Statement 1: Budget Overview
Delivering on the deficit exit strategy
In the February 2009 Updated Economic and Fiscal Outlook, the Government stated that the immediate and overriding priority for fiscal policy is to cushion the impact of the global recession on economic activity and jobs. This Budget supports jobs and growth now, and invests in the drivers of long‑term growth in a sustainable way.
It is necessary that the Government continue to draw on its fiscal strength to support the economy through 2009‑10 and into 2010‑11. Without the timely and substantial action that has been taken by the Government, Australia's economy would be in much worse shape. Output would be significantly lower and job losses would be much higher.
The Budget deficit is largely a result of large downwards revisions to expected tax revenues, as a result of the global recession. The Government's decision to support the economy and jobs through the provision of fiscal stimulus will temporarily add to these deficits.
A temporary deficit, with borrowings that will be repaid when conditions improve, is the only responsible course of action if we are to continue important programs and cushion the impact of the global recession on jobs.
The Government has a clear strategy to return the budget to surplus as the economy recovers. This will be achieved by banking increases in tax revenue naturally associated with the economic recovery, and by limiting real growth in spending.
Fiscal strategy
The Government's medium‑term fiscal strategy is achieving budget surpluses, on average, over the economic cycle; keeping taxation as a share of GDP on average below the level for 2007‑08; and improving the Government's net financial worth over the medium term. To ensure that growth is supported in a way that is consistent with the medium‑term fiscal strategy, the Government has outlined a two‑stage fiscal strategy.
The first stage of the fiscal strategy provides that, during the economic slowdown, the Government will support the economy by:
- allowing variations in revenue and expenditure, which are naturally associated with slower economic growth, to drive a temporary underlying cash budget deficit; and
- using additional spending to deliver timely, targeted and temporary stimulus, with the clear objective of other budget priorities and new policy proposals being met through a reprioritisation of existing expenditure.
The Government has delivered on this strategy in the 2009‑10 Budget.
The measures in this Budget will increase the level of GDP by ¾ of a per cent in 2009‑10. This will deliver a boost to the economy and jobs in the period in which the economy is expected to be weakest. To preserve fiscal sustainability, the Government has fully offset spending proposals in the final year of the forward estimates period. The Government has found savings worth a total of $22.6 billion over four years.
This Budget delivers a comprehensive program of nation building investments in infrastructure and human capital, which will lay the foundations for future productivity and growth. As the economy grows, the fiscal position will also become stronger.
The second stage of the fiscal strategy provides that, as the economy recovers and grows above trend, the Government will take action to return the budget to surplus by:
- allowing the level of tax receipts to recover naturally as the economy improves, while maintaining the Government's commitment to keep taxation as a share of GDP below the 2007‑08 level on average; and
- holding real growth in spending to 2 per cent a year until the budget returns to surplus.
The Government has begun to deliver on this strategy in this Budget. Spending has been fully offset in the final year of the forward estimates. Real growth in spending has been kept below 2 per cent in the years the economy is projected to grow above trend.
This combination of continued spending restraint in accordance with the fiscal strategy and the restoration of receipts is currently expected to see the deficit more than halve by the final year of the forward estimates, and return the budget to surplus by 2015‑16.
Chart 4: Projected underlying cash balance to 2019‑20
Source: Treasury.
Responsible and necessary borrowing
The global recession has led to a series of downward revisions to taxation receipts since the 2008‑09 Budget. In total, these revisions have stripped around $210 billion from the budget bottom line, representing more than two‑thirds of the Government's total borrowing needs over the forward estimates.
Under these circumstances, it is appropriate to allow the automatic stabilisers to operate to cushion the impact of the economic slowdown. Maintaining expenditure in the face of declining revenues will necessitate borrowing, but failure to do so would be irresponsible. Reducing expenditure in an effort to hold the Budget in surplus would lead to a deeper and more protracted economic downturn.
Early and decisive fiscal stimulus has also been essential to support economic activity and jobs, along with investment in the economy's future productivity. Investment in nation building infrastructure and world‑class universities and hospitals will position Australia to take full advantage of the global recovery.
Collectively, these changes in the fiscal outlook will require increased borrowing. The Government's balance sheet is projected to remain strong over the medium‑term projection period. Based on current projections, net debt will reach a peak of 13.8 per cent of GDP in 2013‑14 before declining to around 3.7 per cent in 2019‑20.
Australia is not alone; the global recession has affected fiscal positions across the world. Public debt levels are increasing as governments take action to minimise the impact of the global recession.
Between now and the end of 2014, average net debt levels in the major advanced economies are projected to increase to over 80 per cent. Australia will retain significantly lower levels of net debt over this period (Chart 5).
The small size of Australia's borrowing program relative to other advanced economies leaves the Government well placed to pay down debt quickly when the economy improves and the budget returns to surplus.
Chart 5: Government net debt position for selected countries
- Treasury calculations.
Source: IMF World Economic Outlook April 2009 chapter 2 supplemental tables (net Government debt).
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