3     The Fiscal Strategy

Key Issues

·       Over the term of the 2021‑22 Budget and Forward Estimates the Government will continue to achieve all Fiscal Strategy Strategic Actions.

·       The social and economic impacts of the COVID‑19 pandemic have been less dramatic than originally anticipated. There have been material increases in General Government Sector revenue in 2020-21 compared to the 2020-21 Budget. However, material risks remain, with the evolution of the pandemic continuing to be highly uncertain.

·       The effective implementation of the Government’s Fiscal Strategy in previous years has been a key factor in providing the Budget flexibility to enable the Government to continue to respond to the COVID‑19 pandemic.

·       The 2021-22 Budget forecasts a return to an operating surplus from 2023-24, providing Budget flexibility to meet the Government’s future policy priorities. 


 

The Government’s Fiscal Strategy

The Government’s Fiscal Strategy continues to provide a strong and effective framework for the management of the State’s Budget position. It is focused on the achievement of long-term fiscal principles that aim to deliver budget sustainability. 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 fiscal principles, embedded in the Charter of Budget Responsibility Act 2007, 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.

In the context of 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 and the length of time that uncertainty can remain.

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.


 

Medium‑Term Outlook

The stronger than expected economic recovery from the impacts of the COVID-19 pandemic at both a State and national level has contributed to material increases in revenue in the 2021-22 Budget compared to forecasts in the 2020-21 Budget. This has led to an improvement in the Government’s fiscal position, with the 2021‑22 Budget continuing to meet all of the strategic actions above.

The outlook however, remains uncertain, with the impact of the COVID-19 pandemic continuing to evolve, as demonstrated by the recent return to lockdowns across a number of states in Australia and continuing new cases across the world. This uncertainty will require the Government to continue to carefully manage the long‑term requirements of the Tasmanian community and the Budget position.

The 2021-22 Budget reflects the Government’s focus on supporting Tasmanians and the economy through targeted recovery measures together with increased investment in service delivery and infrastructure.

Forecasts included in the 2021-22 Budget and Forward Estimates indicate that the Government will return to an operating cash surplus from 2022-23. From 2023-24, the Budget will return to a Net Operating Balance surplus, meaning that the Government is generating sufficient revenue to cover operating expenditure, and support the replacement of existing assets.

The achievement of an operating cash surplus from 2022-23 and a Net Operating Balance surplus from 2023‑24 will enable the Government to stabilise growth in net debt in the short to medium‑term. This is demonstrated, not only by the reduced level of net debt compared to forecasts in the 2020‑21 Budget, but also by the reduction in the growth of annual borrowings over the Forward Estimates.


 

Fiscal Strategy Progress

Set out below is a summary of the current progress that has been made by the Government in implementing its Fiscal Strategic Actions.

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 the 2020-21 Preliminary Outcome to the 2024-25 Forward Estimate year is 2.2 per cent. This includes the high level of expenditure incurred in response to the COVID‑19 pandemic and the budgeted return to lower levels of expenditure by the end of the Forward Estimates. Even with the increase in expenditure, required as part of the Government’s COVID-19 response and recovery measures, expenditure growth is still below the long‑term average revenue growth rate of 4 per cent (calculated from 2008‑09 to 2020‑21 Preliminary Outcome).

·            Over the period of the 2020-21 Preliminary Outcome to the end of the Forward Estimates (2024‑25), revenue growth is expected to be 4.1 per cent. This represents an improvement compared to the 2020‑21 Budget, largely driven by a material upward revision to GST forecasts and the continued growth in State Taxation revenue.

·            Chart 3.1 shows General Government revenue and expense growth over the period of 1999‑00 to 2024‑25. It shows the impact of short term expenditure measures to support the community, business sector and economy in response to the COVID-19 pandemic, with a return to lower expenditure growth over the Forward Estimates.

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 3.1 shows that over the 2021-22 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. 

·            Defined benefit superannuation is a significant liability and the Government 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 2021-22 Budget and Forward Estimates, General Government Net Debt is forecast to increase to $3.5 billion in 2024-25. This is a reduction from the estimates in the 2020‑21 Budget and reflects the State’s stronger than anticipated recovery to date from the impacts of the COVID-19 pandemic.

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

·            Chart 3.2 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 2020‑21, the Government introduced or extended several taxation measures designed to support Tasmanian businesses and their employees during the COVID‑19 pandemic. These included:

-      extending 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;

-      consistent with the Australian Government’s extension of the JobKeeper Payment program to 28 March 2021, an extension to the payroll tax waiver for wages paid under the program;

-      introducing a payroll tax waiver relating to certain employees involved in the delivery of a hotel quarantine service; and

-      introducing a land tax exemption for 2020‑21 for commercial land owners where the business that operates on the land has suffered financial impacts due to the COVID‑19 pandemic.

·            In late 2020‑21, the Government also introduced a suite of measures aimed at addressing cost of living issues, providing affordable housing support and lowering emissions. These included:

-      resetting Land Tax thresholds to increase the tax free threshold for land tax from $24 999 to $49 999, increase the start of the middle tax band threshold to $50 000 and increase the top tax band threshold from $350 000 to $400 000;

-      allowing the Commissioner of State Revenue to accept payment of Land Tax in three instalments where the amount of Land Tax payable in any financial year exceeds $500 (previously $1 000);

-      reducing the premium component of the interest rate charged on unpaid tax from eight per cent to four per cent;

-      increasing the value threshold for the First Home Buyer Duty Concession and Pensioner Duty Concession (from $400 000 to $500 000);

-      capping the Motor Accidents Insurance Board premium duty at $20 per annum to enable quarterly payment of vehicle registration bills; and

-      providing a two‑year waiver of duty on the purchase of new and second hand electric and hydrogen fuel cell vehicles to incentivise the uptake of these vehicles by reducing up‑front costs.

