Document Index Budget Paper 3

Chapter IV: Loan Council Oversight of Commonwealth and State Borrowings

• Loan Council Allocations For 1999-2000
• Estimated Commonwealth LCA Outcome For 1998-99
• Budget Time Commonwealth LCA For 1999-2000
• Other Loan Council Developments

This chapter sets out the Loan Council Allocations (LCAs) nominated by the Commonwealth and each State for 1999-2000 and endorsed by Loan Council at its meeting on 9 April 1999. It also reports the Commonwealth's 1998-99 expected LCA outcome and its 1999-2000 Budget time LCA. Background on Loan Council arrangements is provided in Box 2.

LOAN COUNCIL ALLOCATIONS FOR 1999-2000

Under the Loan Council arrangements, each jurisdiction nominates an LCA comprising:

• the estimated general government deficit/surplus (based on its mid-year report projections);
• its public trading enterprise (PTE) sector net financing requirement (also based on mid-year report projections); and
• memorandum items (such as transactions that, while not formally borrowings, have many of the characteristics of borrowings).

These nominations are considered by Loan Council having regard to each jurisdiction's fiscal position and reasonable infrastructure requirements, as well as to the macroeconomic implications of the aggregate figure. LCAs are on a headline rather than an underlying basis as they seek to measure a government's call on financial markets.

The LCAs nominated for 1999-2000 are set out in Table 18. In aggregate, they represent a surplus of $15.6 billion compared with an estimated surplus for 1998-99 of $15.0 billion.

Loan Council considered that the process of fiscal consolidation has been important in helping to shield the domestic economy from the instability experienced in our region and noted the need for continued perseverance with sound fiscal policies. Against this background, the aggregate of 1999-2000 LCA nominations was judged consistent with current macroeconomic policy objectives and Loan Council endorsed each jurisdiction's nomination without change.

LCA nominations for all jurisdictions were prepared on a no policy change basis. They thus provide an indication of the public sector's likely call on financial markets. The actual call may vary from the nomination primarily because of changes in economic parameters and policy measures. Updated information will be provided to financial markets through publication by each jurisdiction of its budget time LCA and a mid-year update of its expected LCA outcome.

A tolerance limit of 2 per cent of total non-financial public sector revenue applies between the LCA approved by Loan Council and the budget time LCA, and again between the budget time LCA and the LCA outcome. Tolerance limits recognise that LCAs are nominated at an early stage of budget processes and that estimates are likely to change as a result of policy and parameter changes before and after budgets are brought down. If a jurisdiction expects to exceed the upper or lower bound of the tolerance limit around its LCA estimate, it is obliged to provide an explanation to Loan Council and to make this explanation public. While Loan Council would not be required formally to approve the change, it would have the opportunity to pursue with the particular jurisdiction any concerns raised by the new LCA estimate.

In making their LCA nominations to the Loan Council, the Commonwealth, States and Territories also provide information on government contingent exposures under infrastructure projects with private sector involvement. These exposures, which are measured as the government's contractual liabilities in the event of termination of the project, are not included as a component of the LCA as they are unlikely to be realised and are thus materially different from actual borrowings undertaken to finance the public sector deficit. Government outlays under these projects, such as equity contributions and ongoing commercial payments to the private sector, continue to be included in the annual total public sector deficit, and hence the LCA.

ESTIMATED COMMONWEALTH LCA OUTCOME FOR 1998-99

In May 1998, Loan Council endorsed the Commonwealth's 1998-99 LCA nomination of a $6.9 billion surplus, provided on a no policy change basis. The Commonwealth subsequently estimated a budget time LCA surplus of $17.3 billion, incorporating the then estimated headline budget surplus of $18.7 billion (see Chapter IV of Budget Paper No. 3 1998-99). This comprised in large part proceeds from the planned sale of the Government's remaining equity in Telstra in 1998-99.

In December 1998, a revised LCA estimate was provided in Table E5 of the Mid-Year Economic and Fiscal Outlook 1998-99 (MYEFO). This showed a surplus of $6.1 billion, incorporating a revised estimate for the headline budget surplus of $8.7 billion. The revisions to the budget and LCA estimates in the MYEFO mainly reflected changes in the planned timing of the Telstra sale. The MYEFO indicated that, as a result, the Commonwealth expected to exceed the upper bound of the 2 per cent of revenue tolerance limit that applies on either side of its budget time LCA estimate.

The current estimate of the Commonwealth's 1998-99 LCA outcome is a surplus of $8.0 billion. The increase in this figure since MYEFO mainly reflects improvements in the estimated general government underlying surplus and a lower estimated PTE net financing requirement.

