APPENDIX B: SENSITIVITY OF FISCAL AGGREGATES TO ECONOMIC DEVELOPMENTS

Table B1 provides a guide to the sensitivity of the forward estimates of outlays and revenue to variations in economic parameters in 1998-99. It is important to recognise that such guides provide only a ‘rule of thumb’ indication of the impact on the budget of changes in prices, wages and other parameters.

On the outlays side, the sensitivity analysis of the estimates provides for the following assumptions about changes to four broad groups of parameters:

• prices — all price deflators are assumed to increase by one percentage point at the start of the September quarter 1998, with wage deflators left unchanged;
• wages — all wage and salary rates are assumed to increase by one percentage point from the beginning of the September quarter 1998, with price deflators left unchanged;
• unemployment benefit recipients (includes Newstart Allowance and unemployed Youth Allowance recipients) — the total number of recipients is assumed to increase by 5 per cent from the beginning of the September quarter 1998; and
• Safety Net Adjustment — the Safety Net Adjustment determined by the AIRC is assumed to increase by $2 per week in the budget and forward years from the 1997-98 financial year.

Projected outlays respond to changes in economic parameters through a variety of mechanisms. For example, the Government’s decision to maintain pensions at 25 per cent of Male Total Average Weekly Earnings (MTAWE) means that projected spending on pensions will depend not just on changes to the CPI, by which pensions have been indexed for some time, but also on expected changes in the level of MTAWE.

In addition, about $26 billion of underlying outlays, comprising running costs, other Commonwealth Own Purpose Outlays of a running cost nature and Specific Purpose Payments to the States of a running cost nature, are indexed to weighted averages of movements in underlying inflation and the Safety Net Adjustment (SNA) determined by the AIRC.

The items affected by prices and wages have been re-examined since the 1997-98 MYEFO. This has resulted in a compositional change between the sensitivity of prices and wages. In addition, the Government has introduced the Youth Allowance which has had the effect of reducing unemployment benefit recipients.

The number of unemployment benefit recipients, and therefore the total spending on benefits, are affected by economic growth and employment growth. However, the relationship between GDP growth and unemployment benefit recipients is highly variable and difficult to quantify. For this reason, Table B1 only includes the impact of changes in the number of unemployment benefit recipients (ie Newstart Allowance and unemployed Youth Allowance recipients) on the estimates.

On the revenue side, the figures show the estimated impact of a one percentage point change in a range of economic variables in 1998-99 as a whole. The CPI is assumed to increase by a quarter of one percentage point at the start of each quarter in 1998-99.

Differences in impact over the years reflect:

• the full-year impact of variations in parameters not occurring until the year following the variation;
• the effect on revenue collections of variations in company and other individuals income occurring largely in the year following the receipt of income; and
• for variations in most economic parameters, the flow-through effect of a higher (or lower) base in a year on revenue collections in subsequent years.