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Tuesday, 21 August 1973
Page: 159

Compared with the practice followed in the Budget Speeches of recent years, several important changes have been made in the presentation of the 1973-74 Budget Speech and the Statements attached to it. The principal change is the introduction of a functional classification of budget outlays and receipts and its use as the main framework for the detailed discussion of budget policy proposals. In addition, national accounting conventions have been consistently adopted in the Budget Speech and Statements for the definition of outlays and receipts. The functional headings employed are described and briefly discussed later in this Statement.

In previous years some additional information on various outlays and indirect assistance through the taxation system has been provided in Statements such as the former Statements No. 8 External Aid, No. 9 Commonwealth Assistance to Industry, and No. 10 Commonwealth Assistance for Social Welfare and Repatriation. These Statements were, of course, adjuncts to the now discarded 'conventional' classification. Since it is important to maintain consistency in classification in the Budget Speech and Statements, it would be inappropriate to continue Statements in that format in combination with the new functional classification. Furthermore, much information of the kind contained in these Statements in previous years is now provided in the discussion of budget outlays by function in Statement No. 4. Accordingly, the former Statements Nos. 8, 9 and 10 have been discontinued.

The Need for a Functional Classification

There has been for some time a clear and widely recognised need to improve the presentation of budget data in order to provide better information for the decision-making processes of the Government and to provide generally a more useful framework for the consideration of policies and their expenditure implications. The so-called 'conventional' budget classification used in recent years was essentially a product of the historical evolution of the Budget Statements from earlier legal appropriation documents. It concentrated on input, organisational and institutional characteristics of receipts and outlays. With such a classification it can be very difficult to clarify the purposes to which outlays are being committed and to judge how effective these outlays are in attaining policy objectives. The increasing attention being given to longer-term trends in budget outlays has also emphasised the need for a new purpose-oriented classification.

The basic aim of the new functional classification is to bring together outlays with like objectives or purposes. In this way it aims to reveal more fully information on the nature of Government activities, the share of resources devoted to particular objectives and to facilitate assessment of the effectiveness of outlays in meeting objectives.

Compared with the previous classification, the value of the new functional classification is increased because it is applied to budget outlays and receipts based on national accounting conventions. There is thus a consistent conceptual basis underlying both the economic classification and the functional classification. This removes a considerable source of confusion which existed in past budget documents where two conceptually different classifications were used - the so-called 'conventional' classification for information and general policy purposes and the national accounting classification for the analysis of the economic impact of the budget.

Basis of the Functional Classification

The conventions and principles used in the new functional classification are essentially those set out for the classification of outlays by the purpose of government in the publication A System of National Accounts, United Nations, New York 1968. That classification is a widely accepted international standard for the classification of public expenditure by function and is also being used by the Organisation for Economic Co-operation and Development as a basis for the development of internationally comparable statistics on the public sector. The Bureau of Census and Statistics has concurrently adopted these conventions and principles for purpose classifications in the documents it publishes on public authority finance.

As a result of close co-operation between the Bureau of Census and Statistics and the Treasury in the development of this classification structure, the major functional headings adopted for budget purposes are conceptually consistent with those used by the Statistician in his publications. It should be noted, however, that the figures published by the Bureau for Australian Government outlays cover both budget outlays and outlays by Australian Government authorities which operate outside the budget sector and hence will differ in some respects from the figures shown for the budget sector in the Budget Statements. Information on the transactions of authorities operating outside the budget sector is shown in the Supplement to the Treasury Information Bulletin entitled National Accounting Estimates of Public Authority Receipts and Expenditure which is published concurrently with the budget documents. In addition, a number of Australian Government departments and instrumentalities which operate in Papua New Guinea incur direct expenditures which may be classified as aid to a developing country. These outlays, however, are shown under the same functional heading in the Budget Statements as similar outlays made within Australia. Supplementary information on the functional allocation of these outlays is available in the Bureau's publication Public Authority Finance - Authorities of the Australian Government, 1972-73.

