(ISSN 1448-5974) Budget 2010/11
/
The backdrop to this year’s budget
On May 11th the Commonwealth
Government announced its budget for
spending and revenue for the year ending
June 2011. The budget statement provides a
detailed source of information about the
Government’s financial plans, its fiscal policy
setting and its expectations about the future
state of the economy.
For several years in the lead up to 2008, the
Government had been able to run budget
surpluses. The strength of the economy in
pushing up tax receipts was the main driver
of these surpluses; rather than any particular
policy initiative designed to contract net
Government spending. Record low
unemployment over this period also assisted
expenditure control as it led to a reduced
need for social security payments.
However, as economic conditions quickly
changed over the course of 2008 with the
onset of the Global Financial Crisis, the
Government’s budget position deteriorated.
Previously expected taxation revenue
increases were not delivered due to slower
increases in company profits and
employment; whilst the Government also
commenced a number of unprecedented
spending initiatives designed to stimulate the
economy over 2008/09 and 2009/10.
This policy of providing fiscal stimulus
appeared to have some success, with
Australia’s economic growth fortunes turning
around rapidly. At the time of this May’s
budget announcement, Australia had
successfully avoided a recession (unlike most
other developed economies) with economic
growth now close to its longer term average
at 2.7%. This return of solid growth has
supported employment and company
profitability, thereby creating an increase in
tax revenue for the Government and an
improved the budget position.
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Special Issue
Subsequent to the Government substantially
loosening fiscal policy over the past two
years, the Reserve Bank has been gradually
tightening monetary policy since last October.
This tightening of policy is aimed primarily at
managing the rate of inflation, which has
approach the upper end of the Reserve
Bank’s target range at 2.9% for the year
ended March. The Commonwealth
Government would no doubt be cognisant of
the likelihood that a failure to reverse some of
the previous loosening of fiscal policy would
place additional upward pressure on inflation
and increase the need for higher interest
rates.
The need to improve the position of
Government finances is also heightened by
the ageing of Australia’s population. Like
many developed economies, projections of
age profiles in Australia suggest that there
will be a steep decline in the proportion of the
population in working age groups over the
next 2 decades. This reduces the relative
size of the tax base available to the
Government to fund the needs of a larger
population of retirees.
None-the-less, the extent of the improvement
in likely revenue over the next few years, did
provide the Government with the opportunity
to increase spending on areas of greatest
perceived need, such as health and
infrastructure. The fact that 2010 was an
election year may have also placed additional
pressure on the Government to increase
spending.
In formulating the 2010/11 budget therefore,
the Government had to determine to what
extent the improved taxation revenue would
be allowed to flow through to an improved
budget position and to what extent it would
be used to fund new spending initiatives.
1
 Fiscal policy response This time last year, such a significant
improvement in the position of fiscal policy
The Treasurer announced that the expected was not anticipated. As shown on the table
underlying cash balance position for the below, at the time of Budget Statement last
2010/11 financial year was a deficit of $40.8 year it was expected that the 2010/11
billion (or 2.9% of GDP). That is, the financial year would deliver a deficit of $57.1
Government expects its revenue next billion. The reduction in the size of the deficit
financial year to be $40.8 billion below its predominantly reflects significant changes in
expenditure. This compares with an expected economic parameters (changes in the
underlying deficit of $57.1 billion in the economic environment which have acted
current financial year and a $27.1 billion primarily to increase taxation revenue). New
deficit recorded in 2008/09. policy initiatives of the Government have had
much less impact on the fiscal stance.
However, as shown on the chart below, the
Government does anticipate a rapid 2010/11 Underlying Cash $ Billion % GDP
improvement in its budget position. In the Balance
2011/12 financial year the deficit is expected Forecast made in May 2009 -57.1 -4.1
to contract sharply to $13.0 billion, before Effect of parameter changes 17.7 1.3
returning to a small surplus the following Policy decisions -1.4 -0.1
year. Total variation 16.3 1.2
Forecast made in May 2010 -40.8 -2.9
Budget Surplus (cash position % GDP)
3% Source: 2010/11 Budget Statement
2%
1% Government debt
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

2012
2013
2014
2011

-1% With the budget position remaining in deficit,

-2% the size of the Government’s debt is
-3% expected to increase from $41.8 billion in
-4% 2009/10 to $78.5 billion in 2010/11 (5.6% of
-5% GDP). Debt levels are expected to peak at
Source: 2010/11 Budget Statement. Positive numbers in the graph 6.1% of GDP in 2011/12. This is significantly
are surplus positions and negative numbers are deficits. Figures below previous estimates and is also well
from financial years 2010 and onwards are Commonwealth
Government estimates.
below the peak of 18% of GDP that was
recorded in the mid 1990’s.
Compared with the current year, the lower
budget deficit expected in 2010/11 means International comparisons
that the net addition to demand across the
economy from the Government sector is The running of a net deficit in the Australian
lower. Therefore the change in the Government’s budget is consistent with most
Government’s fiscal policy setting will have a other developed economies. However,
“contractionary” impact on economic growth. weaker rates of economic growth elsewhere
That is, unless non Government demand have contributed to much larger deficits being
increases between 2009/10 and 2010/11, the adopted by many Governments around the
size of the economy would contract as a world than is being forecast in Australia.
result of the change in fiscal policy settings. Government debt of the world’s largest 25
developed economies is calculated to be
The change in the stance of fiscal policy is equivalent to 82% of GDP in 2011.The extent
equivalent to 1.5% of Gross Domestic of the rise in Government debt in some
Product (GDP). This financial year (2009/10) southern European nations has recently led
the Government’s deficit is now expected to to a downgrade in Government credit ratings.
be equivalent to 4.4% of GDP, with this ratio
anticipated to fall to 2.9% in 2010/11.

