The Commonwealth of Australia presented its budget for 2019-20 last week. Buoyed by higher tax revenues from natural resources, Treasurer Josh Frydenberg MP announced that Australia's federal finances had returned to surplus, enabling a modest pre-election tax giveaway.
As illustrated by our ICAEW chart of the week, the latest forecast for the current financial year ending this June is for the federal element of general government revenues to exceed expenses and net investment by A$2bn, with a surplus of A$8bn planned for 2019-20 and further surpluses in the coming years. On a cash basis the turnaround is a year later, with a reduction in underlying cash balances of A$4bn in 2018-19 expected to be followed by an increase of A$7bn in 2019-20.
This is a welcome return to positive territory after a decade of red ink after the global financial crisis.
Revenue is expected to total A$514bn or 25.6% of GDP in 2019-20, with expenses A$501bn (25.0% of GDP) and net capital investment of A$5bn (0.2% of GDP). The financial projections assume that expenses can be kept under control, with a plan to cut spending in some areas in real-terms to offset expected increases in the costs of education and social security and welfare. The ratio of revenue to GDP is expected to increase to 26.0% in 2021-22, before falling back again to 25.6% in 2022-23, while expenses as a share of GDP are expected to fall to 24.6% in 2022-23. Net capital investment is expected to increase to 0.5% of GDP over the same period.
On a per capita basis, revenue in 2019-20 is expected to be in the order of A$1,670 per month, with expenses of A$1,630 per month and net investment of A$15 per month to arrive at a fiscal surplus in the region of A$25 per month.
Surpluses in the years to come should help the Australian government improve its financial position, with net financial liabilities projected to reduce from A$491bn (25% of GDP) at 30 June 2019 to A$447bn (20% of GDP) at 30 June 2023. Net debt is expected to fall from A$374bn (19% of GDP) in 2019 to A$326bn (14% of GDP) in 2023, with a view to being eliminated by 2030.
The surplus for 2019-20 benefits from A$5bn in investment returns from the A$146bn Future Fund, which was established in 2006 to address the Australian government's unfunded superannuation liabilities. These liabilities, forecast to add up to A$224bn at 30 June 2019, continue to grow, albeit more much slowly since the closure of defined benefit arrangements to new civilian and military employees from 2005 and 2016 respectively. Up until now earnings from the Future Fund have been reinvested, but from 2020-21 they will support pension payments, reducing the cash required from the Australian exchequer. The government has also established the DisabilityCare Australia Fund with assets of A$14bn, the Medical Research Future Fund (A$9bn) and the Aboriginal and Torres Strait Islander Land and Sea Future Fund (A$2bn) to support specific objectives, while there are plans to establish new funds this year for droughts and emergency response with initial investments of A$4bn in each case.
Australia has managed its balance sheet through a combination of expenditure control, financial investment and risk reduction. This contrasts with many other developed nations, which continue to struggle with proportionately much larger amounts of debt and public sector pension obligations. For example, public sector net debt in the UK is around 83% of GDP, while net financial liabilities (including public sector pensions) are in the order of 180%.
Might a similar approach help us to get our public finances here in the UK under control?
At 31 March 2019, £1 was equal to A$1.84.
Amounts exclude public sector corporations (including the Reserve Bank of Australia) and locally-funded expenditure by Australian states and local government.
For more information go to budget.gov.au.