The Structure of the Functional Classification

The major functional headings are shown in the summary table in Statement No. 4. The main addition to the classification structure recommended in the publication A System of National Accounts has been the inclusion of a category 'Immigration', because of the particular relevance of this function in Australia. Brief descriptions of the contents of each function are given below. These descriptions are intended to convey the scope of the outlays included under each function rather than to be a detailed listing of the content of each category. Further detail on each function is provided in the discussion in Statement No. 4.

From an examination of the classification structure set out in the Budget Statements it will be evident that the functional classification is at this stage relatively aggregative in nature. It has, for example, not been possible on the whole to dissect the administrative outlays of departments and to allocate them over the particular sub-categories shown under each functional heading.

Under each functional heading in the classification, outlays have been grouped together into readily identifiable expenditure blocks. These expenditure blocks do not, as a rule, purport to represent detailed purpose-oriented sub-functions or programs; rather, they are meant as recognisable and meaningful expenditure groupings which readily lend themselves to discussion and analysis. Nevertheless, the main outlay blocks are decidedly more purposeoriented than was the case with the categories of expenditure identified under the conventional classification used in the past.

Given the need to produce a continuing and up-to-date record of actual monthly outlays and receipts which is consistent with the overall estimates embodied in the Budget Speech and documents, it has been necessary to work largely within existing central accounting records. These records are, at present, built around the Appropriation Acts, which are the legal authority for expenditure rather than detailed costing documents. The figures presented have, therefore, been derived essentially by reclassifying appropriation data supplemented, where necessary, by a limited number of sub-costings of substantial appropriation items which cover several functions.

The problems of using existing accounting records for the purposes of the functional classification were magnified by the major changes to departmental administrative arrangements which were announced in December 1972. These changes have made it difficult to produce a strictly consistent set of outlay aggregates for the period of years covered in the Budget Statements. Where possible, the more important discontinuities have been eliminated by the sub-costing and regrouping of appropriation data, but it has not been practicable to eliminate all inconsistencies to produce strict comparability of detailed estimates. This should be borne in mind when examining the tables set out in Statement No. 4.

It should also be noted that the functional categories do not necessarily correspond with appropriation or departmental structures. Furthermore, some outlay and receipts figures are netted in arriving at aggregates. Expenditure votes and revenue heads under the control of a particular department may, therefore, be classified under more than one functional heading and it will not always be possible to identify individual appropriation items in the Statements. The introduction of the functional classification does not, however, alter the structure of the appropriations or the summaries presented with the Appropriation Bills, such as the document Estimates of Receipts and Summary of Estimated Expenditure.

Although the basic aim of a functional classification scheme is to reveal the broad purposes for which government expenditure is undertaken, it is important to note that such a classification cannot always be unambiguously applied. Particular expenditure items will often serve two or more distinct functions. Military colleges, for example, may be said to serve both a defence and an education purpose. The application of a functional classification scheme, however, requires that expenditure be classified to the function which it is considered primarily to serve. In the example above, the primary function is considered to be defence. This is also in line with United Nations recommendations.

As in any single classification system, it is not possible to focus at one and the same time on every outlay characteristic that may be of interest to the Government or the public. Supplementary information on particular aspects of expenditure is therefore provided in other documents, for example, details of wage and salary estimates are shown in the document Estimates of Receipts and Summary of Estimated Expenditure and a separate White Paper is provided on Payments To or For the States. Other supplementary documents or statements may in future years be provided in order to focus on outlays related to particular policies or activities.

The Implications of Adopting National Accounting Conventions

As indicated earlier in this Statement, the use of definitions of budget outlays and receipts based on national accounting conventions will place budget data on a basis where they are conceptually consistent with, and can more easily be related to, trends in the public sector as a whole and to developments in the economy reflected in national accounting information published by the Bureau of Census and Statistics.

