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Tuesday, 15 August 1972
Page: 61

The Budget Estimates in National Accounts Form

General

The influence of the Commonwealth budget upon trends in the economy may usefully be considered as operating through the effects on incomes and expenditures transmitted by changes in particular types of budget outlays and receipts and through the effects of the budget and its financing upon liquidity in the economy. Moreover, the budget may affect private sector expectations about economic prospects. This statement is devoted primarily to an examination of the first of these transmission mechanisms, although some reference is made to the possible effects of the budget upon private sector expectations. Statement No. 3 presents an examination of the implications of domestic budget transactions for Australian monetary conditions.

The economic effects of particular classes of outlays and receipts differ significantly from one another. On the outlay side, it is particularly important to distinguish between domestic and overseas outlays. This distinction must be made because the immediate effects of overseas outlays are on the balance of payments, f1) while domestic outlays have their substantial effects upon domestic economic activity. There is also an important distinction to be made within domestic outlays between expenditures on goods and services, on the one hand, and transfers and advances from the budget, on the other. This further distinction is important because government expenditures on goods and services add directly to demand within the economy, while the impact on demand of transfers and advances depends upon their effects on the spending of the recipients. (2)

As with outlays, differences exist between the various taxes and charges in terms of their economic effects. These differences pertain both to the magnitude of their effects upon real expenditures and prices and to the time lags between implementation and effect.

There is a further and fundamental distinction, which is of particular significance on the revenue side, to be made when assessing the effects of budgetary measures. This is the distinction between the revenues which would have been collected with unchanged tax rates and charges, and the estimated collections allowing for any changes in rates and charges contained in the budget. Changes in revenues in the former class result from changes in the economy which affect the bases on which taxes are levied. (3) The latter class, however, also includes the effects on revenues of any changes in rates and charges. Changes in revenue of the first kind, of course, exert an influence upon economic activity. However, only changes in revenue arising from changes in rates and charges can be considered as stemming from the independent influence of policy measures upon the economy and as capable of influencing trends in the economy which would otherwise be expected to emerge. In contrast, the existing tax structure is part of the complex of factors producing presently forseen trends and therefore cannot be seen as capable of offsetting them. By convention then, only changes in revenue of the discretionary type are considered as part of the impact of the budget. (') Such payments do not add to domestic incomes and the demand for locally-produced goods and services. Payments within Australia may add indirectly to overseas rather than Australian incomes, because orders met by local suppliers may include an import content. Although il is not possible to make reliable estimates of the import content of Commonwealth expenditure within Australia the proportion would not be large, and it may be assumed that it is unlikely to change markedly between one year and the next. By contrast, direct payments overseas by the Commonwealth may fluctuate widely between one year and another.

The main overseas components are shown separately in Table I on page 9 of the Supplement to the Treasury Information Bulletin, entitled 'National Accounting Estimates of Public Authority Receipts and Expenditure', being published concurrently with the Budget. (*) It is also important to distinguish, in practice, between different types of transfers and advances, because of the differences which may exist between the ways in which the amounts are spent by the various recipients of these budget outlays. (*) For the most pan, movements which would be expected in gross collections of P.A.Y.E. instalment deductions, indirect taxes and the income of public enterprises, at existing rates and charges, fall within this class. Collections of income tax from individuals subject to provisional tax and from companies are also of this type although in these cases past movements are also involved

The distinction made above is blurred somewhat due to changes in " effective " rates of tax which are themselves the product of changing economic trends. In particular, due to the progressive nature of the income tax scale, as income rises the average, or effective, rate of tax will increase. Similarly, since different classes of goods are subject to different rates of sales and excise taxes, changes in the composition of sales will yield changes in the overall effective rates of sales and excise taxes. While changes of this sort therefore involve changes in effective rates of tax they are, again by convention, classified as arising from economic trends rather than policy measures^1) in order fully to evaluate the influence of budget outlays and receipts upon economic conditions, consideration must be given not only to the impact effects of these measures but also to the subsequent economic effects which arise because of the complex interrelationships between different sectors of the economy. The latter effects inevitably require some time to develop , to assess them fully requires consideration of the timing of budget transactions and the time lags associated with the subsequent effects which flow from them. The significantly different impact effects of various categories of outlays and receipts have been referred to above, lt is important to point out that the time required for these subsequent changes to have effect also varies between different categories.

Finally, it might be reiterated that the influence of a particular budget upon the economy and the appropriateness of that influence, can only be evaluated by relating the budget in question to the particular economic context to which it applies.

