3     The Fiscal Strategy

Key Issues

·       Over the term of the 2020-21 Budget and Forward Estimates the Government will continue to achieve all Fiscal Strategy Strategic Actions.

·       The COVID-19 pandemic has had a significant social and economic impact on Tasmania, and the 2020‑21 Budget and Forward Estimates reflect the COVID-19 response and recovery measures implemented by the Government to mitigate the impact of the virus.

·       The effective implementation of the Government’s Fiscal Strategy has been a factor in providing the Budget flexibility to successfully respond to the COVID-19 pandemic.

·       The full social and economic impacts of the COVID-19 pandemic remain uncertain and, in this context, the strategic actions continue to provide a clear indication of the Government’s fiscal intent and focus.


 

The Government’s Fiscal Strategy

The Government’s Fiscal Strategy provides an effective and appropriate framework for the ongoing management of the State’s Budget position. It is focused on the achievement of long-term fiscal principles that are embedded within the Charter of Budget Responsibility Act 2007. These principles are:

·       manage the State’s finances responsibly for the wellbeing of all Tasmanians;

·       provide for the future for the next generation of Tasmanians;

·       prepare for unexpected events by building a robust financial position;

·       improve services to Tasmanians by building a strong economy and efficiently allocating resources to gain the maximum community benefit;

·       formulate spending and taxation policies that ensure a reasonable degree of equity, stability and predictability; and

·       ensure transparency and accountability in developing, implementing and reporting on fiscal objectives.

A focus on these principles reflects responsible financial management and drives the achievement of long‑term Budget sustainability. Through the need to prepare for the unexpected, a focus on these principles also recognises that Tasmania’s economic and fiscal circumstances can change quickly and significantly. The occurrence and impact of the COVID-19 pandemic demonstrates the speed with which circumstances can change.

The use of a principles based approach also 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 Government’s long established Fiscal Strategy includes six 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.


 

The impact of the COVID-19 pandemic and the Government’s COVID-19 response and recovery measures have resulted in increased expenditure and lower revenue. Notwithstanding these impacts, the 2020‑21 Budget and Forward Estimates continue to meet the requirements of these strategic actions. While this is an important outcome, like governments around Australia and the world, the Government recognises the negative impact that the pandemic has had on the State’s finances and that the full impact of the pandemic, from a social, economic and fiscal perspective, remains very uncertain.

The Government will, therefore, continue to consider the long-term requirements of the Tasmanian community and the Budget position and, if considered necessary, will adapt its strategic actions.

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:         2020-21 Budget - Fiscal Strategy Progress

Strategic Action

2020-21 Budget Progress

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

·       The compound annual growth in expenses over the period from 2019-20 to 2023-24 is 2 per cent. This low level of growth reflects the relatively high level of “time limited” expenditure incurred in 2019-20 in response to the COVID‑19 pandemic and the projected return to lower levels of expenditure by the end of the current Forward Estimates. This level of expenditure growth is well below the long-term average revenue growth rate of 3.7 per cent (calculated from 2008‑09 to 2019‑20 actual).

·       Over the period from the 2019-20 actual to the end of the Forward Estimates (2023‑24), revenue growth is calculated to be 3.4 per cent. Notwithstanding this level of growth over the measurement period, the Budget has been negatively impacted by material reductions in revenue (below previously estimated levels) in 2019-20 and the first years of the 2020-21 Budget and Forward Estimates.

·       Chart 3.1 shows General Government revenue and expense growth over the period from 1999-00 to 2023-24. It highlights the impact of the pandemic on expenditure levels, as the Government has responded to support the community, business sector and the economy.

·       Chart 3.2 compares the annual growth rates of General Government revenue and expenses in the periods 1999-00 to 2003-04; 2003-04 to 2008‑09; 2008-09 to 2013-14; and 2014‑15 to 2023-24.


Table 3.1:         2020-21 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2020-21 Budget Progress

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

·       Table 3.2 shows that, over the 2020-21 Budget and Forward Estimates, 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 2020-21 Budget and Forward Estimates, General Government Net Debt will increase to $4.4 billion in 2023‑24. This Net Debt position reflects the combined impacts of the COVID‑19 pandemic and the Government’s COVID-19 response and recovery measures to mitigate the social and economic impact of the pandemic, and the associated increased investment in next generation infrastructure.

