Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
BUDGET 1995-1996 : OVERVIEW



Download WordDownload Word

 

     

Budget Estimates

   
 

Summary of Budget Estimates

image

 

 

• The Government will budget for a surplus of $718m in 1995-96; this represents a turnaround in the budget balance of 2.8 percentage points of GDP.

 

- This is the largest budget improvement on record. *

 

• Total outlays in 1995-96 are estimated to decrease by 2.5 per cent in real terms, compared with an increase of 5.4 per cent in 1994-95.

 

- This represents a decline from 26.7 per cent of GDP in 1994-95 to 25.1 per cent in 1995-96.

 

- If outlays stayed at 1994-95 levels (relative to GDP) they would be $7.6 billion higher in 1995-96 than the actual estimates.

 

• Total revenue in 1995-96 is estimated to increase by 8.9 per cent in real terms, compared with 7.9 per cent in 1994-95.

 

• Outlays and revenue measures in this Budget will bring about a tightening of fiscal policy of around $2½ billion in 1995-96 and $4¼ billion in 1996-97.

 

* Records that enable budget balances to be derived on a basis comparable with current estimates date from 1953-54.

 
     

 

     

Trends in Budget Aggregates

   
 

Commonwealth Budget Aggregates 
Per cent of GDP

image

 

 

 

 

• The Government has achieved a budget surplus in 1995-96 through expenditure restraint, increased taxes and the effect of asset sales and capital transactions.

 

• Outlays are expected to continue to decline, as a share of GDP, over the estimates period.

 

- The Government will provide additional funding to priority areas while cutting projected outlays through savings measures.

 

• Revenue is expected to grow in real terms, reflecting a range of measures aimed at restoring the tax base and higher receipts resulting from continuing economic growth.

 

- Revenue is expected to remain stable as a share of GDP over the estimates period.  Australia's tax to GDP ratio remains among the lowest in the OECD.

 

• A budget surplus has been achieved with revenue being almost 2 percentage points of GDP lower than when surplus was achieved in the last cycle.

 
     

 

     

Medium Term Budget Strategy

   
 

Budget Deficit

image

 

 

 

• In last year's Budget the Government maintained its commitment to a medium-term deficit reduction strategy under which the deficit would be reduced to around 1 per cent of GDP by 1996-97.

 

• Since last year's Budget the business cycle has matured while the structural imbalance between national savings and investment has persisted.

 

• The significant acceleration in the Government's fiscal consolidation strategy in this Budget will help redress that imbalance.

 

- The Budget is projected to be in surplus three years earlier than anticipated in last year's Budget.

 

- The superannuation measures announced with the Budget will further boost savings in the medium term.

 

• These enhancements to both public and private saving will help accommodate the expansion in investment necessary to sustain medium-term growth.

 

 
     

 

     

Superannuation to Increase National Saving

   
 

Budget Measure — Net Additions to National Saving

image  

 

 

 

• The measures announced in this Budget will further strengthen the role of superannuation in providing Australians with a higher standard of living in retirement and in boosting national saving.

 

• By the year 2000, most employees will be contributing 3 per cent of their earnings to superannuation under the terms of industrial agreements and awards. 

 

• Additionally, these contributions (and equivalent voluntary contributions by the self employed) will be matched by means-tested government superannuation contributions, paid in lieu of further cuts to personal income tax rates.

 

• The result will be an increase in national saving of around 1 per cent of GDP per annum by 2005, rising to 1.7 per cent of GDP per annum by 2020.  Together, the Government's superannuation policy initiatives since 1983 will contribute to national saving the equivalent of 4 per cent of GDP per annum by 2020.

 
     

 

     

Growth in Superannuation Assets

   
 

Superannuation Fund Assets by Sources of Contributions

image

 

 

 

• The measures announced in this Budget mean that, from the year 2002 (when employer contributions under the Superannuation Guarantee are scheduled to rise to 9 per cent), the equivalent of up to 15 per cent of the earnings of employees will be directed towards their superannuation saving. 

 

• The Government's matching contributions will also give the lower income self employed an important further incentive to increase their superannuation savings.

