Part III:  Fiscal Outlook
Overview
The fiscal outlook over the four years to 2001‑02 remains sound. The budget is already in surplus and surpluses are projected to continue over the forward estimates period. In 1998‑99, the underlying budget surplus is expected to be $3.3 billion, an increase from the $1.2 billion surplus achieved in 1997‑98. While the expected surplus in 1998‑99 is larger than estimated at the time of the September 1998 PEFO, smaller surpluses are now projected for the outyears compared with the PEFO.
Chart 2:  Underlying Budget Aggregates
Panel A:  Budget Sector Revenue and Outlays 

Panel B:  Underlying Budget Balances

The current fiscal outlook is consistent with the Government’s commitment to maintain the budget in surplus while economic growth prospects remain sound. Furthermore, the current and anticipated surpluses have been achieved primarily through outlays restraint rather than increases in revenue. Following the introduction of A New Tax System, underlying outlays as a proportion of GDP are expected to decline to 20.5 per cent by 2001‑02, while revenue is expected to decline to 21.9 per cent of GDP over the same period.
The Government is also on target to achieve its five year objective of halving the ratio of Commonwealth general government net debt to GDP from that inherited in 1995‑96 (see Chart 3). This is driven by the underlying surpluses in prospect, combined with asset sale proceeds.
Chart 3:  Commonwealth General Government Net Debt(a)

(a)	Data for 1987‑88 to 1997‑98 are from ABS Public Sector Financial Assets and Liabilities (Cat. No.5513). These data take into account the reclassification of universities from the general government sector to a separate multijurisdictional sector. Data for years prior to 1987‑88 are Treasury estimates which do not exclude universities. The adjustment for universities has only a negligible effect on the estimates.

Table 5 provides a reconciliation between the underlying budget balance estimates released at the time of the 1998‑99 Budget, the September 1998 PEFO and the 1998‑99 MYEFO, identifying the effects of policy decisions and parameter and other variations.
The major revisions to the outyears from the 1998-99 Budget to the PEFO reflect the impact of A New Tax System. Since the PEFO, parameter and other variations have been the major source of changes in the budget outlook. These variations improve the budget balance in 1998‑99, but reduce the estimated balance in the other three years.
In particular, parameter and other variations since the PEFO result in lower outlays over the forward estimates period. This is primarily due to the combination of regular conservative bias allowance drawdowns from the contingency reserve and lower than expected beneficiary numbers for disability support programmes. On the revenue side, parameter and other variations increase revenue in 1998‑99, but reduce revenue over the forward estimates period. Over the outyears, the impact on revenue from parameter variations more than offsets the impact on outlays.
Table 5:  Reconciliation of Underlying Budget Balance Estimates(a)

(a)	A negative figure for revenue indicates a deterioration in the budget balance. For all other items, a negative figure indicates an improvement in the budget balance. Totals may not sum due to rounding.
(b)	Includes total budgetary cost of A New Tax System (including the PDI effects of A New Tax System). For all other policy decisions, PDI effects are included in parameter and other variations.
(c)	Includes the PDI cost of policy measures.
(d)	Includes the interest revenue impact of policy measures.

Major policy decisions taken in the period from the 1998‑99 Budget to PEFO include:
•	measures announced in A New Tax System, including substantial reductions in total revenue and outlays;
•	funding from the Telstra Social Bonus to upgrade telecommunications infrastructure in remote Australia to facilitate the abolition of the pastoral call rate, and increase funding for Networking the Nation ($210 million over four years);
•	additional funding provided to the States under the Australian Health Care Agreements of $724 million over three years; and
•	additional funding for the Australian Federal Police of approximately $65 million over three years.
Major policy decisions taken from the PEFO to 13 December 1998 include:
•	one-off funding for the Victoria Emergency Fund of $100 million in 1998-99;
•	increased funding for Catholic schools of around $444 million over four years;
•	additional funding for the Strategic Partnerships — Industry Research and Training Scheme of approximately $60 million over three years;
•	additional funding of $250 million in 2001‑02 from the Telstra Social Bonus for the Natural Heritage Trust; and
•	funding from the Telstra Social Bonus to establish up to 500 rural transaction centres, further increase funding for the Networking the Nation regional telecommunications programme, and additional Television Fund Initiative expenditure ($163 million over four years).
A full description of all policy decisions taken since the 1998‑99 Budget can be found in Appendix A. 
Appendix B sets out a Statement of Risks which details potential factors which could materially affect the fiscal outlook. One important factor influencing the fiscal outlook will be variations in the economic parameters. A discussion of the estimated sensitivity of the outlays and revenue estimates to changes in economic parameters is provided in Appendix C.

