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Budget Strategy and Outlook Budget Paper No. 1 2021-22

Circulated by

The Honourable Josh Frydenberg MP Treasurer of the Commonwealth of Australia

and

Senator the Hon Simon Birmingham Minister for Finance of the Commonwealth of Australia

For the information of honourable members on the occasion of the Budget 2021-22

11 May 2021

© Commonwealth of Australia 2021

ISSN 0728 7194 (print); 1326 4133 (online)

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Notes

(a) The following definitions are used in this Budget Paper:

- ‘real’ means adjusted for the effect of inflation;

- real growth in expenses and payments is calculated using the Consumer Price Index (CPI) as the deflator;

- the Budget year refers to 2021-22, while the forward years refer to 2022-23, 2023-24 and 2024-25; and

- one billion is equal to one thousand million.

(b) Figures in tables and generally in the text have been rounded. Discrepancies in tables between totals and sums of components are due to rounding:

- estimates under $100,000 are rounded to the nearest thousand;

- estimates $100,000 and over are generally rounded to the nearest tenth of a million;

- estimates midway between rounding points are rounded up; and

- the percentage changes in statistical tables are calculated using unrounded data.

(c) For the budget balance, a negative sign indicates a deficit while no sign indicates a surplus.

(d) The following notations are used:

- nil

na not applicable (unless otherwise specified)

$m millions of dollars

$b billions of dollars

nfp not for publication

(e) estimates (unless otherwise specified)

(p) projections (unless otherwise specified)

NEC/nec not elsewhere classified

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(e) The Australian Capital Territory and the Northern Territory are referred to as ‘the territories’. References to the ‘states’ or ‘each state’ include the territories. The following abbreviations are used for the names of the states, where appropriate:

NSW New South Wales

VIC Victoria

QLD Queensland

WA Western Australia

SA South Australia

TAS Tasmania

ACT Australian Capital Territory

NT Northern Territory

(f) In this paper the term ‘Commonwealth’ refers to the Commonwealth of Australia. The term is used when referring to the legal entity of the Commonwealth of Australia.

The term ‘Australian Government’ is used when referring to the Government and the decisions and activities made by the Government on behalf of the Commonwealth of Australia.

Budget Paper No. 1, Budget Strategy and Outlook 2021-22, is one of a series of Budget Papers that provides information to supplement the Budget Speech. A full list of the series is printed on the inside cover of this paper.

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Contents

Statement 1: Budget Overview ...................................................................... 5

Introduction ...................................................................................................................... 5

Economic Outlook ........................................................................................................... 8

Fiscal Strategy and Outlook ............................................................................................ 9

Budget Priorities ............................................................................................................ 11

Statement 2: Economic Outlook .................................................................. 33

Overview ....................................................................................................................... 33

Outlook for the international economy .......................................................................... 38

Outlook for the domestic economy ................................................................................ 44

Medium-term projections ............................................................................................... 65

Statement 3: Fiscal Strategy and Outlook .................................................. 71

Overview ....................................................................................................................... 71

Economic and Fiscal Strategy ....................................................................................... 72

Fiscal outlook — forward estimates .............................................................................. 75

The Government’s balance sheet ................................................................................. 90

Medium-term fiscal projections ..................................................................................... 94

Statement 4: The labour market through COVID-19 ................................. 107

The impact of COVID-19 ............................................................................................. 107

The policy response .................................................................................................... 110

The labour market recovery and JobKeeper transitions ............................................. 113

Supporting the recovery .............................................................................................. 119

Statement 5: Revenue ................................................................................ 129

Overview ..................................................................................................................... 129

Variations in receipts estimates .................................................................................. 137

Variations in revenue estimates .................................................................................. 149

Appendix A: Tax Benchmarks and Variations Statement ........................................... 152

Statement 6: Expenses and Net Capital Investment ................................ 159

Overview ..................................................................................................................... 159

Estimated expenses by function ................................................................................. 161

General government sector expenses ........................................................................ 165

General government net capital investment ............................................................... 194

Appendix A: Expense by Function and Sub-Function................................................. 198

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Statement 7: Debt Statement ..................................................................... 203

Overview ..................................................................................................................... 203

Australian Government Securities issuance ............................................................... 203

Estimates and projections of key debt aggregates ..................................................... 205

Estimates of AGS on issue ......................................................................................... 205

Non-resident holdings of AGS on issue ...................................................................... 213

Estimates and projections of net debt ......................................................................... 214

Interest on AGS ........................................................................................................... 216

Climate spending......................................................................................................... 219

Statement 8: Forecasting Performance and Sensitivity Analysis ........... 223 Overview ..................................................................................................................... 223

Assessing historical forecasting performance ............................................................. 224

Assessing current forecasts through confidence interval analysis ............................. 231 Assessing current forecasts through sensitivity analysis ............................................ 236

Statement 9: Statement of Risks ............................................................... 249

Risks to the Budget — Overview ................................................................................ 249

Agriculture, Water and the Environment ..................................................................... 258

Attorney-General’s ...................................................................................................... 259

Defence ....................................................................................................................... 260

Education Skills and Employment ............................................................................... 262

Finance ........................................................................................................................ 263

Foreign Affairs and Trade ........................................................................................... 267

Health ......................................................................................................................... 269

Home Affairs ................................................................................................................ 272

Industry, Science, Energy and Resources .................................................................. 274

Infrastructure, Transport, Regional Development and Communications .................... 279 Prime Minister and Cabinet ......................................................................................... 284

Treasury ...................................................................................................................... 285

Veterans’ Affairs .......................................................................................................... 291

Government loans ....................................................................................................... 292

Loan Items ................................................................................................................... 296

Statement 10: Australian Government Budget Financial Statements .................................................................................................. 309

Notes to the general government sector financial statements ...................................... 324

Appendix A: Financial reporting standards and budget concepts ............................... 339 AASB 1049 Conceptual framework............................................................................. 339

Appendix B: Assets and Liabilities .............................................................................. 347

The Australian Government’s major assets and liabilities .......................................... 347

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Statement 11: Historical Australian Government Data ............................ 355 Data sources ............................................................................................................... 355

Comparability of data across years ............................................................................. 355

Revisions to previously published data ....................................................................... 357

Statement 1: Budget Overview | Page 1

Statement 1: Budget Overview

This Budget sets out the next stage in the Government’s economic plan to get Australia through COVID-19. It secures Australia’s recovery by creating jobs, guaranteeing the essential services and building a more secure and resilient Australia.

It builds on Australia’s successful management of the pandemic which was supported by an unprecedented $311 billion in health and economic support.

As a result the economy is recovering strongly from its first recession in almost 30 years, growing at its fastest pace on record over the latter half of last year and outperforming all major advanced economies in 2020. Labour market outcomes have surpassed even the most optimistic of expectations with employment levels having more than fully recovered the job losses seen through the pandemic to reach record highs.

The virus continues to present an ongoing threat to the global and domestic economy, therefore it is critical that fiscal support continues to be provided to secure the recovery. As emergency COVID-19 support concludes, the next stage of the Government’s plan to secure Australia’s economic recovery is focused on the transition to sustainable private sector-led growth to create jobs and drive unemployment down to pre-pandemic levels or lower. The unemployment rate is forecast to fall to 4¾ per cent by mid-2023. This would mark the first sustained period of unemployment below 5 per cent since before the Global Financial Crisis and only the second time since the early 1970s.

The stronger-than-expected economic recovery has improved the budget position. The underlying cash balance is now expected to be a deficit of $161.0 billion in 2020-21, compared with $213.7 billion at the 2020-21 Budget and $106.6 billion in 2021-22. The budget position is expected to improve over the forward estimates to an expected deficit of $57.0 billion in 2024-25. Net debt is now expected to peak as a share of GDP at 40.9 per cent, compared with the 43.8 per cent peak projected at the 2020-21 Budget.

To protect Australians from COVID-19 and facilitate the re-opening of the economy, the Government is:

• investing $1.9 billion through the COVID-19 Vaccination Strategy

• providing $1.5 billion to extend a range of COVID-19 health response measures.

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To secure the economic recovery, the Government is continuing to provide support to Australian households and businesses to drive the unemployment rate down. Key measures include:

• $7.8 billion to extend tax relief to around 10.2 million low- and middle-income earners

• $20.7 billion in tax relief through extending temporary full expensing and temporary loss carry-back

• $15.2 billion in new commitments to infrastructure projects across Australia.

The Government is building skills for the future and encouraging more Australians to participate in the labour market. Investments are being made to support a dynamic and flexible economy, including by laying the foundations for Australia to be a leading digital economy and introducing a patent box for medical and biotechnology innovations. Major initiatives include:

• $2.7 billion to extend the Boosting Apprenticeship Commencements wage subsidy

• $1.7 billion to support an increased Child Care Subsidy for families with second and subsequent children aged five years and under

• $1.2 billion to implement a comprehensive Digital Economy Strategy.

The Government is taking comprehensive action to guarantee the provision of high-quality and sustainable services and support our community’s most vulnerable, including:

• $17.7 billion to transform the aged care system to ensure older Australians are treated with respect, care and dignity

• $2.3 billion for mental health and suicide prevention services to deliver accessible, compassionate and coordinated care

• an additional $13.2 billion for the National Disability Insurance Scheme.

The Budget delivers programs to improve women’s safety, economic security, health and wellbeing, committing more than $3.4 billion to support women.

The Government is investing to support Australia’s economic resilience, including by shoring up Australia’s fuel security. This Budget improves Australia’s disaster resilience and provides $537.6 million to strengthen our regions and $486.3 million to protect our environment in addition to $1.6 billion to fund clean energy technology.

The Government’s plan will secure Australia’s economic recovery by prioritising economic growth and job creation, and ensure that Australian households and businesses emerge stronger on the other side of the pandemic.

Statement 1: Budget Overview | Page 3

Contents

Introduction .................................................................................................... 5

Economic Outlook .......................................................................................... 8

Fiscal Strategy and Outlook .......................................................................... 9

Budget Priorities .......................................................................................... 11

Getting Australians through COVID-19 ......................................................................... 13

Setting Australia up for the future .................................................................................. 15

Guaranteeing the essential services ............................................................................. 21

Building a more resilient and secure Australia .............................................................. 25

Statement 1: Budget Overview | Page 5

Statement 1: Budget Overview

Introduction

This Budget sets out the next stage in the Government’s plan to get Australia through the COVID-19 pandemic, secure the economic recovery and set the nation up for the future. It is a plan to protect the health of Australians, create more jobs and guarantee the essential services.

The Government’s priority remains to save lives by continuing to suppress COVID-19 and rollout the vaccine to support the further re-opening of the economy. The Government will secure the economic recovery by taking further action to support private sector-led growth and drive down the unemployment rate. Economic support announced as part of the emergency response in 2020 is still flowing to households and businesses. This, together with further targeted support in this Budget and the ongoing rollout of the vaccine, underpins a positive outlook for the Australian economy.

The Australian economy has displayed remarkable resilience in the face of the COVID-19 pandemic. The economy is recovering strongly from its first recession in almost 30 years, growing at its fastest pace on record over the latter half of last year and outperforming all major advanced economies in 2020. Labour market outcomes have surpassed even the most optimistic of expectations. With close to one million jobs added to the economy since May 2020, employment levels have more than recovered the losses seen through the pandemic to reach record highs. The peak in the unemployment rate is now expected to have passed and labour force participation has increased to a record high.

The outlook for the Australian economy has strengthened and output is now expected to have already exceeded its pre-pandemic level in the March quarter of 2021, nine months earlier than forecast last Budget. Ongoing momentum, the rollout of the vaccine and continued fiscal policy support, including new initiatives announced as part of this Budget, are expected to drive robust growth over the forecast period. The conclusion of the JobKeeper Payment is not expected to interrupt the recovery in the labour market, nor hinder growth in the broader economy. Continued steady growth is forecast for employment, along with further declines in the unemployment rate, which is forecast to fall below 5 per cent by late 2022 and to reach 4¾ per cent in the June quarter of 2023. This would mark the first time that Australia has seen a sustained period of unemployment below 5 per cent since the years leading up to the Global Financial Crisis and only the second time since the early 1970’s.

Overall, the outlook remains positive, though considerable risks remain. Australia’s success in containing the health crisis to date has underpinned the economic recovery, but continued growth will rely on the effective containment of any COVID-19 outbreaks in Australia, including those that may arise from any new strains of the virus.

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Experiences in other countries, particularly India, demonstrate the significant health-related risks that are ongoing.

The faster-than-expected economic recovery and improved economic outlook is driving a large upgrade to forecast tax receipts. This has enabled the Government to make significant investments in the next stage of its economic plan. This includes reforms to enable individuals and businesses to better capitalise on the opportunities following the pandemic and improve delivery of high-quality and sustainable government services.

The underlying cash balance is now expected to be a deficit of $161.0 billion in 2020-21, a $52.7 billion improvement compared with $213.7 billion at the 2020-21 Budget, predominantly as a result of better-than-expected tax receipts. The underlying cash balance is expected to be a deficit of $106.6 billion in 2021-22 and continue to improve over the forward estimates to a deficit of $57.0 billion in 2024-25, nearly one third the deficit in 2020-21.

The broad-based economic support measures introduced by the Government were critical during the emergency phase of the COVID-19 pandemic to limit the economic cost and longer-term labour scarring from the crisis. As this emergency support concludes, most notably with the end of the JobKeeper Payment, the Government is providing support and incentives to help facilitate the transition to private sector-led growth to create jobs and drive the unemployment rate lower.

The Government is extending tax relief to low- and middle-income earners to benefit hard-working Australians and tax incentives to encourage businesses to invest, grow and create more jobs. Targeted support is being provided for those sectors and regions disproportionately affected by COVID-19’s impacts, including the aviation, tourism, arts and international education sectors.

The Government is setting Australia up for the future and enabling individuals and businesses to get ahead by building skills and supporting job creation to get Australians into work and drive the unemployment rate lower. Investments are also being made to support a dynamic and flexible economy, including by laying the foundations for Australia to be a leading digital economy by 2030.

Comprehensive action is being taken to guarantee high-quality and sustainable services for our community’s most vulnerable. This includes significant further investments in response to Royal Commissions and inquiries that the Government has commissioned in areas of great national importance, including aged care and mental health. The Budget is also investing in the National Disability Insurance Scheme (NDIS).

In this Budget, the Government is delivering programs to improve women’s safety, economic security, and health and wellbeing, including through more affordable

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Statement 1: Budget Overview | Page 7

childcare for growing families and financial support for women who escape family and domestic violence.

The Government is taking action to build Australia’s economic resilience and keep Australian’s safe in an evolving and complex environment, including through strengthening Australia’s national security, defence and law enforcement capabilities. The Government remains committed to building Defence capability and supporting Australia’s sovereign defence industry.

This Budget improves Australia’s disaster resilience by strengthening the nation’s ability to prepare, respond and recover from natural disasters, and invests in regional Australia so it can grow, prosper and be more resilient to future shocks. Further investments are being made to care for the environment, including through a technology-focused approach to reducing emissions, while supporting jobs and strengthening our economy.

Consistent with the first phase of the Economic and Fiscal Strategy, the Government remains focused on driving the unemployment rate down to pre-pandemic levels or lower by supporting private sector-led growth. This recognises that economic growth is essential to maintaining a strong and sustainable fiscal position.

Although remarkable progress has been made in the domestic economic recovery, the virus still presents an ongoing threat to the economic and fiscal outlook. For this reason, the Government will continue to provide significant fiscal support until the economic recovery is secured.

Table 1.1: Budget aggregates Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Total(a)

Underlying cash balance ($b)(b) -85.3 -161.0 -106.6 -99.3 -79.5 -57.0 -342.4

Per cent of GDP -4.3 -7.8 -5.0 -4.6 -3.5 -2.4

Net operating balance ($b) -92.3 -154.5 -92.7 -90.2 -70.2 -55.7 -308.9

Per cent of GDP -4.7 -7.5 -4.3 -4.1 -3.1 -2.3

(a) Total is equal to the sum of amounts from 2021-22 to 2024-25. (b) Excludes net Future Fund earnings before 2020-21.

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Economic Outlook

The recovery in the Australian economy from the COVID-19 recession has continued to surpass expectations, having outperformed every major advanced economy in 2020. Real GDP grew strongly over the latter half of 2020, marking the first time on record when Australia has experienced two consecutive quarters of economic growth above 3 per cent.

Together with the success in managing the spread of the COVID-19 virus, the Government’s significant fiscal policy response has been central to Australia’s economic performance throughout the pandemic. As emergency support concludes, additional assistance focused on supporting private sector activity remains in place to secure the recovery.

The outlook for the Australian economy has strengthened and output is expected to have exceeded its pre-pandemic level in the March quarter of 2021. Following the strong rebound in economic activity, recent record rates of growth are expected to moderate as the economy transitions from the initial reopening phase of the recovery. Nevertheless, ongoing momentum, the rollout of the vaccine and continued fiscal policy support, including new initiatives announced as part of this Budget, are expected to drive strong growth over the forecast period. Real GDP is forecast to grow by 1¼ per cent in 2020-21, by 4¼ per cent in 2021-22 and 2½ per cent in 2022-23. After falling by 2.5 per cent in 2020, real GDP is expected to grow by 5¼ per cent in 2021, and by 2¾ per cent in 2022.

Robust growth over the forecast period is expected to drive continued steady growth in employment and further declines in the unemployment rate, which is forecast to fall below 5 per cent by late 2022, to reach 4¾ per cent in the June quarter of 2023. This would mark the first time that Australia has seen a sustained period of unemployment below 5 per cent since the years leading up to the Global Financial Crisis, and only the second time since the early 1970’s.

The recent strength in key commodity prices, particularly iron ore, has seen a significant resurgence in Australia’s terms of trade and has supported profitability in the mining sector, the benefits of which will flow through to the broader economy. As a result, nominal GDP is expected to grow by 3¾ per cent in 2020-21, by a further 3½ per cent in 2021-22 and by 2 per cent in 2022-23. The global economic recovery is also gathering pace, with stronger-than-expected activity in the December quarter of 2020 for most major trading partners. Further progress on vaccine rollouts in advanced economies, major fiscal policy support and accumulated household savings have all contributed to increased confidence in the global economic outlook. However, the pace of recovery is uneven and significant risks to the global outlook remain, heightened by ongoing outbreaks of COVID-19 in major economies, most notably in India.

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Statement 1: Budget Overview | Page 9

While the outlook is positive, considerable risks remain. The continued economic recovery will rely on the effective containment of COVID-19 outbreaks both here and abroad and will be a key factor in the timing of the reopening of international borders, which could weigh on the outlook for the tourism and education sectors. Internationally, ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports. More broadly, downside risks to the outlook for the global economy from ongoing outbreaks of the virus in major economies, including India, could have implications for Australia’s domestic economy.

Table 1.2: Major economic parameters(a) Outcome Forecasts

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

Real GDP -0.2 1 1/4 4 1/4 2 1/2 2 1/4 2 1/2

Employment -4.2 6 1/2 1 1 1 1/4 1 1/4

Unemployment rate 6.9 5 1/2 5 4 3/4 4 1/2 4 1/2

Consumer price index -0.3 3 1/2 1 3/4 2 1/4 2 1/2 2 1/2

Wage price index 1.8 1 1/4 1 1/2 2 1/4 2 1/2 2 3/4

Nominal GDP 1.7 3 3/4 3 1/2 2 4 3/4 5

(a) Real GDP and Nominal GDP are percentage change on preceding year. The consumer price index, employment, and the wage price index are through-the-year growth to the June quarter. The unemployment rate is the rate for the June quarter.

Source: ABS Australian National Accounts: National Income, Expenditure and Product; Labour Force, Australia; Wage Price Index, Australia; Consumer Price Index, Australia and Treasury.

Fiscal Strategy and Outlook

Australia entered the COVID-19 pandemic from a position of economic and fiscal strength made possible by years of responsible budget management. This enabled the Government to act decisively and provide an unprecedented level of economic support, which protected vulnerable households and businesses, kept as many Australians as possible in work, and avoided labour market scarring.

The economic support and public health response were critical to successfully mitigating the effects of the pandemic and laying the foundations for economic recovery.

The stronger-than-expected economic recovery has improved the fiscal position. The strength in the domestic economic recovery is reflected in higher tax receipts. Across the four years to 2023-24, taxation receipts are expected to have improved by $84.5 billion since the 2020-21 Budget.

The stronger fiscal position has enabled the Government to continue to invest in the next stage of its economic plan.

The underlying cash balance is now expected to be a deficit of $106.6 billion in 2021-22, compared with a deficit of $112.0 billion at the 2020-21 Budget. The budget position is expected to improve over the forward estimates to an expected deficit of $57.0 billion

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in 2024-25. Over the medium term, the underlying cash balance is projected to improve to a deficit of 1.3 per cent of GDP by 2031-32.

Net debt is expected to be 34.2 per cent of GDP at 30 June 2022 and peak at 40.9 per cent of GDP in 2024-25, below the 43.8 per cent peak projected at the 2020-21 Budget. Net debt is then projected to fall over the medium term to 37.0 per cent of GDP at 30 June 2032. Gross debt is expected to be 45.1 per cent of GDP at 30 June 2022, 5.4 per cent lower compared with the 2020-21 Budget, before increasing to 50.0 per cent of GDP at 30 June 2025. Gross debt is projected to stabilise over the medium term at around 51 per cent of GDP.

Australia continues to have a low debt-to-GDP ratio compared to most other advanced economies and our level of debt remains fiscally sustainable. While gross debt has increased significantly since the onset of the pandemic, the cost of servicing that debt is lower in 2021-22 than it was in 2018-19, as a result of historically low interest rates. The Government’s extension and maintenance of the Australian Government Securities yield curve to 30 years has reduced the refinancing risk on the debt portfolio making debt repayments less sensitive to short term movements in yields. Low yields, together with strong economic growth, means the Government can reduce the debt-to-GDP ratio without running a surplus.

The Government remains committed to maintaining momentum in the economic recovery, consistent with its Economic and Fiscal Strategy. Once the economic recovery is secured and the unemployment rate is at pre-pandemic levels or lower, the Government will steadily transition to the medium-term strategy. The medium-term strategy is to grow the economy in order to stabilise and then reduce debt as a share of GDP.

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Statement 1: Budget Overview | Page 11

Budget Priorities

In this Budget, the Government is delivering on its key priorities of:

• Getting Australians through COVID-19 by:

- protecting Australians from COVID-19, including through the COVID-19 Vaccination Strategy

- extending tax relief to low- and middle-income earners to support hard-working Australians

- extending tax incentives to encourage businesses to invest and create more jobs

- providing targeted support for those sectors and regions continuing to be affected by COVID-19.

• Setting Australia up for the future by:

- supporting employment growth and helping Australians secure more and better paying jobs, including through investing in infrastructure, skills and promoting women’s economic security

- implementing reforms to achieve a more dynamic, productive and flexible economy, including through a comprehensive Digital Economy Strategy, introducing a patent box for medical and biotechnology innovations and policies to support global business and talent attraction.

• Guaranteeing high-quality and sustainable services for Australians, including through major investments in fundamental aged care reform, mental health and the NDIS, strengthening the social safety net, and improving women’s safety.

• Building Australia’s resilience, security and defence capability, including through investing in Australia’s regions to grow, prosper and build resilience to drought and disasters, reducing Australia’s emissions while supporting jobs, and supporting Australia’s sovereign defence industry.

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Box 1.1 Women’s Safety, Economic Security, and Health and Wellbeing

The Government is committed to ensuring that Australia is a place where women are able and encouraged to make the choices that are right for them. This means an Australia that does not tolerate violence against women and their children, promotes women’s economic security, and supports women’s health and wellbeing.

The Government has established a new Cabinet Taskforce to lead the work to address these critical issues. The Taskforce is co-chaired by the Prime Minister and the Minister for Women, and supported by the Minister for Women’s Safety, Minister for Women’s Economic Security and Assistant Minister for Women. In this Budget, a Women’s Budget Statement reflects the priority focus on these important issues.

In the 2021-22 Budget, the Government is committing $3.4 billion to improve women’s safety, economic security, and health and wellbeing. Key measures include:

• $1.7 billion for more affordable childcare for growing families

• $164.8 million in financial support for women who escape family and domestic violence

• $129.0 million for increased legal assistance funding enabling women to access justice

• $31.5 million to expand the superannuation guarantee to include employees earning less than $450 per month, particularly benefitting women

• $25.7 million to boost the next generation of women in STEM

• $21.6 million to provide improved maternal, sexual and reproductive health outcomes, including for endometriosis, for women and girls in Australia.

These commitments build on the:

• Government’s response to the Sex Discrimination Commissioner’s Respect@Work Report

• National Plan to Reduce Violence against Women and their Children 2010-2022

• 2018 and 2020 Women’s Economic Security Statements.

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Statement 1: Budget Overview | Page 13

Getting Australians through COVID-19

Since the start of the pandemic, the Government has committed $311 billion in health and direct economic support. This decisive action from the onset of the pandemic has been central to Australia’s world leading health and economic outcomes.

This Budget builds on the significant economic support already flowing through to households and businesses. The Government is extending tax relief to low- and middle-income earners along with tax incentives to encourage businesses to further invest and create more jobs, while providing targeted support for sectors that continue to be affected by the international border closures.

Protecting Australians’ health

The Government is committed to protecting Australians from COVID-19 and facilitating the re-opening of the Australian economy, investing a further $1.9 billion in Australia’s COVID-19 Vaccination Strategy.

There has been extensive investment in a diverse portfolio of COVID-19 vaccines, with the Government committing to access around 170 million doses. The Government continues to work with states and territories to support the delivery of vaccines to all Australians who wish to be vaccinated.

Alongside the roll-out of COVID-19 vaccines, $1.5 billion is being provided in this Budget to extend a range of COVID-19 health response measures. These include COVID-19 testing, expanding general practitioner respiratory clinics and continuing funding for hospital activity under the National Partnership on the COVID-19 Response.

Securing Australia’s economic recovery

Tax relief for low- and middle-income Australians

To increase household disposable income and support the economic recovery, the Government will retain the low and middle income tax offset (LMITO) in 2021-22 to provide $7.8 billion in targeted support to around 10.2 million low- and middle-income earners. The LMITO provides a further tax cut of up to $1,080 for individuals or $2,160 for dual income couples, with the maximum benefit going to individuals with taxable incomes between $48,000 and $90,000. Treasury estimates that extending the LMITO will boost GDP by around $4.5 billion in 2022-23 and will create an additional 20,000 jobs by the end of 2022-23.

The retention of the LMITO is on top of the $25.1 billion in tax cuts flowing to households in 2021-22 that have been announced in previous budgets. The Government’s legislated Personal Income Tax Plan will continue to create a more competitive and efficient tax system. Stage 3 — the final stage of the plan — will abolish the 37 per cent marginal tax rate and reduce the 32.5 per cent marginal tax rate to 30 per cent. In 2024-25, around 95 per cent of taxpayers will face a marginal tax rate of no more than 30 per cent.

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Extending temporary full expensing and temporary loss carry-back

In the 2020-21 Budget, the Government introduced temporary full expensing of depreciable assets for businesses with turnover or statutory and ordinary income below $5 billion.

In this Budget, temporary full expensing will be extended for 12 months until 30 June 2023 to encourage additional investment by allowing projects with longer lead times or that are experiencing COVID-19 related supply chain disruptions to be eligible for full expensing. Eligible businesses will be able to deduct the full cost of eligible assets, including the cost of improvements to existing assets, incurred between 7:30pm (AEDT) on 6 October 2020 and 30 June 2023.

The Government is also extending temporary loss carry-back to the 2022-23 income year. This will allow companies with turnover below $5 billion to recoup tax previously paid on prior year profits, as far back as the 2018-19 income year, using 2022-23 tax losses. This will provide further cash flow support to businesses and encourage investment utilising the extended temporary full expensing measure while it is available.

These measures are estimated to deliver a further $20.7 billion in tax relief to businesses over the forward estimates period. The cost over the medium term is only $5.3 billion, given these measures work by bringing forward tax deductions or the utilisation of losses from future years.

Full expensing and loss carry-back, including the extension, is estimated to boost GDP by around $2.5 billion in 2020-21, $7.5 billion in 2021-22, and $8 billion in 2022-23, and create around 60,000 jobs by the end of 2022-23.

Supporting our worst hit sectors and regions

While Australia’s economic recovery is well underway, COVID-19 continues to have a significant effect on a number of sectors and regions across the country. The Government is committed to supporting workers and industries that continue to need support, including in the aviation, tourism, arts and international education sectors, to ensure these sectors get to the other side of the COVID-19 pandemic. Consistent with the principles that have guided the Government’s response to the pandemic, economic support will be temporary, targeted, proportionate and have a clear exit strategy.

Key initiatives include:

• an additional $1.2 billion targeted support package to the aviation and tourism sectors to maintain essential air services, boost domestic tourism in our regions and protect tourism and aviation jobs. This builds on over $2.7 billion in direct aviation support provided throughout the COVID-19 pandemic

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• the Small and Medium Enterprise (SME) Recovery Loan Scheme, which builds on the SME Guarantee scheme, to support SMEs with a turnover of up to $250 million that were recipients of JobKeeper Payments in the March quarter of 2021, or were affected by the floods in March 2021 and were located or operating in eligible Local Government Areas. By increasing lenders’ ability to provide cheaper credit, the new Scheme allows many otherwise-viable SMEs to access additional funding, thereby helping businesses manage their cash flows and invest for the future

• almost $300 million to support the successful re-opening of Australia’s creative and cultural sector, building on almost $800 million in targeted support provided in response to the COVID-19 pandemic

• $53.6 million to support Australian education providers most reliant on international students. Grants of up to $150,000 will be available for eligible private higher education and English Language Intensive Course for Overseas Students (ELICOS) providers to invest in staff expertise and new teaching solutions. Courses available for domestic students will also be expanded, with the Government supporting an additional 5,000 Commonwealth supported short course places at non-university higher education providers (NUHEPS) in 2021 and extending regulatory fee relief for all international education providers until 31 December 2021.

Setting Australia up for the future

The 2021-22 Budget introduces further measures to build skills for the future, assist vulnerable unemployed Australians to get back into jobs and boost labour market participation.

Building skills for the future

The Government is investing to build the skills that Australia’s economy needs to thrive in a post-COVID-19 world. These measures build on the Government’s successive reforms and investments in the skills sector since 2013-14, which includes $6.4 billion that the Government will invest into the sector in 2021-22. These initiatives will assist those areas and industries that are facing challenges in getting the workers they need.

The Government is investing an additional $500 million to expand the JobTrainer Fund, subject to matched funding by state and territory governments. Extending JobTrainer until 31 December 2022 will deliver a further 163,000 places. It will support 10,000 digital skills training places and 33,800 places for existing and new aged care workers to upskill. The extended JobTrainer Fund will continue to support job seekers, school leavers and young people in areas of genuine need to reskill and upskill.

The Government is investing an additional $2.7 billion to extend and expand the Boosting Apprenticeship Commencements (BAC) wage subsidy. In March 2021, the Government uncapped the BAC and extended the wage subsidy to 12 months. This is expected to benefit an additional 70,000 apprentices and trainees above the original

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100,000 when the measure was announced in last year’s Budget. In this Budget, the Government is extending the BAC to apprentices and trainees who sign up by 31 March 2022. This will support a further 100,000 apprentices and trainees and build a pipeline of skilled workers for Australia’s economic recovery. The funding in this Budget includes 5,000 additional gateway services to women and in-training support services for women commencing in a non-traditional trade occupation.

The Government is introducing a care workforce package, which will reduce red tape for providers and workers while increasing worker mobility and improve quality of care across the aged, disability and veterans care sectors. As part of the package, the Government is providing $12.3 million to improve the alignment of regulation across the sectors, and $105.6 million to align worker screening processes. The package also includes the development of a care sector code of conduct and improvements to the Boosting the Local Care Workforce Program.

Getting Australians into work

The 2021-22 Budget is focused on creating jobs and supporting the unemployed to develop clear pathways into work. The Government is investing in employment programs and training places, with a focus on young people, women returning to work and Indigenous Australians.

Wage subsidies available through jobactive, Transition to Work and ParentsNext will be increased to $10,000 and the Local Jobs Program will be expanded and extended to 51 employment regions. This will bring together employment service providers, local employers and training organisations to meet local labour market needs and provide targeted training.

To support foundational skills, the Government is providing $23.6 million over the forward estimates for the expansion of the Skills for Employment and Education (SEE) program, including uncapping the number of places and removing the requirement that job seekers are receiving income support. The funding will accelerate the introduction of digital skills training and ensure that all job seekers with low levels of language, literacy, numeracy and digital literacy have access to relevant foundational skills training to boost their employment prospects.

The Budget also includes further measures that focus on disadvantaged job seekers and those most impacted by the pandemic. The Government will introduce a new employment services program to replace jobactive from 1 July 2022. The new program will enable job-ready job seekers to self-manage their job search on a digital platform and redirect resources to intensive face-to-face services for the most disadvantaged job seekers. Job seekers in Disability Employment Services will also be able to participate in digital services to find employment from 1 January 2022.

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The Government’s youth specialist employment service, Transition to Work, will receive an additional $481.2 million over the forward estimates while the National Careers Institute (NCI) will receive an additional $19.8 million to expand services to help young people and women make informed decisions about their education and career pathways. The Government is expanding the Career Revive program to 60 additional businesses to attract and retain women returning to work after a career break.

Investing in women’s economic security

The Government is investing in women’s economic outcomes with a $1.9 billion Women’s Economic Security Package. This package includes $1.7 billion over five years for an increased Child Care Subsidy for families with second and subsequent children aged five years and under. Investments for women’s employment and professional development is being provided with a commitment of $42.4 million over seven years to boost the next generation of women in STEM and $38.3 million over five years to expand the Women’s Leadership and Development Program.

The coverage of the superannuation system is being improved by removing the current $450 per month income threshold from 1 July 2022, under which employees do not have to be paid the superannuation guarantee by their employer. This will benefit lower income workers, particularly women.

Increasing participation through lifting incentives to work

Creating the right incentives to work and seek employment will lift workforce participation and help those Australians who are unemployed return to work.

The Government has provided $9.5 billion to enhance the social security safety net by increasing support for unemployed Australians while strengthening their obligations to search for work. From 1 April 2021, the rate of working age payments increased by $50 a fortnight, benefitting 1.9 million Australians. The Government has also increased the income free area to $150 per fortnight for JobSeeker Payment and Youth Allowance (other), allowing recipients of these payments to earn more income before their payment begins to taper.

Alongside the changes to income support payments, the Government is strengthening mutual obligations to provide better support for job seekers in their search for work. As a complementary measure, the Earn and/or Learn initiative will be extended until 30 June 2022, providing job seekers additional flexibility in how they meet their mutual obligations and better equipping them for employment.

Boosting job creation

The Government is building on the substantial packages of support already provided to boost job creation, through major new investments in infrastructure, housing and the engineering construction sector.

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Infrastructure investment

As part of the Government’s record $110 billion 10-year infrastructure pipeline, an additional $15.2 billion over ten years is being committed to road, rail and community infrastructure projects across Australia. These new commitments will support over 30,000 direct and indirect jobs across the lives of the projects.

As part of this package, the Government is committing $2.0 billion to support delivery of the Melbourne Intermodal Terminal. This project will boost productivity by increasing the efficiency and capacity of the national rail freight network and take thousands of trucks off the road.

Additional road and rail commitments across Australia include:

• $2.6 billion for the North-South Corridor — Darlington to Anzac Highway in South Australia

• $2.0 billion for the Great Western Highway Upgrade — Katoomba to Lithgow in New South Wales

• $400.0 million in additional funding for the Bruce Highway in Queensland

• $380.0 million for the Pakenham Roads Upgrade in Victoria

• $237.5 million for the METRONET to support grade separations and the elevation of stations in Western Australia

• $150.0 million for the Northern Territory National Highway Network

• $132.5 million for the Canberra Light Rail — Stage 2A in the Australian Capital Territory

• $113.4 million for the Midland Highway Upgrades in Tasmania.

This package also includes an additional $1 billion to extend the Local Roads and Community Infrastructure Program, further supporting councils in maintaining and upgrading community assets and local roads. The Road Safety Program is also being extended to 2022-23, with additional funding of $1 billion for projects that will improve roads and save lives. This brings the total investment by the Government in these two stimulus programs to $5.5 billion since the start of the COVID-19 pandemic. Funding for projects under these programs is being provided on a ‘use it or lose it’ basis to ensure the projects are delivered efficiently.

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Supporting home ownership

The Government understands the importance of owning your own home and the significant economic and social benefits home ownership provides.

That is why the Government is providing more pathways to home ownership by establishing the Family Home Guarantee to support single parents with dependants (predominantly women) to enter or re-enter the housing market sooner, with a deposit of as little as 2 per cent. In addition, the First Home Loan Deposit Scheme will be temporarily extended by releasing a further 10,000 places under the New Home Guarantee to support first home buyers to build a new dwelling or to purchase a newly constructed dwelling with a deposit of as little as 5 per cent.

To support first home buyers to raise a deposit more quickly, the Government is also amending the First Home Super Saver Scheme to increase the maximum amount of voluntary contributions eligible to be released under the scheme to $50,000 from $30,000.

Finally, the HomeBuilder six-month construction commencement period has been extended to 18 months for all applications. This will smooth out the HomeBuilder construction pipeline and support jobs in the construction sector in 2021 and into 2022.

A flexible and dynamic economy

The Government is ensuring the Australian economy remains flexible, dynamic and competitive, and workers and businesses can capitalise on the opportunities of the future.

By delivering a comprehensive Digital Economy Strategy and investing $1.2 billion in Australia’s digital future, the Government is laying the foundations for Australia to be a leading digital economy and society by 2030. This package takes advantage of the acceleration of digital transformation that has resulted from COVID-19 and builds on previous commitments to support digitalisation through the Digital Business Plan in 2020-21, the Cyber Security Strategy, the NBN upgrade plan and the JobTrainer Fund.

In this Budget, the Government is continuing to implement the Consumer Data Right (CDR) in the banking sector, and accelerating its rollout across the economy, including in the energy and telecommunications sectors. Expansion of the CDR will underpin a data-driven economy, promote innovation and empower consumers to make more informed choices about their services, reducing costs for Australian households and small businesses.

$124.1 million is being provided to further develop Australia’s AI capabilities, including by helping small and medium sized businesses with medium-high digital capability adopt AI. The Government will enhance service delivery by developing and transitioning government services to a new myGov platform, while changes to My Health Record will help support Australia’s world-class healthcare system.

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Unlocking the digital economy means investing in emerging industries that will support highly-skilled job opportunities for a digital workforce. The Government will invest $18.8 million over the forward estimates in the digital games development industry to attract international investment and encourage creative businesses to grow. From 1 July 2022, eligible entities will receive a 30 per cent refundable tax offset, capped at $20 million per year, for qualifying Australian games expenditure.

In addition, the Government is taking action to enhance the competitiveness of Australian businesses and put Australia at the cutting edge of science and innovation through:

• Introducing a patent box to encourage companies to develop and apply their medical and biotechnology innovations in Australia. This incentive will tax corporate profits from Australian developed and patented medical and biotechnology innovations at a concessional 17 per cent effective corporate tax rate. An internationally competitive tax regime for patents will help encourage firms to develop their research and development innovations into profitable businesses in Australia.

• $387.2 million to build one of the world’s largest radio telescopes in Western Australia as part of the Square Kilometre Array (SKA) project, enabling scientific discoveries in astronomy and generating spin-off technologies that can be applied in other fields, such as advanced manufacturing.

In this Budget, the Government is supporting global business and talent attraction. By bringing additional businesses, new technologies and highly skilled professionals to Australia, the Government is ensuring Australia can capitalise on our strong economic position coming out of the COVID-19 pandemic and remain globally competitive.

The Government will make it easier for businesses to offer employee share schemes, to enable more Australians to share in the economic value they create through their hard work and attract the best and brightest from around the world. To encourage global businesses to invest in, and relocate to Australia, the Government will establish a fast track process to provide investors with certainty around the tax implications of large investments, finalise the implementation of the Corporate Collective Investment Vehicle regime, and establish a more efficient licensing regime for foreign financial service providers. Measures will also be implemented to modernise the individual tax residency rules to provide greater certainty and reduce compliance costs for globally mobile individuals and their employers.

The Budget furthers the Government’s Deregulation Agenda with an investment of an additional $134.6 million. The measures in the deregulation package reduce the regulatory burden for businesses interacting with government, make it easier for businesses to get people into jobs, and lay the foundation for future reforms to improve the business environment. They are estimated to generate benefits averaging

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$430 million annually in reduced compliance costs to businesses, individuals and not-for-profits. The Government will improve mutual recognition of occupational licenses, making it easier for around 124,000 Australians to work in multiple states and territories. This has the potential to generate more than $2.4 billion in additional economic activity over the next ten years.

Guaranteeing the essential services

The Government is implementing reforms to guarantee high-quality and sustainable essential services for Australians and support our community’s most vulnerable. These reforms include taking comprehensive action to respond to the Royal Commission into Aged Care Quality and Safety and reports into mental health by the Productivity Commission and the National Suicide Prevention Adviser.

Ensuring high-quality and sustainable aged care services

In response to the Final Report of the Royal Commission into Aged Care Quality and Safety, the Government has committed to record funding with an additional $17.7 billion over five years to transform the aged care system to ensure it delivers high-quality services for older Australians and their families, now and into the future. This will deliver a generational change to aged care.

To enable older Australians to remain at home for longer, this Budget invests $6.5 billion for the release of 80,000 additional Home Care Packages over the next two years. The Aged Care Quality and Safety Commission will receive additional resources to manage compliance and ensure quality care services, and the introduction of new star ratings. Funding of $798.3 million will also support informal carers of older Australians, including through increased access to respite services, and more targeted assistance for carers of people with dementia.

To improve the quality, sustainability and safety of residential aged care, from 2020-21 the Government is investing $7.8 billion to implement a new funding model and increase the Government’s Basic Daily Fee supplement by $10 per resident per day. In introducing the new model, the Government is supporting provider transition and encouraging better care by increasing funding to support an average of 200 minutes of care time per resident per day. From 1 July 2022, residential care providers will be required to report and publish care staffing minutes on the MyAgedCare website.

The Government is providing $630.2 million to improve access to high-quality aged care services for those in regional, rural and remote areas, Aboriginal and Torres Strait Islander people, and special needs groups.

The reforms announced in the Budget include $942.0 million to support older Australians to access safe and quality care, and $652.1 million to skill the aged care workforce for the future. An additional 33,800 training places through JobTrainer will enable existing and new care workers to improve their qualifications.

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Our reforms to aged care will be supported by new governance structures, including a new Aged Care Act that focuses on the needs of older Australians and places high-quality, safe and compassionate care at the centre of the system.

Delivering comprehensive mental health and suicide prevention services

The mental health of Australians is a national priority. The Government is committed to undertaking significant structural reform of the mental health and suicide prevention system to improve the wellbeing of Australians living with mental illness and prevent suicide. The $2.3 billion package in this Budget is a first step to responding to recommendations from the Productivity Commission and the National Suicide Prevention Adviser. With this commitment to Australians’ mental health, the Government is laying the foundations for systemic, whole-of-government reform to deliver preventative, compassionate and effective care.

The Government will invest to improve access to in-person community based, multidisciplinary adult mental health services. This includes $487.2 million to fund a network of specialist Head to Health Adult Mental Health Centres and to establish a central intake and assessment phone service. Additional centres will be opened in partnership with states and territories. For young Australians aged 12 to 25, $278.6 million is being made available to enhance and expand headspace centres across the country. And for children under 12 years the Government will invest $100.8 million to support parents and early intervention, and establish child mental health and wellbeing hubs with the states and territories.

We are also strengthening the broader primary health care system by supporting our general practitioners in their role as a key entry point into the mental health system by expanding and implementing the Initial Assessment and Referral (IAR) tool and providing additional mental health development opportunities and guidance. A further $111.4 million is being provided for Medicare subsidised psychological therapy sessions for patients’ family members and carers, and additional provisions for group therapy sessions under the Better Access Initiative. To ensure more Australians can quickly access appropriate care, $111.2 million is being provided to expand and improve high-quality, low-cost digital mental health services.

To achieve its commitment of working towards zero suicides, the Government is expanding the services available to Australians experiencing suicidal distress and their loved ones. Through a National Agreement with states and territories, the Government will provide $156.8 million to ensure that every Australian discharged from hospital following a suicide attempt is offered at least three months of follow up care. $22.0 million will be provided for postvention support for the family and friends of people who die by suicide. A National Suicide Prevention Office will also be established as a central point of coordination for a national approach.

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These significant reforms will deliver a system that is evidence-based, person-centred, informed by lived experience, acts early to help people before mental health conditions and suicidal distress worsen, and provides the effective, compassionate care Australians deserve.

Supporting people with disability through the NDIS

In the 2021-22 Budget, the Government will provide an additional $13.2 billion over four years, as more people with disability benefit from the scheme. The NDIS currently provides support to around 450,000 Australians with permanent and significant disability and their families and carers, with over 50 per cent of participants receiving services for the first time. The Government is committed to ensuring people with significant and permanent disability receive the funding they need to enable them to participate in the community.

Delivering a strong health care system

Guaranteeing Medicare remains a key pillar of the Government’s Long Term National Health Plan. In 2021-22 the Government will invest $98.3 billion in health spending as part of our ongoing commitment to guaranteeing Medicare for all Australians. The Government is investing a further $3.4 billion to extend important COVID-19 measures to continue our strong response to the pandemic, including $510.8 million to partner with states and territories to support the rollout of the vaccine, $773.2 million for telehealth, pathology testing and access to home medicines.

To modernise the way Medicare supports quality health care, an additional $50.7 million is being invested to progress work on introducing MyGP, one of the first steps in the Government’s 10 Year Primary Health Care Plan, to strengthen the relationship between Australians and their regular GP and facilitating higher quality health care. As part of its commitment to primary health care, the Government is also contributing $80.9 million to provide incentives and opportunities to work and train in rural and regional Australia, support for public dental services, $421.6 million for the Australian Digital Health Agency’s work on My Health Record and $71.9 million for access to after-hours health care.

This Budget provides greater access to diagnostic imaging by creating an $20.7 million funding pool for the purchase of modern diagnostic imaging machines in rural and remote areas.

The Government continues to guarantee affordable access to essential medicines on the Pharmaceutical Benefits Scheme (PBS), investing $878.7 million over five years to reduce out-of-pocket costs for new and amended listings on the PBS, including for Australians living with chronic migraines, eczema and breast cancer.

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Funding for the National Women’s Health Strategy 2020-2030 and the National Action Plan for Endometriosis is continuing through $21.6 million to target improved maternal, sexual and reproductive health outcomes for women.

Enhancing women’s safety

The 2021-22 Budget commits $1.1 billion for improving women’s safety. The Government is committed to ending all forms of violence against women and their children. It is delivering a new long-term, intergenerational National Plan to Reduce Violence against Women and their Children.

As part of the Women’s Safety package, the Government is providing $164.8 million over three years for financial support to help women who escape family and domestic violence. The Government is further contributing $261.4 million to establish a new agreement with the states and territories for frontline family, domestic and sexual violence supports and $129.0 million for increased legal assistance to help women access justice.

The Government is also investing $20.5 million to prevent and address sexual harassment with its response to the Respect@Work Report.

Investing in education

The Government is committing $2.0 billion in ongoing funding for preschools through a four-year Strategic Reform Agreement. This funding will provide certainty for early childhood education providers and support access for all children to at least 15 hours a week of learning in the year before school. The funding as part of this agreement is contingent on the states and territories agreeing to key reforms on participation and school readiness. This new agreement will improve outcomes for vulnerable and disadvantaged cohorts and ensure that all children, regardless of their economic circumstances, are supported to access high-quality early childhood education.

The Government is also continuing to invest record funding in Australian schools as part of its ongoing commitment to education. Recurrent annual funding provided by the Government for schools has increased from $13.8 billion in 2014 to $23.4 billion in 2021. Over the next ten years, the Government has committed $289 billion in total recurrent funding for schools.

To continue to raise the quality of education, the Government will invest $4.0 million to expand the Literacy and Numeracy Test for Initial Teacher Education Students. Improved data is also a vital element of improving educational outcomes. The Government is investing an additional $5.8 million to continue the Australian Teacher Workforce Data collection and $20.0 million to continue and improve the Nationally Consistent Collection of Data on school students with disability.

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Supporting our community

The Government is investing in outcomes for Indigenous Australians through health, aged care, education, infrastructure and women’s safety programs. The Government is setting the foundation for achieving Closing the Gap targets and Priority Reforms, with further targeted measures to be included in the Commonwealth’s Implementation Plan, which will be released mid-year. To support Aboriginal and Torres Strait Islanders’ economic participation, over $227.7 million will be invested to strengthen remote service delivery and develop a targeted employment and skills program.

The Government is making improvements to the veterans’ support system to deliver a simpler, faster and better experience for veterans and their families and to ensure veterans’ health and wellbeing over the long term. The 2021-22 Budget will provide $460.4 million to ensure the Department of Veterans’ Affairs has adequate capacity to meet veteran support needs and enhance its capacity to address veteran suicide, including through faster processing of compensation claims.

The Government will provide $32.1 million to enable the continued delivery of annual international Anzac Day commemorations and domestic commemorative activities to mark important occasions in Australia’s military history, and better care for official war graves.

Enhancing the flexibility of the superannuation system

The Government is giving older Australians more choices to contribute to their retirement savings and cutting red tape to improve the efficiency of the system. The Government will repeal the work test for voluntary non-concessional and salary sacrificed contributions to superannuation and reduce the eligibility age for downsizer contributions to 60 years. A two-year amnesty is also being introduced to enable holders of certain legacy retirement income products to convert to newer, more flexible products.

The flexibility of the Pension Loans Scheme is being improved by providing access to advance payments through allowing participants to access up to 26 fortnights’ worth of top-up payments as a lump sum and introducing a No Negative Equity Guarantee.

Building a more resilient and secure Australia

The Government is making significant investments to support Australia’s economic resilience and to keep Australians safe in an evolving and complex environment. This Budget improves Australia’s disaster resilience by strengthening the nation’s ability to prepare, respond and recover from natural disasters, and invests in regional Australia so it can grow and prosper and build resilience to future economic shocks. Investments are also being made to care for the environment, including to reduce emissions while supporting jobs and strengthening the economy.

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Bolstering our economic resilience

Building on our previous actions that have helped reduce electricity prices by 11.2 per cent in the last year, the Government is continuing to take necessary steps to secure affordable and reliable energy. To help maintain reliable and secure electricity as we transition to a lower emissions future, the Government is providing $49.3 million for battery and microgrid projects and $24.9 million to assist new gas generators become hydrogen ready. In addition, the Government is providing $30 million for early works on Australian Industrial Power’s Port Kembla gas generator project.

To deliver the next steps of the gas-fired recovery and continue unlocking Australia’s gas reserves, the Government is providing a further $74.3 million to help accelerate priority gas supply projects identified in the Interim National Gas Infrastructure Plan and help realise the opportunities in the North Bowen and Galilee Strategic Basins.

The Government is taking decisive action to support local oil refineries as part of its commitment to Australia’s long-term fuel security. This includes the introduction of a production payment to support local refineries and upgrade infrastructure to continue operating in Australia. This follows on from the six-month interim production payment provided in the 2020-21 MYEFO.

The Government is examining supply chain vulnerabilities for critical products, starting with personal protective equipment (PPE), medical products and agricultural production chemicals, which will inform initial investments under the $107.2 million Supply Chain Resilience Initiative. The Government is also establishing an Office of Supply Chain Resilience to monitor vulnerabilities and coordinate whole-of-government responses to improve ongoing access to essential goods.

Enhancing our disaster resilience

The 2021-22 Budget provides funding to implement key elements of the Government’s response to the Royal Commission into National Natural Disaster Arrangements and strengthen the nation’s ability to prepare for, respond to and recover from natural disasters. The Government will provide $615.5 million over six years for the Preparing Australia grants program to support disaster risk reduction activities. As part of the $2 billion National Bushfire Recovery Fund, $280.0 million will be committed to establish a grants program to support the ongoing recovery needs of communities affected by the 2019-20 bushfires.

The Government will provide $61.1 million to establish the new National Recovery and Resilience Agency to drive the reduction of natural disaster risk, enhance natural disaster resilience, and ensure effective relief and recovery from all hazards, and $90.0 million to enhance the operation of Emergency Management Australia to ensure better informed and timely government decision making during emergencies.

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To transform the Commonwealth’s capacity to prepare for extreme events and a changing climate, the Government will invest $209.7 million to establish the Australian Climate Service (ACS). The ACS will provide the intelligence, insights and analysis for Emergency Management Australia and the National Recovery and Resilience Agency to understand and support decisions on climate and disaster risk.

The Government is committed to improving the affordability and availability of insurance for households and small businesses in Northern Australia. The Government therefore intends to establish a reinsurance pool for cyclones and related flooding, backed by a $10 billion Government guarantee, for properties in areas subject to high cyclone risk.

Resilient regions

The Government is providing $537.6 million to support continued growth in regional Australia. Successful and resilient rural and regional economies will be better able to withstand economic shocks and contribute to national economic activity.

Through the Our North, Our Future Next Five Year Plan for Northern Australia, the Government is providing $189.6 million over five years to create jobs and support sustainable economic growth in Northern Australia. The Plan supports initiatives targeted to the needs of the North, including helping businesses grow, investing in areas of regional strength and enhancing digital connectivity.

The Government is providing communities with $250 million under a sixth round of the Building Better Regions Fund. This will create jobs and build stronger regional communities by funding new or upgraded infrastructure and community development activities. The Government is also investing $84.8 million to improve internet and mobile access in regional Australia.

Boosting farm productivity and protecting our agricultural industry

A vibrant and successful rural and regional Australia needs a strong agricultural sector. The Government is therefore helping the industry grow and become more profitable to help reach its goal of $100 billion farm gate output by 2030.

To protect Australian farmers from pest and weed outbreaks, the Government is committing $414.5 million to enhance Australia’s biosecurity, including by:

• enhancing digital capability to better assess risk through advanced diagnostics, modelling and on the ground data collection

• targeting specific biosecurity threats, for example, investment on the front lines to stop African Swine Fever.

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The Government is helping farmers expand and grow their exports, providing $87.7 million to increase market intelligence, agriculture counsellors and technical experts. $29.8 million is being provided to help farmers attract and retain a high-skilled workforce. The Government’s $237.9 million investment in soils will also help increase on-farm profitability and help reduce our carbon emissions.

Drought Proofing Our Future

Under the National Water Grid Fund (NWGF), the Government is providing $3.5 billion to help ensure reliable water supply in regional Australia. From the NWGF, $258 million will establish a new funding pathway for small-scale water infrastructure and fund the development of new dams and irrigation projects, including secure water supply for the Eurobodalla region.

The Government is securing water for river health by investing $1.3 billion in off-farm irrigation infrastructure. Farmers will be better prepared for variable rainfall through the Government’s investment in Murray-Darling Basin water modelling tools. In addition, $23.0 million as part of the $5 billion Future Drought Fund will help farmers manage their soil moisture.

These policies will improve the reliability of Australia’s water supply, support irrigators and allow communities to better manage their water resources.

Caring for the environment

Reducing emissions

Under the Paris Agreement, the Australian Government has committed to reducing emissions by 26 to 28 per cent below 2005 levels by 2030. To support this commitment, the Government is investing $1.6 billion to fund priority clean energy technologies. This represents a practical, technology-focused approach to reducing emissions, while supporting jobs and strengthening our economy.

Australia will play a leading global role by partnering with other nations to accelerate the commercialisation of low emissions technologies. A $1.2 billion Technology Co-Investment Facility will be established to invest in priority technologies and practical project-based international partnerships. This includes $539.2 million for hydrogen and carbon capture use and storage projects that will support Australian industry and create jobs, and $565.8 million to establish international partnerships on practical low emissions projects. The partnerships will leverage Australia’s comparative advantage and help Australian industries take their share of emerging global low emissions markets. The Government is also committing $316.7 million to help industry and businesses reduce their emissions through voluntary action and adopting low emissions technology.

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Oceans leadership

To safeguard the health of our oceans and create jobs in the emerging blue economy, the Government is investing $100.1 million in an Oceans Leadership Package. This includes investments targeting ‘blue carbon’ ecosystems that involve seagrass and mangroves that play a key role in drawing carbon out of the atmosphere.

Waste package

To ensure Australia takes responsibility for its own waste the Government is investing $11.0 million to support Australia’s recycling industry, including further funding for the National Product Stewardship Investment Fund and support for the Australasian Recycling label to help consumers recycle properly. The Government is investing $67.0 million to enhance organic waste facilities and support community education to reduce the amount of food waste going to landfill. These investments support the Government’s National Waste Policy Action Plan, which aims to reduce waste generation, increase waste recovery rates and regulate waste exports.

EPBC Act Reform

In response to the Independent Review of the Environment Protection and Biodiversity Conservation Act 1999, the Government is investing $29.3 million to ensure our environmental laws are both protecting the environment and supporting economic growth.

Through an investment of $4.7 million, the Government will work with stakeholders to improve the measurement and valuation of Australia’s natural capital.

Keeping Australians safe

The Government is committed to strengthening our national security, defence and law enforcement capabilities. It is providing $1.3 billion over ten years to the Australian Security Intelligence Organisation to further boost its ability to protect Australia and Australians from threats to our security. A further $51.8 million is being provided to support the Australian Criminal Intelligence Commission’s critical role in combatting transnational, serious and organised crime.

Building on Australia’s Cyber Security Strategy 2020, the Government is providing $42.4 million to improve security arrangements for critical infrastructure and to assist critical infrastructure owners and operators respond to significant cyber-attacks.

To support Australia’s strong border protection policies, the Government is providing $464.7 million to bolster domestic detention capabilities and a further $38.1 million to continue the Regional Cooperation Arrangement in Indonesia.

The Government remains committed to building Defence capability and supporting Australia’s sovereign defence industry, including through its defence capability

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Page 30 | Statement 1: Budget Overview

investments valued at $270 billion over the next decade. Maintenance and development of Australia’s 400 owned and approximately 958 leased properties continues to deliver considerable economic, social and environmental support for regional communities, including the recent $747 million defence infrastructure package in the Northern Territory.

Statement 2: Economic Outlook | Page 31

Statement 2: Economic Outlook

This Statement presents the economic forecasts that underlie the Budget estimates.

Contents

Overview ....................................................................................................... 33

Outlook for the international economy ....................................................... 38

Outlook for the domestic economy ............................................................. 44

Outlook for real GDP growth ......................................................................................... 44

Households ................................................................................................................... 46

Business investment ..................................................................................................... 51

Public final demand ....................................................................................................... 55

Net exports .................................................................................................................... 55

The labour market ......................................................................................................... 57

Outlook for nominal GDP growth .................................................................................. 63

Medium-term projections ............................................................................. 65

Statement 2: Economic Outlook | Page 33

Statement 2: Economic Outlook

Overview

The Australian economy has displayed remarkable resilience in the face of the COVID-19 pandemic. Following the first recession in almost 30 years over early 2020, the economy grew at its fastest pace on record over the latter half of the year and outperformed all major advanced economies in 2020. Labour market outcomes have surpassed even the most optimistic of expectations. With close to one million jobs added to the economy since May 2020, employment levels have more than recovered the losses seen through the pandemic to reach record highs. The peak in the unemployment rate is now expected to have passed and labour force participation has increased to a record high.

Together with the success in managing the spread of the COVID-19 virus, the Government’s significant fiscal policy response has been central to Australia’s economic performance throughout the pandemic. Immediate temporary, targeted assistance to individuals, households and businesses provided a crucial lifeline to the economy during the worst of the downturn and the Government’s total economic support response to the crisis now stands at $291 billion or around 14.7 per cent of GDP. As the recovery continues and emergency support concludes, additional assistance focused on supporting private sector activity remains in place to underpin the recovery over the forecast period. Further measures announced as part of this Budget, such as extensions to temporary full expensing, temporary loss carry-back and the low and middle income tax offset will further support strong growth in economic activity over the forecast period, helping to drive the unemployment rate lower.

The global economic recovery is also gathering pace, with stronger-than-expected activity in the December quarter of 2020 for most major trading partners. Further progress on vaccine rollouts in advanced economies, major fiscal policy support and accumulated household savings have all contributed to increased confidence in the global economic outlook. However, the pace of recovery is uneven and significant risks to the global outlook remain, heightened by ongoing outbreaks of the virus in major economies, most notably in India.

The outlook for the Australian economy has strengthened and output is expected to have exceeded its pre-pandemic level in the March quarter of 2021, nine months earlier than forecast last Budget. Real GDP grew strongly over the

September and December quarters of 2020 and recovered around 85 per cent of the fall since the onset of the pandemic. Growth in economic activity has also been supported by strong employment outcomes. Employment increased to a record high in March 2021, with almost 75,000 more people employed than prior to the pandemic.

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Following the strong rebound in economic activity to date, recent record rates of growth are expected to moderate as the economy transitions from the initial reopening phase of the recovery. Nevertheless, ongoing momentum, the rollout of the vaccine and continued fiscal policy support, including new initiatives announced as part of this Budget, are expected to drive strong growth over the forecast period. Real GDP is forecast to grow by 1¼ per cent in 2020-21, by 4¼ per cent in 2021-22 and 2½ per cent in 2022-23.

Robust growth over the forecast period is expected to drive continued steady growth in employment and further declines in the unemployment rate, which is forecast to fall below 5 per cent by late 2022, to reach 4¾ per cent in the June quarter 2023. This would mark the first time that Australia has seen a sustained period of unemployment below 5 per cent since the years leading up to the Global Financial Crisis, and only the second time since the early 1970s.

A lower-than-expected peak and faster-than-anticipated fall in the unemployment rate is expected to reduce the potential for scarring in the labour market and support growth in the medium term. This has also helped to sustain household incomes and has supported ongoing strength in consumer activity.

The outlook for household spending and housing construction has strengthened. Consumer sentiment has recovered substantially and is currently at its highest level in 11 years, with household consumption rebounding at record rates over the second half of 2020. Robust activity in the housing market has also been sustained, reflecting Commonwealth, state and territory government programs to support first home buyers and residential construction, as well as highly accommodative monetary policy settings, which are expected to remain in place for some time.

In the business sector, the Government’s business tax incentives have provided a key boost to business investment and are expected to continue to support the outlook in the near term. Overall, while new business investment will take some time to fully recover from the uncertainty following the recession, business conditions reached a record high in March 2021, confidence indicators have recovered to be well above average and there has been an improvement in firms’ capital expenditure intentions, with some measures at their highest level since 1994.

As international borders reopen and international tourism gradually returns over 2022, spending from incoming tourists is expected to be more than offset by Australians spending more on overseas travel and less on domestic consumption. However, the gradual arrival of international students and migrants over 2022 will support growth, particularly for education services exports and consumption, and assist in filling skill gaps.

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Statement 2: Economic Outlook | Page 35

The recent strength in key commodity prices, particularly iron ore, has seen a significant resurgence in Australia’s terms of trade and has supported profitability in the mining sector, the benefits of which will flow through to the broader economy. As a result, nominal GDP is expected to grow strongly in the near term, before moderating to grow at a slower pace than real GDP, as strength in the terms of trade unwinds over the forecast period.

Overall, the outlook remains positive, though considerable risks remain. The continued economic recovery will rely on the effective containment of COVID-19 outbreaks both here and abroad. This will be a key factor in the timing of the reopening of international borders, which could weigh on the outlook for the tourism and education sectors. More broadly, downside risks to the outlook for the global economy from ongoing outbreaks of the virus in major economies, including India, could also have implications for Australia’s economy.

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Page 36 | Statement 2: Economic Outlook

Box 2.1: Key assumptions underpinning the economic forecasts

The control of the virus in Australia and globally remains a significant risk to the economic outlook. The key assumptions that underpin the economic forecasts are set out below. Outcomes could be substantially different to the forecasts, depending upon the extent to which these assumptions hold.

• The first phase of Australia’s vaccination program, our COVID-19 Vaccine and Treatment Strategy, commenced in late February 2021 with most priority populations having been vaccinated. It is assumed that a population-wide vaccination program is likely to be in place by the end of 2021.

• During 2021, localised outbreaks of COVID-19 are assumed to occur but are effectively contained.

• While most domestic activity restrictions have been lifted, it is assumed that general social distancing restrictions and hygiene practices will continue until medical advice recommends removing them. The lifting of domestic activity restrictions will help support consumer and business activity.

• It is assumed that there are no extended or sustained state border restrictions in place over the forecast period.

• A gradual return of temporary and permanent migrants is assumed to occur from mid-2022. Small phased programs for international students will commence in late 2021 and gradually increase from 2022. The rate of international arrivals will continue to be constrained by state and territory quarantine caps over 2021 and the first half of 2022, with the exception of passengers from Safe Travel Zones.

• Inbound and outbound international travel is expected to remain low through to mid-2022, after which a gradual recovery in international tourism is assumed to occur.

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Statement 2: Economic Outlook | Page 37

Table 2.1: Domestic economy — detailed forecasts(a) Outcomes(b) Forecasts

2019-20 2020-21 2021-22 2022-23

Real gross domestic product -0.2 1 1/4 4 1/4 2 1/2

Household consumption -3.0 1 1/4 5 1/2 4

Dwelling investment -8.1 2 1/2 0 -1 1/2

Total business investment(c) -2.0 -5 1 1/2 10

By industry

Mining investment 6.8 1/2 3 3 1/2

Non-mining investment -4.5 -6 1/2 1 1/2 12 1/2

Private final demand(c) -3.2 3/4 4 1/2 4 1/2

Public final demand(c) 5.5 5 3/4 5 1 3/4

Change in inventories(d) -0.3 1/4 0 0

Gross national expenditure -1.4 2 1/2 4 3/4 3 3/4

Exports of goods and services -1.8 -8 4 3

Imports of goods and services -7.4 -4 6 1/2 9 1/2

Net exports(d) 1.2 -1 - 1/4 -1 1/4

Nominal gross domestic product 1.7 3 3/4 3 1/2 2

Prices and wages

Consumer price index(e) -0.3 3 1/2 1 3/4 2 1/4

Wage price index(f) 1.8 1 1/4 1 1/2 2 1/4

GDP deflator 1.9 2 1/2 - 1/2 - 1/2

Labour market

Participation rate (per cent)(g) 63.4 66 1/4 66 1/4 66

Employment(f) -4.2 6 1/2 1 1

Unemployment rate (per cent)(g) 6.9 5 1/2 5 4 3/4

Balance of payments

Terms of trade(h) 0.9 10 -8 -10 1/2

Current account balance (per cent of GDP) 1.8 3 3/4 1 1/4 -2 1/4

(a) Percentage change on preceding year unless otherwise indicated. (b) Calculated using original data unless otherwise indicated. (c) Excluding second-hand asset sales between the public and private sector. (d) Percentage point contribution to growth in GDP. (e) Through-the-year growth rate to the June quarter. (f) Seasonally adjusted, through-the-year growth rate to the June quarter. (g) Seasonally adjusted rate for the June quarter. (h) The detailed forecasts are underpinned by price assumptions for key commodities: Iron ore spot price

assumed to decline to US$55/tonne free on board (FOB) by the end of the March quarter 2022; metallurgical coal spot price assumed to remain at US$112/tonne FOB; and thermal coal spot price assumed to remain at US$93/tonne FOB. Note: The detailed forecasts for the domestic economy are based on several technical assumptions. The

exchange rate is assumed to remain around its recent average level — a trade-weighted index of around 64 and a $US exchange rate of around 77 US cents. Interest rates are assumed to move broadly in line with market expectations. World oil prices (Malaysian Tapis) are assumed to remain around US$65/barrel. Population growth is around 0.1 per cent in 2020-21, 0.2 per cent in 2021-22 and 0.8 per cent in 2022-23. Source: ABS Australian National Accounts: National Income, Expenditure and Product; Balance of Payments

and International Investment Position, Australia; Labour Force Survey, Australia; Wage Price Index, Australia; Consumer Price Index, Australia; unpublished ABS data and Treasury.

