#GOVERNMENT BUDGET BALANCE FORMULA DRIVERS#

The paper concludes by comparing the estimates with those produced by the IMF and OECD, and explaining the key factors driving the differences between them.

#GOVERNMENT BUDGET BALANCE FORMULA DRIVERS#

It then examines the key drivers of movements in the measure over time, and analyses the sensitivity of the measure to key assumptions, such as the terms of trade and the level of productivity. The paper starts by outlining the major steps involved in structural budget balance measures and explaining the methodology adopted for each of these steps for our structural budget balance measure. The main way our estimates differ from most other approaches is that they adjust for movements in Australia’s terms of trade and for cyclical variations in capital gains taxes. This paper updates these estimates and describes the methodology and assumptions used in their development. The 2009-10 Budget included estimates of the structural budget balance of the Australian Government in the context of a broader analysis of fiscal sustainability. In particular, excessive reliance on point estimates should be avoided. There is therefore a need to exercise caution in the interpretation of structural budget balance measures.

Typically, such measures involve considerable complexity and uncertainty (Ford, 2005). In practice, there are a range of approaches to obtain these estimates, the results of which can vary markedly. The state of the Government’s balance sheet, including the level of contingent liabilities and other risks, and the outlook for long term economic growth are also important elements of fiscal sustainability.

The importance of such measures includes that the appropriate fiscal policy response to structural and cyclical shifts in the budget position is likely to be different (For a fuller discussion on this point, see Chalk, 2002 Mercereau and Razhkov, 2006 Price, Joumard, Andre and Minegishi, 2008.)Įven if a definitive measure could be found, it would only cover one aspect of an assessment of fiscal sustainability. In this context, it would clearly be desirable to have a definitive measure of the Australian Government’s budget adjusting for the economic cycle, separating movements in the budget position between cyclical and structural components. Further, the Charter of Budget Honesty Act 1998 requires the Government to publish a fiscal strategy statement that, among other things, explains key fiscal measures against which fiscal policy will be set and assessed. The Australian Government’s medium-term fiscal strategy includes a commitment to achieve budget surpluses on average over the medium term. It describes the methodology and assumptions used in developing these estimates, includes sensitivity analysis, and explains why these estimates differ from those produced by the IMF and OECD. This paper develops estimates of the structural budget balance of the Australian Government. Tony McDonald, Yong Hong Yan, Blake Ford and David Stephan 1

Government budget balance formula