Fiscal Overview

Budget Review 2021–22 Index

Phillip Hawkins

The effect of the ongoing COVID-19 pandemic on the international and domestic economy has had a substantial impact on the Commonwealth Government’s fiscal position, with the Budget projected to remain in deficit for at least the next decade and government debt increasing, albeit from relatively low starting points.

Despite this, however, forecasts of the fiscal position released in the 2021–22 Budget have improved since the 2020–21 Budget released in October last year and the 2020–21 Mid-Year Economic and Fiscal Outlook (MYEFO) statement released in December 2020. As the Macroeconomic Overview shows, the forecasts for the domestic economy have improved, which has a flow-on to a better fiscal position in 2020-21 and 2021-22, primarily through higher-than-expected government tax receipts. The fiscal position is slightly worse in the last few years of the forward estimates, however, due to a number of significant Government policy announcements.

This brief summarises the key fiscal data and discusses the Government’s medium-term fiscal strategy. It provides historical time-series data over a period of 20 to 30 years to place the current fiscal position into historical context. Longer term historical data and charts are available from the Historical Australian Government Data spreadsheet.

Underlying cash balance

The surplus or deficit is measured by the underlying cash balance (UCB), which is a measure of the difference between the receipts of the Australian Government (including tax and non-tax receipts) and the payments the Government makes, on a cash accounting basis.

The Mid-year Economic and Fiscal Outlook 2019–20 released in December 2019 (the last fiscal update before the start of the COVID-19 pandemic) estimated that the Budget would be in surplus in 2019–20 and over each year of the forward estimates. As a result of COVID-19, the Budget recorded a deficit of $85.3 billion in 2019–20 and is anticipated to remain in deficit across each year of the forward estimates (see Figure 1).

Figure 1: underlying cash balance 2004–05 to 2024–25

Sources: J Frydenberg (Treasurer) and M Cormann (Minister for Finance), Mid–year economic and fiscal outlook 2019–20; Australian Government, Budget strategy and outlook: budget paper no. 1: 2020–21, statement 11; J Frydenberg (Treasurer) and S Birmingham (Minister for Finance), Mid-year economic and fiscal outlook 2020–21; Australian Government, Budget strategy and outlook: budget paper no.1: 2021–22, statement 11.

The Budget deficit in 2020–21, however, has been revised since the 2020–21 MYEFO, from $197.7 billion to $161.0 billion. Across the forward estimates (from 2020–21), cumulative deficits over the period from 2020-21 to 2024-25 are now anticipated to be $8.4 billion less than previously forecast ($503.3 billion compared to $511.7 billion). Over last three years of the forward estimates period, the forecast deficit is expected to be slightly larger than previously estimated in the 2020-21 MYEFO.

Figure 2 shows the change in the UCB because of both parameter variations and policy decisions. Parameter variations occur because of changes in the economy, or in the composition and size of the population and the consequential flow-on effects to revenue and demand for government payments and services. Policy decisions are explicit policy decisions taken by the Government, as announced in Budget Paper 2: Budget Measures.

Figure 2: parameter variations and policy decisions since the 2020-21 MYEFO

Source: Australian Government, Budget strategy and outlook: budget paper no.1: 2021–22, statement 3.

Since the release of the 2020–21 MYEFO, Treasury’s forecasts for the domestic economy have improved. As a result, parameter variations are expected to improve the underlying cash balance by $40.1 billion in 2020–21, $20.0 billion in 2021–22 and $104.2 billion across the five years to 2024–25.

This is primarily being driven by better-than-previously-anticipated government receipts, which are forecast to be $82.5 billion higher across the five years to 2024–25 because of relatively improved economic forecasts.

These parameter variations are offset by the Government’s policy decisions. These policy decisions are expected to reduce the UCB by $3.3 billion in 2020–21, $18.2 billion in 2021–22 and $95.8 billion across the five years to 2024–25.