The principles underlying the national accounting presentation of budget data were set out in the Appendix to the Supplement to the Treasury Information Bulletin on National Accounting Estimates of Public Authority Receipts and Expenditure, August 1970. However, concurrent with the introduction of the functional classification, some changes have been made to the previous national accounting definitions of outlays, receipts, the deficit, and their components used in the Budget Statements. The more significant of these changes are:

(a)   Net advances to the Australian Wheat Board are treated as outlay items, rather than financing transactions as in the past. This brings the classification of these short-term advances into line with that accorded to other advances from the budget;

(b)   purchases of land and existing buildings (including inter-departmental transfers for which a financial adjustment is made) are now treated as outlays rather than offsets to the proceeds from the sale of these assets under a receipts heading. This change permits gross outlays on these assets to be shown under the appropriate functional headings.

Other conceptual changes in line with the principles set out in the publication A System of National Accounts have also been introduced. These changes relate mainly to the treatment of rents and business enterprise transactions and are indicated in the Supplement to the Treasury Information Bulletin issued concurrently with the Budget documents. Overall they do not have a very significant effect on the figures shown for total receipts and total outlays.

The adoption of national accounting conventions implies that the receipts and outlay figures shown in the Statements attached to the Budget Speech relate, for the most part, to the net transactions of the budget sector with the rest of the economy. Some important characteristics of the national accounting treatment shown in the Statements are as follows : (a) The transactions of various Funds forming the Public Account (the Consolidated Revenue Fund, Trust Fund and Loan Fund) are consolidated and inter-fund transfers are eliminated. For example, payments to the Aboriginal Advancement Trust Account are not shown as part of outlays; rather, the expenditure from that Trust Account is included. The aim is essentially to record the transactions between the budget sector and the rest of the economy. Allowance is, however, made for adjustments between functions arising from the transfer of existing assets where financial adjustments for these transfers are recorded; (6) receipts derived from activities which are essentially of a governmental nature, involving regulation and compulsory payment, are normally treated as revenue items. This applies in particular to industry charges and levies, broadcasting and television licence fees, and fees and fines imposed by the courts. Other recoveries and repayments are normally offset against the relevant outlays to arrive at net outlay figures. For example, repayments of principal on advances to other authorities are offset against the corresponding advances under the same outlay heading. Bringing together the relevant outlays and recoveries or repayments makes it possible to see more readily the extent of financial resources which are directed through the budget to a particular activity. Taxes, compulsory charges, licence fees and the like are not regarded as being related to particular outlays but rather as being of a general revenue nature;

(c)   the operating revenues of activities which are carried out as' business-type enterprises are shown net of operating expenses as a receipts item and hence do not appear in the outlay tables. The current operations of enterprises are thus reflected in the Budget Statements to the extent that they contribute to general budget revenues;

(d)   finally, certain transactions which are netted in published totals of the receipts and payments of the Public Account are shown in gross form. The more important of these are interest on loans raised by the Australian Government for State works programs and for the Australian National Airlines Commission and Qantas Airways Limited. Interest paid on these loans is included under the outlay heading 'Public Debt Interest', while interest received on advances made to the relevant authorities is included as a receipts item. This has the effect of making the coverage of interest in the Statements the same as the coverage of the debt to which it relates.

Future Developments

The functional classification presented this year has been developed within time and data availability constraints. Although it provides very useful information on the broad purposes served by government outlays, it is envisaged that further development of the classification will be both possible and desirable in the future.

Description of Functions

The following notes describe briefly the scope of the net outlays encompassed under each functional heading.

1.   Defence:

Outlays on military and civil defence, including outlays to keep the armed services in a state of readiness. Includes outlays on central administration and on research in connection with activities carried out for defence purposes; outlays on military construction and equipment, inspection, transport and storage; all outlays on recruiting, training, equipping and housing of the armed forces, and on medical care and other services for them; outlays on military colleges; expenditure for the provision of quarters for families of military personnel; outlays on pensions and other payments for military personnel under the Defence Forces Retirement and Death Benefit Scheme; outlays on foreign military aid and ontributions to international military organisations and alliances.

