Bills Digest no. 62 2008–09
Appropriation (Economic Security Strategy) Bill (No. 1) 2008-09
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Date introduced:
11 November 2008
House:
House of Representatives
Portfolio:
Finance and Deregulation
Commencement:
On Royal Assent
Links: The relevant
links to the Bill, Explanatory Memorandum and second reading speech
can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills
have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.
To appropriate money for the ordinary
annual services of government as part of the government’s Economic Security
Strategy.
On 14 October 2008, the Rudd Government announced
its Economic Security Strategy.[1]
The context for the announcement is what may be the most severe downturn
in the world economy since the Second World War. The downturn has inevitably
affected Australia, which faces the prospect of a sharp decline in economic
growth if not a recession. To try to counter the slowdown, the government
announced a discretionary fiscal stimulus package known as the Economic
Security Strategy. The Appropriation (Economic Security Strategy) Bill
(No. 1) 2008-09 (the Bill) seeks funding for those elements of the Economic
Security Strategy which are classified as ordinary annual services of
government. Two related Bills—the Appropriation (Economic Security Strategy)
Bill (No. 2) 2008-09 and the Social Security and Other Legislation Amendment
(Economic Security Strategy) Bill 2008—respectively seek funding for services
other than ordinary annual services and for various social welfare measures.[2]
The Economic Security Strategy (the Strategy) is costed
at $10.44 billion, and covers the three years beginning 2008-09.[3] The bulk of the proposed spending—$9.65 billion—is
concentrated in 2008-09. The Strategy has six components. This Bill seeks
to appropriate $146 million in 2008-09, to be distributed as follows:
- an expansion in the number of places in the Productivity Places Program,
costing approximately $117 million;
- administrative costs of implementing the one-off payments detailed
in the Social Security and Other Legislation Amendment (Economic Security
Strategy) Bill 2008:
- departmental expenses of $16.5 million for the Department of Families,
Housing, Community Services and Indigenous Affairs (FaHCSIA) and
$0.64 million for the Department of Veterans Affairs; and
- administered expenses of $11.55 million for FaHCSIA to conduct
a public information campaign, to inform eligible recipients of
their entitlements under the Strategy.
Other elements of the Strategy are contained in the other
two Bills currently before the Parliament. The following measures are
contained in the Social Security and Other Legislation Amendment (Economic
Security Strategy) Bill 2008:
- a one-off pension payment;
- a one-off carers payment;
- a one-off seniors payment to holders of Seniors Cards and eligible
Veterans’ Affairs Gold Cards; and
- a Family Tax Benefit payment of $1000 per eligible child.
The final component of the Strategy is contained in Appropriation
(Economic Security Strategy) Bill (No. 2) 2008-09 which increases subsidies
to first home buyers.
Generally, business groups have welcomed the strategy.
Australian Industry Group:
The Government’s $10.4 Billion Economic Security package
provides timely insurance for the local economy against the risks from
the global crisis and equally timely support against the impacts of
flat and weakening domestic economic activity. These spending
measures will complement the recent interest rate reductions and steps
to underwrite confidence in our banking system.[4]
Business Council of Australia:
This package contains all three ingredients to have
maximum impact. It is well-timed, well-targeted, and temporary…The package
is well-timed. It provides fiscal stimulus that will be delivered when
the economy is likely to be at its weakest point, with the impact of
the global slowdown hitting hardest. The package is well-targeted.
It targets the people most likely to spend it, and most likely to need
it – that is, lower-income households. And the package is temporary.