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Page 38 | Statement 2: Economic Outlook

Outlook for the international economy

The COVID-19 pandemic has resulted in the largest contraction in global economic activity since the Great Depression. Global GDP fell by 3.3 per cent in 2020, as mobility and economic activity were restricted to limit the spread of the virus and in response to rising uncertainty. Notwithstanding the health and economic challenges presented by the pandemic, Australia’s economic growth outperformed all major advanced economies in 2020.

Chart 2.1: Real GDP growth in 2020, Australia and the G7 economies

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^Data are seasonally adjusted. Source: National statistical agencies.

The outlook for the global economy has strengthened and global GDP is now expected to grow by 6 per cent in 2021. Positive outcomes across the latter part of 2020, progress on vaccine rollouts across a range of countries, major additional government spending— most notably in the United States—and accumulated household savings have all contributed to increased confidence in the global economic recovery. However, the pace of recovery is uneven, with some economies, such as China, having already returned to pre-pandemic levels of economic activity, while others, like the euro area, are not expected to do so until 2022.

The recovery has also been uneven in international labour markets, with some countries recovering to pre-pandemic levels of employment faster than others. Compared with major advanced economies who have published data for March 2021, Australia is the first economy to have recovered hours worked and employment levels to pre-pandemic levels. For further details on international comparisons of the labour market see Budget Statement 4: The labour market through COVID-19.

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Statement 2: Economic Outlook | Page 39

Chart 2.2: Employment levels, Australia and the G7 economies

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Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Australia

Canada

United States

Japan

United Kingdom

Italy

France^

Germany

Index (Dec-19=100) Index (Dec-19=100)

^Data are quarterly and latest data are for the December quarter. Note: Data are monthly unless otherwise specified. UK employment data are a 3-month average from December 2020 to February 2021. Due to definitional differences, care must be taken when comparing employment data across countries. Data are up to date as at 6 May 2021.

Source: Refinitiv, National statistical agencies and ABS Labour Force Survey, Australia.

Fiscal support from policy makers has been central to the global economic response to the pandemic. The IMF estimates that overall global support in response to the pandemic totals nearly $US 16 trillion (15.3 per cent of 2020 global GDP) since January 2020. Of this total, direct health and economic fiscal support accounts for almost $US 10 trillion (9.2 per cent of 2020 global GDP), with the remainder comprised of loans, guarantees and other support. The majority of this support has been undertaken by the G20, with G20 advanced economies accounting for over 80 per cent of overall global support and G20 emerging economies accounting for a further 10 per cent. It is important to note that countries have taken different approaches in response to the pandemic in line with their domestic circumstances, with the amount and design of fiscal support measures varying across jurisdictions.

The economic recovery has also been supported by highly accommodative monetary policy settings from global central banks. With low inflation across many countries prior to the pandemic resulting in central banks reducing policy rates to the zero lower bound, unconventional monetary policy measures such as asset purchase programs and lending facilities were also implemented to stimulate economic activity. Central banks have signalled that policy settings will remain stimulatory for some time, with some requiring actual employment and inflation outcomes to consistently meet targets before changes to policy setting will be considered.

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Page 40 | Statement 2: Economic Outlook

High COVID-19 transmission rates and ongoing containment measures continue to weigh on activity abroad. However, the severity of their impact on economic activity has moderated since the initial wave of the virus, as consumer and business behaviours have evolved and adapted over the course of the pandemic. Following its deep contraction in 2020, global GDP is expected to recover to pre-pandemic levels in 2021 and is forecast to grow by 4¼ per cent in 2022 and 3½ per cent in 2023.

An improving outlook for global economic growth is supported by ongoing developments in vaccine rollouts, particularly in economies experiencing high rates of virus transmission and stricter containment measures. The forecasts assume that countries relax their internal containment measures and confidence improves throughout 2021, and that vaccine coverage expands throughout 2021 and 2022.

Global economic activity is expected to recover as the increasing vaccine coverage reduces both the need for containment measures and serious health impacts arising from the pandemic. However, uncertainty around the timing, progress, ongoing efficacy and uptake of vaccine rollouts, which is heightened by the emergence of new virus variants, presents downside risks to the global economic outlook.

Global and Australian financial market conditions are accommodative and are supporting the recovery. Yields on government bonds have risen in recent months, reflecting optimism about the outlook for growth and corporate profits, but remain low on an historical basis. Nevertheless, financial market conditions remain sensitive to the outlook for growth and the continued provision of policy stimulus. In addition, some emerging market economies with high levels of external debt or debt denominated in a foreign currency could, in the event of a rise in global interest rates, experience a rapid outflow of capital and a sharp currency depreciation.

Despite significant improvements to the overall outlook, the global economic recovery is likely to be uneven. In general, advanced economies are expected to return closer to their pre-pandemic trajectories for GDP than emerging market economies in coming years. This reflects a broad trend of earlier vaccine access, more accommodative policy conditions, and greater fiscal capacity in advanced economies. By comparison, the outlook for emerging market economies is more varied. Slower vaccine rollouts will weigh on recoveries, particularly in regions that are experiencing high virus caseloads, or are more reliant on contact-intensive industries and international travel.

Despite the uneven global recovery, Australia’s major trading partners (MTP) weathered the global economic downturn comparatively well, contracting by 1.8 per cent in 2020, outperforming global GDP more broadly which contracted by 3.3 per cent in the same period. MTP is also forecast to grow faster than the global economy, by 6½ per cent in 2021, partly reflecting China’s larger weighting within Australia’s MTP basket. MTP is expected to grow by 4¼ per cent in 2022.

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Statement 2: Economic Outlook | Page 41

Significant uncertainty around the global economic outlook remains. Sustained momentum in the global recovery will depend on how well governments continue to manage the pandemic, along with people’s ongoing willingness to adapt to life with the virus. Some economies, such as the United States, have remained relatively open and achieved favourable economic outcomes despite high virus caseloads. Other economies currently experiencing major outbreaks, most notably India, have so far avoided strict national containment measures, however the health and economic implications are still unknown. It remains to be seen whether relative openness in the face of virus outbreaks is sustainable over the longer-term, particularly in regions where public health services are at or beyond their capacity.

In China, GDP is forecast to grow by 8½ per cent in 2021 and 5¼ per cent in 2022. The economy recovered at a stronger-than-expected pace in the second half of 2020, underpinned by a continued expansion in industrial production, property investment, and exports. However, renewed travel restrictions over the Spring Festival period in response to a COVID-19 outbreak have slowed activity in the March quarter of 2021, and a slow recovery in consumption is expected to exert ongoing downwards pressure on growth. Over the remainder of the forecast period, China’s economic growth is expected to normalise towards pre-pandemic trends.

In the United States, GDP is forecast to grow by 6¼ per cent in 2021 and 3½ per cent in 2022. Across the past two quarters, the economy continued to expand through the peak of a severe third wave of COVID-19 infections, and substantial progress in the nation’s vaccine rollout is expected to enable a meaningful reduction in social distancing in the first half of 2021. Already unprecedented levels of stimulus have been bolstered by the $US 1.9 trillion American Rescue Plan Act, equivalent to around 9 per cent of US GDP and over 2 per cent of global GDP, which will further support activity. This expenditure, which is frontloaded over the next two years, is expected to drive a strong recovery in US demand, which is expected to spill over to the global economy. There are upside risks to the forecast, particularly if recoveries in confidence and the labour market are stronger than expected, or if further spending is legislated.

Euro area GDP is forecast to grow by 4½ per cent in 2021 and 4 per cent in 2022. The European recovery has been disrupted as major economies reimposed containment measures in response to rising infections in the final quarter of 2020 and the first quarter of 2021, seeing the region fall into a double-dip recession. While the economic impact of these measures has so far been less severe than during the first wave of COVID-19, high caseloads and ongoing restrictions will continue to weigh on activity in the first half of 2021. Improving vaccine coverage is expected to enable a fuller recovery across the second half of the year, underpinned by rebounding consumption. Ongoing government support remains strong, with payments from the NextGenerationEU recovery fund due to commence in 2021. More broadly within the region, the recovery in the United Kingdom is likely to outpace that of the euro area in the near term, as its

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Page 42 | Statement 2: Economic Outlook

economy reopens following its strict lockdown in early 2021 and its rapid vaccination rollout.

In Japan, GDP is expected to grow by 3½ per cent in 2021 and 1¾ per cent in 2022. Containment measures have slowed the recovery in domestic consumption from January this year. However, continued growth in exports is softening the economic impacts of the pandemic, including by spurring business investment. Overall, growth in 2021 is expected to be buoyed by increasing confidence as vaccinations are rolled out in earnest from mid-2021, supported by fiscal stimulus measures and accumulated household and corporate savings. Japan is expected to return to long-term potential growth rates from 2023, which are lower than most other advanced economies, owing to a pre-pandemic trend of a declining working-age population.

GDP in Other East Asia is forecast to grow by 4¾ per cent in 2021, and 4 per cent in 2022. Most economies in the region continued to recover in the December quarter of 2020, although momentum slowed for those that implemented further restrictions such as Malaysia. The outlook, and pace of recovery varies across the region. Korea, Taiwan and Vietnam have continued to experience limited virus transmission and have boosted production and exports, while Indonesia’s economy has picked up on the back of strong policy support and exports. Differences in recovery trajectories across the region reflect country-specific factors such as the persistence of virus transmission, fiscal capacity and each economy’s structure. For example, some countries have higher reliance on contact-intensive industries which may lengthen their recovery, relative to countries which rely more strongly on exports of manufactured goods or commodities. Uneven vaccine rollouts across the region will prolong international travel restrictions, and risk further outbreaks. Risks related to financial market volatility and renewed capital outflows also remain.

India’s GDP is forecast to grow by 11 per cent in 2021 and 5¾ per cent in 2022. India is currently facing one of the worst outbreaks of COVID-19 seen during this pandemic. The rapidly evolving situation has added significant downside risks to the outlook, though the full impact on health and economic outcomes remain to be seen. Despite this, the recovery is expected to remain positive, driven by strong resumption in supply-side activity through the second half of 2020. Banking reforms announced in the Indian 2021-22 Budget are expected to support financial-sector resilience and recovery. Nevertheless, economic activity is forecast to remain well below the pre-pandemic trajectory in the near term.

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Statement 2: Economic Outlook | Page 43

Table 2.2: International economy forecasts(a) Outcomes Forecasts

2020 2021 2022 2023

China 2.3 8 1/2 5 1/4 5 1/2

India -6.9 11 5 3/4 7

Japan -4.8 3 1/2 1 3/4 3/4

United States -3.3 6 1/4 3 1/2 1 3/4

Euro area -6.6 4 1/2 4 2

Other East Asia (b) -2.3 4 3/4 4 4

Major trading partners (c) -1.8 6 1/2 4 1/4 4

World (c) -3.3 6 4 1/4 3 1/2

(a) World and Other East Asia growth rates are calculated using GDP weights based on purchasing power parity (PPP), while growth rates for major trading partners are calculated using goods and services export trade weights.

(b) Other East Asia comprises the Association of Southeast Asian Nations group of five (ASEAN-5), comprising Indonesia, Malaysia, the Philippines, Thailand and Singapore, along with Hong Kong, South Korea, Vietnam and Taiwan.

(c) Growth rates are estimates in 2020 rather than outcomes. Source: National statistical agencies, International Monetary Fund, Refinitiv and Treasury.

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Page 44 | Statement 2: Economic Outlook

Outlook for the domestic economy

Outlook for real GDP growth

The recovery in real economic activity from the COVID-19 recession has continued to outperform expectations. On the back of strong growth in the September quarter of 2020, real GDP grew by 3.1 per cent in the December quarter of 2020, and marked the first time on record when Australia has experienced two consecutive quarters of economic growth above 3 per cent (Chart 2.3). Growth over the December quarter was broad-based across most components with strength in household consumption, business investment, residential construction and favourable conditions in the agricultural sector, which saw near-record levels of farm production in late 2020.

Chart 2.3: The recovery in real GDP

Source: ABS Australian National Accounts: National Income, Expenditure and Product and Treasury.

The Government’s significant fiscal policy response has been central to Australia’s economic performance throughout the pandemic, with the total economic support response now amounting to $291 billion. Initial temporary, targeted support measures, including JobKeeper, JobSeeker and Boosting Cash Flow for Employers helped to limit uncertainty, shielded households and businesses from the worst effects of the pandemic, and enabled Australia to respond to the health crisis.

As emergency economic support concludes, fiscal policy measures aimed at stimulating private sector-led growth are supporting a strong recovery in economic activity and employment. Targeted support has also provided ongoing relief to sectors particularly affected by the pandemic. The Government’s personal income tax changes and business tax incentives will continue to support economic activity and employment over the next few years. These measures have been enhanced in this Budget, with temporary full

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Through-the-year growth in real GDP

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Budget Paper No.1 |

Statement 2: Economic Outlook | Page 45

expensing and temporary loss carry-back extended until 2022-23 and the low and middle income tax offset retained for an additional year.

The Reserve Bank of Australia (RBA) has also played an important supportive role in the response to the pandemic by helping to keep borrowing costs low and by supporting the flow of credit across the economy. With the cash rate close to the zero lower bound at the onset of the pandemic, the RBA reduced the cash rate target by 65 basis points to 0.1 per cent and took a range of unprecedented unconventional monetary policy actions to support economic activity. This included setting a target for the three-year Australian Government bond yield, currently 0.1 per cent, and implementing a bond purchasing program, which the RBA estimates has led to longer-term yields being 30 basis points lower than otherwise. Accommodative monetary policy settings are expected to remain in place for some time, with the RBA not expecting conditions to warrant an increase in the cash rate until 2024 at the earliest.

The outlook for real GDP has strengthened in the near term and is forecast to grow by 1¼ per cent in 2020-21, rising to 4¼ per cent in 2021-22 before moderating to 2½ per cent in 2022-23 as the recovery in economic activity stabilises. After falling by 2.5 per cent in 2020, real GDP is expected to grow by 5¼ per cent in 2021, and by 2¾ per cent in 2022.

The near-term strengthening in real GDP is broad-based and reflects a stronger outlook for household consumption, dwelling investment and new private business investment. The conclusion of the JobKeeper Payment is not expected to interrupt the recovery in the labour market, nor hinder growth in the broader economy. The labour market is forecast to continue strengthening over 2021-22 and 2022-23 with ongoing growth in employment, strong labour force participation and the unemployment rate falling to below 5 per cent by late 2022.

Looking further ahead, continued growth in household consumption is expected to moderate as the recovery stabilises. As the international border reopens, net exports are also expected to weigh on growth, with outbound tourism activity more than offsetting that of inbound tourists. In addition, demand for imported goods is expected to increase. However, the gradual arrival of international students and migrants over 2022 will support economic growth, particularly for education services exports and consumption.

Net overseas migration is significantly affected by international travel restrictions and weaker labour markets globally. It is forecast to fall from around 194,000 persons in 2019-20 to be around -97,000 persons by the end of 2020-21, and then to -77,000 in 2021-22 before increasing to 235,000 persons in 2024-25. More broadly, the weak outlook for population growth in the near term as a result of border closures will also weigh on the outlook for real GDP growth.

Overall, the strong and broad-based momentum in the economy is expected to see real GDP continue to grow by 2¼ per cent in 2023-24 and 2½ per cent in 2024-25.

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Page 46 | Statement 2: Economic Outlook

Households

Household activity has continued to recover from the pandemic-driven downturn, with stronger-than-expected outcomes for household consumption and dwelling investment through late 2020 and continued strength in leading indicators for 2021.

By late 2020, household consumption had recovered around 80 per cent of the fall since the onset of the pandemic, following record growth of 7.9 per cent in the September quarter of 2020 and further strong growth of 4.3 per cent in the December quarter of 2020. Growth over the December quarter was driven by the reopening of Victoria from the extensive lockdown and the strongest quarterly rise on record for vehicle purchases. Overall, strength in goods spending has supported the recovery to date (Chart 2.4). The pace of growth is expected to have slowed in the March quarter of 2021 as the boost from the reopening dissipates. Overall, strong growth outcomes and elevated retail spending indicators have contributed to an upgrade to the outlook for household spending in 2020-21.

Chart 2.4: Household consumption

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Source: Unpublished ABS data

Chart 2.5: Consumer sentiment

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Household consumption is forecast to grow by 1¼ per cent in 2020-21, by 5½ per cent in 2021-22 and by 4 per cent in 2022-23. The solid outlook for growth reflects strong household balance sheets and improving labour market conditions. Household balance sheets have been strengthened by the Government’s fiscal policy support, high saving rates during most of 2020 and increased asset prices, including the recent growth in housing prices. Growth in household spending will be further supported by the continued easing of restrictions and robust consumer confidence. Consumer sentiment is currently at its highest level in 11 years (Chart 2.5). Aggregate household consumption is expected to return to pre-pandemic levels in mid-2021, as spending patterns in the

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Statement 2: Economic Outlook | Page 47

two largest states, New South Wales and Victoria return toward pre-pandemic levels. While strength in goods spending has supported the recovery to date, looking forward, growth is expected to be driven by a recovery in the consumption of services.

The faster-than-anticipated recovery in the labour market will provide support to households, as emergency fiscal support concludes. The JobKeeper Payment provided critical support to household incomes over the course of the crisis and household gross disposable income remained almost 5 per cent higher through the year to the December quarter of 2020. This occurred despite the reduction in JobKeeper assistance, which roughly halved in the quarter, and the reduction in the Coronavirus Supplement. The household saving ratio declined in the quarter and, though it remains elevated at around 12 per cent, it is expected to decline further with improving confidence and greater consumption options.

Continued episodes of short, sharp lockdowns pose downside risks to the outlook for consumer spending through a dampening effect on confidence. Analysis of recent localised lockdowns suggests that while consumption typically rebounds quickly, the level of aggregate consumption over the period is lower than in areas that didn’t experience a lockdown.

Dwelling investment has continued to strengthen amid robust housing market fundamentals, including record low interest rates and stimulatory housing policy incentives from Commonwealth, state and territory governments — including the HomeBuilder program (Box 2.2). The housing market rebounded in the second half of 2020 and this has continued into early 2021 with sustained strength in building approvals and owner-occupier lending, including to first home buyers (Chart 2.6). Housing prices have risen significantly in early 2021 and these have been broad-based across the country, with regional growth outpacing rises in capital cities.

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Page 48 | Statement 2: Economic Outlook

Chart 2.6: Dwelling investment and leading indicators

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Source: ABS Australian National Accounts: National Income, Expenditure and Product, ABS Building Approvals and ABS Lending Indicators.

Dwelling investment grew at its fastest pace in more than five years in the December quarter 2020, driven by strength in detached housing construction and renovation activity. Demand for established and new housing has predominantly been driven by owner-occupiers, particularly first home buyers.

Dwelling investment is forecast to grow by 2½ per cent in 2020-21 as the large pipeline of work supports construction activity over the next year. Dwelling investment is expected to remain strong, with flat growth in 2021-22, before falling by 1½ per cent in 2022-23 as the elevated pipeline of work, which reflects some bring-forward in demand for residential construction, winds down. The near-term strength in dwelling investment is expected to be led by detached housing construction following record-high house approvals over late 2020 and early 2021.

It is not yet clear what structural changes will result from the pandemic, particularly given the greater propensity to work from home during the pandemic. Changing preferences for more outer-city, spacious and detached housing may also limit growth in apartment construction in coming years.

Budget Paper No.1 |

Statement 2: Economic Outlook | Page 49

Box 2.2: Recent strength in the housing market

Australia is experiencing a renewed upturn in residential construction, spurred on by a range of government policies designed to support the sector, alongside record low interest rates. This has seen key leading indicators of residential construction activity surge to levels not seen in previous policy-led growth cycles and is providing significant benefits to the broader economy as it recovers from the pandemic.

Growth in residential construction activity supports growth in the broader economy in multiple ways, including through greater employment in the construction sector and associated industries. Additionally, as housing prices rise, household wealth grows and households who benefit from this are expected to increase their level of consumption as their confidence and financial position improves.

The Commonwealth Government’s HomeBuilder program was designed to mitigate the impacts of a significant fall in residential construction activity that was forecast in the early stages of the pandemic. This initiative has been highly successful and has driven a strong recovery in dwelling investment, which is now forecast to increase 2½ per cent in 2020-21 compared to a fall of 11 per cent forecast in the 2020-21 Budget. Announced in June 2020, the program provides eligible owner occupiers with a grant of up to $25,000 to build a new home or undertake substantial rebuilds of an existing home. Over 120,000 applications have been received, supporting over $30 billion of residential construction activity.

The HomeBuilder program is now supporting significant activity in detached housing construction, with private sector house approvals reaching a record-high level in March 2021 (Chart 2.7). This contrasts with the residential construction boom of the mid-2010s, which was driven by medium- and high-density housing.

There has been a significant increase in the number of new loans to owner-occupier first home buyers over the past year (Chart 2.8). The proportion of new loan commitments to owner-occupier first home buyers is around its highest level since 2009. Overall, in February 2021, the monthly number of new loan commitments for owner-occupier dwelling construction rose to its highest level since the series began in 2002 (Chart 2.6). This contrasts with the level of investor activity in the housing market, which, despite recent increases remains lower than in previous upturns.

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Page 50 | Statement 2: Economic Outlook

Box 2.2: Recent strength in the housing market (continued)

Chart 2.7: Private sector residential building approvals

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Chart 2.8: Owner-occupier first home buyer new loan commitments

Source: ABS Lending Indicators.

Highly accommodative monetary policy settings, with record low interest rates and the RBA signalling they will remain in place for some time, have further supported demand for housing, by making it cheaper for prospective homeowners to take out a loan. Lending standards remain sound, although it will be important to continue to monitor standards as market conditions evolve.

This pickup in demand is also reflected in the recent increase in housing prices, which in March 2021 saw the fastest monthly growth in more than 30 years. In contrast to previous cycles, combined regional housing prices have outperformed combined capital city housing prices over the past year. Despite the strengthening in housing prices, record low interest rates have seen mortgage repayments as a proportion of disposable income lower than they were in the mid-2000s.

The near-term outlook for housing activity has strengthened considerably, supported by an elevated pipeline of construction work and rising house prices. However, the policy-driven strength in demand for detached house construction partly reflects a bring-forward in demand from future years and activity is expected to moderate as the current pipeline of work is completed. As the outlook for elevated levels of detached house construction unwinds, slower population growth is also expected to limit demand for higher-density dwellings in coming years, such that the recent strength in housing market activity is not expected to be sustained.

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Budget Paper No.1 |

Statement 2: Economic Outlook | Page 51

Business investment

Following a large fall over the June and September quarters of 2020 amidst the height of the pandemic, new business investment has picked up alongside Australia’s broader economic recovery, supported by government policy incentives implemented in response to the pandemic. Total new private business investment rebounded by 2.6 per cent in the December quarter of 2020, driven by robust demand for machinery and equipment which grew at its fastest pace in almost seven years. In particular, demand for vehicles and agricultural equipment picked up as firms benefitted from the Government’s business tax incentives, and as favourable conditions in the agricultural sector boosted farm production.

The outlook for new private business investment has strengthened considerably, reflecting a stronger-than-expected pick up in late 2020, improvements in firms’ capital expenditure expectations and additional strength from ongoing policy support. Total new business investment is forecast to fall by 5 per cent in 2020-21 as a result of the pandemic, though more moderately than previously expected. Growth is then expected to rise by 1½ per cent in 2021-22 and by a further 10 per cent in 2022-23. Record business conditions, improvements in business confidence, the strong rebound in economic activity and the extension of business tax incentives are expected to bring forward activity and underpin a significant recovery in investment in coming years.

Non-mining business investment is forecast to fall by 6½ per cent in 2020-21 before rising by 1½ per cent in 2021-22 and by a significant 12½ per cent in 2022-23. Investment activity in the non-mining sector rebounded by 3.0 per cent in the December quarter of 2020. Robust fundamentals in the business sector are now evident, providing a strong foundation for further growth in business investment. The Government’s extension of the temporary full expensing and temporary loss carry-back measures announced as part of this Budget will also provide significant continued support to non-mining business investment, particularly machinery and equipment spending, within the forecast period (Box 2.3).

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Page 52 | Statement 2: Economic Outlook

Box 2.3: Impacts of policy support on non-mining business investment

With the onset of the once-in-a-century COVID-19 pandemic in early 2020, substantial uncertainty over the economic outlook reverberated across the business sector, with business conditions, confidence and various activity indices all falling to never-before-seen lows.

In the early stages of the crisis, new private business investment was forecast to fall by more than 12 per cent in 2020-21, driven by a significant deterioration in the outlook for non-mining investment, which was forecast to fall by an unprecedented 25½ per cent in the June quarter of 2020 alone. Underpinning this rapid deterioration in the outlook were expectations of a record contraction in machinery and equipment investment, as mandated restrictions and associated reductions in economic activity looked set to stifle investment plans. Significant downgrades to forward-looking capital expenditure intentions became evident as firms sought to preserve cash flow, amid declining revenues and heightened risks of insolvencies.

With the rollout of the Government’s immediate, targeted fiscal policy response to the pandemic, a range of measures, including accelerated depreciation deductions and expansion of the instant asset write-off, were implemented to stimulate business investment, providing temporary tax incentives that reduce the after-tax cost of new capital investment and deliver cash flow benefits. Such measures, further enhanced through the introduction of the temporary full expensing and loss carry-back policies, have provided a strong incentive for businesses to bring forward investment activity to access the benefits before they expire.

In the months following the immediate response to the pandemic, outcomes for new business investment surprised on the upside. While non-mining business investment fell by 8.0 per cent over the six months to September 2020, this was considerably less weak than the double-digit falls anticipated in the early stages of the crisis (Chart 2.9). On the back of these lower-than-expected declines, non-mining business investment rebounded by 3.0 per cent in the December quarter of 2020, driven by an 8.1 per cent increase in total new machinery and equipment investment (Chart 2.10). This marked the largest quarterly rise in machinery and equipment spending in almost seven years, as firms took advantage of the Government’s business tax incentives.

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Statement 2: Economic Outlook | Page 53

Box 2.3: Impacts of policy support on non-mining business investment (continued)

Chart 2.9: Non-mining business investment

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Chart 2.10: New machinery and equipment investment

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The outlook for the business sector has strengthened considerably and the latest December 2020 quarter ABS capital expenditure survey data suggest that firms’ capital investment intentions for 2020-21 have strengthened, while early indications for capital spending in 2021-22 are also positive (Chart 2.11). NAB capital expenditure intentions have also picked up, reaching its highest level since 1994. The improvement in investment intentions has been supported by a solid improvement in business conditions and confidence (Chart 2.12), which have recovered from record lows in 2020, with conditions reaching a record high in March 2021. Industry performance indicators have also reached some of their highest levels in over a decade.

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Page 54 | Statement 2: Economic Outlook

Box 2.3: Impacts of policy support on non-mining business investment (continued)

Chart 2.11: Non-mining CAPEX expectations

Chart 2.12: Business conditions and confidence

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On the back of strong indicators for a pick-up in business sector activity, new non-mining business investment is forecast to grow solidly over the forecast period, as Government policy such as temporary full expensing and temporary loss carry-back, remains in place to support the recovery in private sector-led growth. These key measures, including the extensions announced as part of this Budget, are estimated to apply to around $320 billion worth of investment. They are estimated to create around 60,000 jobs by the end of 2022-23 and boost GDP by around $2.5 billion in 2020-21, $7.5 billion in 2021-22 and $8 billion in 2022-23.

Mining investment is forecast to grow by ½ per cent in 2020-21, although the latest ABS capital expenditure survey data suggests that some mining companies have reduced investment intentions in 2020-21, amid heightened uncertainty from the pandemic. Mining investment is then forecast to grow by 3 per cent in 2021-22 and by a further 3½ per cent in 2022-23. Early ABS survey data for investment intentions in 2021-22 are positive and while strong iron ore prices have not led to expanded investment intentions by major producers, investment to maintain large existing capital stocks and to bring minor iron ore projects online will support mining investment. Recent announcements also indicate that some companies are beginning to proceed with previously delayed

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Budget Paper No.1 |

Statement 2: Economic Outlook | Page 55

projects as the global outlook improves. Santos has recently made a final investment decision to proceed with the US $3.6 billion Barossa gas project off the coast of northern Australia, with first gas production targeted for early 2025. This development flags the first green light on delayed LNG investment in Australia since the onset of the pandemic.

Public final demand

New public final demand will continue to make a notable contribution to growth in the near term, as government assistance to steer the course of economic recovery continues. New public final demand is expected to grow strongly by 5¾ per cent in 2020-21, 5 per cent in 2021-22 and by a further 1¾ per cent in 2022-23, driven by continued spending on essential services and the robust infrastructure programs across Commonwealth, state and territory governments. Public consumption remains 7.4 per cent higher through the year to the December quarter of 2020 and spending on key essential services is expected to remain strong throughout the forecast period as the health impacts of the pandemic are managed. Record funding of $17.7 billion to reform aged care will also support growth in public final demand over the forecast period. A significant investment of $13.2 billion in the National Disability Insurance Scheme, and $2.3 billion to support mental health system reform will also contribute to growth.

Net exports

Net exports are forecast to detract from economic growth in coming years, driven by increasing import activity, particularly tourism services imports, as international borders reopen, travel restrictions ease and Australian’s resume overseas travel. Net exports are forecast to detract 1 percentage point from real GDP growth in 2020-21, reflecting increasing demand for imported goods from businesses and households. Net exports are then expected to detract ¼ of a percentage point from growth in 2021-22 and 1¼ percentage points in 2022-23, driven by a recovery in outbound tourism which is expected to be larger than inbound tourism once international border restrictions ease. Falling education exports will also weigh on growth over this period as the number of international students finishing their studies is expected to outpace the number of new international students arriving in Australia.

Exports are forecast to fall by 8 per cent in 2020-21 before growing by 4 per cent in 2021-22 and a further 3 per cent in 2022-23. Expected falls in the near-term are driven by substantial falls in services exports as international border restrictions continue to weigh on inbound tourism and international student numbers. Looking forward, tourism exports are expected to increase following the easing of international border restrictions but are not expected to return to pre-pandemic levels for some time.

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Page 56 | Statement 2: Economic Outlook

While the ongoing trade restrictions from China have had significant impacts on specific firms and regions, many goods targeted by the restrictions have so far been successfully re-directed to other export markets, with limited impacts on Australia’s overall economic recovery.

Mining exports are expected to fall by 1½ per cent in 2020-21 as subdued global demand from the COVID-19 downturn has weighed on coal and LNG production in 2020. While recent flooding in NSW impacted some coal exporters in the latter part of March, impacts on overall export volumes are not expected to be large as mines and infrastructure are well placed to address seasonal disruptions and volumes had recovered by early April. The pickup in global economic activity and the associated recovery in global industrial production will support a recovery in export growth and sustained demand for iron ore and coal exports. Mining exports are forecast to grow by 5 per cent in 2021-22 and by 2½ per cent in 2022-23.

Rural export volumes are forecast to grow by 2 per cent in 2020-21 and by 9 per cent in 2021-22, supported by favourable conditions in the agricultural sector that have yielded near-record levels of crop output in the latter half of 2020. Rural exports are then expected to fall by 3 per cent in 2022-23 as an assumed return to more average seasonal conditions sees rural production and exports returning to longer-term average levels.

Imports are forecast to fall by 4 per cent in 2020-21 as international border restrictions continue to weigh heavily on tourism services imports. This is expected to be partially offset by a strong recovery in consumption and capital goods imports. Imports are expected to grow strongly, by 6½ per cent in 2021-22 and by 9½ per cent in 2022-23 as the easing of international travel restrictions see tourism services recover and as goods imports are supported further by the continuing domestic economic recovery.

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Statement 2: Economic Outlook | Page 57

The labour market

Australia’s labour market has shown remarkable resilience in the wake of the pandemic, recovering faster than any major advanced economy and surpassing even the most optimistic of expectations. More people are in work than ever before, with close to one million jobs being created or restored since May 2020. By March 2021 almost 75,000 more people were in work than before the pandemic. This, along with a

faster-than-anticipated fall in the unemployment rate and participation reaching a record high, has laid a strong foundation for Australia’s economic recovery to continue. Initial indicators suggest that the conclusion of the JobKeeper Payment will not hinder growth in the broader economy and strong momentum in the labour market has been sustained during the early stages of transition. In March 2021, employment reached a record high, as the unemployment rate fell further to 5.6 per cent (Chart 2.13) and labour force participation continued to rebound to reach a record high of 66.3 per cent.

Chart 2.13: Employment and the unemployment rate

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Overall, the outlook for the labour market is positive with increasing economic momentum expected to support robust labour demand. Over the four weeks to 30 April, immediately following the conclusion of JobKeeper, the number of people on the JobSeeker Payment and Youth Allowance (other) has fallen by approximately 105,000. Recent data for job advertisements, a key leading indicator for employment growth, have significantly surpassed pre-pandemic levels. ABS Job Vacancies reached a record high in February 2021. In March 2021, ANZ Job Ads were at their highest level since November 2008, before increasing further in April 2021 to be 28 per cent higher than their pre-pandemic level. The ratio of unemployed people to vacancies is now at its lowest level in over a decade (Chart 2.14).

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Page 58 | Statement 2: Economic Outlook

Chart 2.14: Ratio of unemployed to vacancies and advertisements

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Employment is expected to increase strongly by 6½ per cent in 2020-21, before continuing to increase steadily by 1 per cent in both 2021-22 and 2022-23, reflecting the broader pattern of economic growth over the rest of the forecast period and slower population growth.

Employment increased by 321,000 across October 2020 to March 2021, through two transitions in the JobKeeper Payment, and is now 947,000 persons higher than its trough in May 2020 (Box 2.4). Hours worked has also increased by 13.0 per cent since May 2020, to have grown 1.2 per cent through the year to March 2021. Though short, localised lockdowns continue to have an effect, the number of people working zero hours for economic reasons is now lower than it was before the pandemic. The extent of recovery remains different across industries, with employment in several industries having declined over the year to February 2021. Sectors impacted by restrictions, international border closures and reduced tourism remain the most affected.

Budget Paper No.1 |

Statement 2: Economic Outlook | Page 59

In contrast, other disparities that were evident across cohorts over the course of the recovery have eased considerably. By region, employment in all states has now recovered to near pre-pandemic levels, while female employment is 1.2 per cent higher than it was in March 2020. Over the same period, full-time employment has returned to pre-pandemic levels, while part-time employment is 1.9 per cent higher than in March 2020. Younger workers were initially the most affected in terms of employment, as industries adversely impacted by the pandemic, such as hospitality and tourism, are heavily comprised of workers in this age cohort. While youth employment has somewhat recovered, employment levels are still 2 per cent below pre-pandemic levels. In addition to exposure to ongoing impacts in some of these industries, this cohort has been impacted by the youth population steadily declining over the course of 2020, reflecting international border closures. Looking through this effect, the employment-to-population ratio for those aged 15-24 is 0.6 percentage points above the March 2020 level.

Despite the strength of the recovery to date, there remain key uncertainties surrounding the outlook for the labour market, posing both upside and downside risks. Ongoing outbreaks of the virus and, to a lesser extent, the end of the JobKeeper Payment, present near-term downside risks to the outlook, while longer-term risks associated with a stronger- or weaker-than-expected recovery in migration and tourism may have significant employment implications. The opening of borders is crucial for the recovery of parts of the tourism and higher education industries, and the return of skilled migrants will be key in filling skill shortages in some industries.

Box 2.4: JobKeeper and labour market recovery

The $89 billion JobKeeper Payment implemented in the early stages of the pandemic was the largest single fiscal measure in Australia’s history. By keeping workers connected to their employers during periods of lockdown and by supporting incomes over the course of the crisis, the JobKeeper Payment has played a pivotal role in the resilience of the economy during both the downturn and the economic recovery. The RBA has estimated that JobKeeper reduced total employment losses by at least 700,000 at the peak of the crisis (April-July 2020).1

1 Bishop J and Day I (2020), ‘How Many Jobs Did JobKeeper Keep?’, RBA Research Discussion Paper 2020-07, November 2020.

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Page 60 | Statement 2: Economic Outlook

Box 2.4: JobKeeper and labour market recovery (continued)

JobKeeper supported over 3.8 million individuals, including employees and eligible business participants, and over one million organisations from March to September 2020. In doing so, the JobKeeper Payment was integral to mitigating the impacts on unemployment, underemployment and labour force participation that can persist after a downturn.

Around two million individuals transitioned off the JobKeeper Payment at the end of September 2020. Employment levels at firms that transitioned off JobKeeper at this time remained stable, while more broadly the labour market continued to recover with the creation of 498,000 jobs since September 2020 to March 2021.

In the March quarter of 2021, the JobKeeper Payment supported around 1.1 million individuals and around 385,000 organisations. This is around 650,000 fewer individuals than was estimated in the 2020-21 Budget, consistent with a faster than expected labour market recovery. The creative and performing arts, aviation and tourism related services, and road passenger transport (capturing taxis and ride sharing) sectors were amongst those most reliant on the JobKeeper Payment.

JobKeeper coverage was fairly evenly distributed across regions, although Sydney and Melbourne metropolitan areas, and tourism-dependent South East Tasmania and the Gold Coast, were particularly reliant.

Labour market improvements have also been evident in the number of hours worked by JobKeeper recipients, with the share of those working zero or very low hours (less than one day) declining over the program. For example, for those organisations that took part in the final stage of the program, the share of workers on zero or low hours declined from a peak of 22 per cent in May 2020 to around 11 per cent in March 2021.

As the labour market recovers, transitioning away from job retention schemes (like JobKeeper) towards policies that promote labour reallocation is important. The unwinding of the JobKeeper Payment is not expected to impede the broader economic recovery, which is expected to continue across 2021 and beyond. Early indicators are consistent with these expectations and will continue to be monitored closely.

For further information on the labour market recovery and the JobKeeper transitions, see Statement 4: The labour market through COVID-19.

Budget Paper No.1 |

Statement 2: Economic Outlook | Page 61

The unemployment rate is forecast to fall to 5½ per cent by the June quarter of 2021 and to continue to decline over the forecast period, with rapid falls in the near term expected to moderate as the economic recovery stabilises. Continued policy support and increasing momentum in the economy will see the unemployment rate return to its pre-pandemic level in the December quarter of 2021. Beyond this, in line with continued growth in employment, the unemployment rate is expected to decline steadily, to reach 5 per cent in the June quarter of 2022, before falling further to 4¾ per cent in the June quarter of 2023. This would see the unemployment rate fall within the estimated band for the Non-Accelerating Inflation Rate of Unemployment (NAIRU) by the June quarter of 2022 and reach the bottom of the estimated band by the June quarter 2024.

The unemployment rate has fallen much faster in this recession compared with the recessions of the 1980s and 1990s. In the 1980s, the unemployment rate rose from around 5 per cent to over 10 per cent and took more than eight years to recover. In the 1990s recession the unemployment rate rose from around 6 per cent to over 11 per cent and did not return to pre-recession lows for around ten years. In stark contrast, following this recession, the unemployment rate is forecast to return to pre-pandemic levels in around two years.

The participation rate is expected to remain at around 66¼ per cent through to the June quarters of 2021 and 2022, before declining marginally to 66 per cent by the June quarter of 2023. The high participation rate over 2021-22 reflects expectations that continued positive economic conditions will encourage workers to remain in the labour force. A slight decline in the participation rate beyond this reflects the softening cyclical strength in participation as the economy returns towards trend levels of output and employment.

Overall, the outlook for wage growth is expected to remain moderate over the forecast period. This reflects both the severe impacts of the pandemic and the continued spare capacity in the labour market in the near term. The wage growth outlook also reflects a modest downwards revision to Treasury’s estimate of the NAIRU.2

Growth in wages, as measured by the Wage Price Index (WPI), slowed to just 0.1 per cent in the September quarter of 2020, the lowest quarterly growth on record. Growth in the WPI then recovered to 0.6 per cent in the December quarter of 2020 to be 1.4 per cent higher through the year, partly reflecting a rollback of pay reductions implemented earlier in the year as employers responded to the impact of the pandemic. Modest inflation outcomes however have meant that consumers have maintained purchasing power with real wages growth in line with the 10-year average.

2 Ruberl H, Ball M, Lucas L and Williamson T (2021), ‘Estimating the NAIRU in Australia’, Treasury Working Paper 2021-01, 29 April 2021.

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Page 62 | Statement 2: Economic Outlook

The WPI is forecast to grow by 1¼ per cent through the year to the June quarter of 2021 and by 1½ per cent through the year to the June quarter of 2022, before rising to 2¼ per cent through the year to the June quarter of 2023. The near-term outlook is consistent with low wage increases in new federal enterprise bargaining agreements and state public sector wage caps that are expected to moderate the outlook for wage growth over the forecast period. Towards the end of the forecast period, the lower unemployment rate and broader economic strength should see wages begin to pick up.

Growth in consumer prices, as measured by the Consumer Price Index (CPI), experienced large fluctuations throughout 2020, largely resulting from the impacts of the pandemic and the Government’s associated policy response. In June, the CPI fell by 1.9 per cent, the largest quarterly fall in the history of the series. This was driven by the introduction of free childcare, waiving of preschool fees in some cities and a sharp fall in the price of automotive fuel following the significant contraction in global oil prices. The subsequent reinstatement of childcare fees, recovery in fuel prices and increases in tobacco excise saw a strong rebound in the CPI over the second half of 2020, increasing by 2.4 per cent in the six months to December. This strong growth did not continue into 2021, with CPI growing by 0.6 per cent in the March quarter.

Looking forward, CPI growth is expected to peak at around 3½ per cent through the year to the June quarter of 2021 before moderating to 1¾ per cent through the year to the June quarter of 2022. CPI growth is then expected to rise to 2¼ per cent through the year to the June quarter of 2023. Growth in the near term reflects the rebound from the record fall in CPI inflation in the June quarter of 2020, alongside the continued recovery in global oil prices, with some strength being offset by the continued rollout of HomeBuilder grants. However, this near-term strength is expected to be transitory, and underlying inflation is expected to remain subdued, below the RBA’s target band of 2-3 per cent in the near term. From the second half of 2021 onwards, CPI growth is expected to strengthen, reflecting a reduction in labour market slack and expected wage growth. Headline inflation is expected to approach the RBA’s target band of 2-3 per cent in 2022-23, as the unemployment rate reaches the estimated NAIRU.

Underlying measures of price growth have remained subdued in recent quarters with trimmed mean inflation increasing by 0.3 per cent in the March quarter of 2021 to be 1.1 per cent higher through the year, the weakest annual growth in the history of the series. As the unemployment gap is reduced and the unemployment rate approaches the NAIRU, growth in underlying price measures are expected to strengthen. Further falls in the unemployment rate below the NAIRU will likely see wage and price growth become increasingly sensitive to employment growth. However, the extent to which tightening labour market conditions will flow through into wage and price pressures remains highly uncertain.

There are potential upside risks to the outlook for wages and prices, as stronger labour market conditions could increase upward pressure on wages over the forecast period.

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Statement 2: Economic Outlook | Page 63

In addition, ongoing international border closures may cause labour shortages and place upward pressure on wages in selected industries.

Outlook for nominal GDP growth

Nominal GDP is forecast to grow by 3¾ per cent in 2020-21, by a further 3½ per cent in 2021-22 and by 2 per cent in 2022-23. The increases in nominal GDP over 2021-22 and 2022-23 are expected to be lower than for real GDP, reflecting a notable decline in the terms of trade. The terms of trade are expected to rise strongly in the near term, by 10 per cent in 2020-21, supported by significant strength in iron ore prices. In line with the prudent approach to forecasting volatile commodity prices, elevated iron ore prices are assumed to decline and the terms of trade are expected to fall by 8 per cent in 2021-22 and by a further 10½ per cent in 2022-23.

Commodity prices remain a key driver of the terms of trade and the inherent volatility in commodity prices remains a key uncertainty in the outlook for nominal GDP. Iron ore prices have remained elevated at around US$160 per tonne since mid-December 2020, due to strong Chinese demand and unresolved supply disruptions in Brazil. Treasury’s industry liaison suggests that in the near term, global iron ore supply is not expected to recover rapidly and the sustained demand for steel production is expected to drive iron ore demand. The iron ore price is assumed to decline to US$55 per tonne FOB by the end of the March quarter 2022, three quarters later than was assumed in the 2020-21 Budget.

Metallurgical coal prices have also been volatile recently and are modestly higher than recent COVID-period lows. Thermal coal prices have been supported by the continued recovery in global economic activity, the cold winter in East Asia over early 2021 and recent weather-related supply disruptions in Australia. While Chinese restrictions have affected the price of some types of Australian coal, so far, most coal exports have been able to be re-directed to alternative markets. Consultation with market and industry participants, however, has highlighted that there is elevated uncertainty in the coal market, in particular around the duration of the Chinese restrictions on Australian coal, as well as around global environmental policies.

There are upside risks to the outlook for commodity prices as industry consultation suggests that iron ore prices could remain elevated for an extended period of time. Meanwhile, a stronger recovery in steel production outside of China could also provide further support for iron ore and metallurgical coal prices.

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Page 64 | Statement 2: Economic Outlook

Box 2.5: Sensitivity analysis of the iron ore spot price

Movements in commodity prices can have significant effects on nominal GDP and Commonwealth Government tax revenue. The analysis below provides an indication of the direct impacts on nominal GDP and company tax receipts of altering the timing around the iron ore spot price assumption, holding everything else constant.

If the iron ore price was to fall immediately to US$55 per tonne FOB, rather than by the end of the March quarter of 2022 as assumed, nominal GDP could be around $11.6 billion lower than forecast in 2020-21 and $38.1 billion lower in 2021-22. This would result in a decrease in tax receipts of around $600 million in 2020-21, $8.3 billion in 2021-22 and, reflecting the timing of company tax collections, around $3.5 billion in 2022-23 (Table 2.3).

By contrast, if the iron ore price was to remain elevated until the end of the March quarter of 2022, before falling immediately to US$55 per tonne FOB, nominal GDP could be around $1.1 billion higher than forecast in 2020-21 and $48.7 billion higher in 2021-22. This would result in an increase in tax receipts of around $100 million in 2020-21, $5.5 billion in 2021-22 and, again reflecting the timing of company tax collections, around $6.9 billion in 2022-23.

Table 2.3: Sensitivity analysis of movements in the iron ore spot price $billion Earlier fall to US$55/tonne FOB(a) Later fall to US$55/tonne FOB

2020-21 2021-22 2022-23 2020-21 2021-22 2022-23

Nominal GDP -11.6 -38.1 0.0 1.1 48.7 0.0

Tax receipts -0.6 -8.3 -3.5 0.1 5.5 6.9

(a) FOB is the free-on-board price which excludes freight costs. Source: Treasury.

Further details on how movements in commodity prices can affect the economy are detailed in Statement 8: Forecasting Performance and Sensitivity Analysis.

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Statement 2: Economic Outlook | Page 65

Medium-term projections

The fiscal aggregates in this year’s Budget are underpinned by forecasts of economic activity over the Budget forward estimates and projections over the medium term (Chart 2.15).

Chart 2.15: Medium-term projection period

2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32

Economic forecasts

Budget medium-term projections

Economic medium-term projections

Budget estimates

Detailed forecasts

Source: Treasury.

In the current financial year, the Budget year and the subsequent financial year, more emphasis is placed on detailed forecasts of the expenditure components of economic activity. Beyond this period, estimates are constructed based on expectations for the level of potential output and modelling of the path by which output converges back to this potential level. An output gap exists if actual output is below potential.

A macroeconometric model of the Australian economy is used to help inform the path that the economy takes to close the output gap, accounting for factors such as the nature and level of spare capacity in the economy, the drivers of potential output growth, and the expected path of international trade prices. The model allows for a considered assessment of the path of output beyond the detailed forecast period, including incorporating major policy into the economic forecasts over the budget forward estimates period.

Potential GDP is estimated based on an analysis of trends for population, productivity, and participation. As additional capacity in the economy is absorbed over time (that is, the output gap closes), real GDP converges towards its potential level and the unemployment rate converges towards the estimate of the NAIRU. On the nominal side, key non-rural commodity export prices are projected based on cost curve analysis. Domestic prices return over time to the mid-point of the RBA’s inflation target band.

Overall, the outlook for the level of nominal GDP over the forecast and medium-term projection period has strengthened, reflecting a faster-than-expected recovery to date, a higher level of potential GDP over the medium term and stronger actual and updated commodity export prices assumptions. Potential GDP over the medium term is projected to remain below its expected pre-pandemic level. The terms of trade are projected to return to and remain around their 2006-07 level from 2025-26.

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The faster-than-anticipated recovery in output and the labour market means that spare capacity continues to be reduced. Spare capacity in the labour market is expected to be absorbed by the end of 2022-23. From this point onwards, real GDP is projected to be primarily driven by potential GDP growth.

Potential GDP growth is estimated to fall below 2 per cent per annum in the near term before rising to average around 2¾ per cent per annum over the medium term to 2031-32.

Treasury has recently updated its approach to estimating the NAIRU, resulting in a lower NAIRU estimate that lies within the band of 4½ to 5 per cent. A lower NAIRU is consistent with the international experience prior to the pandemic of low unemployment with little to no inflation.

The trend participation rate has been revised up over the forward estimates and through the medium term. This primarily reflects improved expectations for labour-force participation for females, particularly full-time prime working age and older females.3

Labour productivity growth depends on both trends in underlying productivity4 and the productive capital stock. Underlying productivity growth is assumed to converge over a 10-year period to the average growth rate in labour productivity over the 30 years to 2018-19 of 1.5 per cent per annum. Increases in underlying productivity lead to complementary increases in the productive capital stock, but this takes time due to costs of adjustment.

3 Gustafsson L (2021), ‘Australian labour force participation: historical trends and future prospects’, Treasury Working Paper 2021-02, 29 April 2021. 4 Underlying productivity is also known as labour augmenting technical change.

Statement 3: Fiscal Strategy and Outlook | Page 67

Statement 3: Fiscal Strategy and Outlook

The Government’s decisive action in providing unprecedented economic support in response to the COVID-19 pandemic has been central to Australia’s economic recovery.

The Government’s support was temporary, targeted, proportionate and delivered using existing mechanisms. It cushioned Australian households and businesses from the worst of the crisis, and limited the economic cost and longer-term labour scarring.

The Government’s support was vital in driving the speed with which the economy has recovered, exceeding even the most optimistic of expectations. The strength in the domestic economic recovery has flowed through to higher tax receipts and lower unemployment payments and a stronger fiscal position.

While remarkable progress has been made in our domestic economic recovery, the virus presents an ongoing threat to the global and domestic economy. As a result, Australia remains in the first phase of the Government’s Economic and Fiscal Strategy. The first phase of the Strategy focuses on driving down the unemployment rate back to where it was prior to the pandemic or lower and ensuring the economic recovery is sustained and secured.

Consistent with the first phase of the Strategy, the Government is using a large share of the gains from automatic stabilisers to invest in a stronger economy. The Government’s economic plan is focussed on achieving strong and sustainable private sector-led growth, prioritising job creation as a pathway to a stronger economy and stronger fiscal position.

Decisions taken in this Budget will help get Australians through the COVID-19 pandemic, secure the economic recovery and set the nation up for the future. Securing our economic recovery also ensures we can guarantee the essential services that Australians rely on, support our community’s most vulnerable, and enhance Australia’s resilience and national security.

The underlying cash balance is now expected to be a deficit of $161.0 billion in 2020-21, a $52.7 billion improvement compared with $213.7 billion at the 2020-21 Budget, predominantly as a result of better than expected tax receipts. The underlying cash balance is expected to be a deficit of $106.6 billion in 2021-22 and continue to improve over the forward estimates to a deficit of $57.0 billion in 2024-25, nearly half of the deficit in 2021-22. The underlying cash balance is projected to further improve over the medium term to a deficit of 1.3 per cent of GDP in 2031-32.

A strong economy will enable the Government to stabilise debt as a share of the economy over time. Net debt is expected to peak at 40.9 per cent of GDP at 30 June 2025, a lower peak than forecast in the 2020-21 Budget, and fall to 37.0 per cent of GDP by the end of the medium term.

Statement 3: Fiscal Strategy and Outlook | Page 69

Contents

Overview ....................................................................................................... 71

Economic and Fiscal Strategy ..................................................................... 72

Fiscal outlook — forward estimates............................................................ 75

Underlying cash balance estimates .............................................................................. 76

Net operating balance estimates ................................................................................... 85

Headline cash balance estimates ................................................................................. 87

Recurrent and capital spending .................................................................................... 89

The Government’s balance sheet ................................................................ 90

Gross debt estimates .................................................................................................... 90

Net debt estimates ........................................................................................................ 92

Net financial worth and net worth .................................................................................. 93

Medium-term fiscal projections ................................................................... 94

Underlying cash balance projections ............................................................................ 95

Receipts and payments projections .............................................................................. 96

Gross debt projections .................................................................................................. 98

Net debt projections ...................................................................................................... 99

Net financial worth projections .................................................................................... 100

Structural budget balance estimates ........................................................................... 100

Statement 3: Fiscal Strategy and Outlook | Page 71

Statement 3: Fiscal Strategy and Outlook

Overview

The Government acted decisively in response to the COVID-19 pandemic in providing an unprecedented level of fiscal support to protect vulnerable households and save Australian businesses and jobs. The Government was well placed to provide this response, as it entered the pandemic with a strong economy and from a position of fiscal strength, made possible by years of responsible budget management.

The public health and economic responses were successful in mitigating the significant impacts at the height of the pandemic and avoiding labour scarring, by protecting as many jobs as possible. The Government’s economic support was underpinned by a clear set of principles: that it be temporary, targeted, proportionate and delivered using existing mechanisms where possible. These principles ensured that support was delivered when needed and set the economy on a path to recovery from the pandemic.

Significant economic support announced as part of the emergency response in 2020 is still flowing to households and businesses. This, together with further targeted support in this Budget and the ongoing rollout of the vaccine, underpins a positive outlook for the Australian economy.

The strength in the domestic economic recovery is reflected in a stronger fiscal position, predominantly due to higher-than-expected tax receipts as well as lower-than-expected unemployment benefits.

The stronger fiscal position has enabled the Government to continue to invest in the next stage of its economic plan to grow the economy, reduce unemployment and secure the recovery, while guaranteeing the essential services that Australians rely on. This is consistent with the Government’s Economic and Fiscal Strategy which recognises that sustainable private sector-led growth with low unemployment is key to stabilising and ultimately reducing debt as a share of the economy in the medium term.

The underlying cash balance in 2020-21 is expected to be a deficit of $161.0 billion (7.8 per cent of GDP), an improvement of $52.7 billion since the 2020-21 Budget. The underlying cash balance is expected to improve to a deficit of $106.6 billion in 2021-22 (5.0 per cent of GDP) and continue to improve over the forward estimates to $57.0 billion (2.4 per cent of GDP) in 2024-25. Over the medium term, the underlying cash balance is projected to improve to a deficit of 1.3 per cent of GDP in 2031-32.

Net debt is expected to be 34.2 per cent of GDP at 30 June 2022 and peak at 40.9 per cent of GDP at 30 June 2025. This compares to a previous peak in net debt of 43.8 per cent of GDP estimated in the 2020-21 Budget. Net debt is projected to fall over the medium term to 37.0 per cent of GDP at 30 June 2032.

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Gross debt is projected to be lower as a share of GDP in each year of the forward estimates and medium term compared with the 2020-21 Budget. Gross debt is expected to be 45.1 per cent of GDP at 30 June 2022, increasing to 50 per cent of GDP at 30 June 2025. Gross debt is projected to stabilise over the medium term at around 51 per cent of GDP. This compares to the 2020-21 Budget where gross debt was projected to stabilise at around 55 per cent of GDP in the medium term.

Table 3.1: Australian Government general government sector budget aggregates Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b $b

Underlying cash balance(a) -85.3 -161.0 -106.6 -99.3 -79.5 -57.0

Per cent of GDP -4.3 -7.8 -5.0 -4.6 -3.5 -2.4

Net operating balance -92.3 -154.5 -92.7 -90.2 -70.2 -55.7

Per cent of GDP -4.7 -7.5 -4.3 -4.1 -3.1 -2.3

Net debt(b) 491.2 617.5 729.0 835.0 920.4 980.6

Per cent of GDP 24.7 30.0 34.2 38.4 40.4 40.9

Gross debt(c) 684.3 829.0 963.0 1,058.0 1,134.0 1,199.0

Per cent of GDP 34.5 40.2 45.1 48.6 49.7 50.0

(a) Excludes net Future Fund earnings before 2020-21. (b) Net debt is the sum of interest-bearing liabilities (which include Australian Government Securities (AGS) on issue measured at market value) minus the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements).

(c) Gross debt measures the face value of AGS on issue.

Economic and Fiscal Strategy The Government revised its Economic and Fiscal Strategy in the 2020-21 Budget. Core to the Strategy is a focus on supporting strong and sustainable private sector-led growth and job creation, recognising this is the pathway to a strong and sustainable fiscal position.

The Strategy operates in two phases. The first phase of the Strategy seeks to promote employment, growth, business and consumer confidence through discretionary fiscal policy and the operation of automatic stabilisers. The priority of this phase is to ensure a strong and sustained recovery to drive down the unemployment rate.

Consistent with the Strategy, since the onset of the COVID-19 pandemic, the Government has provided unprecedented support to households and businesses. This was underpinned by a clear set of principles: that it be temporary, targeted and proportionate to the shock and delivered using existing mechanisms where possible. The support was intended to limit the economic cost and longer-term labour scarring from the crisis by protecting as many jobs as possible.

As a result of the substantial economic support provided to the economy, the success in managing the health crisis, and the resilience and flexibility shown by Australian

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Statement 3: Fiscal Strategy and Outlook | Page 73

businesses and households, the Australian economy has recovered strongly from its first recession in almost 30 years.

The transition to sustainable private sector-led growth, away from emergency government support programs such as the JobKeeper Payment, will lay the foundations for a stronger economy and a sustainable fiscal position over the medium term. In this Budget, the Government is maintaining a focus on growth-friendly economic policies to prioritise job creation as a pathway for a stronger economy and stronger fiscal position.

The Government is also providing targeted and temporary support for regions and sectors that continue to be disproportionately affected by COVID-19, recognising that the economic recovery is not necessarily progressing evenly.

While the economic forecasts suggest that an unemployment rate of 4¾ per cent will be achieved by the June quarter 2023, a high degree of uncertainty remains. The virus continues to present an ongoing threat to the health and economic recovery, both domestically and globally, and the longer-term effects of the pandemic on people and the economy are unclear. For this reason, Australia will continue to remain in the first phase of the Economic and Fiscal Strategy until the recovery is secured.

Before a transition to the second phase of the Strategy, the Government’s ambition is for sustainable private sector-led growth to drive unemployment down to pre pandemic levels or lower. With further support from monetary policy limited, fiscal policy will need to continue to play an active role in driving the unemployment rate lower.

Only once the economic recovery is secured will the Government transition towards the medium-term objective of stabilising and then reducing debt as a share of GDP. Stronger economic growth, coupled with low costs of servicing debt, will enable the Government to maintain a steady and declining ratio of debt to GDP over time while running a modest deficit.

When the Government’s focus transitions to rebuilding fiscal buffers, it will act consistently with its core values by:

• controlling expenditure growth, while maintaining the efficiency and quality of government spending and guaranteeing the delivery of essential services

• supporting revenue growth through policies that drive economic growth, while maintaining a tax-to-GDP ratio at or below 23.9 per cent

• using the Government’s balance sheet to support productivity-enhancing investments

• pursuing ongoing structural reforms to boost economic growth.

The Government’s Economic and Fiscal Strategy is consistent with the requirements of the Charter of Budget Honesty Act 1998 and is set out in Box 3.1.

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Box 3.1: The Government’s Economic and Fiscal Strategy

The Government’s Economic and Fiscal Strategy will drive sustainable, private sector-led growth and job creation and ensure Australia is well-placed to respond to future shocks.

By supporting economic growth now and over the medium term, the Strategy will underpin stronger public finances over time, guaranteed provision of essential services and lower taxes as a share of the economy.

COVID-19 Economic Recovery Plan The Government’s Economic Recovery Plan aims to promote employment, growth and business and consumer confidence through: • allowing the budget’s automatic stabilisers to operate, to support aggregate

demand • temporary, proportionate and targeted fiscal support, including through tax measures that incentivise private sector investment to drive productivity and

create jobs • structural reforms to improve the ease of doing business and increase the economy’s long-term growth potential to create the jobs of the future • continuing to improve the efficiency and quality of government spending.

Progress on the economic recovery will be reviewed at each Budget update. This phase of the Strategy will remain in place until the economic recovery is secure and the unemployment rate is back to pre-crisis levels or lower, at which time the Strategy will be governed by the Government’s medium-term fiscal objectives.

Medium term fiscal strategy Over the medium term, the fiscal strategy will be focused on growing the economy in order to stabilise and reduce debt. This underlines the commitment to budget and balance sheet discipline and provides flexibility to respond to changing economic conditions.

The strategy is underpinned by the following elements: • stabilising and then reducing gross and net debt as a share of the economy • targeting a budget balance, on average, over the course of the economic cycle that is consistent with the debt objective. This will be achieved by:

- controlling expenditure growth, while maintaining the efficiency and quality of government spending and guaranteeing the delivery of essential services - supporting revenue growth through policies that drive earnings and economic growth, while maintaining a sustainable tax burden consistent with a

tax-to-GDP ratio at or below 23.9 per cent of GDP - using the Government’s balance sheet to support productivity-enhancing investments that build a stronger economy, support private investment and

create jobs - ongoing structural reforms to boost economic growth.

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Statement 3: Fiscal Strategy and Outlook | Page 75

Fiscal outlook — forward estimates

An underlying cash deficit of $106.6 billion (5.0 per cent of GDP) is forecast in 2021-22, improving to an estimated deficit of $57.0 billion (2.4 per cent of GDP) in 2024-25 (Table 3.2).

Table 3.2: Australian Government general government sector budget aggregates Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Total(a)

$b $b $b $b $b $b $b

Receipts 469.4 499.8 482.1 494.0 532.9 572.0 2,080.9

Per cent of GDP 23.6 24.3 22.6 22.7 23.4 23.9

Payments(b) 549.6 660.8 588.7 593.3 612.4 628.9 2,423.2

Per cent of GDP 27.7 32.1 27.6 27.3 26.9 26.2

Net Future Fund earnings(c) 5.0 na na na na na na

Underlying cash balance(d) -85.3 -161.0 -106.6 -99.3 -79.5 -57.0 -342.4

Per cent of GDP -4.3 -7.8 -5.0 -4.6 -3.5 -2.4

Revenue 486.3 504.9 496.6 505.1 544.5 578.0 2,124.2

Per cent of GDP 24.5 24.5 23.3 23.2 23.9 24.1

Expenses 578.5 659.4 589.3 595.4 614.7 633.7 2,433.1

Per cent of GDP 29.2 32.0 27.6 27.4 27.0 26.4

Net operating balance -92.3 -154.5 -92.7 -90.2 -70.2 -55.7 -308.9

Per cent of GDP -4.7 -7.5 -4.3 -4.1 -3.1 -2.3

Net capital investment 4.0 8.6 10.3 10.9 10.1 9.2 40.6

Fiscal balance -96.3 -163.2 -103.0 -101.2 -80.3 -64.9 -349.4

Per cent of GDP -4.9 -7.9 -4.8 -4.6 -3.5 -2.7

Memorandum:

Net Future Fund earnings(c) 5.0 5.5 3.0 3.2 3.4 3.6 13.2

Headline cash balance -93.9 -168.2 -117.0 -109.4 -75.4 -65.1 -367.0

(a) Total is equal to the sum of amounts from 2021-22 to 2024-25. (b) Equivalent to cash payments for operating activities, purchases of non-financial assets and net cash flows from financing activities for leases. (c) Under the Future Fund Act 2006, net Future Fund earnings will be available to meet the Australian

Government’s superannuation liability from 2020-21. From this time, the underlying cash balance includes expected net Future Fund earnings. (d) Excludes net Future Fund earnings before 2020-21.

Receipts are expected to fall to $482.1 billion (22.6 per cent of GDP) in 2021-22, then increase across each year of the forward estimates to $572.0 billion (23.9 per cent of GDP) in 2024-25.

Payments are expected to fall to $588.7 billion (27.6 per cent of GDP) in 2021-22, and then increase across the forward estimates to $628.9 billion (26.2 per cent of GDP) in 2024-25.

A headline cash deficit of $117.0 billion is expected in 2021-22, improving to an estimated deficit of $65.1 billion in 2024-25.

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In accrual terms, a net operating deficit of $92.7 billion (4.3 per cent of GDP) is expected in 2021-22, improving to an estimated deficit of $55.7 billion (2.3 per cent of GDP) in 2024-25.

Underlying cash balance estimates

Table 3.3 provides a summary of the cash flows of the Australian Government general government sector.

Table 3.3: Summary of Australian Government general government sector cash flow Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b

Cash receipts

Operating cash receipts 499.6 481.8 493.8 532.6 571.8

Capital cash receipts(a) 0.2 0.3 0.2 0.2 0.2

Total cash receipts 499.8 482.1 494.0 532.9 572.0

Cash payments

Operating cash payments 642.3 567.5 570.9 588.9 605.4

Capital cash payments(b) 16.1 18.8 19.9 21.0 21.1

Total cash payments 658.4 586.3 590.8 609.9 626.5

GFS cash surplus(+)/deficit(-) -158.5 -104.2 -96.8 -77.0 -54.5

Per cent of GDP -7.7 -4.9 -4.4 -3.4 -2.3

plus Net cash flows from

financing activities for leases(c) -2.4 -2.4 -2.4 -2.5 -2.5

Underlying cash balance -161.0 -106.6 -99.3 -79.5 -57.0

Per cent of GDP -7.8 -5.0 -4.6 -3.5 -2.4

Memorandum:

Net cash flows from investments in financial

assets for policy purposes -7.3 -10.4 -10.1 4.1 -8.2

Headline cash balance -168.2 -117.0 -109.4 -75.4 -65.1

(a) Equivalent to cash receipts from the sale of non-financial assets in the cash flow statement. (b) Equivalent to cash payments for purchases of non-financial assets in the cash flow statement. (c) Principal payments on lease liabilities, which are financing cash payments, are deducted in the calculation of the underlying cash balance to maintain consistency of measure following the implementation of

AASB 16.

Table 3.4 provides a reconciliation of changes in the underlying cash balance between the 2020-21 Budget and 2021-22 Budget.

Table 3.5 provides a reconciliation of the changes in the underlying cash balance between the 2020-21 Budget, the 2020-21 MYEFO and 2021-22 Budget, disaggregated by policy decisions and parameter and other variations on receipts and payments estimates.

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Table 3.4: Changes to the underlying cash balance between the 2020-21 Budget and 2021-22 Budget Estimates

2020-21 2021-22 2022-23 2023-24 Total

$m $m $m $m $m

Effect of policy decisions(a)

Receipts -67 -416 -8,006 -14,999 -23,487

Payments 8,150 21,030 18,914 16,145 64,239

Total policy decisions impact on

underlying cash balance -8,217 -21,445 -26,920 -31,144 -87,727

Effect of parameter and other

variations(a)

Receipts 36,134 30,551 19,359 21,490 107,535

Payments -24,785 3,722 3,822 2,934 -14,307

Total parameter and other variations

impact on underlying cash balance 60,919 26,829 15,537 18,556 121,841

Total change in underlying

cash balance 52,702 5,383 -11,383 -12,587 34,115

(a) A positive number for receipts improves the underlying cash balance, while a positive number for payments worsens the underlying cash balance.

In aggregate, parameter variations over the four years to 2023-24 are expected to improve the underlying cash balance by $121.8 billion since the 2020-21 Budget (Table 3.4). Since the 2020-21 MYEFO, parameter variations over the five years to 2024-25 are expected to improve the underlying cash balance by $104.3 billion (Table 3.5). The operation of automatic stabilisers has resulted in higher-than-expected tax receipts and lower-than-expected unemployment benefits due to the strength in the economy. This is expected to drive a positive cumulative fiscal improvement since the COVID-19 pandemic by the end of the forward estimates (Chart 3.1).

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Chart 3.1: Cumulative fiscal improvement from 2013-14 to 2024-25

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

2013-14 2015-16 2017-18 2019-20 2021-22 2023-24

% of GDP % of GDP

Underlying cash balance

Cumulative fiscal improvement

Estimates

Note: Excludes net Future Fund earnings before 2020-21. Source: Treasury projections

The improvements from securing the economic recovery have enabled the Government to invest in the next stage of its economic plan to grow the economy and guarantee the essential services that Australians rely on.