2.   Education:

Outlays on the provision, management and support of educational services from pre-school level through to'higher school certificate level, of trade and technical courses, courses in music, fine arts, etc., and of university and other higher education. Includes outlays relating to the provision of scholarships and allowances to students at all levels; special educational programs designed specifically for the benefit of persons of Aboriginal descent, for children of migrants and for handicapped children; expenditure on non-vocational adult education courses, school bus services, and general administration, regulation and research activities related to education.

3.   Health:

Outlays on facilities or services for the prevention and treatment of human illness. Includes outlays related to the prevention of diseases, such as chest X-ray campaigns, immunisation and vaccination programs, regulation of standards of sanitation, etc. ; outlays concerned with the provision of hospital and clinical services, including treatment and care of those suffering from psychiatric disorders, infectious diseases, etc., and expenditure on nursing schools associated with hospitals. Also includes the payment of hospital, nursing home, medical and pharmaceutical benefits which are designed to cover all or part of the costs of hospitalisation and medical treatment and provision of drugs and appliances; outlays on the provision of dental services, school medical services, ambulance services; special programs for the treatment and care of specific groups, such as persons of Aboriginal descent, the aged, former members of the armed forces and their dependants; community health centres, centres for the treatment of drug addicts, and domiciliary care services; general administration, regulation and research related to health matters. -

4.   Social Security and Welfare:

Provision of pensions and allowances and other benefits to persons who, because of age, physical or mental disability, domestic circumstances or other reasons, are unable or not expected to earn a sufficient livelihood for themselves and their dependants. Includes the provision of benefits such as unemployment benefits, age and repatriation pensions, accident and sickness benefits, other benefits to compensate for loss of income and unemployment relief schemes. Provision of financial assistance towards the expenses associated with the bearing and raising of children, marriage guidance and child care facilities, other social security benefits, child welfare services and institutions, homes for and care of the aged and disabled and welfare programs to meet specific needs of disadvantaged groups.

5.   Housing and Community Amenities nec:

Housing: Outlays on the provision of dwellings for sale or rental, and mortgage finance for purchase or construction of dwellings, other financial assistance aimed at facilitating the purchase or construction of dwellings or home ownership. General administration, regulation and promotion of standards, and research in the field of housing.

Community Development nec: Outlays on general promotion and assistance for urban and regional planning and development. Includes outlays on the development of new cities or suburbs where it is not possible to distinguish expenditure as specifically for housing, roads, sewerage or other purposes, or it is not appropriate to classify the expenditure to other categories (such as in the case of major urban sub-division or renewal outlays, including the purchase of land for such purposes). Also includes the administrative costs of departments and agencies engaged in urban and regional planning and development and miscellaneous outlays on the provision of community amenities.

Sewerage, Sanitation and Protection of the Environment: Outlays on the treatment and disposal of sewage, refuse collection and disposal, street cleaning, water quality control, air pollution monitoring and control. Other outlays related to pollution prevention and control and protection of the environment including research, planning and regulation.

6.   Culture and Recreation:

Outlays related to the support of performing and creative arts; support of organisations concerned with sporting and other leisure time activities, and provision of facilities serving purposes primarily related to these activities, such as swimming pools, community centres, athletic fields, etc. ; contributions to youth and social organisations; outlays on the protection and preservation of historic sites and buildings, parks and wildlife reserves, and other elements of the national estate; outlays on the provision and operation of government radio and television broadcasting services.

7.   Immigration:

Outlays on administration and research in relation to programs of assisted and unassisted immigration, including provision of temporary accommodation for immigrants and other services designed to facilitate the integration of migrants into the community in the shorter term.

8.   Economic Services:

This category covers regulation of, and assistance provided to, the private sector, direct government participation in economic activity and provision of economic infrastructure.

A.   Transport and Communication.Outlays concerned with postal services, and domestic and overseas telecommunications; outlays on construction, maintenance, promotion, administration and research relating to the various modes of land, sea and air transport, including urban transportation systems and pipelines for petroleum and gas transport. (Road traffic control services are shown under the category 'Law, Order and Public Safety'.)