This is vital. By providing one-off and time-limited payments, Australia
keeps the capacity to return to budget surpluses again once this emergency
is over. The payments in this package meet that criteria and avoiding
building continuing obligations into the Budget.[5]
Australian Retailers Association:
Retailers applaud any move to reinvigorate consumer
sentiment and start the upwards trend for consumer spending in time
for the 2008 Christmas season. Prime Minister Rudd's plans for a Christmas
bonus is great news for consumers who look forward to enjoying the gift
giving tradition of Christmas - and even better news for retailers hard
hit by months of reduced consumer demand.[6]
Australian Chamber of Commerce and Industry:
However, the Australian Chamber of Commerce and Industry
believes that additional measures are required beyond those contained
in the Strategy:
The Australian Chamber of Commerce and Industry says
that economic measures directed at lifting productivity such as taxation
reform and cutting back on non-productive government expenditure are
still needed to complement [the] economic stimulus package…
Our best response to minimise job losses in an economic
downturn is to take cost pressure off businesses, including small business,
and increase national productivity. This is unfinished work, which still
needs attention. Difficult balances need to be made between savings
and spending in these times. Committing so much of the surplus to injecting
cash into households leaves less to finance other necessary structural
reforms like taxation reform that have a more lasting effect on productivity.
Today’s commitment to additional training places will
be welcomed by business and is well targeted to include a wider range
of skills needed by employers.[7]
Seniors groups have also welcomed the package, particularly
the assistance directed to pensioners.
Council on the Ageing (COTA) Over 50s:
Pensioners have been quite rightly identified as well
deserving beneficiaries of the Rudd Government economic stimulus package
designed to shield Australia from the global financial crisis. We know
that financial support to pensioners will stimulate the local economy.
Pensioners spend on basic needs at their local shops, not on luxury
imports.[8]
National Seniors Australia:
[National Seniors Australia are] very pleased.
The government has listened to the concerns of our most vulnerable older
Australians and they’ve come to the table. This means single age pensioners
in particular, who usually barely scrape by, will have little reason
to do without this Christmas. In a real sense, it means being able
to buy presents for their grandchildren, have ham on the table or fix
that leaky roof.[9]
Australian Council of Social Services:
However, whilst the Australian Council of Social Services
(ACOSS) supports the assistance given to pensioners and carers, they
have criticised the package for not providing any additional support to
the unemployed:
ACOSS welcomes the Government's measures to assist
pensioners, carers and families while also reducing the risk of a serious
economic downturn. Groups such as disability support pensioners and
sole parents, who have previously missed out on benefits like the Utilities
Allowance, will be financially better off. However, unemployed people,
who will be most affected in the event of an economic downturn, have
missed out on financial assistance.[10]
A number of economists have been quoted on their thoughts
about the Strategy in the Sydney Morning Herald on 14 October 2008. The
following comments are relevant to this Bill:[11]
Shane Oliver, AMP Capital:
It's a 50-50 call whether we'll see [a recession]
or not - the risk is the December quarter or the first six months of
next year. Whether it helps to stop a recession remains to be seen.
There's no doubt it will help minimise the severity of recession.
Alan Oster, National Australia Bank:
The current spending initiatives for low income families
and pensioners should provide a significant boost to household consumption
by over one per cent around the end of 2008 and in the first half of
2009 given that the majority is likely to be spent.
Riki Polygenis, ANZ Bank:
Not only is this package much larger than earlier
speculated, but it has been constructed to get the maximum economic
impact for the dollars spent. It is largely directed to people who
are likely to spend them and the largest impact will be in the December
quarter when the negative effects of the financial crisis are likely
to be greatest.
Wolfgang Munchau (Financial Times, quoted on www.businessspectator.com.au) has
outlined a theoretical case for fiscal stimulus, not just in Australia,
but globally. He believes that monetary policy will be ineffective as
long as money markets are ‘clogged’:
The Bank of England’s extraordinary 1.5 percentage
point interest rate cut to 3 per cent is scary, justified and irrelevant.
It is scary because it confirms the British economy may be headed for
one of the biggest slumps since the second world war. It is justified
in the sense that falling inflation rates give central banks sufficient
room for manoeuvre. But unfortunately, it will not make much difference
to the prospects of an economic recovery…The reason is that the channels
through which monetary policy affects the real economy are still clogged.