Since the 2020-21 Budget, policy decisions over the four years to 2023-24 are expected to reduce the underlying cash balance by $87.7 billion (Table 3.4). Since the 2020-21 MYEFO, policy decisions over the five years to 2024-25 are expected to reduce the underlying cash balance by $95.9 billion (Table 3.5). This reflects spending to secure the economic recovery and lower the unemployment rate consistent with the Economic and Fiscal Strategy while also guaranteeing high quality sustainable services, in areas such as aged care and mental health.

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Table 3.5: Reconciliation of underlying cash balance estimates Estimates

2020-21 2021-22 2022-23 2023-24 2024-25 Total

$m $m $m $m $m $m

2020-21 Budget underlying

cash balance(a) -213,654 -112,003 -87,883 -66,926 -57,456 -537,922

Per cent of GDP -11.0 -5.6 -4.2 -3.0 -2.5

Changes from 2020-21 Budget to

2020-21 MYEFO

Effect of policy decisions(b) -4,884 -3,236 -2,162 -1,813 * *

Effect of parameter and other variations 20,791 6,778 5,659 2,765 * *

Total variations(c) 15,907 3,542 3,497 952 2,298 26,197

2020-21 MYEFO underlying cash

balance(d) -197,747 -108,461 -84,386 -65,974 -55,158 -511,725

Per cent of GDP -9.9 -5.3 -4.0 -3.0 -2.4

Changes from 2020-21 MYEFO to

2021-22 Budget

Effect of policy decisions(b)(e)

Receipts 38 14 -7,357 -14,392 -5,890 -27,587

Payments 3,372 18,224 17,401 14,939 14,351 68,287

Total policy decisions impact on

underlying cash balance -3,334 -18,210 -24,758 -29,331 -20,241 -95,874

Effect of parameter and other variations(e)

Receipts 26,660 23,541 14,300 20,972 24,615 110,089

Payments -13,468 3,490 4,422 5,181 6,182 5,808

Total parameter and other variations

impact on underlying cash balance 40,129 20,051 9,878 15,791 18,433 104,281

2021-22 Budget underlying cash

balance -160,952 -106,619 -99,266 -79,514 -56,966 -503,318

Per cent of GDP -7.8 -5.0 -4.6 -3.5 -2.4

*Data is not available. (a) 2024-25 underlying cash balance as published in the medium-term projections, pages 3-28 of Budget Paper No. 1: Budget Strategy and Outlook 2020-21. (b) Excludes secondary impacts on public debt interest of policy decisions, offsets from the Contingency

Reserve for decisions taken. (c) 2024-25 shows the total variation between medium term projections of the underlying cash balance published in the 2020-21 Budget and 2020-21 MYEFO. (d) 2024-25 underlying cash balance as published in the medium-term projections, page 55 of the

2020-21 MYEFO. (e) A positive number for receipts improves the underlying cash balance, while a positive number for payments worsens the underlying cash balance.

Receipts estimates

Total receipts are expected to be $30.1 billion higher in 2021-22 than estimated at the 2020-21 Budget, with tax receipts $31.8 billion higher and non-tax receipts $1.7 billion lower.

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Policy decisions

Policy decisions since the 2020-21 Budget are expected to reduce total receipts by $67 million in 2020-21, $416 million in 2021-22 and $23.5 billion over the four years to 2023-24. Since the 2020-21 MYEFO, policy decisions are expected to reduce total receipts by $27.6 billion over the five years to 2024-25.

Policy decisions since the 2020-21 Budget are expected to reduce tax receipts by $4 million in 2020-21 and $22.6 billion over the four years to 2023-24.

Significant measures since the 2020-21 MYEFO include:

• Extending temporary full expensing for 12 months until 30 June 2023. This will allow eligible businesses with aggregated annual turnover or total income of less than $5 billion to deduct the full cost of eligible depreciable assets of any value, acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023. This measure is estimated to decrease receipts by $17.9 billion over the four years to 2024-25

• Extending temporary loss carry-back to allow eligible companies to carry back tax losses from the 2022-23 income year. Companies with aggregated annual turnover of less than $5 billion will be able to carry back tax losses incurred during the 2019-20, 2020-21, 2021-22 and now the 2022-23 income years to offset tax paid in 2018-19 or later years. This measure is estimated to decrease receipts by $2.8 billion over the four years to 2024-25

• Retaining the low and middle income tax offset (LMITO) for the 2021-22 income year. This measure is estimated to decrease receipts by $7.8 billion over the four years to 2024-25.

Further details of Government policy decisions are provided in Budget Paper No. 2, Budget Measures 2021-22.

Parameter and other variations

Parameter and other variations since the 2020-21 Budget are expected to increase total receipts by $36.1 billion in 2020-21, $30.6 billion in 2021-22 and $107.5 billion over the four years to 2023-24.

Since the 2020-21 Budget, parameter and other variations are expected to increase tax receipts by $34.8 billion in 2020-21 and $107.1 billion over the four years to 2023-24.

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Statement 3: Fiscal Strategy and Outlook | Page 81

The upward tax receipts revisions are driven by a number of factors. Elevated iron ore prices have supported company tax receipts. The rapid rebound in the labour market is supporting higher personal income tax receipts. Upward revisions to GST receipts reflect underlying strength in activity statements in the current year and upgrades to the outlook for consumption. Over the latter half of the forward estimates period, improvement in the outlook for the labour market is expected to drive higher prices and wages growth supporting tax receipts.

Further information on expected tax receipts is provided in Statement 5: Revenue. Analysis of the sensitivity of the receipts estimates to changes in the economic outlook is provided in Statement 8: Forecasting Performance and Scenario Analysis.

Payments estimates

Since the 2020-21 Budget, total nominal payments estimates have decreased by $16.6 billion in 2020-21 due to improving economic conditions following the COVID-19 pandemic, but increased by $49.9 billion over the four years to 2023-24. Since the 2020-21 MYEFO, total nominal payments are estimated to increase by $74.1 billion over the five years to 2024-25. This reflects the Government’s continued support in response to the COVID-19 pandemic and further funding for important government services and payments to improve the lives of Australians.

Policy decisions

Between the 2020-21 Budget and the 2021-22 Budget, policy decisions increased cash payments by $8.2 billion in 2020-21 and increased total cash payments by $64.2 billion over the four years to 2023-24. Since the 2020-21 MYEFO, policy decisions have increased total cash payments by $3.4 billion in 2020-21 and by $53.9 billion over the four years to 2023-24.

Major increases in payments as a result of policy decisions since the 2020-21 MYEFO include:

• increased funding in response to the recommendations of the Royal Commission into Aged Care Quality and Safety (the Royal Commission) to improve safety and quality and the availability of aged care services, which is expected to increase payments by $17.7 billion over five years from 2020-21

• an increase to working age payments, including the JobSeeker Payment, while strengthening mutual obligation requirements and maximising job seekers’ ability to find and retain employment, which is expected to increase payments by $9.5 billion over the five years from 2020-21

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• expanding the Boosting Apprenticeships Commencements wage subsidy to further support business and Group Training Organisations to take on new apprentices and trainees, which is expected to increase payments by $2.7 billion over four years from 2020-21

• continuing support for the aviation, tourism, arts and international education sectors, as part of the Government’s response to the COVID-19 pandemic, supporting the transition to recovery and stimulating tourism, which is expected to increase payments by $2.1 billion over four years from 2020-21

• improving access to mental health prevention and support services, as well as suicide prevention initiatives, including initiatives to be progressed with states and territories for a new national agreement on mental health and suicide prevention, which is expected to increase payments by $2.0 billion over four years from 2021-22

• further funding to purchase COVID-19 vaccines and for the distribution and administration of these to residents of Australia, which is expected to increase payments by $1.9 billion over five years from 2020-21

• improving women’s choices and economic security, including assistance to families with children in child care by reducing out-of-pocket costs, which is expected to increase payments by $1.8 billion over five years from 2020-21. The measure will remove the Child Care Subsidy (CCS) annual cap and increase the CCS rate for the second child and subsequent children aged five years and under

• an ongoing Commonwealth funding contribution to preschool, which is expected to increase payments by $1.6 billion over four years from 2021-22. The first four years of funding, covering the 2022 to 2025 preschool years, will be delivered through a new four year funding agreement to be negotiated with the states and territories

• initiatives to reduce and support the victims of Family, Domestic and Sexual Violence against women and children, which is expected to increase payments by $998.1 million over four years from 2021-22. This measure forms the Government’s transitional strategy ahead of the development of the new National Plan to replace the National Plan to Reduce Violence against Women and their Children (2010-2022).

Parameter and other variations

Between the 2020-21 Budget and the 2021-22 Budget, parameter and other variations decreased total cash payments by $24.8 billion in 2020-21 and decreased total cash payments by $14.3 billion over the four years to 2023-24. Since the 2020-21 MYEFO, parameter and other variations have decreased cash payments by $13.5 billion in 2020-21 and decreased total cash payments by $374.5 million over the four years to 2023-24.

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Statement 3: Fiscal Strategy and Outlook | Page 83

Major increases in cash payments as a result of parameter and other variations since the 2020-21 MYEFO include:

• payments relating to the provision of GST to the States and Territories, which are expected to increase by $6.6 billion in 2020-21 ($21.1 billion over the four years to 2023-24), consistent with an increase in GST receipts

• payments relating to the National Disability Insurance Scheme, which are expected to increase by $1.2 billion in 2020-21 ($13.2 billion over the four years to 2023-24), largely reflecting increased participant numbers and higher than expected average participant costs

• payments related to the Military Rehabilitation Compensation Acts — Income Support and Compensation program, which are expected to increase by $3.3 million in 2020-21 ($2.5 billion over the four years to 2023-24), largely reflecting an increase in the number of claims made by members of the Australian Defence Force and veterans

• payments under the General Revenue Assistance program, which are expected to increase by $76.6 million in 2020-21 ($2.3 billion over the four years to 2023-24), largely reflecting changes to transitional GST top-up payments, Horizontal Fiscal Equalisation transition payments and increased royalty payments resulting from higher sale price and volume for liquefied natural gas and condensate

• payments relating to the Financial Support for People with Disability program, which are expected to decrease by $54.0 million in 2020-21 (increasing by $1.6 billion over the four years to 2023-24), largely reflecting changes to estimated recipient numbers

• payments related to the National Partnership for Housing, which are expected to increase by $227.4 million in 2020-21 ($959.4 million over the three years to 2022-23), largely reflecting a higher than expected number of applications for the HomeBuilder program

• payments relating to the Pharmaceutical Benefits Scheme, which are expected to increase by $95.4 million in 2020-21 ($852.5 million over the four years to 2023-24), largely reflecting higher than expected price and volume forecasts for subsidised medicines.

Major decreases in cash payments as a result of parameter and other variations since the 2020-21 MYEFO include:

• payments relating to the Job Seeker Income Support program, which are expected to decrease by $4.9 billion in 2020-21 ($5.4 billion over the four years to 2023-24), largely reflecting lower than expected recipients and average payment rates

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• payments relating to the Economic Response to the Coronavirus program, which are expected to decrease by $1.5 billion in 2020-21 ($4.9 billion over the three years to 2022-23), largely reflecting lower than expected uptake of the JobMaker Hiring Credit and improving labour market conditions

• payments relating to the Infrastructure Investment Program, which are expected to decrease by $188.7 million in 2020-21 ($3.3 billion over the four years to 2023-24), largely reflecting a re-profile of program funding to align with the delivery of project milestones. As part of the 2021-22 Budget measures titled Infrastructure Investment and Road Safety Program — extension, the Government will provide additional payments for priority road and rail projects to support short term economic stimulus

• payments relating to the Aged Care Services program, which are broadly in line in 2020-21 (decreasing by $2.3 billion over the four years to 2023-24), largely reflecting lower than expected occupancy for residential aged care in line with consumer demand. Between 2020-21 and 2023-24, the Government is providing $12.2 billion as part of the response to the recommendations of the Royal Commission into Aged Care Quality and Safety, including $9.6 billion in payments for the Aged Care Services program

• payments relating to the Support for Seniors program, which are expected to decrease by $531.3 million in 2020-21 ($1.3 billion over the four years to 2023-24), largely reflecting lower than expected average payment rates caused by increases to recipients’ average income and assets levels as the economy improves

• payments relating to the Workplace Support Program, which are expected to decrease by $314.0 million in 2020-21 ($744.6 million over the four years to 2023-24), largely reflecting the effect of improving economic conditions on payments made under the Fair Entitlement Guarantee scheme.

Consistent with previous budgets, the underlying cash balance has been improved by the regular draw down of the conservative bias allowance. Details of this draw down are provided in Statement 6: Expenses and Net Capital Investment.

A significant proportion of Government spending is adjusted at each update to align with changes in economic parameters (including prices and wages, unemployment and foreign exchange rates). As a result, improving economic conditions have caused an increase in spending in some programs and has also led to a reduction in the number of beneficiaries for income support payments, which decreases payments.

Analysis of the sensitivity of the payments estimates to change in the economic outlook is provided in Statement 8: Forecasting Performance and Scenario Analysis.

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Net operating balance estimates

The net operating balance is an accrual measure, reflecting revenue minus expenses. It excludes the impact of the Commonwealth’s net new capital expenditure and helps to distinguish between the Government’s capital and recurrent spending.

The net operating balance is expected to be a deficit of $92.7 billion (4.3 per cent of GDP) in 2021-22, compared to an expected deficit of $103.4 billion (5.1 per cent of GDP) in the 2020-21 Budget. Table 3.6 provides a reconciliation of the variations in the net operating balance since the 2020-21 Budget.

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Table 3.6: Reconciliation of net operating balance estimates Estimates

2020-21 2021-22 2022-23 2023-24 2024-25 Total(a)

$m $m $m $m $m $m

2020-21 Budget net operating

balance -197,888 -103,420 -83,507 -58,519 * *

Per cent of GDP -10.2 -5.1 -4.0 -2.7

Changes from 2020-21 Budget to

2020-21 MYEFO

Effect of policy decisions(b) -5,474 -3,150 -2,029 -1,662 * *

Effect of parameter and other

variations 18,178 8,406 4,585 3,042 * *

Total variations 12,704 5,255 2,556 1,380 * *

2020-21 MYEFO net operating

balance -185,185 -98,164 -80,950 -57,139 * *

Per cent of GDP -9.2 -4.8 -3.8 -2.6

Changes from 2020-21 MYEFO to

2021-22 Budget

Effect of policy decisions(b)(c)

Revenue 38 353 -7,352 -14,406 -6,240 -27,645

Expenses 3,748 18,354 17,470 14,858 13,940 64,622

Total policy decisions impact on

net operating balance -3,710 -18,001 -24,822 -29,264 -20,180 -92,266

Effect of parameter and other

variations(c)

Revenue 22,714 23,717 17,631 20,366 * *

Expenses -11,632 265 2,092 4,142 * *

Total parameter and other variations

impact on net operating balance 34,345 23,452 15,539 16,224 * *

2021-22 Budget net operating

balance -154,549 -92,713 -90,233 -70,178 -55,736 -308,860

Per cent of GDP -7.5 -4.3 -4.1 -3.1 -2.3

Net capital investment

Effect of net capital investment(d) 8,620 10,330 10,939 10,135 9,161 40,565

2021-22 Budget fiscal balance -163,169 -103,043 -101,171 -80,313 -64,897 -349,424 Per cent of GDP -7.9 -4.8 -4.6 -3.5 -2.7

*Data is not available. (a) Total is equal to the sum of amounts from 2021-22. (b) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

(c) A positive number for revenue improves the net operating balance, while a positive number for expenses worsens the net operating balance. (d) A positive number for net capital investment worsens the fiscal balance.

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Changes in accrual revenue are generally driven by the same factors as cash receipts, though differences arise where revenue raised in a given year is not received in that year.

Movements in expenses over the forward estimates are broadly similar to the movements in cash payments. The key exceptions include:

• superannuation benefits, where there is a timing difference with the expense accruing during employment and cash payments occurring during retirement

• purchases of non-financial assets, which are included in cash payments but not in accrual expenses. The expense estimates include depreciation of non-financial assets rather than recognising the impact at the time of purchase.

Detailed information on expenses can be found in Statement 6: Expenses and Net Capital Investment.

Headline cash balance estimates

The headline cash balance consists of the underlying cash balance and net cash flows from investments in financial assets for policy purposes (for example, student loans and equity investment in the NBN). Table 3.7 provides further detail of differences between the underlying and headline cash balance estimates of the Australian Government general government sector.

The headline cash balance for 2021-22 is estimated to be a deficit of $117.0 billion, compared with a deficit of $123.8 billion estimated at the 2020-21 Budget. This is primarily driven by the improvement in the underlying cash balance.

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Table 3.7: Reconciliation of general government underlying and headline cash balance estimates Estimates

2020-21 2021-22 2022-23 2023-24 2024-25 Total(a)

$m $m $m $m $m $m

2021-22 Budget underlying cash

balance -160,952 -106,619 -99,266 -79,514 -56,966 -342,366

plus Net cash flows from

investments in financial

assets for policy purposes

Student loans -3,524 -3,260 -3,271 -3,100 -2,758 -12,389

NBN loan(b) 5,550 0 0 13,908 0 13,908

Trade support loans -75 -70 -55 -50 -46 -221

CEFC loans and investments -517 -378 -493 -351 -329 -1,551

Northern Australia

Infrastructure Facility -229 -881 -1,324 -1,077 -674 -3,956

Australian Business

Securitisation Fund -235 -500 -250 -500 -501 -1,751

Structured Finance

Support Fund -1,186 -1,002 -6 -7 -7 -1,022

Drought and rural assistance

loans -2,714 -396 -207 35 42 -525

Official Development Assistance

- Multilateral Replenishment -78 -127 -128 -132 -139 -526

National Housing Finance and

Investment Corporation -91 -10 -15 -7 -42 -74

COVID-19 Support for

Indonesia — loan -1,450 100 100 100 100 400

Financial Assistance to

Papua New Guinea — loan -539 37 37 37 37 148

Net other(c) -2,199 -3,941 -4,528 -4,759 -3,864 -17,092

Total net cash flows from

investments in financial

assets for policy purposes -7,286 -10,428 -10,140 4,096 -8,182 -24,654

2021-22 Budget headline cash

balance -168,238 -117,047 -109,407 -75,417 -65,148 -367,019

(a) Total is equal to the sum of amounts from 2021-22 to 2024-25. (b) This financial profile represents the actual repayments for 2020-21. As the loan agreement between the Government and NBN Co allows some flexibility in relation to the timing of the repayment, the remaining amount is included in 2023-24.

(c) Net other includes amounts that have been itemised for commercial-in-confidence reasons.

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Recurrent and capital spending

Table 3.8 outlines estimates of the Government’s recurrent and capital spending from 2020-21 to 2024-25.

Table 3.8: The Government’s recurrent and capital spending(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b

Recurrent spending

Operating payments 466.5 378.1 375.1 390.6 405.8

Recurrent grants 96.4 99.8 100.3 101.9 103.0

Total recurrent spending 563.0 477.9 475.4 492.5 508.8

Per cent of total spending 91.3 89.4 88.5 88.9 89.9

Capital spending

Direct capital investment(b) 18.5 21.2 22.3 23.5 23.5

Capital grants 14.8 17.1 19.7 17.1 13.3

Financial asset investments 20.6 18.3 19.8 20.8 20.4

Total capital spending 53.8 56.5 61.8 61.4 57.3

Per cent of total spending 8.7 10.6 11.5 11.1 10.1

Total spending 616.8 534.4 537.2 553.9 566.0

(a) General Revenue Assistance is excluded from this analysis. (b) Non-financial asset purchases and net cash flows from financing activities for leases. Note: Recurrent spending includes pension and income support payments, payments to government employees, payments for goods and services, subsidies, grants not made for capital purposes and

specific purpose payments to states for recurrent purposes.

Impact of capital and recurrent spending on the borrowing requirement

Chart 3.2 sets out estimates of the Government’s annual borrowing for capital spending and recurrent cash spending. It does this by analysing the net cash flows from recurrent activities (i.e. current revenue less recurrent spending) and the cash flows for capital investment.

Prior to the COVID-19 pandemic, net cash flows from recurrent activities at the 2019-20 MYEFO were expected to be in surplus across the forward estimates and fully fund recurrent activities with borrowing required for capital spending only. With the underlying cash balance in deficit across the forward estimates as a result of the COVID-19 pandemic, the Government now expects to borrow for both recurrent and capital spending.

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Chart 3.2: Contributions of recurrent and capital spending to the Government’s borrowing requirement

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2009-10 2012-13 2015-16 2018-19 2021-22 2024-25

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Estimates

Capital spending

Recurrent activities

Note: Net capital spending includes spending for non-financial and financial assets, and capital grants to the states and other entities. From 2019-20 onwards, capital spending includes impacts from the implementation of AASB 16 Leases.

The Government’s balance sheet

The balance sheet represents the assets and liabilities of the Australian Government. Whereas ‘flow’ measures such as the underlying cash balance or net operating balance focus on the government’s financial position from year to year, balance sheet measures provide a greater focus on the medium and longer-term sustainability of government operations.

A strong, healthy balance sheet enables governments to respond flexibly to unexpected events and changing economic conditions. The strength of Australia’s fiscal position, including historically low levels of debt, enabled the Government to take decisive action in response to the COVID-19 pandemic.

There are several key aggregates that measure the health of the Government’s balance sheet — gross debt, net debt, net financial worth and net worth.

Gross debt estimates

Gross debt measures the face value of Australian Government Securities (AGS) on issue. This is the amount that the Government pays back to investors at maturity, independent of fluctuations in market prices. Gross debt is a key indicator of fiscal sustainability and, together with net debt, a key focus of the Government’s medium-term fiscal strategy.

The face value of AGS on issue is expected to be 45.1 per cent of GDP ($963 billion) at 30 June 2022 and increase to 50.0 per cent of GDP ($1,199 billion) at 30 June 2025.

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Box 3.2 Government borrowing costs remain at historical lows

The COVID-19 pandemic has resulted in noticeable movements in the yields on Australian Government debt. In line with global trends, the poor economic outlook and elevated uncertainty sparked investor demand for the relative safety of government bonds and drove interest rates to historic lows (Chart 3.3). However, as confidence in the global economic outlook has grown more recently, bond yields in Australia and globally have increased. The spread between Australia’s long-term and short-term yields has increased relative to comparable economies, a sign of investor confidence in the strength of our recovery and the outlook for growth and inflation. Notwithstanding the recent increase, bond yields across all tenors are still lower than their average over the 2 years prior to 2019 when yields started to decline.

Chart 3.3: Yields on 5- and 10-year Australian Government Securities

Source: RBA.

While Government borrowing has increased sharply since the onset of the COVID-19 pandemic, the cost of servicing this debt remains modest owing to very low interest rates. In the period between 20 March 2020 and 3 May 2021, the Australian Office of Financial Management (AOFM) has issued $281.6 billion in Treasury Bonds, with a weighted average tenor of 9.4 years and a weighted average issuance yield of only 0.88 per cent. Based on current yields, an additional $1.6 trillion in debt would need to be issued in order for public debt interest as a share of GDP to reach the 1990’s peak of 2 per cent and $251 billion to reach 1 per cent.

0

1

2

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5

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May-14 May-15 May-16 May-17 May-18 May-19 May-20 May-21

% %

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10 year AGS

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Box 3.2: Government borrowing costs remain at historical lows (continued)

The impact of the recent increase in yields on debt servicing costs has been tempered by the AOFM’s decisions to extend the yield curve over the last decade. In 2010, the weighted average term to maturity was around 5 years and the longest maturity available was only 12 years. The weighted average term to maturity is now 7.6 years and the yield curve extends to June 2051. Extending the yield curve has had the benefit of reducing the refinancing risk of existing debt and increasing the range of issuance options available. This has served the AOFM well in managing the large issuance program arising from the COVID-19 pandemic.

Over the forward estimates, the yield curve is assumed to remain fixed at the level observed prior to each Budget update. This results in a weighted average yield for future bond issuance of around 1.6 per cent compared with 0.8 per cent at the 2020-21 Budget.

Further information on assumed market yields on AGS used at this update and the AOFM’s issuance strategy during the pandemic is in Statement 7: Debt Statement.

Net debt estimates

Net debt is the sum of interest-bearing liabilities less the sum of selected financial assets. Net debt is a broader measure of fiscal sustainability than gross debt as it includes cash-like assets on the Government’s balance sheet as well as the market value of AGS on issue. It provides an indicator of the Government’s ability to meet its future debt obligations.

Net debt is estimated to be 34.2 per cent of GDP ($729.0 billion) at 30 June 2022 (as shown in Table 3.8), lower than the estimate of 40.4 per cent of GDP ($812.1 billion) at the 2020-21 Budget. The improvement in net debt since the 2020-21 Budget is driven by the Government’s decreased borrowing requirements resulting from the improvement in the underlying cash balance and a decrease in the market value of AGS due to higher yields than were assumed at the time of the 2020-21 Budget. Net debt is estimated to increase to 40.9 per cent of GDP ($980.6 billion) at the end of the forward estimates.

Further information on gross debt and net debt is provided in Statement 7: Debt Statement.

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Table 3.9: Australian Government general government sector net financial worth, net debt and net interest payments Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b

Financial assets 509.9 551.2 556.1 565.5 582.7

Non-financial assets 183.3 192.6 202.4 211.6 220.0

Total assets 693.2 743.8 758.5 777.1 802.7

Total liabilities 1,279.7 1,421.8 1,525.9 1,613.9 1,694.1

Net worth -586.5 -678.0 -767.4 -836.8 -891.4

Net financial worth(a) -769.8 -870.6 -969.8 -1,048.4 -1,111.4

Per cent of GDP -37.4 -40.8 -44.6 -46.0 -46.4

Net debt(b) 617.5 729.0 835.0 920.4 980.6

Per cent of GDP 30.0 34.2 38.4 40.4 40.9

Net interest payments 14.1 14.7 14.9 16.7 17.1

Per cent of GDP 0.7 0.7 0.7 0.7 0.7

(a) Net financial worth equals total financial assets minus total liabilities. (b) Net debt is the sum of interest bearing liabilities minus the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements).

Net financial worth and net worth

Net financial worth is the sum of financial assets less liabilities. It includes all classes of financial assets and all liabilities, only some of which are included in net debt. Both the assets of the Future Fund and the public sector superannuation liability that the Future Fund seeks to finance are included in net financial worth.

Net financial worth is estimated to be -$870.6 billion (-40.8 per cent of GDP) at 30 June 2022, an improvement of $76.1 billion compared with the estimate of -$946.8 billion in the 2020-21 Budget.

A further measure of the Government’s financial position is net worth. Net worth is the sum of all assets less all liabilities. It includes non-financial assets such as buildings and plant, equipment and infrastructure. Net worth is expected to be -$678.0 billion (-31.8 per cent of GDP) at 30 June 2022, an improvement of $76.6 billion compared with the estimate of -$754.6 billion in the 2020-21 Budget.

The improvement in net financial worth and net worth are primarily driven by the same drivers as the improvement in net debt.

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Medium-term fiscal projections

The medium-term fiscal projections bring together projections of receipts, payments and the Government’s assets and liabilities for the seven years beyond the forward estimates period.

They outline the trajectory for the fiscal position under current policy settings and prevailing economic assumptions, and provide the starting point to which future policy changes would be applied.

The medium-term fiscal projections generally follow a base-plus-growth methodology, whereby the forward estimates for receipts and payments form the ‘base’ to which future growth is applied. Economic parameters are used to estimate growth rates relevant to different components of receipts and payments. Key economic parameters include nominal GDP, consumption, prices and wages, unemployment, population growth and the structure of the population.

The economic parameters that underpin the medium-term fiscal projections are a product of assumptions and are therefore subject to considerable uncertainty. Small changes to underlying assumptions around the economy, or changes to future policy settings, can have large impacts on projections of fiscal aggregates over the medium term.

While the economic outlook has strengthened considerably, the COVID-19 pandemic is still evolving. A recovery or response which differs from those expected would impact the fiscal aggregates over the medium term. Further discussion of forecasting uncertainty and the sensitivity of current forecasts to changes in key underlying assumptions is contained in Statement 8: Forecasting Performance and Sensitivity Analysis.

The methodology underpinning the medium-term economic projections is explained in Statement 2: Economic Outlook.

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Statement 3: Fiscal Strategy and Outlook | Page 95

Underlying cash balance projections

The underlying cash balance is expected to improve from a deficit of 7.8 per cent of GDP in 2020-21 to a deficit of 1.3 per cent of GDP by 2031-32.

While there is improvement in the underlying cash balance due to stronger tax receipts on the back of the stronger economic outlook, the Government has also made investments to guarantee high quality essential services, in areas such as aged care and mental health. This means that, at the end of the forwards, the underlying cash balance is expected to be largely unchanged compared to the estimates at the 2020-21 Budget. The trajectory for the underlying cash balance across the medium term continues to be largely in line with projections at the 2020-21 Budget (Chart 3.4).

Chart 3.4: Underlying cash balance as a share of GDP

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2016-17 2019-20 2022-23 2025-26 2028-29 2031-32

% of GDP % of GDP

2021-22 Budget

2020-21 Budget

Medium term Estimates

Source: Treasury projections.

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Receipts and payments projections

Total receipts are projected to have increased since the 2020-21 Budget, mainly driven by higher projected tax collections. Tax receipts are highly responsive to economic developments. Projections for a quicker and stronger economic recovery than originally anticipated have therefore increased the level of tax receipts expected across the forward estimates and medium term. Further information on tax receipts can be found in Statement 5: Revenue.

Chart 3.5 shows the level of total receipts projected to 2031-32.

Chart 3.5: Total receipts

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2016-17 2019-20 2022-23 2025-26 2028-29 2031-32

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Note: Total receipts include taxation and non-taxation receipts. Source: Treasury projections.

Payments are expected to fall from a peak of $660.8 billion in 2020-21, reflecting the temporary and targeted nature of COVID-19 emergency support payments such as the JobKeeper Payment.

Although payments fall from the peak, they are expected to be higher than estimated at the 2020-21 Budget from 2021-22 to the end of the medium term (see Chart 3.6). This reflects the Government’s commitment to guaranteeing high quality and sustainable essential services. Key payment programs that are projected to increase across the medium term are aged care, the National Disability Insurance Scheme, and payments to individuals. Projections are also higher across a range of payment programs, reflecting higher indexation as a result of higher prices associated with the stronger than expected economy.

Further information on payments can be found in Statement 6: Expenses and Net Capital Investment.

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Chart 3.6: Total payments

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2016-17 2019-20 2022-23 2025-26 2028-29 2031-32

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2021-22 Budget

2020-21 Budget

Estimates Medium term

Source: Treasury projections.

Payments as a share of GDP are projected to fall from a COVID-19 peak of 32.1 per cent of GDP in 2020-21 and remain flat across the medium term. This reflects the temporary and targeted nature of COVID-19 support. At the end of the medium term, payments are projected to be 26.2 per cent of GDP.

Receipts as a share of GDP are projected to increase from 2021-22 to the end of the medium term. Under Australia’s progressive taxation system, higher wage levels result in a projected increase in tax receipts as a share of the economy across the medium term.

By the end of the medium term, the tax-to-GDP ratio is projected to reach 23.1 per cent of GDP. This is consistent with the Government’s Economic and Fiscal Strategy which outlines the Government’s commitment to maintaining a sustainable tax burden, with a tax-to-GDP ratio at or below 23.9 per cent of GDP.

Chart 3.7 shows total payments and total receipts as a share of GDP projected to 2031-32.

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Chart 3.7: Total payments and receipts as a share of GDP

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Gross debt projections

Gross debt as a share of GDP is projected to be lower in each year of the forward estimates and medium term than projected at the 2020-21 Budget (Chart 3.8). Gross debt is projected to stabilise at around 51 per cent of GDP over the medium term, compared to around 55 per cent of GDP at the 2020-21 Budget.

Australia’s debt position is fiscally sustainable given projections for strong economic growth to continue over the medium term. The economic growth rate is projected to exceed the interest rate on debt, with the result that debt as a share of GDP stabilises over time notwithstanding the projected underlying cash deficit. Further details on Government debt levels can be found in Statement 7: Debt Statement.

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Statement 3: Fiscal Strategy and Outlook | Page 99

Chart 3.8: Gross debt as a share of GDP

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Net debt projections

Net debt is estimated to peak at 40.9 per cent of GDP at 30 June 2025, before improving over the medium term to reach 37.0 per cent of GDP at 30 June 2032, as shown in Chart 3.9. Net debt, as a share of GDP, is projected to fall over the medium term more quickly than gross debt because net debt is based on the market value of AGS which falls as yields rise. Net debt as a share of GDP is projected to be lower in each year of the medium term compared to at the 2020-21 Budget.

Chart 3.9: Net debt as a share of GDP

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Net financial worth projections

Net financial worth improves as a share of GDP over the medium term, reaching -46.4 per cent of GDP at 30 June 2025, before improving to -40.5 per cent of GDP at 30 June 2032 as shown in Chart 3.10.

Chart 3.10: Net financial worth as a share of GDP

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Structural budget balance estimates

Estimates of the structural budget balance can provide broad insights into the sustainability of fiscal settings. Changes in the structural budget balance provide an indication of the impact that government decisions have on the budget position, independent of the current phase of the economic cycle.

The structural budget balance is estimated by removing temporary movements in receipts and payments from the underlying cash balance. These shifts are caused by cyclical factors such as temporary deviations in real GDP from potential (the output gap) or temporary deviations of commodity prices from their long-run trends, as well as temporary fiscal measures designed to support the economy through an economic crisis.

Cyclical factors are expected to provide a small contribution to the budget position over the forward estimates. In the near term, this largely reflects the impact of an elevated terms of trade, particularly due to higher iron ore prices, which more than offsets the effect of a negative output gap on receipts and payments in 2020-21 and 2021-22. By the end of the forward estimates, the contribution from cyclical factors is modest, consistent with the iron ore price having declined to its long-run assumption and an output gap that is closed.

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In the near term, the unprecedented temporary economic support measures, in response to COVID-19, make significant contributions to the deterioration in the underlying cash balance. The underlying cash balance improves steadily from 2020-21 as the temporary measures are unwound and the structural budget balance improves from 2022-23.

Chart 3.11: Structural budget balance

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Note: The presentation of the structural budget balance chart has been adjusted to separate the budgetary impact of temporary measures from structural factors. This approach follows the methodology detailed in Treasury Working Paper 2013-01. ‘Temporary measures’ comprise total direct economic and health support since the start of the COVID-19 pandemic. The ‘cyclical factors’ component comprises the estimated impact on the underlying cash balance from automatic stabilisers and cyclical movements in asset and commodity prices.

Source: Treasury.

Statement 4: The labour market through COVID-19 | Page 103

Statement 4: The labour market through COVID-19

The labour market recovery in Australia has exceeded all expectations. Compared with major advanced economies, Australia is the first economy to have recovered hours worked and employment to pre-pandemic levels.

The Government’s policy response has played a significant role in supporting the labour market through the COVID-19 recession and setting it up for a strong recovery. This includes policies aimed at boosting household incomes, ensuring business continuity and preserving economic and financial linkages.

As a result, Australia is set to avoid the worst of the economic scarring effects seen following past recessions. The size of the COVID-19 shock, coupled with the speed of labour market deterioration, made economic scarring a real possibility as the crisis unfolded. In the 1990s recession, the unemployment rate took a decade to recover to its pre-crisis level. In contrast, the unemployment rate is now on track to recover in just two years.

The next priority must be to lock in the substantial benefits that have been achieved. While Australia is emerging from the COVID-19 shock with a strong recovery in activity and employment, the outlook for the global economy remains highly uncertain. With 800,000 COVID-19 cases diagnosed daily across the world, new strains of the virus emerging and international travel restrictions yet to be lifted, the effects of COVID-19 may not dissipate for some time yet.

In this context, it is crucial that the Government continues to support a strong labour market that is both flexible and resilient. The fiscal support contained in this Budget will provide broad-based support to the economy, stimulating economic activity and driving down the unemployment rate. This is consistent with the Government’s Economic and Fiscal Strategy to drive the unemployment rate down to pre-pandemic levels or below. This Budget will also support cohorts who face greater risks and challenges in the labour market.

With sound policy and an improving global outlook, the Australian economy is on course to do better than merely recover to its pre-pandemic levels, with the unemployment rate forecast to reach 4¾ per cent in the June quarter 2023. The unemployment rate in Australia has only been sustained below 5 per cent once since the early 1970s and this Budget sets us on a course to achieve this again. The Australian economy may be able to sustain lower unemployment rates ⎯ and this will mean more Australians finding work, and setting the foundations for a strong, resilient and productive economy in the longer term.

Statement 4: The labour market through COVID-19 | Page 105

Contents

The impact of COVID-19 ............................................................................. 107

The risks of economic ‘scarring’ .................................................................................. 108

The policy response ................................................................................... 110

The labour market recovery and JobKeeper transitions ......................... 113

Supporting the recovery ............................................................................ 119

Supporting women in the workforce ............................................................................ 119

Helping younger workers ............................................................................................ 120

Getting the long-term unemployed back into work ...................................................... 121

Supporting the broader labour market ........................................................................ 122

Statement 4: The labour market through COVID-19 | Page 107

Statement 4: The labour market through COVID-19

The impact of COVID-19

The COVID-19 pandemic led to Australia’s first recession in almost 30 years. Not only had Australia not faced an economic shock of such magnitude for decades, the nature of the shock was quite different to previous downturns. As such, there was the need for a different framework to guide the development of a policy response that tackled the health crisis and the potential for long-term economic damage.

Past experiences with infectious diseases, such as the Avian Flu and the Severe Acute Respiratory Syndrome (SARS) had provided the basis for analysing the economic effects of a pandemic. The economic effects of pandemics tend to spread quickly as the disease itself spreads quickly across international borders. The effect is magnified as the shock to one country is transmitted to other countries through trade and financial linkages.5 These spillovers have been evident during the COVID-19 pandemic, with substantial disruptions to global value chains and a sharp contraction in global growth over 2020.

On the domestic front, earlier analysis ⎯ including work published by Treasury in 2006 ⎯ identified three key channels through which pandemics impact the economy.6 First, pandemics lower consumer confidence and therefore consumption, even with a small number of deaths. Second, business investment contracts due to weaker demand, lower confidence, and increased domestic and global uncertainty. Both of these channels were evident in Australia during COVID-19.

Third, a pandemic has significant effects on the labour market, decreasing both the supply of, and demand for, labour through absenteeism and activity restrictions. This third channel makes pandemic-related shocks such as COVID-19 different to previous downturns in the early 1980s, the early 1990s and the Global Financial Crisis (GFC). During COVID-19 this last channel was significant. The need to protect the community and its most vulnerable members saw the rapid imposition of activity and travel restrictions. These restrictions led to a deep and sharp downturn in employment ⎯ the largest on record ⎯ as well as a sharp increase in the number of workers on reduced hours (Chart 4.1).

5 See for example: Lee J and McKibbin W (2004), ‘Estimating the Global Cost of SARS’, in Learning from SARS: Preparing for the Next Disease Outbreak: Workshop Summary, 2004 and McKibbin W and Fernando R (2020), ‘The global macroeconomic impacts of COVID-19: Seven scenarios’ CAMA Working Papers Vol 19/2020.

6 Kennedy S, Thomson J and Vujanovic P (2006), ‘A Primer on the Macroeconomic Effects of an Influenza Pandemic’, Treasury Working Paper 2006-01, February 2006.

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Chart 4.1 Labour market indicators

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Note: People working fewer than their usual hours, or no hours at all, for economic reasons, includes those receiving JobKeeper payments. Source: ABS Labour Force, Australia, Detailed.

The risks of economic ‘scarring’

The imposition of restrictions met the overriding policy priority of protecting the health of the Australian people. However, past experiences have shown that economic downturns can have long-term adverse effects on the economy, known as ‘scarring’, and unemployment can remain elevated for a sustained period following a downturn.7

Downturns increase job separations and churn, and can destroy what had been viable businesses. In turn, this can sever productive employee-employer relationships, end business-to-business linkages, and destroy firm-specific human and intangible capital. The risk of this was acute in the context of COVID-19, given the widespread nature of the restrictions meant that many highly productive and otherwise viable firms may have closed.

For individuals, downturns often lead to sharp increases in the number of long-term unemployed. If people are unemployed for an extended period it can cause a deterioration in their skills that may require them to retrain or relocate for new employment opportunities. A slump in the demand for labour can also mean that new entrants to the labour market, such as recent graduates, are unable to secure a solid foothold, limiting their future job opportunities for many years.

7 See for example Day I and Jenner K (2020), ‘Labour Market Persistence from Recessions’, RBA Bulletin, 17 September 2020.

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Statement 4: The labour market through COVID-19 | Page 109

Typically the most affected workers in a downturn are those in the hardest hit industries. This proved to be the case during the COVID-19 downturn. In addition, employment status also had a large bearing on labour market outcomes, with part-time and casual workers experiencing the largest declines.

In past recessions, the most affected cohorts tended to be men in full-time jobs in sectors such as manufacturing. In contrast, the industries most affected by the pandemic were accommodation and food services and arts and recreation services, and casual workers were far more likely to lose employment than permanent employees.8 As a consequence, women and young people were more likely to lose work. Job losses were also more notable for individuals with lower levels of educational attainment (see Chart 4.2), English proficiency, and in lower income quintiles.

Chart 4.2 Employment to population ratio by educational attainment

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The differing cohorts affected by this crisis may have meant that there were additional or different dimensions and risks around labour market scarring. For some of these groups, the scarring may have exacerbated existing economic insecurities, such as for lower-skilled workers and women. For younger workers, it may have disrupted the formative years in their careers.

8 For example, based on analysis of newly available Labour Force Survey microdata, an individual working in accommodation and food services was over 20 percentage points more likely to lose work (either through job loss or a reduction in hours) between February and April 2020, after accounting for other differences. Working in arts and recreation services increased the probability of losing work by almost 30 percentage points. Casual workers were around 20 percentage points more likely to lose work than permanent employees.

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Analysis of historical firm-level data shows that firm closures lead to persistent wage scarring for workers of all age cohorts. For older workers this entirely reflects a lower likelihood of finding a new job, while younger workers still face persistent wage scarring even when they are able to find new employment.

Similarly, Australians graduating into a local labour market where the youth unemployment rate was 5 percentage points higher can expect to earn roughly 8 per cent less in their first year of work, and 3½ per cent less after five years. It takes around a decade for this effect to fully disappear. Female graduates experience even more labour market scarring than men.9

It was with this potential for scarring in mind that the large and rapid fiscal response was developed. The response was designed to maintain productive employee-employer relationships, support productive and viable businesses, and provide income support to those most affected by the downturn. The further support in the 2021-22 Budget, outlined below in ‘Supporting the Recovery’, is targeted at getting vulnerable cohorts into work and driving the unemployment rate down to further mitigate scarring from extended periods of unemployment.

The policy response

As the COVID-19 health crisis unfolded during March 2020, three Economic Response Packages were rapidly introduced. The support was underpinned by clear principles: that it be temporary, targeted, scalable, proportionate and use existing mechanisms. The support packages assisted the economy through three key channels: helping households, directly supporting businesses, and preserving the link between employees and employers.

Individuals and households were supported through the payment of a Coronavirus Supplement to certain income support payment recipients, four Economic Support Payments, and temporary early release of superannuation. These policies helped to support those who had lost employment and who were not supported directly by the other policies aimed at businesses and employees.

Businesses were supported through a number of investment incentives, cash flow boost payments, a wage subsidy to retain apprentices and trainees, and targeted support for the most severely affected sectors and regions. Businesses were also supported with loan guarantees, increased availability of credit, and insolvency reforms.

9 See Andrews D, Deutscher N, Hambur J and Hansell D (2020), ‘The Career Effects of Labour Market Conditions at Entry’, Treasury Working Paper 2020-01, June 2020.

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Statement 4: The labour market through COVID-19 | Page 111

Businesses and their employees were further supported in the third economic support package with the announcement of the JobKeeper Payment. It was the largest one-off fiscal measure in Australia’s history, supporting more than 3.8 million individuals and over one million organisations from March to September 2020. The JobKeeper Payment had a number of objectives including: preserving employee and employer relationships, providing additional income for households, and decreasing uncertainty. It was expressly designed to work in conjunction with the JobSeeker Payment (enhanced by the Coronavirus Supplement). For example, some employees who had more tenuous relationships with their employers were supported by JobSeeker instead of JobKeeper.10

The JobKeeper Payment was complemented with temporary changes to the Fair Work Act 2009 which gave businesses the ability to adapt workplace arrangements to the challenging economic conditions. These policies were designed and implemented in an environment where a large number of businesses faced strict public health restrictions, resulting in significant job losses and reduced incomes. From September 2020, the JobKeeper Payment was tapered and extended by six months, conditional on businesses re-establishing their eligibility for support.

The Government response was targeted towards vulnerable cohorts who had been hit hardest by the shocks, allowing them to continue spending and, in some cases, save. Average incomes in the lowest two income quintiles increased in the June 2020 quarter, despite larger declines in employment for these groups, reflecting the Coronavirus Supplement and JobKeeper (see Chart 4.3). Average incomes in these quintiles remained above pre-pandemic levels through 2020, even as the JobKeeper Payment and the Coronavirus Supplement were tapered as labour income recovered in line with the improvement in employment. In comparison, the third and fourth income quintiles saw broadly no change in income from March to December 2020, while the top quintile experienced a sustained lower level of income throughout the year.

10 JobSeeker arrangements were modified in a number of ways to support employees retaining an attachment to their employers. Separation certifications were no longer required to access the JobSeeker Payment, and partner income tests were eased, as were waiting periods.

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Chart 4.3 Individual fortnightly wages and welfare payments by income quintile (left), and employment index by income quintile (right)

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Source: Treasury analysis of tax and welfare payment microdata; ABS Australian National Accounts: National Income, Expenditure and Product.

The policies kept viable businesses afloat. Over the course of 2020 the number of business insolvencies was subdued, with around 40 per cent fewer companies entering external administration than in 2019.

By keeping businesses afloat, the suite of support policies also kept jobs intact. The JobKeeper Payment was an important component of this. It maintained employee-employer relationships through the worst of the crisis, reducing and then stabilising the rate of decline in employment.11 The RBA estimated that the JobKeeper Payment increased the likelihood of a JobKeeper-nominated employee remaining employed over the April to July 2020 period by around 20 per cent. This implied the JobKeeper Payment saved at least 700,000 jobs at the height of the crisis.12

These policies provided a great deal of support to the economy, and helped to drive the economic recovery. Moreover, they will continue to contribute to the economic recovery even as they are tapered because much of the financial support provided remains on households’ and businesses’ balance sheets, and will contribute to spending in the coming quarters.

11 Treasury (2020), ‘The JobKeeper Payment: Three-month review’, 21 July 2020. 12 Bishop J and Day I (2020), ‘How Many Jobs Did JobKeeper Keep?’, RBA Research Discussion Paper 2020-07, November 2020.

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Statement 4: The labour market through COVID-19 | Page 113

The labour market recovery and JobKeeper transitions

The recovery in the labour market since mid-2020 has been unprecedented. Employment reached a record high of 13.1 million in March 2021 (0.6 per cent higher than a year earlier), and the unemployment rate is down to 5.6 per cent. Total monthly hours worked is now 1.2 per cent higher, and the number of people working zero hours for economic reasons has fallen below pre-pandemic levels.

The recovery has significantly outpaced the protracted recoveries experienced in past downturns (see Chart 4.4), and those of other advanced economies during COVID-19 (see Box 4.1). Workers who lost their jobs were far more likely to be re-employed quickly compared to past downturns, improving outcomes for individuals and ameliorating some concerns around scarring. For example, based on Labour Force Survey microdata, workers who lost their job in 2020 were 17 per cent more likely to be re-employed after six months compared with workers who lost their jobs during the early 1990s recession.

Chart 4.4 Change in unemployment rate during downturns

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Box 4.1: International comparison

Australia’s labour market continues to perform favourably compared with all major advanced economies. Compared with major advanced economies who have published data for March 2021, Australia is the first economy to have recovered hours worked and employment to pre-pandemic levels.

Chart 4.5 Employment levels, Australia and the G7 economies

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Statement 4: The labour market through COVID-19 | Page 115

Box 4.1: International comparison (continued)

Chart 4.6 Hours worked, Australia and the G7 economies

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20-65 years. Due to definitional differences, care must be taken when comparing employment data across countries. Data is up to date as at 6 May 2021. Source: Refinitiv; National statistical agencies; ABS Labour Force, Australia.

The combination of well-targeted economic support, $291 billion as at this Budget, and the lifting of restrictions on activities, means that the labour market has rebounded quickly. Many workers were able to return to their previous jobs supported by policies to keep businesses afloat, with a record number of entries into pre-existing jobs.13 Further, the proportion of the recovery that reflected people returning to past jobs was higher in sectors that were more heavily affected by temporary COVID-19 restrictions, such as accommodation and food services, and arts and recreation services (see Chart 4.7).14

13 Based on Labour Force Survey microdata. 14 Based on Single Touch Payroll microdata.

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Chart 4.7 Share of recovery in employment from April to June 2020 explained by workers returning to previous jobs

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Source: Treasury analysis of Single Touch Payroll data.

As the labour market recovers, transitioning away from job retention schemes (such as the JobKeeper Payment) towards policies that promote labour reallocation is important. Barrero, Bloom and Davis (2020) highlight the risk that policies designed for the height of the recession outstay their welcome and distort incentives to seek new employment, while policies that facilitate reallocation of labour can improve the speed of the recovery.15 The IMF has highlighted that employment reallocation policies can help ease the adjustment process to some of the more persistent effects of the pandemic.16

By early 2021, there was substantial evidence that the labour market was recovering strongly, allowing a smooth transition from JobKeeper and the Coronavirus Supplement and for private sector-led growth to play a greater role in the recovery.

15 Barrero J M, Bloom N and Davis S J (2020), ‘COVID-19 is Also a Reallocation Shock’, May 2020. 16 International Monetary Fund (2021) ‘World Economic Outlook: Managing Divergent Recoveries’, Washington, DC, April 2021.

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The JobKeeper transition at the end of the September 2020 quarter was relatively smooth. Around two million individuals (employees and business participants) transitioned off JobKeeper at the end of September 2020. The vast majority of the employees that transitioned off JobKeeper during this period remained in employment.

Although total employment at organisations transitioning off the JobKeeper Payment remained broadly unchanged, experiences differed across firms. Some organisations grew as operating conditions and confidence in the economic outlook improved. Others shrank, shedding workers as they rolled off the Payment. Overall, these two effects broadly offset each other.17 This highlights the dynamism and resilience of the Australian labour market. This also alleviates some concerns that transitioning organisations might shed JobKeeper workers and hire casuals.

There was only a modest increase in the number of people moving off the JobKeeper Payment and onto other forms of income support, such as JobSeeker and Youth Allowance (Chart 4.8). Unemployment levels have fallen in each successive month since October with nearly half a million jobs created since the initial transition from JobKeeper in September.

The second transition at the end of the December 2020 quarter appears to have been similarly smooth.

17 Based on Single Touch Payroll microdata.

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Chart 4.8 Weekly income support flows for individuals on the first phase of the JobKeeper Payment

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Source: Treasury analysis of tax and welfare payment microdata.

In the final quarter of the JobKeeper Payment (January to March 2021), reliance on the Payment reduced further to around 1.1 million individuals and around 385,000 organisations.

Following the conclusion of the JobKeeper Payment, early data indicates the labour market has remained resilient. Job vacancies rose to reach a record high and the number of job seekers for every vacancy fell to its lowest level in over a decade, while the number of people on unemployment benefits has continued to fall.

Supporting household incomes, keeping firms afloat, and maintaining employee-employer relationships has played a crucial role in reducing potential business and labour market scarring, allowing Australia to recover swiftly. The conclusion of emergency support measures to avoid scarring and transitioning to policies that encourage private sector-led activity will allow the labour market to reallocate resources more efficiently and further drive recovery.

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Statement 4: The labour market through COVID-19 | Page 119

Supporting the recovery

The measures contained in this Budget will provide broad-based support to the economy and are expected to drive the unemployment rate down, consistent with the Government’s Economic and Fiscal Strategy of pre-pandemic levels or below. This includes the Government’s extension of the low and middle income tax offset, business tax relief, infrastructure investment and the significant Government investment in a range of essential services. This broad macroeconomic support will stimulate aggregate demand and economic activity, helping to drive down the unemployment rate.

The Budget is also aimed at assisting cohorts who face greater risks and challenges in the labour market. By building the skills that workers need, and removing barriers to employment faced by women and the long-term unemployed, these measures will help move people into employment and support building a flexible, resilient and productive economy.

Supporting women in the workforce

As noted above, labour market outcomes for women have largely recovered to their pre-pandemic levels. However, even before COVID-19, female participation was well below male participation. COVID-19 has also highlighted existing economic insecurity for women. Raising the female participation rate will assist with the recovery, address longer-term structural issues in the labour force and improve women’s economic security (for more information see Women’s Budget Statement).

The 2021-22 Budget provides further assistance to raise women’s participation in the labour market. The Government is investing an additional $1.7 billion into the Child Care Subsidy, which assists parents with the cost of child care while they are working, training, studying or volunteering. The measure focuses on families with multiple young children in child care, where the secondary earner (often female) can face particularly high financial disincentives to take on additional work.

Changes to the Child Care Subsidy and the removal of the annual cap are estimated to add up to 300,000 hours of work per week, which would be the equivalent of around 40,000 individuals working an extra day per week.

As many women take time out of the workforce during their careers, the 2021-22 Budget includes measures to support women to return to work after a career break. This includes improving access to the Mid-Career Checkpoint program, which provides free career counselling to help people re-enter the workforce or advance their careers after returning to work. It also includes an expansion of the Career Revive program, which supports medium to large businesses to attract and retain women who are returning to work.

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Page 120 | Statement 4: The labour market through COVID-19

The 2021-22 Budget also delivers a range of programs to encourage women into leadership positions and into diverse industries and occupations. An expansion of the Women’s Leadership and Development Program will include further funding for successful Women@Work projects such as the Academy for Enterprising Girls, and an expansion of the National Careers Institute’s Partnership Grant Program will have a specific focus on career opportunities and pathways for women. The Government will also establish the Boosting the Next Generation of Women in STEM Program with an investment of $42.4 million over seven years.

Helping younger workers

Employment among young people has almost recovered to pre-pandemic levels, mitigating some of the concerns about long-term scarring, but some risk still remains. The number of young workers (15-24) looking for full-time employment who have been unemployed for more than 12 months has increased by 54 per cent between March 2020 and 2021. Many of these young workers looking for ‘careers’ are likely to find jobs as the labour market continues to improve. But given the importance of early labour market outcomes for career trajectories, this Budget also contains policies aimed at getting young people upskilled and into work.

The 2021-22 Budget will help provide young people with relevant skills and experience to ensure they can access good job opportunities in the recovery period ahead. The Government’s commitment to extend the JobTrainer Fund, subject to matched funding by state and territory governments, will provide a further 163,000 free or low-fee training places in areas of skills need, helping people access valuable upskilling and reskilling opportunities. The extension and expansion of the Boosting Apprenticeship Commencements wage subsidy will also provide more opportunities for young people to upskill and reskill.

In addition, new avenues for young people to move into digital careers will be created through the Digital Skills Cadetship Trial. Recognising the need for specialist skills in emerging fields such as artificial intelligence, robotics and quantum computing, the Government will provide assistance through funding for more than 460 new scholarships.

The 2021-22 Budget also provides tailored assistance to young people to help them move into employment. Transition to Work, an intensive employment program for young people, is expected to support an average caseload of around 41,000 disadvantaged people each year to transition into work or education (including apprenticeships or traineeships). The National Careers Institute service, which provides independent and impartial careers information and advice, is being extended to support young people to make well-informed decisions about their education and career paths through career coaching sessions.

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Statement 4: The labour market through COVID-19 | Page 121

Getting the long-term unemployed back into work

Success in re-entering employment becomes significantly harder the longer an individual is unemployed. This reflects a range of factors, including the atrophy of critical employability skills which are highly valued by employers. Despite the strong recovery, the long-term unemployment rate (those unemployed for one year and over) has increased (Chart 4.9). While many of these workers are likely to find work as the economy recovers, policies to assist in the process are still valuable.

Because of this, the 2021-22 Budget is focusing on transitioning the long-term unemployed back into work, which will also help to achieve and sustain a lower unemployment rate.

Chart 4.9 Long-term unemployment rate and unemployment rate

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Unemployment rate (RHS)

Source: ABS Labour Force, Australia and ABS Labour Force, Australia, Detailed.

The Government is assisting those who are already long-term unemployed by expanding the support available to them in employment services. All wage subsidies under the existing jobactive program are being increased to $10,000 until 30 June 2022, after which wage subsidies of up to $10,000 will be available under the enhanced services stream of the new employment services program. The introduction of the new employment services program in July 2022 will also deliver more tailored support to job seekers, including the long-term unemployed, which will help them overcome barriers to employment.

In addition, the 2021-22 Budget is ensuring the long-term unemployed have the opportunities to gain the skills employers seek. The Skills for Education and Employment program will be uncapped and expanded, ensuring that more job seekers in employment services can receive the training they need in foundation skills such as literacy and numeracy, as well as digital skills.

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Page 122 | Statement 4: The labour market through COVID-19

Supporting the broader labour market

The labour market recovery to date has been remarkable and ameliorates many concerns about labour market scarring. However, there is still more work to do. Both Treasury and the RBA have estimated that the Non-Accelerating Inflation Rate of Unemployment (NAIRU) in the economy is lower than previously thought (see Box 4.2). This implies that the Australian economy can do more than recover to its pre-pandemic unemployment rate ⎯ that it can realise and sustain unemployment rates below 5 per cent. Economic policy can play an important role achieving this.

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Statement 4: The labour market through COVID-19 | Page 123

Box 4.2: The Non-Accelerating Inflation Rate of Unemployment (NAIRU)

The NAIRU is the rate of unemployment associated with stable wage and price growth. The difference between the observed unemployment rate and the NAIRU is often considered to be a key measure of labour market slack. An unemployment rate below the NAIRU indicates a tight labour market, which will cause wages and prices to be bid up.

Chart 4.10 Decline in NAIRU over time

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In Australia, NAIRU estimates have trended downwards over recent decades (see Chart 4.10). This is due to structural trends such as increased competition in goods markets, increases in services being provided internationally, advances in technology, and changes in the supply of labour.

Estimating the NAIRU presents difficulties as it is not directly observable, and its estimates are thus inherently uncertain. Nonetheless declining inflationary and wage pressures over recent years despite low and declining rates of unemployment have provided evidence that the NAIRU has been lower than previously thought. This is consistent with the experience of other advanced economies, where wage growth began picking up prior to the pandemic, but at lower levels of unemployment than previously expected.

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Page 124 | Statement 4: The labour market through COVID-19

Box 4.2: The Non-Accelerating Inflation Rate of Unemployment (NAIRU) (continued)

Both the Treasury and RBA have estimated that the NAIRU was lower than previously thought prior to the COVID-19 crisis. Australia’s NAIRU was previously thought to be around 5 per cent, but based on updated modelling, Treasury believes it was within a range of 4.5 to 5 per cent preceding COVID-19.18

Large adverse shocks to the economy can lead to labour market scarring, with workers’ skills depreciating, and thereby push up the NAIRU. Although there is still a risk that certain cohorts will find it difficult to gain employment, the strong labour market recovery to date is cause for optimism that such scarring is likely to be far less pronounced following the COVID-19 shock.

Moving the economy towards full capacity and maintaining price stability is normally a role for monetary policy. However, with monetary policy currently constrained, there is a role for fiscal policy to assist in a sustainable manner. That is, there is a greater role for fiscal policy to drive unemployment down further to generate increases in wage growth and inflation, without generating excessive inflation. This is consistent with the Government’s Economic and Fiscal Strategy to drive the unemployment rate down to pre-pandemic levels or below.

Doing so, and locking in the recovery seen to date, is particularly important in light of the ongoing uncertainties on the health and economic fronts. Around the world, more than 800,000 new cases of COVID-19 are being diagnosed every day, with new strains of the virus emerging. Our international borders are still largely closed, and while the vaccine rollout is progressing both here and abroad, it remains at a very early stage.

In this context, while the outlook is strong, it is important to continue to support the economy and ensure that the recovery is locked in. The fiscal support contained in this Budget will provide broad-based support to the economy, stimulating economic activity, creating jobs and driving down unemployment. The measures in this Budget will also assist cohorts that may otherwise face great risks and challenges in the recovery. In doing so, the Government is prioritising job creation as Australia’s pathway to a stronger economy, and a stronger budget position. And with their focus on skills and participation, and emphasis on the digital economy and innovation, the policies in this Budget are designed to boost the economy’s productive capacity, raise living standards, and set Australia up for the future.

18 Ruberl H, Ball M, Lucas L and Williamson T (2021), ‘Estimating the NAIRU in Australia’, Treasury Working Paper 2021-01, 29 April 2021.

Statement 5: Revenue | Page 125

Statement 5: Revenue

As the Australian economy continues to recover from the impacts of the COVID-19 pandemic, the outlook for revenue has improved significantly.

The upward revision to revenue is the largest in the past decade. Parameter and other variations since the 2020-21 Budget have increased tax receipts by $107.1 billion over the four years to 2023-24. The upward revision is driven by a number of factors. A stronger economic recovery and elevated iron ore prices have supported company tax receipts and domestic consumer spending has supported a strong rebound in GST receipts. The rapid recovery in the labour market has supported higher personal income tax receipts. Over the latter half of the forward estimates period, an improvement in the outlook for employment is expected to drive higher prices and wages growth, further supporting personal income tax receipts.

Significant additional Government support for the economic recovery through tax relief for households and businesses has partially offset these revisions. Policy decisions are expected to reduce tax receipts by $22.6 billion over the four years to 2023-24. The largest of these decisions, Temporary full expensing extension, Temporary loss carry back extension and Retaining the low and middle income tax offset for the 2021-22 income year do not reduce tax receipts beyond the forward estimates.

After accounting for policy decisions, compared to the 2020-21 Budget, total tax receipts have been revised up in each year of the forward estimates and by a total of $84.5 billion (or 4.8 per cent) over the four years to 2023-24.

In 2020-21, tax receipts as a share of GDP are expected to be 22.3 per cent, higher than the 2020-21 Budget estimate of 21.8 per cent. Tax receipts as a share of GDP are expected to be 21.9 per cent in 2024-25, the final year of the forward estimates.

Notwithstanding the improved outlook, expected tax receipts remain well below the levels predicted prior to the onset of the COVID-19 pandemic. In addition, the outlook for tax receipts remains more uncertain than usual given a number of factors, such as the potential build-up of tax losses, that may weigh on future tax collections.

Statement 5: Revenue | Page 127

Contents

Overview ..................................................................................................... 129

Tax receipts during the recovery ................................................................................. 129

Tax outlook .................................................................................................................. 133

Variations in receipts estimates ................................................................ 137

Taxation receipts estimates ........................................................................................ 137

Non-taxation receipts .................................................................................................. 145

Variations in revenue estimates ................................................................ 149

Appendix A: Tax Benchmarks and Variations Statement ........................ 152

Statement 5: Revenue | Page 129

Statement 5: Revenue

Overview

The outlook for the Australian economy has strengthened. The faster-than-expected recovery coupled with higher commodity prices has translated into significantly higher receipts in 2020-21 than expected at the 2020-21 Budget. More generally, the improved economic outlook has resulted in upward revisions to receipts across the entire forward estimates period.

Policy decisions since the 2020-21 MYEFO provide substantial additional tax relief for businesses and households to support the recovery. This extends and builds on tax support announced in the 2020-21 Budget.

After accounting for new policy decisions, total tax receipts are forecast to grow by 6.4 per cent in 2020-21, and by 3.4 per cent on average over the four years to 2023-24 (Table 5.1).

Table 5.1: Australian Government general government receipts Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b $b

Total taxation receipts ($b) 431.8 459.5 445.6 455.3 493.1 525.4

Growth on previous year (%) -3.7 6.4 -3.0 2.2 8.3 6.5

Per cent of GDP 21.7 22.3 20.9 20.9 21.6 21.9 Tax receipts excluding GST ($b) 371.5 389.7 373.7 380.1 414.5 443.0 Growth on previous year (%) -3.1 4.9 -4.1 1.7 9.1 6.9 Per cent of GDP 18.7 18.9 17.5 17.5 18.2 18.5 Non-taxation receipts ($b) 37.6 40.4 36.5 38.7 39.7 46.6 Growth on previous year (%) 2.5 7.3 -9.7 6.1 2.8 17.3 Per cent of GDP 1.9 2.0 1.7 1.8 1.7 1.9 Total receipts ($b) 469.4 499.8 482.1 494.0 532.9 572.0 Growth on previous year (%) -3.3 6.5 -3.6 2.5 7.9 7.3 Per cent of GDP 23.6 24.3 22.6 22.7 23.4 23.9 Tax receipts during the recovery The COVID-19 pandemic has had a significant impact on the Australian economy. The spread of the virus, and public health containment measures introduced, forced many businesses to hibernate. Unemployment increased, and discretionary household consumption declined due to the containment measures. This led to a steep deterioration in the outlook for tax receipts, across all heads of revenue. In the 2020-21 Budget, the forecast for tax receipts in 2020-21 was revised down $55.2 billion or 11.5 per cent relative to the forecast in the 2019-20 MYEFO.

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However, an effective public health response coupled with unprecedented levels of Government support allowed the economy to reopen and recover more quickly than expected. Support through the tax system outlined in the 2020-21 Budget has started to take effect. This includes the impact of tax relief provided by the bring-forward of the Personal Income Tax Plan which has been flowing to households since November 2020 (see Box 5.1).

The Government’s support for business investment has also begun to have an impact ⎯ in the December quarter, investment in new machinery and equipment increased at the fastest quarterly rate in almost seven years. This has supported economic growth. Nominal GDP is now expected to grow by 3¾ per cent in 2020-21, compared with a decline of 1¾ per cent forecast at the 2020-21 Budget.

Box 5.1: Tax relief from the 2020-21 Budget flowing to individuals

In the 2020-21 Budget the Government brought forward the tax cuts from Stage 2 of the Personal Income Tax Plan by two years, backdating them to 1 July 2020. The bring-forward aimed to leverage the tax system to immediately boost household disposable income and support the economic recovery.

The chart below shows the tax relief this measure is estimated to have provided to individuals each month to the end of April 2021. In total, the tax cuts are estimated to have provided around $5.2 billion in tax relief so far, through reduced income tax withholding and instalment amounts. This is on top of the 2019-20 low and middle income tax offset (LMITO) which has seen around $6.8 billion flow to households since 1 July 2020.

Most of the tax cuts are delivered through reduced income tax withholding — that is, employers reducing the amount they hold back from individuals’ pay packets. Employers adjust these amounts in line with the Australian Taxation Office’s (ATO) withholding schedules, which were updated on 12 October 2020 to reflect the new tax thresholds. It is estimated that these changes started to materially increase individuals’ take-home pay from November 2020, providing economic stimulus within six weeks of the Budget announcement.

The increase in tax relief flowing to individuals from February reflects tax relief for individuals who pay income tax in instalments (‘other individuals’), with payments for the December and March quarters due to the ATO in the months of March and April respectively.

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Statement 5: Revenue | Page 131

Box 5.1: Tax relief from the 2020-21 Budget flowing to individuals (continued)

Chart 5.1: Estimated monthly tax relief to date from the Personal Income Tax Plan Stage 2 bring-forward

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Note: This chart combines Treasury costing figures with historical monthly collections data and 2020-21 instalment due dates to estimate monthly tax relief. Source: ATO and Treasury.

In the 2020-21 Budget and 2021-22 Budget the Government also announced an additional benefit to taxpayers through retaining the LMITO for the 2020-21 and 2021-22 income years. The LMITO for the 2020-21 income year is expected to benefit around 10 million taxpayers from 1 July 2021, following lodgement of tax returns for the year. In addition, any excess tax paid by individuals prior to the withholding schedule updates in October 2020 will be refunded, providing an additional boost to household disposable income. This is likely to provide continued incentives for early lodgement of tax returns, which was observed in 2019-20 and 2020-21 following the introduction of the LMITO.