 

• Superannuation assets are estimated to increase ten fold by 2020, from their present level of $186 billion.

 
     

 

     

Trends in Outlays

   
 

Outlays

image

 

 

 

• There is a tendency for outlays to change as a share of GDP as economic conditions change.  Discretionary decisions by governments can also have a significant effect.

 

• In the late 1980s, a significant part of the reduction in outlays as a percentage of GDP was on account of expenditure restraint by the Government.

 

• In contrast the growth in outlays in the early 1990s reflected both cyclical factors as the economy slowed and spending decisions by the Government aimed at boosting economic growth.

 

• Outlays are projected to decline over the next four years.  This decline will make a substantial contribution to the budget surplus projected for that period.

 

• Outlays as a share of GDP are projected to fall by almost 20 per cent below their peak in 1984-85.

 

 
     

 

 

     

Outlays — Savings Measures

   
 

Effect of Outlays Decisions on the Budget Balance (a)

image

(a) The effect in the year of announcement of policy decisions taken since the previous Budget (excluding asset sales and accelerated loan repayments from the States and Territories, where relevant).

 

 

 

• The Budget demonstrates the Government's commitment to outlays restraint.

 

• For the first time since 1990-91 the effect of outlays decisions on the budget balance is positive, even after excluding the impact of asset sales.

 

• Major measures underlying outlays restraint include:

 

- reforming the indexation arrangements for Commonwealth Own Purpose Outlays and Specific Purpose Payments to the States (saving $2 billion over four years);

 

- reducing the running costs of departments and budget funded statutory bodies to produce savings of $662m over four years;

 

- better targeting child care expenditure to work related care, achieving net savings of $264m over four years; and

 

- new arrangements for pathology services, achieving savings of $224m over four years.

 
     

 

     

Outlays — Major Initiatives

   
 

 
FAMILIES

 

• A range of additional measures costing $93m in 1995-96 and $747m over four years to assist families including:

 

a lump sum Maternity Allowance costing $643m over four years;

 

- an increase in Rent Assistance to low income families with children costing $88m over four years; and

 

an increase in the Guardian Allowance for sole parents costing $117m over three years.

 

BETTER CITIES

 

• An additional $254m in funding over four years for the Better Cities program.

 

JUSTICE

 

• Measures aimed at improving access to justice across the entire legal system (costing $158m over four years) are to be announced by the Prime Minister.

 

 
HEALTH

 

• A range of additional measures aimed at preventative health including: the continuation of the National Cervical Cancer Screening Program ($42m over four years); the introduction of a National Childhood Immunisation Program ($11m in 1995-96); increased health research funding ($58m over four years); and a new Health Australia program aimed at reducing tobacco consumption ($18m over three years).

 

• An additional $204m over four years to improve the health of indigenous people in the areas of primary health care and environmental health.

 

E NVIRONMENT

 

• $252m over four years for environmental initiatives including:

 

- greenhouse, core environmental functions, biodiversity, wetlands, coastal policy, forestry and waste paper recycling programs.

 
     

 

     

Revenue — Major Initiatives

   
 

 

INCO ME TAX

 

• The second round of One Nation personal income tax cuts will be redirected to employees and the self employed through means-tested government superannuation contributions.

 

• The rate of company tax will be increased from 33 per cent to 36 per cent.  This increased rate will apply to companies' 1995-96 income year and subsequent income years.

 

• The Medicare levy is to be increased by 0.1 of a percentage point to 1.5 per cent from 1 July 1995.

 

GOVERNMENT BUSINESS ENTERPRISES

 

• Wholly-owned government business enterprises will face higher benchmark dividend payout ratios.

 

 

WHOLESALE SALES TAX (WST)

 

• The rate of WST on passenger motor vehicles will return immediately to the general sales tax rate (currently 21 per cent) from the 16 per cent rate.

 

• Builders' hardware and certain building materials which are currently exempt from sales tax will be taxable at the 12 per cent WST rate from 1 July 1995.

 

• The sales tax law will be amended to protect the WST base from erosion.

