This Appendix discusses different cash based measures of the budget balance.
The headline budget balance used in the Budget Statements is measured as total revenue less total outlays, in accordance with longstanding practice. The measure quantifies the estimated call on the financial markets of government activity. The headline measure of the balance differs from that used by the Australian Bureau of Statistics (ABS) in the Government Finance Statistics (GFS) primarily on account of the treatment of receipts and payments by the budget sector of PTE superannuation and compensation provisions.
The underlying budget balance is measured as the headline budget balance adjusted for net advances. The latter comprises transactions in financial assets undertaken for policy purposes. The category consists of net policy lending (new policy loans and advances less repayments) and net equity injections (injections/purchases of equity less equity sales). Because repayments of past advances are now greater in aggregate than new policy lending, and sales of equity outweigh purchases and injections, net advances are currently negative. For 1996-97, net advances are sufficiently negative to provide for an underlying deficit but a headline surplus.
The underlying budget balance is broadly consistent with the ‘net lending’ concept in the national accounts, ie it excludes transactions which simply involve the transfer or exchange of a financial asset, and therefore have no impact on net public lending.
The ABS also estimates a deficit adjusted for net advances which, like its headline deficit counterpart, primarily differs from the underlying balance in its treatment of provisions. The underlying balance presented in the budget is preferred because it is consistent with the ABS national accounts treatment of provisions, which does not include increases in provisions in the net lending estimates.
Fiscal positions vary with the progression of the economic cycle due to the operation of the so-called ‘automatic stabilisers’. For instance, in an economic downturn revenues tend to be lower and social welfare payments higher than when the economy is operating at full capacity. For some purposes it is useful to abstract from these cyclical influences on the fiscal position. For example, it would be useful in analysing the stance of fiscal policy to know how much of the budget deficit is due to the state of the economic cycle and will be reversed as the cycle picks up and how much is attributable to the structure of the budget and will continue in the absence of specific policy adjustments.
While the concept of a structural balance is sound, in practice its estimation is not straightforward and its interpretation needs care. Several methods have been used to derive structural balance estimates, but differences in the definition and measurement mean that no method is generally accepted. The different approaches can yield significantly different estimates. These can often be traced back to issues associated with estimating the level of GDP in the absence of cyclical factors, both in current and future years, especially for an economy undergoing significant structural change.
There are other limitations to the use of structural balance estimates. Although structural balance estimates are often interpreted as being broadly indicative of discretionary fiscal policy, in most approaches taken the estimates will capture changes in all non-cyclical factors, and therefore, elements not directly related to discretionary fiscal policy. These can include the impact on revenues and outlays of changes in interest rates, interactions of the tax system with inflation, demographic changes and changes in the tax base induced by growth.
The OECD and the IMF regularly publish estimates of structural fiscal balances for member countries compiled on a consistent basis. Full details of the methodologies used by these organisations are available in Giorno, C., Richardson, P., Roseveare, D. and van den Noord, P., Potential Output, Output Gaps and Structural Budget Balances OECD Economic Studies No. 24, 1995 and IMF World Economic Outlook, October 1993 and May 1995.