As a result of the faster-than-expected recovery, tax receipts have been well above the levels expected both in the 2020-21 Budget and the upgraded estimates in the 2020-21 MYEFO (Chart 5.2). GST rebounded quickly as public health containment measures were lifted, increases in iron ore prices resulted in strong company tax instalments and increases in employment in recent months have resulted in stronger personal income tax receipts.

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Page 132 | Statement 5: Revenue

In total, 2020-21 taxation receipts at the end of March were $15.7 billion above the 2020-21 MYEFO forecast (Chart 5.2). Although some of this strength relates to one-off factors, such as stronger-than-expected on-assessment payments from 2019-20 tax returns and faster than expected recovery of outstanding tax liabilities, much of it reflects the improved outlook, particularly for the labour market, that is expected to continue through the remainder of the current year and over the forward estimates.

Chart 5.2: 2020-21 tax collections variations against forecasts

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Source: Department of Finance.

Including policy decisions, forecast tax receipts in 2020-21 have been revised up by $26.0 billion since the 2020-21 MYEFO and $34.8 billion since the 2020-21 Budget. The forecast is now 8.2 per cent higher than in the 2020-21 Budget. This upgrade is broad-based and observed across almost all heads of revenue, with the largest upgrades in individuals and other withholding taxes, company tax, and goods and services tax (GST).

Notably, GST receipts for 2020-21 are now forecast to be $2.0 billion higher than expected prior to the COVID-19 pandemic, driven by the faster-than-expected recovery in payments of GST liabilities as well as strength in dwelling investment. For more information on the recovery in GST receipts, see Box 5.3.

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Statement 5: Revenue | Page 133

Chart 5.3: Revisions to 2020-21 tax receipts forecasts since the 2019-20 MYEFO

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Source: Treasury.

Notwithstanding the faster-than-expected recovery and material upgrades, the forecast for total tax receipts in 2020-21 still remains 4.2 per cent below the level forecast in the 2019-20 MYEFO, prior to the onset of the COVID-19 pandemic. While this reflects the economic disruption caused by the pandemic, it is also partially a result of the significant tax relief provided by the Government.

Tax outlook

On the back of the faster-than-expected recovery, the outlook for the Australian economy has strengthened. This translates into an improved outlook for tax receipts, which, relative to the 2020-21 Budget, are forecast to be $84.5 billion (4.8 per cent) higher over the four years to 2023-24.

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Chart 5.4: The outlook for tax receipts at Budget updates

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The outlook for personal income tax receipts reflects the improved outlook for the labour market more broadly. Compensation of employees is expected to be stronger, supported by the recovery in employment to date, and higher expected wages growth later in the forward estimates. Dividends and unincorporated business income are also forecast to be stronger across the forward estimates. Relative to the 2020-21 Budget, individuals and other withholding taxes have been revised up $34.4 billion over the four years to 2023-24.

Upgrades to the forecast for resources sector profits, largely due to ongoing elevated iron ore prices, are supporting an improved outlook for company profits. Since the 2020-21 Budget, company tax forecasts have been revised up by $11.8 billion over the four years to 2023-24.

Upgrades to the outlook for household consumption and dwelling investment, and a faster-than-expected recovery in payments of outstanding GST liabilities have resulted in GST receipts being revised up by $25.8 billion over the four years to 2023-24. The outlook for household consumption combined with increases in forecast inflation is driving upwards revisions to forecasts for excise and customs duties, which have been revised up $2.9 billion over the four years to 2023-24.

The improved labour market outlook, along with a faster-than-expected recovery in asset prices, one-off foreign exchange gains and strong reported incomes in the 2020-21 year, is also contributing to an improved outlook for superannuation taxes, which are forecast to be $8.8 billion higher over the four years to 2023-24.

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Statement 5: Revenue | Page 135

However, forecast tax receipts still remain well below the levels predicted prior to the onset of the COVID-19 pandemic. A slower-growing population as a result of reduced net overseas migration reduced the expected tax base. While employment, prices and wages are all recovering more quickly than expected at the 2020-21 Budget, the levels are still expected to remain lower than projections at the 2019-20 MYEFO for each year to 2024-25.

Policy decisions in this Budget build on the economic support announced in the 2020-21 Budget and provide significant additional tax relief to households and businesses. Policy decisions taken since the 2020-21 Budget provide $22.6 billion in additional tax relief over the four years to 2023-24. However, this support is designed to be temporary and targeted, with little impact beyond 2024-25 (Box 5.2). For more details on policy decisions, see Budget Statement 1 and Budget Paper No. 2.

Considerable uncertainty remains around the outlook for tax receipts as they are inextricably tied to the outlook for economic activity. Additionally, there are uncertainties about the extent to which taxpayers may have accrued losses during the pandemic, and the extent to which the carry forward of losses may weigh on future tax collections.

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Page 136 | Statement 5: Revenue

Box 5.2: Temporary and targeted support through the tax system

In the 2020-21 Budget, the Government provided significant tax relief to businesses and households to support the economic recovery. The largest of these were bringing forward the Government’s legislated Personal Income Tax Plan and retaining the low and middle income tax offset to increase household disposable incomes, as well as temporary loss carry back and temporary full expensing to support business cash flow, investment and job creation. This Budget extends the business investment measures and provides further tax relief for households by retaining the low and middle income tax offset for 2021-22. In total, policy decisions taken since the 2019-20 MYEFO are expected to reduce tax receipts by $79.1 billion across the four years to 2023-24.

These tax initiatives have been carefully calibrated to boost confidence and investment, supporting the economic recovery in the near-term while not structurally impacting the longer term fiscal position (Chart 5.5). In aggregate, policy decisions since the 2019-20 MYEFO are expected to increase tax receipts at the start of the medium term, as the tax incentive measures are temporary and largely bring forward tax deductions or the utilisation of losses from future years.

Chart 5.5: Tax receipts as a share of GDP, with and without policy announced since 2019-20 MYEFO

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Statement 5: Revenue | Page 137

Variations in receipts estimates

Since the 2020-21 Budget, total receipts have been revised up by $36.1 billion in 2020-21 and $84.0 billion over the four years to 2023-24. Table 5.2 reconciles the 2021-22 Budget estimates of total receipts with the 2020-21 Budget and 2020-21 MYEFO.

Table 5.2: Reconciliation of Australian Government general government receipts estimates from the 2020-21 Budget(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25 Total(b)

$m $m $m $m $m $m

Receipts at 2020-21 Budget 463,764 451,918 482,647 526,363 * * Changes from 2020-21 Budget to 2020-21 MYEFO

Effect of policy decisions -105 -430 -649 -607 * *

Effect of parameter and other variations 9,474 7,010 5,059 518 * *

Total variations 9,369 6,580 4,410 -89 * *

Receipts at 2020-21 MYEFO 473,133 458,497 487,057 526,274 * *

Changes from 2020-21 MYEFO

to 2021-22 Budget

Effect of policy decisions 38 14 -7,357 -14,392 -5,890 -27,625

Effect of parameter and other variations 26,660 23,541 14,300 20,972 24,615 83,428 Total variations 26,698 23,555 6,943 6,581 18,724 55,803

Receipts at 2021-22 Budget 499,831 482,053 494,000 532,855 571,969 2,080,877 * Data is not available. (a) Includes expected Future Funds earnings. (b) Total is equal to the sum of amounts from 2021-22 to 2024-25.

Since the 2020-21 Budget, parameter and other variations have increased total receipts by $36.1 billion in 2020-21 and $107.5 billion across the four years to 2023-24. Policy decisions reduce receipts by $23.5 billion over the four years to 2023-24 compared with the 2020-21 Budget.

The upgrade to the forecasts of total receipts is predominantly driven by the upgrades to the forecasts of taxation receipts.

Taxation receipts estimates

Relative to the 2020-21 Budget, forecasts of total tax receipts have been revised up by $34.8 billion in 2020-21 and by $84.5 billion across the four years to 2023-24. These upgrades are broad-based, with the largest upward revisions to total individuals and other withholding taxes and GST.

Table 5.3 reconciles the 2021-22 Budget estimates of tax receipts with the 2020-21 Budget and 2020-21 MYEFO.

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Page 138 | Statement 5: Revenue

Table 5.3: Reconciliation of Australian Government general government taxation receipts estimates from the 2020-21 Budget Estimates

2020-21 2021-22 2022-23 2023-24 2024-25 Total(a)

$m $m $m $m $m $m

Tax receipts at 2020-21 Budget 424,643 413,799 442,912 487,645 * *

Changes from 2020-21 Budget

to 2020-21 MYEFO

Effect of policy decisions -4 -5 -32 8 * *

Effect of parameter and other variations 8,861 6,123 2,303 -1,261 * *

Total variations 8,857 6,118 2,271 -1,253 * *

Tax receipts at 2020-21 MYEFO 433,500 419,917 445,182 486,392 * *

Changes from 2020-21 MYEFO

to 2021-22 Budget

Effect of policy decisions 0 -243 -7,638 -14,688 -6,204 -28,773

Effect of parameter and other variations 25,970 25,925 17,784 21,403 21,259 86,370 Total variations 25,970 25,682 10,145 6,715 15,055 57,597

Tax receipts at 2021-22 Budget 459,470 445,599 455,328 493,106 525,353 1,919,386 * Data is not available. (a) Total is equal to the sum of amounts from 2021-22 to 2024-25.

Since the 2020-21 Budget, parameter and other variations are expected to increase tax receipts by $34.8 billion in 2020-21 and $107.1 billion over the four years to 2023-24. Policy decisions reduce tax receipts by $22.6 billion over the four years to 2023-24 compared with the 2020-21 Budget.

Chart 5.6: Revisions to total tax receipts since the 2020-21 Budget Chart 5.7: Parameter and other variations to total tax receipts since

the 2020-21 Budget

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Statement 5: Revenue | Page 139

These upgrades reflect broad-based strength across almost all heads of revenue, driven by the faster-than-expected recovery from the COVID-19 pandemic and an improved economic outlook. Growth in the key economic parameters that influence tax receipts is shown in Table 5.4.

Table 5.4: Key economic parameters for tax receipts(a) Outcomes Forecasts

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

Nominal gross domestic product 1.7 3 3/4 3 1/2 2 4 3/4 5

Change since 2020-21 MYEFO 2 3/4 2 1/4 -1 3/4 0 na

Change since 2020-21 Budget 5 1/2 1/4 -2 1/2 - 1/4 na

Compensation of employees(b) 3.5 2 1/4 3 3 3/4 4 4 3/4

Change since 2020-21 MYEFO 2 1/4 1 1/2 1/4 - 1/2 na

Change since 2020-21 Budget 1 1/4 2 1/4 - 1/4 - 1/4 na

Corporate gross operating surplus(c) 7.9 9 3/4 -6 3/4 -3 1/2 5 5 1/4

Change since 2020-21 MYEFO 5 4 1/4 -5 1/2 - 1/4 na

Change since 2020-21 Budget 10 1 3/4 -8 1/2 - 1/4 na

Non-farm gross mixed income 7.4 14 3/4 -7 1/4 3 1/4 7 7 1/4

Change since 2020-21 MYEFO -2 1/4 3 1/4 1 1/2 1 1/2 na

Change since 2020-21 Budget 3 3/4 1 1/2 1 1/4 1 1/4 na

Property income(d) -3.3 -5 1/4 13 1/4 4 1/4 4 3/4 5

Change since 2020-21 MYEFO -1 1/2 6 1/2 1 1/2 0 na

Change since 2020-21 Budget 9 - 1/4 3/4 0 na

Consumption subject to GST -4.2 3/4 9 1/4 7 6 5 1/4

Change since 2020-21 MYEFO 2 1 0 3/4 na

Change since 2020-21 Budget 5 1/2 -1 -1 -1 na

(a) Current prices, per cent change on previous year. Changes since the 2020-21 MYEFO and 2020-21 Budget are percentage points. (b) Compensation of employees measures total remuneration earned by employees. (c) Corporate gross operating surplus is an Australian System of National Accounts measure of company

profits, gross of depreciation. (d) Property income measures income derived from rent, dividends and interest. na: not applicable Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

The changes in the outlook for individual heads of revenue are explained in more detail below.

Individuals and other withholding taxation receipts

Since the 2020-21 Budget, total individuals and other withholding taxation receipts have been revised up $10.6 billion in 2020-21 and $34.4 billion over the four years to 2023-24. Individuals and other withholding taxation receipts are expected to increase by 2.7 per cent in 2020-21 and decline by 3.8 per cent in 2021-22. Growth over the forward estimates is reduced by the further extension of LMITO in this Budget as well as Stage 3 of the Personal Income Tax Plan commencing 1 July 2024.

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Excluding new policy decisions, individuals and other withholding taxation receipts have been revised up $10.6 billion in 2020-21 and $44.3 billion over the four years to 2023-24. This revision reflects the faster-than-expected recovery in the labour market in 2020-21 supporting higher employment, and the persistent strength in that labour market recovery resulting in both higher wages and employment in subsequent years. The outlook for income from unincorporated businesses, dividends and capital gains has also improved.

New tax policy measures announced since the 2020-21 Budget are expected to reduce individuals and other withholding tax receipts by $9.9 billion over the four years to 2023-24. This includes $7.8 billion from retaining the LMITO for the 2021-22 income year, which will benefit around 10.2 million taxpayers. The retention of the LMITO is on top of the $25.1 billion in tax cuts flowing to households in 2021-22 that has been announced in previous Budgets.

Fringe benefits tax

Since the 2020-21 Budget, fringe benefits tax receipts have been revised up $100 million in 2020-21 and $630 million over the four years to 2023-24, reflecting higher compensation of employees. Fringe benefits tax receipts are forecast to grow by 1.3 per cent in 2020-21 and 1.5 per cent in 2021-22.

Company tax

Since the 2020-21 Budget, company tax receipts are expected to be $8.8 billion higher in 2020-21 and $11.8 billion higher over the four years to 2023-24. Company tax receipts are forecast to rise by 10.0 per cent in 2020-21 and decline by 11.8 per cent in 2021-22.

Compared with the 2020-21 Budget, parameter and other variations account for $8.8 billion of the upgrade in the forecast for company tax receipts in 2020-21 and $25.1 billion of the upgrade over the four years to 2023-24. Company tax receipts have been revised up significantly in 2020-21 and 2021-22 largely as a result of elevated iron ore prices increasing profits in the resources sector, but this strength is expected to taper off in later years in line with the assumed decline in iron ore prices. For more information on the sensitivity of company tax receipts to iron ore prices, see Budget Statement 2, Box 2.5: Sensitivity analysis of the iron ore spot price. Upgrades to profits in the non-mining, non-finance sector support the company tax forecast in the latter years of the forward estimates.

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New tax policy measures announced since the 2020-21 Budget are expected to reduce company tax receipts by $13.3 billion over the four years to 2023-24. This includes the measures to extend temporary full expensing and temporary loss carry back by one year. There is evidence that businesses are capitalising on the Government's tax incentives with investment in new machinery and equipment increasing at the fastest quarterly rate in almost seven years in the December quarter 2020. Further, the outlook for the business sector has strengthened considerably and the latest December 2020 quarter ABS capital expenditure survey data suggest that firms’ capital investment intentions for 2020-21 have strengthened, while early indications for capital spending in 2021-22 are also positive.

There continues to be considerable uncertainty around the forecasts for company tax receipts. This is partly due to substantial uncertainty around the outlook for the economy, as well as uncertainty around the extent to which companies will use losses incurred during the COVID-19 pandemic to offset future profits. Details on the impact of changes in economic assumptions on tax receipts are discussed in Budget Statement 8.

Superannuation fund taxes

Since the 2020-21 Budget, superannuation fund tax receipts have been revised up $3.5 billion in 2020-21 and $8.8 billion across the four years to 2023-24. Tax from superannuation funds is expected to grow strongly, by 86.2 per cent in 2020-21 and by 30.8 per cent in 2021-22.

This reflects strong foreign exchange gains increasing tax liabilities for 2020-21, with improved labour market conditions and a further recovery in asset prices supporting receipts across the forward estimates.

Petroleum resource rent tax (PRRT)

Since the 2020-21 Budget, PRRT receipts have been revised down $100 million in 2020-21, but up by $200 million over the four years to 2023-24, consistent with recent higher oil prices. PRRT receipts are forecast to decline by 24.6 per cent in 2020-21 but grow by 25.0 per cent in 2021-22.

Goods and services tax (GST)

Since the 2020-21 Budget, GST receipts have been revised up $9.8 billion in 2020-21 (refer to Box 5.3) and $25.8 billion across the four years to 2023-24. Receipts from GST are forecast to increase by 15.8 per cent in 2020-21 and 3.1 per cent in 2021-22.

Increases in GST receipts largely reflect underlying strength in collections consistent with stronger-than-expected consumption subject to GST and dwelling investment, and a faster-than-expected recovery in payments of outstanding GST liabilities. Upgrades in the outer years reflect upwards revisions to consumption subject to GST.

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Box 5.3: GST - downturn and recovery

The COVID-19 pandemic has had profound impacts on household consumption patterns, resulting in unprecedented volatility in GST receipts. In the June quarter of 2020, the spread of the virus and the related health restrictions led to a 7.5 per cent contraction in nominal GDP and a 12.7 per cent contraction in nominal consumption. As COVID-related restrictions eased through the latter half of 2020, consumption and GST receipts recovered sharply.

Chart 5.8 shows through-the-year growth in net GST revenue reported on Business Activity Statements (BAS) by selected industries and overall. In the June quarter of 2020, falls in net GST were particularly pronounced in the accommodation and food services industries, consistent with them being heavily affected by the COVID-related health restrictions. In contrast, growth in retail trade remained strong and has contributed significantly to the growth in net GST revenue in the September and December quarters of 2020-21.

During the downturn in the March and June quarters of 2020, GST receipts fell more as a share of consumption than the GST liabilities being reported to the ATO (Chart 5.9). This reflected increases in unpaid GST liabilities in the latter half of 2019-20 as well as administrative support provided by the ATO. The payment of ATO granted deferrals and repayment of outstanding liabilities has supported the recovery of GST receipts in 2020-21. For further detail on administrative support, see 2020-21 Budget, Budget Paper 1, Statement 5, Box 1.

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Excise and customs duty

Since the 2020-21 Budget, total excise and customs duty receipts have been revised up $1.1 billion in 2020-21 and $2.9 billion over the four years to 2023-24. Excise and customs duties are forecast to decline by 0.8 per cent in 2020-21 but grow by 1.1 per cent in 2021-22.

Compared with the 2020-21 Budget, parameter and other variations account for $1.1 billion of the upgrade in the forecast for excise and customs duty receipts in 2020-21 and $3.1 billion of the upgrade over the four years to 2023-24. This reflects higher-than-expected fuel and alcohol excise collections, as well as upgrades to the outlook for fuel and alcohol consumption and an increase to forecasts of the Consumer Price Index across the forward estimates. This is partially offset by a downgrade to the outlook for tobacco consumption.

Box 5.3: GST - downturn and recovery (continued)

Chart 5.8: Growth in GST revenue, selected industries Chart 5.9: GST receipts and liabilities raised as a share of consumption

-80

-60

-40

-20

0

20

40

-80

-60

-40

-20

0

20

40

Jun-19 Dec-19 Jun-20 Dec-20

%, tty %, tty

Accommodation and food services

Retail trade

All industries

Note: GST revenue refers to net GST reported on the BAS. This is the total GST collected on business sales, less the GST paid on inputs. It does not include GST paid by businesses that lodge GST statements annually, or GST paid on imported goods at the border.

Source: ATO; Treasury.

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Jun-19 Dec-19 Jun-20 Dec-20

% %

GST liabilities raised

GST receipts

GST liabilities raised

GST receipts

GST liabilities raised

GST receipts

GST liabilities raised

GST receipts

Note: GST receipts includes all GST collected (net of refunds) during the quarter. GST liabilities are net liabilities raised during the quarter.

Source: ATO; ABS Australian National Accounts: National Income, Expenditure and Product and Treasury.

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Policy decisions are expected to reduce excise and customs duty receipts by $180 million over the four years to 2023-24. This largely reflects the measure Aligning the excise refund scheme for brewers and distillers with the producer rebate for wine producers, which provides $165 million in additional support ($225 million to 2024-25) to eligible Australian brewers and distillers.

The 2021-22 Budget estimates continue to include provisions for a number of free trade agreements (FTAs) which have not been finalised and which impact the customs duty heads of revenue:

• Australia-European Union Free Trade Agreement

• Australia-India Comprehensive Economic Cooperation Agreement

• Australia-United Kingdom Free Trade Agreement.

A number of other FTAs are currently under negotiation, but are not expected to have a material impact on revenue over the forward estimates. A full list of FTAs currently under negotiation is available on the Department of Foreign Affairs and Trade website.

Other sales taxes

Since the 2020-21 Budget, luxury car tax (LCT) receipts have been revised up $260 million in 2020-21 and $480 million over the four years to 2023-24. LCT receipts are forecast to increase by 40.3 per cent in 2020-21 but decrease by 15.0 per cent in 2021-22. This is consistent with stronger-than-expected purchases of motor vehicles in the current year, but the expectation is that this will moderate in the latter years of the forward estimates.

Since the 2020-21 Budget, wine equalisation tax (WET) receipts have been revised up by around $10 million in 2020-21, and $100 million over the four years to 2023-24. WET receipts are forecast to grow by 9.5 per cent in 2020-21 but decline by 1.9 per cent in 2021-22.

Other taxes

Other taxes encompass a range of sources of revenue, including the major bank levy and agricultural levies. Those particularly impacted by the travel restrictions implemented in response to the COVID-19 pandemic include visa application charges and passenger movement charge.

Since the 2020-21 Budget, other taxes have been revised up by $786 million in 2020-21, but revised down by $585 million over the four years to 2023-24. Other taxes are forecast to decline by 17.7 per cent in 2020-21 and decline by 8.3 per cent in 2021-22.

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Excluding new policy decisions, other taxes have been revised up by $0.8 billion in 2020-21, but revised down by $1.3 billion over the four years to 2023-24.

Non-taxation receipts

Since the 2020-21 Budget non-taxation receipts are expected to increase by $1.2 billion in 2020-21 and decrease by $0.5 billion over the four years to 2023-24.

Since the 2020-21 MYEFO, dividends from the Reserve Bank of Australia and receipts from Australian Government Investment Funds have been revised down by $4.7 billion over the four years to 2023-24 due to volatility of the financial markets and the impacts of the COVID-19 pandemic on the global economy. Interest and loan fee repayments on Higher Education Loan Program loans are lower by $0.5 billion over the four years to 2023-24.

The reduction in non-taxation receipts since the 2020-21 MYEFO has been partially offset by higher than expected petroleum royalties of $0.8 billion over the four years to 2023-24.

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Table 5.5: Reconciliation of 2020-21 general government (cash) receipts Estimates Change on 2020-21 Budget

2020-21 Budget 2021-22 Budget

$m $m $m %

Individuals and other withholding taxes

Gross income tax withholding 210,800 216,500 5,700 2.7

Gross other individuals 44,000 47,500 3,500 8.0

less: Refunds 37,400 36,000 -1,400 -3.7

Total individuals and other withholding tax 217,400 228,000 10,600 4.9

Fringe benefits tax 3,800 3,900 100 2.6

Company tax 84,500 93,300 8,800 10.4

Superannuation fund taxes 8,210 11,670 3,460 42.1

Petroleum resource rent tax 900 800 -100 -11.1

Income taxation receipts 314,810 337,670 22,860 7.3

Goods and services tax 59,981 69,782 9,801 16.3

Wine equalisation tax 1,040 1,050 10 1.0

Luxury car tax 540 800 260 48.1

Excise and customs duty

Petrol 5,550 5,850 300 5.4

Diesel 11,930 12,530 600 5.0

Other fuel products 1,690 1,550 -140 -8.3

Tobacco 15,290 15,060 -230 -1.5

Beer 2,470 2,560 90 3.6

Spirits 2,670 3,070 400 15.0

Other alcoholic beverages(a) 1,050 1,270 220 21.0

Other customs duty

Textiles, clothing and footwear 170 170 0 0.0

Passenger motor vehicles 310 340 30 9.7

Other imports 1,050 1,180 130 12.4

less: Refunds and drawbacks 500 790 290 58.0

Total excise and customs duty 41,680 42,790 1,110 2.7

Major bank levy 1,650 1,650 0 0.0

Agricultural levies 481 509 28 5.8

Other taxes 4,461 5,219 758 17.0

Indirect taxation receipts 109,833 121,800 11,967 10.9

Taxation receipts 424,643 459,470 34,827 8.2

Sales of goods and services 16,538 16,381 -157 -1.0

Interest received 4,133 2,995 -1,139 -27.5

Dividends 6,837 8,493 1,655 24.2

Other non-taxation receipts 11,613 12,494 881 7.6

Non-taxation receipts 39,121 40,361 1,240 3.2

Total receipts 463,764 499,831 36,067 7.8

Memorandum:

Total excise 22,820 23,980 1,160 5.1

Total customs duty 18,860 18,810 -50 -0.3

Capital gains tax(b) 13,100 16,600 3,500 26.7

(a) ‘Other alcoholic beverages’ are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandy and wine). (b) ‘Capital gains tax’ is part of gross other individuals, company tax and superannuation fund taxes.

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Table 5.6: Reconciliation of 2021-22 general government (cash) receipts Estimates Change on 2020-21 Budget

2020-21 Budget 2021-22 Budget

$m $m $m %

Individuals and other withholding taxes

Gross income tax withholding 209,000 216,500 7,500 3.6

Gross other individuals 41,700 45,200 3,500 8.4

less: Refunds 42,700 42,300 -400 -0.9

Total individuals and other withholding tax 208,000 219,400 11,400 5.5

Fringe benefits tax 3,780 3,960 180 4.8

Company tax 71,000 82,300 11,300 15.9

Superannuation fund taxes 12,810 15,260 2,450 19.1

Petroleum resource rent tax 900 1,000 100 11.1

Income taxation receipts 296,490 321,920 25,430 8.6

Goods and services tax 65,602 71,941 6,339 9.7

Wine equalisation tax 1,000 1,030 30 3.0

Luxury car tax 540 680 140 25.9

Excise and customs duty

Petrol 5,850 6,100 250 4.3

Diesel 12,440 13,140 700 5.6

Other fuel products 1,860 1,830 -30 -1.6

Tobacco 15,150 14,750 -400 -2.6

Beer 2,380 2,600 220 9.2

Spirits 2,620 2,720 100 3.8

Other alcoholic beverages(a) 1,000 1,070 70 7.0

Other customs duty

Textiles, clothing and footwear 190 160 -30 -15.8

Passenger motor vehicles 340 310 -30 -8.8

Other imports 1,120 1,230 110 9.8

less: Refunds and drawbacks 500 650 150 30.0

Total excise and customs duty 42,450 43,260 810 1.9

Major bank levy 1,700 1,650 -50 -2.9

Agricultural levies 496 505 10 1.9

Other taxes 5,521 4,613 -909 -16.5

Indirect taxation receipts 117,309 123,679 6,370 5.4

Taxation receipts 413,799 445,599 31,800 7.7

Sales of goods and services 17,418 17,364 -54 -0.3

Interest received 4,202 3,063 -1,140 -27.1

Dividends 6,687 5,829 -858 -12.8

Other non-taxation receipts 9,812 10,198 386 3.9

Non-taxation receipts 38,119 36,454 -1,665 -4.4

Total receipts 451,918 482,053 30,135 6.7

Memorandum:

Total excise 23,610 24,840 1,230 5.2

Total customs duty 18,840 18,420 -420 -2.2

Capital gains tax(b) 12,500 17,400 4,900 39.2

(a) ‘Other alcoholic beverages’ are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandy and wine). (b) ‘Capital gains tax’ is part of gross other individuals, company tax and superannuation fund taxes.

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Table 5.7: Australian Government general government (cash) receipts Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m $m

Individuals and other withholding

taxes

Gross income tax withholding 214,426 216,500 216,500 224,500 236,000 236,900

Gross other individuals 43,713 47,500 45,200 50,200 53,900 58,800

less: Refunds 36,219 36,000 42,300 38,100 33,100 33,900

Total individuals and other

withholding tax 221,920 228,000 219,400 236,600 256,800 261,800

Fringe benefits tax 3,850 3,900 3,960 4,160 4,330 4,500

Company tax 84,781 93,300 82,300 70,400 81,000 100,500

Superannuation fund taxes 6,267 11,670 15,260 14,510 15,260 16,210

Petroleum resource rent tax(a) 1,052 800 1,000 1,000 1,000 1,000

Income taxation receipts 317,870 337,670 321,920 326,670 358,390 384,010 Goods and services tax 60,263 69,782 71,941 75,231 78,570 82,400 Wine equalisation tax 959 1,050 1,030 1,060 1,090 1,140 Luxury car tax 570 800 680 610 610 640 Excise and customs duty Petrol 5,734 5,850 6,100 6,300 6,650 7,150 Diesel 12,046 12,530 13,140 13,740 14,340 15,390 Other fuel products 1,923 1,550 1,830 1,850 1,920 2,020 Tobacco 16,270 15,060 14,750 14,610 14,970 15,340 Beer 2,455 2,560 2,600 2,660 2,750 2,890 Spirits 2,648 3,070 2,720 2,800 2,900 3,030 Other alcoholic beverages(b) 1,059 1,270 1,070 1,100 1,140 1,200 Other customs duty Textiles, clothing and footwear 169 170 160 110 90 100 Passenger motor vehicles 369 340 310 70 70 80 Other imports 1,142 1,180 1,230 780 780 850 less: Refunds and drawbacks 669 790 650 650 650 650 Total excise and customs duty 43,147 42,790 43,260 43,370 44,960 47,400 Major bank levy 1,612 1,650 1,650 1,700 1,750 1,850 Agricultural levies 469 509 505 522 536 540 Other taxes 6,885 5,219 4,613 6,165 7,199 7,373 Indirect taxation receipts 113,905 121,800 123,679 128,658 134,716 141,343 Taxation receipts 431,775 459,470 445,599 455,328 493,106 525,353 Sales of goods and services 15,490 16,381 17,364 17,848 18,908 19,996 Interest received 3,244 2,995 3,063 3,080 3,363 3,721 Dividends 7,007 8,493 5,829 7,451 7,077 7,460 Other non-taxation receipts 11,883 12,494 10,198 10,293 10,401 15,439 Non-taxation receipts 37,623 40,361 36,454 38,672 39,748 46,616 Total receipts 469,398 499,831 482,053 494,000 532,855 571,969 Memorandum: Total excise 23,352 23,980 24,840 25,780 26,950 28,820 Total customs duty 19,795 18,810 18,420 17,590 18,010 18,580 Capital gains tax(c) 16,100 16,600 17,400 18,600 19,300 20,500 (a) This item includes an amount of MRRT receipts in 2019-20 which has not been separately disclosed owing to taxpayer confidentiality. (b) ‘Other alcoholic beverages’ are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandy and wine). (c) ‘Capital gains tax’ is part of gross other individuals, company tax and superannuation fund taxes. The 2019-20 reported figure is an estimate.

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Variations in revenue estimates

The revenue estimates are the accrual accounting equivalent of the cash-based receipts estimates. Changes in revenue are generally driven by the same factors as receipts.

Revenues are usually higher than the cash equivalents because the amounts are generally recognised when they are owed rather than when they are paid. The differences between the accrual and cash amounts therefore generally reflect payment timing differences. Table 5.8 provides a reconciliation of the 2021-22 Budget’s revenue estimates with those at the 2020-21 Budget and 2020-21 MYEFO.

Table 5.8: Reconciliation of Australian Government general government revenue estimates from the 2020-21 Budget Estimates

2020-21 2021-22 2022-23 2023-24 2024-25 Total(b)

$m $m $m $m $m $m

Revenue at 2020-21 Budget 472,442 464,072 491,400 538,100 * *

Changes from 2020-21 Budget

to 2020-21 MYEFO

Effect of policy decisions(a) -72 -364 -590 -552 * *

Effect of parameter and other variations 9,766 8,843 4,056 980 * *

Total variations 9,694 8,479 3,466 427 * *

Revenue at 2020-21 MYEFO 482,136 472,551 494,866 538,527 * *

Changes from 2020-21 MYEFO

to 2021-22 Budget

Effect of policy decisions(a) 38 353 -7,352 -14,406 -6,240 -27,645

Effect of parameter and other variations 22,714 23,717 17,631 20,366 * *

Total variations 22,752 24,070 10,279 5,960 * *

Revenue at 2021-22 Budget 504,888 496,621 505,145 544,487 577,959 2,124,211 * Data is not available. (a) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

(b) Total is equal to the sum of amounts from 2021-22 to 2024-25.

Since the 2020-21 Budget, total revenue has been revised up by around $32.4 billion in 2020-21 and by $85.1 billion over the four years to 2023-24. Total revenue has been revised up by $3.6 billion less than total receipts in 2020-21 due to downward revisions in expected net tax receivable and downward revisions to expected write-offs including gross income tax withholding, gross other individuals and GST. This reflects administrative relief offered by the ATO during the COVID-19 pandemic. Thereafter, revisions to revenue broadly reflect those made to receipts.

The changes in the individual heads of revenue accrual estimates relative to the 2020-21 Budget are shown in Tables 5.9 and 5.10, for 2020-21 and 2021-22 respectively. For the five year accrual table, the accrual equivalent of Table 5.7, see Budget Statement 10, Note 3.

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Additional revenue and receipts historical tables are available online and can be accessed at www.budget.gov.au.

Table 5.9: Reconciliation of 2020-21 general government (accrual) revenue Estimates Change on 2020-21 Budget

2020-21 Budget 2021-22 Budget

$m $m $m %

Individuals and other withholding taxes

Gross income tax withholding 212,300 217,500 5,200 2.4

Gross other individuals 47,300 49,500 2,200 4.7

less: Refunds 37,400 36,000 -1,400 -3.7

Total individuals and other withholding tax 222,200 231,000 8,800 4.0

Fringe benefits tax 3,880 4,040 160 4.1

Company tax 86,200 94,300 8,100 9.4

Superannuation fund taxes 8,180 11,680 3,500 42.8

Petroleum resource rent tax 870 840 -30 -3.4

Income taxation revenue 321,330 341,860 20,530 6.4

Goods and services tax 62,970 71,080 8,110 12.9

Wine equalisation tax 1,060 1,070 10 0.9

Luxury car tax 540 800 260 48.1

Excise and customs duty

Petrol 5,550 5,850 300 5.4

Diesel 11,880 12,480 600 5.1

Other fuel products 1,690 1,560 -130 -7.7

Tobacco 15,270 15,080 -190 -1.2

Beer 2,460 2,550 90 3.7

Spirits 2,670 3,070 400 15.0

Other alcoholic beverages(a) 1,050 1,270 220 21.0

Other customs duty

Textiles, clothing and footwear 170 170 0 0.0

Passenger motor vehicles 310 340 30 9.7

Other imports 1,050 1,180 130 12.4

less: Refunds and drawbacks 500 790 290 58.0

Total excise and customs duty 41,600 42,760 1,160 2.8

Major bank levy 1,670 1,640 -30 -1.8

Agricultural levies 481 509 28 5.8

Other taxes 5,262 6,052 791 15.0

Indirect taxation revenue 113,583 123,911 10,329 9.1

Taxation revenue 434,913 465,771 30,859 7.1

Sales of goods and services 15,874 15,947 73 0.5

Interest 4,181 2,901 -1,281 -30.6

Dividends 6,419 8,038 1,619 25.2

Other non-taxation revenue 11,054 12,231 1,177 10.6

Non-taxation revenue 37,529 39,116 1,588 4.2

Total revenue 472,442 504,888 32,446 6.9

Memorandum:

Total excise 22,760 23,930 1,170 5.1

Total customs duty 18,840 18,830 -10 -0.1

Capital gains tax(b) 13,100 16,600 3,500 26.7

(a) ‘Other alcoholic beverages’ are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandy and wine). (b) ‘Capital gains tax’ is part of gross other individuals, company tax and superannuation fund taxes.

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Table 5.10: Reconciliation of 2021-22 general government (accrual) revenue Estimates Change on 2020-21 Budget

2020-21 Budget 2021-22 Budget

$m $m $m %

Individuals and other withholding taxes

Gross income tax withholding 211,400 218,700 7,300 3.5

Gross other individuals 44,900 48,500 3,600 8.0

less: Refunds 42,700 42,300 -400 -0.9

Total individuals and other withholding tax 213,600 224,900 11,300 5.3

Fringe benefits tax 3,860 4,090 230 6.0

Company tax 73,000 84,200 11,200 15.3

Superannuation fund taxes 12,770 15,280 2,510 19.7

Petroleum resource rent tax 900 1,050 150 16.7

Income taxation revenue 304,130 329,520 25,390 8.3

Goods and services tax 67,720 74,130 6,410 9.5

Wine equalisation tax 1,020 1,050 30 2.9

Luxury car tax 540 680 140 25.9

Excise and customs duty

Petrol 5,850 6,100 250 4.3

Diesel 12,440 13,140 700 5.6

Other fuel products 1,870 1,830 -40 -2.1

Tobacco 15,150 14,750 -400 -2.6

Beer 2,390 2,600 210 8.8

Spirits 2,620 2,720 100 3.8

Other alcoholic beverages(a) 1,000 1,070 70 7.0

Other customs duty

Textiles, clothing and footwear 190 160 -30 -15.8

Passenger motor vehicles 340 310 -30 -8.8

Other imports 1,120 1,230 110 9.8

less: Refunds and drawbacks 500 650 150 30.0

Total excise and customs duty 42,470 43,260 790 1.9

Major bank levy 1,720 1,670 -50 -2.9

Agricultural levies 496 505 10 1.9

Other taxes 6,702 6,157 -544 -8.1

Indirect taxation revenue 120,667 127,452 6,785 5.6

Taxation revenue 424,797 456,972 32,175 7.6

Sales of goods and services 17,161 17,175 14 0.1

Interest 4,008 3,621 -387 -9.7

Dividends 7,454 7,265 -189 -2.5

Other non-taxation revenue 10,651 11,588 937 8.8

Non-taxation revenue 39,274 39,648 374 1.0

Total revenue 464,072 496,621 32,549 7.0

Memorandum:

Total excise 23,630 24,840 1,210 5.1

Total customs duty 18,840 18,420 -420 -2.2

Capital gains tax(b) 12,500 17,400 4,900 39.2

(a) ‘Other alcoholic beverages’ are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandy and wine). (b) ‘Capital gains tax’ is part of gross other individuals, company tax and superannuation fund taxes.

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Appendix A: Tax Benchmarks and Variations Statement This appendix contains an overview of Australian Government tax benchmark variations, as required by Section 12 of the Charter of Budget Honesty Act 1998 (CBHA).

The information in Table 5.11 is derived from the 2020 Tax Benchmarks Variations Statement, based on economic parameters as at the publication of the 2020-21 MYEFO. It does not include the impact of policy decisions, or changes in the economic outlook since then on benchmark variations. Further information on benchmarks and variations from them will be available in future Tax Benchmark and Variations reports.

Tax benchmarks represent a standard taxation treatment that applies to similar taxpayers or types of activities. Policy approaches can apply a taxation treatment different from a standard approach and the resulting variations can give rise to positive or negative variations. The choice of benchmark unavoidably involves judgment and may therefore be contentious in some cases.

Benchmark variation estimates should be interpreted with caution as they do not indicate the revenue gain or loss to the Budget if they were to be abolished by a change of policy. In addition, the characterisation of a provision of the tax law that gives rise to a benchmark variation does not indicate a view on how an activity or class of taxpayer ought to be taxed.

Consistent with most OECD countries, estimates of a benchmark variation reflect the extent to which a variation is utilised, similar to Budget estimates of outlays on demand-driven expenditure programs. This is known as the ‘revenue forgone’ approach which, in practice, involves estimating the difference in revenue between the actual and benchmark tax treatments but, importantly, assuming taxpayer behaviour is the same in each circumstance. Revenue forgone estimates therefore do not indicate the revenue gain to the Budget if specific benchmark variations were abolished through policy change, as there may be significant changes in taxpayer behaviour were the variations removed.

Care needs to be taken when comparing benchmark variations with direct expenditures as they may measure different things. In addition, estimates from different editions of previously released Tax Benchmarks and Variations Statements are generally not comparable, because of changes or modifications to ⎯ for example ⎯ benchmarks, individual benchmark variations, data used or modelling methodology.

The CBHA also requires the publication of an annual report. The 2020 Tax Benchmarks and Variations Statement was published in January 2021 and provides a detailed description of Australian Government benchmarks and benchmark variations and, where possible, the estimated value, or order of magnitude, of each benchmark variation.

Statement 5: Revenue

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Table 5.11: Estimates of large measured benchmark variations Benchmark variations Estimate $m

2021-22 2022-23 2023-24 2024-25

Large positive benchmark variations

E8 Main residence exemption - discount component 25,500 26,500 29,000 28,500

E7 Main residence exemption 21,500 22,000 24,000 23,500

C2 Concessional taxation of employer superannuation contributions 19,350 20,550 22,550 20,750

C4 Concessional taxation of superannuation entity earnings 16,450 16,400 16,600 16,800

B66 Accelerated depreciation for business entities 11,000 11,100 -5,500 -8,700

E15 Discount for individuals and trusts 8,530 9,060 9,680 10,420

H26 Food 8,200 8,500 8,800 9,100

B82 Simplified depreciation rules 6,900 5,000 -4,400 -5,600

H14 Education 5,350 5,600 5,900 6,200

H17 Health - medical and health services 5,050 5,300 5,600 5,900

H2 Financial supplies - input taxed treatment 3,850 4,050 4,300 4,550

A25 Exemption for National Disability Insurance Scheme amounts 3,420 3,120 3,130 3,400

B24 Temporary loss carry-back for certain incorporated entities 3,120 2,270 -540 -460

B23 Tax exemption for assistance provided through the ‘boosting cash flow for employers’ measure 3,030 660 30 ..

B12 Exemption from interest withholding tax on certain securities 2,600 2,600 2,600 2,600

A26 Exemption of Child Care Assistance payments 2,350 2,500 2,600 2,550

A23 Concessional taxation of non-superannuation termination benefits 2,350 2,250 2,150 1,850

B2 Local government bodies income tax exemption 2,200 2,300 2,400 2,500

D15 Exemption for public benevolent institutions (excluding hospitals) 2,050 2,150 2,200 2,150

A18 Medicare levy exemption for residents with taxable income below the low-income thresholds 1,950 1,950 1,950 1,950

B56 Lower company tax rate 1,900 1,800 2,800 3,000

A38 Exemption of Family Tax Benefit payments 1,780 1,770 1,780 1,780

D11 Exemption for public and not-for-profit hospitals and public ambulance services 1,750 1,800 1,850 1,750

C6 Deductibility of life and total permanent disability insurance premiums provided inside of superannuation 1,750 1,890 2,030 2,020 H5 Child care services 1,670 1,760 1,840 1,930

A16 Exemption of the Private Health Insurance Rebate 1,560 1,610 1,640 1,670

H18 Health - residential care, community care and other care services 1,400 1,480 1,560 1,640

Large negative benchmark variations

F10 Higher rate of excise levied on cigarettes not exceeding 0.8 grams of tobacco -1,635 -1,630 -1,645 -1,675

F21 Customs duty -1,680 -1,110 -1,110 -820

Statement 6: Expenses and Net Capital Investment | Page 155

Statement 6: Expenses and Net Capital Investment

Statement 6 presents estimates of the Australian Government general government sector expenses and net capital investment, allocated according to the functions of government, on a fiscal balance basis. The functions are based on an international standard classification of functions of government that is incorporated into the Government Finance Statistics (GFS) reporting framework. Unless otherwise specified, tables in Statement 6 are presented in nominal terms.

Explanatory text in Statement 6 is presented in real terms (that is, excluding the impact of inflation) to focus on trends in estimated expenses and their underlying drivers. Consistent with this emphasis, much of Statement 6 explains year on year changes across the forward estimates period.

With the conclusion of most temporary measures responding to the COVID-19 pandemic, expenses are reducing from the peak of $659 billion in 2020-21 to $589 billion in 2021-22 (see Chart 6.1 below). The 2021-22 Budget includes measures that continue targeted support to respond to the COVID-19 economic environment for individuals, business, sectors and regions in need. In this Budget the Australian Government is also investing to guarantee the essential services that Australians rely on, and to ensure quality care for vulnerable people, including in aged care, people with disability and mental health support.

Chart 6.1: Australian Government expenditure

450

500

550

600

650

700

450

500

550

600

650

700

2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$b $b

Estimates

Page 156 | Statement 6: Expenses and Net Capital Investment

The main trends in functional expenditure are:

• an estimated decline in government expenditure from 2020-21 to 2021-22 reflecting the conclusion of many of the temporary measures that were part of the Government’s immediate response to the COVID-19 pandemic

• in real terms, the strongest growth across the budget year and forward estimates is expected to occur in the other purposes and defence functions

• in 2021-22 and across the forward estimates the social security and welfare, health, defence and education functions account for around two thirds of total expenses, with social security and welfare accounting for slightly more than one third of total expenses

• net capital investment from 2020-21 to 2024-25 largely reflects a significant investment in defence capital projects.

Statement 6: Expenses and Net Capital Investment | Page 157

Contents

Statement 6: Expenses and Net Capital Investment ................................ 159

Overview ..................................................................................................... 159

Estimated expenses by function ............................................................... 161

Program expenses ...................................................................................................... 164

General government sector expenses ...................................................... 165

General public services ............................................................................................... 165

Defence ....................................................................................................................... 167

Public order and safety ............................................................................................... 168

Education .................................................................................................................... 169

Health .......................................................................................................................... 171

Social security and welfare ......................................................................................... 174

Housing and community amenities ............................................................................. 179

Recreation and culture ................................................................................................ 180

Fuel and energy .......................................................................................................... 182

Agriculture, forestry and fishing ................................................................................... 183

Mining, manufacturing and construction ..................................................................... 184

Transport and communication ..................................................................................... 186

Other economic affairs ................................................................................................ 188

Other purposes ............................................................................................................ 191

General government net capital investment ............................................. 194

Reconciliation of net capital investment since the 2020-21 Budget ............................ 194 Net capital investment estimates by function .............................................................. 196

Appendix A: Expense by Function and Sub-Function ............................. 198

Statement 6: Expenses and Net Capital Investment | Page 159

Statement 6: Expenses and Net Capital Investment

Overview

Australian Government general government sector (GGS) accrual expenses are expected to increase by 12.3 per cent in real terms in 2020-21, which is primarily driven by the Government’s temporary and targeted response to the impact of the COVID-19 pandemic on Australia’s health system, the economy, and employment levels. The decrease by 12.3 per cent in real terms in 2021-22 reflects the cessation of many elements of the temporary and targeted Government response to the COVID-19 pandemic, and improved economic and labour market conditions. Following this decrease, total expenses are estimated to gradually increase from 2023-24. As a percentage of GDP, total expenses are expected to reach 32.0 per cent in 2020-21, reflecting both the Government’s economic response and an expected slowdown in GDP growth due to the economic impact of the COVID-19 pandemic. Expenses are estimated to decline as a share of GDP over the forward estimates period, reaching 26.4 cent of GDP in 2024-25.

Table 6.1.1 Estimates of general government sector expenses 2020-21 2020-21

Revised

Estimates

Budget MYEFO

2020-21 2020-21 2020-21 2021-22 2022-23 2023-24 2024-25

Total expenses ($b) 670.3 667.3 659.4 589.3 595.4 614.7 633.7

Real growth on

previous year (%)(a) 15.3 14.3 12.3 -12.3 -1.2 0.8 0.6

Per cent of GDP 34.4 33.3 32.0 27.6 27.4 27.0 26.4

(a) Real growth is calculated using the Consumer Price Index.

As set out in Statement 3: Fiscal Strategy and Outlook of Budget Paper No. 1, the Government also reports spending on an underlying cash basis. In cash terms, Government spending is estimated to increase by 18.4 per cent in real terms in 2020-21, reflecting the Government’s significant response to the COVID-19 pandemic, and then to decline by 12.6 per cent in real terms in 2021-22, due to the cessation of many elements of the Government’s temporary and targeted response to the impact of the COVID-19 pandemic and improved economic and labour market conditions. Growth in payments is then estimated to gradually increase from 2023-24. As a percentage of GDP, total payments are expected to reach 32.1 per cent in 2020-21 and then to gradually decrease to 26.2 per cent in 2024-25.

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Table 6.1.2 Estimates of general government sector payment 2020-21 2020-21

Revised

Estimates

Budget MYEFO

2020-21 2020-21 2020-21 2021-22 2022-23 2023-24 2024-25

Total payments ($b) 677.4 670.9 660.8 588.7 593.3 612.4 628.9

Real growth on

previous year (%)(a) 22.6 20.9 18.4 -12.6 -1.4 0.8 0.2

Per cent of GDP 34.8 33.4 32.1 27.6 27.3 26.9 26.2

(a) Real growth is calculated using the Consumer Price Index.

Table 6.2 provides a reconciliation of expense estimates between the 2020-21 Budget and the 2021-22 Budget showing the effect of policy decisions, and economic parameter and other variations.

Table 6.2: Reconciliation of expense estimates Estimates

2020-21 2021-22 2022-23 2023-24 Total

$m $m $m $m $m

2020-21 Budget expenses 670,330 567,491 574,907 596,619 2,409,347

Changes from 2020-21 Budget to

2020-21 MYEFO

Effect of policy decisions(a) 5,402 2,787 1,439 1,110 10,737

Effect of parameter and other variations -8,411 437 -529 -2,063 -10,566

Total variations -3,009 3,224 909 -953 171

2020-21 MYEFO expenses 667,321 570,715 575,816 595,666 2,409,518

Changes from 2020-21 MYEFO to

2021-22 Budget

Effect of policy decisions(a) 3,748 18,354 17,470 14,858 54,430

Effect of economic parameter variations

Total economic parameter variations 2,292 4,287 5,141 7,132 18,852

Unemployment benefits -4,096 -1,659 -1,403 -757 -7,914

Prices and wages -112 873 2,334 3,672 6,767

Interest and exchange rates -111 -277 -326 -386 -1,100

GST payments to the States 6,610 5,350 4,535 4,604 21,099

Public debt interest 72 881 1,595 2,838 5,386

Program specific parameter variations -3,547 -2,531 -121 -1,851 -8,049

Other variations -10,449 -2,372 -4,524 -3,978 -21,322

Total variations -7,884 18,619 19,562 18,999 49,296

2021-22 Budget expenses 659,437 589,334 595,378 614,665 2,458,814

(a) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

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The combined impact of policy decisions and variations to program estimates has increased expenses by $49.5 billion over the four years from 2020-21 to 2023-24 compared to the 2020-21 Budget. Since the 2020-21 MYEFO, public debt interest, economic parameter variations and GST payments to states and territories have increased expenses by $33.3 billion, while unemployment benefits variations, interest and exchange rate variations, program specific parameter and other variations have decreased expenses by $38.4 billion.

Estimated expenses by function

Table 6.3 sets out the estimates of Australian Government general government sector expenses by function for the period 2020-21 to 2024-25.

Table 6.3: Estimates of expenses by function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

General public services 33,037 26,070 24,811 25,148 25,830

Defence 33,375 34,473 36,496 38,344 40,721

Public order and safety 6,712 6,652 6,074 5,889 5,919

Education 42,604 42,799 43,496 44,626 46,010

Health 94,533 98,283 95,779 99,300 103,177

Social security and welfare 225,394 209,975 214,655 219,028 224,512

Housing and community amenities 6,953 7,869 6,283 5,517 5,028

Recreation and culture 4,405 4,532 4,151 3,959 3,938

Fuel and energy 9,090 9,638 9,546 10,069 10,567

Agriculture, forestry and fishing 4,014 4,483 3,779 3,280 2,450

Mining, manufacturing and construction 4,394 4,354 4,230 4,138 3,739

Transport and communication 13,828 14,460 17,618 16,411 13,322

Other economic affairs 83,819 14,640 11,091 10,103 10,068

Other purposes 97,279 111,106 117,368 128,853 138,414

Total expenses 659,437 589,334 595,378 614,665 633,694

Major expense trends between 2020-21 and 2021-22, and from 2021-22 over the forward years include movements in the following functions:

• Defence — the increase in expenses from 2020-21 to 2024-25 reflects the increased investment required to deliver the plans set out in the 2016 Defence White Paper and the 2020 Force Structure Plan

• Education —the decrease in expenses between 2020-21 and 2021-22 primarily reflects the cessation of temporary COVID-19 support measures implemented in the 2020-21 financial year. An increase in expenses from 2021-22 to 2024-25 largely reflects the school funding arrangements implemented under the Quality Schools package

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• Health — the increase in expenses from 2020-21 to 2021-22 is primarily driven by expected growth in the assistance to the States for public hospitals sub-function, largely reflecting higher anticipated growth in the volume of services. Decreases in expenses from 2021-22 to 2024-25 are largely driven by expected decreases in the health services and general administration sub-functions, primarily reflecting the cessation of COVID-19 pandemic response measures

• Social security and welfare — the decrease in expenses from 2020-21 to 2021-22 largely reflects the cessation of temporary measures to respond to the COVID-19 pandemic, as well as an anticipated reduction in the number of unemployed individuals, including through the forward estimates as the economy recovers. From 2021-22 to 2024-25 there are increases across key sub-functions reflecting the Government’s increased investment in the 2021-22 Budget in aged care, child care and the NDIS

• Housing and community amenities — the increase in expenses from 2020-21 to 2021-22 largely reflects expected payments under the HomeBuilder program and several urban and regional development measures. The decrease from 2022-23 to 2024-25 largely reflects the conclusion of the HomeBuilder program and the scheduled completion of urban and regional development projects

• Transport and communication — the decrease in expenses from 2020-21 to 2024-25 largely reflects the conclusion of stimulus initiatives and cessation of temporary support for the aviation sector as part of the Government’s response to the COVID-19 pandemic

• Other economic affairs —the decrease in expenses from 2020-21 to 2021-22, and the decline in expenses from 2021-22 to 2024-25, largely reflects the temporary nature of the Government’s COVID-19 economic support package

• Other purposes — the increase in expenses from 2020-21 to 2024-25 largely reflects growing general revenue assistance payments (largely GST) to be made to the states and territories and the conservative bias allowance component of the Contingency Reserve.

Government expenses are strongly influenced by underlying trends in spending in the social security and welfare, health and education functions (see Box 6.1). Together, these functions account for 59.6 per cent of all government expenses in 2021-22. Further details of spending trends against all functions, including movements in expenses from 2020-21 to 2021-22, are set out under individual function headings.

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Box 6.1: Where does government spending go in 2021-22?

Government spending provides a wide range of services to the community. The most significant component of government spending relates to social security and welfare, with around one third of total expenses providing support to the aged, families with children, people with disabilities, veterans, carers and unemployed people.

Another one sixth of government expenses occur in health, including Medicare Benefits Schedule (MBS) and Pharmaceutical Benefits Scheme (PBS) payments. Approximately one eighth of government expenses are also transferred to the states and territories in general revenue assistance under the other purposes function.

The Government also provides significant investment under the education function, supporting government and non-government schools, as well as higher education and vocational education and training. The remainder is spent on defence and a range of other public services.

Chart 6.2: Expenses by function in 2021-22

Social security and welfare 35.6%

Other purposes 18.9%

Health 16.7%

Education 7.3%

Defence 5.8%

General public services 4.4%

All other functions 11.3%

The estimates presented in the chart above are explained in greater detail under each individual function in the following pages.

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Program expenses

Program expenses Table 6.3.1 reports the top 20 expense programs in the 2021-22 financial year. These programs represent around two thirds of total expenses in that year. More than half of the top 20 expense programs provide financial assistance or services to the aged, families, people with a disability, students, carers and the unemployed.

Table 6.3.1: Top 20 programs by expenses in 2021-22 Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

Program(a) Function $m $m $m $m $m

Revenue assistance to the

States and Territories Other Purposes 71,729 75,188 78,564 82,032 86,408

Support for Seniors SSW 52,853 51,223 53,163 55,067 56,851

Medical Benefits Health 28,497 29,124 29,867 31,461 32,975

National Disability Insurance SSW

Scheme 24,607 28,115 29,835 30,796 33,320

Assistance to the States for Health

public hospitals 22,646 25,463 26,649 28,238 29,916

Aged Care Services SSW 22,533 24,159 27,621 29,817 31,136

Family Assistance SSW 18,746 21,009 20,707 20,826 20,549

Job Seeker Income Support SSW 31,266 18,099 15,135 14,694 14,493

Financial Support for People SSW

with Disability 18,411 17,763 18,073 18,596 18,923

Non Government Schools Education

National Support 13,010 14,710 15,509 16,200 16,752

Pharmaceutical Benefits Health 13,942 14,406 14,578 15,013 15,319

Government Schools National Education

Support 9,052 9,727 10,423 11,002 11,447

Financial Support for Carers SSW 9,906 9,709 10,154 10,642 11,046

Child Care Subsidy SSW 8,968 9,492 10,644 11,180 11,970

Public Sector Superannuation - Other purposes;

Benefits(b) General public

services 8,142 8,521 8,612 8,678 9,079

Fuel Tax Credits Scheme Fuel and Energy 7,623 8,072 8,450 9,117 9,860

National Partnership Payments - Transport and

Road Transport Communication 7,119 7,645 10,935 10,091 7,414

Commonwealth Grants Scheme Education 7,549 7,560 7,225 7,167 7,277

Army Capabilities Defence 7,221 7,469 7,934 8,524 9,247

Air Force Capabilities Defence 7,106 7,235 7,801 8,317 9,004

Sub-total 390,928 394,687 411,878 427,459 442,988

Other programs 268,510 194,647 183,500 187,206 190,707

Total expenses 659,437 589,334 595,378 614,665 633,694

(a) The entry for each program includes eliminations for inter-agency transactions within that program. (b) This program is a combination of superannuation nominal interest and accrual expenses.

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Statement 6: Expenses and Net Capital Investment | Page 165

General government sector expenses

General public services

The general public services function includes expenses to support the organisation and operation of government such as those related to: the Parliament, the Governor-General; the conduct of elections; the collection of taxes and management of public funds and debt; assistance to developing countries to reduce poverty and achieve sustainable development, particularly countries in the Pacific region; contributions to international organisations; and foreign affairs. It also includes expenses related to research in areas not otherwise connected with a specific function, those associated with overall economic and statistical services, as well as government superannuation benefits (excluding nominal interest expenses on unfunded liabilities, which are included under the nominal superannuation interest sub-function in the other purposes function).

Table 6.4: Summary of expenses — general public services Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Legislative and executive affairs 1,446 1,744 1,385 1,356 1,653

Financial and fiscal affairs 9,013 8,067 7,216 6,791 7,030

Foreign affairs and economic aid 6,949 6,340 6,204 6,615 6,532

General research 3,238 3,448 3,448 3,546 3,549

General services 1,237 771 748 759 764

Government superannuation benefits 11,153 5,700 5,810 6,082 6,301

Total general public services 33,037 26,070 24,811 25,148 25,830

Total general public services expenses are estimated to decrease by 22.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 7.6 per cent in real terms over the period 2021-22 to 2024-25.

Expenses under the legislative and executive affairs sub-function partly reflect costs expected to be incurred by the Australian Electoral Commission to support federal elections in 2021-22 and 2024-25.

Expenses in the financial and fiscal affairs sub-function are expected to decrease by 12.2 per cent in real terms from 2020-21 to 2021-22, and are forecast to decrease by 18.8 per cent in real terms from 2021-22 to 2024-25. The decrease from 2020-21 to 2021-22 are largely due to the cessation of temporary departmental funding increases provided to the Australian Taxation Office, including for the administration of JobKeeper, the JobMaker Hiring Credit and the modernisation of business registries. The subsequent decrease from 2021-22 to 2024-25 reflects the termination of a number of compliance measures.

Table 6.4.1 provides further details of the major components of foreign affairs and economic aid sub-function expenses.

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Table 6.4.1: Trends in the major components of foreign affairs and economic aid sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Foreign aid(b) 4,278 3,731 3,675 4,226 4,181

Diplomacy(c) 1,275 1,322 1,327 1,159 1,133

Payments to international organisations 471 419 428 429 435

Passport services 268 265 268 272 266

International police assistance 201 164 158 181 181

International agriculture research and

development 109 106 103 104 106

Consular services 199 181 130 127 128

Finance and insurance services for

Australian exporters and investors 13 9 8 6 3

Other 135 143 107 110 97

Total 6,949 6,340 6,204 6,615 6,532

(a) The entry for each component includes eliminations for inter-agency transactions within that component. (b) The foreign aid figures reflect aid spending by the Department of Foreign Affairs and Trade in accrual terms. This differs from the international measure of aid reporting, official development assistance (ODA), which is in cash terms. Aid spending by other entities is usually reflected in other sub-functions.

(c) Diplomacy includes Departmental expenditure for the Department of Foreign Affairs and Trade’s Operations, Security and IT, overseas property and international climate change engagement.

Total expenses under the foreign affairs and economic aid sub-function are expected to decrease by 10.5 per cent in real terms in 2021-22, and are forecast to decrease by 4.0 per cent in real terms from 2021-22 to 2024-25.

The decrease in expenditure in 2021-22 and variation in the profile from 2022-23 to 2024-25 largely reflects the payment cycles of Australia’s contributions under multi-year funding arrangements for multilateral funds and support provided in response to the COVID-19 pandemic, including for vaccine access in the Pacific and Southeast Asia.

Table 6.4.2 sets out the major components of general research sub-function expenses.

Table 6.4.2: Trends in the major components of general research sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Research — science services and innovation fund 1,374 1,407 1,413 1,421 1,360

Discovery — research and research training 484 490 496 502 511

Science and technology solutions 366 374 379 384 393

Linkage — cross sector research partnerships 325 327 332 336 341

Supporting science and commercialisation 294 430 389 351 307

Research capacity 285 305 320 430 517

Other 110 115 120 121 121

Total 3,238 3,448 3,448 3,546 3,549

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

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The general research sub-function incorporates expenses incurred by the Department of Industry, Science, Energy and Resources, the Commonwealth Scientific and Industrial Research Organisation (CSIRO), the Australian Nuclear Science and Technology Organisation, the Australian Institute of Marine Science, the Department of Education, Skills and Employment, and the Australian Research Council.

Total expenses under this sub-function are expected to increase by 4.5 per cent in real terms from 2020-21 to 2021-22, and decrease by 4.0 per cent in real terms from 2021-22 to 2024-25. The increase in 2021-22 is primarily due to the 2021-22 Budget measure Square Kilometre Array Radio Telescope Project.

The general services sub-function incorporates expenses largely incurred by the Department of Finance, Australian Public Service Commission and Comcare. Total expenses are expected to decrease by 38.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 7.7 per cent from 2021-22 to 2024-25, largely reflecting increased insurance claims expenditure in 2020-21.

The fall in expenses from 2020-21 to 2024-25 in the government superannuation benefits sub-function primarily reflects the use of different discount rates. In accordance with accounting standards, superannuation expenses for 2020-21 were calculated using the long term government bond rate which best matched each individual scheme’s duration of liabilities at the start of the financial year. These rates were between 1.0 and 1.7 per cent per annum. In preparing the latest Long Term Cost Reports, the scheme actuaries have determined that a discount rate of CPI plus 2.5 per cent should be applied to the forward estimates.

Defence

The defence function includes expenses incurred by the Department of Defence (Defence) and related agencies. Defence expenses support Australian military operations overseas, the delivery capabilities across the Land, Maritime, Air, Space and Information and Cyber domains, and strategic policy advice in the defence of Australia and its national interests.

This function records the majority of expenses incurred by the Defence portfolio but does not include the expenses incurred by the Department of Veterans’ Affairs, superannuation payments to retired military personnel, and housing assistance provided through Defence Housing Australia. These expenses are reported in the social security and welfare, other purposes, and housing and community amenities functions, respectively.

Table 6.5: Summary of expenses — defence Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Defence 33,375 34,473 36,496 38,344 40,721

Total defence 33,375 34,473 36,496 38,344 40,721

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Total expenses for the defence sub-function are estimated to increase by 1.4 per cent in real terms from 2020-21 to 2021-22, and by 10.1 per cent in real terms over the period 2021-22 to 2024-25. The real growth reflects funding required by Defence to continue delivery of the 2016 Defence White Paper and new or adjusted capability investments outlined in the 2020 Force Structure Plan.

While the Government has committed to concluding Operations Highroad and Okra, and finalising the drawdown of Australian Defence Force (ADF) personnel in Afghanistan by September 2021, the Government has provided in the 2021-22 Budget a further $181.8 million in 2021-22 to support major ADF Operations in the Middle East and the protection of Australia’s borders and offshore maritime interests.

Public order and safety

The public order and safety function includes expenses to support the administration of the federal legal system and the provision of legal services, including legal aid, to the community. Public order and safety expenses also include law enforcement, border protection and intelligence activities, and the protection of Australian Government property.

Table 6.6: Summary of expenses — public order and safety Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Courts and legal services 1,529 1,633 1,518 1,457 1,438

Other public order and safety 5,184 5,019 4,556 4,432 4,482

Total public order and safety 6,712 6,652 6,074 5,889 5,919

Total expenses for the public order and safety function are estimated to decrease by 2.7 per cent in real terms from 2020-21 to 2021-22, and decrease by 17.1 per cent in real terms over the period 2021-22 to 2024-25.

Expenses within the courts and legal services sub-function are estimated to increase by 4.8 per cent in real terms from 2020-21 to 2021-22, mainly reflecting the 2021-22 Budget measure Royal Commission into Defence and Veteran Suicide, legal assistance spending associated with the 2021-22 Budget measure Women’s Safety, and an increase in spending on family law case management in the Federal Circuit Court of Australia and Family Court of Australia. Expenses are expected to decrease by 18.0 per cent in real terms from 2021-22 to 2024-25, reflecting the conclusion of several Royal Commissions which were largely provided funding from 2019-20 to 2022-23.

The major components of the other public order and safety sub-function expenses are set out in Table 6.6.1.

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Table 6.6.1: Trends in the major components of the other public order and safety sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Policing and law enforcement 3,802 3,594 3,287 3,157 3,199

Border protection 1,382 1,425 1,269 1,275 1,283

Total 5,184 5,019 4,556 4,432 4,482

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

Total expenses within the other public order and safety sub-function are expected to decrease by 5.0 per cent in real terms from 2020-21 to 2021-22. An expected decrease of 16.8 per cent in real terms from 2021-22 to 2024-25 mainly reflects terminating measures and reduced expenses for Border Enforcement and Management activities. The decrease is partially offset by new investment through the following 2021-22 Budget measures: Australian Security Intelligence Organisation — additional funding, Australian Criminal Intelligence Commission — additional funding, and Protecting Critical Infrastructure and Systems of National Significance.

Education

The education function includes expenses to support the delivery of education services through higher education institutions; vocational education and training providers (including technical and further education institutions); and government (state and territory) and non-government primary and secondary schools.

Table 6.7: Summary of expenses — education Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Higher education 11,369 10,628 10,241 10,200 10,339

Vocational and other education 2,224 2,022 1,805 1,622 1,644

Schools 22,061 24,437 25,933 27,202 28,199

Non-government schools 13,010 14,710 15,509 16,200 16,752

Government schools 9,052 9,727 10,423 11,002 11,447

School education — specific funding 705 744 679 702 690

Student assistance 5,953 4,686 4,570 4,646 4,882

General administration 292 282 268 255 256

Total education 42,604 42,799 43,496 44,626 46,010

Total education function expenses are expected to decrease by 1.4 per cent in real terms from 2020-21 to 2021-22, and increase by 0.2 per cent in real terms from 2021-22 to 2024-25.

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Expenses under the higher education sub-function are expected to decrease by 8.3 per cent in real terms from 2020-21 to 2021-22, and decrease by 9.3 per cent in real terms from 2021-22 to 2024-25. The decrease in expenses in 2021-22 primarily reflects the cessation of additional funding to maintain universities’ research efforts in response to the challenges caused by the COVID-19 pandemic. The subsequent decrease in expenses over the forward estimates primarily reflects lower costs under the Commonwealth Grant Scheme as a result of the Job-ready Graduates higher education reform package.