 

CUSTOMS AND EXCISE

 

• The excise (and corresponding customs duty) rate on tobacco products will be increased by 10 per cent from midnight on 9 May 1995.  This increase brings forward and replaces the previously announced 5 per cent increase in tobacco excise scheduled for August 1995.

 
     

 

     

Revenue Measures — Impact on the Budget

   
 

Impact of Revenue Measures on the Budget

image

(a) Includes measures relating to wholesale sales tax, excise, commercial debt forgiveness, trafficking in trust losses and research and development taxation concessions.  Details provided in Budget Statement 4 .

(b) Estimate for 1998-99 includes revenue savings from the redirection of the second round of One Nation personal income tax cuts to the means-tested government superannuation contributions. 

 

 

 

• Revenue measures contribute to the structural tightening of fiscal policy in the Budget.

 

• Tax changes also assist in addressing other government objectives.

 

- Ensuring Medicare levy receipts make a greater contribution to the cost of government health programs.

 

- Supporting health policy on smoking through an increase in tobacco excise.

 

- Protection of taxation revenue through a number of reform measures.

 

• The Bank Licence and Supervision Fee will add to Reserve Bank profits and thereby contribute to budget revenues.

 
     

 

     

Public Sector Financing

   
 

Public Sector Financing

image

image

Commonwealth General Government Net Debt

image

 

 

• The total public sector — comprised of Commonwealth, State and local governments, including public trading enterprises (PTEs) — is expected to become a net lender in 1996-97.

 

- This turnaround is due almost entirely to the achievement of Commonwealth budget surplus.

 

• The total net public sector financing position is expected to further consolidate over the three years beyond 1995-96, as the structural measures in the Budget have their full effect, and as the economy continues to grow strongly.

 

• The Commonwealth public sector is expected to be a net lender in 1996-97.

 

• The result will be a continuing fall in Commonwealth net debt as a proportion of GDP.

 

• Net public borrowings by the State/local sector are expected to continue to decline in underlying terms on the basis of existing policies.

 
     

 

     

International Comparisons (a)

   
 

General Government Budget Balances (b)

image  
OECD Government Debt Levels - 1995 
Per cent of GDP

image

 

 

 

• Australia's fiscal consolidation program and debt levels compare favourably with those of other OECD countries.

 

- High levels of debt left many OECD countries with reduced scope to use fiscal policy during the recession of the early 1990s.

 

- By contrast, Australia's fiscal consolidation through the mid-1980s gave us the capacity to responsibly use stimulatory fiscal policy during the recession, dampening the impact of the downturn.

 

• This Budget and the on-going fiscal consolidation program will ensure that Australia's government debt remains among the lowest in the OECD and that the Government retains the scope for fiscal flexibility.

 

 

(a) All data are for the general government sector (ie the aggregate of all levels of government including the social security sector but excluding public trading enterprises).  The OECD is the Organisation for Economic Co-operation and Development .  Its membership consists of the industrialised countries of Europe and North America, Japan, Australia and New Zealand. However, the data here relate to 19 member countries.

(b) All data for 1983 to 1992 are outcomes.  For 1993, the Australian figure is an outcome and the OECD data include estimates.  All data for 1994 and 1995 are estimates.  All data for 1996 to 1998 are projections.

 
     

 

     

1994-95 Economic Overview

   
 

Gross Domestic Product (A) (a)

image

(a) GDP(A) represents output measured by the average of the expenditure, income and production measures of Gross Domestic Product.

 

• The Australian economy grew strongly in 1994 before slowing later in the year and into 1995.

 

- A severe drought reduced farm production.

 

• Australia was one of the fastest growing economies in the OECD in 1994-95.

 

• Growth in consumer spending was very high and investment in plant and equipment grew at record levels.

 

• The housing cycle peaked, following three years of strong growth.

 

• Employment increased rapidly and the unemployment rate fell to its lowest level since February 1991.

 

• The current account deficit increased as imports rose in line with strong demand growth, the drought reduced rural exports and growth in other exports eased.

