Government Budgets and Budget Submissions

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Government Budgets and Budget Submissions

• Window on Economics conference
• Andrew Wade
• Senior Analyst, ACIL Tasman

10 February 2005
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Presentation structure

• Broad role of government
• What is a government budget?
• Components of Victorian Budget
• Budget politics
• Budget submissions by NGOs
• Exercise Analysing a budget proposal
• Information sources

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Broad role of government

• Federal level
• Some economic management (interest rates) and
  economic regulation
• provision of income other welfare support
• Defence
• Fund range of services provided by states
• State level
• Public services (mixed economy)
• Law and order
• Some economic regulation

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What is a government budget?

• Government policies need to be implemented
  (spending) and funded (revenue)
• Outside of election campaign, budget is main
  opportunity for policy announcements
• Financial plan for government forward order
  book - expected revenue and expenditure
• Annual statement of government priorities
• Sets key parameters for economic performance of
  jurisdiction

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Main participants in budget process

• Political
• Expenditure Review Committee sub-committee of
  Cabinet Premier, Treasurer etc
• Ministers fighting for funding against cuts
• Parliament involved after tabling of budget
  limited role in Westminster system
• Public service
• Central agencies Treasury (coordination),
  Department of Premier Cabinet
• Line/service delivery agencies - advising
  respective Ministers

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Current budget orthodoxy

• Global budgeting much discretion at the agency
  (and sub-agency level)
• Increased scrutiny on value for money
• Government increasingly focussed on results
  outputs and outcomes
• Focus on balance sheet (not an issue 20 years
  ago)

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Cash versus Accrual Budgeting

• Cash budgeting
• Can provide illusion of financial position open
  to manipulation
• concerned only with cash transactions
• Does not take into account revenue earned but not
  received, or expenses incurred but not paid (e.g.
  Unfunded superannuation)
• No depreciation for fixed assets (eg. buildings)
• No measurement of liabilities other than
  government loans

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Cash versus Accrual Budgeting (cont)

• Accrual budgeting
• Recognises items as they are earned or incurred
  (and not as cash is received or paid)
• Recognises occurrence of event that commits
  government to pay, or right to receive cash
• Provide information on the true cost of services

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Output/Outcome budgeting

• Increased focus on purchase of outputs goods or
  services produced by government
• Outcomes the impact of outputs, or other
  government intervention (eg. regulation)
• Increasing emphasis on the delivery of services
  at efficient costs a response to increasing
  expectations of citizens for results
• Under output budgeting, agencies funded to
  deliver a range of outputs

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Budget timetable

• Starting point for 2005-06 budget set in 2004-05
  budget Forward Estimates
• Revisions to estimates during year due to
  policy initiatives and parameter change (eg.
  economic forecasts)
• Ministers (and agencies) typically advised of
  preliminary allocations for budget around October
• Ministers invited (but often discouraged) to
  bid for additional funding for new or
  existing initiatives

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Budget timetable (cont)

• Expenditure Review Committee (ERC) meets February
  to April to decide
• Overall spending limits
• New Output initiatives
• New Asset Investment initiatives
• Savings initiatives
• Revenue initiatives (taxes, user charges etc)
• Once budget finalised by ERC, put together by
  Department of Treasury Finance
• Budget submitted to Parliament in May
• Reviewed by Public Accounts and Estimates
  Committee and passed by Parliament

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Victorian Budget Papers

• Comprise
• Budget Paper No. 1 - Treasurer's Speech
• Budget Paper No. 2 - Strategy and Outlook
• Budget Paper No. 3 - Service Delivery
• Budget Paper No. 4 - Service Delivery
• Budget Information Paper No. 1 Public Sector
  Asset Investment Program
• Also, Appropriation Bills, Budget overview, fact
  sheet and media releases

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Example of a State Budget - VIC

• Yes, the budget is about finances
• Much useful information contained in budget
  documents

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Expenditure by function VIC
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Balance Sheet now a focus VIC
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Budget politics and context