Expenses under the vocational and other education sub-function are expected to decrease by 10.8 per cent in real terms from 2020-21 to 2021-22, and decrease by 24.2 per cent in real terms between 2021-22 and 2024-25. The decrease in expenses in 2021-22 primarily reflects the impact of the conclusion of one-off increases in 2020-21, which were part of the Government’s response to the COVID-19 pandemic. This includes the Commonwealth’s share of the $1.0 billion JobTrainer Fund to assist job seekers in accessing training to develop new skills in growth sectors of the economy. This decrease is partially offset by the 2021-22 Budget measure Addressing Workforce Shortages in Key Areas — JobTrainer Fund — extension. Further investments in skills and apprenticeships are identified in the other economic affairs function. The subsequent expected decrease in expenses over the forward estimates primarily reflects the conclusion of the National Partnership on the Skilling Australians Fund on 30 June 2022, and the JobTrainer Fund on 31 December 2022.

Aggregate schools funding expenses are expected to increase by 8.7 per cent in real terms between 2020-21 and 2021-22, and increase by 7.6 per cent in real terms from 2021-22 to 2024-25. Expenses in the schools — non-government schools sub-function are expected to increase by 11.0 per cent in real terms between 2020-21 and 2021-22, and increase by 6.1 per cent in real terms from 2021-22 to 2024-25. Expenses under the schools — government schools sub-function are expected to increase by 5.5 per cent in real terms between 2020-21 and 2021-22, and increase by 9.7 per cent in real terms from 2021-22 to 2024-25. The increase in expenses for schools funding over the forward years is primarily due to the funding arrangements implemented under the Quality Schools package and increased funding for non-government schools in the Government’s response to the National School Resourcing Board’s Review of the socio-economic status score methodology.

Expenses under the school education — specific funding sub-function are expected to increase by 3.5 per cent in real terms between 2020-21 and 2021-22, and decrease by 13.5 per cent in real terms from 2021-22 to 2024-25. The increase and subsequent decrease in expenses primarily reflects the funding profile for the Early Learning and Schools Support program.

Expenses under the student assistance sub-function are expected to decrease by 22.7 per cent in real terms from 2020-21 to 2021-22, and decrease by 2.9 per cent in real terms from 2021-22 to 2024-25. The decrease in expenses in 2021-22 primarily reflects the cessation of temporary COVID-19 support measures implemented in the

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2020-21 financial year. The decrease from 2021-22 to 2024-25 largely reflects an expected decline in eligibility for student payments as the economy recovers following the COVID-19 pandemic, partly offset by an increase in expenses under the Higher Education Loan Program (HELP) as a result of an increase in loans issued under the Job-ready Graduates higher education reform package. Expenses under HELP mainly reflect the estimated cost to the Government of providing concessional loans, which will vary with enrolment numbers and the number and value of HELP loans.

Health

The health function includes expenses relating to medical services that are funded through Medicare; payments to the states and territories to deliver essential health services, including public hospitals; the Pharmaceutical Benefits and Repatriation Pharmaceutical Benefits Schemes; the Private Health Insurance Rebate; Aboriginal and Torres Strait Islander health programs; mental health services; and health workforce initiatives.

Table 6.8: Summary of expenses — health Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Medical services and benefits 36,841 37,551 38,352 39,960 41,656

Pharmaceutical benefits and services 14,762 15,208 15,375 15,817 16,127

Assistance to the states for public hospitals 22,646 25,463 26,649 28,238 29,916

Hospital services(a) 1,143 1,195 1,147 1,161 1,172

Health services 14,130 13,653 9,755 9,658 9,811

General administration 4,036 4,233 3,491 3,419 3,405

Aboriginal and Torres Strait Islander health 975 980 1,011 1,048 1,089

Total health 94,533 98,283 95,779 99,300 103,177

(a) The hospital services sub-function predominantly reflects Commonwealth funding to the states and territories for veterans’ hospital services.

Expenses for the health function are estimated to increase by 2.0 per cent in real terms between 2020-21 and 2021-22. This is largely driven by growth in the assistance to the States for public hospitals sub-function, due primarily to higher anticipated growth in the volume of services. Expenses for the health function are expected to decrease by 2.1 per cent in real terms over the period 2021-22 to 2024-25, largely driven by expected decreases in the health services and general administration sub-functions due to the cessation of COVID-19 emergency response measures.

The medical services and benefits sub-function, which primarily consists of Medicare and Private Health Insurance Rebate expenses, comprises 38.2 per cent of total estimated health expenses for 2021-22. Growth in Medicare expenses is the major driver of growth in this sub-function, with sub-function expenses estimated to increase by 3.4 per cent in real terms over the period 2021-22 to 2024-25.

The major components of the medical services and benefits sub-function are set out in Table 6.8.1.

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Table 6.8.1: Trends in the major components of medical services and benefits sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Medical benefits 28,497 29,124 29,867 31,461 32,975

Private health insurance 6,657 6,747 6,864 6,981 7,138

General medical consultations and services 776 743 700 657 666

Dental services(b) 337 338 343 343 341

Other 573 600 578 518 537

Total 36,841 37,551 38,352 39,960 41,656

(a) The entry for each component includes eliminations for inter-agency transactions within that component. (b) Payments under the funding agreements on Public Dental Services for Adults from 2017-18 are provided for under the health services sub-function in Table 6.8.

Expenses for medical benefits are expected to increase by 0.3 per cent in real terms between 2020-21 and 2021-22, and increase by 5.5 per cent in real terms over the period 2021-22 to 2024-25, largely as a result of ongoing growth in the use of medical services and the use of high value items on the Medicare Benefits Schedule.

Expenses for private health insurance are expected to decrease by 0.5 per cent in real terms between 2020-21 and 2021-22, and decrease by 1.4 per cent in real terms over the period 2021-22 to 2024-25. The proportion of Australians with private health insurance is currently around 53.4 per cent.

Expenses for the pharmaceutical benefits and services sub-function are expected to increase by 1.1 per cent in real terms between 2020-21 and 2021-22 largely as a result of growth in the Pharmaceutical Benefits Scheme (PBS). Expenditure for this sub-function is expected to decrease by 1.2 per cent in real terms over the period 2021-22 to 2024-25 primarily due to the impacts of existing pricing policies under the PBS, an expected reduction in the number of veterans accessing services, and maintenance of current levels of investment in the National Immunisation Program.

The major components of the pharmaceutical benefits and services sub-function are set out in Table 6.8.2.

Table 6.8.2: Trends in the major components of pharmaceutical benefits and services sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Pharmaceutical benefits, services and supply 13,942 14,406 14,578 15,013 15,319 Immunisation 475 479 473 479 479

Veterans’ pharmaceutical benefits 345 323 323 325 328

Total 14,762 15,208 15,375 15,817 16,127

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

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The Australian Government’s contribution to public hospital funding is reported through the assistance to the States for public hospitals sub-function. Hospital services covered by this sub-function include all admitted services, programs that deliver hospital services in the home, and emergency department services. Expenditure for this sub-function is expected to increase by 10.3 per cent in real terms from 2020-21 to 2021-22, largely reflecting higher anticipated growth in the volume of services. Expenditure also reflects the impact of the National Efficient Price 2020-21 determination. Expenditure is expected to increase by 9.5 per cent in real terms over the period 2021-22 to 2024-25, reflecting the Government’s agreement with states and territories for the Commonwealth to fund 45.0 per cent of the efficient growth in activity based services for public hospitals from 2020-21 to 2024-25.

The hospital services sub-function consists mainly of payments to the states and territories to deliver veterans’ hospital services. Expenditure for this sub-function is expected to increase by 2.6 per cent in real terms between 2020-21 and 2021-22, and decrease by 8.5 per cent in real terms over the period 2021-22 to 2024-25. The decrease in expenses reflects an expected reduction in the number of veterans requiring treatment and efficiencies achieved in the pricing arrangements.

Expenses in the health services sub-function include Australian Government expenses associated with the delivery of population health, medical research, mental health, blood and blood products, other allied health services, health infrastructure and disbursements from the Medical Research Future Fund.

Health services expenditure is expected to decrease by 5.2 per cent in real terms between 2020-21 and 2021-22, largely reflecting expected payments under the National Partnership Agreement on the COVID-19 response. This is partially offset by an increase in expenses reflected in the 2021-22 Budget measure COVID-19 Response Package — vaccine purchases and rollout. Expenses are expected to decrease by 33.0 per cent in real terms over the period from 2021-22 to 2024-25, largely reflecting the cessation of COVID-19 emergency response measures.

The general administration sub-function includes the Government’s general administrative costs, investment in health workforce measures and support for rural health initiatives. Expenditure for this sub-function is expected to increase by 2.9 per cent in real terms between 2020-21 and 2021-22, largely reflecting the continuation of short-term measures to respond to the COVID-19 pandemic, and decrease by 25.0 per cent in real terms over the period 2021-22 to 2024-25, largely reflecting a cessation of COVID-19 pandemic response measures.

Expenses in the Aboriginal and Torres Strait Islander health sub-function are expected to decrease by 1.4 per cent in real terms from 2020-21 to 2021-22, as a result of reduced payments to states and territories for an expiring partnership agreement, and increase by 3.5 per cent in real terms over the period 2021-22 to 2024-25 reflecting utilisation of Indigenous-specific services under the Indigenous Australians Health Program.

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Social security and welfare

The social security and welfare function includes expenses for pensions and services to the aged; assistance to the unemployed and the sick; people with disabilities and families with children; and income support and compensation for veterans and their dependants. It also includes assistance provided to Indigenous Australians that has not been included under other functions.

Table 6.9: Summary of expenses — social security and welfare Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Assistance to the aged 78,100 77,166 82,644 86,590 89,611

Assistance to veterans and dependants 8,050 7,962 8,071 6,602 6,487

Assistance to people with disabilities 56,881 58,779 60,854 62,854 64,972

Assistance to families with children 42,252 39,573 40,467 41,257 41,895

Assistance to the unemployed and the sick 31,266 18,099 15,135 14,694 14,493

Other welfare programs 1,847 1,646 1,561 1,345 1,367

Assistance for Indigenous Australians nec 2,431 2,522 2,347 2,422 2,477

General administration 4,567 4,229 3,576 3,262 3,210

Total social security and welfare 225,394 209,975 214,655 219,028 224,512

Expenses in the social security and welfare function are estimated to decrease by 8.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 0.3 per cent in real terms from 2021-22 to 2024-25.

The most significant driver of the reduction in real expenditure between 2020-21 and 2024-25 is the assistance to the unemployed and the sick sub-function. However, this reduction in expenditure has been partially offset by an ongoing increase in expenditure from 2021-22 to 2024-25 in the assistance to the aged and assistance to people with disabilities sub-functions. The assistance to the unemployed and the sick sub-function is expected to decrease by 43.2 percent in real terms between 2020-21 and 2021-22, and decrease by 25.4 per cent in real terms from 2021-22 to 2024-25, reflecting the cessation of the temporary COVID-19 support measures and the recovery from the COVID-19-pandemic. The assistance to the aged sub-function is expected to decrease by 3.0 per cent in real terms between 2020-21 and 2021-22 reflecting the cessation of temporary COVID-19 supports, and grow by 8.2 per cent in real terms from 2021-22 to 2024-25. The assistance to people with disabilities sub-function is expected to increase by 1.4 per cent in real terms from 2020-21 to 2021-22, and increase by 3.0 per cent in real terms from 2021-22 to 2024-25.

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The principal driver of growth over the forward estimates for the assistance to the aged sub-function is growth in the Aged Care Services program, which is estimated to increase by 5.2 per cent in real terms from 2020-21 to 2021-22, and increase by 20.1 per cent in real terms from 2021-22 to 2024-25. This largely reflects the impact of the 2021-22 Budget measures Aged Care — Government response to the Royal Commission into Aged Care Quality and Safety — residential aged care services and sustainability, and Aged Care — Government Response to the Royal Commission into Aged Care Quality and Safety — home care, which includes significant new investment in home care and residential aged care services.

The Government’s response to the Royal Commission into Aged Care Quality and Safety also includes significant new investments to improve the quality and safety of the sector, reflected in increased expenditure for the Aged Care Quality program, the Aged Care Quality and Safety Commission (in the other sub-function) and Access and Information program. Aged Care Quality program expenditure is estimated to decrease by 55.4 per cent in real terms from 2020-21 to 2021-22 reflecting terminating funding that was provided in 2020-21 in response to the COVID-19 pandemic. The program is estimated to increase by 24.4 per cent in real terms from 2021-22 to 2022-23 reflecting increased investment in the aged care workforce.

Also contributing to the overall growth in expenditure for the assistance to the aged sub-function is the Support for Seniors program, which is estimated to decline by 6.1 per cent in real terms from 2020-21 to 2021-22, and increase by 3.5 per cent in real terms from 2021-22 to 2024-25. The fall in expenditure in 2021-22 is largely due to the cessation of one-off COVID-19 related expenditure in 2020-21, with growth over the forward estimates reflecting increased numbers of aged pensioners.

Expenses for veterans’ community care and support are estimated to decrease by 6.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 19.5 per cent in real terms from 2021-22 to 2024-25, reflecting an expected decline in the number of veterans and dependants. The majority of veterans expenditure is in the sub-function assistance to veterans and dependants.

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The major components of the assistance to the aged sub-function are outlined below in Table 6.9.1.

Table 6.9.1: Trends in the major components of assistance to the aged sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Support for Seniors 53,544 51,223 53,163 55,067 56,851

Aged Care Services 22,533 24,159 27,621 29,817 31,136

Veterans’ Community Care and Support 965 915 848 761 791

Aged Care Quality 644 292 372 303 205

Access and information 274 363 446 448 456

National Partnership Payments —

Assistance to the Aged 20 13 19 20 0

Other 122 200 176 174 172

Total 78,100 77,166 82,644 86,590 89,611

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

Expenses for assistance to veterans and dependants is expected to decrease by 2.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 24.1 per cent in real terms from 2021-22 to 2024-25. This reduction in expenditure is mainly attributable to the declining veteran population.

Expenses for the assistance to people with disabilities sub-function are expected to increase by 1.4 per cent in real terms from 2020-21 to 2021-22, and increase by 3.0 per cent in real terms from 2021-22 to 2024-25. These increases largely reflect a higher number of people with a disability entering the National Disability Insurance Scheme (NDIS) and associated increases in individual support costs, which contributes 12.1 per cent growth in real terms from 2020-21 to 2021-22, and 10.5 per cent growth in real terms from 2021-22 to 2024-25 for the NDIS.

Expenses for the Financial Support for People with Disability program, which primarily consists of Disability Support Pension (DSP), are estimated to decrease by 5.3 per cent in real terms from 2020-21 to 2021-22 mainly due to one-off COVID-19 related expenditure in 2020-21, and to decrease by 0.7 per cent in real terms from 2021-22 to 2024-25 reflecting gradual growth in estimated recipient numbers.

Expenses for the Financial Support for Carers component are estimated to decrease by 1.6 per cent in real terms from 2020-21 to 2021-22 due to one-off COVID-19 related expenditure in 2020-21, and increase by 2.7 per cent in real terms from 2021-22 to 2024-25 reflecting higher recipient numbers and payment rates.

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The major components of the assistance to people with disabilities sub-function are outlined below in Table 6.9.2.

Table 6.9.2: Trends in the major components of assistance to people with disabilities sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

National Disability Insurance Scheme(b) 24,607 28,115 29,835 30,796 33,320

Financial Support for People with Disability 18,411 17,763 18,073 18,596 18,923

Financial Support for Carers 11,516 11,552 11,860 12,319 12,728

National Partnership Payments — Assistance

to People with Disabilities 2,347 1,350 1,087 1,143 0

Total 56,881 58,779 60,854 62,854 64,972

(a) The entry for each component includes eliminations for inter-agency transactions within that component. (b) Includes both Commonwealth and State contributions to the cost of the National Disability Insurance Scheme delivered through the National Disability Insurance Agency, which is a Commonwealth agency in the General Government Sector and the cost of the NDIS Transition program delivered by the Department

of Social Services.

Expenses for the assistance to families with children sub-function are expected to decrease by 8.1 per cent in real terms from 2020-21 to 2021-22, and decrease by 1.3 per cent in real terms from 2021-22 to 2024-25, driven primarily by decreased expenditure because of improving economic conditions. The major programs impacted by this trend include Family Assistance, Parents Income Support, and the Child Care Subsidy. Family Assistance expenses are expected to decrease by 2.3 per cent in real terms from 2020-21 to 2021-22, and decrease by 8.8 per cent in real terms from 2021-22 to 2024-25. The decrease in Family Assistance expenses to 2024-25 is driven by Family Tax Benefit (FTB) estimated recipient numbers and average payment rates falling from 2021-22 as the economy recovers from the effects of the COVID-19 pandemic.

The assistance to families with children sub-function profile includes an increase in Child Care Subsidy (CCS) expenses of 3.9 per cent in real terms from 2020-21 to 2021-22, and an increase of 17.5 per cent in real terms from 2021-22 to 2024-25. The increase primarily reflects expected continued growth in the use of child care by families, expected increases in fees charged by child care providers, and (from 2022-23) the Government’s decision to remove the CCS annual cap and increase CCS payments to services on behalf of families with multiple children aged five and under in care under the 2021-22 Budget measure Women’s Economic Security Package.

Support for the child care system expenses are expected to decrease by 79.5 per cent in real terms from 2020-21 to 2021-22, and decrease by 7.2 per cent in real terms from 2021-22 to 2024-25. The decrease in expenses from 2020-21 to 2021-22 is driven by the cessation of additional support payments which were provided to Early Childhood Education and Care services in 2020-21 to help services remain viable during the COVID-19 pandemic.

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Expenses for Parents Income Support are expected to decrease by 28.8 per cent in real terms from 2020-21 to 2021-22 due to the ending of the temporary Coronavirus Supplement, and decrease by 3.5 per cent in real terms from 2021-22 to 2024-25.

The major components of the assistance to families with children sub-function are set out in Table 6.9.3.

Table 6.9.3: Trends in the major components of assistance to families with children sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Family Assistance 21,109 21,009 20,707 20,826 20,549

Child Care Subsidy 8,968 9,492 10,644 11,180 11,970

Parents income support 7,932 5,755 5,757 5,847 5,961

Child Support 2,082 2,103 2,127 2,151 2,175

Support for the child care system 1,336 279 282 277 278

Families and Children 626 689 692 712 695

Family relationship services 182 229 241 247 250

Other 16 16 17 17 17

Total 42,252 39,573 40,467 41,257 41,895

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

Expenses for the assistance to the unemployed and the sick sub-function are estimated to decrease by 43.2 per cent in real terms from 2020-21 to 2021-22, and to decrease by 25.4 per cent in real terms from 2021-22 to 2024-25. The fall in expenditure in 2021-22 is largely due to the cessation of the temporary Coronavirus Supplement and improved labour market conditions. The decline in expenses from 2021-22 to 2024-25 reflects the continuing economic recovery from COVID-19.

Expenses for the assistance for Indigenous Australians not elsewhere classified (nec) sub-function are estimated to increase by 1.8 per cent in real terms from 2020-21 to 2021-22, and decrease by 8.5 per cent in real terms from 2021-22 to 2024-25. This decrease is largely due to cessation of temporary 2020-21 Budget measures to address the impacts of the COVID-19 pandemic, such as the increased support for the Community Development Program and employees of Commonwealth-owned Indigenous subsidiaries, from 2021-22 onwards.

Expenses for the general administration sub-function are estimated to decrease by 9.1 per cent in real terms from 2020-21 to 2021-22, and decrease by 29.2 per cent in real terms from 2021-22 to 2024-25. This is mainly attributable to an estimated reduction in recipients of income support payments as the economic recovery builds, as well as the implementation of measures by Services Australia and the Department of Social Services, involving upfront service delivery costs that are estimated to decrease over time.

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Housing and community amenities

The housing and community amenities function includes expenses for the Australian Government’s contribution to the National Housing and Homelessness Agreement, other Australian Government housing programs, the expenses of Defence Housing Australia (DHA), urban and regional development programs and environmental protection initiatives.

Table 6.10: Summary of expenses — housing and community amenities Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Housing 3,735 4,418 3,185 2,508 2,443

Urban and regional development 1,476 1,606 1,254 1,069 750

Environment protection 1,743 1,844 1,845 1,940 1,835

Total housing and community amenities 6,953 7,869 6,283 5,517 5,028

Total expenses under the housing and community amenities function are estimated to increase by 11.1 per cent in real terms from 2020-21 to 2021-22, and decrease by 40.4 per cent in real terms from 2021-22 to 2024-25. The decrease is primarily driven by reduced expenses for the housing sub-function due to the ending of the HomeBuilder program in 2022-23 and the urban and regional development sub-function, reflecting completion of projects under key programs.

The housing sub-function includes the Australian Government’s contribution to the National Housing and Homelessness Agreement, the provision of housing for the general public and people with special needs, and DHA expenses. Expenses for this sub-function are estimated to increase by 16.1 per cent in real terms from 2020-21 to 2021-22, and decrease by 48.5 per cent in real terms from 2021-22 to 2024-25. This is largely driven by the cessation of the temporary HomeBuilder program, and decreasing payments under the National Rental Affordability Scheme which is now closed to new applicants.

The Government also provides housing support through the National Housing Finance and Investment Corporation in the form of guarantees, loans, investments and grants to encourage investment in housing, with a particular focus on affordable housing.

The urban and regional development sub-function comprises of City and Regional Deals, services to territories and regional development programs, including Community Development Grants and the Building Better Regions Fund. Expenses are estimated to increase by 6.8 per cent in real terms from 2020-21 to 2021-22 reflecting a number of 2021-22 Budget measures, including Supporting Regional Australia and Services to Territories — additional funding. Expenses decline by 56.5 per cent in real terms from 2021-22 to 2024-25, largely reflecting the expected completion of a number of projects under key programs, such as the Building Better Regions Fund, the National Stronger Regions Fund, the Regional Jobs and Investment packages, the Regional Growth Fund, and various City Deals.

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The environment protection sub-function includes expenses for a variety of initiatives, including the protection and conservation of the environment, water and waste management, pollution abatement and environmental research. Expenses are estimated to increase by 3.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 7.3 per cent in real terms from 2021-22 to 2024-25. The increase from 2020-21 to 2021-22 primarily reflects the continued investment in water infrastructure under the $3.4 billion National Water Grid Fund (formerly the National Water Infrastructure Development Fund). The decrease in expenditure from 2021-22 to 2024-25 primarily relates to the cessation of funding to maintain timely Commonwealth environmental assessments and approvals during the transition to single touch approvals announced in the 2020-21 and 2021-22 Budgets, and the re-profiling of expenditure from 2020-21 to 2021-22 for the Bushfire Recovery Species and Landscapes under the National Bushfire Recovery Fund.

Recreation and culture

The recreation and culture function includes expenses to support public broadcasting and cultural institutions, funding for the arts and the film industry, assistance to sport and recreation activities, as well as the management and protection of national parks and other world heritage areas. This function also includes expenses relating to the protection and preservation of historic sites and buildings, including war graves.

Table 6.11: Summary of expenses — recreation and culture Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Broadcasting 1,507 1,524 1,515 1,526 1,537

Arts and cultural heritage 1,699 1,914 1,672 1,568 1,585

Sport and recreation 615 543 478 391 338

National estate and parks 584 550 486 474 478

Total recreation and culture 4,405 4,532 4,151 3,959 3,938

Total expenses under the recreation and culture function are estimated to increase by 0.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 19.0 per cent in real terms over the period 2021-22 to 2024-25.

Expenses under the broadcasting sub-function are expected to decrease by 0.8 per cent in real terms from 2020-21 to 2021-22, and decrease by 6.0 per cent in real terms from 2021-22 to 2024-25. This partly reflects the Government’s decision in the 2018-19 Budget to pause indexation of the Australian Broadcasting Corporation’s (ABC) operational funding from 2019-20 to 2021-22, which has no impact on funding for transmission and distribution. This decision is partially offset by additional funding announced in the 2021-22 Budget measure Media Sector Support.

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Table 6.11.1 provides further details of the major components of broadcasting sub-function expenses.

Table 6.11.1: Trends in the major components of broadcasting sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

ABC general operational activities 901 900 891 903 914

SBS general operational activities 343 357 353 348 344

ABC transmission and distribution services 190 192 193 195 198

SBS transmission and distribution services 73 75 78 80 82

Total 1,507 1,524 1,515 1,526 1,537

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

Expenses under the arts and cultural heritage sub-function are estimated to increase by 10.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 22.8 per cent in real terms from 2021-22 to 2024-25. This sub-function includes funding for the arts and cultural institutions. The estimated increase from 2020-21 to 2021-22, and the decrease from 2021-22 to 2024-25 are predominantly driven by the 2021-22 Budget measures COVID-19 Response Package — additional arts sector support and National Collecting Institutions — enhancements, that include a range of temporary support measures, many of which terminate in 2021-22 or 2022-23.

Expenses under the sport and recreation sub-function are estimated to decrease by 13.3 per cent in real terms from 2020-21 to 2021-22, and decrease by 42.0 per cent in real terms from 2021-22 to 2024-25. The decrease in 2021-22 primarily reflects the cessation of short-term funding provided for sport in the 2020-21 Budget and MYEFO, as well as COVID-19 related delays to sports grants programs which had moved expenditure from 2019-20 into 2020-21. The reduction in expenditure from 2021-22 to 2024-25 largely reflects the expected completion of grant funding for short-term community-led projects to increase participation in sport and physical activity, and the further completion of elements of the national sport plan, Sport 2030.

Expenses under the national estate and parks sub-function are estimated to decrease by 7.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 19.1 per cent in real terms from 2021-22 to 2024-25. The decrease from 2020-21 to 2021-22 reflects additional investment in 2020-21 for heritage sites in Sydney Harbour relative to outer year expenditure through the 2020-21 Budget measure titled Sydney Harbour Federation Trust — infrastructure improvements. The decrease from 2021-22 to 2024-25 reflects a number of terminating measures for the Australian Antarctic Program, Director of National Parks and Great Barrier Reef Marine Park Authority.

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Fuel and energy

The fuel and energy function includes expenses for the Fuel Tax Credits and Product Stewardship Waste (Oil) schemes, administered by the Australian Taxation Office. It also includes expenses related to improving Australia’s energy efficiency, resource related initiatives, and programs to support the production and use of renewable energy.

Table 6.12: Summary of expenses — fuel and energy Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Fuel and energy 9,090 9,638 9,546 10,069 10,567

Total fuel and energy 9,090 9,638 9,546 10,069 10,567

Fuel and energy expenses are estimated to increase by 4.1 per cent in real terms from 2020-21 to 2021-22, and increase by 2.2 per cent in real terms over the period 2021-22 to 2024-25 reflecting 2021-22 Budget measures that invest in fuel security.

Table 6.12.1 provides further details of the fuel and energy sub-function.

Table 6.12.1: Trends in the major components of fuel and energy sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Fuel Tax Credits Scheme 7,623 8,072 8,450 9,117 9,860

Resources and Energy 756 424 170 57 24

Renewable Energy 298 373 281 294 308

Other 413 769 645 601 375

Total 9,090 9,638 9,546 10,069 10,567

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

The major program within this function is the Fuel Tax Credits Scheme, which is estimated to increase by 3.9 per cent in real terms from 2020-21 to 2021-22, and increase by 13.9 per cent in real terms from 2021-22 to 2024-25, largely reflecting increased use of fuels that are eligible for the Fuel Tax Credits Scheme.

Expenses under the Resources and Energy component are estimated to decrease by 44.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 94.8 per cent in real terms from 2021-22 to 2024-25. The decrease in expenses from 2021-22 to 2024-25 reflects the upfront recognition of expenses in 2020-21 associated with the rehabilitation of the Ranger Uranium Mine.

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Expenses under the Renewable Energy component are expected to increase by 22.7 per cent in real terms from 2020-21 to 2021-22, and decrease by 23.0 per cent from 2021-22 to 2024-25. The increase in expenses from 2020-21 to 2021-22 reflects additional funding for the Australian Renewable Energy Agency (ARENA) in the 2020-21 Budget measure JobMaker Plan — investment in new energy technologies, including for further grant funding and for the Future Fuels Fund. The overall decrease in expenses under the Renewable Energy component from 2021-22 to 2024-25 reflects the ARENA’s legislated funding profile, which is partially offset by the additional grant funding provided to ARENA in the 2020-21 Budget.

Agriculture, forestry and fishing

The agriculture, forestry and fishing function includes expenses to support assistance to primary producers, forestry, fishing, land and water resources management, quarantine services and contributions to research and development.

Table 6.13: Summary of expenses — agriculture, forestry and fishing Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Wool industry 50 53 56 61 65

Grains industry 204 211 206 206 204

Dairy industry 53 53 53 54 55

Cattle, sheep and pig industry 244 250 254 259 259

Fishing, horticulture and other agriculture 483 402 352 345 350

General assistance not allocated to

specific industries 44 39 39 39 39

Rural assistance 1,170 553 448 336 360

Natural resources development 859 1,940 1,447 1,141 279

General administration 906 982 925 840 841

Total agriculture, forestry and fishing 4,014 4,483 3,779 3,280 2,450

Total expenses under this function are estimated to increase by 9.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 49.1 per cent in real terms over the period 2021-22 to 2024-25.

The rural assistance sub-function is expected to decrease by 53.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 39.4 per cent in real terms over the period 2021-22 to 2024-25. The initial decrease from 2020-21 to 2021-22 mainly reflects the cessation of the additional package of measures provided to support farmers and communities in drought as well as COVID-19 response measures. In particular, this includes the discount on expenses associated with the additional concessional loan funding through the Regional Investment Corporation (RIC) in the July 2020 Economic and Fiscal Update measure Drought Response, Resilience and Preparedness Plan — further support for farmers and communities in drought. The subsequent decrease from 2021-22 to 2024-25 mainly relates to the profile of expenses for the concessional loans through the RIC and the Farm Household Allowance.

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The majority of expenses under the natural resources development sub-function are related to water initiatives comprising urban and rural programs, including irrigation modernisation, recycling and stormwater capture. This also includes activities to enhance the environmental outcomes in the Murray-Darling Basin.

Table 6.13.1 provides further details of the natural resources development sub-function.

Table 6.13.1: Trends in the major components of natural resources development sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Water reform(b) 573 1,539 1,130 909 64

Sustainable management — natural resources 15 71 84 17 14

Other 271 330 233 215 201

Total 859 1,940 1,447 1,141 279

(a) The entry for each component includes eliminations for inter-agency transactions within that component. (b) Water Reform includes the following programs: National Partnership Payments — Water and Natural Resources; Water Reforms; and Commonwealth Environmental Water.

Expenses under the natural resources development sub-function are estimated to increase by 121.6 per cent in real terms from 2020-21 to 2021-22, which reflects the Government’s commitment to enhancing the implementation of the Murray-Darling Basin Plan (Basin Plan). The subsequent decrease of 86.6 per cent in real terms from 2021-22 to 2024-25 reflects the expected completion of water reform activities under the Basin Plan in 2023-24. Basin Plan initiatives are funded through the Sustainable Rural Water Use and Infrastructure Program and the Water for the Environment Special Account.

Mining, manufacturing and construction

The mining, manufacturing and construction function includes expenses for programs designed to promote the efficiency and competitiveness of Australian industries. The major components include the Research and Development Tax Incentive and industry assistance programs, including the Australian Technology and Science Growth Plan which supports the Government’s commitment to science and innovation as key drivers of business growth, economic prosperity and job opportunities.

Table 6.14: Summary of expenses — mining, manufacturing and construction Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Mining, manufacturing and construction 4,394 4,354 4,230 4,138 3,739

Total mining, manufacturing

and construction 4,394 4,354 4,230 4,138 3,739

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Total expenses under the mining, manufacturing and construction function are expected to decrease by 2.8 per cent in real terms from 2020-21 to 2021-22, and decrease by 20.0 per cent in real terms over the period 2021-22 to 2024-25.

Table 6.14.1 provides further details of the major components of the mining, manufacturing and construction sub-function.

Table 6.14.1: Trends in major components of mining, manufacturing and construction sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Research and Development Tax Incentive 3,085 2,729 2,759 2,891 3,030

Growing Business Investment 384 726 850 662 238

Northern Australia Infrastructure Facility 671 549 314 311 218

Other 254 351 308 274 253

Total 4,394 4,354 4,230 4,138 3,739

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

Expenses for the Research and Development Tax Incentive, administered by the Australian Taxation Office, are expected to decrease by 13.2 per cent in real terms from 2020-21 to 2021-22, reflecting a one-off adjustment for higher than estimated claims for prior years (both the number and size of claims). Expenses are expected to increase by 3.5 per cent in real terms from 2021-22 to 2024-25, reflecting changes in the number and size of expected claims from eligible companies with an annual turnover of less than $20 million.

Expenses under the Growing Business Investment component are expected to increase by 85.6 per cent in real terms from 2020-21 to 2021-22, and decrease by 69.5 per cent in real terms from 2021-22 to 2024-25. The increase and subsequent decrease in expenditure reflects the funding profile of the 2020-21 Budget measure JobMaker Plan — Modern Manufacturing Strategy, which provides additional financial support to the manufacturing sector.

The Northern Australia Infrastructure Facility (NAIF) was established on 1 July 2016. The NAIF offers concessional finance of up to $5 billion to encourage and complement private sector investment in infrastructure that benefits northern Australia. The decrease in expenses over the forward estimates reflects changes in concessional loan discount expenses associated with the expected commitment of concessional loans across the forward estimates.

Expenses under the Other component are expected to increase by 35.4 per cent in real terms from 2020-21 to 2021-22, and decrease by 32.8 per cent in real terms from 2021-22 to 2024-25. The increase and subsequent decreases in the expenditure profile reflect the completion of the 2020-21 MYEFO measure Satellite Based Augmentation System.

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Transport and communication

The transport and communication function includes expenses to support the infrastructure and regulatory framework for Australia’s transport and communication sectors.

Table 6.15: Summary of expenses — transport and communication Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Communication 1,244 1,708 1,603 1,379 1,349

Rail transport 1,376 2,805 3,436 3,437 3,107

Air transport 2,732 1,020 348 273 267

Road transport 7,765 8,187 11,473 10,595 7,934

Sea transport 458 462 463 469 475

Other transport and communication 253 277 296 258 191

Total transport and communication 13,828 14,460 17,618 16,411 13,322

Total expenses under this function are estimated to increase by 2.6 per cent in real terms between 2020-21 and 2021-22, and decrease by 14.1 per cent in real terms over the period 2021-22 to 2024-25.

The estimated expenses for the communication sub-function relate to communication activities and support for the digital economy through the Department of Infrastructure, Transport, Regional Development and Communications, and the Australian Communications and Media Authority. Total expenses under this sub-function are estimated to increase by 34.8 per cent in real terms between 2020-21 and 2021-22, and decrease by 26.4 per cent in real terms from 2021-22 to 2024-25. The increase from 2020-21 to 2021-22 primarily reflects the commencement of the Regional Broadband Scheme and the 2021-22 Budget measures Supporting Regional Australia and Our North, Our Future — Next Five Year Plan for Northern Australia. The decrease in expenditure from 2021-22 to 2024-25 primarily reflects the conclusion of the Regional Connectivity Program and the Mobile Black Spot Program.

The expenses under the rail transport sub-function primarily consist of grants provided under the Infrastructure Investment Program. Expenses are estimated to increase by 100.0 per cent in real terms between 2020-21 and 2021-22, and increase by 3.2 per cent in real terms from 2021-22 to 2024-25. The significant initial increase in expenditure primarily reflects the Government’s commitments to major rail projects, including the Sydney Metro — Western Sydney Airport, METRONET and Melbourne Airport Rail Link. The subsequent increase in expenditure from 2021-22 to 2024-25 reflects the Government’s continued investment in priority rail projects, including through the 2021-22 Budget measures titled Infrastructure Investment.

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The estimated expenses for the air transport and sea transport sub-functions primarily relate to activities of the safety regulators — the Civil Aviation Safety Authority and the Australian Maritime Safety Authority (AMSA), and support for the aviation sector as part of the Government’s response to the COVID-19 pandemic. Total expenses under the air transport sub-function are estimated to decrease by 63.3 per cent in real terms between 2020-21 and 2021-22, and decrease by 75.6 per cent in real terms from 2021-22 to 2024-25. The significant decrease in expenditure is associated with the cessation of temporary support for the aviation sector as part of the Government’s response to the COVID-19 pandemic. Total expenses under the sea transport sub-function are estimated to decrease by 1.0 per cent in real terms between 2020-21 and 2021-22, and decrease by 4.3 per cent in real terms from 2021-22 to 2024-25, reflecting a reduction in levy revenue and costs for AMSA.

The expenses under the road transport sub-function primarily consist of grants provided under the Infrastructure Investment Program. Expenses are estimated to increase by 3.5 per cent in real terms between 2020-21 and 2021-22, and decrease by 9.7 per cent in real terms from 2021-22 to 2024-25. The initial increase in expenditure reflects the Government’s continued investment in priority road projects, including through the 2021-22 Budget measures titled Infrastructure Investment. The subsequent decrease in expenditure from 2021-22 to 2024-25 reflects the completion of stimulus initiatives, including the $3.0 billion Road Safety Program.

Total expenses under the other transport and communication sub-function are estimated to increase by 7.6 per cent in real terms between 2020-21 and 2021-22, and decrease by 35.9 per cent in real terms from 2021-22 to 2024-25. The initial increase in expenditure primarily reflects the increase in program support provided to the Infrastructure, Transport, Regional Development and Communications Portfolio for the delivery of priority infrastructure and transport initiatives, including through the 2021-22 Budget measure Supporting Infrastructure Investment. The subsequent decrease in expenditure from 2021-22 to 2024-25 reflects the cessation of temporary program support provided through the 2020-21 Budget measure Supporting Infrastructure Investment.

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Other economic affairs

The other economic affairs function includes expenses on tourism and area promotion, labour market assistance, immigration, industrial relations and other economic affairs not elsewhere classified (nec).

Table 6.16: Summary of expenses — other economic affairs Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Tourism and area promotion 227 199 160 161 164

Total labour and employment affairs 6,546 7,530 5,541 4,702 4,577

Vocational and industry training 3,061 3,737 2,430 1,370 1,354

Labour market assistance to job

seekers and industry 2,687 2,945 2,376 2,648 2,549

Industrial relations 798 848 735 683 674

Immigration 3,622 3,694 2,683 2,638 2,746

Other economic affairs nec 73,424 3,216 2,708 2,604 2,581

Total other economic affairs 83,819 14,640 11,091 10,103 10,068

Total expenses under the other economic affairs function are expected to decrease by 82.9 per cent in real terms from 2020-21 to 2021-22, and decrease by 35.9 per cent in real terms over the period 2021-22 to 2024-25.

Expenses under the tourism and area promotion sub-function are expected to decrease by 13.6 per cent in real terms in 2021-22 and decrease by 23.2 per cent in real terms from 2021-22 to 2024-25. The decreases in expenses in 2021-22 and subsequent decrease from 2021-22 to 2024-25 largely reflect the temporary nature of the Government’s tourism recovery campaigns in response to COVID-19 and bushfires.

Expenses under the vocational and industry training sub-function are expected to increase by 19.8 per cent in real terms from 2020-21 to 2021-22, and decrease by 66.2 per cent in real terms from 2021-22 to 2024-25. The increase in expenses in 2021-22 reflects further investment in the vocational education and training sector, on top of the major upskilling and re-skilling programs announced by the Government in the 2020-21 Budget, such as the JobMaker Plan — Skills Reform. Further investments in the 2021-22 Budget include programs designed to help businesses to hire more apprentices, including the Building skills for the Future — Boosting Apprenticeship Commencements wage subsidy — expansion and other measures that would improve job seekers’ employability, to assist Australia’s economic recovery from the COVID-19 pandemic. The expenses are expected to decline from 2021-22 after temporary support measures such as the July 2020 Economic and Fiscal Update measure COVID-19 Response Package — supporting apprentices and trainees and the 2020-21 Budget measure JobMaker Plan — boosting apprenticeships wage subsidy cease.

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Expenses under the labour market assistance to job seekers and industry sub-function are expected to increase by 7.6 per cent in real terms from 2020-21 to 2021-22, and decline by 19.3 per cent in real terms from 2021-22 to 2024-25, primarily due to the 2021-22 Budget measure New Employment Services Model, and other measures announced by the Government supporting job seekers to retain jobs and find sustainable employment. The expenses are expected to decline from 2021-22 primarily as a result of anticipated service delivery efficiencies from servicing job-ready job seekers using digital platforms instead of face-to-face engagement.

Expenses under the industrial relations sub-function are expected to increase by 4.3 per cent in real terms from 2020-21 to 2021-22, which reflects higher expected payments for employee entitlements for employee entitlements under the Fair Entitlements Guarantee Act 2012 resulting from employer bankruptcies during the COVID-19 pandemic. Expenses under this sub-function are expected to decrease by 26.0 per cent in real terms from 2021-22 to 2024-25 as a result of lower expected payments for employee entitlements under the Fair Entitlements Guarantee Act 2012 as a result of predicted improved economic conditions.

The main components of the immigration sub-function relate to the management of unlawful non-citizens, the provision of migration and citizenship services, and refugee and humanitarian assistance.

Table 6.16.1 provides further details of the major components of the immigration sub-function expenses.

Table 6.16.1: Trends in major components of the immigration sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Management of unlawful non-citizens 2,091 2,059 1,284 1,294 1,300

Citizenship, visas and migration 821 799 693 676 760

Regional co-operation and refugee and

humanitarian assistance 710 835 706 668 686

Total other economic affairs 3,622 3,694 2,683 2,638 2,746

(a) The entry for each component includes eliminations for inter-agency transactions within that component.

Expenses under this sub-function are expected to increase by 0.1 per cent in real terms between 2020-21 and 2021-22, and decrease by 30.7 per cent in real terms from 2021-22 to 2024-25.

The increase in expenditure between 2020-21 and 2021-22 reflects higher expenses for regional cooperation and refugee and humanitarian assistance, including the 2021-22 Budget measure Migration Program — 2021-22 planning levels. This sub-function also includes additional funding for onshore detention in the 2021-22 Budget measure Immigration Detention Network, which is more than offset by lower occupancy rates in offshore detention. The decrease in expenditure from 2021-22 to 2024-25 primarily reflects lower forecast occupancy rates in offshore detention.

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Expenses under the other economic affairs nec sub-function are expected to decrease by 95.7 per cent in real terms from 2020-21 to 2021-22, and decrease by 25.2 per cent in real terms from 2021-22 to 2024-25.

Table 6.16.2 provides further details of the major components of the other economic affairs nec sub-function expenses.

Table 6.16.2: Trends in major components of the other economic affairs nec sub-function expenses Component(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Economic Response to the Coronavirus 69,434 47 12 0 0

Promotion of Australia’s export and other

international economic interests(b) 1,439 632 360 350 350

Operating costs for:

Department of Industry, Science,

Energy and Resources 538 535 509 473 450

Australian Securities and Investments

Commission 677 563 536 529 529

Bureau of Meteorology 481 527 531 516 516

IP Australia 202 216 224 232 241

Australian Competition and Consumer

Commission 200 206 189 171 163

Australian Prudential Regulation Authority 196 226 206 206 207

National Partnership Payments — Competition

and Productivity Enhancing Reform 134 127 0 0 0

Other 123 138 140 126 126

Total 73,424 3,216 2,708 2,604 2,581

(a) The entry for each component includes eliminations for inter-agency transactions within that component. (b) The programs Export Market Development Grants scheme and trade, education and investment development have been moved into the Promotion of Australia’s export and other international economic interests.

The decrease in expenditure for the other economic affairs nec sub-function between 2020-21 and 2021-22 is primarily the result of the temporary nature of the Government’s economic response to the COVID-19 pandemic and reflects the conclusion of JobKeeper in 2020-21.

The decrease in the level of expenditure for the promotion of Australia’s export and other international economic interests between 2020-21 and 2021-22 is primarily driven by support provided as part of the Government’s response to the COVID-19 pandemic in 2020-21, including through the International Freight Assistance Mechanism, Export Market Development Grants scheme and the Consumer Travel Support Program.

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Expenses for the Department of Industry, Science, Energy and Resources are expected to decrease by 21.6 per cent in real terms from 2021-22 to 2024-25, largely driven by measures that start and terminate during the forward estimates. These include the 2021-22 Budget measure Australia’s Global Resources Strategy, as well as 2020-21 Budget measures such as the JobMaker Plan — Modern Manufacturing Strategy and Australia’s Cyber Security Strategy 2020.

Expenses for the Bureau of Meteorology (the Bureau) are expected to increase by 7.6 per cent in real terms from 2020-21 to 2021-22. The increase in expenses reflects additional funding provided to the Bureau in the 2021-22 Budget measure Building Australia’s Resilience. Expenses for the Bureau are expected to decrease by 8.8 per cent in real terms from 2021-22 to 2024-25, which reflects the profile of spending associated with information and communications technology (ICT) projects, including the second and third tranche of investment to strengthen the Bureau’s ICT security and resilience and observations network announced in the 2018-19 Budget and the 2020-21 Budget.

Other purposes

The other purposes function includes expenses incurred in the servicing of public debt interest, and assistance to state, territory and local governments. This function also includes items classified as natural disaster relief, the Contingency Reserve and expenses related to the nominal interest on unfunded liabilities for government superannuation benefits.

Table 6.17: Summary of expenses — other purposes Sub-function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Public debt interest 17,123 18,196 19,118 20,580 21,873

Interest on Commonwealth Government’s

behalf 17,123 18,196 19,118 20,580 21,873

Nominal superannuation interest 7,004 10,018 10,775 11,372 12,191

General purpose inter-government transactions 75,250 77,509 81,884 84,795 89,219 General revenue assistance — states and

territories 71,729 75,188 78,564 82,032 86,408

Local government assistance 3,520 2,321 3,321 2,763 2,811

Natural disaster relief(a) 748 327 253 92 39

Contingency reserve -2,845 5,055 5,338 12,014 15,091

Total other purposes 97,279 111,106 117,368 128,853 138,414

(a) Includes funding for the establishment of the National Recovery and Resilience Agency.

Total expenses under the other purposes function are estimated to increase by 12.1 per cent in real terms from 2020-21 to 2021-22, and increase by 16.1 per cent in real terms over the period 2021-22 to 2024-25.

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Expenses under the public debt interest sub-function are expected to increase by 4.3 per cent in real terms from 2020-21 to 2021-22, and increase by 12.0 per cent in real terms from 2021-22 to 2024-25. The increase in expenses reflects an increase in expected issuance of Australian Government Securities. Statement 7: Debt Statement of Budget Paper No. 1 provides further information on Government debt, including estimates of the relative contribution of capital and recurrent spending to the Government’s annual borrowing task.

The increase in nominal superannuation interest expenses between 2020-21 and 2021-22 and over the forward estimates primarily reflects the use of different discount rates. In accordance with the accounting standards, superannuation expenses for 2020-21 were calculated using the long-term government bond rate, which best matched each individual scheme’s duration of liabilities at the start of the financial year. These rates were between 1.0 and 1.7 per cent per annum. In preparing the latest Long-Term Cost Reports, the scheme actuaries have determined that a discount rate of CPI plus 2.5 per cent should be applied to the forward estimates.

Expenses under the general purpose inter-government transactions sub-function are expected to increase by 7.3 per cent in real terms from 2021-22 to 2024-25. Nearly all of the expenses under this sub-function relate to general revenue assistance paid to state and territory governments, which is expected to increase by 7.1 per cent in real terms from 2021-22 to 2024-25, and largely comprises payments of GST entitlements provided on an ‘untied’ basis. Payments to state and territory governments tied to specific purposes are reported under the relevant sections in this Statement. Further information on general revenue assistance to the states and territories can be found in Budget Paper No. 3, Federal Financial Relations 2021-22.

Expenses under local government assistance are expected to decrease by 35.3 per cent in real terms from 2020-21 to 2021-22, and increase by 12.9 per cent in real terms from 2021-22 to 2024-25, largely reflecting half of the expected 2021-22 Financial Assistance Grants being brought forward to enable the immediate use of these funds in 2020-21. This is partially offset by the termination of the Local Roads and Community Infrastructure Program in 2022-23.

The natural disaster relief sub-function reflects financial support provided by the Australian Government to affected states and territories under the Natural Disaster Relief and Recovery Arrangements and, since November 2018, the Disaster Recovery Funding Arrangements. The majority of the funding profile over the forward estimates reflects expected payments to the states in relation to disaster events that have already occurred. As no provision is made for future disasters, the amount reduces over time. The sub-function also reflects departmental funding for the new National Recovery and Resilience Agency.

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The contingency reserve sub-function comprises the Contingency Reserve, which is an allowance that principally reflects anticipated events that cannot be assigned to individual programs in the preparation of the Australian Government budget estimates. It is used to ensure that the estimates are based on the best information available at the time of the Budget. It is not a general policy reserve and is not appropriated.

Allowances that are included in the Contingency Reserve can only be drawn upon once they have been appropriated by Parliament. These allowances are allocated to specific entities for appropriation closer to the time when the associated events occur.

The contingency reserve sub-function in the 2021-22 Budget increases expenses by $5.1 billion in 2021-22, $5.3 billion in 2022-23, $12.0 billion in 2023-24 and $15.1 billion in 2024-25. A significant component of this is the conservative bias allowance (CBA), which makes provision for the tendency for the estimates of expenses for existing Government policy to be revised upwards in the forward years. The 2021-22 Budget includes a provision of:

• nil in the Budget year 2021-22

• ½ of a percentage point of total general government sector expenses (excluding GST payments to the states) in the first forward year 2022-23 ($2.5 billion)

• 1 per cent of expenses in the second forward year 2023-24 ($5.2 billion)

• 2 per cent provision of expenses in the third forward year 2024-25 ($10.6 billion).

The drawdown of the CBA decreased expenses by $1.3 billion in 2021-22, $1.2 billion in 2022-23, $2.5 billion in 2023-24 and $1.6 billion in 2024-25. This is consistent with long standing practice and does not represent a saving or offset to spending measures.

In general, the Contingency Reserve can also include:

• a provision for underspends in the current financial year reflecting the tendency for budgeted expenses for some entities or functions not to be met

• commercial-in-confidence and national security-in-confidence items that cannot be disclosed separately and programs that are yet to be renegotiated with state and territory governments

• the effect, on the budget and forward estimates, of economic parameter revisions received late in the process and hence not able to be allocated to individual entities or functions

• decisions taken but not yet announced by the Government, and decisions made too late for inclusion against individual entity estimates

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• provisions for other specific events and pressures that are reasonably expected to affect the budget estimates.

General government net capital investment

Net capital investment is broadly defined as the sale and acquisition of non-financial assets less depreciation expenses. It provides a measure of the overall growth in capital assets (including buildings and infrastructure, specialist military equipment and computer software) after taking into account depreciation and amortisation as previously acquired assets age.

Government capital spending involves acquisition of physical assets, financial assets and provision of grants and subsidies to others (primarily state and territory governments), which they use to acquire assets.

Australian Government general government sector net capital investment is expected to be $10.3 billion in 2021-22, $1.7 billion higher than net capital investment in 2020-21. This change is largely due to increased investment by the Department of Defence outlined in the 2016 Defence White Paper and 2020 Force Structure Plan. The Government’s investment in capital assets is expected to continue to increase in 2022-23 before declining over the remainder of the forward estimates.

Details of movements are further explained in the following section.

Table 6.18: Estimates of total net capital investment 2020-21 2020-21

Revised

Estimates

Budget MYEFO

2020-21 2020-21 2020-21 2021-22 2022-23 2023-24 2024-25

Total net capital

investment ($m) 7,818 8,758 8,620 10,330 10,939 10,135 9,161

Per cent of GDP 0.4 0.4 0.4 0.5 0.5 0.4 0.4

Reconciliation of net capital investment since the 2020-21 Budget

A reconciliation of the net capital investment estimates, showing the effect of policy decisions and parameter and other variations since the 2020-21 Budget, is provided in Table 6.19.

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Statement 6: Expenses and Net Capital Investment | Page 195

Table 6.19: Reconciliation of net capital investment estimates Estimates

2020-21 2021-22 2022-23 2023-24 Total

$m $m $m $m $m

2020-21 Budget net capital investment 7,818 9,906 11,013 10,819 39,556

Changes from 2020-21 Budget to

2020-21 MYEFO

Effect of policy decisions(a) 52 -1 27 39 117

Effect of parameter and other variations 888 -51 16 -62 791

Total variations 940 -52 43 -23 908

2020-21 MYEFO net capital investment 8,758 9,854 11,056 10,796 40,464

Changes from 2020-21 MYEFO to

2021-22 Budget

Effect of policy decisions(a) -114 342 239 -70 397

Effect of parameter and other variations -24 134 -357 -591 -838

Total variations -138 476 -118 -661 -441

2021-22 Budget net capital investment 8,620 10,330 10,939 10,135 40,023

(a) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency Reserve for decisions taken.

Forecast net capital investment for 2021-22 has increased by $423.8 million since the 2020-21 Budget. This increase is driven by the effect of policy decisions of $341.0 million, with a further increase of $82.8 million resulting from parameter and other variations.

Further information on the capital measures since the 2020-21 MYEFO can be found in Budget Paper No. 2, Budget Measures 2021-22.

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Page 196 | Statement 6: Expenses and Net Capital Investment

Net capital investment estimates by function

Estimates for Australian Government general government sector net capital investment by function for the period 2020-21 to 2024-25 are provided in Table 6.20.

Table 6.20: Estimates of net capital investment by function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

General public services 421 597 250 -322 -540

Defence 5,868 8,965 10,686 11,160 10,787

Public order and safety 312 315 -288 -282 -326

Education 34 42 13 10 -25

Health 1,991 14 -36 -78 -92

Social security and welfare -390 -127 220 -78 -144

Housing and community amenities -242 -128 55 42 101

Recreation and culture 111 257 226 6 -93

Fuel and energy 21 21 14 -3 -1

Agriculture, forestry and fishing 41 68 63 18 -27

Mining, manufacturing and construction -22 -24 -12 0 -14

Transport and communication -4 -25 -36 37 -47

Other economic affairs 478 297 -231 -436 -473

Other purposes 2 58 15 59 54

Total net capital investment 8,620 10,330 10,939 10,135 9,161

A significant component of the Government’s net capital investment occurs in the defence function, and relates primarily to the acquisition of military equipment. Major factors contributing to changes in net capital investment, expected to occur in the following functions, include:

• General public services — the increase in net capital investment from 2020-21 to 2021-22 reflects the timing of lease renewals by the Department of Home Affairs, the expected timing of various overseas capital works to be undertaken by the Department of Foreign Affairs and Trade, and the expected completion of a major ICT project by the Australian Tax Office

• Defence — reflects funding associated with the implementation of the 2016 Defence White Paper and new or adjusted investments outlined in the 2020 Force Structure Plan to build the future Defence Force and capability. These investments are guided by the Defence Integrated Investment Program. Major investments include military capabilities such as ships, aircraft and armoured vehicles, as well as ICT capabilities and infrastructure

• Public order and safety — reflects the completion of investments from previous Budgets in national security capabilities for law enforcement and intelligence agencies and the administration of the federal legal system, partially offset by further investment in the 2021-22 Budget

Budget Paper No. 1 |

Statement 6: Expenses and Net Capital Investment | Page 197

• Health — largely reflects the change in the National Medical Stockpile procurement strategies in response to the COVID-19 pandemic

• Social security and welfare — is largely driven by depreciation and amortisation of prior Commonwealth investments into Services Australia’s non-financial assets such as ICT capabilities and infrastructure. This is partially offset by further Commonwealth investment in ICT capabilities and infrastructure across 2020-21 to 2022-23, including the 2021-22 Budget measures GovERP — Common Corporate Australian Public Service System and myGov enhancements, and the 2020-21 Budget measure Welfare Payment Infrastructure Transformation — tranche four

• Other economic affairs — the increase in net capital investment from 2020-21 to 2021-22 reflects the timing of lease renewals by the Department of Home Affairs.

Table 6.21 reports the acquisition of non-financial assets by function before taking into account depreciation or amortisation.

Table 6.21: Australian Government general government sector purchases of non-financial assets by function Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

General public services 1,951 2,244 1,788 1,227 1,029

Defence 11,951 15,207 17,507 18,980 19,166

Public order and safety 1,105 1,155 558 559 501

Education 74 83 59 57 19

Health 268 250 193 131 112

Social security and welfare 444 751 1,008 684 573

Housing and community amenities 336 343 421 420 450

Recreation and culture 544 716 682 481 379

Fuel and energy 15 33 25 9 8

Agriculture, forestry and fishing 134 162 157 114 70

Mining, manufacturing and construction 16 14 27 39 26

Transport and communication 123 107 100 174 56

Other economic affairs 1,353 1,188 661 465 445

Other purposes 3 75 17 61 57

General government purchases

of non-financial assets 18,318 22,325 23,202 23,402 22,890

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Page 198 | Statement 6: Expenses and Net Capital Investment

Appendix A: Expense by Function and Sub-Function

Table 6A.1: Estimates of expenses by function and sub-function Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m $m

General public services

Legislative and executive affairs 1,366 1,446 1,744 1,385 1,356 1,653

Financial and fiscal affairs 7,302 9,013 8,067 7,216 6,791 7,030

Foreign affairs and economic aid 6,270 6,949 6,340 6,204 6,615 6,532

General research 2,940 3,238 3,448 3,448 3,546 3,549

General services 855 1,237 771 748 759 764

Government superannuation

benefits 10,739 11,153 5,700 5,810 6,082 6,301

Total general public services 29,472 33,037 26,070 24,811 25,148 25,830

Defence 33,187 33,375 34,473 36,496 38,344 40,721

Public order and safety

Courts and legal services 1,416 1,529 1,633 1,518 1,457 1,438

Other public order and safety 4,973 5,184 5,019 4,556 4,432 4,482

Total public order and safety 6,388 6,712 6,652 6,074 5,889 5,919

Education

Higher education 9,652 11,369 10,628 10,241 10,200 10,339

Vocational and other education 1,713 2,224 2,022 1,805 1,622 1,644

Schools 22,305 22,061 24,437 25,933 27,202 28,199

Non-government schools 13,918 13,010 14,710 15,509 16,200 16,752

Government schools 8,387 9,052 9,727 10,423 11,002 11,447

School education —

specific funding 722 705 744 679 702 690

Student assistance 5,271 5,953 4,686 4,570 4,646 4,882

General administration 222 292 282 268 255 256

Total education 39,885 42,604 42,799 43,496 44,626 46,010

Health

Medical services and benefits 32,668 36,841 37,551 38,352 39,960 41,656

Pharmaceutical benefits and

services 14,175 14,762 15,208 15,375 15,817 16,127

Assistance to the states for

public hospitals 22,560 22,646 25,463 26,649 28,238 29,916

Hospital services(a) 1,248 1,143 1,195 1,147 1,161 1,172

Health services 11,888 14,130 13,653 9,755 9,658 9,811

General administration 3,510 4,036 4,233 3,491 3,419 3,405

Aboriginal and Torres Strait

Islander health 973 975 980 1,011 1,048 1,089

Total health 87,023 94,533 98,283 95,779 99,300 103,177

Social security and welfare

Assistance to the aged 71,855 78,100 77,166 82,644 86,590 89,611

Assistance to veterans and

dependants 7,711 8,050 7,962 8,071 6,602 6,487

Assistance to people with

disabilities 49,038 56,881 58,779 60,854 62,854 64,972

Budget Paper No. 1 |

Statement 6: Expenses and Net Capital Investment | Page 199

Table 6A.1: Estimates of expenses by function and sub-function (continued) Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m $m

Social security and welfare

(continued)

Assistance to families with

children 38,604 42,252 39,573 40,467 41,257 41,895

Assistance to the unemployed

and the sick 20,128 31,266 18,099 15,135 14,694 14,493

Other welfare programs 1,869 1,847 1,646 1,561 1,345 1,367

Assistance for Indigenous

Australians nec 2,388 2,431 2,522 2,347 2,422 2,477

General administration 4,526 4,567 4,229 3,576 3,262 3,210

Total social security and welfare 196,119 225,394 209,975 214,655 219,028 224,512 Housing and community

amenities

Housing 2,752 3,735 4,418 3,185 2,508 2,443

Urban and regional development 1,292 1,476 1,606 1,254 1,069 750

Environment protection 1,288 1,743 1,844 1,845 1,940 1,835

Total housing and community

amenities 5,332 6,953 7,869 6,283 5,517 5,028

Recreation and culture

Broadcasting 1,500 1,507 1,524 1,515 1,526 1,537

Arts and cultural heritage 1,439 1,699 1,914 1,672 1,568 1,585

Sport and recreation 544 615 543 478 391 338

National estate and parks 487 584 550 486 474 478

Total recreation and culture 3,971 4,405 4,532 4,151 3,959 3,938

Fuel and energy 7,892 9,090 9,638 9,546 10,069 10,567

Agriculture, forestry and fishing

Wool industry 58 50 53 56 61 65

Grains industry 199 204 211 206 206 204

Dairy industry 55 53 53 53 54 55

Cattle, sheep and pig industry 230 244 250 254 259 259

Fishing, horticulture and other

agriculture 393 483 402 352 345 350

General assistance not allocated

to specific industries 39 44 39 39 39 39

Rural assistance 426 1,170 553 448 336 360

Natural resources development 431 859 1,940 1,447 1,141 279

General administration 754 906 982 925 840 841

Total agriculture, forestry and

fishing 2,584 4,014 4,483 3,779 3,280 2,450

Mining, manufacturing and

construction 2,819 4,394 4,354 4,230 4,138 3,739

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Page 200 | Statement 6: Expenses and Net Capital Investment

Table 6A.1: Estimates of expenses by function and sub-function (continued) Actual Estimates

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m $m

Transport and communication

Communication 679 1,244 1,708 1,603 1,379 1,349

Rail transport 555 1,376 2,805 3,436 3,437 3,107

Air transport 935 2,732 1,020 348 273 267

Road transport 4,499 7,765 8,187 11,473 10,595 7,934

Sea transport 438 458 462 463 469 475

Other transport and

communication 216 253 277 296 258 191

Total transport and

communication 7,321 13,828 14,460 17,618 16,411 13,322

Other economic affairs

Tourism and area promotion 165 227 199 160 161 164

Total labour and employment

affairs 3,810 6,546 7,530 5,541 4,702 4,577

Vocational and industry training 1,083 3,061 3,737 2,430 1,370 1,354

Labour market assistance to

job seekers and industry 2,024 2,687 2,945 2,376 2,648 2,549

Industrial relations 702 798 848 735 683 674

Immigration 3,488 3,622 3,694 2,683 2,638 2,746

Other economic affairs nec 58,030 73,424 3,216 2,708 2,604 2,581

Total other economic affairs 65,494 83,819 14,640 11,091 10,103 10,068

Other purposes

Public debt interest 16,923 17,123 18,196 19,118 20,580 21,873

Interest on Commonwealth

Government’s behalf 16,923 17,123 18,196 19,118 20,580 21,873

Nominal superannuation interest 7,673 7,004 10,018 10,775 11,372 12,191

General purpose inter-government

transactions 64,603 75,250 77,509 81,884 84,795 89,219

General revenue assistance —

states and territories 62,027 71,729 75,188 78,564 82,032 86,408

Local government assistance 2,576 3,520 2,321 3,321 2,763 2,811

Natural disaster relief(b) 1,863 748 327 253 92 39

Contingency reserve 0 -2,845 5,055 5,338 12,014 15,091

Total other purposes 91,062 97,279 111,106 117,368 128,853 138,414

Total expenses 578,549 659,437 589,334 595,378 614,665 633,694

(a) The hospital services sub-function predominantly reflects Commonwealth funding to the states and territories for veterans’ hospital services. (b) Includes funding for the establishment of the National Recovery and Resilience Agency.

Statement 7: Debt Statement | Page 201

Statement 7: Debt Statement

Using the Government’s balance sheet to provide emergency support to limit the economic impact and long-term scarring stemming from the COVID-19 crisis was necessary and prudent. While the unprecedented support has resulted in a significant increase in debt, historically low interest rates mean the cost of servicing debt is relatively low. Furthermore, debt as a share of the economy remains low in comparison with other advanced economies.

Net debt is expected to be 34.2 per cent of GDP at 30 June 2022 and peak at 40.9 per cent of GDP ($980.6 billion) at 30 June 2025, before decreasing to 37.0 per cent of GDP at 30 June 2032.

Details on debt projections over the forward estimates and medium-term can be found in Statement 3: Fiscal Strategy and Outlook.

Contents

Overview ..................................................................................................... 203

Australian Government Securities issuance ............................................ 203

Estimates and projections of key debt aggregates .................................. 205

Estimates of AGS on issue ........................................................................ 205

Changes in AGS on issue since the 2020-21 Budget ................................................. 208

Breakdown of AGS currently on issue ........................................................................ 210

Treasury Bonds ........................................................................................................... 210

Treasury Indexed Bonds ............................................................................................. 212

Treasury Notes ............................................................................................................ 213

Non-resident holdings of AGS on issue ................................................... 213

Estimates and projections of net debt ...................................................... 214

Changes in net debt since the 2020-21 Budget .......................................................... 214

Interest on AGS .......................................................................................... 216

Climate spending........................................................................................ 219

Impact of climate spending on debt ............................................................................ 220

Statement 7: Debt Statement | Page 203

Statement 7: Debt Statement

Overview

The Debt Statement provides information on current and projected Government gross and net debt, interest costs related to Australian Government Securities (AGS) and details of climate spending, including the extent to which this spending has contributed to debt.

The Government’s strong track record of budget management enabled Australia to make effective use of the balance sheet during the COVID-19 pandemic. Prior to the pandemic, the 2019-20 MYEFO forecast that net debt would be 19.5 per cent of GDP ($392.3 billion) at 30 June 2020, declining to 16.9 per cent of GDP ($364.5 billion) at 30 June 2022 and 1.8 per cent of GDP by the end of the medium term at 30 June 2030. As a result of the Government’s decisive action in providing unprecedented economic support in response to the COVID-19 pandemic, net debt is now expected to be 34.2 per cent of GDP ($729.0 billion) at 30 June 2022, increasing to a peak of 40.9 per cent of GDP ($980.6 billion) at 30 June 2025, before falling to 37.0 per cent of GDP by the end of the medium term.

The face value of AGS on issue (gross debt) subject to the Treasurer’s Direction is expected to be around $963 billion (45.1 per cent of GDP) at 30 June 2022, increasing to around $1,199 billion (50.0 per cent of GDP) at 30 June 2025. Total AGS on issue is projected to stabilise as a share of the economy over the medium term.

Australian Government Securities issuance

The Government finances its activities either through receipts or by borrowing. When receipts fall short of payments, the Government borrows by issuing AGS.

The Australian Office of Financial Management (AOFM) is responsible for issuing AGS and managing the Government’s financing activities. The AOFM currently issues three types of securities:

• Treasury Bonds: medium to long-term securities with a fixed annual rate of interest payable every six months.

• Treasury Indexed Bonds (TIBs): medium to long-term securities for which the capital value of the security is adjusted for movements in the consumer price index (CPI). Interest on TIBs is paid quarterly, at a fixed rate, on the adjusted capital value.

• Treasury Notes: short-term discount securities, which mature within one year of issuance. The volume of Treasury Notes on issue will vary over the course of the year, depending on the size and profile of the within-year funding requirements.

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Within these three broad categories of AGS, issuance is undertaken into a limited number of maturities (known as lines). The number of lines on issue is determined by the AOFM as part of its debt portfolio management role. Each line has a fixed maturity date (the date on which the Government repays the principal it has borrowed) and, for Treasury Bonds and TIBs, a coupon rate (the annual fixed interest rate paid on the security).

Concentrating AGS issuance into a limited number of lines (rather than issuing securities with a specific tenor, such as 10 years) ensures each line is sufficiently large that it can be more readily traded in the secondary market. Strong liquidity in the secondary market is attractive to investors and intermediaries, promotes demand for AGS and assists in lowering borrowing costs. All AGS issuance is undertaken in Australian dollars.