 

• Despite strong demand, underlying inflation remained low with strong growth in productivity and moderate wage rises.

 
     

 

     

World Growth Continues

   
 

Growth in Australia's Major Trading Partners (MTP) (a)

image

(a) Ranked on an export basis, Australia's OECD major trading partners include Japan, United States, New Zealand, United Kingdom, Germany, Canada, Italy and France, and East Asian major trading partners are Korea, Singapore, Chinese Taipei, Hong Kong, the People's Republic of China, Indonesia, Malaysia, Thailand and the Philippines.

(b) 1994-95 and 1995-96 are Treasury forecasts.

 

 

 

• Growth in Australia's major trading partners improved in 1994-95.

 

• Growth in our major trading partners is expected to be around 4½ per cent in 1994-95 with stronger activity in our OECD trading partners and continued strong growth in our East Asian trading partners.

 

- The United States continues to grow strongly and while growth in Europe has strengthened, the timing of the recovery in Japan remains uncertain.

 

• Growth is expected to ease slightly in 1995-96 but remain strong as activity in both our East Asian and OECD major trading partners slows a little.

 

- Japan's recovery is not expected to consolidate until 1996 and the United States is expected to slow.

 

 
     

 

     

Acceleration in Domestic Demand in 1994-95

   
 

Contribution to Quarterly GDP(A) Growth by:

Private Consumption Business Investment

image   image

Dwelling Investment Net Exports

image   image

 

 

• Consumer spending grew strongly as rising employment and moderate wage growth increased household income.

 

• Business investment strengthened from the September quarter 1992, with most growth coming from expenditure on plant and equipment.

 

• The housing cycle peaked during 1994 and is expected to decline toward more normal levels in 1995.

 

• Public sector expenditure made a strong contribution to growth in 1994-95, especially because of high investment expenditure.

 

• Businesses increased stocks because of strong sales.

 

• Net exports* fell. Strong domestic demand boosted imports. Export growth slowed, in part due to the drought.

 

* The volume of exports minus the volume of imports.

 
     

 

     

A Strong Recovery in Business Investment

   
 

Investment as a Proportion of Output

image

Investment and Capacity Utilisation

image

(a) Treasury estimate.

(b) The net balance of respondents is the percentage of firms operating at above normal less the percentage operating at below normal capacity utilisation.

 

 

• Business investment accelerated in 1994 and should continue to grow strongly over the remainder of 1994-95.

 

- The recovery in investment occurred earlier than previously thought, with business investment in 1992-93 and 1993-94 revised up by a total of around $6.2 billion since the last Budget.

 

• Investment in plant and equipment is particularly strong, while investment in buildings remains constrained by oversupply of offices.

 

• The factors boosting investment in 1994-95 were:

 

- continuing strong growth in profits that allowed businesses to reduce debt and finance investment;

 

- a rise in capacity utilisation* to above the level of the 1980s, as demand strengthened; and

 

- record levels of business confidence during 1994.

 

* This is a measure of the extent to which plant and equipment is being utilised.

 

(c) This excludes second-hand asset sales and large imported investment items, eg satellites.

(d) Average capacity utilisation over the 1980s, ACCI/Westpac measure.

 
     

 

     

Housing Cycle Peaks

   
 

Housing Affordability and Commencements

image

Commencements and Underlying Demand (b)

image

(a) Seasonally adjusted.

(b) Data for underlying demand from the Indicative Planning Council for the Housing Industry.

(c) Treasury estimate of commencements.

 

 

• The long upturn in the housing cycle has now peaked.

 

-   Housing commencements fell in the December quarter 1994 following earlier falls in approvals for finance and building.

 

- Housing construction increased very rapidly in recent years due to high affordability. Excess demand has now been eliminated and construction is returning towards underlying demand*.

 

- Housing affordability remains high, despite falling recently as a result of rises in mortgage interest rates.

 

• Housing commencements should continue to decline through the remainder of 1994-95.

 

* Broadly, underlying demand is equal to the number of new households formed each year.