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 for the Government continues to be the delivery of affordable energy to the Tasmanian community at predictable prices that are amongst the lowest in Australia.

·            Through support for the implementation of a range of Government priorities and ongoing provision of vital services to the Tasmanian community, government businesses will continue to provide strong support for the State’s recovery from the impact of the COVID-19 pandemic.

·            The Government is continuing to work with government businesses on the development, assessment and implementation of major economic infrastructure projects, including Project Marinus, Battery of the Nation, the redevelopment of the Port of Devonport and Port of Burnie, a range of major irrigation projects and the TT-Line vessel replacement.

·            The operation of government businesses and the government business governance framework will continue to be monitored and reviewed, where necessary, with a view to improving governance arrangements and the efficiency of government businesses and ensuring that the provision of services is in accordance with the Government’s and community’s expectations. In 2021-22, this will include an independent review of the operations of the Public Trustee.

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 2021-22 Budget and Forward Estimates, $3.8 billion is provided for Government agencies to deliver community infrastructure projects. This includes funding for roads and bridges ($2 billion); hospitals and health ($503.7 million); human services and housing ($404.9 million); schools, education and skills ($335.8 million); law and order ($238.8 million); tourism, recreation and culture ($183.6 million); and ICT support to service delivery ($145.4 million).

·            In addition to the significant investment in the General Government Sector, the 2021-22 Budget supports investment by government businesses and other entities, with $783.8 million in equity funding for infrastructure investment including: $199 million to Tasmanian Irrigation Pty Ltd; $184.8 million to Tasmanian Railway Pty Ltd; $140 million to Tasmanian Water and Sewerage Corporation Pty Ltd; $79.2 million to TT‑Line Company Pty Ltd; $65 million to the new Stadium Authority Trust; and $64.6 million to Macquarie Point Development Corporation.

·            The Government has also announced it will support investment of $385 million for the largest port redevelopments in Tasmania’s history, including the $240 million Port of Devonport redevelopment and the $145 million Port of Burnie upgrade.  The Government will also support Hydro Tasmania, with $700 million to be invested in the redevelopment of the Tarraleah power station.

·            Chart 3.3 shows that, over the 2021-22 Budget and Forward Estimates, investment in General Government non-financial assets continues to materially exceed the value of depreciation. In 2021‑22 investment in non-financial assets will exceed depreciation by 93 per cent. Table 3.2 summarises 2021-22 Budget and Forward Estimates for Depreciation and Purchases of non‑financial assets.

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

·            Despite a stronger than expected economic recovery, the COVID-19 pandemic continues to have an impact on the State’s fiscal position. In addition to being committed to keeping the Tasmanian community informed of the health and wellbeing impacts of the pandemic, the Government has provided information on the impact of the COVID-19 pandemic on the economy and the State’s fiscal position. This includes providing information through the Revised Estimates Report 2020-21 (including December Quarterly Report) in February 2021; and the Fiscal Sustainability Report 2021 in June 2021.

·            The Government has received the Final Report on the Review of the Tasmanian State Service. The report recognises that Tasmanian State Service employees are passionate and committed to delivering better outcomes for Tasmania. The Review recommends a substantial suite of changes to address the challenges in the future. The Government will release the Report in the near future.

Fiscal Strategy Data

Chart 3.1:         General Government Revenues and Expenses, 1999‑00 to 2024‑251

Title: General Government Revenues and Expenses, 1999-00 to 2024-25 - 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 and 2020-21 combined with a reduction in revenue growth. Growth rates return to previous levels over the Budget Forward Estimates.

Note:

1.    This chart is based on actual data for the period 1999-00 to 2019-20 and preliminary outcomes for 2020-21 (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 2021-22 to 2024-25.

Table 3.1:         General Government Borrowing and Defined Benefits Superannuation Costs, 2021-22 to 2024-25

 

2021-22

2022-23

2023-24

2024-25

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Superannuation ‑ defined benefit schemes

296.0

300.7

306.4

321.1

Borrowing costs

44.0

79.0

105.6

114.6

Total borrowing and defined benefit scheme costs

340.0

379.7

412.0

435.7

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

4.5%

4.8%

5.0%

5.2%

 

 

 

 

 

Chart 3.2:         Ratio of Actual to Assessed Revenue, 2019-201,2

Title: Ratio of Actual to Assessed Revenue, 2019-20 - Description: The chart shows that Tasmania currently has the second lowest ratio of actual to assessed revenue of all jurisdictions.

Source: Commonwealth Grants Commission 2021 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 3.2:         Purchases of Non-Financial Assets in Excess of Depreciation, 2021‑22 to 2024-25

 

2021-22

2022-23

2023-24

2024-25

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Purchases of Non-Financial Assets

795.8

897.8

1 023.8

977.5

Depreciation

412.5

430.4

455.0

475.6

Surplus

383.3

467.4

568.8

501.9

 

 

 

 

 

Chart 3.3:         Purchases of Non-Financial Assets in Excess of Depreciation

Title: Purchases of Non-Financial Assets and Depreciation, 2006-07 to 2024-25 - Description: The chart shows that, over the 2021-22 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.