There are several such channels, including ones for bank lending. But
most of them go through the money market, as neither companies nor households
have direct access to central bank money. To the extent that the money
markets are not working properly, monetary policy is correspondingly
ineffective.[12]
Institute of Public Affairs:
Alan Moran of the Institute of Public Affairs disagrees
with the need for both monetary and fiscal stimulus, saying that instead
of being encouraged to spend, households need to repair their balance
sheets.
Simply reducing interest rates does not solve the
problem, which is that assets are overvalued - and some financial businesses
that have highly leveraged loans are holding some assets that are worthless.
Nor are cash handouts or other such measures in the Government's $10.4
billion program a solution. As ever, the problem is not a shortage of
demand. It is that people have become overextended and, with assets
overvalued, they have to repair their real levels of savings. Disposing
of the budget surplus in a spending spree means releasing funds that
previously were locked up in forced savings by taxpayers.
If pushing $10.4 billion into the economy to promote
consumer spending was going to do the trick why not increase the largesse
tenfold? There is no documented case of handouts averting a recession.
Unless the productive potential is there, more money will not bring
increased output. And Australia's productive potential has been diminished
in recent years by wasteful investments and by regulatory impediments.
While we should release funds that have been taken from the community
in over-taxation, we must simultaneously remove many other inflexibilities
that have diverted savings from productive venues. Above all, we must
recognise that assets are not worth as much as we thought they were.
Having done so, we have to allow asset prices to fall to their underlying
market value.[13]
The Bill proposes additional expenditure of $146,054,000
for the ordinary annual services of government in 2008-09.
Monetary policy has moved into an aggressive easing cycle,
with the RBA’s cash rate target (the ‘cash rate’) being dramatically cut
by two full percentage points since the cash rate peaked at 7.25 per cent
prior to the September 2008 RBA Board meeting (after the 12 rises of 25
basis points each that occurred from May 2002 to March 2008). The cash
rate is now at the same level it was between December 2003 and March 2005.
Clearly, interest rates have recently been cut to expansionary levels
and this looks set to continue for the immediate future. Thus, monetary
policy is moving in the same direction as the Economic Security Strategy.
Quite obviously, as discussed by others above (and assuming
successful passage of this Bill), a significant fiscal stimulus will be
introduced into the economy by the Commonwealth. The magnitude of the
stimulus package is roughly 1 per cent of real Gross Domestic Product
(GDP). The extent to which this actually feeds into real GDP growth depends
on the propensities of each of the groups that are being targeted with
the Strategy to consume their present income. In terms of the one-off
payments to pensioners, carers, seniors and families, the first three
of these four demographic groups would be likely to spend a considerable
portion of the bonus payments they receive. With the fourth group, the
effect is uncertain. Individual households all face different financial
circumstances and so the impact on both immediate and long-term consumption
from a temporary increase in income is ambiguous.
The key factors in determining the marginal propensities
to consume out of current income are:
- whether a household is a net borrower or saver and their current levels
of ‘financial wealth’[14]
- access to credit markets
- percentage of income spent on essential items, like food, shelter,
energy and transport, and
- the amount of debt/savings relative to present income.
If households are neither savers nor borrowers (nor have
any significant holdings of assets) and are unable to borrow money at
similar rates to the interest they would receive on highly liquid assets,
such as savings deposits (i.e. they face ‘liquidity constraints’), then
it may be optimal for them to consume all of the windfall change to their
current income and not ‘smooth’ their consumption over their lifetime.
It is likely that a significant percentage of the groups that are targeted
in the Strategy would be liquidity-constrained, so these measures are
more likely to induce additional consumption than, say a lump-sum subsidy
to all households or income tax cuts.
As the payments are lump-sum in nature, the percentage
increase in current income for households will vary by their existing
income levels. Low-income households will see a larger percentage change
to their income than high-income households. Given that low-income earners
are more likely to spend the extra income on essentials, rather than spend
it on luxuries or save it, it is probable that low-income households will
spend the bulk of their additional payments as a result of the Strategy.