 
     

 

     

Drought Reduces Growth

   
 

Farm Production by Sector

image

Farm Income

image

(a) Treasury estimates.

 

 

• Severe drought affected most of eastern Australia during 1994-95.

 

-   Farm production fell, with the size of Australia's grain crops being approximately halved.

 

- The decline in farm production lowered GDP growth in 1994-95 by about ¾ of a percentage point.

 

• The sharp fall in production has been partly offset by rising world prices for Australia's rural commodities.

 

-   Prices for wool, grains, sugar and cotton have increased, but prices for meat have generally fallen.

 

• While aggregate farm income declined, it remained higher than in the droughts of 1982-83 and the early 1990s.

 

• Lower rural production led to a fall in rural export volumes and was an important factor in the increase in the current account deficit.

 
     

 

     

Employment Grows Strongly and Unemployment Falls

   
 

Employment Level and Unemployment Rate Full-time and Part-time Employment

image   image

ABS Job Vacancies Productivity and Employment Growth

image   image

(a) On corresponding quarter of previous year.

(b) GDP(P) in the non-farm market sector at average 1989-90 prices per hour worked.

 

 

• Employment growth has been rapid due to strong growth in domestic output and moderate wage increases.

 

- Employment has risen by around 550 000* since April 1993 and the unemployment rate has fallen markedly, despite a rise in the participation rate** from late 1994.

 

- Part-time employment has grown at a faster rate than full-time employment although the number of jobs created is similar.

 

• The number of job vacancies remains high despite falling slightly in early 1995.

 

• Productivity growth remains high as output has grown faster than employment.

 

* Seasonally adjusted.

** The proportion of the working-age population either employed or actively looking for work.

 
     

 

     

Underlying Inflation Remains Low

   
 

Underlying and Headline Inflation

image

Wages and Productivity

image

(a) Wages are seasonally adjusted non-farm wages, salaries and supplements (national accounts basis) divided by the number of non-farm wage and salary earners.

(b) GDP(P) in the non-farm market sector at average 1989-90 prices per hour worked.

 

 

• Underlying inflation* has been below 2½ per cent for almost three years.

 

• Despite strong demand growth, underlying inflation has remained low due to:

 

- strong productivity growth and moderate wage increases; and

 

- strong competition between businesses.

 

• The Government and the Reserve Bank are committed to keeping underlying inflation around 2 to 3 per cent on average over the course of the economic cycle.

 

• Headline inflation** increased as mortgage interest and consumer credit charges rose.

 

* Treasury's estimate of underlying inflation excludes from the Consumer Price Index (CPI) those items affected by government policy, seasonal factors or temporary volatility.

** The headline inflation rate is the All Groups CPI, adjusted to remove the effect of the introduction of Medicare in 1984.

 
     

 

     

Monetary Policy Tightened to Maintain Low Inflation

   
 

Short- and Long-Term Interest Rates

image

Competitiveness (a)

image

(a) An improvement in competitiveness is represented by a fall in the competitiveness index.

 

 

• The Reserve Bank increased official short-term interest rates on three occasions over the second half of 1994, consistent with the commitment to keep inflation low.

 

• The timely adjustment to interest rates took into account the lags in the impact of such adjustments on the economy.

 

- Operating monetary policy in a forward-looking way, and the tightening of fiscal policy delivered in this Budget, should constrain interest rates to well below the levels of previous cycles.

 

• Low inflation has helped Australia's international competitiveness* rise by 18 per cent since the September quarter 1990.

 

* This is a country's ability to produce goods and services at prices which are competitive in international markets.

 
     

 

     

Current Account Deficit

   
 

Balance on Current Account and Main Components

image

Australia's Net Foreign Debt

image

(a) Treasury estimates.

 

 

• The current account deficit increased in 1994-95 because of:

 

- strong growth in imports of consumer goods and capital equipment as domestic demand, particularly investment, rose rapidly;

 

-  a decline in rural export volumes due to the drought;

 

- non-rural export growth easing, as lower prices partly offset an increase in the amount of exports; and

 

- rising profits due to overseas investors.