The AOFM exercises operational independence in the execution of its duties. Its announced issuance program for each year is determined on the basis of maturing AGS, net new issuance required to fund the Budget and operational considerations.

Operational considerations often mean that the annual issuance program may not be equivalent to the financing task for a particular year. For example, the AOFM may decide there is merit in partially pre-funding the following year’s financing task. Alternatively, the AOFM might choose to smooth issuance across several financial years in order to minimise changes in AGS supply from one financial year to the next.

The AOFM aims to maintain an AGS yield curve out to a 30-year benchmark bond. This facilitates a lower risk profile of maturing debt, broadens the investor base and helps to reduce the impact of interest rate volatility on budget outcomes. Further details on the AOFM’s debt issuance program are available on the AOFM website at www.aofm.gov.au.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 205

Estimates and projections of key debt aggregates

The level of current and projected Government debt on issue is commonly expressed in one of two ways: gross or net debt.

Gross debt measures the face value of AGS on issue at a point in time. While gross debt is measured in face-value terms, estimates of AGS on issue are published in both face value and market value terms in this Statement.

• The face value of AGS on issue is the amount that the Government pays back to investors at maturity, independent of fluctuations in market prices.19 The total face value of AGS on issue changes when new securities are issued, or when securities are repurchased or reach maturity.

• The market value of AGS on issue represents the value of securities as traded on the secondary market, which changes continuously with movements in market prices (often quoted as a yield to maturity). Consistent with external reporting standards, the market value of AGS on issue is reported in the Australian Government general government sector balance sheet.

Net debt is equal to the sum of interest-bearing liabilities (which includes AGS on issue measured at market value) less the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements). As net debt incorporates both selected financial assets and liabilities at their fair value, it provides a broader measure of the financial obligations of the Australian Government than gross debt.

Not all government assets or liabilities are included in the measurement of net debt. For example, the Government’s unfunded superannuation liability is not accounted for in net debt, nor are holdings of equities, for example those held by the Future Fund or the Government’s equity investment in the NBN.

Estimates of AGS on issue

Table 7.1 contains estimates of the face value (end-of-year and within-year peak)20 and the market value (end-of-year) of AGS on issue.

19 For TIBs, the final repayment amount paid to investors includes an additional amount owing to inflation growth over the life of the security. This amount is not included in the calculation of face value.

20 End-of-year values are estimates of AGS on issue at 30 June for the particular year. The precise timing and level of within-year peaks of AGS on issue cannot be determined with accuracy. The timing of the within-year peak is therefore reported to the given month in the particular year.

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Page 206 | Statement 7: Debt Statement

The Commonwealth Inscribed Stock Act 1911 (CIS Act) requires the Treasurer to issue a direction stipulating the maximum face value of relevant AGS that may be on issue.

As required by the Charter of Budget Honesty Act 1998, Table 7.1 reports estimates of AGS on issue subject to the Treasurer’s Direction. On 7 October 2020, the Treasurer directed that the maximum face value of AGS that can be on issue is $1,200 billion.

When considering these estimates, it is important to note that the AOFM publishes an issuance program for the budget year only. Estimates beyond the budget year are based on a set of technical assumptions and will vary with changes to these assumptions and budget estimates.

Table 7.1: Estimates of AGS on issue subject to the Treasurer’s Direction(a)(b) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b

Face value — end-of-year 829 963 1,058 1,134 1,199

Per cent of GDP 40.2 45.1 48.6 49.7 50.0

Face value — within-year peak(c) 841 963 1,058 1,139 1,220

Per cent of GDP(c) 40.8 45.1 48.6 49.9 50.9

Month of peak(c) May-21 Jun-22 Apr-23 Apr-24 Apr-25

Market value — end-of-year 892 1,028 1,126 1,207 1,274

Per cent of GDP 43.3 48.2 51.7 52.9 53.2

(a) The Treasurer’s Direction applies to the face value of AGS on issue. This table also shows the equivalent market value of AGS that are subject to the Treasurer’s Direction. (b) The stock and securities that are excluded from the current limit set by the Treasurer’s Direction are outlined in subsection 51JA(2A) of the CIS Act. (c) The precise within-year timing of cash receipts and payments is not known. Estimated peaks of AGS on

issue are therefore subject to considerable uncertainty. Source: AOFM.

The total amount of AGS on issue subject to the Treasurer’s Direction is reported weekly on the AOFM website.

In 2021-22, the end-of-year face value of AGS on issue subject to the Treasurer’s Direction is expected to be around $963 billion, compared with $1,016 billion at the 2020-21 Budget. The end-of-year face value of AGS on issue subject to the Treasurer’s Direction is expected to reach around $1,199 billion in 2024-25.

In 2021-22, the face value of AGS on issue subject to the Treasurer’s Direction is expected to reach a within-year peak of around $963 billion. In 2024-25, this is estimated to rise to a within-year peak of $1,220 billion.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 207

Box 7.1: AOFM’s issuance strategy during the COVID-19 pandemic

Prior to the pandemic, the largest Treasury bond issuance program was $106 billion in 2016-17 (see Chart 7.1). For March to June 2020 alone, around $90 billion of issuance was required and a total of more than $250 billion was issued from March 2020 to March 2021. This meant there was no precedent to guide whether extremely large weekly bond issuance could be sustained. Early uncertainty was compounded by stress in global financial markets in mid-March 2020 which saw investors rapidly selling bonds in large volumes to meet liquidity needs.

The overriding objective of government cash management is to ensure the Commonwealth can meet its financial obligations at all times. A precautionary cash balance held at the Reserve Bank of Australia (RBA) and access to short-term funding markets (in the form of issuing Treasury Notes) act as a ‘buffer’ in times of unforeseen stress. During periods of extreme market turbulence, investors seek safety in short-term, low risk places to invest cash, such as Treasury Notes. Together, cash reserves and Treasury Note issuance allowed access to sufficient liquidity while the required bond issuance program was established.

Chart 7.1: Annual bond issuance and Treasury Notes outstanding

0

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225

2006-07 2008-09 2010-11 2012-13 2014-15 2016-17 2018-19 2020-21

$b $b

Gross term debt issuance

Maximum volume of Treasury Notes on issue

Source: AOFM and Treasury projections.

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Page 208 | Statement 7: Debt Statement

Box 7.1: AOFM’s issuance strategy during the COVID-19 pandemic (continued)

The AOFM provided regular updates to funding markets as new information became available to facilitate a smooth build up in bond issuance over the year. The scale of the issuance task was such that bond issuance via competitive tenders alone was judged not to be sufficient. A significant increase in tender volumes was combined with a number of large syndicated issues, in which a panel of banks was engaged to place bonds directly with investors. At the same time Treasury Note issuance was increased to unprecedented levels. The RBA’s unconventional monetary policy tools helped to ease market conditions and facilitate smooth absorption of bond issuance.

The Australian response to the extreme financing tasks, in terms of a balanced reliance on bond and Treasury Note issuance and the heavy use of syndications, was consistent with the approaches taken by many OECD countries.

There are a number of factors that meant Australia was well positioned to finance the Government’s COVID-19 response: the starting point for issuance programs was low because of declining budget deficits leading into the pandemic; a previous focus on long-dated borrowing had reduced annual refinancing requirements; the Australian Government has the highest possible credit rating (AAA by all major agencies); the AGS market has a strong reputation amongst the international investor community; a relatively large number of banks service the market through the intermediary role; the Australian dollar is a well-understood and liquid currency; and the actions of the RBA ensured functionality of the AGS market.

The events of last year, while unforeseen and unprecedented, are reflective of the depth and strength of the Australian Government’s access to global funding markets. Australia remains well positioned to deal with many possible future scenarios given the profile of the debt portfolio, a diverse investor base, strong funding market-facing institutions, and the Government’s commitment to its Economic and Fiscal Strategy.

Changes in AGS on issue since the 2020-21 Budget

Table 7.2 shows the change in the estimated end-of-year face value of AGS on issue subject to the Treasurer’s Direction between the 2020-21 Budget and the 2021-22 Budget.

Gross debt is expected to be lower across all years than estimated at the 2020-21 Budget. The improvement in gross debt is driven by the Government’s decreased borrowing requirements resulting from the improvement in the underlying cash balance since the 2020-21 Budget.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 209

Table 7.2: Estimated AGS on issue subject to the Treasurer’s Direction — reconciliation from the 2020-21 Budget to the 2021-22 Budget Estimates

2020-21 2021-22 2022-23 2023-24

$b $b $b $b

Total face value of AGS on issue subject to the Treasurer’s Direction as at 2020-21 Budget 872 1016 1083 1138

Factors affecting the change in face value of AGS on issue from 2020-21 Budget to 2021-22 Budget(a)

Cumulative receipts decisions 0.1 0.5 8.5 23.5

Cumulative receipts variations -36.1 -66.7 -86.0 -107.5

Cumulative payment decisions 8.2 29.2 48.1 64.2

Cumulative payment variations -24.8 -21.1 -17.2 -14.3

Cumulative change in net investments in financial assets(b)(c) -42.2 -67.8 -36.0 -25.6 Other contributors(c) 51.9 72.9 57.7 55.7

Total face value of AGS on issue subject to the Treasurer’s Direction as at 2021-22 Budget 829 963 1,058 1,134

(a) Cumulative impact of decisions and variations from 2020-21 to 2023-24. Increases to payments are shown as positive and increases to receipts are shown as negative. (b) Change in net cash flows from investments in financial assets for policy and liquidity purposes. (c) AOFM has moved from primarily using term deposits to a cash management account for investing cash

for short-term liquidity management. This has resulted in a decrease in investments, loans and placements and an increase in cash and deposits. Note: End-of-year data.

The total face value of AGS on issue (gross debt) is expected to rise over the forward estimates and stabilise over the medium term at around 51 per cent of GDP. At the 2020-21 Budget, gross debt was projected to stabilise at around 55 per cent of GDP (Chart 7.2). Gross debt at the 2021-22 Budget is projected to be lower in each year of the forward estimates and medium term than projected at the 2020-21 Budget.

Chart 7.2: Face value of AGS as a share of GDP

35

40

45

50

55

60

35

40

45

50

55

60

2020-212021-222022-232023-242024-252025-262026-272027-282028-292029-302030-312031-32

% of GDP % of GDP

2021-22 Budget

2020-21 Budget

Medium term Estimates

Source: AOFM and Treasury projections.

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Page 210 | Statement 7: Debt Statement

Breakdown of AGS currently on issue

Table 7.3 provides a breakdown of the AGS on issue by type of security as at 3 May 2021.

Table 7.3: Breakdown of current Australian Government Securities on issue On issue as at 3 May 2021

Face value Market value

$m $m

Treasury Bonds 764,434 815,848

Treasury Indexed Bonds 38,276 51,998

Treasury Notes 30,750 30,748

Total AGS subject to Treasurer’s Direction(a) 833,459 898,595

Other stock and securities 6 6

Total AGS on issue 833,465 898,601

(a) The stock and securities that are excluded from the current limit set by the Treasurer’s Direction are outlined in subsection 51JA(2A) of the CIS Act. Source: AOFM.

Treasury Bonds

Table 7.4 lists Treasury Bonds currently on issue, as well as the annual interest rate (the coupon) and the timing of coupon payments. As at 3 May 2021, there were 30 Treasury Bond lines on issue, with a weighted average term to maturity of around 7.6 years and the longest maturity extending to June 2051.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 211

Table 7.4: Treasury Bonds on issue On issue as at

Coupon 3 May 2021

Per cent Maturity $m Timing of interest payments(a)

5.75 15-May-21 25,824 Twice yearly 15-May 15-Nov

2.00 21-Dec-21 16,398 Twice yearly 21-Dec 21-Jun

5.75 15-Jul-22 24,763 Twice yearly 15-Jul 15-Jan

2.25 21-Nov-22 26,500 Twice yearly 21-Nov 21-May

5.50 21-Apr-23 34,200 Twice yearly 21-Apr 21-Oct

2.75 21-Apr-24 32,900 Twice yearly 21-Apr 21-Oct

0.25 21-Nov-24 32,300 Twice yearly 21-Nov 21-May

3.25 21-Apr-25 33,900 Twice yearly 21-Apr 21-Oct

0.25 21-Nov-25 27,900 Twice yearly 21-Nov 21-May

4.25 21-Apr-26 33,400 Twice yearly 21-Apr 21-Oct

0.50 21-Sep-26 30,000 Twice yearly 21-Sep 21-Mar

4.75 21-Apr-27 30,700 Twice yearly 21-Apr 21-Oct

2.75 21-Nov-27 28,000 Twice yearly 21-Nov 21-May

2.25 21-May-28 29,700 Twice yearly 21-May 21-Nov

2.75 21-Nov-28 31,100 Twice yearly 21-Nov 21-May

3.25 21-Apr-29 33,000 Twice yearly 21-Apr 21-Oct

2.75 21-Nov-29 32,900 Twice yearly 21-Nov 21-May

2.50 21-May-30 36,600 Twice yearly 21-May 21-Nov

1.00 21-Dec-30 36,900 Twice yearly 21-Dec 21-Jun

1.50 21-Jun-31 31,300 Twice yearly 21-Jun 21-Dec

1.00 21-Nov-31 32,000 Twice yearly 21-Nov 21-May

1.25 21-May-32 23,900 Twice yearly 21-May 21-Nov

1.75 21-Nov-32 14,000 Twice yearly 21-Nov 21-May

4.50 21-Apr-33 14,800 Twice yearly 21-Apr 21-Oct

2.75 21-Jun-35 8,550 Twice yearly 21-Jun 21-Dec

3.75 21-Apr-37 12,000 Twice yearly 21-Apr 21-Oct

3.25 21-Jun-39 9,600 Twice yearly 21-Jun 21-Dec

2.75 21-May-41 13,000 Twice yearly 21-May 21-Nov

3.00 21-Mar-47 13,300 Twice yearly 21-Mar 21-Sep

1.75 21-Jun-51 15,000 Twice yearly 21-Jun 21-Dec

(a) Where the timing of an interest payment falls on a non-business day, the payment will occur on the following business day. Source: AOFM.

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Page 212 | Statement 7: Debt Statement

Treasury Indexed Bonds

Table 7.5 lists TIBs currently on issue, as well as the annual interest rate (the coupon) and the timing of coupon payments. As at 3 May 2021, there were 7 TIB lines on issue, with a weighted average term to maturity of around 9.5 years and the longest maturity extending to February 2050.

Table 7.5: Treasury Indexed Bonds on issue On issue as at

Coupon 3 May 2021

Per cent Maturity $m Timing of interest payments(a)

1.25 21-Feb-22 6,840 Quarterly 21-Feb 21-May 21-Aug 21-Nov

3.00 20-Sep-25 7,743 Quarterly 20-Sep 20-Dec 20-Mar 20-Jun

0.75 21-Nov-27 6,100 Quarterly 21-Nov 21-Feb 21-May 21-Aug

2.50 20-Sep-30 5,743 Quarterly 20-Sep 20-Dec 20-Mar 20-Jun

2.00 21-Aug-35 4,350 Quarterly 21-Aug 21-Nov 21-Feb 21-May

1.25 21-Aug-40 3,650 Quarterly 21-Aug 21-Nov 21-Feb 21-May

1.00 21-Feb-50 3,850 Quarterly 21-Feb 21-May 21-Aug 21-Nov

(a) Where the timing of an interest payment falls on a non-business day, the payment will occur on the following business day. Source: AOFM.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 213

Treasury Notes

Table 7.6 lists the Treasury Notes currently on issue. As at 3 May 2021 there were five Treasury Note lines on issue. Treasury Notes do not pay a coupon.

Table 7.6: Treasury Notes on issue On issue as at 3 May 2021

Maturity $m Timing of interest payment

21-May-21 8,000 At maturity 21-May

25-Jun-21 8,500 At maturity 25-Jun

23-Jul-21 6,500 At maturity 23-Jul

27-Aug-21 4,250 At maturity 27-Aug

24-Sep-21 3,500 At maturity 24-Sep

Source: AOFM.

Non-resident holdings of AGS on issue

As at the December quarter 2020, the proportion of non-resident holdings of AGS was around 54 per cent (Chart 7.3). This proportion is down from historical highs of around 76 per cent in 2012.

Chart 7.3: Non-resident holdings of AGS

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$b

Resident holdings (LHS) Non-re side nt hol dings ( LHS) Proportion of non-resident holdings (RHS)

% of total AGS on issue

Note: Data refer to the repo-adjusted market value of holdings. Source: ABS Balance of Payments and International Investment Position, Australia December 2020, AOFM, RBA.

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Page 214 | Statement 7: Debt Statement

Estimates and projections of net debt

Table 7.7 contains the liabilities and assets included in net debt over the forward estimates.

Net debt is expected to be $729.0 billion (34.2 per cent of GDP) at 30 June 2022 and increase to $980.6 billion (40.9 per cent of GDP) at 30 June 2025.

Table 7.7: Liabilities and assets included in net debt Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Liabilities included in net debt

Deposits held 484 484 484 484 484

Government securities(a) 891,811 1,028,091 1,126,277 1,207,245 1,274,052

Loans 16,345 16,125 16,091 16,073 16,101

Other borrowing 19,527 19,991 20,071 19,480 18,494

Total liabilities included in net debt 928,166 1,064,691 1,162,923 1,243,281 1,309,131 0 0 0 0 0 Assets included in net debt

Cash and deposits(b) 46,693 61,795 43,691 42,473 40,883

Advances paid 82,235 85,655 88,321 76,384 77,706

Investments, loans and placements(b) 181,717 188,218 195,897 203,976 209,981 Total assets included in net debt 310,645 335,668 327,909 322,833 328,570 0 0 0 0 0 Net debt 617,521 729,023 835,015 920,448 980,561

(a) Government securities are presented at market value. (b) AOFM has moved from primarily using term deposits to a cash management account for investing cash for short-term liquidity management. This has resulted in a decrease in investments, loans and placements and an increase in cash and deposits.

Changes in net debt since the 2020-21 Budget

Table 7.8 shows the drivers of the change in net debt between the 2020-21 Budget and the 2021-22 Budget.

Net debt is expected to be lower than estimated at the 2020-21 Budget across all years of the forward estimates. The improvement in net debt since the 2020-21 Budget is driven by the Government’s decreased borrowing requirements resulting from the improvement in the underlying cash balance and a decrease in the market value of AGS due to higher yields than were assumed at the 2020-21 Budget.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 215

Table 7.8: Net debt — reconciliation from the 2020-21 Budget to the 2021-22 Budget Estimates

2020-21 2021-22 2022-23 2023-24

$b $b $b $b

Net debt as at 2020-21 Budget 703.2 812.1 899.8 966.2

Changes in financing requirement -52.4 -62.9 -35.4 -10.8

Impact of yields on AGS -34.1 -33.1 -29.7 -25.5

Asset and other liability movements 0.7 12.9 0.3 -9.4

Cash and deposits(a) -40.9 -55.8 -37.0 -36.4

Advances paid 4.8 3.5 2.3 -4.7

Investments, loans and placements(a) 36.8 65.6 35.3 31.9

Other movements 0.1 -0.4 -0.4 -0.3

Total movements in net debt from 2020-21 Budget to 2021-22 Budget -85.7 -83.1 -64.8 -45.7

Net debt as at 2021-22 Budget 617.5 729.0 835.0 920.4

(a) AOFM has moved from primarily using term deposits to a cash management account for investing cash for short-term liquidity management. This has resulted in a decrease in investments, loans and placements and an increase in cash and deposits.

Net debt is estimated to rise over the forward estimates, peaking at 40.9 per cent of GDP at 30 June 2025, before improving over the medium term to reach 37.0 per cent of GDP at 30 June 2032 (Chart 7.4). At the 2020-21 Budget, net debt was projected to be 39.6 per cent of GDP at 30 June 2031. Net debt at the 2021-22 Budget is projected to be lower in each year of the forward estimates and medium term than projected at the 2020-21 Budget.

Chart 7.4: Net debt as a share of GDP

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2020-212021-222022-232023-242024-252025-262026-272027-282028-292029-302030-312031-32

% of GDP % of GDP

2021-22 Budget

2020-21 Budget

Medium term Estimates

Source: Treasury projections.

| Budget Paper No. 1

Page 216 | Statement 7: Debt Statement

Further details on changes to the fiscal outlook, including the medium term, since the 2020-21 Budget can be found in Statement 3: Fiscal Strategy and Outlook.

Interest on AGS

The interest costs related to AGS are presented in these statements in both cash and accrual accounting terms. The difference between the cash interest payments and accrual interest expense generally relates to the timing of when the interest cost is recognised.

• Interest payments are recognised in the period when they are paid during the life of the security.

• Interest expense is recognised in the period in which an expense is incurred during the life of the security, rather when it is actually paid.

Estimates of the interest payments and expense of AGS on issue include the cost of AGS already on issue and future AGS issuance.

• The cost of AGS already on issue uses the actual interest rates incurred at the time of issuance.

• The expected future issuance of AGS is based on the prevailing market rates across the yield curve at the time of a budget estimates update.

The assumed market yields for the 2021-22 Budget result in a weighted average cost of borrowing of around 1.6 per cent for future issuance of Treasury Bonds over the forward estimates, compared with around 0.8 per cent at the 2020-21 Budget. The increased weighted average cost of borrowing primarily reflects investor confidence in the strength of Australia’s recovery and the outlook for growth and inflation.

Chart 7.5 shows the yield curve assumptions underpinning the 2020-21 Budget and the 2021-22 Budget. For the 2021-22 Budget, an average of daily spot rates was used to derive a fixed yield for the forward estimates to minimise the likelihood of locking in high or low yields during volatile periods.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 217

Chart 7.5: Yield curve assumptions from 2021-22 to 2024-25

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2020-21 Budget

2021-22 Budget

Source: AOFM.

The Government’s total interest payments in 2021-22 are estimated to be $17.8 billion, of which $17.3 billion relates to AGS on issue (Table 7.9).

Interest payments on AGS are expected to remain broadly consistent as a share of GDP over the forward estimates and broadly in line with estimates at the 2020-21 Budget, reflecting historically low interest rates.

Table 7.9: Interest payments, interest receipts and net interest payments(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Interest payments on AGS 16,658 17,319 17,519 19,573 20,354

Per cent of GDP 0.8 0.8 0.8 0.9 0.8

Interest payments 17,121 17,789 18,002 20,060 20,834

Per cent of GDP 0.8 0.8 0.8 0.9 0.9

Interest receipts 2,995 3,063 3,080 3,363 3,721

Per cent of GDP 0.1 0.1 0.1 0.1 0.2

Net interest payments(b) 14,126 14,727 14,922 16,698 17,113

Per cent of GDP 0.7 0.7 0.7 0.7 0.7

(a) Interest payments and receipts are a cash measure, with the relevant amount recognised in the period in which the interest payment is made or interest is received. (b) Net interest payments are equal to the difference between interest payments and interest receipts.

| Budget Paper No. 1

Page 218 | Statement 7: Debt Statement

The Government’s interest expense in 2021-22 is estimated to be $19.5 billion, of which $18.2 billion relates to AGS on issue. Table 7.10 shows the Government’s estimated interest expense, interest expense on AGS, interest income and net interest expense over the forward estimates.

Table 7.10: Interest expense, interest income and net interest expense(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Interest expense on AGS 17,041 18,164 19,085 20,548 21,841

Per cent of GDP 0.8 0.9 0.9 0.9 0.9

Interest expense 19,812 19,519 20,137 21,889 22,969

Per cent of GDP 1.0 0.9 0.9 1.0 1.0

Interest income 2,901 3,621 3,403 3,727 4,094

Per cent of GDP 0.1 0.2 0.2 0.2 0.2

Net interest expense(b) 16,911 15,898 16,734 18,161 18,875

Per cent of GDP 0.8 0.7 0.8 0.8 0.8

(a) Interest expense is an accrual measure, with the relevant amount recognised in the period in which the expense is incurred, but not necessarily paid. (b) Net interest expense is equal to the difference between interest expenses and interest income.

Budget Paper No. 1 |

Statement 7: Debt Statement | Page 219

Climate spending

The Government’s climate spending is shown on an aggregated basis in Table 7.11.

Table 7.11: Climate spending from 2020-21 to 2024-25 Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b

Climate spending(a)(b) 1.4 1.9 1.5 1.9 1.4

(a) Spending in this table is on a headline cash balance basis — that is, payments and net cash flows from investments in financial assets for policy purposes, as well as estimated interest receipts associated with Clean Energy Finance Corporation investments.

(b) These figures do not include expected repayments from the Clean Energy Finance Corporation over the forward estimates.

The key components of climate spending are:

• the Clean Energy Finance Corporation (CEFC), which invests in renewable energy, energy efficiency and low emissions technologies

• the Australian Renewable Energy Agency (ARENA), which supports research and development of renewable energy and related technologies

• the Clean Energy Regulator, which administers legislation to reduce carbon emissions and increase the use of clean energy.

The above figures incorporate the:

• $1.6 billion package in the 2021-22 Budget to fund priority low emissions technologies

• $1.9 billion package over 12 years from 2020-21 to support the acceleration of technologies that will deliver lower emissions, increase investment, lower costs and create jobs to support the economic recovery

• $3.5 billion over 15 years from 2018-19 for the Climate Solutions package, which provides incentives to support abatement activities across the economy.

Climate spending is higher from 2021-22 onwards in the 2021-22 Budget compared to the 2020-21 Budget, primarily due to the new measures in the climate package and a reprofiling of CEFC funding reflecting the impact of COVID-19. Spending is lower in 2020-21 primarily due to the COVID-19 impact of markets conditions for the CEFC and ARENA.

| Budget Paper No. 1

Page 220 | Statement 7: Debt Statement

Impact of climate spending on debt

Climate spending is financed through either receipts or debt. This Statement assumes that the proportion of climate spending being financed through new debt (as opposed to receipts) is equivalent to the proportion of total spending financed by debt. This is shown in Table 7.12.

Table 7.12: Impact on debt — climate spending as a proportion of total spending Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$b $b $b $b $b

Climate spending(a) 1.4 1.9 1.5 1.9 1.4

Total Spending(b) 685 610 616 598 637

Climate spending (per cent of total spending) 0.2 0.3 0.2 0.3 0.2

Change in face value of AGS from

previous year(c) 145 134 95 76 65

Contribution to change in face value of AGS

from climate spending 0.3 0.4 0.2 0.2 0.1

(a) The calculation of climate spending in this table is on a headline cash balance basis — that is, payments and net cash flows from investments in financial assets for policy purposes, as well as estimated interest receipts associated with the Clean Energy Finance Corporation investments.

(b) The calculation of total spending in this table is on a headline cash balance basis — that is, total payments and net cash flows from investments in financial assets for policy purposes. (c) Calculations of the change in the face value of AGS are calculated using total AGS on issue.

Statement 8: Forecasting Performance and Sensitivity Analysis | Page 221

Statement 8: Forecasting Performance and Sensitivity Analysis

The economic and fiscal forecasts and projections presented in the 2021-22 Budget incorporate a range of assumptions taken, and judgments made, at the time of preparation. While these figures reflect the best available information at the time, the economic and fiscal circumstances that eventuate may be different from those forecast.

These divergences may occur at any time, however, heightened uncertainty, as a result of the continuing COVID-19 pandemic, could increase the extent to which the forecasts vary from the ultimate outcomes.

This Statement assesses the performance of previous forecasts as well as the inherent risk around the current forecasts using confidence interval analysis. The Statement also presents sensitivity analyses that illustrate the impacts of alternative underlying assumptions.

Contents

Overview ..................................................................................................... 223

Assessing historical forecasting performance ........................................ 224

Economic forecasting performance............................................................................. 224

Tax receipts forecasting performance ......................................................................... 226

Assessing current forecasts through confidence interval analysis ....... 231 Confidence interval analysis in a COVID-19 context .................................................. 231

Economic uncertainty based on historical forecast errors .......................................... 231

Fiscal uncertainty based on historical forecast errors ................................................. 233

Assessing current forecasts through sensitivity analysis ...................... 236 Alternative pathways for commodity exports and the terms of trade .......................... 236 Alternative pathways for productivity growth ............................................................... 239

Alternative pathways for yields .................................................................................... 241

Statement 8: Forecasting Performance and Sensitivity Analysis | Page 223

Statement 8: Forecasting Performance and Sensitivity Analysis

Overview

Economic and fiscal forecasts and projections (hereafter referred to as ‘forecasts’ in this Statement) are important for government decision making. Understanding how economic and fiscal outcomes might vary from these forecasts contributes to better decision making and better government policy. While this analysis is always important, the current environment of heightened uncertainty increases the scope for variance.

This Statement assesses the performance of previous budget forecasts by looking at the forecast errors over the past two decades. This is achieved by analysing the variance between historical forecasts and outcomes in each year.

Forecast errors are also used to assess the likely degree of uncertainty around the current forecasts. This analysis, referred to as confidence interval analysis, assesses the degree of uncertainty surrounding current forecasts. There are a number of ways to measure uncertainty. Confidence intervals in this Statement are based on historical forecast errors. However, the continuing uncertainty surrounding the implications of the COVID-19 response and recovery means that forecast errors could potentially be larger than in the past.

Finally, this Statement assesses the sensitivity of the 2021-22 Budget forecasts to changes in key underlying assumptions.

These assessments are consistent with requirements under the Charter of Budget Honesty Act 1998. Further, they are consistent with the practice of many other international fiscal agencies to improve forecasting performance and to raise awareness of the uncertainties inherent in forecasting.

| Budget Paper No. 1

Page 224 | Statement 8: Forecasting Performance and Sensitivity Analysis

Assessing historical forecasting performance

This section assesses the variance between historical forecasts and outcomes in each year for real and nominal GDP growth as well as for tax receipts. Economic forecasts are prepared using a range of modelling techniques, including macroeconomic models, spreadsheet analysis and accounting frameworks. Tax receipts forecasts are generally prepared using a ‘base plus growth’ methodology. The last outcome for each head of revenue is the base to which growth rates are applied, using appropriate economic parameters. Estimates for the current year also incorporate recent trends in tax collections.

Forecasts incorporate a number of assumptions and judgments. The accuracy of the forecasts is influenced by the extent to which the assumptions and judgments underpinning them prove to be correct, and the reliability of the economic and fiscal relationships embodied in the models used to produce them. For example, tax receipts forecasts for a number of income taxes involves assessing whether this tax will be paid in the year the income is earned, such as for pay-as-you-go withholding tax, or in future years, such as tax on capital gains for companies and individuals.

Economic forecasting performance

Real GDP forecasts incorporate a number of assumptions, including those regarding exchange rates, interest rates, commodity prices and population growth. The forecasts also incorporate judgments about how developments in one part of the economy affect other parts and how the domestic economy is affected by events in the international economy.

Prior to the Global Financial Crisis (GFC), the Budget forecasts of real GDP displayed little evidence of bias. Forecasts of real GDP growth were less accurate in the years during and immediately after the GFC, given that it was an unforeseen event and there was heightened uncertainty regarding the economic ramifications. Forecast errors have been smaller in recent years with the notable exception of 2019-20, reflecting the impacts of the COVID-19 pandemic on the economy (Chart 8.1).

Budget Paper No. 1 |

Statement 8: Forecasting Performance and Sensitivity Analysis | Page 225

Chart 8.1: Comparison of forecasts and outcomes for real GDP growth

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Outcomes

Note: Outcome is as published in the December quarter 2020 National Accounts. Forecast is that published in the Budget for that year. Source: ABS Australian National Accounts: National Income, Expenditure and Product and Budget papers.

Compared with real GDP forecasts, nominal GDP forecasts include a prices component which is an additional source of uncertainty. This uncertainty stems from the evolution of domestic prices and wages, prices of imported goods and world prices for Australia’s exports, including commodities.

Since the early 2000s, nominal GDP forecast errors have reflected the difficulties in predicting movements in global commodity prices (Chart 8.2). From 2011-12 to 2015-16, as key commodity prices were falling from their record highs, larger-than-expected falls in the terms of trade meant that nominal GDP growth was overestimated. The outcomes for nominal GDP growth from 2016-17 to 2018-19 were higher than forecast in the Budgets for those years, primarily reflecting stronger-than-expected commodity prices. The large forecast error in 2019-20 was due to the onset of the COVID-19 pandemic, which was unknown at the time the forecast was made.

| Budget Paper No. 1

Page 226 | Statement 8: Forecasting Performance and Sensitivity Analysis

Chart 8.2: Comparison of forecasts and outcomes for nominal GDP growth

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Outcomes

Note: Outcome is as published in the December quarter 2020 National Accounts. Forecast is that published in the Budget for that year. Source: ABS Australian National Accounts: National Income, Expenditure and Product and Budget papers.

Tax receipts forecasting performance

Generally, there is a strong correlation between the accuracy of the forecasts of nominal GDP and its components and the forecasts for tax receipts. On average, economic forecast errors will be magnified in receipts forecast errors, owing to the progressive nature of the personal income tax system. Chart 8.3 plots the forecast errors for nominal non-farm GDP growth against the errors for tax receipts growth excluding capital gains tax (CGT). It shows that where there has been an underestimate of nominal non-farm GDP growth, tax receipts tend to be underestimated and vice versa.

Budget Paper No. 1 |

Statement 8: Forecasting Performance and Sensitivity Analysis | Page 227

Chart 8.3: Forecast errors for nominal non-farm GDP growth and taxation receipts growth(a)

2002-03 2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

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2020-21

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2011-12

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Forecast error on taxation growth

Forecast error on nominal non-farm GDP growth

Percentage points Percentage points

2018-19

2019-20

(a) Excludes CGT. Note: Forecast error for 2020-21 is an estimate. Source: ABS Australian National Accounts: National Income, Expenditure and Product, Budget papers and Treasury.

Over the past two decades, tax receipts forecasts have both under-predicted and over-predicted outcomes (see Chart 8.4).

Chart 8.4: Comparison of forecasts and outcomes for tax receipts growth

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Note: Forecast error for 2020-21 is an estimate. Source: Budget papers and Treasury.

| Budget Paper No. 1

Page 228 | Statement 8: Forecasting Performance and Sensitivity Analysis

The forecast error for 2020-21 is an estimate based on the revised 2021-22 Budget forecast. The largest contributor to the forecast error for 2020-21 is individuals and other withholding taxation, which is estimated to be $10.6 billion (4.9 per cent) higher than expected in the 2020-21 Budget. This largely reflects stronger-than-expected employment and faster-than-expected repayment of individuals’ tax debts. Receipts from GST are estimated to be $9.8 billion (16.3 per cent) above the 2020-21 Budget estimate, reflecting stronger-than-expected household consumption and private dwelling investment, and earlier repayment of GST debt than anticipated. Company tax receipts are expected to be $8.8 billion (10.4 per cent) higher than forecast at the 2020-21 Budget. This is largely driven by higher-than-expected collections from mining companies due to elevated iron ore prices. These and other variations are discussed further in Statement 5: Revenue.

Box 8.1 shows the varying volatility of forecast errors across the different heads of revenue. Of note is that corporate income taxes have larger forecast errors than other revenue bases which reflects the high concentration of tax paid by a small group of companies.

Budget Paper No. 1 |

Statement 8: Forecasting Performance and Sensitivity Analysis | Page 229

Box 8.1: Tax receipts forecast performance in historical context

A stable and predictable tax system can support sound fiscal management. Accurate tax receipts forecasts allow government to make decisions about spending and debt management with confidence. Chart 8.5 shows that over the past 50 years, tax receipts forecasts for all heads of revenue have both under-predicted and over-predicted outcomes, in broadly equal measure (suggesting forecasts over this horizon do not show a material bias). There is, however, significant year-to-year variance in estimate accuracy. Variance of errors for total tax receipts estimates are smaller than those for individual heads of revenue, which highlights the benefits of diversified tax bases in providing revenue stability.

Forecasting errors have been lower on personal income taxes, reflecting the relative predictability of salary and wage income. By contrast, forecasting errors have been far higher for corporate income taxes, as company profits are highly sensitive to changes in the economy, and concentrated ⎯ with a significant proportion of corporate taxes paid by large companies in a few specific sectors of the economy.

Chart 8.5: Tax receipts forecast errors by head of revenue

Note: Reporting of tax receipts has varied across budgets (1970-71 to 2019-20). Personal income taxes include individuals and other withholding taxes and fringe benefits tax. Corporate income taxes include company tax, superannuation fund taxes and resource rent taxes. Sales taxes include wholesales sale tax, goods and services tax, luxury car tax and wine equalisation tax. Other indirect taxes include all other taxes, including excise and customs duty.

Source: Budget papers and Treasury.

budget balance positive

budget balance negative

Total tax receipts

Other indirect taxes

Sales taxes

Corporate income taxes

Personal income taxes

-20 -15 -10 -5 0 5 10 15 20

-20 -15 -10 -5 0 5 10 15 20

%

%

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Page 230 | Statement 8: Forecasting Performance and Sensitivity Analysis

Box 8.1: Tax receipts forecast performance in historical context (continued)

As Chart 8.6 shows, the decade average absolute error on total tax receipts has increased over the past 30 years from around 2.3 per cent of budget forecasts in the 1990s to 3.5 per cent of budget forecasts in the 2010s.

Chart 8.6: Tax receipts absolute forecast errors by head of revenue (error as a per cent of the budget forecast), decade average

Note: Forecast error for 2020-21 is an estimate. Source: Budget papers and Treasury.

The increase in the variance of total tax receipts has been driven by increases to the variance of corporate income taxes. The higher variance in forecast accuracy in corporate income taxes is driven by the resources sector, as profits are highly exposed to volatile global commodity prices, and have grown as a share of the economy over the past 20 years. In contrast, personal income taxes have seen declining average absolute errors, and sales and other indirect taxes have largely recorded stable average absolute errors.

If corporate tax revenue continues to be heavily exposed to mining related volatility, total tax receipts can be expected to remain volatile, posing challenges to managing fiscal policy.

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Personal income taxes Corporate income taxes

Sales taxes Other indirect taxes Total tax receipts

% of budget % of budget

1970s 1980s 1990s 2000s 2010s 2020-21 est.

Budget Paper No. 1 |

Statement 8: Forecasting Performance and Sensitivity Analysis | Page 231

Assessing current forecasts through confidence interval analysis

Confidence interval analysis in a COVID-19 context

This Statement presents confidence intervals consistent with practice in previous budget updates. The confidence intervals provide a guide to the degree of uncertainty around current forecasts if it is assumed that forecast errors are consistent with forecast errors since 1997-98.21

However, forecast errors in the future will not necessarily be consistent with historical forecast errors. Forecast errors can be larger than usual during periods of extreme economic volatility and heightened uncertainty, such as the current once-in-a-hundred-year pandemic. During such periods, the range of possible outcomes for economic and fiscal estimates can be considerably wider than normal. The large forecast errors in 2019-20, due to the unforeseen nature of the COVID-19 pandemic, are captured in the historical dataset.

However, as the pandemic is still progressing and the outlook remains uncertain, there is a possibility that the future outcomes fall outside of the typical confidence intervals presented in this Statement. Delays in the vaccine rollout, the emergence of additional strains of the virus, or alternatively, a more rapid recovery, are possible significant events that could cause forecasting errors to be larger than normal. Similarly, the confidence intervals do not capture potential future policy decisions, including those that could be implemented to further contain the spread of the virus and to further support households and businesses.

Economic uncertainty based on historical forecast errors

Based on forecast errors for real GDP in the past, Chart 8.7 shows the degree of variance around the current forecasts if similar magnitude errors were made again. The chart suggests that the average annualised growth rate of real GDP in the two years to 2021-22 is expected to be around 2¾ per cent, with the 70 per cent confidence interval ranging from 2 per cent to 3½ per cent. The 90 per cent confidence interval ranges from 1½ per cent to 4 per cent. In other words, if forecast errors are similar to those made over recent years, there is a 90 per cent probability that the average annualised growth rate of the economy over the two years to 2021-22 will lie in this range.

21 The assumptions behind the confidence intervals presented are based on the methodology presented in the Treasury Working Paper Estimates of Uncertainty around Budget Forecasts. As in the paper, it is assumed that forecast errors are normally distributed with zero mean and the past errors are representative of the future errors.

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Chart 8.7: Confidence intervals around real GDP growth rate forecasts

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90% confidence interval

Note: The central line shows the outcomes and the 2021-22 Budget forecasts. Annual growth rates are reported for the outcomes. Average annualised growth rates from 2019-20 are reported for 2020-21 onwards. Confidence intervals are based on the root mean squared errors (RMSEs) of Budget forecasts from 1997-98 onwards. (f) are forecasts.

Source: December quarter 2020 ABS Australian National Accounts: National Income, Expenditure and Product, Budget papers and Treasury.

The confidence intervals around the nominal GDP forecasts are wider than those around the real GDP forecasts, reflecting the uncertainty around domestic prices and commodity prices. Average annualised growth in nominal GDP in the two years to 2021-22 is expected to be around 3¾ per cent, with the 70 per cent confidence interval ranging from 2½ per cent to 5 per cent. The 90 per cent confidence interval ranges from 1¾ per cent to 5¾ per cent (Chart 8.8).

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Statement 8: Forecasting Performance and Sensitivity Analysis | Page 233

Chart 8.8: Confidence intervals around nominal GDP growth rate forecasts

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Note: See note to Chart 8.7. Source: December quarter 2020 ABS Australian National Accounts: National Income, Expenditure and Product, Budget papers and Treasury.

Fiscal uncertainty based on historical forecast errors

The fiscal estimates contained in the Budget are based on, and are highly sensitive to, economic and demographic forecasts as well as estimates of the impact of spending and revenue measures. Changes to any of these factors will affect forecasts for receipts and payments. As such, this will have a direct impact on the profile of the underlying cash balance.

Historical variations caused by subsequent policy decisions are excluded as these do not relate to the forecasting errors presented in this section. However, payments estimates include the public debt interest impact of policy decisions and a provision for contingencies.22

22 The impacts of past policy decisions on historical public debt interest through time cannot be readily identified or estimated. For this reason, no adjustment has been made to exclude these impacts from the confidence interval analysis.

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Total receipts

Chart 8.9 shows confidence intervals around the forecasts for total receipts (excluding GST23). The chart shows that there is considerable uncertainty around receipts forecasts and that this uncertainty is likely to increase as the forecast horizon lengthens.

Total receipts (excluding GST) are expected to be around 19.2 per cent of GDP in 2021-22, with the 70 per cent confidence interval ranging from 18.3 per cent to 20.1 per cent of GDP. The 90 per cent confidence interval ranges from 17.8 per cent to 20.6 per cent (Chart 8.9).

Chart 8.9: Confidence intervals around total receipts forecasts(a)

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(a) Excludes GST and includes Future Fund earnings. Note: The central line shows the outcomes and the 2021-22 Budget forecasts. Confidence intervals use RMSEs for Budget forecasts from the 1997-98 Budget onwards. (f) are forecasts. Source: Budget papers and Treasury.

Payments

Chart 8.10 shows confidence intervals around payments forecasts (excluding GST). Payments (excluding GST) are expected to be around 24.2 per cent of GDP in 2021-22, with the 70 per cent confidence interval ranging from 23.8 per cent to 24.6 per cent of GDP. The 90 per cent confidence interval ranges from 23.6 per cent to 24.9 per cent (Chart 8.10).

23 GST was not reported as a Commonwealth tax in budget documents prior to the 2008-09 Budget. As a result, GST data have been removed from historical receipts and payments data to abstract from any error associated with this change in accounting treatment.

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Statement 8: Forecasting Performance and Sensitivity Analysis | Page 235

Automatic stabilisers have operated to provide support during the pandemic. Demand-driven programs, such as payments to individuals for social welfare, form the bulk of government expenditure. Forecasts of payments associated with a number of these government programs depend on forecasts of economic conditions. Due to the uncertainty in the economic forecasts as a result of the COVID-19 pandemic, Chart 8.10 is likely to understate the range of possible outcomes for payments.

Chart 8.10: Confidence intervals around payments forecasts(a)

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(a) Excludes GST payments. Note: See note to Chart 8.9. Source: Budget papers and Treasury.

Underlying cash balance

The underlying cash balance estimates are sensitive to the same forecast errors that affect estimates of receipts and payments. Chart 8.11 shows that there is considerable uncertainty around underlying cash balance forecasts and that this uncertainty is likely to increase as the forecast horizon lengthens. The underlying cash deficit in 2021-22 is expected to be 5.0 per cent of GDP, with the 70 per cent confidence interval ranging from a deficit of 6.0 per cent to 3.9 per cent of GDP. The 90 per cent confidence interval ranges from a deficit of 6.7 per cent to 3.3 per cent (Chart 8.11).

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Chart 8.11: Confidence intervals around the underlying cash balance forecasts

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Note: See note to Chart 8.9. Source: Budget papers and Treasury.

Assessing current forecasts through sensitivity analysis

Sensitivity analysis provides an alternative way to examine the uncertainty surrounding current forecasts. Sensitivity analysis assesses the degree of uncertainty by considering alternative assumptions for key variables. In doing so, sensitivity analysis can illustrate the impact of small changes in assumptions on economic and fiscal aggregates.

As discussed earlier in this Statement, there is a greater level of uncertainty around the forecasts due to the COVID-19 pandemic. The scale of the shock is unprecedented in most Australians’ lifetimes. As such, it is difficult to estimate the impact that the COVID-19 pandemic will have on Australia’s economy in the short and medium term. The sensitivity analysis in this section aims to shed light on the range of outcomes that could arise under different assumptions.

There are a range of variables that could have different outcomes from those assumed in the forecasting process. However, the terms of trade, productivity, and yields have been chosen for the following sensitivity analysis as they are all fundamental to Australia’s economic and fiscal outcomes and have varied considerably over time.

Alternative pathways for commodity exports and the terms of trade

Non-rural commodity exports play a key role in Australia’s economy. World prices of non-rural commodities are affected by many factors, are volatile and are uncertain.

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This analysis considers the consequences of a permanent 10 per cent increase in world prices of non-rural commodity exports from 2021-22, relative to baseline levels in the 2021-22 Budget forecasts. It is assumed that the exchange rate appreciates in response to an increase in non-rural commodity prices.

The 10 per cent increase in the assumed price for non-rural commodity exports is expected to result in an increase in the terms of trade of 4¾ per cent and a rise in nominal GDP of ½ of a per cent by 2022-23. The change in the terms of trade varies over time in line with how non-rural commodity exports shift as a proportion of total exports. The impact on nominal GDP is stronger than presented in the 2020-21 Budget as the share of non-rural commodity exports in economic activity has increased.

Table 8.1 shows the illustrative effects of the higher price for commodity exports on economic parameters, expressed as percentage deviations from the Budget baseline levels.

Table 8.1: Sensitivity of the economic parameters to a 10 per cent increase in non-rural commodity prices Impact after 1 year (2021-22) Impact after 2 years (2022-23)

per cent per cent

Real GDP 0 0

GDP deflator 3/4 1/2

Nominal GDP 3/4 1/2

Employment 0 - 1/4

Nominal wages 0 0

CPI - 1/4 - 1/4

Company profits 2 3/4 2 3/4

Nominal household consumption - 1/4 - 1/2

Under this analysis, the increase in non-rural commodity export prices leads directly to higher output prices as measured by the GDP deflator. However, the appreciation in the exchange rate reduces import prices which flows through to lower consumer price inflation. Lower consumer price inflation partially offsets the increase in output prices. Output, investment and export volumes in the mining sector increase in response to higher non-rural commodity prices. However, the higher exchange rate leads to a substitution towards imports which offsets the higher output in the mining sector, so that the impact on real output is neutral.

On the receipts side, an increase in non-rural commodity export prices increases company profits and, as a result, company tax receipts. The impact on company tax is larger in 2022-23, partly owing to lags in tax collections and a larger impact on company profits in the second year of the analysis. This is partially offset by lower employment resulting in lower individuals and other withholding taxes and lower domestic prices resulting in lower nominal consumption and, consequently, reductions in indirect taxes.

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In practice, the extent of these offsetting price effects on tax receipts would depend on the monetary policy response of the central bank to the lower growth in domestic prices. However, under current circumstances, there is limited scope for monetary policy to offset price effects.

On the payments side, a significant proportion of government expenditure is partially indexed to movements in costs (as reflected in various price and wage indicators). Many forms of expenditure, in particular income support payments, are also driven by the number of beneficiaries.

The overall estimated expenditure on income support payments (including pensions, unemployment benefits and other allowances) decreases over the two years. This reflects a small increase in the number of unemployment benefit recipients as a result of output growth shifting to the less labour-intensive mining industry. The increase in spending on unemployment benefits is more than offset in the second year by decreased expenditure on pensions and allowances reflecting slower growth in benefit payment rates, resulting from slightly lower inflation. At the same time, other payments linked to inflation are also lower in line with the weaker growth in prices.

Table 8.2 shows the illustrative effects of the higher price for commodity exports on the underlying cash balance, expressed as nominal deviations from the Budget baseline levels. The overall impact of the increase in the terms of trade is an improvement in the underlying cash balance estimates of $3.2 billion in 2021-22 and $3.3 billion in 2022-23.

Table 8.2: Sensitivity of the fiscal forecasts to a 10 per cent increase in non-rural commodity prices 2021-22 2022-23

$b $b

Receipts

Individuals and other withholding taxes 0.0 -1.4

Superannuation fund taxes 0.0 -0.1

Company tax 3.2 4.4

Goods and services tax -0.2 -0.2

Excise and customs duty -0.1 -0.1

Other receipts 0.1 0.1

Total receipts 3.0 2.7

Payments

Income support -0.1 0.1

Other payments 0.1 0.2

Goods and services tax 0.2 0.2

Total payments 0.2 0.6

Public debt interest 0.0 0.1

Underlying cash balance impact 3.2 3.3

Note: Numbers may not sum due to rounding. A positive number denotes an improvement to the underlying cash balance.

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The specific impact of a US$10 per tonne free-on-board (FOB) higher or lower iron ore price is outlined in Box 8.2.

Box 8.2: Sensitivity analysis of iron ore price movements

The impacts of a US$10 per tonne FOB movement in the iron ore price is set out in Table 8.3. This is based on the terms of trade sensitivity analysis above and is calibrated to take into account the share of iron ore in the value of total exports, which can change over time. An increase of US$10 per tonne FOB in the iron ore price results in an increase in nominal GDP of around $6.5 billion in 2021-22 and around $5.7 billion in 2022-23. Similarly, a decrease of US$10 per tonne FOB in the iron ore price results in a decrease in nominal GDP of an equivalent amount.

Table 8.3: Sensitivity analysis of a US$10 per tonne movement in the iron ore price

US$10/tonne FOB(a) fall

US$10/tonne FOB increase

2021-22 2022-23 2021-22 2022-23

Nominal GDP ($billion) -6.5 -5.7 6.5 5.7

Tax receipts ($billion) -1.3 -1.3 1.3 1.3

(a) Prices are presented in FOB terms which exclude the cost of freight.

Sensitivity analysis of the direct impacts of earlier and later falls in the iron ore spot price assumption is in Box 2.5, Statement 2: Economic Outlook.

Alternative pathways for productivity growth

Labour productivity growth is an important determinant of Australia’s potential GDP growth. It depends on both trends in underlying productivity24 and the capital stock. In the medium-term projection methodology, underlying productivity growth is assumed to converge to 1.5 per cent per annum, which is the average growth in labour productivity over the past 30 years. This convergence begins in the first year of the forecasts and occurs over a 10-year period.

The COVID-19 pandemic is likely to have lasting economic effects through multiple channels, and the impacts on productivity are highly uncertain. This analysis examines the impacts of both a slower and faster pace of convergence to the long-run productivity growth assumption of 1.5 per cent (Chart 8.12).

24 Underlying productivity is otherwise known as labour-augmenting technical change.

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Under the slower convergence analysis, underlying productivity growth is assumed to converge to the 30-year average over 15 years rather than 10 years. This reduces the economy’s potential growth rate over the projection period and real GDP grows more slowly.

By the end of the projection period in 2031-32, the levels of real GDP and nominal GDP are around 1½ per cent and 1¾ per cent lower, respectively. Slower convergence of underlying trend productivity growth also flows through to lower wages.

Under the faster convergence analysis, underlying productivity growth is assumed to converge to the long-run average of 1.5 per cent per annum over five years. This has broadly symmetrical but opposite effects on the economy compared with the slower convergence analysis, resulting in higher real GDP, nominal GDP and wages.

Chart 8.12: Real GDP growth, impact of the pace of productivity growth convergence

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Source: ABS Australian National Accounts: National Income, Expenditure and Product and Treasury.

Under the slower productivity convergence analysis, lower nominal GDP results in lower projected tax receipts over the 10-year period to 2031-32. Payments are projected to be slightly lower due to lower prices and wages growth resulting in a decrease in indexation rates for some payment programs. Public debt interest payments are projected to be higher. A larger fall in receipts than payments results in a negative impact on the underlying cash balance projections (Chart 8.13). The underlying cash balance is 0.5 percentage points of GDP lower at the end of the medium term, compared with the baseline projection.

The variation in the underlying cash balance has implications for government debt. Gross debt, measured by the face value of Australian Government Securities on issue, is projected to be around 3.8 percentage points of GDP higher at the end of the medium

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Statement 8: Forecasting Performance and Sensitivity Analysis | Page 241

term, compared with the baseline projection. This reflects higher government borrowing associated with the weaker budget position.

By contrast, the faster pace of productivity growth convergence has a positive impact on the underlying cash balance projections and gross debt projections, of a similar, but opposite, magnitude to the impacts of the slower productivity convergence analysis (Chart 8.13).

Chart 8.13: Underlying cash balance, impact of the pace of productivity growth convergence

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Source: Treasury.

Alternative pathways for yields

Yields on Australian Government bonds reflect the cost of government borrowing. Despite the recent increase in yields, Australia is still experiencing historically low yields on government debt. The following analysis illustrates the sensitivity of the underlying cash balance and gross debt over the next 10 years to different assumptions surrounding yields.

This analysis illustrates the impact of changes in the yield assumption in isolation. Other economic projections, including nominal GDP, are the same as those used in the baseline projections. While it is likely that yields would not move in isolation, by isolating the yield effect it is possible to see how changes in yields above and beyond other changes may impact fiscal aggregates. It should be noted however that, from a fiscal sustainability perspective, it is the difference between nominal yields and nominal economic growth that matters. If higher yields are accompanied by an economy that is growing at a faster rate than the rate on the government borrowing, this may be sufficient to improve debt as a share of the economy over time, all else being equal.

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There are a multitude of factors, often impacting in opposite directions, that could affect current and future yields. Given this uncertainty, a technical assumption for baseline yields is employed. Nominal yields are assumed to remain fixed over the budget year and following three years at the levels observed immediately prior to the Budget update. The 10-year bond yield then converges to a long-run 10-year bond yield of around 5 per cent, consistent with long-run nominal GDP growth. The timeframe for this transition is 15 years (Chart 8.14). This section examines the consequences of different yield assumptions.

The lower yield assumption assumes that the 10-year bond yield remains at current levels over the entire 11-year period rather than beginning to rise after four years, as is assumed in the baseline assumption. A lower yield assumption is supported by the observation that yields on Australian Government debt have generally been trending downwards for several decades. The higher yield assumption assumes that yields converge immediately from current levels over five years to the long-run yield rate of around 5 per cent. While the medium- and long-term effects on yields of the COVID-19 pandemic are unclear, changes in expectations for the global recovery or inflation expectations, among other factors, could drive yields to increase.

Chart 8.14: Alternative transition paths of the 10-year bond yield compared to the Budget baseline assumption

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Source: Treasury.

Yields affect both government receipts and payments. Yields affect the amount of public debt interest the Government has to pay on its borrowings, but also have an impact on projections of the receipts the Government earns on its investments.

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Compared with the Budget projections, the lower yield assumption results in a slight improvement to the underlying cash balance over the medium term. Cumulative improvements to the underlying cash balance are projected to reduce gross debt by 2.0 percentage points of GDP at 30 June 2032 (Chart 8.15).

Conversely, the higher yield assumption results in a deterioration in the underlying cash balance of around 1.0 percentage point of GDP by 2031-32. If yields transitioned to the long-run yield curve more quickly, gross debt would increase by a projected 6.3 percentage points of GDP compared to the Budget baseline at 30 June 2032 (Chart 8.15).

Chart 8.15: Gross debt, impact of alternative yield assumptions

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Source: Australian Office of Financial Management and Treasury.

Statement 9: Statement of Risks | Page 245

Statement 9: Statement of Risks

A range of factors may influence the actual budget outcome in future years. The Charter of Budget Honesty Act 1998 requires these factors to be disclosed in a statement of risks in each Budget and Mid-Year Economic and Fiscal Outlook. This Statement outlines general fiscal risks, specific contingent liabilities and specific contingent assets that may affect the budget balances.

Contents

Risks to the Budget — Overview ............................................................... 249

Specific risks to the Budget ......................................................................................... 251

Agriculture, Water and the Environment .................................................. 258

Fiscal Risks ................................................................................................................. 258

Contingent liabilities — unquantifiable ........................................................................ 258

Attorney-General’s ..................................................................................... 259

Fiscal Risk ................................................................................................................... 259

Contingent liabilities — unquantifiable ........................................................................ 260

Defence ....................................................................................................... 260

Fiscal Risk ................................................................................................................... 260

Significant but remote contingencies .......................................................................... 261

Contingent liabilities — unquantifiable ........................................................................ 261

Contingent liability — quantifiable ............................................................................... 262

Education Skills and Employment ............................................................ 262

Fiscal Risk ................................................................................................................... 262

Contingent liability — quantifiable ............................................................................... 263

Page 246 | Statement 9: Statement of Risks

Finance ........................................................................................................ 263

Significant but remote contingency ............................................................................. 263

Contingent liabilities — unquantifiable ........................................................................ 263

Foreign Affairs and Trade .......................................................................... 267

Fiscal Risk ................................................................................................................... 267

Significant but remote contingency ............................................................................. 268

Contingent liability — quantifiable ............................................................................... 268

Health .......................................................................................................... 269

Contingent liabilities — unquantifiable ........................................................................ 269

Contingent asset — unquantifiable ............................................................................. 271

Home Affairs ............................................................................................... 272

Fiscal Risk ................................................................................................................... 272

Significant but remote contingency ............................................................................. 272

Contingent liabilities — unquantifiable ........................................................................ 272

Industry, Science, Energy and Resources................................................ 274

Fiscal Risk ................................................................................................................... 274

Significant but remote contingencies .......................................................................... 274

Contingent liabilities — unquantifiable ........................................................................ 276

Contingent liability — quantifiable ............................................................................... 278

Infrastructure, Transport, Regional Development and Communications ........................................................................................ 279

Fiscal Risk ................................................................................................................... 279

Significant but remote contingencies .......................................................................... 279

Contingent liabilities — unquantifiable ........................................................................ 281

Contingent liabilities — quantifiable ............................................................................ 284

Prime Minister and Cabinet ....................................................................... 284

Contingent liability — unquantifiable ........................................................................... 284

Contingent liability — quantifiable ............................................................................... 284

Treasury ...................................................................................................... 285

Fiscal Risk ................................................................................................................... 285

Significant but remote contingencies .......................................................................... 285

Contingent liabilities — unquantifiable ........................................................................ 287

Contingent liabilities — quantifiable ............................................................................ 289

Veterans’ Affairs ......................................................................................... 291

Fiscal Risk ................................................................................................................... 291

Statement 9: Statement of Risks | Page 247

Government loans ...................................................................................... 292

Loan Items .................................................................................................. 296

Agriculture, Water and the Environment ..................................................................... 296

Education, Skills and Employment .............................................................................. 298

Foreign Affairs and Trade ........................................................................................... 299

Health .......................................................................................................................... 300

Industry, Science, Energy and Resources .................................................................. 300

Infrastructure, Transport, Regional Development and Communications .................... 301 Prime Minister and Cabinet ......................................................................................... 302

Social Services ............................................................................................................ 302

Treasury ...................................................................................................................... 303

Statement 9: Statement of Risks | Page 249

Statement 9: Statement of Risks

Risks to the Budget — Overview

The forward estimates of revenue and expenses in the 2021-22 Budget incorporate assumptions and judgments based on the best information available at the time of publication, together with a range of economic assumptions and other forecasts and projections.

Events that could affect fiscal outcomes include:

• changes in economic and other parameters, including the path of recovery from the COVID-19 pandemic in both Australia and overseas, as well as other global economic developments more broadly

• matters not included in the fiscal forecasts because of uncertainty about their timing, magnitude or likelihood

• the realisation of contingent liabilities or assets.

The revenue and expense estimates and projections published in the 2021-22 Budget Papers are based on a range of economic and other parameters. These parameters are consistent with the domestic and international outlook detailed in Statement 2: Economic Outlook. While the economic recovery in Australia is well underway, there are still significant international and domestic risks, including those associated with the COVID-19 pandemic, and the outlook remains highly uncertain. Economic outcomes that differ from the parameters used in the Budget represent a material risk to the Budget estimates. Statement 8: Forecasting Performance and Scenario Analysis examines the impact on receipts and payments of altering some of the key economic assumptions underlying the Budget estimates.

A significant portion of government expenditure is for demand-driven programs. Outcomes for these programs could differ from the estimates and projections due to changes in economic circumstances and other factors. For example, differing levels of unemployment will mean expenditure for related social services payments, including allowances, will continue to vary. Similarly, a number of other support programs, including the National Disability Insurance Scheme, are demand-driven and outcomes for these programs may differ from the estimates in the Budget.

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In addition, revenue forecasting relies heavily on the observed historical relationships between the economy, tax bases and tax revenues. Such relationships may shift over time as the economy changes, particularly following a once-in-a-century shock, presenting further risk to the estimates. For example, the ability of entities to utilise tax losses to offset future profits may continue to pose heightened challenges in estimating the profile for tax receipts over the next few years. Revenue forecasts also incorporate costings for new policies that typically involve a degree of uncertainty.

The estimates and projections of revenue are also subject to a number of general risks that can affect taxation collections. These general pressures include the ability of the tax system to keep pace with changes in the business environment, tax avoidance, court decisions and Australian Taxation Office rulings, and the outcome of compliance programs. These pressures may result in a shift in the composition of taxation collected from the various tax bases and/or a change in the size of the tax base.

Many agencies rely on external revenue to underpin their delivery of a range of outputs. Estimates included in the Budget for these agencies reflect the best and most up-to-date information regarding the likely scale of external revenue. However, outcomes in relation to external revenue are not certain and are subject to risks. In some cases, these risks are common to a number of agencies and the aggregate impact on the Budget can extend beyond a single entity. In the current environment, the COVID-19 pandemic continues to impact on the operations of, and revenue received by, a number of agencies and remains a source of risk to the Budget.

The forward estimates in the Budget include the impact of all policy decisions, including those that remain unlegislated. Where legislation is not passed in time to enable commencement of the measure at the anticipated commencement date, the legislation is passed with amendments to the original decision, or is rejected, there is a risk of a variation to the fiscal position outlined in the Budget.

There is also a risk that further Government expenditure may be required to respond to the direct impacts of the pandemic. The need for, and scale of, this potential expenditure would depend on the nature of further possible outbreaks and how effectively they are contained, or future uncertainties related to vaccines.

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Statement 9: Statement of Risks | Page 251

Specific risks to the Budget

The Budget is subject to a number of contingent liabilities. A large number of these reflect indemnities, including those relating to the Department of Defence, the Future Fund Management Agency and Future Fund Board of Guardians, and the Reserve Bank of Australia. The Australian Government has also issued a number of guarantees, such as those relating to guarantee schemes for the banking and financial sector, payments by Export Finance Australia, and the superannuation liabilities of the Commonwealth Bank prior to its sale to the private sector. Other significant contingent liabilities relate to uncalled capital subscriptions and credit facilities to international financial institutions and legal cases concerning the Australian Government. The Government has robust and conservative strategies in place to reduce its potential exposure to these contingent liabilities.

Fiscal risks comprise general developments or specific events that may affect the fiscal outlook. Some developments or events raise the possibility of a fiscal impact. In other cases, the likelihood of a fiscal impact may be reasonably certain, but will not be included in the forward estimates because the timing or magnitude is not known.

Table 9.1 outlines how fiscal risks, assets and liabilities and contingent assets and liabilities are disclosed in the Budget.

Contingent liabilities, contingent assets and other fiscal risks with a possible impact on the forward estimates greater than $20 million in any one year, or $50 million over the forward estimates period, are listed in this Statement and summarised in Table 9.2. Some financial information in the text may not add to totals due to rounding. Information on contingent liabilities and contingent assets is also provided in the

Australian Government’s annual consolidated financial statements, and in the annual financial statements of departments and other Government entities.

The Government makes loans for policy purposes. All loans contain some element of credit risk that they will not be repaid in full, although in many cases this risk is small. Details of Government loans estimated to exceed $200 million at 30 June 2021 are included at the conclusion of this Statement.

This year the Statement of Risks is set out by Portfolio (rather than by risk type). This makes it easier to find information about specific risks. The change in format has not altered the threshold for disclosure or the detail of the descriptions provided.

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Table 9.1: Disclosure of fiscal risks, contingent assets and contingent liabilities, and assets and liabilities in the Budget papers Category Type(a) Disclosure

Fiscal Risks Fiscal Risks Statement of Risks

Contingent assets and contingent liabilities Significant contingent assets and liabilities considered remote

Statement of Risks

Unquantifiable contingent assets and liabilities that are

improbable but not remote

Statement of Risks

Quantifiable contingent assets and liabilities that are

improbable but not remote

Statement of Risks

Contingent assets and liabilities excluded on the basis

of immateriality(b)

None

Assets and liabilities Assets and liabilities that are probable and can be reliably measured Balance sheet(c)(d)

Assets and liabilities that are probable but have an

uncertain timing or amount (provisions) Balance sheet

(a) Items that are described as probable have a 50 per cent or higher chance of occurrence. (b) Only risks with a possible impact on the forward estimates greater than $20 million in any one year, or $50 million over the forward estimates period, are considered material and disclosed in this Statement. (c) Unearned income from charging guarantee fees is shown as a liability in the balance sheet. (d) Additional disclosure to increase transparency on loans over $200 million is included in the Statement of

Risks.