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 Revenue mix & initiatives • Increase in tobacco excise by 25%, with
effect from 30 April 2010.
Overall revenue is expected to increase by
9.4% in 2010/11, with the following • A 50% tax discount on up to $1,000 of
contribution to total revenue by category. interest income earned directly by an
individual.
Revenue Mix Non Tax
Revenue Initiative Saving in Projected
6%
Other Taxes
2010/11 $B 4-year
3% saving $B
Individual Resource Super Profits Tax 0.0 12.0
Indirect Tax Income Tax
43% Reduction in Company Tax 0.0 -2.3
24%
Increase superannuation 0.0 -1.3
contribution cap
Companies Super2%
Increase tobacco excise 1.3 5.5
22% 50% tax discount on interest 0.0 -1.0
Source: 2010/11 Budget Statement.

(Notably, revenue from the GST is reported Expenditure mix & initiatives
in the Commonwealth budget statement as
an indirect tax even though it is past directly Overall expenditure is expected to increase
through to the State Governments. In by 3.4% in 2010/11 (or 0.5% in real after
2009/10, GST is expected to be $50 billion or inflation terms). This is a substantial slowing
16% of total revenue). on the 5.7% increase in expenditure
estimated for the current financial year, which
The two primary drivers of revenue increase was largely aimed at providing a stimulus to
are individual income tax (up 11%) and the economy.
company tax (up 24%). Improvements in the
underlying state of the economy have The chart below shows the expected relative
supported increased employment and share of expenditure contributed by each
increased company profitability, thereby category in the 2010/11 financial year.
directly contributing to higher Government
revenue. Expenditure Mix Other
10% Social
Security
As per the Government’s previous 33%
commitment, small reductions in personal General
income tax rates were confirmed in the Government
26%
Budget Statement.

Some of the larger specific revenue initiatives Defence

announced in the budget are listed below:-
• Introduction a 40% Resource Super
Profits Tax (RSPT) on non-renewable
resources from July 2012.
• Reduction in the company tax rate from
30% to 29% for 2013/14 and 28% from
2014/15
• increasing the superannuation
contribution cap for individuals over 50
years old with superannuation balances
below $500,000,
6% Health
Education 16%
9%
Source: 2010/11 Budget Statement. The pass through of GST
revenue to the States is included in “General Government”,
The most significant change in expenditure
policy related to the increased health
allocation, which was a component of the
National Health and Hospitals Network plan,
where the Commonwealth Government
becomes the dominant funder of the health
system. All State Governments, with the
exception of Western Australia, have agreed
to participate in the new arrangements.

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 Provided below is a brief overview of the
major expenditure initiatives announced in
the Budget Statement.
• Implementation of a range of measures
encompassing the National Health and
Hospitals Network (see April issue of
Plain English Economics for more
details).
• Continued enhancement of Australia’s
military contribution to international
efforts in Afghanistan and the wider
Middle East Area.
and the relaxation in superannuation
contribution limits for those aged over 50
years are all measures designed to
encourage savings and reduce the impact
of population ageing on future budgets.
• Infrastructure spending – a capital
expenditure commitment of $1 billion for
upgrades to major rail networks and a
new infrastructure fund (the State
Infrastructure Fund, which will invest
more than $5bn over the next decade)
provide continued increased funding for
infrastructure projects.

• Deferral of the Carbon Pollution Government economic forecasts

Reduction Scheme (CPRS) creating net
expenditure savings. The Australian Government expects
economic growth will continue to increase
• Reforms to ensure the ongoing over the next 2 years. The forecast 4% rise in
sustainability of the Pharmaceutical GDP for 2011/12 suggests that the economy
Benefits Scheme (PBS) creating will be expanding at a rate above its longer
expenditure reductions. term trend.

A significant 14% improvement in the terms

Initiative Cost in Projected of trade (due mainly to export price growth) in
2010/11 4-year cost 2010/11, will act as a stimulus to the
$B $B economy and also support Government
Health & hospitals 1.5 7.0 revenue growth. Strong business investment
Military contribution 0.9 1.3 will also be a significant contributor to
Deferral of CPRS -0.4 -2.9 economic growth.
Reforms of PBS 0.0 -1.3
As shown on the table below, the rise in
economic growth is expected to be achieved
Longer term initiatives with a decline in the inflation rate from the
current level. This may imply that monetary
Some measures contained in the budget policy is expected to be held relatively tight
announcement supported longer term over the forecast period.
initiatives that have been themes of previous
budgets. Examples of newly announced Variable 2009/10 2010/11 2011/12
measures that are part of longer term
GDP 2.00% 3.25% 4.00%
strategies include:-
Unemployment (at 5.25% 5.00% 4.75%
June)
• Environmental sustainability - the Employment Growth 2.5% 2.3% 2.0%
Government will provide $653 million over
Inflation 3.25% 2.50% 2.50%
4 years to establish a Renewable Energy
Future Fund to provide additional support Wages 2.75% 3.75% 4.00%
for renewable energy projects. Current Account 4.75% 3.75% 5.00%
Deficit (% GDP)
• Private sector savings – a phased Terms of Trade -3.75% 14.25% -3.75%
increase in compulsory superannuation
from 9% to 12%, the 50% tax discount on Source: 2010/11 Commonwealth Government Budget Papers – Year
Average Data
up to $1,000 of interest income earned

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is held by the producers as a result of any use of the contents of this document. 4