Variations to the fiscal balance estimates

The upward revision of $0.1 billion in the 2007-08 fiscal surplus since MYEFO reflects higher than anticipated tax revenue and lower than anticipated spending, offset by the cost of additional personal income tax relief and other new policy measures.

Table 2 provides a reconciliation of the fiscal balance estimates between the 2006-07 Budget, the 2006‑07 MYEFO and the 2007-08 Budget.

Table 2: Reconciliation of 2006-07 Budget, 2006-07 MYEFO and 2007-08 Budget fiscal balance estimates^(a)

Table 2: Reconciliation of 2006-07 Budget, 2006-07 MYEFO and 2007-08 Budget fiscal balance estimates(a)

A positive number for revenue indicates an increase in the fiscal balance, while a positive number for expenses and net capital investment indicates a decrease in the fiscal balance.
Excludes the public debt net interest effect of policy measures.

Variations in revenue estimates

Total revenue for 2007-08 has been revised up by $4.0 billion since the 2006-07 MYEFO.

The upward revision represents the flow-on effect of stronger than expected labour market outcomes, together with a stronger outlook for corporate profits in 2007. These upward revisions have been partly offset by the impact of the Government's decision to provide personal income tax relief worth $5.3 billion in 2007-08 and $31.5 billion over the forward estimates.

Other major policy decisions affecting revenue over the four year period from 2007-08 to 2010-11 include:

converting the Child Care Tax Rebate to a direct payment administered through the Department of Families, Community Services and Indigenous Affairs, which will increase revenue by $1.4 billion over the forward estimates period. This increase is more than offset by the increase in expenses arising from the measure;
increasing the dependent spouse rebate to $2,100 from 1 July 2007, at a cost to revenue of $425 million over the forward estimates period;
not proceeding with the Review of Business Taxation recommendation relating to the taxation of finance leasing at a cost of $260 million over the forward estimates; and
relaxing the beneficial ownership provisions of the premium 175 per cent research and development (R&D) tax concession, to allow certain entities to claim deductions for their incremental R&D expenditure where the resulting intellectual property is held overseas. The measure is expected to have a cost to revenue of $200 million over the forward estimates period.

Looking ahead, economic conditions remain supportive of continued strength in underlying revenue, particularly through compensation of employees, company profits and the realisation of capital gains by investors.

Further detail on how the revised outlook for the economy has affected individual revenue heads over the forward estimates is provided in Statement 5. An analysis of the sensitivity of the taxation revenue estimates to changes in the economic parameters is provided in Appendix C.

Non-taxation revenue in 2007-08 is expected to be $520 million higher than the MYEFO estimate, including a $237 million increase in Reserve Bank of Australia dividends largely due to previously unanticipated realised gains in 2006-07, and a $235 million increase in interest received by the Australian Office of Financial Management on term deposits.

Variations in expense estimates

Since MYEFO, estimated expenses for 2007-08 have increased by $3.3 billion reflecting increased expenses from new policy decisions of $6.4 billion, partially offset by parameter and other variations of $3.1 billion.

Major policy decisions since MYEFO that have increased expenses include:

$658 million in 2007-08 ($3.3 billion over five years including $452 million in 2006-07) to convert the existing Child Care Tax Rebate to a direct payment and to increase the rate of Child Care Benefit by 10 per cent (these costs are partially offset by an increase in revenue of $1.4 billion);
$621 million in 2007-08 ($6.6 billion over 13 years) to acquire Super Hornet aircraft for the Australian Defence Force which will improve Australia's air combat capability edge by introducing enhanced sensors, weapon and networking capabilities;
$534 million in 2007-08 ($2.6 billion over four years) to increase the level and effectiveness of Australia's Official Development Assistance;
$531 million in 2007-08 ($3.5 billion over four years) for investment in Australia's education system under the Realising Our Potential package; and
$448 million in 2007-08 ($703 million over four years including $32.4 million in 2006-07) to enhance Australia's military contribution to the reconstruction and rehabilitation of Afghanistan.

In 2007-08, parameter and other variations have decreased forecast expenses by $3.1 billion since MYEFO largely reflecting:

a $993 million reduction in expenses arising from delays to some Defence acquisition projects;
a $477 million reduction in expenses for Newstart Allowance arising from a lower than anticipated increase following implementation of the Government's Welfare to Work measures;
a $276 million reduction under the Water Smart Australia programme primarily due to slippage in grant payments and fewer than expected projects from the 2006-07 grant round;
a $245 million reduction in expenses for Parenting Payment due to a reduction in the expected number of benefit recipients following implementation of the Government's Welfare to Work measures and strong labour market conditions; and
the regular draw-down of the conservative bias allowance¹ reducing estimated expenses in 2007-08 by around $1 billion.

The above decreases in expenses are partially offset by:

a $460 million increase in expenses due to higher than expected penalties remissions by the Australian Taxation Office;
a $336 million increase in expenses for Medicare Services reflecting higher than anticipated demand for pathology services, diagnostic imaging, and services provided by general practitioners; and
a $283 million increase in expenses for the Private Health Insurance Rebate reflecting annual premium increases, a trend for private health insurance customers to take out higher priced policies and an increase in private health insurance participation.

In 2006-07, estimated expenses have increased by $2.5 billion since MYEFO. This largely reflects new spending of $4.2 billion, including:

$1.3 billion for a one-off payment of $500 to eligible older Australians;
$1.1 billion to pay a one-off additional superannuation co-contribution for those persons who made eligible contributions in the 2005-06 income year;
$486 million to fund a variety of development and expansion projects by medical research facilities and the operations of the Australian Synchrotron;
$390 million for a lump sum payment to eligible carers, in recognition of their contribution in caring for people with disabilities and the frail aged; and
$250 million for the Auslink Strategic Regional Programme to fund contributions to road, rail and multi-modal projects in Australia's regions.

These measures are partially offset by reductions in parameter and other variations including a $301 million reduction in Newstart Allowance and a $222 million reduction in Family Tax Benefit expenses.

More detailed information on expenses can be found in Statement 6. A full description of all policy measures since MYEFO can be found in Budget Paper No. 2, Budget Measures 2007-08.

Variations in net capital investment estimates

In 2007-08, forecast net capital investment has increased by $693 million since MYEFO. This represents the combined effect of:

new policy measures of $352 million, including $118 million for the Strengthening National Security package of measures; $37 million for the Australian Securities and Investments Commission's redevelopment of information technology systems; and $30 million for the Australian Nuclear Science and Technology Organisation's automation of production processes for radiopharmaceuticals; and
parameter and other variations of $341 million, including $75 million for the Health and Social Services Access Card programme, reflecting changes in the project timetable and associated movements between expense and capital; $34 million for Defence commercial vehicle sales; and $33 million for the fit out of the Anzac Park office buildings.

In 2006-07, estimated net capital investment has decreased by $265 million since MYEFO, including $70 million for Health Emergency Planning and Response as a result of unavoidable delays in the purchase of items in the national medical stockpile, and $21 million reflecting delays in the construction of significant aged care payments systems.

¹ The forward estimates include an allowance for the established tendency of existing Government policy (particularly demand driven programmes) to be higher than estimated in the forward years. To offset this, the contingency reserve includes an allowance based on past experience to preserve the overall integrity of the forward estimates. This allowance, known as the conservative bias allowance, is progressively reduced so that the budget year conservative bias is zero by budget night.