The changes through the course of the year in the Commonwealth's 1998-99 LCA and its main components are shown in Table 19. The Commonwealth's actual LCA outcome will be reported in Final Budget Outcome 1998-99.

BUDGET TIME COMMONWEALTH LCA FOR 1999-2000

Each jurisdiction is required to take into account its Loan Council approved LCA in formulating its budget, and to report a budget time LCA estimate in its budget papers.

The Commonwealth's budget time LCA estimate for 1999-2000 is a $22.3 billion surplus, compared with the nominated surplus of $14.4 billion approved by Loan Council. The change in the LCA estimate primarily reflects improvements in the general government headline balance due to the re-appraisal of the market value of Telstra and changes to the proposed method and timing of its sale. The budget time LCA estimate exceeds the lower bound of the tolerance limit of 2 per cent of total non-financial public sector revenue. The components of the Commonwealth's nominated and budget time LCAs for 1999-2000 are shown in Table 20.

Under the Loan Council arrangements, jurisdictions are required to disclose, as a footnote to their LCA, government termination liabilities under infrastructure projects with private sector involvement which operate for 10 years or longer and involve gross project liabilities of at least $5 million. The Commonwealth plans no such projects in 1999-2000.

OTHER LOAN COUNCIL DEVELOPMENTS

The current Uniform Presentation Framework was agreed by Loan Council in 1997. In accordance with this framework, all jurisdictions published mid-year budget reports for the first time in 1998-99. The Uniform Presentation Framework tables included in these mid-year reports, like those published in State and Territory budgets, feature consistent cash-based budget estimates.

The move of the States and Territories and the Commonwealth to accrual based budget reporting, together with the shift by the ABS later in 1999 to accrual based Government Finance Statistics, has necessitated a review of the uniform presentation framework. Such a review is to be undertaken over the course of 1999.

During 1998-99, Loan Council members agreed by correspondence to cease publication of the National Fiscal Outlook Report. Some background to this development is given in Chapter I.

Table 18: Loan Council Allocations -- 1999-2000 Nominations ($million)^(a)

1. LCA nominations for 1999-2000 reflect best estimates of 1999-2000 public sector deficits/surpluses as at the 9 April 1999 Loan Council meeting. Nominations have been provided on the basis of policies announced up to and included in jurisdictions' mid year reports. With the exception of Victoria (see footnote (d)) nominations are based on preliminary estimates of general government finances provided by jurisdictions for purposes of their mid year reports, and projected bottom lines for each jurisdiction's PTE sector. Updated LCA estimates will be provided through publication by each jurisdiction of its budget time LCA as part of its budget documentation. The 2 per cent (of total non-financial public sector revenue) tolerance limits around each jurisdiction's 1999-2000 LCA are designed, inter alia, to accommodate changes to the LCA resulting from changes in policy.
   
2. Memorandum items are used to adjust the public sector deficit/surplus to include in LCAs certain transactions -- such as operating leases -- that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the public sector deficit/surplus certain transactions that Loan Council has agreed should not be included in LCAs -- for example, the funding of more than employers' emerging costs under public sector superannuation schemes, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes. Overfunding and underfunding of emerging superannuation liabilities is also included as a memorandum item, as are interest earnings on employer superannuation balances.
   
3. New South Wales' 1999-2000 allocations and latest 1998-99 estimates incorporate the impact of its superannuation conversion offer.
   
4. Victoria updated its 1999-2000 LCA nomination, and its latest estimate of 1998-99 LCA, on 7 April 1999. These changes were mainly due to significant privatisation receipts, which occurred after Victoria's mid-year budget report.
   
5. Changes in the measurement of overfunding of superannuation have led to a substantial upward revision in South Australia's memorandum items and in the LCA surplus estimated for 1998-99.
   
6. The revision in the Commonwealth's 1998-99 estimate since Budget time mainly reflects a change in the timing of the sale of the Government's remaining equity in Telstra.
   
   

Table 19: Commonwealth's Loan Council Allocation for 1998-99 ($million)

1. For the Commonwealth, memorandum items comprise the change in the net present value of operating leases (with a net present value greater than $5 million) of departments and authorities, university borrowings, overfunding of superannuation, and an adjustment to exclude the net financing requirement of statutory marketing authorities and Telstra from the LCA.
   

Table 20: Commonwealth's Loan Council Allocation for 1999-2000 ($million)

1. For the Commonwealth, memorandum items comprise the change in the net present value of operating leases (with a net present value greater than $5 million) of departments and authorities, university borrowings, overfunding of superannuation, and an adjustment to exclude the net financing requirement of statutory marketing authorities and Telstra from the LCA.
   
2. The Commonwealth does not expect to enter into any infrastructure projects with private sector involvement in 1999-2000.