3     The Fiscal Strategy

Key Issues

·       The effective implementation of the Government’s Fiscal Strategy, since its introduction in 2014, has been a key factor in providing the Budget flexibility to enable the Government to respond to the COVID‑19 pandemic, which continues to change and evolve.

·       As has been the case for other jurisdictions, the response to COVID-19 has required the Government to implement far reaching measures to mitigate the social and economic impacts of the pandemic and these have resulted in increased expenditure and lower revenue.

·       While the Government is currently achieving all of its Strategic Actions under the Fiscal Strategy and will continue to achieve the vast majority of the strategic actions over the Budget and Forward Estimates period, in the final year of the Forward Estimates the strategic action relating to the combined annual debt servicing cost and defined benefit superannuation costs being less than six per cent of General Government Sector cash receipts, is forecast to be exceeded.

·       It is important to note that if the temporary fiscal impacts resulting from the COVID-19 pandemic are removed from the calculations, the Government would be achieving all Fiscal Strategy Strategic Actions.

·       The Government is committed to its Fiscal Strategy and meeting all Strategic Actions. Consistent with the fiscal principles, embedded in the Charter of Budget Responsibility Act 2007, a temporary departure from the Strategic Actions has been necessitated by the significant and unprecedented challenges of the COVID-19 pandemic.

·       The Government will take action as required to achieve all the Strategic Actions over the medium‑term.

 


 

The Government’s Fiscal Strategy

The Government’s Fiscal Strategy provides 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 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 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 effective implementation of the Government’s Fiscal Strategy, since its introduction in 2014, has been a key factor in providing the Budget flexibility to enable the Government to respond to the COVID‑19 pandemic, which continues to change and evolve.

Whilst there is still some uncertainty, as the State transitions to living with COVID-19, it is important that temporary COVID-19 support measures are curtailed and expenditure is focused on investment in essential service delivery and infrastructure to support the long‑term needs of the Tasmanian community.

The Government is committed to the Fiscal Strategy and meeting all its Strategic Actions. However, it acknowledges that it is necessary to temporarily depart from the fiscal objectives when circumstances change. The COVID-19 pandemic has presented significant and unprecedented challenges that have required such a temporary departure.

The Government will take action as required to achieve all the Strategic Actions over the medium‑term. It will rebuild the fiscal buffers crucial to provide the budget flexibility to respond to future shocks in a measured way over time, which does not impact on the provision of essential Government services.

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:         2022‑23 Budget - Fiscal Strategy Progress

Strategic Action

2022‑23 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 the 2020‑21 actual to the 2025‑26 Forward Estimate year is 3.1 per cent. This includes a continuation of the level of expenditure incurred in response to the COVID‑19 pandemic, combined with the delivery of Government commitments, including election commitments.

·        Expenditure growth remains below the long‑term average revenue growth rate of 4.0 per cent (calculated from 2008‑09 to 2020‑21 actual).

·        Over the 2022-23 Budget and Forward Estimates period, the compound annual growth in expenses is 0.5 per cent. This reflects the high levels of fixed‑term expenditure in response to the COVID-19 pandemic in 2022-23 which tapers down over the Forward Estimates.

·        Over the period of the 2020-21 actual to the end of the Forward Estimates (2025‑26), revenue growth is expected to be 4.2 per cent. This represents a slight improvement compared to the 2021‑22 Budget.

·        Chart 3.1 shows General Government revenue and expense growth over the period of 1999‑00 to 2025‑26. It shows the impact of short‑term expenditure in 2019‑20 to 2021‑22 to support the community, business sector and economy in response to the COVID-19 pandemic, with a return to lower expenditure growth over the Budget and Forward Estimates period.


Table 3.1:         2022‑23 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2022‑23 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 period 2022‑23 to 2024‑25 borrowing and defined benefit superannuation costs as a percentage of General Government cash receipts, will remain below the established maximum of six per cent.

·        However, in the final Forward Estimate year (2025‑26) it is forecast to be 6.3 per cent, which exceeds the benchmark.

·        This forecast reflects the cumulative impacts of the Government’s COVID-19 response and recovery measures, which were targeted to mitigate the social and economic impact of the pandemic.

·        The fiscal impacts of the Government’s COVID-19 response and recovery measures are estimated to be in excess of $1.5 billion. The combined borrowing and defined benefit superannuation costs as a percentage of General Government cash receipts, would be forecast to be 5.8 per cent in 2025-26, below the established maximum of six per cent, if the impact of these COVID-19 costs was removed.

·        Over the 2022‑23 Budget and Forward Estimates period, General Government Net Debt will increase to $5.2 billion in 2025‑26.

 

 

Table 3.1:         2022‑23 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2022‑23 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 3.2 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.

·        The Government reduced the land tax thresholds that applied in 2021-22 by increasing the tax free threshold from $24 999 to $49 999 and increasing the top tax band threshold from $350 000 to $400 000.

·        In its 2022 State of the State Address, the Government announced further changes to land tax rates and thresholds to apply from 1 July 2022:

-    the tax-free threshold will double to $100 000 and the upper tax threshold will increase to $500 000; and

-    the tax rate applying to land valued between $100 000 and $500 000 will reduce from 0.55 per cent to 0.45 per cent.

