Statement by the Treasurer and the Minister for Finance and Deregulation

Statement by the Treasurer and the Minister for Finance

Consistent with the Charter of Budget Honesty Act 1998, we declare that we have disclosed to the Secretary to the Treasury and the Secretary of the Department of Finance all details of any Government decision, or any other circumstance, that we know about:

1. that has, or could have, material fiscal or economic implications; and
2. that neither of the responsible Secretaries could reasonably be expected to know about.

Statement by the Secretary to the Treasury and the Secretary of the Department of Finance

Consistent with the Charter of Budget Honesty Act 1998, the 2016 PEFO provides updated fiscal and economic estimates and projections, based on the best professional judgment of the Treasury and the Department of Finance, reflecting all known information at the time of the issuance of the election writs.

In our best professional judgment, the economic and fiscal outlook for the Commonwealth has not materially changed since the publication of the 2016-17 Budget on 3 May 2016. While there has been recent movement in several economic indicators (including commodity prices, market interest rates and foreign exchange rates), these indicators can be volatile and our judgment is that these do not reflect a material change. As such, the fiscal projections published in the 2016-17 Budget provide a solid platform for decision making about the budget trajectory, including over the medium term.

The medium-term economic projections are based on the same set of underlying assumptions as the projections in the 2016-17 Budget. These assumptions are informed by past outcomes, economic theory and international practice. As the sensitivity analysis included in Statement 7 of Budget Paper No. 1, Budget Strategy and Outlook 2016-17 shows, projections are very sensitive to the underlying assumptions.

Importantly, the medium-term projections continue established practice of assuming that, once the economy returns to potential, it remains growing at that rate. That assumption is consistent with international practice but it is benign. Should Australia experience a significant negative economic shock, the fiscal position would be expected to deteriorate rapidly and not be consistent with the projections.

The medium-term projections are also underpinned by an assumption of annual productivity growth equal to the average of recent decades. Continued economic reform would be required in order to achieve this growth. Even if this rate of productivity growth were attained, living standards will rise more slowly than over recent decades.

Australia's relatively rich endowment has led it to run current account deficits for much of its history. Australians benefit from the willingness of foreign savers to finance current account deficits and support higher levels of investment. This alone suggests that it is prudent for Australia to run a relatively conservative fiscal stance. Successive Australian governments have adopted such prudent fiscal strategies.

The PEFO projections also maintain the assumption that tax receipts as a proportion of GDP do not rise above 23.9 per cent over the medium term. This is the average after the introduction of the GST and before the Global Financial Crisis.

The medium-term projections show that, without considerable effort to reduce spending growth, it will not be possible to run underlying cash surpluses, say in the order of one per cent of GDP, without tax receipts rising above 23.9 per cent of GDP. Even if payments were reduced from the levels projected at the 2016-17 Budget to the long-term average of 24.9 per cent of GDP by the end of the medium term, tax receipts would still need to rise to around 24.2 per cent of GDP by 2026-27, well above the average of the past 30 years, to achieve a surplus of one per cent of GDP. Reducing spending growth has proved difficult in practice.

Consistent with normal practice, the estimates in the PEFO assume that unlegislated policy decisions will be legislated and take effect from the next possible commencement date. Where legislation is not passed in time to enable commencement at that date, 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 PEFO. The indicative net impact of all unlegislated policy decisions included in forward estimates in the PEFO is around $18 billion in underlying cash terms and updated for parameter changes, over the five years to 2019-20.

Australia has a relatively strong fiscal position by international standards. However, Commonwealth Government debt levels are projected to reach recent historical highs, both on a gross and net basis. These debt levels are not an immediate concern given historically low interest rates and a growing economy. But should Australia experience a significant negative economic shock or increased interest rates or debt levels rise above current projections over the medium term, the debt burden will impose an increasingly significant cost on the fiscal and economic outlook. It is crucial for Australia to maintain its top credit rating to ensure the Commonwealth’s borrowing costs, and those across the economy more generally, are kept as low as possible.

More generally, the medium term outlook also shows the crucial importance of increasing productivity. This will require renewed vigour in encouraging and delivering structural reform across all parts of the economy.

Consistent with the Charter of Budget Honesty Act 1998, we declare that, to the fullest extent possible, the information in the Pre-election Economic and Fiscal Outlook 2016 for which we are responsible:

1. reflects the best professional judgment of the officers of the Treasury and the Department of Finance;
2. takes into account all economic and fiscal information available; and
3. incorporates the fiscal implications of Government decisions and circumstances disclosed by the responsible Ministers.