B.   Water Supply and Electricity.Outlays on construction and other assistance, regulation and research in connection with the production, transmission and distribution of electricity; and on the conservation, collection, purification and distribution of water primarily for domestic and industrial consumption.

C.   Industry Assistance.Direct assistance to primary, secondary or service enterprises in forms such as bounties, subsidies, export incentives, advances from the budget and other transfers including payments to ensure guaranteed prices for commodities or to maintain the prices of commodities below their normal market price ; support of agricultural and other industrial research and development and of promotional activities including export promotion; outlays on the management of timber and fishery resources; provision of veterinary, extension and other services to agriculture; land clearing, reclamation and settlement activities; outlays on programs of rural debt reconstruction and farm rehabilitation; investigation, measurement, development and management of water resources for irrigation and pastoral purposes and flood mitigation; assistance and encouragement of mineral exploration; geological surveys; development of tourist facilities and tourist promotion; administration, promotion, regulation and research, directly associated with specific primary, secondary or service industries.

D.   Employment Conditions^Outlays related to the regulation of working conditions, the prevention and settlement of industrial disputes and the enforcement of industrial awards and agreements; programs designed to facilitate changes of occupation by persons displaced by redundancy, occupational training schemes for adults including assistance to enter or re-enter the work-force, provision of labour exchange facilities; and general administration, regulation and research in the field of labour affairs.

E.   Other Economic Services.Outlays related to regulation of monopolies and restrictive trade practices, price control and justification, regulation of the tariff, other forms of business regulation; outlays on patents and trade marks administration, outlays on meteorological services and other technical services not allocable to specific kinds of industry; outlays on general administration in the area of economic and commercial affairs not allocable to other outlay categories within the 'Economic Services' function.

This category covers outlays on a number of general public services and activities con.cerned with the organisation and operation of government.

A.   Legislative Activities.Outlays of the legislative and executive bodies of government, including parliamentary committees and the operation of the Governor-General's establishments; outlays related to the conduct of elections and maintenance of registers of voters.

B.   Law, Order and Public Safety.Outlays on law courts (other than those concerned with industrial relations) and bodies concerned with the administration of the legal system and preparation and execution of law court action; provision of legal aid; registration of legal titles to property; outlays in respect of prisons and other places of detention and correction and probation services; police services, including traffic control; fire protection and other public safety promotion or services; general administration and research related to these activities.

C.   Foreign Affairs and External Territories.Outlays of departments and agencies charged primarily with the handling of foreign relations; administration and other expenditure relating to external territories; and outlays on foreign economic aid and contributions to international bodies other than military alliances and organisations.

D.   General and Scientific Research.Contributions for the promotion of, and outlays on, basic and general research in the biological, physical and social sciences, which cannot readily be classified to other outlay categories or linked with the provision or promotion of a particular service or activity.

E.   Administrative Services.Outlays on the collection of taxes, raising public loans, managing public debt, and controlling the disbursement and audit of public funds. Outlays on general services for the government as a whole, such as statistical services, the purchase and operation of government buildings and equipment (including the construction, repair and maintenance of general purpose buildings), office cleaning, personnel and other administration. General administrative expenses of departments covering a variety of government activities and which cannot be readily dissected are also included under this heading.

10.   Outlays Not Allocated to Function:

A.   Payments to State Governments nec and Natural Disaster Relief.General purpose grants and advances to State and other level government authorities which may be spent at the recipient's discretion and grants not classifiable to specific functions. This category includes payments to assist States meet debt charges.

Payments to States and direct assistance for the relief of victims of drought, flood, fire and other natural disasters, and for the restoration of community services and facilities.

B.   Public Debt Interest.Net interest payments made from the budget sector to other sectors, including interest payments on government securities, or under defence credit arrangements with other countries. Interest received from Government investments in Australian Government securities is offset against gross interest payments.

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