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 2019‑20, the Government introduced taxation measures designed to improve the operation of the Duties Act 2001 to ensure that foreign investors in Tasmania contribute their fair share to the Tasmanian economy and that the property market remains accessible to Tasmanians. These included:

-   amending the Act to better reflect the policy intent of the Foreign Investor Duty Surcharge and to help ensure that only persons, companies and trusts that are genuinely foreign are charged the surcharge; and

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

Table 3.1:         2020-21 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2020-21 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).

·       From 1 January 2020, the Government also introduced a 15 per cent point of consumption tax to apply to all betting operators licensed in Australia where their net wagering revenue from Tasmanian bets exceeds the annual tax-free threshold.

·       Several short‑term taxation measures were also introduced during 2019‑20 as part of the Government’s response and recovery measures to mitigate the economic risk of the COVID‑19 pandemic in Tasmania. These included:

-   a one year rebate of payroll tax paid for newly employed persons aged 24 years and under, employed between 1 April 2020 and 31 December 2020;

-   a waiver from payroll tax for hospitality, tourism and seafood industry businesses for the 2019‑20 financial year;

-   a waiver from payroll tax for small to medium Tasmanian businesses with an annual payroll of up to $5 million in Australian wages where operations have been impacted by the COVID‑19 pandemic for the 2019‑20 financial year; and

-   a waiver from payroll tax for the wages paid using JobKeeper payments to ensure that employers and employees receive the full benefit of the JobKeeper program.

·       The Government has introduced a land tax exemption for 2020‑21 for commercial land owners where the business that operates on the land has suffered financial impact due to the COVID‑19 pandemic.

·       The Government also intends to extend the payroll tax rebate scheme for youth employees, and for apprentices and trainees to 30 June 2022, alongside an expansion of the apprentices and trainees component of the scheme across all industries. These changes are in line with a recommendation from the Premier's Economic and Social Recovery Advisory Council.


 

Table 3.1:         2020-21 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2020-21 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 key priority of the Government has been to ensure the delivery of affordable energy at predictable prices that are amongst the lowest in Australia, consistent with its Tasmania First Energy Policy. During 2020-21, 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 CPI; and

-   progressing the review of wholesale electricity market arrangements.

·       The Government is continuing to work with the Government electricity businesses on the development and assessment of the Project Marinus and Battery of the Nation projects.

·       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 2020-21 Budget and Forward Estimates, the Government will invest nearly $5 billion to support investment in Tasmania’s infrastructure. This investment demonstrates the Government’s continuing commitment to drive the State’s economic prosperity through investment in next generation infrastructure, while simultaneously supporting the development of stronger building, construction and related trades industries.

·       The 2020‑21 Budget and Forward Estimates provides $3.9 billion for Government agencies to deliver community infrastructure projects, including: $2.4 billion for roads and bridges; $369.6 million for health and hospitals; $296.8 million for housing and human services; $275.4 million for law and order; $218.1 million for schools, education and skills; $198.1 million for tourism, recreation and culture; and $135.4 million for ICT to support service delivery.


 

Table 3.1:         2020-21 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2020-21 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).

·       In addition, the Government will provide support for infrastructure investment by Government businesses and Tasmanian Water and Sewerage Corporation Pty Ltd, including: $208.8 million to Tasmanian Railway Pty Ltd; $168.7 million to Tasmanian Irrigation Pty Ltd; $160 million to Tasmanian Water and Sewerage Corporation Pty Ltd; and $218.4 million to TT-Line Company Pty Ltd.

·       Chart 3.4 shows that, over the 2020-21 Budget and Forward Estimates, investment in General Government non‑financial assets continues to significantly exceed the value of depreciation. Table 3.3 summarises 2020-21 Budget and Forward Estimates for Depreciation and Purchases of non‑financial assets.

·       A further $70 million has been provided to support the maintenance of existing infrastructure through the Government’s Public Building Maintenance Program and $120.9 million will be provided, over the 2020-21 Budget and Forward Estimates, to support the first four years of the Tasmanian Government Radio Network project that will significantly improve Tasmania’s emergency communications.

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

·       The COVID-19 pandemic and the Government’s response and recovery measures has necessarily had a material impact on the State’s financial position. In addition to being committed to keeping the Tasmanian community informed of the health and wellbeing impacts of the pandemic, the Government has also been committed to providing information to the Tasmanian community on the impact of the pandemic on the economy and the State’s fiscal position. Through the publication of the Economic and Fiscal Update Report in May 2020, the Government was the first jurisdiction to provide a substantive update on the economic and fiscal impact of the pandemic. This was followed by the publication of a further Economic and Fiscal Update Report in August 2020.