Outlays
Table 6 provides estimates of budget sector outlays for 1998‑99 to 2001‑02.
Table 6:  Estimates of Budget Sector Outlays

Over the period 1998‑99 to 2001‑02, underlying outlays are expected to:
•	in real terms, increase in 1998‑99 and 1999‑2000, decline in 2000‑01 reflecting the impact of A New Tax System and remain broadly unchanged in 2001‑02; and
•	decline from 24.3 per cent of GDP in 1998‑99 to 20.5 per cent of GDP in 2001‑02, again largely reflecting the impact of A New Tax System.
Table 7 reconciles the underlying outlays estimates between the 1998‑99 Budget, the 1998 PEFO and the 1998‑99 MYEFO in terms of policy decisions and parameter and other variations.
Table 7:  Reconciliation of Changes to Budget Sector Underlying Outlays Since the 1998‑99 Budget

(a)	Includes PDI effects of A New Tax System. For all other policy decisions, PDI effects are included in parameter and other variations.
(b)	Includes PDI impact of revenue and outlays measures.

Since the 1998‑99 Budget, the estimates of underlying outlays have increased for 1998‑99 and 1999‑2000 and declined significantly for the remaining outyears.
Variations in outlays estimates since the 1998-99 Budget have largely been driven by policy decisions. This primarily reflects A New Tax System, which has:
•	increased outlays by $0.3 billion and $1.9 billion in 1998-99 and 1999-2000 respectively; and
•	reduced outlays by $11.9 billion and $12.7 billion in 2000‑01 and 2001‑02 respectively (due mainly to the abolition of Financial Assistance Grants to the States/Territories).
Parameter and other variations since the budget increase underlying outlays in 1998‑99 and reduce underlying outlays in the outyears.
Revisions to economic parameters since the budget include an increase in the number of unemployment beneficiaries (including through a technical adjustment for those unemployed persons previously receiving Youth Training Allowance and now receiving Youth Allowance); a weaker exchange rate; and a reduction in public debt interest costs relative to the 1998‑99 Budget estimates.
Downward revisions to program specific parameters over the four years to 2001-02 principally reflect lower average rates and forecast client numbers for a range of Disability Support Pensions and allowances.
Other revisions increase underlying outlays in 1998‑99, but reduce outlays over the forward estimates period.  
•	Increased underlying outlays in 1998-99 largely reflects ‘carryovers’ of underspends from 1997‑98 into 1998‑99, and the upfront cost associated with the downsizing of Centrelink.
•	Reduced underlying outlays in the outyears are due primarily to a drawdown of the conservative bias allowance in the Contingency Reserve, partly offset by, among other things, increased aged care due to revised demographic and eligibility criteria.
Conservative Bias Allowance
The forward estimates are based on decisions already made and economic projections. They also include an allowance for the established tendency for spending on existing Government policy (particularly for demand driven programmes) to be higher than estimated. This allowance, known as the conservative bias allowance, is included as part of the contingency reserve in the forward estimates at the beginning of each budget year. It is then gradually reduced as the year progresses so that the budget year conservative bias allowance is zero.

Table 8:  Policy Decisions taken since the 1998‑99 Budget(a)

(a)	Policy decisions taken up to 13 December 1998.

Table 8:  Policy Decisions taken since the 1998‑99 Budget (continued)

Table 8:  Policy Decisions taken since the 1998‑99 Budget (continued)

Table 8:  Policy Decisions taken since the 1998‑99 Budget (continued)

Table 8:  Policy Decisions taken since the 1998‑99 Budget (continued)

*	These measures have no impact on underlying outlays; they will, however, affect headline outlays.

Table 9:  Changes to Budget Sector Underlying Outlays by Function since the 1998‑99 Budget ($m)

Table 10:  Changes to Budget Sector Outlays by Economic Type since the 1998‑99 Budget ($m)

Table 11:  Changes to Budget Sector Underlying Outlays by Portfolio since the 1998‑99 Budget ($m)
(a)	Figures differ from estimates published in the 1998‑99 Budget due to Administrative Arrangements Order changes introduced since that time.