• Little scope for variation year to year in
  budgets
• While most of budget is discretionary, opposite
  is really the case
• In 2004-2005 Victorian budget, recurrent
  initiatives total 688 million
• Politicians talk of turning government aroundbut
  size of government makes this near impossible

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Budget politics and context (cont)

• Major political parties committed to maintaining
  fiscal credibility
• Public finances more transparent than ever
• Spending has to be funded
• In Australian state governments, little room to
  move in taxation
• Budget policy (e.g. taxes) does influence private
  sector investment decisions
• Ratings agencies do feature in governments
  budget thinking

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Victorian Budget Papers

• 10 Departments plus Parliament funded directly by
  budget
• Departments enter into service agreements with
  DTF
• Departments then responsible for allocating funds
  to large number of organisations
• Each Department funded to deliver a range of
  outputs

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Budget submissions from NGOs

• An opportunity to be heard by government
• Identifies priorities from community perspective
• Nature of Westminster government means opposition
  has no influence over budget policy (contrast to
  the United States)
• Budget proposals are assessed on basis of budget
  impact, efficiency, and equity

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Budget submissions (cont)

• Important to advocate evidence based policies
• Lack of evidence is a common rebuttal
• Treasury is wary of an input focus (i.e. more
  )
• Treasury is interested in what works (or is
  likely to work)
• But submissions likely to be dismissed by
  Treasury due to higher priorities default
  response is no!

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Exercise Evaluate budget proposal

• Aim To evaluate proposal from VCOSS 2005-06
  Budget submission from economic perspective
• Proposal objective Increase the affordability of
  first home ownership and resources for affordable
  housing
• Proposal Restructure stamp duty to a
  progressive scale that reduces the amount payable
  at the lower end of the cost spectrum and
  increases it for luxury properties
• The formula should be regionally specific and
  indexed to the median first home price

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Evaluation criteria

• Equity
• Horizontal equity people with a similar ability
  to pay taxes pay the same amount
• Vertical equity principle that people with a
  greater ability to pay should pay more tax than
  those with a lesser ability to pay
• Affects sellers and buyers
• Efficiency
• Targeting of tax
• Effect on housing prices and locational decisions
  (also regional impact)
• Administrative complexity
• Impact on budget

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Future budget trends

• Department of Treasury and Finance (DTF)
  attempting to increase policy capacity
• DTF increasingly a purchaser of outputs/outcomes
  a strategic investor
• Attempts to move away from incremental budgeting
  greater focus on the base and first
  principles
• Constant quest for efficiency

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The Triple Bottom Line

• Difficult to incorporate into budgeting
• Increased use of performance measures
  (outputs/outcomes) a way forward
• Often many outputs/outcomes take a long time to
  emerge (eg. education)
• United States Budget providing some reporting,
  but is on the periphery
• Much scope for increased use, but lacks science
  full of unknowns and risks

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Where to save money?

• Substantial chunks of budget are spent on
  questionable (inefficient) items
• Examples
• Prison for non-violent offenders
• Tax breaks to attract companies and events
• Policing in areas with low crime
• Paperwork and red tape everywhere
• Schools with unviable student numbers
• And policies with doubtful benefitideas?

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Information sources

• Budget Papers www.budget.vic.gov.au
• Agency annual reports
• Auditor-General reports (all states and federal)
  www.audit.vic.gov.au
• Productivity Commission Report on Government
  Service Provision www.pc.gov.au
• Australian Bureau of Statistics definitive
  comparison of Government finances
• NSW Treasury publications Interstate Comparison
  of Government Finances, and Interstate Comparison
  of Government Taxes

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Further reading Books

• Budgeting in practice Memoirs Biographies
• Peter Walsh, Confessions of a Failed Finance
  Minister
• Neal Blewett, A Cabinet Diary
• John Edwards, Keating The Inside Story
• Textbooks
• Wanna et al, Managing public expenditure in
  Australia
• Funnell and Cooper, Public Sector Accounting and
  Accountability in Australia