The Government has announced a number of major policy decisions. These include increases in payments that are anticipated to cost the Budget $68.3 billion over the period to 2024–25, and reductions in receipts (due to tax cuts and concessions) that are anticipated to reduce the UCB by $27.6 billion over the same period. On the payments side of the Budget, this includes the impact of $9.5 billion in spending decisions the Government has included in the Budget that it has not yet announced (‘decisions taken but not yet announced).
Many of these policy decisions, unlike some of the temporary economic assistance measures announced to address the impact of the pandemic (including JobKeeper), will have ongoing impacts beyond the forward estimates.

The net impact of policy and parameter and other variations is that the deficit is forecast to be $36.8 billion less in 2020–21 than previously forecast and $1.8 billion less in 2021–22. However, the deficit is anticipated to be larger in the last three years of the forward estimates as policy decisions more than offset the improvement in the UCB due to parameter variations.

Payments and receipts

Figure 3 shows how government forecasts of payments have changed since the start of the COVID-19 pandemic. As a result of the pandemic the Government announced several temporary economic support measures that, along with the economic impacts of the crisis, led to substantially higher payments in 2019–20 and 2020–21.

Figure 3 also shows how forecasts of payments have changed since the 2020–21 Budget and 2020–21 MYEFO. Payments are anticipated to be slightly lower than previously expected in 2020–21, but higher across the forward estimates period. While much of the major expenditure included in the 2020–21 Budget comprised temporary economic support measures, many of the significant measures announced in the 2021-22 Budget involve increased expenditure that has an ongoing impact. These include major announcements in aged care, mental health, domestic violence, and childcare.

Payments are expected to be $660.8 billion in 2020–21 (32.1% of GDP—a peak as a percentage of GDP). This compares to the previous MYEFO forecast of $670.9 billion (33.4% of GDP).
However, payments are expected to be higher in later years than previously forecast at MYEFO; for example, payments are now forecast to be $612.4 billion (26.9% of GDP) in 2023–24, slightly higher than forecast at MYEFO when they were forecast to be $592.2 billion (26.8% of GDP). This is primarily due to a number of significant spending announcements in the 2021–22 Budget that have ongoing impacts. Total payments in 2024-25 are forecast to be $628.9 billion (26.2% of GDP).

Figure 3: Australian Government payments 2004–05 to 2024–25

Figure 4 also shows how the COVID-19 pandemic has affected Australian Government receipts, which fell significantly in 2019–20 following the start of the pandemic. However, the fall across the forward estimates forecast in the 2021–22 Budget is not as pronounced as previously anticipated in the 2020-21 MYEFO, particularly in 2020–21 and 2021–22. This upward revision in receipts forecasts is primarily due to an improvement in the underlying economic forecasts.

Figure 4: Australian Government receipts 2004–05 to 2024–25

Total receipts have been revised upwards by $26.7 billion to $499.8 billion (24.3% of GDP) in 2020–21 and by $23.6 billion to $482.0 billion in 2021–22 (22.6% of GDP). Across the four years to 2023–24 total receipts have been revised upwards by $63.8 billion.
Forecasts for income and other withholding tax receipts, which is primarily personal income tax, have been revised up since MYEFO, by $10.0 billion in 2020–21, by $9.1 billion in 2021–22 and by $32.5 billion across the forward estimates. According to Budget Paper 1: Budget strategy and outlook, this largely reflects stronger employment forecasts.
Company tax forecasts have been revised up since MYEFO, by $5.4 billion in 2020–21, by $9 billion in 2021–22 and by $4.8 billion over the four years. This partly reflects higher-than-expected iron-ore prices, which have improved the profitability of Australia’s mining sector. This effect is expected to taper off over the forward estimates period. Company tax receipts are expected to be around $10.6 billion lower in 2023–24, but this reflects a policy decision to extend a measure to allow immediate expensing of depreciable assets for a further year.
Goods and services tax receipts have also been revised upwards since MYEFO—by $6.6 billion in
2020–21, by $5.3 billion in 2021–22 and by $20.9 billion across the four years to 2023–24—as a result of stronger-than-expected consumption forecasts and increases in dwelling investment.
Superannuation tax receipts have been revised upwards since MYEFO, by $2.9 billion in 2020–21, by $2.1 billion in 2021–22 and by $7.8 billion across the four years to 2023–24.

Table 1 summarises the major variances in government receipts since the release of the 2019–20 MYEFO.