Revenue
Table 12 provides estimates of tax, non‑tax and total revenue from 1998‑99 to 2001‑02.
Table 12:  Estimates of Budget Sector Revenues

Relative to the 1998‑99 Budget, the MYEFO estimate of total revenue is higher in 1998‑99 but lower in 1999-2000, 2000-01 and 2001-02.
•	Measured as a proportion of GDP, total revenue is expected to be slightly lower in 1998-99 and 1999-2000, and significantly lower in 2000-01 and 2001-02.
The measures announced in A New Tax System will result in both revenues and outlays being significantly lower in 2000-01 and 2001-02. Key factors resulting in reduced revenue are the abolition of Wholesale Sales Tax and major reductions in personal income tax. Revenue from the GST is classified as State and Territory revenue.
Revisions to the 1998‑99 Budget estimates reflect the impact of revisions to economic parameters, revenue collections up to early December, and policy decisions taken since the Budget — up to and including 10 December 1998.
Table 13 reconciles the 1998‑99 Budget revenue estimates to current revenue estimates in terms of policy decisions and parameter and other variations.
Table 13:  Reconciliation of Changes to Budget Sector Revenue since the 1998‑99 Budget

(a)	Includes interest revenue impact of revenue and outlays measures.

Policy decisions made after the 1998‑99 Budget increase revenue in 1999-2000 and reduce revenue significantly in 2000-01 and 2001-02. As noted above, the most significant changes in revenue are due to A New Tax System. Revenue policy decisions are outlined in Table 14 and detailed in Appendix A.
Table 14:  Policy Decisions Taken Since the 1998‑99 Budget

(a)	This measure relates to a policy decision taken in the period before the 1998 election but which was not identified as a measure in the September 1998 PEFO.
(b)	The omission of this measure from the September 1998 PEFO was corrected by a press release by the Secretary to the Treasury on 9 September 1998.
(c)	This measure protects revenue.

Table 15 provides a detailed breakdown of the changes to estimates of major revenue items for 1998‑99.
Table 15:  Revenue Estimates

(a)	Includes tax on realised capital gains.
(b)	Includes Child Support Trust Account receipts of $520 million.
(c)	Includes Reportable Payments System payments by individuals of $1 million.
(d)	Includes refunds of Child Support Trust Account receipts of $10 million.
(e)	Customs duty collections include around $920 million of customs duty imposed on imported petroleum products, tobacco, beer and spirits, which is akin to excise duty on these items.

The changes in the 1998‑99 estimates mirror changes in underlying economic conditions in 1997‑98 and 1998‑99.  In particular, higher PAYE collections (following stronger than expected employment growth), increases in other individual income tax collections, and strong collections from companies and superannuation funds add to the estimates for 1998-99. Petroleum Resource Rent Tax is sharply lower, due to weaker oil prices and lower production.
Total revenue in 1999‑2000 is lower than the 1998‑99 Budget estimate due to forecast economic growth (reflecting the move from projections to forecasts), and lower non‑tax revenue. The large decreases in revenue in the outyears largely reflect the abolition of Wholesale Sales Tax, coupled with the provision of personal income tax cuts in the tax reform package.
Table 16 provides estimates of major categories of revenue from 1998‑99 to 2001‑02.
Revenue estimates are highly dependent on general economic conditions and the effects of tax policy measures.  In particular, taxpayers may respond to new measures in ways which were not fully anticipated at the time the relevant revenue estimates were prepared.  Appendix B contains a description of the sources of risks to taxation revenue while Appendix C provides information on the sensitivity of the revenue estimates to changes in economic parameters.

Table 16:  Revenue Estimates

Tax Expenditures
Table 17 shows estimates and projections for the period 1995‑96 to 2000‑01 of aggregate tax expenditures identified and costed in the 1996‑97 Tax Expenditures Statement. These estimates have not been updated to reflect policy decisions (including measures announced in A New Tax System) or changes in economic parameters that have occurred since December 1997. Updated figures will be released in the 1997‑98 Tax Expenditures Statement, which is expected to be released in early 1999.
Table 17:  Aggregate Tax Expenditures 1995‑96 to 2000‑01

(a)	This aggregate does not include timing measures.