 

Table 3.1:         2020-21 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2020-21 Budget Progress

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

·       The Government announced a wholesale Review of the Tasmanian State Service in June 2019. Draft Terms of Reference for the Review were open to public consultation for several months between November 2019 and February 2020. The Review commenced formally in March 2020 but was paused due to the COVID‑19 pandemic. It has now recommenced and will consider issues and opportunities including:

-   facilitating public sector change and innovation;

-   identifying opportunities to improve government services;

-   implementing enhanced workforce management practices; and

-   attracting, developing and retaining a skilled public sector workforce.

·       The Financial Management Act 2016 supports a modern financial management framework for the General Government Sector, with 2019‑20 being the first year of operation under the Act. Treasury continues to work with agencies within this new framework to further strengthen financial and budget management processes, and improve information provided to stakeholders.

Fiscal Strategy Data

Chart 3.1:         General Government Revenues and Expenses, 1999-00 to 2023-241

Title: General Government Revenues and Expenses, 1999-00 to 2023-24 - Description: The chart shows the historical growth in both General Government Revenue and Expenses. Revenue and expense growth rates have generally been similar over most years. The chart highlights the impact of the pandemic. It shows a sharp increase in expenditure growth in 2019-20 combined with a reduction in revenue growth. Growth rates return to previous levels over the Forward Estimates. Note:

1.    This chart is based on actual data for the period 1999-00 to 2019-20 (excluding the impact of the significant one-off payment for the Mersey Community Hospital of $730.4 million in 2016-17) and the Budget and Forward Estimates for 2020-21 to 2023-24.

Chart 3.2:         Compound Annual Growth Rates of General Government Revenues and Expenses, 1999-00 to 2023-24

Title: Compound Annual Growth Rates of General Government Revenues and Expenses, 1999-00 to 2023-24 - Description: The chart shows that revenue and expense growth rates over the period 2014-15 to 2023-24 is expected to be slightly above the growth rates over 2008-09 to 2013-14. Revenue and expenses growth rates are expected to be similar over the period 2014-5 to 2023 24.

Table 3.2:         General Government Borrowing and Defined Benefits Superannuation Costs, 2020‑21 to 2023‑24

 

2020-21

2021-22

2022-23

2023-24

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

 

 

 

 

 

Superannuation ‑ defined benefit schemes

302.2

301.4

310.1

318.0

Borrowing costs

29.4

53.1

62.6

70.3

Total borrowing and defined benefit scheme costs

331.6

354.5

372.7

388.3

 

 

 

 

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

5.1%

5.1%

5.1%

5.1%

 

 

 

 

 

Chart 3.3:         Ratio of Actual to Assessed Revenue, 2018-191,2

Title: Ratio of Actual to Assessed Revenue, 2018-19 - Description: The chart shows that Tasmania currently has the third lowest ratio of actual to assessed revenue of all jurisdictions. 

Source: Commonwealth Grants Commission 2020 Update Report on GST Revenue Sharing Relativities

Notes:

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.

2.    The Commonwealth Grants Commission noted when publishing its revenue ratios that the Australian Capital Territory’s ratio of actual to assessed revenue may not be directly comparable with those of other States as some categories include municipal transactions. 

Table 3.3:         Purchases of Non‑Financial Assets in Excess of Depreciation, 2020‑21 to 2023‑24

 

2020-21 

2021-22

2022-23

2023-24

 

   

Forward 

Forward 

Forward 

 

Budget 

Estimate 

Estimate 

Estimate 

 

$m 

$m 

$m 

$m 

 

 

 

 

 

Purchases of non-financial assets

1 085.5 

922.9 

819.0 

936.8 

Less Depreciation

388.1 

415.

430.7 

446.2 

Surplus

697.4 

507.6 

388.3 

490.6 

 

 

 

 

 

Chart 3.4:         Purchases of Non‑Financial Assets and Depreciation, 2006-07 to 2023‑24

Title: Purchases of Non-Financial Assets and Depreciation, 2006-07 to 2023-24 - Description: The chart shows that, over the 2020-21 Budget and Forward Estimates, investment by the Government in Purchases of Non-Financial Assets exceeds the value of depreciation. This excess reflects the high level of funding allocated for infrastructure investment by the Government.