Table 1: major variations in taxation receipts estimates (2020–21 MYEFO to 2021–22 Budget)

Receipts ($m)	Fiscal update	2020–21	2021–22	2022–23	2023–24	2024–25
Total receipts	2020–21 MYEFO	473,133	458,497	487,057	526,274	na
	2021–22 Budget	499,831	482,053	494,000	532,855	571,969
	Variation	26,698	23,556	6,943	6,581	na
Income and other withholding taxes	2020–21 MYEFO	218,000	210,300	233,200	246,800	na
	2021–22 Budget	228,000	219,400	236,600	256,800	261,800
	Variation	10,000	9,100	3,400	10,000	na
Company tax	2020–21 MYEFO	87,900	73,300	69,400	91,600	na
	2021–22 Budget	93,300	82,300	70,400	81,000	100,500
	Variation	5,400	9,000	1,000	-10,600
Goods and services tax	2020–21 MYEFO	63,212	66,641	70,751	74,011	na
	2021–22 Budget	69,782	71,941	75,231	78,570	82,400
	Variation	6,570	5,300	4,480	4,559	na
Superannuation fund taxes	2020–21 MYEFO	8,760	13,160	13,560	13,460	na
	2021–22 Budget	11,670	15,260	14,510	15,260	16,210
	Variation	2,910	2,100	950	1,800	na

Note: ‘na’ means figures are not available from published documents.

Sources: J Frydenberg (Treasurer) and S Birmingham (Minister for Finance), Mid-year economic and fiscal outlook 2020–21; Australian Government, Budget strategy and outlook: budget paper no.1: 2021–22, statement 5.

Net debt and interest payments

Australian Government general government sector net debt is equal to the sum of deposits held; government securities; loans and other borrowing, minus the sum of cash and deposits; advances paid; and investments, loans and placements.

Figure 5 shows Australian Government net debt and net interest costs as a proportion of the economy. The Government has increased its borrowing and will continue to do so over the forward estimates period. However, net and gross debt are not expected to be as high as previously forecast at the 2020–21 MYEFO.

Net debt increased from $373.6 billion in 2018–19 (19.1% of GDP) to $491.2 billion in 2019–20 (24.7% of GDP) and is expected to increase to $617.5 billion (30.0% of GDP) in 2020–21. Net debt is expected to be $980.6 billion (40.9% of GDP) in 2024–25.
Despite increases in net debt, the net amount of interest paid on these debts is expected to stay flat at around 0.7% of GDP across the forward estimates period, reflecting continuing low interest rates on Australian Government debt.
Gross debt, measured as the total face value of Australian Government securities on issue, increased from $542.0 billion (27.8% of GDP) in 2018-19 to $684.3 billion (34.5% of GDP) in 2019–20. It is expected to increase to $829.0 billion (40.2% of GDP) in 2020-21 and to $1,199.0 billion in 2024–25 (50% of GDP).

Figure 5: net debt and net interest payments

Source: Australian Government, Budget strategy and outlook: budget paper no.1: 2021–22, statement 11.

Medium-term fiscal outlook

In the 2020–21 Budget the Government stepped away from a medium-term strategy to achieve budget surpluses, on average, over the economic cycle. It focused instead on growing the economy to reduce the unemployment rate over the medium-term and to stabilising, then reducing, net and gross debt over the medium-term. The Government reaffirmed this medium-term strategy in the 2021–22 Budget.

Medium-term projections now outline ongoing, but reducing, budget deficits across the medium-term with a deficit of 1.3% of GDP projected for 2031–32.
Payments are anticipated to stay relatively constant, at around 26.2% of GDP over the medium-term. Prior to 2019–20, the last time payments were higher than 26.2% of GDP was 1986–87.
Receipts are anticipated to grow slightly as a proportion of GDP over the medium-term, from 23.9% of GDP in 2024–25 to closer to 25% of GDP.
Net debt is projected to peak at 40.9% of GDP at 30 June 2025, lower than the peak of 43% of GDP at 30 June 2024 predicted at MYEFO. Net debt is expected to fall to 37% of GDP by 2031–32.