 

• Australia's terms of trade* rose in 1994-95 as the price of commodities increased.

 

• Net foreign debt (as a share of GDP) has fallen since September 1993.

 

• The debt servicing ratio** remained about half the peak June 1990 level.

 

* The ratio of export prices to import prices.

** The ratio of interest payments on net external debt to exports.

 
     

 

     

Strong Growth in Most States

   
 

Growth in Output

image   image

Growth in Employment

image   image

 

 

 

• The economic performance of the States generally improved in 1994-95.

 

• Western Australia and Queensland continued to grow very strongly.

 

- Strong employment growth gave Western Australia the lowest unemployment rate among the States.

 

• New South Wales and Victoria grew steadily, with a marked decline in Victoria's unemployment rate.

 

• Both activity and labour market conditions remain weak in South Australia and Tasmania.

 
     

 

     

Policy Challenge — Lifting Australia's Productive Capacity

   
 

Growth in the Capital Stock (a)

image

(a) Public and private capital stock.

(b) 1993-94 and 1994-95 are Treasury estimates.

 

 

• To achieve continued strong growth with low inflation in coming years, Australia must increase its capacity to produce goods and services.

 

• Productive capacity can be expanded by:

 

- ongoing high levels of investment to expand the capital stock;

 

- raising productivity by making better use of existing capital

 

: through reforms such as the National Competition Policy package; and

 

- reducing unemployment as much as possible through

 

: more flexible wage bargaining arrangements; and

 

: helping the unemployed to improve their skills and find work and raising the skills of all workers — this is the aim of the Working Nation initiatives.

 
     

 

     

Policy Challenge — Increasing National Saving

   
 

National, Private and Public Saving

image

(a) Treasury estimate.

 

• National saving must rise so that the investment needed to expand Australia's productive capacity can increase without excessive foreign borrowing.

 

• National saving has been falling as a proportion of income since the mid-1970s.

 

-   Public saving has fallen, particularly over the mid-1970s to early 1980s.

 

-   Private saving (which includes household and company saving) declined over the 1980s.

 

• Policies are in place to raise national saving.

 

- Public saving will be increased by the Government's fiscal consolidation program which is accelerated and strengthened in this Budget.

 

- Household saving will be bolstered by policies in this Budget to increase employee superannuation contributions and to introduce government superannuation contributions in place of tax cuts.

 

: This will add to the effect of the Superannuation Guarantee arrangements.

 
     

 

     

Economic Outlook — 1995-96

   
 

Gross Domestic Product (A)

image

Unemployment Rate

image

 

Underlying Inflation

image

Current Account Deficit

image

 

 

• Economic activity will remain strong in 1995-96, although domestic demand will slow from the rapid growth of early 1994-95.

 

• The tightening of monetary policy in 1994 and the faster progress in reducing the budget deficit will return demand growth to more sustainable levels.

 

• Although underlying inflation will increase it will remain consistent with the objective of keeping it around 2 to 3 per cent on average over the cycle.

 

• Strong growth will continue to reduce the unemployment rate.

 

• The current account deficit will fall as a proportion of GDP.

 

- Import demand will ease and export growth accelerate but income payments overseas will rise.

 
     

 

     

Composition of Growth in 1995-96

   
 

Contributions to GDP(A) Growth

Year-Average Growth

image

(a) Real estate transfer expenses and the difference between GDP(E) and GDP(A).

 

 

 

• Growth in most components of domestic demand will ease from the rapid rates experienced during 1994-95.

 

• Private consumption will slow as households begin to rebuild savings.

 

• Business investment growth will remain strong, continuing the rebuilding of the capital stock required for sustained growth.

 

• The downturn in housing activity is expected to continue.

 

• Public investment will remain strong while public consumption expenditure will slow, reflecting the fiscal consolidation programs of the Commonwealth and the States.

 

• The rebound in the farm sector will contribute to growth in farm stocks and exports.

 

• Net exports will contribute to growth, as import demand eases, rural exports recover and strong world demand boosts non-rural exports.

 
     

 

     

Detailed Forecasts

   
 

image