Households with large debts, all else being equal, are
more likely to save, rather than consume their windfall gain. One would
suspect that eligible recipients of the family payments would be more
likely to be paying a mortgage than the other targeted groups (given that
a lot of people who are currently raising children are at an earlier stage
of the lifecycle than most pensioners and seniors) and so there is a greater
chance that this group would, as a whole, have a lower marginal propensity
to consume than the other groups targeted by the Strategy.
Another key factor in determining the total effect of
the Strategy is the degree to which consumption is directed to Australian-made
goods and services, rather than imports. Whilst there will still be some
stimulus to the domestic economy (as a result of the value being added
by the retail industry), all else being equal, the greater the proportion
spent on imports, the lower the stimulus to the domestic economy.
Finally, the degree to which state and territory finances
deteriorate, and the choices made by state and territory governments to
deal with that situation will also have a bearing on the effectiveness
of the strategy. Any fiscal stimulus from the Commonwealth could be offset
by fiscal tightening at the state and territory level.
Therefore, one can conclude that in broad terms, fiscal
and monetary policy are both moving in an expansionary direction, although
the precise effect of the fiscal stimulus package is uncertain.
For the most part, the Bill’s provisions are identical
to those in Appropriation Act (No. 1) 2008-09, which appropriates funds
for ordinary annual services. The Bill differs from Appropriation Act
(No. 1) 2008-09 in that certain provisions in Appropriation Act
(No. 1) 2008-09 are not relevant to the Bill (for example, those relating
to the advance to the Finance Minister) or have been rendered redundant
by subsequent legislation (for example, those relating to section 31 agreements).
Clause 3 contains definitions. Most definitions
are identical to those in Appropriation Act (No. 1) 2008-09. However,
clause 3 expands the definition of ‘Portfolio Budget Statements’
to mean not only the Portfolio Budget Statements for the Bill but also
the Portfolio Budget Statements for Appropriation Act (No. 1) 2008-09
and Appropriation Act (No. 2) 2008-09.
Clause 3 defines Portfolio Supplementary Estimates
Statements to mean the Portfolio Supplementary Estimates
Statements that were tabled in the Senate or the House of Representatives
in relation to the Bill for this Act and the Bill for the Appropriation
(Economic Security Strategy) Act (No. 2) 2008-2009.
Clause 4 deals with ‘portfolio statements’. Clause
4 provides that the Portfolio Budget Statements and Portfolio Supplementary
Estimates Statements are relevant documents for the purposes of section
15AB of the Acts Interpretation Act 1901.[15]
Clause 6 Summary of appropriations states
the total of the items specified in Schedule 1 is $146,054,000.
Schedule 1 lists all the agencies that are to be funded,
the amount of funding, and whether the item is departmental or administered.
Clause 8 deals with ‘administered items’. In essence,
these are the costs of programs such as aged and disability pensions.[16] Clause 8 is identical
to that in Appropriation Act (No. 1) 2008-09 except that subclause
8(2) includes the additional words ‘or Portfolio Supplementary Estimates
Statements’. Subclause 8(1) confirms that if an amount is specified
as an administered item for an outcome, then money can be expended to
achieve that outcome. Subclause 8(2) provides that where the Portfolio
Budget Statements or Portfolio Supplementary Estimates Statements indicate
an activity is for an outcome, the amount in the administered item is
taken to contribute towards the achievement of that outcome.
Clause 9 deals with CAC Act body payments. A CAC
Act body is a Commonwealth authority or company within the meaning of
the Commonwealth Authorities and Companies Act 1997 (the CAC Act).
Clause 9 deals with a ‘CAC Act body payment item’. This is the
total amount set out in Schedule 1 of the Bill in relation to a
CAC Act body under the heading ‘Administered Expenses’. For example, for
the Defence portfolio, Schedule 1 shows a payment to the Australian
War Memorial—a CAC Act body—of almost $39 million.