·        The Government has also announced a number of measures to support sustainable housing outcomes across the State and to encourage businesses to employ young Tasmanians, including:

-    extending the eligible period for the First Home Buyer and Pensioner duty concessions for a further 12 months from 1 July 2022 and increasing the dutiable value cap from $500 000 to $600 000, with the new cap to apply retrospectively from 1 January 2022; and

-    extending the payroll tax rebate scheme for youth employees and for apprentices and trainees for two years from 1 July 2022.

·        The Government has introduced legislation to implement a two per cent Foreign Investor Land Tax Surcharge which will apply to residential land that is not used as a principal place of residence and is acquired by a foreign person on or after 1 July 2022.


 

Table 3.1:         2022‑23 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2022‑23 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.

·        Through support for the implementation of a range of Government priorities and the ongoing provision of vital services to the Tasmanian community, government businesses will continue to provide strong support to the Tasmanian community and returns to Government.

·        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, rail infrastructure improvement, a range of major irrigation projects and the TT-Line vessel replacement.

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

·        The operation of government businesses and the government business governance framework will continue to be monitored and reviewed with a view to improving governance arrangements, the efficiency of government businesses and ensuring that the provision of services is in accordance with the Government’s and community’s expectations. A rolling process of review of government business Ministerial Charters and Statement of Ministerial Expectations has commenced.

·        With the completion of the Independent Review of the Operations of the Public Trustee, Treasury will work with the Department of Justice and the Public Trustee to support the implementation of changes to the business’s operations.


 

Table 3.1:         2022‑23 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2022‑23 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.

·        Over the 2022‑23 Budget and Forward Estimates, the Government will invest nearly $5 billion in community infrastructure. This is in addition to the 2021‑22 Estimated Outcome of approximately $850 million.

·        Infrastructure investment in the General Government Sector exceeds $4.8 billion over the 2022‑23 Budget and Forward Estimates. This investment includes funding for roads and bridges ($2.7 billion); human services and housing ($578.4 million); hospitals and health ($490.4 million); schools, education and skills ($313.7 million); ICT support to service delivery ($297.2 million); law and order ($222.9 million); and tourism, recreation and culture ($205 million).

·        In addition, the Government will provide support through equity contributions for infrastructure investment by Government businesses and Tasmanian Water and Sewerage Corporation Pty Ltd, including: $229 million to Tasmanian Railway Pty Ltd; $202 million to Tasmanian Irrigation Pty Ltd; $100 million to Tasmanian Water and Sewerage Corporation Pty Ltd; and $52 million for Hydro Tasmania.

·        Chart 3.3 shows that, over the 2022‑23 Budget and Forward Estimates, investment in General Government non‑financial assets continues to significantly exceed the value of depreciation. Table 3.3 summarises 2022‑23 Budget and Forward Estimates for Depreciation and Purchases of non‑financial assets.

 


 

Table 3.1:         2022‑23 Budget - Fiscal Strategy Progress (continued)

Strategic Action

2022‑23 Budget Progress

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

·        The Independent Review of the Tasmanian State Service - Final Report was released in July 2021. The Tasmanian Government supports, or supports in principle, all 77 recommendations of the Review. The Government will undertake a reform program across three stages, with all recommendations implemented within five years. More information is available on the Department of Premier and Cabinet’s website: https://www.dpac.tas.gov.au/divisions/policy/ review_of_the_tasmanian_state_service.  

·        The Department of Premier and Cabinet’s 2022‑23 Key Deliverables include initiatives targeted to address recommendations made in the Report.

 


 

Fiscal Strategy Data

Chart 3.1:         General Government Revenues and Expenses, 1999‑00 to 2025‑261

Title: General Government Revenues and Expenses, 1999-00 to 2025-26 - 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. Forecast revenue and expenditure growth are estimated to be relatively in-line from 2023-24.

Note:

1.    This chart is based on actual data for the period 1999-00 to 2020‑21 (excluding the impact of the significant one-off payment for the Mersey Community Hospital of $730.4 million in 2016-17), the 2021‑22 Estimated Outcome and the 2022‑23 Budget and Forward Estimates.

 

Table 3.2:         General Government Borrowing and Defined Benefits Superannuation Costs, 2022‑23 to 2025-26

2022‑23

2023‑24

2024‑25

2025‑26

Forward

Forward

Forward

 

Budget

Estimate

Estimate

Estimate

$m

$m

$m

$m

Superannuation ‑ defined benefit schemes

306.5

310.2

329.4

340.6

Borrowing costs

90.1

138.9

175.2

207.2

Total borrowing and defined benefit scheme costs

396.6

449.1

504.6

547.8

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

4.9%

5.3%

5.9%

6.3%

 

 

 

 

 

 

Chart 3.2:         Ratio of Actual to Assessed Revenue, 2020‑211,2

Title: Ratio of Actual to Assessed Revenue, 2020-21 - Description: The chart shows that Tasmania currently has the second lowest ratio of actual to assessed revenue of all jurisdictions

Source: Commonwealth Grants Commission 2022 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, 2022‑23 to 2025‑26

 

202223 

202324 

202425 

202526

Forward 

Forward 

Forward

 

Budget 

Estimate 

Estimate 

Estimate

$m 

$m 

$m 

$m

Purchases of Non-Financial Assets

1 176.3

1 310.9

1 200.5

910.7

Depreciation

466.4

497.2

517.4

543.8

Surplus

709.9

813.7

683.1

366.9

 

 

 

 

 

 

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

Title: Purchases of Non-Financial Assets in Excess of Depreciation - Description: The chart shows that, over the 2022-23 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.