The presentation of budget outlays and receipts in national accounts form facilitates the analysis of the relationship between the budget and the economy as a whole. The following analysis accordingly utilises budget figures expressed in national accounts form.

PROSPECTS FOR 1972-73

The Effects of Changes in Budget Outlays and Receipts

The 1972-73 Budget has been formulated in the context of an assessment of economic prospects throughout the following twelve months. The budget, however, is only one of many major influences upon economic developments, and any assessment at this point of economic prospects in 1972-73 must be subject to a degree of uncertainty. Unforeseen developments arising either from domestic or overseas influences may result in the need for corrective policy action at some future date. Flexibility in economic policy is, for these reasons, of obvious importance.

Although the economic effects in 1972-73 of the expansionary policy measures announced during the course of 1971-72 will be significant, the latest assessment of economic prospects for this financial year suggests that further stimulus to the economy is warranted - particularly in relation to consumption demand. The magnitude of the desirable stimulus - either through increased outlays or in terms of revenue forgone - depends, of course, upon the expected trends in the economy, relative to the likely availability of resources, in the absence of new policy measures. The total cost to the budget of the policy measures required to produce that stimulus will in turn depend upon the particular measures adopted, because, as already discussed, different outlays and receipts have different economic effects. Accordingly, the cost to the budget of imparting a given stimulus to the economy would be somewhat higher if that stimulus were to be produced through increases in transfers and advances or reductions in taxation than if it were sought through increased expenditure on goods and services. (') It might be noted that revenue estimates may sometimes reflect prospective trends in some particular areas of activity which are not the most desirable from the point of view of economic balance and reasonable price stability but which cannot, in practice, bc corrected fully or quickly by fiscal or monetary means. Should average earnings rise by less than assumed in compiling budget estimates, taxation revenue would for that reason tend to be less than estimated and a larger budget deficit would tend to emerge (although the extent of the increase in the budget deficit would not reflect the full extent of the shortfall in receipts, because some components of expenditure - for example, financial assistance grants to the States - could also be lower than estimated if average earnings rose more slowly than assumed). It would not follow, however, that the budget objective of maintaining an environment conducive to balanced economic growth would be affected adversely by such a development

The magnitude of the direct effects of increases in budget domestic outlays or receipts is, of course, only one of a number of factors which must be considered. For example, a stimulus affecting a particular sector rather than a general impetus to aggregate demand, may be required. As noted above, one area which - on present indications - requires stimulus in 1972-73 is consumption demand. Accordingly, increases in transfer payments - particularly increased pensions - and reduced personal income taxation rates, which may be expected to exert much of their economic impact through increased consumption demand, are features of the 1972-73 Budget.

In the 1972-73 Budget measures relating to National Welfare Fund and repatriation benefits alone are estimated to add over $183 million to domestic outlays while it is estimated that a net $436 million of revenue will be forgone as a result of the taxation measures announced in the Budget Speech.

The following table reflects, inter alia, the effects of the new expenditure measures adopted in the 1972-73 Budget upon the composition of domestic outlays:

COMMONWEALTH BUDGET- DOMESTIC OUTLAYS

(a)   The figures Tor 1971-72 and 1972-73 have been adjusted Tor a number of factors which affect year-to-year comparisons. These include an adjustment for the effects on the figures for 'current expenditure' of an additional public service pay-day in 1971-72. In addition, allowance has been made for the effects of an additional pension pay-day in 1971-72, and an extra twelve-weekly child endowment pay-day in 1972-73, on the figures ibr 'cash benefits to persons'. Finally, an adjustment has been made to the figures for transfers and advances to the States in both years to take account or the effects of the transfer of the pay-roll tax to the States as from I September 1971.

(o)   Consisting of subsidies and grants for private capital purposes.

The relatively rapid increases in estimated cash benefits to persons and transfers and net advances to States as proportions of total domestic outlays in 1972-73 are notable.

The taxation measures proposed in the 1972-73 Budget have been formulated, for the most part, to stimulate private sector spending. This applies particularly to the decisions to increase the minimum taxable income for individuals from $417 to $1,041 per annum, the increase of $52 per annum in the dependants' allowances, and the decision to reduce rates of personal income tax payable by an average of 10 per cent. These and other measures are also intended to benefit the family man and lower and medium income groups.

Review

The Budget is the main vehicle for fiscal policies aimed at demand management and is particularly important, therefore, in relation to short run economic objectives. Budgets, of course, have other and wider objectives and, moreover, even in relation to short run economic objectives, cannot be framed in terms of achieving precise targets. The nature of economic phenomena precludes this. None the less, in the present economic context, in which a degree of tinder-utilisation of resources exists, the objective of stimulating demand assumes relatively greater importance than may be the case at other times.

