BP1ST2 - APPENDIX A: STATEMENT OF RISKS

APPENDIX A: STATEMENT OF RISKS

Overview

The forward estimates of revenue and outlays in the Budget Papers incorporate assumptions and judgements based on information available at the time of publication.

A range of factors may influence the actual budget outcome in future years. The Charter of Budget Honesty Bill 1996 requires these to be disclosed in a Statement of Risks in each Economic and Fiscal Outlook Report. The purpose of this report is to increase the transparency of the fiscal projections.

Events which could affect fiscal outcomes include:

changes in economic and other parameters;
matters which have not been included in the fiscal forecasts because of uncertainty about their timing, magnitude, or whether they will eventuate; and
the realisation of contingent liabilities.

Economic and Other Parameters

The major factor influencing expected outlays and revenues in any year is typically changes in forecasts of economic and non-economic parameters. Over the past decade, differences between the economic parameter forecasts and outcomes have tended to be random in their effect on the budget balance. Differences in non-economic (programme-specific) parameter forecasts and outcomes, however, have been strongly biased towards an understatement of outlays in recent years. The sensitivity of the estimates to major economic parameters (but not other parameters) is discussed in Appendix B. Part I of this Statement discusses the economic outlook and identifies risks affecting major components

Programme-specific parameters are specific assumptions underpinning specific programme estimates, eg client numbers and/or average rates payable on family payments, family tax payments and disability support pension programmes.

The projected values for programme specific parameters are determined jointly with the relevant spending portfolio, drawing on trends in actual payments and information which the portfolio is able to provide on the impact of policy changes on the programme estimates. Forecasting of programme-specific parameters has been complicated by substantial policy changes in the past decade.

Fiscal Risks

Fiscal risks are general developments or specific events which may have an effect on the fiscal outlook. In some cases, the events will simply raise the possibility of some fiscal impact. In other cases, some fiscal impact will be reasonably certain, but it will not be included in the forward estimates because the timing or magnitude is not known. Fiscal risks may affect both outlays and revenue and may be positive or negative.

Specific sources of fiscal risk include:

litigation currently before the courts; and
possible Senate rejection of budget measures.

Some fiscal risks are reflected in the Outlays Contingency Reserve and are therefore included in the aggregate outlays figuring. The Contingency Reserve is an allowance included in aggregate outlays to reflect anticipated events which cannot be assigned to individual programmes at budget time. These items are not also included in the Statement of Risks. Fiscal risks in the Contingency Reserve include expected running costs carryovers from 1997-98 to 1998-99 and allowances for the established tendency for estimates of some programme expenditure to be overstated in the budget year and understated in the forward years.

Matters that are not currently under active consideration by government or pressure from interests outside the government for changes in spending levels are not treated as fiscal risks.

Details of known fiscal risks which may have an impact on fiscal forecasts but are not reflected in the forward estimates in the Economic and Fiscal Outlook are provided below.

Contingent Liabilities

Contingent liabilities differ from fiscal risks in that they are generally more readily quantifiable and clearly defined.

Contingent liabilities are defined as costs the Government will have to face if a particular event occurs. They include loan guarantees, non-loan guarantees, warranties, indemnities, uncalled capital and letters of comfort.

The Commonwealth's major exposures to contingent liabilities arise out of legislation providing guarantees over certain liabilities of Commonwealth controlled financial institutions (ie the RBA, Australian Industry Development Corporation, Housing Loans Insurance Corporation and Export Finance and Insurance Corporation) and the now fully privatised Commonwealth Bank of Australia. Other substantial non-loan guarantees include guaranteed payments from Telstra Corporation Ltd to the Telecom Superannuation Scheme.

The strategies for managing these exposures are aimed at ensuring the underlying strength and viability of the entities with respect to which guarantees have been provided so that the guarantees are not triggered. Similar strategies apply to entities not subject to explicit guarantees.

This is achieved through, for example:

the appointment of specialist boards to manage the entities in accordance with sound business practice;
specific oversight of the businesses by a Minister with responsibilities set down in establishing legislation (or the Memoranda and Articles of Association in the case of Corporations Law companies);
general monitoring and oversight of all government business enterprises by the Minister for Finance and Cabinet under Government Business Enterprise (GBE) monitoring arrangements; and
where applicable, prudential oversight by the RBA, the Insurance and Superannuation Commission and the Australian Securities Commission.

The Government has commissioned an independent review of governance and other arrangements applying to GBEs. Risk exposure is addressed as part of the terms of reference. The report has been finalised and the Government is currently preparing a response to allow any new arrangements adopted to come into effect from 1 July 1997.

Other arrangements are in place governing the entering into and monitoring of contingent liabilities such as indemnities and uncalled capital. Uncalled capital is primarily associated with international financial institutions such as the International Bank for Reconstruction and Development, the Asian Development Bank and the European Bank for Reconstruction and Development. Arrangements concerning uncalled capital are approved by Parliament and reports on the institutions are provided annually by the Government to Parliament.

Consistent with ABS standards, transactions concerned with the management of international reserves and the monetary system are classified as financing transactions (and do not impact on the deficits). Therefore, contingent liabilities (and assets) with the IMF are not shown here.

The issue of indemnities and other similar undertakings by Commonwealth agencies is primarily governed by the Finance Directions issued under the authority of the Audit Act 1901 and related policy guidelines issued by the Department of Finance. The policy guidelines covering indemnities have been reviewed and will be re-issued. The guidelines will be prepared in consultation with the Australian National Audit Office (ANAO) and the Attorney-General's Department and will be extended to cover guarantees and letters of comfort. The guidelines will reflect recommendations contained in the ANAO Report Commonwealth Guarantees, Indemnities and Letters of Comfort (No. 6 of 1996-97).