Departmental items do not automatically lapse if they
are not spent. A process exists whereby unspent and unwanted departmental
items can be abolished. Clause 10—Reducing departmental items,
contains this process. Subclause 10(1) specifies who can request
reductions in departmental expenses. Paragraph 10(1)(a) enables
the Minister for an agency to ask the Finance Minister to reduce a departmental
item for that agency, while paragraph 10(1)(b) enables the Chief
Executive of an agency, for which the Finance Minister is responsible,
to ask the Finance Minister to reduce a departmental item for that agency.
Subclause 10(2) specifies that the Finance Minister may make a
determination reducing a departmental item by the amount in the request.
Subclause 10(3) provides that the determination will be
null and void if its effect is to reduce the departmental item below nil.
There is also a process for reducing administered items.
This process differs from that for departmental items. Clause 11—Reducing
administered items contains the process for administered items. Subclause
11(1) provides that if the amount shown in the financial statements
of an agency’s annual report shows that the expensed amount of an administered
item is less than the amount appropriated for that item, then the amount
of the reduction is the difference between the appropriated amount and
the amount in the annual report. Subclause 11(2) enables the Finance
Minister to determine that an amount, published in the financial statements
of an agency, is taken to be the amount specified in his or her determination,
while paragraph 11(2)(b) ensures that the amount published in the
annual report can be corrected. Subclause 11(3) provides that the
Finance Minister’s determination, made under subclause 11(2), is
a legislative instrument, that section 42 (relating to disallowance) of
the Legislative
Instruments Act 2003 applies to the determination, but that Part
6 (relating to sunsetting provisions) of the Legislative Instruments
Act 2003 does not apply to the determination. In brief, this means
that the Minister’s determinations are disallowable by Parliament, but
once made, will not expire.
Clause 12 contains the process for reducing
CAC Act body payments. This is almost identical to that for departmental
items. One difference is that whereas paragraph 10(1)(b) enables
the Chief Executive of an agency, for which the Finance Minister is responsible,
to ask the Finance Minister to reduce a departmental item for that agency,
paragraph 12(1)(b) enables the Secretary of the Department for
which the Finance Minister is responsible to request a reduction for a
CAC Act body. The reason the Secretary of the Department is empowered
to request a reduction follows from the fact that payments to CAC Act
bodies are channelled through the relevant portfolio departments. Subclause
12(2) empowers the Finance Minister to make a determination reducing
a CAC Act body payment by the amount requested. Subclause 12(5) provides
that proposed subsection 9(2) does not limit the reduction of a
CAC Act body payment under this section.
Concluding
comments
This Bill contains provisions for the Finance Minister
to appropriate funds for an increase of 56 000 training places
under the Productivity Places Program. The Bill also contains provisions
to appropriate funds in order to implement other elements of the Economic
Security Strategy, such as one-off payments to pensioners, carers and
seniors (the funds for these payments are to be appropriated under the
Social Security and Other Legislation Amendment (Economic Security Strategy)
Bill 2008) and an increase in subsidies for first home buyers (these funds
are to be appropriated under the Appropriation (Economic Security Strategy)
Bill (No. 2) 2008‑09.
If this Bill is passed, the Finance Minister will appropriate
$117 million to fund the additional 56 000 training places under the Productivity
Places Program, administered by the Department of Education, Employment
and Workplace Relations. The Finance Minister will also appropriate $16.5
million for the Department of Families, Housing Community Services and
Indigenous Affairs; and $0.64 million for the Department of Veterans Affairs
for administrative costs associated with implementing the payments to
pensioners, families, carers and seniors. Finally, the Department of
Families, Housing Community Services and Indigenous Affairs will also
receive $11.55 million to conduct a public information campaign to
ensure eligible recipients under the Strategy are aware of their entitlements.
The total financial impact of this Bill is estimated to be $146 million.
Scott Kompo-Harms and Richard Webb
24 November 2008
Bills Digest Service
Parliamentary Library
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