The new measures announced in the Budget Speech will add significantly to the growth of gross national product in 1972-73. Overall, before adjustment for special factors, domestic outlays are estimated to increase by $1,065 million. This increase arises from a variety of sources, including the rising cost of existing programmes. A significant factor contributing to the increase is the cost of measures adopted during 1971-72, including those decisions announced at the Premiers' Conference and Australian Loan Council Meetings in June. The most important source, however, of increased outlays is the new measures announced in the Budget Speech. The new taxation measures announced in the Budget Speech are estimated to reduce revenue by $436 million.

The effects of these measures on spending cannot be precisely quantified, not least because the effect they have on expectations and business and community psychology makes mechanical calculation vulnerable to error. However, it is clear that the 1972-73 Budget will both add directly and substantially to spending in the economy, and particularly to consumer spending and will also encourage private sector expectations of an increased rate of growth and employment during 1972-73. In this way, the 1972-73 Budget should contribute to an improvement in private sector confidence.

To summarise: the Budget is quite strongly stimulatory. Although the full effects will not be felt immediately, there will be a significant impetus given to spending, particularly to consumer spending, and the economy should resume a strong growth path during 1972-73.

1970-71

1971-72

1972-7.1

Estimate

Outlay - Net expenditure on goods and i Current expenditure - Defence Repatriation

Development of resources and assistance to industry

Civil aviation

Immigration

Law, order and public safety Education Health and welfare Foreign affairs All otherfa)

Capital expendilure(A)Public enterprises - Houses and Rats Other .. General and government - Transport Other .

Total net expenditure on goods and services

Transfer payments - Cash benefits to person? Grams to Statestc) Interest paid Transfers overseas Subsidies

Grant; for private capital purposes

Total transfer payments

Total expenditure

Net advances - to States - Works purposes Housing Other to Commonwealth authorities - Post Office S.M.H.E.A. Airlines Other to Oilier Sectors - by War Service Homes Other

Total net advances

Total Outlay .

Receipts- Taxation - Indirect taxestd)

Income taxes on companies

Income taxes on persons - P.A.Y.P..

Other

Estate and gift duties

Other direci faxes, fees, fines, etcU >

Total taxation

Other receipts - Interest, rent and dividends, etc. Gross income of public enterprises Net sales of existing assets(A) . .

Total other receipts

Total Receipts Deficit__ .. $ million

1,069 92 177 43 60 20 57 80 35 343

9 34

76 105

1,771 2,207 576 183 309 37

36b 126 28

247 27 20 46

17 30

2,502 1,444 2.432 743 78 47

800 60

1.976

$ million

1.   13b 108 198 50 51 25 69 95 41 405

40

62 120

2,178

222

$ million

1.244 119 218 55 54 27 82 110 45 451

249

200

2.401

2,055 2,373 616 205 382 43

2,417 2,716 649 234 338 56

5,084

5,674

7,284

8,075

i20

140 47

533 53

270 16 52 37

17 47

S87

375 64

586 58

288 10

(e)   37 52

23 43

907

1.025

8.190

9.101

2,525 1,535 2.88') 876 76 58

2.620 1,564 3,278 926 75 63

7.245

870

385 62

7.959

954

8,115

8,914

75

187

(a)   Includes current expenditure of the Australian Broadcasting Commission. In tables in this series prior to tbe 1971-72 Budget trie Commission was treated as a public enterprise.

(6)   Consisting of fixed capital expenditure on new assets plus increase in stocks less sales of previously rented houses.

(c)   An interest-free capital grant of $200 million in 1970-71, S219 million in 1971-72 and $249 million in 1972-73 under the works programme is included in 'Grants to States'. (/I) Following the transfer of the pay-roll tax to the States, the export incentive scheme will operate in respect of exports in 1971-72 and subsequent years through direct payments from the Commonwealth, not by way of rebates of pay-roll tax. To facilitate year to year comparisons, figures for 'Indirect taxes' have been adjusted to include pay-roll tax collections on a gross basis. 'Subsidies' have been adjusted by corresponding amounts to include rebates of pay-roll tax under the export incentive scheme. («) Includes advance to Australian National Airlines Commission in connexion with revised superannuation arrangements, $25 million. (/) Includes broadcasting and television licence fees paid by private persons. Broadcasting and television licence fees paid by producers are included in 'Indirect taxes'.

(g)   Includes payment by Australian National Airlines Commission in connexion with revised superannuation arrangements, $21 million. tfr) Excludes sales of previously rented houses. See footnote (4) above.







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