumption tax on wagering at a rate of up to 15 per cent on the net wagering revenue of betting companies offering services to Tasmania, from 1 January 2020.

Table 3.1: 2019-20 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2019-20 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.

· A priority in 2018‑19 has been the delivery of affordable energy at predictable prices that are amongst the lowest in Australia, consistent with the Government’s energy strategy. During 2019‑20, work will continue to progress a number of actions already underway, including:

- ensuring that regulated electricity tariffs do not increase by more than the increase in the CPI;

- providing rebates to large electricity customers to ease the burden of high wholesale electricity prices;

- continuing the review of wholesale electricity market arrangements; and

- progressing the review of irrigation tariff arrangements.

· The Government is also working with the Government electricity businesses on the development and assessment of the Project Marinus and Battery of the Nation projects.

· Over the coming period, the Government will continue to review and monitor the strategies and performance of government businesses.

· The Government also continually reviews the governance framework and operations of government businesses with the aim of improving the governance and efficiency of government businesses.

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

· Over the 2019‑20 Budget and Forward Estimates period, the Government will provide funding of $3.6 billion to support investment in Tasmania’s infrastructure. This includes $2.8 billion for agency infrastructure.

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

· Over the Budget and Forward Estimates period $1.6 billion has been provided for roads infrastructure, $353 million is allocated to health and hospital infrastructure, $213 million is provided to housing and human services, $194 million is provided to improve school and education infrastructure and $171 million is provided to support law and order.

Table 3.1: 2019-20 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2019-20 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).

· Equity injections to support infrastructure investment include the provision of $256 million to Tasmanian Railway Pty Ltd, $185 million to Tasmanian Irrigation Pty Ltd, $180 million to Tasmanian Water and Sewerage Corporation Pty Ltd and $158 million to TT-Line Company Pty Ltd.

· Chart 3.4 shows that, over the 2019-20 Budget and Forward Estimates period, investment in General Government non‑financial assets continues to significantly exceed the value of depreciation. Table 3.3 summarises 2019‑20 Budget and Forward Estimates for Depreciation and Purchases of non‑financial assets.

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

· The Government has undertaken important reforms that strengthen the State’s financial management framework and help improve transparency. These include amendments to the Charter of Budget Responsibility Act and the new Financial Management Act 2016.

- The Financial Management Act, effective from 1 July 2019, simplifies and reforms Tasmania’s financial management legislation to support a modern financial management framework for the General Government Sector. The FMA introduces a new structure for the Public Account and a new series of Treasurer’s Instructions, and clarifies responsibilities for managing the State’s finances. These changes will provide for management of the public finances of the State in an economical, efficient and effective manner. The FMA will also improve financial and budget management processes, and strengthen the quality of information provided to Parliament and other stakeholders.

· In the 2017-18 Budget, significant funding was allocated to undertake a number of significant digital transformation projects which will continue to be delivered in 2019-20 and across the Forward Estimates period. Projects are currently underway in the Departments of Health; Communities Tasmania; Justice; Police, Fire and Emergency Management; Premier and Cabinet; and Treasury and Finance. These projects will result in the provision of improved services to the community and deliver public sector efficiency and productivity benefits.

Table 3.1: 2019-20 Budget - Fiscal Strategy Progress (continued)

Strategic Action	2019-20 Budget Progress
6. Public sector efficiency, productivity and financial transparency will be improved (continued).	· The Government remains committed to ongoing effective management of wages expenditure. The Government will continue to work with employee groups to achieve affordable and reasonable wage outcomes. The Government’s current wages policy provides wage increases of two per cent per annum.

Fiscal Strategy Data

Chart 3.1: General Government Revenues and Expenses, 1999-00 to 2022‑231

Title: General Government Revenues and Expenses, 1999-00 to 2022-23 - Description: The chart shows the historical growth in both General Government Revenues and Expenses. Revenue and expenditure growth have generally been similar over most years. Revenue growth is expected to exceed expenditure growth over the 2019-20 Budget and Forward Estimates period.

Note:

1. This chart is based on actual data for the period 1999-00 to 2017-18 (excluding the impact of the significant one-off payment for the Mersey hospital of $730.4 million in 2016-17), the Estimated Outcome for 2018-19 and the Budget and Forward Estimates for 2019-20 to 2022-23.

Chart 3.2: Comparative Compound Annual Growth Rates of General Government Revenue and Expenditure, 1999-00 to 2022‑23

Table 3.2: General Government Borrowing and Defined Benefits Superannuation Costs, 2019‑20 to 2022‑23

	2019-20	2020-21	2021-22	2022-23
		Forward	Forward	Forward
	Budget	Estimate	Estimate	Estimate
	$m	$m	$m	$m

Superannuation ‑ defined benefit schemes	303.2	305.4	315.6	323.3
Borrowing costs	14.3	23.9	30.0	35.4
Total borrowing and defined benefit scheme costs	317.5	329.3	345.6	358.7

Borrowing and defined benefit costs as a percentage of General Government cash receipts	4.9%	5.1%	5.1%	5.2%

Chart 3.3: Ratio of Actual to Assessed Revenue, 2017-181

Title: Ratio of Actual to Assessed Revenue, 2017-18 - Description: The chart shows that Tasmania currently has the second lowest ratio of actual to assessed revenue of all jurisdictions. Source: Commonwealth Grants Commission 2019 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, 2019‑20 to 2022‑23

	2019-20	2020-21	2021-22	2022-23
		Forward	Forward	Forward
	Budget	Estimate	Estimate	Estimate
	$m	$m	$m	$m

Purchases of non-financial assets	700.1	718.6	613.9	677.0
Less Depreciation	329.4	352.0	384.2	394.1
Surplus	370.7	366.6	229.7	282.9

Chart 3.4: Purchases of Non‑Financial Assets and Depreciation, 2006-07 to 2022‑23

Title: Purchases of Non-Financial Assets and Depreciation, 2006-07 to 2022 23 - Description: This chart shows that, over the 2019-20 Budget and Forward Estimates period, investment by the Government in Purchases of Non-Financial Assets exceeds the value of depreciation.