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Table 9.2: Summary of contingent liabilities and contingent assets in the Statement of Risks(a) Agriculture, Water and the Environment Status

Fiscal Risks

Murray Darling Basin Reform — risk assignment Unchanged

Remediation of Jabiru Township Unchanged

Contingent liabilities — unquantifiable

Commonwealth liabilities in respect of matching payments to industries for research and development contributions Unchanged

Emergency pest and disease response arrangements Modified

Attorney-General’s Status

Fiscal Risk

Departure of the ACT Government from the Comcare workers’ compensation scheme Unchanged Contingent liabilities — unquantifiable

Native Title costs Unchanged

Prospective investor-State claim against Australia Unchanged

Defence Status

Fiscal Risk

Major operations of the Australian Defence Force in 2021-22 Modified

Significant but remote contingencies

ADI Limited — Officers’ and Directors’ Indemnities Unchanged

Litigation cases Unchanged

Remote contingencies Modified

Contingent liabilities — unquantifiable

Cockatoo Island Dockyard Unchanged

Land decontamination, site restoration and decommissioning of Defence assets Unchanged Non-remote contingent liabilities Removed

Contingent liability — quantifiable

Claims against the Department of Defence Unchanged

Education, Skills and Employment Status

Fiscal Risk

Recovery of inappropriately claimed VET FEE-HELP payments from VET providers Unchanged Contingent liability — quantifiable

ParentsNext program Unchanged

Finance Status

Significant but remote contingency

Australian Naval Infrastructure Pty Ltd — Termination of the Equity Funding Agreement Unchanged

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Table 9.2: Summary of contingent liabilities and contingent assets in the Statement of Risks(a) (continued) Finance (continued) Status

Contingent liabilities — unquantifiable

ASC Pty Ltd — Directors’ and Executives’ Indemnities Unchanged

ASC Pty Ltd — Guarantee of Indemnity from ASC in favour of ASC Shipbuilding Pty Limited Unchanged

Australian Government domestic property Unchanged

Australian Government general insurance fund — Comcover Unchanged

Australian Naval Infrastructure Pty Ltd — Guarantee in favour of Naval Group Australia Unchanged

Commonwealth Superannuation Corporation — Immunity and Indemnity Unchanged Future Fund Management Agency and Future Fund Board of Guardians — Indemnity Unchanged Googong Dam Unchanged

Indemnities for the Reserve Bank of Australia and private sector banks Unchanged Indemnities relating to other former asset sales, privatisations and information technology outsourcing projects Unchanged

Foreign Affairs and Trade Status

Fiscal Risk

Export Finance Australia — National Interest Account (NIA) Modified

Significant but remote contingency

World Food Program — Charter Flights Indemnity Modified

Contingent liability — quantifiable

Export Finance Australia Modified

Health Status

Contingent liabilities — unquantifiable

Accommodation Payment Guarantee Scheme Unchanged

Advance Purchasing Agreements for COVID-19 vaccine candidates Modified Australian Red Cross Society — Indemnities Unchanged

Blood and blood products liability cover Unchanged

CSL Ltd Unchanged

Indemnities relating to vaccines Unchanged

Medical Indemnity Exceptional Claims Scheme Unchanged

New South Wales Health Administration Council — Indemnity Unchanged

2032 Brisbane Olympic and Paralympics Games New

Contingent asset — unquantifiable

Legal action seeking compensation Unchanged

Home Affairs Status

Fiscal Risk

Regional Processing Arrangements Unchanged

Significant but remote contingency

Indemnities relating to the Air Security Officer Program Unchanged

Contingent liabilities — unquantifiable

Australian Victims of Terrorism Overseas Payment Unchanged

Disaster Recovery Unchanged

Garrison, welfare and health services at regional processing countries — liability limit Unchanged Immigration detention services by state and territory governments — liability limit Unchanged Immigration detention services contract — liability limit Unchanged

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Table 9.2: Summary of contingent liabilities and contingent assets in the Statement of Risks(a) (continued) Industry, Science, Energy and Resources Status

Fiscal Risk

Snowy Hydro Limited — Snowy 2.0 Unchanged

Significant but remote contingencies

Snowy Hydro Limited — Board Members’ Indemnity Unchanged

Snowy Hydro Limited — Termination of the Equity Subscription Agreement Unchanged Liability for damages caused by space and certain high-power rocket activities Unchanged Operations and Maintenance of the Northern Endeavour and Associated Infrastructure Modified Contingent liabilities — unquantifiable

Australian Nuclear Science and Technology Organisation — asbestos contamination Unchanged Australian Nuclear Science and Technology Organisation — Indemnity Unchanged Former British atomic test site at Maralinga Unchanged

Gorgon liquefied natural gas and carbon dioxide storage project — long-term liability Unchanged Liability for costs incurred in a national liquid fuel emergency Unchanged

Land decontamination and site restoration for CSIRO property Unchanged

Snowy Hydro Limited — water releases Unchanged

United States Strategic Petroleum Reserve (US SPR) Lease Agreement — Indemnity under certain conditions Unchanged Contingent liability — quantifiable

Underwriting of Transmission Projects Unchanged

Infrastructure, Transport, Regional Development and Communications Status Fiscal Risk

Inland Rail — Delivery Unchanged

Significant but remote contingencies

Inland Rail — Termination of the Equity Financing Agreement Unchanged

Significant but remote contingencies

Maritime Industry Finance Company Limited — Board Members’ Indemnity Unchanged Moorebank Intermodal Company Limited — Termination of the Equity Funding Agreement Unchanged

Moorebank Intermodal Project — Glenfield Waste Site Easement Unchanged

NBN Co Limited — Equity Agreement Removed

Optus Financial Guarantee Modified

Telstra Financial Guarantee Modified

Tripartite deeds relating to the sale of federal leased airports Unchanged

WSA Co Limited — Board Members’ Indemnities Unchanged

WSA Co Limited — Termination of the Equity Subscription Agreement Unchanged

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Table 9.2: Summary of contingent liabilities and contingent assets in the Statement of Risks(a) (continued) Infrastructure, Transport, Regional Development and Communications — continued

Status

Contingent liabilities — unquantifiable

Australian Maritime Safety Authority incident costs Unchanged

Aviation rescue and firefighting potential per- and poly-fluoroalkyl substances contamination Modified

Indemnity provided to the New South Wales Rural Fire Fighting Service in relation to the Jervis Bay Territory Unchanged

Moorebank Intermodal Company Limited — Board Members’ Indemnity Unchanged Moorebank Intermodal Project — Georges River rail crossing Unchanged

NBN Co Limited — Board Members’ Insolvency Indemnity Removed

Service Delivery Arrangement Indemnities — External Territories and Jervis Bay Territory Unchanged Contingent liabilities — quantifiable

Australian Government contribution to the East West Link project Unchanged

Australian Government contribution to the Perth Freight Link project Unchanged Prime Minister and Cabinet Status

Contingent liability — unquantifiable

Basil Dawson and Ors vs Commonwealth of Australia (Community Development Program Class Action) Unchanged

Northern Territory Stolen Generations Class Action New

Contingent liability — quantifiable

Indigenous Land and Sea Corporation — Debt Guarantee Unchanged

Social Services Status

Fiscal Risk

COVID-19 Social Welfare Debt Pause Removed

Treasury Status

Fiscal Risk

Establishment of a Cyclone and related flooding reinsurance pool New

Significant but remote contingencies

Asbestos Injuries Compensation Fund Modified

Financial Claims Scheme Modified

Guarantee for the National Housing Finance and Investment Corporation Unchanged Guarantee of state and territory borrowing Modified

Guarantees under the Commonwealth Bank Sale Act 1995 Modified

Reserve Bank of Australia — Guarantee Modified

Contingent liabilities — unquantifiable

Government Guarantees for Housing Modified

Indemnities for specialised external advisers during the COVID-19 pandemic Unchanged International Monetary Fund — Poverty Reduction and Growth Trust Modified

Small and Medium Enterprise Guarantee Scheme Modified

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Table 9.2: Summary of contingent liabilities and contingent assets in the Statement of Risks(a) (continued) Treasury (continued) Status

Contingent liabilities — quantifiable

Terrorism insurance — commercial cover Unchanged

Australian Taxation Office — tax disputes Modified

International financial institutions — uncalled capital subscriptions Modified

International Monetary Fund Modified

Veterans’ Affairs Status

Fiscal Risk

Defence Service Homes Insurance Scheme Modified

(a) Detailed descriptions of these items are in the following text.

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Agriculture, Water and the Environment

Fiscal Risks

Murray Darling Basin Reform — risk assignment

The Australian Government has committed to bridge the gap between the Baseline Diversion Limit (BDL) and the Sustainable Diversion Limits (SDLs) in the Basin Plan through water recovery. On 1 July 2019, the SDLs took effect. The Water Act 2007 provides a risk assignment framework whereby entitlement holders with reductions in water allocations, or changes in the reliability of water allocations (where the gap has not been bridged and an accredited water resource plan is in place), may be eligible for a payment from the Commonwealth.

The total cost (if any) of the operation of the risk assignment framework is not able to be quantified at this time and remains a fiscal risk until the gap between the BDL and SDLs is fully bridged.

Remediation of Jabiru Township

The Director of National Parks (DNP) holds a revisionary interest under a lease for the town of Jabiru expiring in 2021. The make good and rehabilitation arrangements of Jabiru is being negotiated between the DNP, the Northern Territory Government, Energy Resources of Australia and other stakeholders. Remediation work includes renewal of essential services, removal of hazardous materials and chemicals, ensuring structures are compliant to Building Codes and ecological remediation. Expenditure for the remediation work will be shared across all parties to the arrangements.

The Government agreed to provide $35.0 million toward the remediation of contaminants in Jabiru as part of the 2019-20 Budget measure Securing Tourism and Jobs in Kakadu.

Contingent liabilities — unquantifiable

Commonwealth liabilities in respect of matching payments to industries for research and development contributions

Under several Acts, the Commonwealth provides matching contributions to encourage expenditure on research and development (R&D) and to increase the competitiveness and sustainability of industries within Australia. Matching contributions on eligible R&D are subject to an annual limit that is calculated based on the determined gross value of production (GVP cap) for the industries. There will be an R&D excess, which can be claimable in future years, where the cumulative R&D expenditure is more than the GVP cap. The Commonwealth’s future liability in respect of the matching contributions is contingent on the GVP cap and is therefore unquantifiable.

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Emergency pest and disease response arrangements

National emergency response arrangements for animal, plant and environmental pest and disease incursions are largely funded through cost-sharing agreements between Australian governments and affected agricultural industry bodies. Under the terms of the emergency response agreements, the Australian Government is typically liable for 50 per cent of the total government funding for a nationally agreed response to a pest or disease incursion. Funding is provided in the forward estimates for the Australian Government’s contributions under the emergency response agreements, which are paid to the state or territory governments undertaking relevant activities.

Recent concurrent incursions have placed considerable pressure on this funding which may be insufficient to meet the costs of any additional large-scale pest or disease responses. There are currently 17 national cost-shared emergency responses. Until 2026-27, more than half of this funding has been allocated to an eradication program for red imported fire ants in Queensland.

Governments have agreed to develop an Aquatic Emergency Animal Disease Deed covering aquatic emergency animal diseases. Final consultation will begin shortly with prospective industry signatories.

The Australian Government may provide financial assistance to an agricultural industry body by funding its share of an emergency response. These contributions are recovered from the industry over a period of up to 10 years, usually through an emergency response levy. The Australian Government may also contribute in situations where an incursion is not covered by a cost-sharing agreement or where the affected industry body/bodies is/are not party to an emergency response agreement, depending on the circumstances of the incursion.

Attorney-General’s

Fiscal Risk

Departure of the ACT Government from the Comcare workers’ compensation scheme

On 1 March 2019, the ACT Government departed the Comcare premium scheme following the decision by the Safety, Rehabilitation and Compensation Commission to grant the ACT Government a licence to self-insure its workers’ compensation liabilities under the Safety, Rehabilitation and Compensation Act 1988.

The licence conditions transfer all workers’ compensation liabilities for ACT Government employees, with a date of injury on or after 1 July 1989, from the Commonwealth to the ACT Government. Funding will be transferred to the ACT Government for outstanding costs relating to claims with a date of injury before

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1 March 2019 pending an exit valuation of claims liabilities. The payment will have an impact on the underlying cash balance.

The Commonwealth has made an initial payment of $76.2 million in 2018-19, which has been included in the estimates, but the total costs of these arrangements are yet to be determined.

Contingent liabilities — unquantifiable

Native Title costs

The Australian Government will likely be liable for any compensation found to be payable under the Native Title Act 1993 in respect of compensable acts for which the Australian Government is responsible. While the High Court’s decision in the Timber Creek litigation (Northern Territory v Griffiths et al [2019] HCA 7) provides guidance on the principles for calculating compensation under the Native Title Act, the Australian Government’s liability cannot be quantified owing to uncertainty about the number and effect of compensable acts and the value of Native Title affected by those acts.

Prospective investor-State claim against Australia

The Commonwealth has received requests for consultation in relation to a dispute pertaining to the Iron Ore Processing (Mineralogy Pty Ltd) Agreement Amendment Act 2020 (WA) (2020 Amendment Act). These consultations are a pre-condition to the formal commencement of investor-State dispute settlement proceedings.

If proceedings are commenced and Australia is unsuccessful, Australia would be liable for any compensation found to be payable to the claimant. Any such potential liability cannot be quantified at this stage.

Defence

Fiscal Risk

Major operations of the Australian Defence Force in 2021-22

The 2021-22 estimates for the Department of Defence include the cost of major operations of the Australian Defence Force (ADF) in 2021-22 in Afghanistan, Iraq, Syria, and the broader Middle East region, as well as the protection of Australia’s borders and offshore maritime interests. Funding for major Defence operations is considered and provisioned on a year-by-year basis. The forward estimates at the 2021-22 Budget include additional funding for these major operations in the 2021-22 year, but do not provide for further extensions. While the Government has committed to concluding Operations Highroad and Okra, and finalising the drawdown of ADF personnel in Afghanistan by September 2021, the Department of Defence will likely have additional funding requirements for major operations beyond 30 June 2022.

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Significant but remote contingencies

ADI Limited — Officers’ and Directors’ Indemnities

Under the sale agreements for ADI Limited, the Australian Government agreed to indemnify the Directors, officers and employees of ADI Limited for claims and legal costs associated with assistance related to the sale of the Australian Government’s shares in the company. The Australian Government has also provided an indemnity to ADI Limited for uninsured losses relating to specific heads of claims.

Litigation cases

The Department of Defence (Defence) is involved in a wide range of litigation and other claims for compensation and/or damages that may result in litigation where the matters are not able to be finalised by use of negotiation. The litigation includes common law liability claims, including for personal injury and property damage, investigations of Defence by Comcare and active prosecutions in relation to alleged breaches of the Work Health and Safety Act 2011. A number of claims have been received seeking compensation for alleged loss or damage arising from Defence use of aqueous film forming foam (AFFF) that contained man-made per- and poly-fluoroalkyl substances (PFAS). A number of claims have also been received following reviews into the Australian Defence Force and Defence culture. There is also potential for claims to arise from the disposal of assets to third parties where such assets contain hazardous materials or components that have the potential to cause injury.

Remote contingencies

As at 31 March 2021, the Department of Defence carried 152 instances of quantifiable remote contingent liabilities valued at $4.5 billion and 1,327 instances of unquantifiable remote contingent liabilities.

These significant remote contingent liabilities are restricted in nature and details are not given due to commercial sensitivities and/or national security.

Contingent liabilities — unquantifiable

Cockatoo Island Dockyard

On 13 October 2001, Cockatoo Island Dockyard (CODOCK) commenced proceedings against the Australian Government (Department of Defence) in the New South Wales (NSW) Supreme Court seeking full reimbursement from the Australian Government for personal injury claims costs incurred by CODOCK after 31 October 1995 in relation to asbestos exposure. Following decisions in the NSW Supreme Court on 17 December 2004 and 4 February 2005, and the NSW Court of Appeal on 23 November 2006, CODOCK was awarded a complete indemnity from the Australian Government for its uninsured exposure to asbestos damages claims, plus profit of 7.5 per cent. Defence continues to manage reimbursement of claims costs incurred by CODOCK.

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Land decontamination, site restoration and decommissioning of Defence assets

The Department of Defence has made a financial provision for the estimated costs involved in restoring, decontaminating and decommissioning where a legal or constructive obligation has arisen. For cases where there is no legal or constructive obligation, the potential costs have not been assessed and are unquantifiable contingencies.

Contingent liability — quantifiable

Claims against the Department of Defence

The Department of Defence (Defence) has six instances of non-remote, quantifiable contingent liabilities in respect of claims on Defence valued at $53.8 million. The estimated figure is determined by conducting an objective analysis of the probable amount payable for all matters managed by firms engaged by Defence through the Attorney-General’s Whole of Australian Government Legal Services Panel and those being handled in-house by Defence Legal Division. However, the exact amount payable under those claims is uncertain. Defence is defending the claims or is trying to resolve them by recourse to alternative dispute resolution measures.

Education Skills and Employment

Fiscal Risk

Recovery of inappropriately claimed VET FEE-HELP payments from VET providers

The Australian Government is undertaking compliance action, including court action, to recover VET FEE-HELP payments from VET providers where loans were issued inappropriately to students by providers. The Government has legislated a remedy, which commenced 1 January 2019, for VET FEE-HELP students who incurred debts under the VET FEE-HELP loan scheme following inappropriate conduct by VET providers. The Government will undertake recovery activities against VET providers in cases where the student was ineligible for a VET FEE-HELP loan.

There are potential financial risks to the Commonwealth in the event that it is unable to recover payments from VET providers where they have closed or entered into administration or liquidation.

The financial risk to the Commonwealth is currently unquantifiable as it depends on the receipt and assessment of applications from students, as well as outcomes from the Government’s investigations into VET providers’ conduct.

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Contingent liability — quantifiable

ParentsNext program

ParentsNext supports parents to identify their education and employment related goals, to build their work readiness and plan and prepare for employment by the time their youngest child starts school.

Under the program, providers accumulate one-off credits which accrue to their provider’s Participation Fund on commencement of an intensive stream participant.

Currently providers are forecast to spend less than the value of the available credits, creating an accumulating surplus of credits that present a contingent liability.

The current outstanding credits accumulated from years prior to 2020-21 represent a contingent liability for the Budget.

Finance

Significant but remote contingency

Australian Naval Infrastructure Pty Ltd — Termination of the Equity Funding Agreement

The Australian Government will provide sufficient funding to enable Australian Naval Infrastructure Pty Ltd (ANI) to meet the direct costs of termination that may be incurred by ANI in the event that the Commonwealth terminates the Equity Funding Agreement between the Commonwealth and ANI.

Contingent liabilities — unquantifiable

ASC Pty Ltd — Directors’ and Executives’ Indemnities

The Australian Government has provided former Directors of the then Australian Submarine Corporation Pty Ltd (now known as ASC Pty Ltd — ASC) with indemnities in relation to any claim against them as a result of complying with the ASC’s obligations under the Process Agreement between the Electric Boat Corporation (EBC), the Australian Government and the ASC; any claim against them as a result of complying with the ASC’s obligations under the Service Level Agreement between the ASC, the Department of Defence, EBC and Electric Boat Australia; and any claims and legal costs arising from the Directors acting in accordance with the Board’s tasks and responsibilities, as defined under the indemnity.

The Australian Government has provided Directors and senior executives of ASC with indemnities to mitigate personal risk and provide coverage for legal costs related to any legal proceedings that may arise in relation to the transaction to separate ASC Shipbuilding Pty Limited from ASC.

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ASC Pty Ltd — Guarantee of Indemnity from ASC in favour of ASC Shipbuilding Pty Limited

The Australian Government has agreed to provide a guarantee of an indemnity from ASC Pty Ltd (ASC) in favour of ASC Shipbuilding Pty Limited (ASC Shipbuilding).

ASC provided an indemnity in favour of ASC Shipbuilding prior to ASC Shipbuilding being separated from ASC Pty Ltd. This indemnity is intended to cover any liabilities unknown at the time of separation which may arise after separation. The indemnity is time limited to seven years.

The guarantee will only be called on in the event that ASC is no longer owned by the Commonwealth and ASC can no longer meet its obligations under the terms of the indemnity. It is Government policy to retain ASC as a Government Business Enterprise.

Australian Government domestic property

The Department of Finance owns and is responsible for managing a number of properties within the Australian Government’s domestic non-Defence portfolio. A small number of properties have had potential remediation issues identified, which are currently the subject of further investigation. Except for properties at Lucas Heights in New South Wales and Cox Peninsula in Northern Territory, none of the remaining properties with potential remediation issues have had a provision recognised, as neither the conditions for legal nor constructive obligations have been met, nor is a reliable estimate of the obligation currently possible.

Australian Government general insurance fund — Comcover

The Department of Finance (Finance) provides insurance and risk management services to Australian Government general government sector entities. Insurance liabilities are subject to potential revisions as the total number and size of claims covered is subject to unforeseen future events.

Finance takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures, with estimates and parameters regularly updated based on historical analysis of experience, actuarial calculations and other relevant factors.

Australian Naval Infrastructure Pty Ltd — Guarantee in favour of Naval Group Australia

Under the commercial arrangements in respect of the Future Submarine Program and the Submarine Construction Yard, Australian Naval Infrastructure Pty Ltd (ANI) is responsible for the construction of a purpose built Submarine Construction Yard and providing access to the yard to Naval Group Australia and Naval Group S.A. (Société Anonyme). As part of these commercial arrangements, the Australian Government has entered into a Deed of Guarantee and Indemnity with Naval Group Australia Pty Limited and Naval Group S.A., whereby the Australian

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Government has agreed to provide a guarantee in respect of ANI’s financial obligations under the Submarine Construction Yard Access arrangements with Naval Group Australia and Naval Group S.A.

Commonwealth Superannuation Corporation — Immunity and Indemnity

The Governance of Australian Government Superannuation Schemes Act 2011 (the Governance Act) provides for specific immunities for activities undertaken in good faith by Directors and delegates of the board of the Commonwealth Superannuation Corporation (CSC), provided these activities relate to the performance of their functions.

Under the Governance Act, other than in cases where the Superannuation Industry (Supervision) Act 1993 or regulations under that Act do not so permit, any money that becomes payable by CSC in respect of an action, liability, claim or demand that relates to the superannuation schemes or funds for which it is responsible, is to be paid out of the relevant superannuation fund or if there is no fund, the Consolidated Revenue Fund (CRF). Amounts paid from a superannuation fund are reimbursed to the fund from the CRF.

Future Fund Management Agency and Future Fund Board of Guardians — Indemnity

The Australian Government has provided certain staff members of the Future Fund Management Agency (the Agency) and the members (Board members) of the Future Fund Board of Guardians (the FFBG) with deeds of indemnity. The indemnities are intended to cover liabilities in excess of the insurance cover (including Comcover) of the FFBG, its subsidiary entities and the Agency. Board members are indemnified for liabilities incurred arising out of an act, omission or breach of statutory duty by the Board or a Board member that relates to the performance of the FFBG’s functions or the exercise of the FFBG’s powers or that relates to any act, omission or breach of statutory duty by a Board member as a director or officer of a wholly owned Australian subsidiary of the FFBG. Certain Agency staff members are indemnified in connection with the performance of functions or the exercise of powers in their capacity as a director or officer of investee companies or subsidiaries of the FFBG. Subject to certain exceptions or qualifications, Board members and Agency staff members are indemnified for amounts up to the value of the relevant funds.

Board members are not indemnified in respect of any liability owed by them to the FFBG or its subsidiary, or which results from a contravention of a civil penalty provision of the Future Fund Act 2006 or the Corporations Act 2001. Agency staff members are not indemnified to the extent they are indemnified by the relevant investee company or subsidiary, in respect of any liability owed to the FFBG or the Commonwealth, or to the extent that they are granted and receive financial assistance under Appendix E of the Legal Services Directions 2017. Both Board members and Agency staff members are not indemnified for any liability resulting from conduct they engage in other than in good faith, to the extent they recover a liability under a Directors and Officers insurance policy

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(including Comcover) or in respect of legal costs incurred by them in unsuccessfully defending or resisting criminal proceedings or proceedings regarding a contravention of a civil penalty provision.

Googong Dam

On 4 September 2008, a 150-year lease for Googong Dam was signed between the Australian Government and the Australian Capital Territory (ACT) Government. The Australian Government is liable to pay just terms compensation if the terms of the lease are breached by introducing new legislation or changing the Canberra Water Supply (Googong Dam) Act 1974 in a way that impacts on the rights of the ACT. The lease includes a requirement for the Australian Government to undertake rectification of easements or any defects in title in relation to Googong Dam, and remediation of any contamination it may have caused to the site. It also gives an indemnity in relation to acts or omissions by the Australian Government.

Indemnities for the Reserve Bank of Australia and private sector banks

In accordance with Government entities’ contracts for transactional banking services, the Australian Government has indemnified the Reserve Bank of Australia and contracted private sector banks against loss and damage arising from error or fraud by an entity, or transactions made by a bank with the authority of an entity.

Indemnities relating to other former asset sales, privatisations and information technology outsourcing projects

Ongoing indemnities have been given in respect of a range of asset sales, privatisations and information technology (IT) outsourcing projects that have been conducted by the Department of Finance (Finance), and the former Office of Asset Sales and Commercial Support and its predecessors. The probability of an action being made under one of these indemnities diminishes over time.

Details of indemnities in respect of the other asset sales and privatisations have been provided in previous Budget and MYEFO papers, and previous Annual Reports of Finance and the Office of Asset Sales and Commercial Support.

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Indemnities are listed below. Apart from instances noted elsewhere, Finance does not currently expect any other action to be taken in respect of these indemnities.

Indemnified body Year(s) raised

ADI Ltd 1998

Albury-Wodonga Development Corporation 2014

Australian Airlines 1991

Australian Industry Development Corporation 1996

Australian Multimedia Enterprise 1997

Australian National Rail Commission and National Rail Corporation Ltd 1997 and 2000 Australian River Co Ltd 1999

Australian Submarine Corporation Pty Ltd 2000

Bankstown Airport Limited 2002

Camden Airport Ltd 2002

ComLand Ltd 2004

Commonwealth Accommodation and Catering Services 1988

Commonwealth Bank of Australia 1993 to 1996

Commonwealth Funds Management and Total Risk Management 1996 to 1997 Employment National Ltd 2003

Essendon Airport Ltd 2001

Federal Airports Corporation’s Airports 1995 to 1997

Health Insurance Commission 2000

Housing Loans Insurance Corporation Ltd 1996

Hoxton Park Airport Limited 2002

Medibank Private Limited 2014

National Transmission Network 1999

Sydney Airports Corporation Ltd 2001

Telstra 1996, 1999 and 2006

Wool International 1999

Foreign Affairs and Trade

Fiscal Risk

Export Finance Australia — National Interest Account (NIA)

There are three financing facilities under the NIA as detailed below.

The Australian Infrastructure Financing Facility for the Pacific (AIFFP) became operational on 1 July 2019. The AIFFP will provide up to $2.0 billion in facilities including up to $500 million in grants and the balance in loans to support high priority infrastructure development in Pacific countries and Timor-Leste. To date, the Government has agreed to provide loans and grants to support the development of three infrastructure projects in Palau and the Solomon Islands. As at 31 March 2021, funding was yet to be drawn down and the facility will have no financial implications until drawn on.

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The Defence Export Facility (DEF) was established to grow Australia’s defence exports by helping overcome difficulties in accessing private sector finance. The DEF has a maximum aggregate exposure of US$3.0 billion. As at 31 March 2021, three loans under the DEF had been agreed for a total maximum value of $228 million, of which $124.5 million had been drawn down. These three loans are reflected in the Budget estimates.

The COVID-19 Export Capital Facility (COVID-19 Facility) was announced on 15 April 2020, with a maximum aggregate exposure of $500 million. As at 31 March 2021, the COVID-19 Facility has agreed to provide finance for a total maximum value of $57.8 million, these loans are reflected in the Budget estimates.

Significant but remote contingency

World Food Program — Charter Flights Indemnity

The Australian Government provided the World Food Program (WFP) an indemnity with regard to charter flights for the repatriation of Department of Foreign Affairs and Trade personnel at isolated international missions impacted by COVID-19.

The indemnity applies to aircraft delay costs, loss of baggage, injury to those on-board the aircraft and exposure to aircraft damage to the extent that any loss is not covered by existing insurance policies held by the WFP. The risk of the indemnity being called upon is remote but could result in a liability to the Australian Government of up to $30 million in 2020-21. The indemnity does not extend into Budget year 2021-22 but continues to reflect a risk to the 2020-21 estimates.

Contingent liability — quantifiable

Export Finance Australia

The Australian Government guarantees the due payment of money that is, or may at any time, become payable by Export Finance Australia to anybody other than the Government. As at 31 March 2021, the Government’s total contingent liability was $2.7 billion. The $2.7 billion contingent liability comprises Export Finance Australia’s liabilities to third parties ($2.3 billion) and Export Finance Australia’s overseas investment insurance, contracts of insurance and guarantees ($0.4 billion). Of the total contingent liability, $2.3 billion relates to Export Finance Australia’s Commercial Account and $0.4 billion relates to the National Interest Account.

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Health

Contingent liabilities — unquantifiable

Accommodation Payment Guarantee Scheme

The Accommodation Payment Guarantee Scheme (the Guarantee Scheme) guarantees the repayment of aged care residents’ refundable accommodation payments (including refundable deposits and accommodation bonds) if the approved provider becomes insolvent or bankrupt and defaults on its refund obligations. In return for the payment, the rights that the resident had to recover the amount from their approved provider are transferred to the Australian Government so it can pursue the approved provider for the funds. In cases where the funds are unable to be recovered, the Australian Government may levy all approved providers holding bonds, entry contributions and refundable accommodation deposits to meet any shortfall.

Advance Purchasing Agreements for COVID-19 vaccine candidates

The Australian Government has provided indemnities to the suppliers of potential COVID -19 vaccine candidates, for which the Australian Government has entered into Advance Purchasing Agreements, covering certain liabilities that could result from the use of the vaccine. This comprises the University of Oxford vaccine candidate, which is sponsored by AstraZeneca, the Pfizer vaccine candidate, and the Novavax vaccine candidate.

The Australian Government has also entered into the Gavi-led COVAX Facility and has made an upfront payment towards Australia’s purchase of future COVID-19 vaccine doses through the Facility, part of which will be returned through a risk sharing arrangement should vaccine candidates not be successful.

The Australian Government has also entered into risk-sharing arrangements with the Pfizer and Novavax candidates to limit financial exposure to the Commonwealth.

Australian Red Cross Society — Indemnities

Deeds of Agreement between the Australian Red Cross Society (the Red Cross) and the National Blood Authority in relation to the operation of Australian Red Cross Lifeblood and the development of principal manufacturing sites in Sydney and Melbourne, include certain indemnities and a limitation of liability in favour of the Red Cross. These indemnities cover defined sets of potential business, product and employee risks and liabilities. Certain indemnities for specific risk events that operate within the term of the Deed of Agreement are capped, and must meet specified pre-conditions. Other indemnities and the limitation of liability only operate in the event of the expiry and non-renewal, or the earlier termination, of the Deed of Agreement relating to the operation of the Red Cross or the cessation of funding for the principal sites, and only within a certain scope. All indemnities are also subject to appropriate limitations and

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conditions, including in relation to mitigation, contributory fault, and the process of handling relevant claims.

Blood and blood products liability cover

The National Managed Fund (NMF) was established by a memorandum of understanding between the Australian Government, Australian Red Cross Lifeblood (Lifeblood) and state and territory governments to cover potential future claims in relation to the supply of blood and blood products by Lifeblood. The NMF provides for liabilities incurred by Lifeblood where other available mitigation or cover is not available. Under certain conditions, the Australian Government and the state and territory governments may jointly provide indemnity for Lifeblood through a cost-sharing arrangement for claims, both current and potential, regarding personal injury and loss or damage suffered by a recipient of certain blood products. If there are insufficient funds in the NMF to cover claim costs, the Jurisdictional Blood Committee will consider a report provided by the National Funds Manager to determine the level of additional funds required. The Australian Government’s share of any additional liability is limited to 63 per cent of any agreed net cost.

CSL Ltd

CSL Ltd (CSL) is indemnified against claims made by individuals who contract specified infections from specified products and against employees contracting asbestos-related injuries. CSL has unlimited cover for most events that occurred before the sale of CSL on 1 January 1994, but has more limited cover for a specified range of events that occurred during the operation of the Plasma Fractionation Agreement from 1 January 1994 to 31 December 2004. Where alternative cover was not arranged by CSL, the Australian Government may have a contingent liability.

The Australian Fractionation Agreement with CSL Behring (Australia) Ltd (a subsidiary of CSL), which operated from 1 January 2010 to 31 December 2017, and the National Fractionation Agreement for Australia with CSL Behring (Australia) Ltd, which has operated since 1 January 2018, both include a requirement that the National Blood Authority make a defined payment to CSL Behring (Australia) Ltd, in certain circumstances only, in the event that the volume of plasma supplied annually to CSL Behring (Australia) Ltd is less than a specified amount.

Indemnities relating to vaccines

The Australian Government has provided an indemnity to a manufacturer of smallpox vaccine held by the Australian Government, covering possible adverse events that could result from the use of the vaccine in an emergency situation. Indemnities have also been provided to a particular manufacturer of pandemic and pre-pandemic influenza vaccines for the supply or future supply of influenza vaccines under certain conditions (including H1N1 and H5N1).

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Medical Indemnity Exceptional Claims Scheme

Under the Medical Indemnity Exceptional Claims Scheme, the Australian Government assumes liability for 100 per cent of any damages payable against practitioners practising in a medical profession that exceeds a specified level of cover provided by the practitioner’s medical indemnity insurer (currently $20 million). In 2019, the Government agreed to expand eligibility of the Scheme through an amendment to the Midwife Professional Indemnity (Commonwealth Contribution) Scheme Rules 2010 (MPIS) to provide cover for employed private practising midwives who are not eligible for cover under the MPIS. These arrangements apply to payouts either related to a single large claim or to multiple claims that in aggregate exceed the cover provided by the practitioner’s medical indemnity insurer, and would apply to claims notified under contract-based cover since 2003. From 1 July 2020, the Medical and Midwife Indemnity Legislation Amendment Act 2019 provides transferred eligibility for this cohort of midwives and allied health professionals (including registered only midwives) into the Allied Health High Cost Claims Scheme and Allied Health Exceptional Claims Scheme within the Medical Indemnity Act 2002.

New South Wales Health Administration Council — Indemnity

The New South Wales Government is indemnified by the Commonwealth against liabilities or claims arising in relation to the operation of the National Health Funding Body (NHFB) in two respects:

(i) liabilities or claims arising from acts or omissions of NHFB staff as users of State Pool account information

(ii) liabilities or claims arising from unauthorised access to the banking services or system from NHFB premises.

2032 Brisbane Olympic and Paralympics Games

On 24 February 2021, the International Olympic Committee (IOC) entered into exclusive negotiations with the Queensland Government to host the 2032 Olympic and Paralympic Games. The Australian Government has committed to fund half the costs of critical infrastructure for the Games. The support will be subject to successful candidature and shared governance arrangements with the Queensland Government. The Commonwealth has also provided a range of guarantees to the IOC for provision of government services in support of Brisbane’s candidature to host the Games at no cost to the Organising Committee for the Olympic Games.

Contingent asset — unquantifiable

Legal action seeking compensation

The Department of Health is engaged in legal action against certain pharmaceutical companies to recover savings denied to the Commonwealth because interim injunctions

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granted to these companies in unsuccessful patent litigation delayed generic versions of drugs being listed on the Pharmaceutical Benefits Scheme and thereby delaying statutory and price disclosure related price reductions for these drugs.

Home Affairs

Fiscal Risk

Regional Processing Arrangements

The Australian Government supports the Governments of Nauru and Papua New Guinea (PNG) to provide support and services to transferees residing in Nauru and PNG under regional processing arrangements. Any significant changes in the number of transferees, the arrangements that underpin the provision of those services, relevant litigation or legislative changes, may incur a cost or generate cost reductions which are unquantifiable at this time.

Significant but remote contingency

Indemnities relating to the Air Security Officer program

The Australian Government has indemnity agreements with Australian airlines that agree to allow Air Security Officers on board their aircraft. The indemnity agreements limit the Government’s exposure to a maximum of $2 billion per incident. The indemnity applies to the extent that any loss is not covered by existing relevant insurance policies held by the airline(s) and only applies where the airline(s) can prove that an action on the part of an Air Security Officer under or in connection with the Air Security Officer program caused a loss.

Contingent liabilities — unquantifiable

Australian Victims of Terrorism Overseas Payment

The Social Security Amendment (Supporting Australian Victims of Terrorism Overseas) Act 2012 inserted Part 2.24AA into the Social Security Act 1991 to create a scheme for providing financial assistance to Australian residents who are victims of an overseas terrorist act that has been declared by the Prime Minister. The scheme commenced on 22 January 2013. Under the scheme, Australian residents harmed (primary victims) or whose close family members die as a direct result of a declared terrorist act (secondary victims) are eligible to claim one-off payments of up to $75,000. As acts of terrorism are unpredictable, and the declaration of overseas terrorists acts discretionary, the cost of the scheme is unquantifiable.

Disaster Recovery

The Australian Government provides funding to states and territories through the Australian Government cost-sharing arrangements (Natural Disaster Relief and Recovery Arrangements (NDRRA) and the Disaster Recovery Funding Arrangements

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(DRFA) to assist with natural disaster relief and recovery costs. A state or territory may claim NDRRA/DRFA funding if a natural disaster occurs and state or territory relief and recovery expenditure for that event meets the requirements set out in the arrangements.

The current forward estimates for the NDRRA/DRFA include preliminary estimates for past events, based on the best information available at the time of preparation. Preliminary estimates of the cost of a disaster and the timing of expenditure are subject to change. The total cost of relief and recovery from these past events may not be completely realised for some years.

For major disasters, the Australian Government may approve payments to individuals under the Social Security Act 1991. These include the Australian Government Disaster Recovery Payment and Disaster Recovery Allowance. As disasters and their impacts are unpredictable, the cost relating to these payments from future disasters is unquantifiable and therefore not included in the forward estimates.

The Government also maintains an Emergency Response Fund (ERF) to provide additional resourcing to assist with the preparation for, and response to, natural disasters. Reflecting the unpredictability of natural disasters the cost of any payments from the ERF are unquantifiable and not included in the Budget estimates.

Garrison, welfare and health services at regional processing countries — liability limit

The Department of Home Affairs (Home Affairs) entered into a contract with Canstruct International Pty Ltd (Canstruct), which commenced on 1 November 2017, for the provision of garrison and welfare services on Nauru in relation to regional processing arrangements. The contract includes a provision that limits Canstruct’s liability to Home Affairs to a maximum of $20 million for any single occurrence and $50 million in aggregate for the term of the contract. The limitation of liability does not apply to personal injury, breach of third-party IP rights, damage to third-party property or malicious acts or omissions attributable to Canstruct.

Immigration detention services by state and territory governments — liability limit

Home Affairs has negotiated arrangements with a number of state and territory governments for the provision of various services (including health, education and policing services) to immigration detention facilities and people in immigration detention. Some jurisdictions sought indemnification by the Australian Government for the provision of those services. These agreements, as listed below, contain unquantifiable indemnities relating to any damage or loss incurred by state and territory governments arising out of, or incidental to, the provision of services under the proposed agreements.

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Service streams

Jurisdictions Health Education Police

WA $5 million per claim or

event

Uncapped liability $5 million per claim or event

NSW N/A $5 million per claim or

event

$5 million per claim or event

VIC Uncapped liability Uncapped liability $5 million per claim or

event

QLD/TAS/ACT/NT N/A $5 million per claim or

event

$5 million per claim or event

SA $5 million per claim or

event

$5 million per claim or event $5 million per claim or event

Home Affairs negotiates arrangements as necessary for the provision of correction services. The indemnity provided to states and territory governments under these arrangements is no more than $30 million per event.

Immigration detention services contract — liability limit

Home Affairs entered into a contract with Serco Australia Pty Ltd (Serco), which commenced on 11 December 2014, to deliver immigration detention services in Australia on behalf of the Australian Government at immigration detention facilities. The contract term limits Serco’s liability to Home Affairs to a maximum of any insurance proceeds recovered by Serco up to a value of $330 million for the term of the contract. Serco’s liability is unlimited for specific events defined under the contract.

Industry, Science, Energy and Resources

Fiscal Risk

Snowy Hydro Limited — Snowy 2.0

The Australian Government has committed up to $1.38 billion in additional equity to Snowy Hydro Limited to support the delivery of the Snowy 2.0 pumped hydro project. Snowy 2.0 will improve the security and reliability of the National Electricity Market by providing reliable, dispatchable power and large-scale energy storage. Project risks for both projects include construction delays, cost pressures, and cash flow forecasts.

These pressures are being mitigated through close management of the delivery program and engagement with key stakeholders.

Significant but remote contingencies

Snowy Hydro Limited — Board Members’ Indemnity

The Australian Government has provided an indemnity for each of the Directors of Snowy Hydro Limited (SHL) to protect them against certain claims relating to their employment as Directors. Until the indemnity agreements are varied or ceased, they will remain as contingent and unquantifiable liabilities.

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Snowy Hydro Limited — Termination of the Equity Subscription Agreement

The Australian Government will provide sufficient funding to cover costs and liabilities incurred by Snowy Hydro Limited (SHL) for delivery of Snowy 2.0, capped to the total remaining undrawn equity, in the event that the Commonwealth terminates the Equity Subscription Agreement between the Commonwealth and SHL.

Liability for damages caused by space and certain high power rocket activities

Under the United Nations Convention on International Liability for Damage Caused by Space Objects, the Australian Government may be liable to pay compensation for damage caused to nationals of other countries by space objects launched from Australia, or by Australian nationals overseas. For activities approved under the Space (Launches and Returns) Act 2018 (the Act), the Government also accepts liability for damage suffered by Australian nationals, to a maximum value of $3 billion above an insured level.

To address this risk, in order to have a space or high power rocket activity approved under the Act, the responsible party is required to insure against, or take financial responsibility for, damage to third parties. The amount of insurance or financial responsibility is capped at $100 million.

The Act provides for amounts lower than $100 million depending on the risk profile of the activity. A maximum probable loss methodology is also available to calculate the amount of insurance or financial responsibility.

Operations and Maintenance of the Northern Endeavour and Associated Infrastructure

The Government has engaged Upstream Production Solutions (Upstream PS) to maintain, operate and prepare the Northern Endeavour Floating Production Storage and Offtake facility (FPSO) for disconnection. Under the contract, the parties release one another for damage to their own property or injury to their own personnel, to the extent that the harm is not caused by the other party’s gross negligence or wilful misconduct. Generally, each party’s liability to the other is limited to 7.5 per cent of the contract budget (although this limit does not apply in some circumstances, as specified in the contract), but this limit may be adjusted by 10 per cent if the contract budget is increased by 10 per cent or more. The Government has also agreed to indemnify Upstream PS against claims made by third parties for damage to property or personal injury, where the loss of or damage was caused by the Commonwealth’s performance of the contract (or its negligence or failure in performing the contract), or the condition of the FPSO and associated subsea and subsurface infrastructure. The Government has also provided an indemnity against any pollution or loss of well control related to the FPSO, except to the extent caused by Upstream PS’s gross negligence or wilful misconduct. The liability cap does not apply to these indemnities.

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The Government has obtained Protection and Indemnity, Facility Damage and Control of Well Insurance and also taken out membership with oil spill response agencies. These will limit the Government’s risk and financial exposure.

The risk of an incident is remote. The FPSO is being maintained with safety critical maintenance carried out, limited oil in storage and no further oil production taking place. The additional works to prepare the FPSO for disconnection are not considered to materially increase the risk.

The secured creditor of Timor Sea Oil & Gas Australia Pty Limited (TSOGA) and Northern Oil & Gas Australia Pty Limited (NOGA), Castleton Commodities Merchant Asia Co. Pte. Ltd., has commenced legal proceedings in the Supreme Court of New South Wales (NSW) against the Commonwealth, TSOGA and NOGA seeking orders for the delivery of the FPSO, the appointment of a receiver to realise the value of the property and a declaration that it is entitled to a first charge over the proceeds.

Contingent liabilities — unquantifiable

Australian Nuclear Science and Technology Organisation — asbestos contamination

The Australian Nuclear Science and Technology Organisation (ANSTO) site contains asbestos in a number of buildings and in the soil at the Lucas Heights campus. Although there is potential for claims being made in relation to asbestos related diseases, the potential costs have not been assessed and are unquantifiable contingencies.

Australian Nuclear Science and Technology Organisation — Indemnity

On 21 April 2016, the then Minister for Industry, Innovation and Science signed a Deed of Indemnity between the Commonwealth Government, ANSTO and ANSTO Nuclear Medicine Pty Ltd (ANM), under which the Government formally agreed to indemnify ANSTO and ANSTO Officers, and ANM and ANM Officers, from any loss or liability arising from claims caused by ionising radiation. This Deed will remain in place until April 2026.

Former British atomic test site at Maralinga

The Australian Government is responsible for 14 unlimited indemnities relating to the Maralinga Rehabilitation Project (1995-2000). In November 2009, the Australian Government agreed to the handback of the former nuclear test site — Maralinga section 400—to the site’s Traditional Owners, Maralinga Tjarutja. Under the terms of the Maralinga Nuclear Test Site Handback Deed, the Australian Government has indemnified the Maralinga Tjarutja people and the South Australian Government in respect of claims arising from test site contamination.

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Gorgon liquefied natural gas and carbon dioxide storage project — long-term liability

The Australian and Western Australian (WA) Governments have provided an indemnity to the Gorgon Joint Venture Partners (GJV) against independent third-party claims (relating to stored carbon dioxide) under common law following closure of the carbon dioxide sequestration project. The claims are subject to conditions equivalent to those set out in the Offshore Petroleum and Greenhouse Gas Storage Act 2006.

The WA Government has indemnified the GJV, and the Australian Government has indemnified the WA Government for 80 per cent of any amount determined to be payable under that indemnity.

Liability for costs incurred in a national liquid fuel emergency

The Australian Government has responsibility for the Liquid Fuel Emergency Act 1984 (the Act). In addition, the Australian Government and state and territory governments have entered into an inter-governmental agreement in relation to a national liquid fuel emergency (IGA 2006). Under the IGA, the Australian Government agrees to consult IGA parties on a likely shortage and, if necessary after those consultations, to advise the Governor-General of the Commonwealth of Australia to declare a national emergency under the Act.

The IGA also contains three areas where the Australian Government may incur expenses in the unlikely event of a national liquid fuel emergency. These relate to the direct costs of managing a liquid fuel emergency and include the possibility of the Australian Government reimbursing the state and territory governments for costs arising from their responses, and potential compensation for industry arising from Australian Government directions under the Act.

Land decontamination and site restoration for CSIRO property

The Commonwealth Scientific and Industrial Research Organisation (CSIRO) has made a financial provision for the estimated costs in restoring and decontaminating land where a legal or constructive obligation has arisen. For cases where there is no legal or constructive obligation, the potential costs have not been assessed and are unquantifiable contingencies.

Snowy Hydro Limited — water releases

On 29 June 2018, Snowy Hydro Limited became a wholly Commonwealth owned company following the Commonwealth’s acquisition of the New South Wales (NSW) and Victorian Governments’ shares. At the time of corporatisation of Snowy Hydro Limited on 28 June 2002, the Australian, NSW and Victorian Governments, as the then owners, indemnified the company for liabilities arising from water releases in the Snowy River below Jindabyne Dam, where these releases are in accordance with the Snowy Water Licence and related regulatory arrangements agreed between the

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three governments, including the Snowy Water Inquiry Outcomes Implementation Deed (SWIOID) 2002. The indemnity applies to liabilities for which a claim is notified within 20 years from 28 June 2002.

As the sole owner, the Commonwealth is now wholly liable for the indemnity. However, NSW must pay 100 per cent of the amount claimable where the liability is a result of the Snowy Water Licence being inconsistent with the SWIOID or with a direction from NSW that is inconsistent with principles for managing water releases from Jindabyne Dam, as agreed by the Australian, NSW and Victorian Governments.

United States Strategic Petroleum Reserve (US SPR) Lease Agreement — Indemnity under certain conditions

On 3 June 2020, the Australian Government entered into a commercial leasing agreement with the United States (US) Department of Energy (DoE). This agreement facilitates the storage of Australia’s first-ever government-owned strategic fuel reserve in the US Strategic Petroleum Reserve (SPR).

Under the lease agreement, the Australian Government indemnifies the US SPR for any liabilities incurred (subject to certain exceptions) arising from or related to: the transportation of crude oil to the SPR; third-party claims made in connection with the drawdown or delivery of the oil; and customs duties, fees or other charges which may arise from the Australian Government’s non-compliance with US Customs Law.

Contingent liability — quantifiable

Underwriting of Transmission Projects

The Australian Government is working with the New South Wales (NSW), South Australian and Victorian Governments to provide early works underwriting support to the HumeLink, Project EnergyConnect and Victoria to NSW Interconnector West (VNI West) projects.

The Australian Government and NSW Government will each underwrite 50 per cent of the early works of the proposed HumeLink transmission line (up to a total of $65.7 million). The underwriting of the early works project costs for Project EnergyConnect and VNI West will be capped at a maximum amount, but the specific terms of the underwriting arrangements will not be finalised until negotiations are complete with relevant parties.

Conditions for the underwritings to be called upon are likely to relate to the projects not achieving regulatory and approval requirements, but are also dependent on the final underwriting arrangements negotiated.

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Infrastructure, Transport, Regional Development and Communications

Fiscal Risk

Inland Rail — Delivery

The Australian Government has committed up to $14.5 billion in equity for the Australian Rail Track Corporation (ARTC), enabling ARTC to deliver the Inland Rail project which provides a direct, high-performance freight rail corridor between Melbourne and Brisbane, as well as a new freight corridor between Brisbane and Perth (via Parkes).

The ARTC will finance Inland Rail with a combination of Commonwealth equity investment, private debt and internal cash flows. A Public Private Partnership will be established to design, build, finance and maintain the complex Toowoomba to Kagaru (Brisbane) section of the project, including major tunnelling works.

Project risks include securing jurisdictional support, construction delays, cost pressures and realising revenues. These pressures are being mitigated through close management of the delivery program and engagement with key stakeholders and jurisdictions. Project costs will be settled through the completion of procurements for all sections of Inland Rail following all final design, planning and environmental approvals.

Significant but remote contingencies

Inland Rail — Termination of the Equity Financing Agreement

The Australian Government will provide sufficient funding to cover all costs and liabilities incurred by the Australian Rail Track Corporation (ARTC) for delivery of Inland Rail in the event that the Commonwealth terminates the Equity Financing Agreement between the Commonwealth and the ARTC.

Maritime Industry Finance Company Limited — Board Members’ Indemnity

Indemnities for Maritime Industry Finance Company Limited (MIFCO) board members were provided to protect them against civil claims relating to their employment and conduct as Directors. MIFCO was placed into voluntary liquidation in November 2006 and was deregistered on 24 April 2008. The indemnity is not time-limited and continues even though the company has been liquidated. Until the indemnity agreements are varied or brought to an end, they will remain as contingent and unquantifiable liabilities.

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Moorebank Intermodal Company Limited — Termination of the Equity Funding Agreement

The Australian Government has provided an indemnity to cover all costs and liabilities that may be incurred by Moorebank Intermodal Company Limited (MIC) in the event that the Commonwealth terminates the Equity Funding Agreement between the Commonwealth and MIC.

Moorebank Intermodal Project — Glenfield Waste Site Easement

The Australian Government has provided an indemnity to cover all costs and liabilities that may be incurred by the Grantor (the private sector owner of the Glenfield Waste Site) of any easement for the rail spur going across the Glenfield Waste Site, to the extent such costs or liabilities are caused or contributed to by the Commonwealth or its agents.

Optus Financial Guarantee

The Australian Government has provided a guarantee in respect of NBN Co’s financial obligations to Optus Networks Pty Ltd, Optus Internet Pty Limited, Optus Vision Media Pty Limited and SingTel Optus Pty Ltd (collectively, Optus) under the Optus HFC Subscriber Agreement (the Agreement). An amended version of the Agreement came into effect on 22 January 2019. The Guarantee continues to apply to that Agreement. The Agreement extends for the period of the National Broadband Network roll-out in Optus Hybrid Fibre Coaxial (HFC) areas. The Australian Government is only liable in the event NBN Co does not pay an amount when due under the Agreement. As at 28 February 2021, NBN Co had generated liabilities covered by the Agreement which are estimated at an amount less than $200.0 million. There is a low risk that a claim would be made under the Guarantee. The Guarantee will terminate in 2021.

Telstra Financial Guarantee

The Australian Government has provided Telstra Corporation Limited (Telstra) a guarantee in respect of NBN Co’s financial obligations under the Definitive Agreements. The Agreements were amended on 14 December 2014. The Guarantee was not amended at that time and it continues in force in accordance with its terms in respect of the amended Definitive Agreements. The liabilities under the Definitive Agreements between Telstra and NBN Co arise progressively during the roll-out of the National Broadband Network as Telstra’s infrastructure is accessed and Telstra’s customers are disconnected from its copper and Hybrid Fibre Coaxial cable networks. The Australian Government is only liable in the event NBN Co does not pay an amount when due under the Definitive Agreements. As at 28 February 2021, NBN Co had generated liabilities covered by the Guarantee estimated at $10.7 billion. The Guarantee will terminate when NBN Co achieves specified credit ratings for a period of two continuous years and either:

• the company is capitalised by the Commonwealth to the agreed amount or

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• the Communications Minister declares, under the National Broadband Network Companies Act 2011, that, in his or her opinion, the National Broadband Network should be treated as built and fully operational.

Tripartite deeds relating to the sale of federal leased airports

The tripartite deeds between the Australian Government, the airport lessee company and financiers, amend airport (head) leases to provide for limited step-in rights for financiers in circumstances where the Australian Government terminates the head lease to enable the financiers to correct the circumstances that triggered such a termination event. The tripartite deeds may require the Australian Government to pay financiers compensation as a result of terminating the (head) lease, once all Australian Government costs have been recovered. The Australian Government’s contingent liabilities are considered to be unquantifiable and remote.

WSA Co Limited — Board Members’ Indemnities

The Australian Government has provided an indemnity for each of the Directors of WSA Co Limited (WSA Co) to protect them against certain claims relating to their employment as Directors. Unless the indemnity agreements are varied or brought to an end, they cease to apply from the date the Commonwealth has fully satisfied its obligations to subscribe for equity in WSA Co pursuant to the WSA Co Equity Subscription Agreement.

WSA Co Limited — Termination of the Equity Subscription Agreement

The Australian Government is required to cover all costs and liabilities that may be incurred by WSA Co in the event that the Commonwealth terminates the Equity Subscription Agreement between the Commonwealth and WSA Co.

Contingent liabilities — unquantifiable

Australian Maritime Safety Authority incident costs

In the normal course of operations, the Australian Maritime Safety Authority (AMSA) is responsible for the provision of funds necessary to meet the clean-up costs arising from ship-sourced marine pollution and, in all circumstances, is responsible for making appropriate efforts to recover the costs of any such incidents. The

Australian Government meets costs that cannot be recovered from such incidents. It is not possible to estimate the amounts of any eventual payments that may be required in relation to these incident costs. AMSA has established a pollution response financial capability of $50 million, backed by liquid investment funds, to provide funding should the overall clean-up costs exceed the liability limit of the ship-owner.

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Aviation rescue and firefighting potential per- and poly-fluoroalkyl substances contamination

The Department of Infrastructure, Transport, Regional Development and Communications (the Department) has identified a number of sites in Australia potentially contaminated with per- and poly-fluoroalkyl substances (PFAS) previously contained in firefighting foams.

The identified contaminants do not naturally break down in the environment and several have been listed on the Stockholm Convention as persistent contaminants. Australian health and environmental agencies have set a range of standards for environmental protection and precautionary health measures.

Up to 37 airport sites are potentially contaminated with PFAS (20 federally leased airports and 17 regional airports) relating to the Commonwealth provision of fire-fighting services. The Department is undertaking PFAS investigations at these airports to understand the risks and develop corresponding management plans for any identified PFAS contamination. Airservices Australia (Airservices) is also implementing a national PFAS management program, which includes PFAS investigations at 21 airport sites. The costs of potential long-term management options cannot be quantified at this time.

For federally leased airports, Airport Lessee Companies (ALCs) are responsible for environmental management of their airport sites. Airport leases indemnify the Commonwealth in relation to damages or injury to the environment, including in respect of costs and claims arising due to such damages or injury.

Moorabbin and Canberra ALCs have formally requested that the Airport Environment Officer issue remediation orders to Airservices for PFAS contamination under the Airports (Environment Protection) Regulations 1997. Brisbane Airport Corporation has also commenced legal proceedings in the Queensland Supreme Court against Airservices in relation to legacy PFAS contamination from Airservices’ firefighting activities at the airport.

Indemnity provided to the New South Wales Rural Fire Fighting Service in relation to the Jervis Bay Territory

The Department of Infrastructure, Transport, Regional Development and Communications (the Department) engages the New South Wales Rural Fire Service (NSW RFS) to provide fire management in the Jervis Bay Territory (JBT). To provide these services, the NSW RFS requires the Australian Government to provide an uncapped indemnity against any actions or claims resulting from the actions of the NSW RFS while providing fire management services in the JBT. The indemnity covers the same period of time for which NSW RFS is engaged to provide the fire management services. The likelihood of an event occurring that may result in a liability for the Australian Government is assessed as remote. The risk of a liability is mitigated through

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a range of risk management measures, including the Jervis Bay Territory Rural Fires Ordinance 2014, the establishment of a JBT Emergency Management Committee (EMC), a fire management plan prepared and implemented by the EMC, NSW RFS staff training and professional qualifications and the Department actively managing the Service Level Agreement with the NSW RFS.

Moorebank Intermodal Company Limited — Board Members’ Indemnity

The Australian Government has provided certain indemnities for the Directors and Officers of the Moorebank Intermodal Company Limited to protect them against civil claims relating to their employment and conduct. These indemnities were provided to Directors when the Board was first established, however not to subsequent Directors. The indemnities apply to the period of appointment as Directors or Officers of the company. Until the indemnity agreements are varied or brought to an end, they will remain as contingent and unquantifiable liabilities.

Moorebank Intermodal Project — Georges River rail crossing

The Australian Government has provided an indemnity to cover costs and liabilities that may be incurred by the State of New South Wales arising under the

Native Title Act 1993 (Cth) associated with the construction of a rail bridge over the Georges River to the Moorebank Intermodal Terminal. The likelihood of costs being incurred is considered remote and potential costs are unquantifiable.

Service Delivery Arrangement Indemnities — External Territories and Jervis Bay Territory

Since 1992, the Australian Government has been entering into Service Delivery Arrangements with the Western Australian (WA) Government for the provision of services to the Indian Ocean Territories of Christmas Island and the Cocos (Keeling) Islands. The Australian Government has provided certain indemnities for the WA Government, their respective officers, agents, contractors and employees against civil claims relating to their employment and conduct as officers.

From 1 July 2016, the New South Wales (NSW) Government has provided a range of services to the Norfolk Island community through a Heads of Agreement.

The Australian Capital Territory (ACT) provides a number of services to the Jervis Bay Territory under Memoranda of Understanding. The Australian Government has provided certain indemnities for the ACT Government authorities and officials in respect of the delivery of services to the Jervis Bay Territory.

The likelihood of an event occurring that may result in a liability for the Australian Government has been assessed as remote and the risks are currently mitigated through the training and professional qualifications of the staff of these agencies.

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Contingent liabilities — quantifiable

Australian Government contribution to the East West Link project

The Australian Government remains committed to the construction of the East West Link despite the decision of the Victorian Government not to proceed with the project.

To this end, the Australian Government will provide $4 billion to the first Victorian Government willing to build the East West Link and is therefore recording this commitment as a contingent liability in the Budget.

Australian Government contribution to the Perth Freight Link project

The Australian Government remains committed to the extension of the Roe Highway, despite the decision of the Western Australian (WA) Government not to proceed with the project.

To this end, the Australian Government will provide $1.2 billion to the first WA Government willing to construct the Roe 8 and 9 extensions and is therefore recording this commitment as a contingent liability in the Budget.

Prime Minister and Cabinet

Contingent liability — unquantifiable

Basil Dawson and Ors vs Commonwealth of Australia (Community Development Program Class Action)

Aspects of the Community Development Program are part of a class action that is before the Federal Court. Costs associated with this litigation (if any) and any potential related future litigation are not quantifiable until the matter is determined by the Court or otherwise resolved.

Northern Territory Stolen Generations Class Action

A class action against the Commonwealth has been lodged in the NSW Supreme Court seeking compensation for Stolen Generations survivors who were removed from their families in the Northern Territory prior to self-government, and family members living with them at the time who were affected by the removals. Costs associated with this litigation (if any) and any potential related future litigation are not quantifiable until the matter is determined by the Court or otherwise resolved.

Contingent liability — quantifiable

Indigenous Land and Sea Corporation — Debt Guarantee

The Indigenous Land and Sea Corporation (ILSC) provides a guarantee to a major bank that has provided a $120 million facility to its wholly-owned subsidiary, Voyages Indigenous Tourism Australia Pty Ltd. As at 30 June 2020, the estimated outstanding balance of the facility will total $102.5 million.

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Treasury

Fiscal Risk

Establishment of a Cyclone and related flooding reinsurance pool

The Government has announced its intention to provide a $10 billion annually reinstated Government guarantee to the Australian Reinsurance Pool Corporation (ARPC) in support of administering a reinsurance pool for cyclones and related flooding. The details of the intended guarantee will be subject to consultation and further Government consideration, but is expected to be in effect from 1 July 2022 and may be called upon in the event of a large cyclone and/or related flood, or a year with a high number of cyclones and related flooding, to ensure the ARPC can pay any liabilities.

The reinsurance pool will be designed to be cost-neutral to Government over time, based on the predicted cost and frequency of cyclone events. The estimated value and range of calls on the guarantee is unquantifiable at this stage of policy development. Further modelling on the potential costs of the guarantee will be undertaken before 1 July 2022.

Significant but remote contingencies

Asbestos Injuries Compensation Fund

In February 2016, the Commonwealth agreed to assume one-third of the default risk associated with a $320 million New South Wales (NSW) Government loan to the Asbestos Injuries Compensation Fund (AICF), contingent on all states and territories agreeing to assume the remaining default risk. States and territories agreed to assume the remaining default risk in the period following the publication of the 2016-17 Budget.

The AICF provides compensation to Australian asbestos disease related claims against former subsidiaries of the James Hardie Group, and is funded on an ongoing basis through contributions from the James Hardie Group. NSW provided a $320 million loan facility in 2010 to enable AICF to continue to pay compensation as lump sums, rather than on an instalment basis.

The Commonwealth ceased issuing loans from this facility from 9 December 2020.

Financial Claims Scheme

The Financial Claims Scheme provides depositors of authorised deposit-taking institutions (ADIs) and claimants of general insurers with timely access to their funds in the event of a financial institution failure.

Under the Banking Act 1959, the scheme provides a mechanism for making payments to depositors under the Australian Government’s guarantee of deposits in ADIs. Payments are capped at $250,000 per account holder per ADI. It is estimated that deposits eligible for coverage under the Financial Claims Scheme were $1.1 trillion at 1 December 2020,

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compared to an estimated $1.0 trillion at 30 June 2021. This largely reflects overall deposit growth in the financial system due to fiscal policies that were implemented to support the economy during COVID-19 and consumer caution resulting in an increase in the savings rate.

Under the Insurance Act 1973, the scheme provides a mechanism for making payments to eligible beneficiaries with a valid claim against a failed general insurer. It is not possible to estimate the amounts of any eventual payments that may be required in relation to general insurance claims.

In the very unlikely event of an ADI or general insurer failure, any payments made under the Financial Claims Scheme would be recovered through the liquidation of the failed institution. If there was a shortfall in the amount recovered through the liquidation of the failed institution, a levy could be applied to the relevant industry to recover the difference between the amount expended and the amount recovered in the liquidation.

The Australian Prudential Regulation Authority (APRA) is responsible for administration of the Financial Claims Scheme. Under the Financial Claims Scheme, any payments to account holders with eligible protected accounts or eligible claimants would be made from APRA’s Financial Claims Scheme Special Account. Under the legislation, upon activation, up to $20 billion per institution would be available to meet Financial Claims Scheme payments and up to $100 million for administration costs per institution.

Guarantee for the National Housing Finance and Investment Corporation

The Australian Government guarantees the due payment of money payable by the National Housing Finance and Investment Corporation (NHFIC) to anybody other than the Government.

The NHFIC Board must not allow NHFIC to enter into a transaction that would result in the total guaranteed liabilities of the NHFIC, and any outstanding amount which NHFIC has borrowed from the Government, to exceed $3 billion unless approved by the Government.

Guarantee of state and territory borrowing

The Australian Government announced on 25 March 2009 that a voluntary, temporary guarantee would be put in place over state and territory borrowing. The Guarantee of state and territory borrowing commenced on 24 July 2009 and closed on 31 December 2010. New South Wales and Queensland were the only states that chose to participate in the Guarantee.

Securities covered by the Guarantee will continue to be guaranteed until these securities either mature or are bought back and extinguished by the issuer.

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The expected liability under the Guarantee is remote and unquantifiable. Australian Government expenditure would arise under the Guarantee only in the unlikely event that a state failed to meet its obligations with respect to a commitment that was subject to the Guarantee and the Guarantee was called upon. In such a case, the Government would likely be able to recover any such expenditure through a claim on the relevant state at a future date. The impact on the Government’s Budget would depend upon the extent of the default and the state’s ability to meet the Government’s claim.

As at 31 March 2021, the face value of state and territory borrowings covered by the Guarantee was $1.2 billion, down from $1.3 billion at 31 October 2020.

Guarantees under the Commonwealth Bank Sale Act 1995

Under the terms of the Commonwealth Bank Sale Act 1995, the Australian Government has guaranteed various superannuation and other liabilities: $131.7 million is attributable to liabilities of the Commonwealth Bank of Australia as at 31 March 2021; and $4.7 billion is attributable to liabilities of the Commonwealth Bank Officers’ Superannuation Corporation as at 31 March 2021.

Reserve Bank of Australia — Guarantee

The Australian Government guarantees the liabilities of the Reserve Bank of Australia, measured as the Bank’s total liabilities excluding capital, reserves, and Australian Government deposits. The major component of the Bank’s liabilities is Australian banknotes on issue. As at 31 March 2021, banknotes on issue amount to $96.8 billion, and the total Guarantee is $319.0 billion.

Contingent liabilities — unquantifiable

Government Guarantees for Housing

The Australian Government has a number of programs to support individuals to enter the housing market sooner.

The First Home Loan Deposit Scheme (the Scheme) is designed to support eligible first home buyers to build or purchase a first home sooner by providing a guarantee to participating lenders for up to 15 percent of the property purchase price. The Scheme began on 1 January 2020.

The New Home Guarantee is designed to support eligible first homes buyers seeking to build a new home or purchase a newly built home by providing a guarantee to participating lenders for up to 15 percent of the property purchase price. A second tranche of 10,000 New Home Guarantees will be made available between 1 July 2021 and 30 June 2022.

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The Family Home Guarantee is designed to support single parents with dependants seeking to enter, or re-enter, the housing market. The Family Home Guarantee will commence on 1 July 2021, subject to the passage of legislation.

For the three programs listed above, the Australian Government guarantees the liabilities as they arise. Guaranteed liabilities arise where a lender’s loss is covered by the guarantee. The lender then makes a claim against the guarantee and the National Housing Finance and Investment Corporation (NHFIC) accepts the claim. Given liabilities under the Scheme are met by a standing appropriation, the NHFIC is not required to maintain capital and reserves to meet the liabilities associated with these programs.

Indemnities for specialised external advisers during the COVID-19 pandemic

The Government has provided indemnities for certain specialised external advisers engaged to provide advice on emerging markets issues related to COVID-19. Indemnities were provided to mitigate personal risk and provide coverage for costs related to any legal proceedings that may arise in relation to the provision of that advice.

The indemnities apply for the period of engagement as advisers and for claims that are notified within 12 years after cessation of the adviser’s engagement. Until the indemnity agreements are varied or expire, they will remain as contingent and unquantifiable liabilities.

International Monetary Fund — Poverty Reduction and Growth Trust

On 26 October 2020, the Australian Government entered into an agreement to make a line of credit available to the International Monetary Fund (IMF) under the Poverty Reduction and Growth Trust (PRGT) through to 31 December 2029. The PRGT provides concessional financial support to low-income countries to help them achieve, maintain, or restore a stable and sustainable macroeconomic position. PRGT funds are drawn upon by the IMF as needed and will be repaid in full with interest.

Through this agreement, the Government made available Special Drawing Rights (SDR, the IMF’s unit of account) 500 million (approximately A$932.0 million at 1 April 2021) to loan to the IMF under the PRGT. As at 31 March 2021, SDR 1,902,857 (approximately A$3.5 million) has been drawn down, leaving SDR 498,097,143 (approximately A$928.4 million) remaining available to the IMF under the PRGT.

Small and Medium Enterprise Guarantee Scheme

The Australian Government will guarantee 50 per cent of loans issued under the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme provided by eligible lenders to SMEs.

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The Australian Government will also guarantee 100 per cent of loans issued under the Show Starter Loan Scheme and provided by eligible lenders (up to $90 million of loans).

The Show Starter Loan Scheme is being administered alongside the Coronavirus SME Guarantee Scheme.

On 11 March 2021, the Australian Government announced a range of initiatives as part of a new $1.2 billion support package targeting the businesses, workers and regions still impacted by COVID-19. This includes an expansion and extension of the Coronavirus SME Guarantee Scheme. The SME Recovery Loan Scheme is designed to support the economic recovery, and to provide continued assistance, to firms previously on JobKeeper. On 27 March 2021, the Government extended this to SMEs that were negatively economically affected by the floods in eligible Local Government Areas in March 2021. The Government will work with lenders to ensure that eligible firms continue to have access to finance to maintain and grow their businesses.

Loans under the SME Recovery Loan Scheme will be available from 1 April 2021 until 31 December 2021. The SME Recovery Loan Scheme is being administered alongside the Coronavirus SME Guarantee Scheme and Show Starter Loan Scheme.

The Australian Government will guarantee 80 per cent of loans issued under the SME Recovery Loan Scheme provided by eligible lenders to SMEs.

Terrorism insurance — commercial cover

The Terrorism Insurance Act 2003 established a scheme for terrorism insurance covering damage to commercial property, including associated business interruption and public liability (extended in 2017 to mixed-use and high-value residential buildings). The Australian Reinsurance Pool Corporation (ARPC) uses reinsurance premiums paid by insurers to meet its administrative expenses, to maintain a pool of funds and to purchase reinsurance to help meet future claims. The Australian Government guarantees to pay any liabilities of the ARPC, but the responsible Minister (or delegate) must declare a reduced payout rate to insured entities if the Government’s liability would otherwise exceed $10 billion.

Contingent liabilities — quantifiable

Australian Taxation Office — tax disputes

At any point in time the Australian Taxation Office is involved in a range of dispute resolution processes, including litigation, relating to tax disputes.

Details of the outcome of dispute resolution processes are uncertain until a court ruling is made and/or an agreement is reached with the taxpayer. As a result, in most cases it is not possible to estimate with any reliability the likely financial impact of current

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disputes. The estimated aggregate value of tax in dispute as at 31 March 2021, for which a provision has not been made, is $6.1 billion.

Outcomes of dispute resolution processes are included in the Commissioner of Taxation’s Annual Report each year. This may include disputes resolved through objections, settlements and court and tribunal decisions. It may also include amounts owed by taxpayers that are subject to dispute but not finalised.

International financial institutions — uncalled capital subscriptions

The Australian Government has held an uncalled capital subscription in the International Bank for Reconstruction and Development (IBRD) since 1947.

In November 2020, Australia’s uncalled capital subscription increased by US$0.8 billion bringing the total to approximately US$4.4 billion (estimated value A$5.9 billion as at 31 March 2021).

The Australian Government has also held an uncalled capital subscription in the European Bank for Reconstruction and Development (EBRD) since 1991. Australia’s uncalled capital subscription to the EBRD totals around EUR237.5 million (estimated value A$393.9 million as at 31 March 2021).

The Australian Government has further held an uncalled capital subscription in the Asian Development Bank (ADB) since 1966. Australia’s uncalled capital subscription to the ADB totals around US$7.0 billion (estimated value A$9.3 billion as at 31 March 2021).

The Australian Government has further held an uncalled capital subscription in the Multilateral Investment Guarantee Agency of US$26.5 million (estimated value A$35.4 million as at 31 March 2021).

The Asian Infrastructure Investment Bank (AIIB) was established on 25 December 2015. The Australian Government has subscribed to shares in the AIIB, which includes an uncalled capital subscription. Australia’s uncalled capital subscription to the AIIB totals around US$3.0 billion (estimated value A$4.0 billion as at 31 March 2021).

None of these international financial institutions has ever drawn on Australia’s uncalled capital subscriptions.

International Monetary Fund

Australia has made a line of credit available to the International Monetary Fund (IMF) under its New Arrangements to Borrow (NAB) since 1998. This is a contingent loan to help ensure that the IMF has the resources available to maintain stability in the global economy. The value of Australia’s NAB credit arrangement now stands at around SDR4.4 billion (estimated value A$8.3 billion at 31 March 2021). On 8 October 2020, the Treasurer advised the IMF that Australia consented to the new NAB Decision and on 26

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January 2020, the IMF Executive Board approved amendments to the NAB decision, including increasing the credit arrangements of all participants and extending it from 1 January 2021 to 31 December 2025.

In addition, Australia has made available approximately SDR 2.0 billion (approximately A$3.7 billion at 31 March 2021) via a contingent bilateral loan to the IMF, known as a Bilateral Borrowing Agreement (BBA). This contingent bilateral loan is on terms consistent with other bilateral loans and note purchase agreements between the IMF and other contributing countries. The contingent bilateral loan will be drawn upon by the IMF only if needed to supplement the IMF’s quota and NAB resources and any drawings on loans would be repaid in full with interest. The BBA is made available to the IMF through 31 December 2023 with the possibility of a one-year extension.

Veterans’ Affairs

Fiscal Risk

Defence Service Homes Insurance Scheme

The Defence Service Homes Insurance Scheme (the Scheme) was established in 1919 under the Defence Service Homes Act 1918. The Scheme offers personal insurance products to eligible serving Australian Defence Force members, veterans and widow(er)s. It underwrites home building insurance and offers a range of personal insurance products (such as contents and motor vehicle insurance) underwritten by QBE Insurance (Australia) Limited.

The Scheme is funded by premiums collected from policy holders, commissions from QBE and returns on investments. Due to the nature of insurance, the Scheme’s financial performance can be volatile from year to year. Last year saw a significant increase in claims due to extreme weather events (including bushfires, hailstorms and floods).

The Scheme manages the volatility of the insurance cycle by holding an appropriate level of capital (i.e. reserves) consistent with the obligations placed on insurers through the relevant regulatory regime. The Scheme also has a comprehensive reinsurance program in place, reducing the exposure to loss by passing part of the risk of loss to a group of reinsurers. Nevertheless, there remains a risk that additional Government contributions could be required should these reserves be insufficient to cover the liabilities of the scheme.

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Government loans

Loans are recorded as financial assets and accordingly the amounts advanced and repaid do not normally affect the budget aggregates of fiscal balance and underlying cash balance. Loans that are concessional (lower than market interest rate) or are agreed to be written off, result in an impact on the fiscal balance.

The Government makes loans for policy purposes. All loans contain some element of credit risk that they will not be repaid in full, although in many cases this risk is small. Table 9.3 summarises Government loans estimated to exceed $200 million at 30 June 2021.

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Table 9.3: Summary of Australian Government loans exceeding $200 million

Entity

Loan amount (a) ($m) Borrower Interest rate Term Status(b)

Agriculture, Water and the Environment

Drought related and farm finance concessional loans — Agriculture

400 State Governments (that, through their delivery agencies, on-lend to eligible farm businesses)

Various Various Unchanged

Farm Investment Loans, Drought Loans, AgriStarter Loans, AgBiz Drought Loans and AgRebuild Loans

2,461 Eligible Australian farm businesses and related small businesses, via Regional Investment Corporation

Up to 1.92 per cent Up to 10 years Modified

Education, Skills and Employment

Higher Education Loan and VET Student Loans Program 52,966 Eligible tertiary education students

Consumer Price Index (CPI) growth 9.3 years* Unchanged

Trade Support Loans Program 812 Eligible Australian Apprentices CPI growth Unchanged

Foreign Affairs and Trade

Papua New Guinea Liquefied Natural Gas

199 Entities associated with the Papua New Guinea Liquefied Natural Gas project

Commercial-in- confidence Until 2026 Unchanged

Health

Zero Real Interest Loans 218 Residential aged care CPI growth Up to 22 years Modified

Industry, Science, Energy and Resources

Clean Energy Finance Corporation 2,457 Approved entities undertaking clean energy technology projects

4.4 per cent weighted average 5-15 years Unchanged

Northern Australia Infrastructure Facility Loans 272 Northern Australia jurisdictions (Western Australia,

Queensland or the Northern Territory) for on lending to project proponents

5 per cent Various Modified

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Table 9.3: Summary of Australian Government loans exceeding $200 million (continued)

Entity

Loan amount (a) ($m) Borrower Interest rate Term Status(b)

Infrastructure, Transport, Regional Development and Communications NBN Co Loan 13,908 NBN.Co Limited 3.96 per cent 30 June 2024 Modified

WestConnex stage 2 Concessional loan 1,975 WCX M5 Finco Pty Ltd 3.36 per cent November

2015 to July 2034

Unchanged

Prime Minister and Cabinet

Indigenous Home Ownership, Business Development and Assistance 1,025 Eligible Indigenous persons 2.5-6.9 per cent* Up to 30 years Modified

Voyages Indigenous Tourism Australia Pty Ltd

289 Voyages Indigenous Tourism Australia Pty Ltd 90 Day bank bill swap reference

rate + 5 per cent

9 years, 11 months

Modified

Social Services

Student Start up Loan 682 Eligible Youth Allowance

(student), Austudy and ABSTUDY Living Allowance recipients

CPI growth Various Unchanged

Student Financial Supplement Scheme 373 Eligible recipients of Youth Allowance (student), Austudy and ABSTUDY recipients

CPI growth Various Unchanged

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Table 9.3: Summary of Australian Government loans exceeding $200 million (continued)

Entity

Loan amount (a) ($m) Borrower Interest rate Term Status(b)

Treasury Loan Agreement between the Government of Australia and the Government of Indonesia

1,364 Government of Indonesia Commonwealth cost of Borrowing plus 0.5 per cent

15 years Modified

Commonwealth State financing arrangements — Housing and Specific Purpose Capital

1,414 State and Northern Territory Governments 4.0 per cent — 6.0 per cent

Up to 30 June 2042

Unchanged

International Monetary Fund — New Arrangements to Borrow

123 International Monetary Fund 0.1 per cent 10 years Modified

Affordable Housing Bond Aggregator 115 National Housing Finance and

Investment Corporation Commonwealth cost of borrowing Various Unchanged

Loan to the Government of Papua New Guinea 558 Government of Papua New Guinea

Commonwealth cost of Borrowing plus 0.5 per cent

15 years Modified

* Average. (a) Loan amount is the estimated loan program amounts outstanding as at 30 June 2021 in $ million. (b) Status of loan items are considered ‘unchanged’ unless there are modifications to respective interest rates and/or loan term.

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Loan Items

Agriculture, Water and the Environment

Drought related and farm finance concessional loans — Agriculture

As at 30 June 2020, the fair value of farm business, drought and dairy farm related loans is estimated to total $586.6 million. This includes:

Drought Concessional Loans Scheme: This scheme provided loans to drought-affected farm businesses for debt restructuring, operating expenses and drought recovery and preparedness activities. The scheme commenced in June 2014 as a loans scheme available for two years and operated in Queensland, Victoria, New South Wales, South Australia, Western Australia, Tasmania and the Northern Territory. The Government extended the application period until 31 October 2016 to cover the period until the new 10-year Farm Business Concessional Loans Scheme was able to commence on 1 November 2016. The Government also extended the Western Australian application period for the Drought Concessional Loans Scheme until 30 June 2017.

As at 1 February 2021, the interest rate was 1.22 per cent, reviewed on a six-monthly basis and revised in accordance with material changes in the five-year Commonwealth bond rate. Loans have a maximum term of five years, with an extenuating circumstances clause in some jurisdictions, which allows a maximum two-year extension to the loan at commercial rates.

Drought Recovery and Dairy Recovery Concessional Loans Scheme(s): The drought recovery component of this scheme provided loans to farm businesses affected by unprecedented drought or, where applicable, Queensland farm businesses directly impacted by the combined effects of drought and the mid-2011 disruption to live cattle exports to Indonesia. The loans funded planting and restocking activities and associated expenses, when seasonal conditions allowed. The loans were available from January 2015, and in 2014-15, operated in Queensland and New South Wales. In 2015-16, drought recovery concessional loans were available in Queensland, New South Wales, South Australia and Tasmania.

The dairy recovery component of this scheme provided concessional loans to dairy farm businesses affected by the 2016 reduction in farm gate milk prices by Murray Goulburn, Fonterra and National Dairy Products. Loans were available for debt restructuring, providing new debt for operating expenses or productivity enhancement activities, or a combination of these purposes. Dairy recovery concessional loans became available in Victoria, New South Wales, South Australia and Tasmania from June 2016. Applications closed on 31 October 2016. A dairy recovery concessional loan product was available under the Farm Business Concessional Loans Scheme until 30 June 2018.

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As at 1 February 2021, the interest rate was 0.89 per cent, reviewed on a six-monthly basis and revised in accordance with changes in the 10-year Australian Government bond rate. Loans have a maximum term of 10 years with interest-only payments required for the first five years. Principal and interest repayments will be made in the remaining five years of the loan term.

Farm Business Concessional Loans Scheme: This scheme provided three types of concessional loans ⎯ drought assistance, dairy recovery and business improvement. This scheme was designed to cover a farmer’s short-term needs when income was tight and to supplement, rather than replace, commercial finance. Loans under the scheme were first available in November 2016. Applications for loans under the scheme closed on 30 June 2018.

Drought assistance concessional loans were available in Queensland, New South Wales, Victoria, South Australia, Tasmania and the Northern Territory. Loans were available for debt restructuring, operating expenses, drought preparedness activities or drought-recovery activities or a combination of these purposes.

Business improvement concessional loans were available in Queensland, New South Wales, Victoria, South Australia, Tasmania and the Northern Territory. Loans were available for eligible Farm Household Allowance (FHA) recipients who were recovering from financial hardship and had exhausted, or would exhaust their FHA 1,095-day income support entitlement by 30 June 2018. These loans were for debt restructuring only.

Dairy recovery concessional loans were available in New South Wales, Victoria, South Australia and Tasmania to eligible suppliers of Murray Goulburn, Fonterra and National Dairy Products. Loans were available for debt restructuring, providing new debt for operating expenses, productivity enhancement activities or a combination of these purposes.

As at 1 February 2021, the interest rate was 1.29 per cent, reviewed on a six-monthly basis and revised in accordance with changes in the 10-year Australian Government bond rate. Loans have a maximum term of 10 years.

Farm Finance Concessional Loans Scheme: This scheme provided concessional loans to eligible farm businesses experiencing financial difficulties that were considered commercially viable in the long term, and were for productivity enhancements and debt restructuring. Applications for Farm Finance Concessional Loans closed on 30 June 2015.

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As at 1 February 2021, the interest rate was 1.72 per cent, reviewed on a six-monthly basis and revised in accordance with material changes in the five-year Commonwealth bond rate. Loans have a maximum term of five years, with an extenuating circumstances clause in some jurisdictions, which allows a maximum two-year extension to the loan, on commercial terms.

Farm Investment Loans, Drought Loans, AgriStarter Loans, AgBiz Drought Loans and AgRebuild Loans

The Regional Investment Corporation commenced operations on 1 July 2018.

There are three loan products currently available to farm businesses ⎯ Farm Investment Loans, Drought Loans, and AgriStarter Loans (launched on 1 January 2021). In addition, AgBiz Drought Loans are also available for small businesses. AgRebuild Loans (North Queensland flood) were available to 30 June 2020.

All loan products provide concessional loans to eligible businesses that are experiencing financial difficulties and are considered financially viable in the long term (additional criteria apply for each product and terms and conditions may vary). All products are for farm businesses, with the exception of AgBiz Drought Loans which are for small businesses that provide primary production related goods and services for drought affected farm businesses.

As at 1 February 2021, the variable interest rate was 1.77 per cent. Interest rates are revised on a six monthly basis in line with any material changes to the Australian Government 10 year bond rate, where a material change is taken to be a movement of more than 10 basis points (0.1 per cent).

Interest is not payable during the first two years of the AgRebuild Loan, or on the Drought Loans and AgBiz Drought Loans for loan applications received before 30 September 2020.

Loans have a maximum term of 10 years.

Education, Skills and Employment

Higher Education Loan and VET Student Loans Program

The Higher Education Loan Program (HELP) and the VET Student Loans (VSL) program are income-contingent loan programs that assist eligible tertiary education students with the cost of their fees. As at 30 June 2021 the fair value of debt outstanding is estimated to be $53 billion. The fair value takes into account the concessionality of HELP loans and makes an allowance for debt not expected to be repaid.

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Debts outstanding for more than 11 months are indexed annually using the Consumer Price Index. The Australian Taxation Office collects repayment of these debts through the tax system. Repayment of debts commence when an individual debtor’s income reaches the repayment threshold.

There were 2,851,725 HELP debtors as at 30 June 2020. The repayment term of a HELP debt can only be determined for people who have fully repaid their debt. As at the end of June 2020, the average time taken to repay HELP debts was 9.3 years.

Trade Support Loans Program

The Trade Support Loans Program is an income-contingent, concessional loan program that assists eligible Australian Apprentices by providing financial support of up to $21,542 to assist with the costs of living, learning and undertaking an apprenticeship, and helping apprentices to focus on completing a trade qualification.

Eligible Australian Apprentices can access up to $718.07 per month in the first year of their apprenticeship, $538.56 per month in the second year, $359.04 per month in the third year and $179.52 per month in the fourth year.

The loan amounts provided are higher in the early years of training to compensate for lower wages. The lifetime limit of $21,542 was indexed on 1 July 2020 using the Consumer Price Index and will continue to be indexed annually on 1 July to maintain its real value.

As an incentive to encourage completion of training, apprentices who successfully complete their apprenticeships are eligible for a 20 per cent discount on their loan. The loans become repayable at the same thresholds as the Higher Education Loan Program, which is $46,620 for the 2020-21 income year. This is a demand-driven program.

Foreign Affairs and Trade

Papua New Guinea Liquefied Natural Gas

The loan in support of the Papua New Guinea Liquefied Natural Gas (PNG LNG) project involves the development, construction, operation and maintenance of a LNG liquefaction plant, gas production and processing facilities, onshore and offshore pipelines, associated ancillary facilities and infrastructure. As at 30 June 2021, the fair value of the loan amount outstanding is estimated to total $198.8 million.

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Health

Zero Real Interest Loans

The Zero Real Interest Loans program provided loans to assist aged care providers to build or extend residential aged care services in areas of high need. Loans provided under the program attract an interest rate equivalent to the change in the All Groups Consumer Price Index (updated quarterly). Four funding rounds were completed, with the final round of offers finalised in 2013. No further loans will be allocated under the program. The total amount owing to the Commonwealth as at 30 June 2021 is estimated to be $217.7 million.

Industry, Science, Energy and Resources

Clean Energy Finance Corporation

The Clean Energy Finance Corporation (CEFC) has developed a portfolio of loans and investments across the spectrum of clean energy technologies, as required by the Clean Energy Finance Corporation Act 2012. This portfolio has an acceptable but not excessive level of risk relative to the sector, as required under the Clean Energy Finance Corporation Investment Mandate Direction 2020.

The CEFC’s loan portfolio consists of predominantly senior-ranking, secured loans, and secured project finance facilities, typically secured against energy-generating assets such as wind or solar farms or biogas facilities or energy efficiency assets. The CEFC has predominantly made loans as a co-financier either jointly or in consortiums with private sector financial institutions. Interest rates vary with a current average expected return of approximately 4.4 per cent. Loans have various maturity dates, typically in the range of 5 to 15 years. As at 30 June 2021, loans contracted and outstanding are expected to total $2.5 billion.

Northern Australia Infrastructure Facility Loans

The Northern Australian Infrastructure Facility (NAIF) is a lending facility established by the Commonwealth Government under the Northern Australia Infrastructure Facility Act 2016, and will operate until 30 June 2026 (pending passage of legislation by Parliament extending operations beyond 30 June 2021). The primary purpose of the NAIF is to provide loans to infrastructure projects and businesses across northern Australia to achieve economic and population growth, and enhance private sector investment in the region.

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To be eligible for a loan from the NAIF, including up to 100 per cent of the project’s debt, project proponents must meet the mandatory criteria outlined in the NAIF Investment Mandate of 2 May 2018. The Commonwealth Government announced changes to the NAIF on 30 September 2020 to:

• expand the eligibility for NAIF financing to include non-construction activities associated with the development of economic infrastructure

• enhance the potential to deliver significant public benefit to northern Australia by removing the prohibition against the Commonwealth assuming the majority risk in any project. The new requirement is that the financial risk be acceptable but not excessive.

Further changes were announced in the 2020-21 MYEFO context to simplify the NAIF’s use of debt tools other than loans, such as guarantees and the purchase of bonds, and to permit the NAIF to make equity investments.

The Commonwealth Government has introduced legislation to give effect to these changes.

Infrastructure, Transport, Regional Development and Communications

NBN Co Loan

The Australian Government has provided a loan of $19.5 billion to NBN Co, on commercial terms, which was fully drawn in July 2020. The loan was established in December 2016 and must be repaid in full by 30 June 2024. $3.0 billion was repaid in December 2020 and a further $2.6 billion was repaid in May 2021, with an outstanding balance of $13.9 billion expected as at 30 June 2021. The loan has a fixed interest rate of 3.96 per cent per annum, with interest payable monthly over the life of the facility.

WestConnex Stage 2 Concessional Loan

The WestConnex concessional loan is a $2 billion loan facility provided to deliver WestConnex Stage 2. The concessional loan enabled Stage 2 to be brought forward, allowing Stages 1 and 2 to proceed in parallel. This resulted in significant time savings, compared to the original approach where these stages progressed in sequence.

WestConnex Stage 2 includes the King Georges Road Interchange Upgrade (completed in 2016) and construction of new twin tunnels from Kingsgrove to a new St Peters interchange, providing motorway connections to Alexandria and Mascot, the future Sydney Gateway and the M4-M5 Link.

The concessional loan agreement requires that the loan be repaid between September 2029 and July 2034.

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Prime Minister and Cabinet

Indigenous Home Ownership, Business Development and Assistance

Indigenous Business Australia (IBA) delivers flexible loans with concessional interest rates to improve Indigenous home ownership across Australia, including in remote Indigenous communities. IBA also provides concessional interest rate business loans and business support to increase Indigenous ownership of small to medium sized enterprises, and support their sustainability and growth. As at 30 June 2021, the fair value of outstanding loans for Indigenous Home Ownership and Business Development and Assistance will total $1.0 billion.

Voyages Indigenous Tourism Australia Pty Ltd

The Indigenous Land and Sea Corporation (ILSC) purchased Ayers Rock Resort (ARR) for $291.2 million in May 2011 and immediately on-sold it to its wholly owned subsidiary, Voyages Indigenous Tourism Australia Pty Ltd (Voyages), creating an intercompany loan that is partly funded by borrowings. The interest rate is set at the 90-day bank bill swap reference rate plus 5 per cent, and is reset six-monthly. As at 30 June 2021, the estimated outstanding loan balance will total $289 million.

Social Services

Student Start-up Loan

The Student Start-up Loan (SSL) is a voluntary income-contingent loan for student payment (Youth Allowance (student), Austudy and ABSTUDY Living Allowance) recipients undertaking higher education. Introduced on 1 January 2016, the SSL is paid a maximum of twice a year and each SSL payment is valued at $1,094 (in 2021). The SSL is repayable under similar arrangements to Higher Education Loan Program (HELP) debts. Students are required to start repaying their SSL once they earn over $46,620 for 2020-21 and only after they have repaid their HELP debt. When it commenced, the SSL was initially for new student payment recipients undertaking higher education. From 1 July 2017, with the closure of the Student Start-up Scholarship, the SSL has become available to all eligible student payment recipients undertaking higher education. As at 30 June 2021, the fair value of the Student Start-up Loan is estimated to be $672.8 million.

Student Financial Supplement Scheme

The Student Financial Supplement Scheme (SFSS) commenced in January 1993 and closed on 31 December 2003. It was a voluntary income-contingent loan scheme for tertiary students (primarily Austudy and ABSTUDY) to help cover their living expenses while studying. Under the scheme, eligible students were able to trade one dollar of income support entitlement for two dollars in loans. Debtors are required to start repaying their SFSS loan once they earn $46,620 for 2020-21. As at 30 June 2021, the fair value of SFSS loans outstanding is estimated to total $372.8 million.

Budget Paper No. 1 |

Statement 9: Statement of Risks | Page 303

Treasury

Loan Agreement between the Government of Australia and the Government of Indonesia

On 12 November 2020, Australia entered into a A$1.5 billion loan agreement with Indonesia. This agreement is part of a multilateral action to support Indonesia led by the Asian Development Bank (ADB) and includes the Asian Infrastructure Investment Bank, the Japan International Cooperation Agency (JICA) and the German state-owned development bank (KfW).

The funds will be used to support Indonesia’s COVID-19 response, including social protection initiatives and health system development.

Commonwealth-State financing arrangements — Housing and Specific Purpose Capital

From 1945 to 1989, the Australian Government made concessional advances to the state and Northern Territory Governments under Commonwealth-State financing arrangements for housing and for specific purpose capital. The advances were concessional fixed-rate loans to be repaid over 53 years, with the last loans maturing in 2042. Annual payments, comprising both interest and principal repayment, are made to the Commonwealth Government. As at 30 June 2021, the amortised value of the advances was $1.414 billion (and principal value of $1.554 billion).

The Australian Office of Financial Management manages the receipt of interest and principal repayments from the state and Northern Territory Governments to the Commonwealth Government.

International Monetary Fund — New Arrangements to Borrow

Australia has made a line of credit available to the International Monetary Fund (IMF) under its New Arrangements to Borrow (NAB) since 1998. On 26 January 2020, the IMF Executive Board agreed to a new NAB period from 1 January 2021 to 31 December 2025. The NAB helps ensure that the IMF has the resources available to maintain stability and support recovery in the global economy. NAB funds are drawn upon by the IMF as needed to supplement the IMF’s usual quota resources and will be repaid in full with interest. It is expected that the fair value of loans outstanding to Australia was SDR 63.476 million (approximately A$122.5 million as at 30 June 2021).

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Affordable Housing Bond Aggregator

The Australian Government, through the Treasury, has made available a line of credit for the National Housing Finance and Investment Corporation’s (NHFIC) Affordable Housing Bond Aggregator (AHBA). The provision of funds will be in accordance with appropriations under the National Housing Finance and Investment Corporation Act 2018. The line of credit is ongoing and funds borrowed will be repaid with interest. The Treasury manages the receipt of interest and principal repayments from the NHFIC.

Loan to the Government of Papua New Guinea

On 23 November 2020, the Government entered into a loan agreement for US$400 million (approximately A$558 million) in 2020-21 to the

Government of Papua New Guinea. The loan refinances the US$300 million short-term loan made in 2019-20 and a further A$140 million loan for budget support, including PNG’s response to COVID-19. The previous short-term loan was made to support budget sustainability, assist in the delivery of core government services, support longer term economic reforms and increase the availability of foreign exchange in the country. The Australian Government has agreed to enter negotiations with PNG to suspend principal and interest repayments for the loan consistent with the Debt Service Suspension Initiative of G20 nations to support low-income nations during the COVID-19 pandemic.

Statement 10: Australian Government Budget Financial Statements | Page 305

Statement 10: Australian Government Budget Financial Statements

Consistent with the Charter of Budget Honesty Act 1998 (the Charter), the Government has produced a single set of financial statements for the Australian Government general government sector (GGS), the public non-financial corporations (PNFC) sector, the total non-financial public sector (NFPS) and the public financial corporations (PFC) sector. The financial statements comply with both the Australian Bureau of Statistics’ (ABS) accrual Government Finance Statistics (GFS) and Australian Accounting Standards (AAS), with departures disclosed. These statements are:

• an operating statement, including other economic flows, which shows net operating balance and net lending/borrowing (fiscal balance) • a balance sheet, which also shows net worth, net financial worth, net financial liabilities and net debt • a cash flow statement, which includes the calculation of the underlying cash

balance.

In addition to these general purpose statements, notes to the financial statements are required. These notes include a summary of accounting policies, disaggregated information and other disclosures required by AAS.

The statements reflect the Government’s policy that the ABS GFS remains the basis of budget accounting policy, except where AAS is applied because it provides a better conceptual basis for presenting information of relevance to users of public sector financial reports.

The Australian, state and territory governments have an agreed framework — the Uniform Presentation Framework (UPF) — for the presentation of government financial information on a basis broadly consistent with the Australian Accounting Standard AASB 1049. The financial statements are consistent with the requirements of the UPF.

Statement 10: Australian Government Budget Financial Statements | Page 307

Contents

Statement 10: Australian Government Budget Financial Statements ................................................................................................ 309

Notes to the general government sector financial statements ...................................... 324

Appendix A: Financial reporting standards and budget concepts ......... 339 AASB 1049 Conceptual framework............................................................................. 339

Appendix B: Assets and Liabilities ........................................................... 347

The Australian Government’s major assets and liabilities .......................................... 347

Statement 10: Australian Government Budget Financial Statements | Page 309

Statement 10: Australian Government Budget Financial Statements Table 10.1: Australian Government general government sector operating statement Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

Note $m $m $m $m $m

Revenue

Taxation revenue 3 465,771 456,972 466,100 504,313 536,676

Sales of goods and services 4 15,947 17,175 17,704 18,772 19,864

Interest income 5 2,901 3,621 3,403 3,727 4,094

Dividend income 5 8,038 7,265 6,789 7,138 7,263

Other 6 12,231 11,588 11,148 10,537 10,061

Total revenue 504,888 496,621 505,145 544,487 577,959

Expenses

Gross operating expenses

Wages and salaries(a) 7 21,779 22,440 22,082 21,920 22,494

Superannuation 7 12,387 6,973 7,074 7,187 7,419

Depreciation and amortisation 8 11,851 12,154 12,741 13,624 14,264

Supply of goods and services 9 144,601 161,315 156,814 164,735 168,722

Other operating expenses(a) 7 8,405 8,891 9,294 8,184 8,413

Total gross operating expenses 199,021 211,772 208,005 215,649 221,312

Superannuation interest expense 7 7,004 10,018 10,775 11,372 12,191

Interest expenses(b) 10 19,812 19,519 20,137 21,889 22,969

Current transfers

Current grants 11 167,111 170,580 175,249 180,694 186,080

Subsidy expenses 86,892 17,364 15,598 15,293 16,107

Personal benefits 12 161,889 140,253 143,027 149,462 158,398

Total current transfers 415,892 328,198 333,875 345,449 360,585

Capital transfers 11

Mutually agreed write-downs(b) 2,954 2,746 2,913 3,159 3,331

Other capital grants 14,755 17,080 19,673 17,147 13,307

Total capital transfers 17,709 19,826 22,586 20,306 16,637

Total expenses 659,437 589,334 595,378 614,665 633,694

Net operating balance -154,549 -92,713 -90,233 -70,178 -55,736

Other economic flows —

included in operating result

Net write-downs of assets -4,003 -6,351 -6,711 -6,860 -7,156

Assets recognised for the first time 195 200 204 209 214

Actuarial revaluations 126 124 86 76 64

Net foreign exchange gains -479 -352 0 22 134

Net swap interest received 1,148 0 0 0 0

Market valuation of debt 37,494 260 -1,051 -1,284 -1,361

Other gains/(losses) 15,502 8,030 8,514 8,778 9,420

Total other economic flows —

included in operating result 49,984 1,910 1,043 943 1,315

Operating result(c) -104,565 -90,804 -89,189 -69,236 -54,421

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Table 10.1: Australian Government general government sector operating statement (continued) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

Note $m $m $m $m $m

Non-owner movements in equity

Revaluation of equity investments -10,149 -230 8 0 0

Actuarial revaluations -1,242 -375 -138 -151 -212

Other economic revaluations -2,614 -88 -47 -40 -28

Total other economic flows -

included in equity -14,005 -694 -177 -191 -239

Comprehensive result —

Total change in net worth -118,570 -91,497 -89,367 -69,426 -54,660

Net operating balance -154,549 -92,713 -90,233 -70,178 -55,736

Net acquisition of non-financial assets

Purchases of non-financial assets 18,318 22,325 23,202 23,402 22,890

less Sales of non-financial assets 228 281 172 207 212

less Depreciation 11,851 12,154 12,741 13,624 14,264

plus Change in inventories 2,381 440 649 564 747

plus Other movements in non-financial assets 0 0 0 0 0

Total net acquisition of

non-financial assets 8,620 10,330 10,939 10,135 9,161

Fiscal balance

(Net lending/borrowing)(d) -163,169 -103,043 -101,171 -80,313 -64,897

(a) Consistent with the ABS GFS classification, other employee related expenses are classified separately from wages and salaries under other operating expenses. Total employee expenses equal wages and salaries plus other operating expenses.

(b) From the 2020-21 Budget, the value of Debt Not Expected to be Repaid (DNER) on initial recognition of income contingent concessional loans was reported as an expense. The expense is now reported as a mutually agreed write-down, which is a form of capital transfer. It was previously recorded in other financing costs.

(c) Operating result under AAS. (d) The term fiscal balance is not used by the ABS.

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Statement 10: Australian Government Budget Financial Statements | Page 311

Table 10.2: Australian Government general government sector balance sheet Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

Note $m $m $m $m $m

Assets

Financial assets

Cash and deposits(a) 46,693 61,795 43,691 42,473 40,883

Advances paid 13 82,235 85,655 88,321 76,384 77,706

Investments, loans and placements(a) 14 181,717 188,218 195,897 203,976 209,981 Other receivables 13 67,065 73,678 75,835 79,163 81,858

Equity investments

Investments in other public sector

entities 55,821 58,649 62,992 67,462 70,991

Equity accounted investments 3,528 3,892 4,243 4,553 4,952

Investments — shares 72,829 79,311 85,130 91,497 96,328

Total financial assets 509,888 551,198 556,108 565,509 582,700

Non-financial assets 15

Land 11,817 11,871 11,941 11,921 11,971

Buildings 43,970 45,056 47,315 49,264 50,374

Plant, equipment and infrastructure 93,468 100,662 107,314 114,252 121,067

Inventories 11,710 11,744 11,980 12,105 12,403

Intangibles 9,821 10,796 11,343 11,581 11,640

Investment properties 210 217 217 217 217

Biological assets 28 16 16 16 16

Heritage and cultural assets 11,979 11,986 11,995 11,986 11,977

Assets held for sale 250 248 248 248 248

Other non-financial assets 37 37 37 37 37

Total non-financial assets 183,290 192,634 202,407 211,630 219,952

Total assets 693,178 743,832 758,515 777,139 802,652

Liabilities

Interest bearing liabilities

Deposits held 484 484 484 484 484

Government securities 891,811 1,028,091 1,126,277 1,207,245 1,274,052

Loans 16 16,345 16,125 16,091 16,073 16,101

Lease liabilities 19,527 19,991 20,071 19,480 18,494

Total interest bearing liabilities 928,166 1,064,691 1,162,923 1,243,281 1,309,131

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Table 10.2: Australian Government general government sector balance sheet (continued) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

Note $m $m $m $m $m

Provisions and payables

Superannuation liability 17 243,455 247,892 252,795 257,899 269,936

Other employee liabilities 17 33,124 33,839 34,588 35,417 36,255

Suppliers payables 18 8,507 9,226 9,779 9,882 10,238

Personal benefits payables 18 3,137 2,998 2,964 3,683 3,842

Subsidies payables 18 1,090 1,482 1,524 1,573 1,595

Grants payables 18 4,332 4,026 3,767 3,991 4,040

Other payables 18 3,302 3,136 3,055 2,925 2,804

Provisions 18 54,560 54,534 54,478 55,274 56,256

Total provisions and payables 351,507 357,133 362,951 370,644 384,966

Total liabilities 1,279,673 1,421,824 1,525,874 1,613,925 1,694,097

Net worth(b) -586,495 -677,992 -767,359 -836,786 -891,445

Net financial worth(c) -769,785 -870,626 -969,767 -1,048,416 -1,111,397

Net financial liabilities(d) 825,606 929,275 1,032,758 1,115,878 1,182,388

Net debt(e) 617,521 729,023 835,015 920,448 980,561

(a) Australian Office of Financial Management has moved from primarily using term deposits to a cash management account for investing cash for short-term liquidity management. This has resulted in a decrease in investments, loans and placements and an increase in cash and deposits.

(b) Net worth equals total assets minus total liabilities. (c) Net financial worth equals total financial assets minus total liabilities. (d) Net financial liabilities equals total liabilities less financial assets other than investments in other public sector entities.

(e) Net debt is the sum of interest bearing liabilities less the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements).

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Statement 10: Australian Government Budget Financial Statements | Page 313

Table 10.3: Australian Government general government sector cash flow statement(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Cash receipts from operating activities

Taxes received 459,470 445,599 455,328 493,106 525,353

Receipts from sales of goods and services 16,381 17,364 17,848 18,908 19,996

Interest receipts 2,995 3,063 3,080 3,363 3,721

Dividends and income tax equivalents 8,493 5,829 7,451 7,077 7,460

Other receipts 12,259 9,916 10,120 10,195 15,226

Total operating receipts 499,596 481,771 493,827 532,648 571,757

Cash payments for operating activities

Payments to employees(b) -32,100 -35,292 -35,065 -35,449 -35,112

Payments for goods and services -140,017 -159,044 -154,782 -163,850 -168,195

Grants and subsidies paid -281,234 -206,165 -210,712 -212,611 -215,419

Interest paid -17,121 -17,789 -18,002 -20,060 -20,834

Personal benefit payments -163,952 -140,966 -143,776 -149,494 -158,228

Other payments(b) -7,873 -8,219 -8,590 -7,396 -7,626

Total operating payments -642,297 -567,475 -570,928 -588,860 -605,414

Net cash flows from operating activities -142,701 -85,704 -77,101 -56,212 -33,657

Cash flows from investments in

non-financial assets

Sales of non-financial assets 235 282 173 207 213

Purchases of non-financial assets -16,056 -18,786 -19,901 -21,042 -21,067

Net cash flows from investments in

non-financial assets -15,821 -18,504 -19,728 -20,836 -20,854

Net cash flows from investments in

financial assets for policy purposes -7,286 -10,428 -10,140 4,096 -8,182

Net cash flows from investments in

financial assets for liquidity purposes 60,898 -3,513 -4,185 -4,448 -320

Cash receipts from financing activities

Borrowing 345,507 710,589 942,139 790,717 605,094

Other financing 1,142 6 6 6 11

Total cash receipts from financing

activities 346,649 710,595 942,145 790,723 605,104

Cash payments for financing activities

Borrowing -197,595 -570,386 -841,299 -708,341 -536,277

Other financing -6,904 -6,958 -7,796 -6,200 -7,405

Total cash payments for financing

activities -204,499 -577,344 -849,095 -714,541 -543,682

Net cash flows from financing activities 142,150 133,252 93,050 76,182 61,422 Net increase/(decrease) in cash held 37,240 15,102 -18,104 -1,217 -1,590

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Table 10.3: Australian Government general government sector cash flow statement (continued)(a) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

GFS cash surplus(+)/deficit(-)(c) -158,522 -104,209 -96,829 -77,048 -54,511

plus Net cash flows from financing

activities for leases(d) -2,430 -2,411 -2,438 -2,466 -2,455

Equals underlying cash balance(e) -160,952 -106,619 -99,266 -79,514 -56,966 plus Net cash flows from investments in

financial assets for policy purposes -7,286 -10,428 -10,140 4,096 -8,182

Equals headline cash balance -168,238 -117,047 -109,407 -75,417 -65,148

(a) A positive number denotes a cash inflow; a negative number denotes a cash outflow. (b) Consistent with the ABS GFS classification, other employee related payments are classified separately from wages and salaries under other payments. (c) GFS cash surplus/deficit equals net cash flows from operating activities and investments in

non-financial assets. (d) Principal payments on lease liabilities, which are financing cash payments, are deducted in the calculation of the underlying cash balance to maintain consistency of measure following the implementation of

AASB 16. (e) The term underlying cash balance is not used by the ABS.

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Statement 10: Australian Government Budget Financial Statements | Page 315

Table 10.4: Australian Government public non-financial corporations sector operating statement Estimates

2020-21 2021-22

$m $m

Revenue

Grants and subsidies 874 269

Sales of goods and services 17,075 18,175

Interest income 21 8

Other 53 79

Total revenue 18,024 18,532

Expenses

Gross operating expenses

Wages and salaries(a) 4,603 4,650

Superannuation 506 510

Depreciation and amortisation 4,761 4,873

Supply of goods and services 9,304 8,372

Other operating expenses(a) 825 545

Total gross operating expenses 19,999 18,949

Interest expenses 1,788 1,740

Other property expenses 241 281

Current transfers

Tax expenses 134 0

Total current transfers 134 0

Total expenses 22,162 20,969

Net operating balance -4,139 -2,438

Other economic flows -398 -1,305

Comprehensive result — Total change in net worth

excluding contribution from owners -4,536 -3,743

Net acquisition of non-financial assets

Purchases of non-financial assets 7,101 8,423

less Sales of non-financial assets 1 0

less Depreciation 4,761 4,873

plus Change in inventories 27 -2

plus Other movements in non-financial assets 0 0

Total net acquisition of non-financial assets 2,366 3,548

Fiscal balance (Net lending/borrowing)(b) -6,505 -5,986

(a) Consistent with the ABS GFS classification, other employee related expenses are classified separately from wages and salaries under other operating expenses. Total employee expenses equal wages and salaries plus other operating expenses.

(b) The term fiscal balance is not used by the ABS.

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Page 316 | Statement 10: Australian Government Budget Financial Statements

Table 10.5: Australian Government public non-financial corporations sector balance sheet Estimates

2020-21 2021-22

$m $m

Assets

Financial assets

Cash and deposits 1,690 1,743

Investments, loans and placements 596 220

Other receivables 3,166 3,198

Equity investments 195 202

Total financial assets 5,646 5,364

Non-financial assets

Land and other fixed assets 57,614 60,053

Other non-financial assets(a) 4,091 3,900

Total non-financial assets 61,705 63,952

Total assets 67,351 69,316

Liabilities

Interest bearing liabilities

Deposits held 13 13

Advances received and loans 28,684 31,907

Lease liabilities 12,625 12,409

Total interest bearing liabilities 41,322 44,328

Provisions and payables

Superannuation liability 19 19

Other employee liabilities 2,203 2,056

Other payables 5,460 5,634

Other provisions(a) 679 598

Total provisions and payables 8,360 8,307

Total liabilities 49,682 52,635

Shares and other contributed capital 17,669 16,681

Net worth(b) 17,669 16,681

Net financial worth(c) -44,035 -47,272

Net debt(d) 39,036 42,365

(a) Excludes the impact of commercial taxation adjustments. (b) Under AASB 1049, net worth equals total assets minus total liabilities. Under the ABS GFS, net worth equals total assets minus total liabilities minus shares and other contributed capital. The AASB 1049 method is used in this table.

(c) Under AASB 1049, net financial worth equals total financial assets minus total liabilities. Under the ABS GFS, net financial worth equals total financial assets minus total liabilities minus shares and other contributed capital. The AASB 1049 method is used in this table.

(d) Net debt is the sum of interest bearing liabilities less the sum of selected financial assets (cash and deposits and investments, loans and placements).

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Statement 10: Australian Government Budget Financial Statements | Page 317

Table 10.6: Australian Government public non-financial corporations sector cash flow statement(a) Estimates

2020-21 2021-22

$m $m

Cash receipts from operating activities

Receipts from sales of goods and services 18,785 19,527

Grants and subsidies received 1,043 348

GST input credit receipts 1,237 1,147

Other receipts 31 134

Total operating receipts 21,096 21,156

Cash payments for operating activities

Payments to employees(b) -5,011 -4,999

Payment for goods and services -12,091 -10,162

Interest paid -1,783 -1,839

GST payments to taxation authority -751 -849

Distributions paid -246 -281

Other payments(b) -882 -686

Total operating payments -20,763 -18,816

Net cash flows from operating activities 333 2,340

Cash flows from investments in non-financial assets

Sales of non-financial assets 3 2

Purchases of non-financial assets -6,306 -7,898

Net cash flows from investments in non-financial assets -6,303 -7,896

Net cash flows from investments in financial assets

for policy purposes -4 12

Net cash flows from investments in financial assets

for liquidity purposes -442 71

Net cash flows from financing activities

Borrowing (net) 3,622 3,211

Other financing (net) 2,223 2,315

Net cash flows from financing activities 5,845 5,526

Net increase/(decrease) in cash held -571 53

Cash at the beginning of the year 2,261 1,690

Cash at the end of the year 1,690 1,743

GFS cash surplus(+)/deficit(-)(c) -5,970 -5,556

plus Net cash flows from financing activities for leases(d) -389 -472

Adjusted GFS cash surplus(+)/deficit(-)(d) -6,360 -6,028

(a) A positive number denotes a cash inflow; a negative number denotes a cash outflow. (b) Consistent with the ABS GFS classification, other employee related payments are classified separately from wages and salaries under other payments. (c) GFS cash surplus/deficit equals net cash flows from operating activities and investments in non-financial

assets.

(d) To retain a consistent measure of the GFS cash surplus/deficit following the implementation of AASB 16, its calculation is adjusted to include the principal payments on lease liabilities.

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Page 318 | Statement 10: Australian Government Budget Financial Statements

Table 10.7: Australian Government total non-financial public sector operating statement Estimates

2020-21 2021-22

$m $m

Revenue

Taxation revenue 465,236 456,261

Sales of goods and services 32,121 34,503

Interest income 2,222 3,068

Dividend income 7,797 6,984

Other 12,170 11,615

Total revenue 519,545 512,431

Expenses

Gross operating expenses

Wages and salaries(a) 26,382 27,089

Superannuation 12,893 7,483

Depreciation and amortisation 16,612 17,027

Supply of goods and services 152,874 168,823

Other operating expenses(a) 9,230 9,436

Total gross operating expenses 217,990 229,857

Superannuation interest expense 7,004 10,018

Interest expenses(b) 20,899 20,698

Current transfers

Current grants 167,111 170,580

Subsidy expenses 85,338 16,540

Personal benefits 161,889 140,253

Total current transfers 414,337 327,373

Capital transfers(b) 17,497 19,652

Total expenses 677,727 607,598

Net operating balance -158,182 -95,168

Other economic flows 38,293 204

Comprehensive result — Total change in net worth -119,889 -94,964

Net acquisition of non-financial assets

Purchases of non-financial assets 25,418 30,748

less Sales of non-financial assets 230 281

less Depreciation 16,612 17,027

plus Change in inventories 2,409 438

plus Other movements in non-financial assets 0 0

Total net acquisition of non-financial assets 10,986 13,878

Fiscal balance (Net lending/borrowing)(c) -169,168 -109,045

(a) Consistent with the ABS GFS classification, other employee related expenses are classified separately from wages and salaries under other operating expenses. Total employee expenses equal wages and salaries plus other operating expenses.

(b) From the 2020-21 Budget, the value of Debt Not Expected to be Repaid (DNER) on initial recognition of income contingent concessional loans was reported as an expense. The expense is now reported as a mutually agreed write-down, which is a form of capital transfer. It was previously recorded in other financing costs.

(c) The term fiscal balance is not used by the ABS.

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Statement 10: Australian Government Budget Financial Statements | Page 319

Table 10.8: Australian Government total non-financial public sector balance sheet Estimates

2020-21 2021-22

$m $m

Assets

Financial assets

Cash and deposits(a) 48,383 63,808

Advances paid 68,047 71,435

Investments, loans and placements(a) 182,293 188,431

Other receivables 69,606 75,873

Equity investments 97,852 104,804

Total financial assets 466,181 504,351

Non-financial assets

Land and other fixed assets 230,549 241,362

Other non-financial assets 14,487 15,266

Total non-financial assets 245,037 256,628

Total assets 711,218 760,979

Liabilities

Interest bearing liabilities

Deposits held 496 496

Government securities 891,811 1,028,091

Advances received and loans 30,820 33,805

Lease liabilities 32,145 32,392

Total interest bearing liabilities 955,273 1,094,784

Provisions and payables

Superannuation liability 243,474 247,911

Other employee liabilities 35,327 35,895

Other payables 24,751 25,079

Other provisions 55,233 55,112

Total provisions and payables 358,784 363,997

Total liabilities 1,314,057 1,458,781

Net worth(b) -602,839 -697,803

Net financial worth(c) -847,876 -954,430

Net debt(d) 656,550 771,111

(a) Australian Office of Financial Management has moved from primarily using term deposits to a cash management account for investing cash for short-term liquidity management. This has resulted in a decrease in investments, loans and placements and an increase in cash and deposits.

(b) Under AASB 1049, net worth equals total assets minus total liabilities. Under the ABS GFS, net worth equals total assets minus total liabilities minus shares and other contributed capital. The AASB 1049 method is used in this table.

(c) Under AASB 1049, net financial worth equals total financial assets minus total liabilities. Under the ABS GFS, net financial worth equals total financial assets minus total liabilities minus shares and other contributed capital. The AASB 1049 method is used in this table.

(d) Net debt is the sum of interest bearing liabilities less the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements).

| Budget Paper No. 1

Page 320 | Statement 10: Australian Government Budget Financial Statements

Table 10.9: Australian Government total non-financial public sector cash flow statement(a) Estimates

2020-21 2021-22

$m $m

Cash receipts from operating activities

Taxes received 459,369 445,657

Receipts from sales of goods and services 32,245 34,336

Interest receipts 2,327 2,520

Dividends and income tax equivalents 8,252 5,548

Other receipts 12,082 9,969

Total operating receipts 514,275 498,031

Cash payments for operating activities

Payments to employees(b) -37,111 -40,291

Payments for goods and services -149,162 -166,338

Grants and subsidies paid -279,608 -205,817

Interest paid -18,212 -19,077

Personal benefit payments -163,952 -140,966

Other payments(b) -8,576 -8,902

Total operating payments -656,621 -581,391

Net cash flows from operating activities -142,347 -83,360

Cash flows from investments in non-financial assets

Sales of non-financial assets 238 284

Purchases of non-financial assets -22,362 -26,684

Net cash flows from investments in non-financial assets -22,124 -26,400

Net cash flows from investments in financial assets

for policy purposes -10,224 -7,374

Net cash flows from investments in financial assets

for liquidity purposes 60,460 -3,442

Net cash flows from financing activities

Borrowing (net) 157,076 143,403

Other financing (net) -6,167 -7,402

Net cash flows from financing activities 150,908 136,001

Net increase/(decrease) in cash held 36,672 15,425

Cash at the beginning of the year 11,711 48,383

Cash at the end of the year 48,383 63,808

GFS cash surplus(+)/deficit(-)(c) -164,471 -109,760

plus Net cash flows from financing activities for leases(d) -2,817 -2,883

Adjusted GFS cash surplus(+)/deficit(-)(d) -167,289 -112,643

(a) A positive number denotes a cash inflow; a negative number denotes a cash outflow. (b) Consistent with the ABS GFS classification, other employee related payments are classified separately from wages and salaries under other payments. (c) GFS cash surplus/deficit equals net cash flows from operating activities and investments in non-financial

assets.

(d) To retain a consistent measure of the GFS cash surplus/deficit following the implementation of AASB 16, its calculation is adjusted to include the principal payments on lease liabilities.

Budget Paper No. 1 |

Statement 10: Australian Government Budget Financial Statements | Page 321

Table 10.10: Australian Government public financial corporations sector operating statement Estimates

2020-21 2021-22

$m $m

Revenue

Grants and subsidies 156 138

Sales of goods and services 768 636

Interest income 4,735 8,743

Other 94 94

Total revenue 5,753 9,610

Expenses

Gross operating expenses

Wages and salaries(a) 209 222

Superannuation 77 39

Depreciation and amortisation 69 67

Supply of goods and services 513 575

Other operating expenses(a) 56 60

Total gross operating expenses 923 964

Interest expenses 378 157

Other property expenses 2,116 3,535

Current transfers

Tax expenses 6 7

Total current transfers 6 7

Total expenses 3,424 4,663

Net operating balance 2,329 4,948

Other economic flows -11,968 -4,874

Comprehensive result — Total change in net worth

excluding contribution from owners -9,638 74

Net acquisition of non-financial assets

Purchases of non-financial assets 2 3

less Sales of non-financial assets 0 0

less Depreciation 69 67

plus Change in inventories -42 0

plus Other movements in non-financial assets 0 0

Total net acquisition of non-financial assets -109 -65

Fiscal balance (Net lending/borrowing)(b) 2,438 5,013

(a) Consistent with the ABS GFS classification, other employee related expenses are classified separately from wages and salaries under other operating expenses. Total employee expenses equal wages and salaries plus other operating expenses.

(b) The term fiscal balance is not used by the ABS.

| Budget Paper No. 1

Page 322 | Statement 10: Australian Government Budget Financial Statements

Table 10.11: Australian Government public financial corporations sector balance sheet(a) Estimates

2020-21 2021-22

$m $m

Assets

Financial assets

Cash and deposits 664 649

Investments, loans and placements 405,291 409,269

Other receivables 164 207

Equity investments 726 739

Total financial assets 406,845 410,864

Non-financial assets

Land and other fixed assets 913 908

Other non-financial assets(b) 92 93

Total non-financial assets 1,005 1,001

Total assets 407,850 411,866

Liabilities

Interest bearing liabilities

Deposits held 371,800 371,817

Borrowing 8,666 9,055

Total interest bearing liabilities 380,466 380,871

Provisions and payables

Superannuation liability 944 944

Other employee liabilities 216 217

Other payables 3,179 6,656

Other provisions(b) 1,786 1,840

Total provisions and payables 6,125 9,657

Total liabilities 386,591 390,528

Shares and other contributed capital 21,260 21,337

Net worth(c) 21,260 21,337

Net financial worth(d) 20,254 20,336

Net debt(e) -25,489 -29,047

(a) Assumes no valuation or currency movement. (b) Excludes the impact of commercial taxation adjustments. (c) Under AASB 1049, net worth equals total assets minus total liabilities. Under the ABS GFS, net worth equals total assets minus total liabilities minus shares and other contributed capital. The AASB 1049

method is used in this table. (d) Under AASB 1049, net financial worth equals total financial assets minus total liabilities. Under the ABS GFS, net financial worth equals total financial assets minus total liabilities minus shares and other

contributed capital. The AASB 1049 method is used in this table. (e) Net debt is the sum of interest bearing liabilities less the sum of selected financial assets (cash and deposits and investments, loans and placements).

Budget Paper No. 1 |

Statement 10: Australian Government Budget Financial Statements | Page 323

Table 10.12: Australian Government public financial corporations sector cash flow statement(a) Estimates

2020-21 2021-22

$m $m

Cash receipts from operating activities

Receipts from sales of goods and services 783 672

Grants and subsidies received 156 138

GST input credit receipts 13 1

Interest receipts 4,724 8,719

Other receipts 14 9

Total operating receipts 5,690 9,539

Cash payments for operating activities

Payments to employees(b) -293 -264

Payment for goods and services -714 -755

Interest paid -266 -131

GST payments to taxation authority -16 -18

Distributions paid -2,583 -16

Other payments(b) -64 -59

Total operating payments -3,935 -1,243

Net cash flows from operating activities 1,755 8,296

Cash flows from investments in non-financial assets

Sales of non-financial assets 0 0

Purchases of non-financial assets -105 -3

Net cash flows from investments in non-financial assets -105 -3

Net cash flows from investments in financial assets

for policy purposes -615 -445

Net cash flows from investments in financial assets

for liquidity purposes(c) -130,231 -8,303

Net cash flows from financing activities

Borrowing and deposits received (net)(c) 122,381 494

Other financing (net) 6,776 -54

Net cash flows from financing activities 129,158 441

Net increase/(decrease) in cash held -39 -14

Cash at the beginning of the year 702 664

Cash at the end of the year 664 649

GFS cash surplus(+)/deficit(-)(d) 1,650 8,293

plus Net cash flows from financing activities for leases(e) -1 -1

Adjusted GFS cash surplus(+)/deficit(-)(e) 1,649 8,292

(a) A positive number denotes a cash inflow; a negative number denotes a cash outflow. (b) Consistent with the ABS GFS classification, other employee related payments are classified separately from wages and salaries under other payments. (c) Assumes no cash flows associated with valuation or currency movements. (d) GFS cash surplus/deficit equals net cash flows from operating activities and investments in non-financial

assets.

(e) To retain a consistent measure of the GFS cash surplus/deficit following the implementation of AASB 16, its calculation is adjusted to include the principal payments on lease liabilities.

| Budget Paper No. 1

Page 324 | Statement 10: Australian Government Budget Financial Statements

Notes to the general government sector financial statements

Note 1: External reporting standards and accounting policies

The Charter of Budget Honesty Act 1998 (the Charter) requires that the Budget be based on external reporting standards and that departures from applicable external reporting standards be identified.

The external standards used for budget reporting purposes are:

• the Australian Bureau of Statistics’ (ABS) accrual Government Finance Statistics (GFS) publication, Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2015 (cat. no. 5514.0), which is based on the International Monetary Fund (IMF) accrual GFS framework

• the Australian Accounting Standards (AAS), issued by the Australian Accounting Standards Board (AASB), which includes International Financial Reporting Standards as adopted in Australia for use by the not-for-profit sector and specific standards such as AASB 1049 Whole of Government and General Government Sector Financial Reporting (AASB 1049).

The financial statements have been prepared on an accrual basis that complies with both the ABS GFS and AAS, except for departures disclosed at Note 2. A more detailed description of the AAS and the ABS GFS frameworks, in addition to definitions of key terms used in these frameworks, can be found in Appendix A. Detailed accounting policies, as well as a set of notes and other disclosures as required by AAS, are disclosed in the Australian Government Consolidated Financial Statements.

Fiscal reporting focuses on the general government sector (GGS). The GGS provides public services that are mainly non-market in nature and for the collective consumption of the community, or involve the transfer or redistribution of income. These services are largely financed through taxes and other compulsory levies. This sector comprises all government departments, offices and some other bodies. In preparing financial statements for the GGS, all material transactions and balances between entities within the GGS have been eliminated.

The Government’s key fiscal aggregates are based on the ABS GFS concepts and definitions, including the ABS GFS cash surplus/deficit and net financial worth. AASB 1049 requires the disclosure of other ABS GFS fiscal aggregates, including the net operating balance, net lending/borrowing (fiscal balance) and net worth. In addition to these ABS GFS aggregates, the Uniform Presentation Framework (UPF) requires disclosure of net debt, net financial worth and net financial liabilities.

Budget Paper No. 1 |

Statement 10: Australian Government Budget Financial Statements | Page 325

AASB 1049 and the UPF also provide a basis for reporting the public non-financial corporations (PNFC) and public financial corporations (PFC) sectors and the total non-financial public sector (NFPS).

AASB 1049 requires disaggregated information, by ABS GFS function, for expenses and total assets to be disclosed where they are reliably attributable. The ABS GFS does not require total assets to be attributed to functions. In accordance with the ABS GFS, disaggregated information for expenses and net acquisition of non-financial assets by function is disclosed in Statement 6: Expenses and Net Capital Investment. In accordance with the UPF, purchases of non-financial assets by function are also disclosed in Statement 6.

AASB 1055 Budgetary Reporting requires major variances between original budget estimates and outcomes to be explained in the financial statements. Explanations of variances in fiscal balance, revenue, expenses, net capital investment, cash flows, net debt, net financial worth and net worth since the 2020-21 Budget are disclosed in Statement 3: Fiscal Strategy and Outlook, with decisions taken since the Mid-Year Economic and Fiscal Outlook 2020-21 (MYEFO) disclosed in Budget Paper No. 2 Budget Measures 2021-22. All policy decisions taken between the 2020-21 Budget and the 2020-21 MYEFO are disclosed in Appendix A of the MYEFO.

Details of the Australian Government’s GGS contingent liabilities are disclosed in Statement 9: Statement of Risks.

Note 2: Departures from external reporting standards

The Charter requires that departures from applicable external reporting standards be identified. The major differences between AAS and the ABS GFS treatments of transactions are outlined in Table 10.13.

AASB 1049 requires AAS measurement of items to be disclosed on the face of the financial statements with reconciliation to the ABS GFS measurement of key fiscal aggregates, where different, in notes to the financial statements. Only one measure of each aggregate has been included on the face statements to avoid confusion.

Further information on the differences between the two systems is provided in the ABS publication Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2015 (cat. no. 5514.0).

| Budget Paper No. 1

Page 326 | Statement 10: Australian Government Budget Financial Statements

Table 10.13: Major differences between AAS and ABS GFS Issue AAS treatment ABS GFS treatment Treatment

adopted

Circulating coins — seigniorage The profit between the cost and sale of circulating coins

(seigniorage) is treated as revenue.

Circulating coins is treated as a liability, and the cost of producing the coins is treated as an expense.

AAS

Valuation of loans Changes in the valuation of loans are treated as a revenue or an expense.

In some circumstances recognition as a revenue or an expense is delayed until the loan ends or is transferred.

Changes in the valuation of loans (excluding mutually agreed write-downs) are treated as an other economic flow.

ABS GFS

Timing recognition of Boosting Cash Flow for Employers

Expense recognition based on underlying economic activity that gives rise to the Cash Flow Boost payment.

Recognised when the businesses receive payments after submitting their activity statements and having met all requirements.

AAS

Leases AASB 16 introduced a single

lease accounting framework for lessees, which replaced the distinction between operating and finance leases. Right of use assets and lease liabilities are recognised on the balance sheets for leases that were previously accounted for as operating expense.

The distinction between operating leases and finance leases will be continued for lessees.

AAS

Concessional loans Concessional elements are treated as an expense on initial recognition and unwound over the loan term.

Concessional elements are treated as an other economic flow.

AAS

Investment in other public sector entities Valued at fair value in the balance sheet as long as it can

be reliably measured, otherwise net assets is permissible.

Unlisted entities valued based on their net assets in the balance sheet.

AAS

Provision for restoration, decommissioning and make-good

Capitalised when the asset is acquired. Capitalised when make-good activity takes

place.

AAS

Renewable Energy Certificates (RECs) The issuance and registration of RECs is considered to be an

administrative function and does not result in the recognition of assets or liabilities and, consequently, no revenue or expenses are recognised.

The issuance and registration of RECs is considered to be government financial transactions resulting in the recognition of assets, liabilities, revenue and expenses.

AAS

Dividends paid by public corporations Treated as an equity distribution. Equity distributions are treated

as a distribution of profits, as opposed to an expense.

Dividends are treated as an expense. ABS GFS

Budget Paper No. 1 |

Statement 10: Australian Government Budget Financial Statements | Page 327

Table 10.13: Major differences between AAS and ABS GFS (continued) Issue AAS treatment ABS GFS treatment Treatment

adopted

Dividends paid by the Reserve Bank of Australia

Dividends are recognised in the year profit was earned. Dividends are recognised when the Treasurer makes a

determination.

AAS

National Disability Insurance Scheme (NDIS) revenue

Funding contributions by the state and territory governments to NDIS are treated as sales of goods and services revenue.

In-kind disability services provided by the state and territory governments are treated as other revenue.

Funding contributions by the state and territory governments to NDIS are treated as grants revenue.

In-kind disability services provided by the state and territory governments are treated as sales of goods and services revenue.

AAS

Commercial tax effect accounting assets and liabilities

Corporations in the PNFC and PFC sectors record tax expenses on a commercial basis.

Deferred tax assets and liabilities are reversed so that corporations record tax expenses on a consistent basis to the Australian Taxation Office.

ABS GFS

Fiscal aggregates differences

Net worth of PNFC and PFC sectors Calculated as assets less liabilities.

Calculated as assets less liabilities less shares and other contributed capital.

AAS

Net financial worth of PNFC and PFC sectors

Calculated as financial assets less total liabilities. Calculated as financial assets less total liabilities

less shares and contributed capital.

AAS

Classification differences

Prepayments Treated as a non-financial asset. Treated as a financial asset. ABS GFS

Spectrum sales Recognise non-financial asset sale for fiscal balance when licences take effect, which may be after the auction of licences, as this is regarded as the point at which control is transferred. Recognise cash at the time of receipt.

Recognise non-financial asset sale for fiscal balance at time of auction as this is regarded as the point at which control is transferred. Recognise cash at the time of receipt.

AAS

| Budget Paper No. 1

Page 328 | Statement 10: Australian Government Budget Financial Statements

Note 3: Taxation revenue by type Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Individuals and other withholding taxes

Gross income tax withholding 217,500 218,700 226,700 238,600 239,400

Gross other individuals 49,500 48,500 53,500 57,300 62,500

less: Refunds 36,000 42,300 38,100 33,100 33,900

Total individuals and other withholding taxation 231,000 224,900 242,100 262,800 268,000 Fringe benefits tax 4,040 4,090 4,290 4,460 4,630

Company tax 94,300 84,200 72,300 82,300 102,400

Superannuation fund taxes 11,680 15,280 14,530 15,280 16,230

Petroleum resource rent tax 840 1,050 990 1,030 1,030

Income taxation revenue 341,860 329,520 334,210 365,870 392,290

Goods and services tax 71,080 74,130 77,180 80,950 84,980

Wine equalisation tax 1,070 1,050 1,080 1,110 1,160

Luxury car tax 800 680 610 610 640

Excise and Custom duty

Petrol 5,850 6,100 6,300 6,650 7,050

Diesel 12,480 13,140 13,740 14,390 15,090

Other fuel products 1,560 1,830 1,860 1,910 2,000

Tobacco 15,080 14,750 14,610 14,970 15,340

Beer 2,550 2,600 2,660 2,760 2,810

Spirits 3,070 2,720 2,800 2,900 3,030

Other alcoholic beverages(a) 1,270 1,070 1,100 1,140 1,200

Other customs duty

Textiles, clothing and footwear 170 160 110 90 100

Passenger motor vehicles 340 310 70 70 80

Other imports 1,180 1,230 780 780 850

less: Refunds and drawbacks 790 650 650 650 650

Total excise and customs duty 42,760 43,260 43,380 45,010 46,900

Major bank levy 1,640 1,670 1,720 1,770 1,870

Agricultural levies 509 505 522 536 540

Other taxes 6,052 6,157 7,398 8,457 8,296

Mirror taxes 583 604 670 702 721

less: Transfers to States in relation to

mirror tax revenue 583 604 670 702 721

Mirror tax revenue 0 0 0 0 0

Indirect taxation revenue 123,911 127,452 131,890 138,443 144,386

Taxation revenue 465,771 456,972 466,100 504,313 536,676

Budget Paper No. 1 |

Statement 10: Australian Government Budget Financial Statements | Page 329

Note 3: Taxation revenue by type (continued) Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Memorandum:

Total excise 23,930 24,840 25,790 27,000 28,320

Total customs duty 18,830 18,420 17,590 18,010 18,580

Capital gains tax(b) 16,600 17,400 18,600 19,300 20,500

(a) ‘Other alcoholic beverages’ are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandy and wine). (b) ‘Capital gains tax’ is part of gross other individuals, company tax and superannuation fund taxes.

Note 3(a): Taxation revenue by source Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Taxes on income, profits and capital gains

Income and capital gains levied on individuals 235,040 228,990 246,390 267,260 272,630 Income and capital gains levied on enterprises 106,820 100,530 87,820 98,610 119,660 Total taxes on income, profits and

capital gains 341,860 329,520 334,210 365,870 392,290

Taxes on employers’ payroll and labour force 1,350 812 845 902 974

Taxes on the provision of goods and services

Sales/goods and services tax 72,950 75,860 78,870 82,670 86,780

Excises and levies 24,439 25,345 26,312 27,536 28,860

Taxes on international trade 18,830 18,420 17,590 18,010 18,580

Total taxes on the provision of

goods and services 116,219 119,625 122,772 128,216 134,220

Taxes on the use of goods and performance of

activities 6,342 7,015 8,273 9,325 9,193

Total taxation revenue 465,771 456,972 466,100 504,313 536,676

Note 4: Sales of goods and services revenue Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Sales of goods 1,352 1,435 1,423 1,462 1,522

Rendering of services 12,668 13,557 14,052 15,283 16,310

Lease rental 92 89 91 90 78

Fees from regulatory services 1,836 2,095 2,137 1,936 1,953

Total sales of goods and services revenue 15,947 17,175 17,704 18,772 19,864

| Budget Paper No. 1

Page 330 | Statement 10: Australian Government Budget Financial Statements

Note 5: Interest and dividend revenue Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Interest from other governments

State and territory debt 15 13 12 11 9

Housing agreements 81 77 72 67 62

Total interest from other governments 96 89 84 77 72

Interest from other sources

Advances 1,019 662 457 450 458

Deposits 196 101 97 101 127

Indexation of HELP receivable and other

student loans 280 1,137 909 1,053 1,190

Other 1,310 1,632 1,856 2,047 2,248

Total interest from other sources 2,805 3,531 3,320 3,650 4,023

Total interest 2,901 3,621 3,403 3,727 4,094

Dividends

Dividends from other public sector entities 2,368 3,812 3,106 3,216 3,084

Other dividends 5,670 3,453 3,683 3,921 4,179

Total dividends 8,038 7,265 6,789 7,138 7,263

Total interest and dividend revenue 10,939 10,885 10,192 10,865 11,357

Note 6: Other sources of non-taxation revenue Estimates

2020-21 2021-22 2022-23 2023-24 2024-25

$m $m $m $m $m

Industry contributions 170 170 177 179 191