Total outlays exceeded the Budget estimate by$1 75 million (0.6 per cent) in 1978-79 while total receipts fell short of the Budget estimate by $490 million (1.9 per cent). As a result the actual deficit of $3478 million exceeded the Budget estimate by $666 million.
In summary, the main features of the 1978-79 Budget outcome were: o most of the increase in the deficit over the original Budget estimate was attributable to a shortfall in receipts; o the largest overruns on outlays were $109 million for unemployment and sickness benefits, $77 million on defence equipment and stores and $65 million for public debt interest payments - these and other overruns were partially offset by shortfalls in a number of areas; o the shortfall in receipts was largely the result of lower than estimated col lections of personal income tax by assessment and of company tax; and o these shortfalls in turn mainly reflected over-estimates of 1977-78 incomes on which these 1978-79 taxes were levied and greater than anticipated tax avoidance.
OUTLAYS
The following table shows, for each major functional block, the difference between the Budget estimates and the actual outcome:
(a) The Budget estimates and actual figures for 1978-79 have been adjusted to reflect a classification change to transfer expenditure on pensioner housing from 'Social Security and Welfare' to Housing'.
(b) The bulk allowances for prospective wage and salary increases and administrative savings could not be apportioned by function at the time the estimates were prepared. These allowances, however, were effectively apportioned during the year and the resultant allocations are partly responsible for some of the differences between estimates and outcomes at the functional level.
The main variations from Budget estimates within functional headings are identified below:
Defence- up $105 million
Outlays on defence equipment and stores exceeded the Budget estimate by $77 million. This reflected re-scheduling by the US Navy of progress payments on patrol frigates being constructed for Australia; payments of $10 million for purchase of VIP aircraft which were not allowed for in the Budget estimates; cost increases, particularly for fuel and lubricants, which were not provided for; and exchange rate fluctuations. Manpower costs exceeded the Budget estimate by $22 million mainly because of increases in wages and salaries awarded during the year; provision was made in the Budget for such increases in the bulk allowance for wage and salary increases, rather than in the estimates for Defence as such. Other overruns included $5 million in respect of government factory operations (reflecting in part the provision of additional working capital to the Government Aircraft Factories to finance stocks of Nomad aircraft) and $2 million for the purchase of land at Puckapunyal for which no provision was made in the Budget.
Education- down $4 million
The small net change reflected some diverse movements. Mainly because the number of beneficiaries under the Tertiary Education Assistance Scheme fell short of that assumed at the time of the Budget, there was a shortfall of $10 million in outlays on student assistance. Expenditure by the Education Commissions, on the other hand, exceeded the Budget estimate by a net S6 million; grants for universities, colleges of advanced education and schools were, in aggregate, $18 million greater than originally estimated but there were shortfalls totalling $12 million in grants to the States for technical and further education because the latter's cash-flow requirements turned out to be different from those assumed at Budget time.
Health- down $12 million
There were several variations from Budget estimates within this function. Medical benefits payments overran the Budget estimate by $34 million because the lag between the provision of medical services and the submission of claims to the Commonwealth under the revised medical benefits arrangements proved to be shorter than that assumed at the time of the Budget. The post-Budget decision to provide $11 million to Medibank Private to ensure that the Fund remained actuarially solvent also had the effect of adding to the original Budget estimates.
These overruns, however, were more than offset by shortfalls in several areas. Commonwealth hospital payments fell short of the Budget estimate by $23 million; this reflected, mainly, lower than estimated operating deficits of hospitals covered by cost-sharing arrangements. Pharmaceutical benefits for the general population were down $14 million (because of lower than estimated usage) though this was offset to some extent by a $4 million overrun in respect of benefits paid for pensioners. Nursing Home Benefits and payments were $8 million less than the Budget estimate; the proportion of privately insured patients in nursing homes turned out to be higher than that assumed while prospective increases in benefit rates were less widespread than had been assumed. Outlays on the isolated patients travel and accommodation scheme were $5 million down on the estimate because of delays in commencing the scheme and lower than anticipated utilisation rates.
Other shortfalls occurred in respect of general administrative expenses (down $13 million, reflecting lower than estimated costs incurred in assuming functions previously performed by Medibank, and lower agency payments to private health insurance funds for processing and payment of the Commonwealth medical benefit); the Community Health Program (down $4 million) and Health Program Grants (down $3 million).
Social Security and Welfare- up $143 million
As indicated earlier, expenditure on unemployment and sickness benefits was $109 million above the estimate; this reflected greater than assumed numbers of unemployment beneficiaries and a higher than estimated average rate of benefit. Family allowance payments exceeded the original estimate by $49 million; this resulted in part from the post-Budget decision not to proceed with an income test on the child's income for family allowances and in part from the recording in 1978-79 outlays of $22.7 million in respect of payments due on 3 July 1979.
Overall, payments of pensions and allowances for the aged, veterans and their dependants, invalids, the handicapped, widows and supporting parents were $2 million less than had been budgeted for. (Within this category there were some diverse movements which reflected mainly variations between numbers of recipients assumed for estimates purposes and actual numbers.) Other small shortfalls occurred in the capital programs for aged persons' homes and hostels ($3 million), handicapped persons' facilities (S4 million) and the home care program ($3 million).
Housing- up $6 million
About $2 million of the overrun shown for this function reflects the change to administrative arrangements in December 1978, which resulted in the general administrative expenditures relating to housing being recorded here. Previously these expenditures were subsumed in administrative votes of the former Department of the Environment, Housing and Community Development and recorded in the heading Urban and Regional Development nec and the Environment: there is a corresponding decrease on the Budget estimate for that function.
Outlays for Defence Service Homes were S5 million above the estimate. This reflected, in the main, an increase in the level of the interest subsidy to maintain existing rates to borrowers (following the decision to progressively apply interest rates more in keeping with current interest rates to the Corporation's capital) and lower than estimated receipts from the sale of surplus land holdings.
Urban and Regional Development nec and the Environment
Total outlays for this function were very close to the Budget estimate. The reduction on the Budget estimates associated with the changed administrative arrangements mentioned under Housing was largely offset by a S2 million overrun in expenditure by the NCDC on sewerage, garbage and drainage facilities in the A.C.T.
Transport and Communication- down S46 million
The shortfall here results mainly from a decision taken by Qantas Airways Ltd on commercial grounds to advance to 1978-79, repayments of $74 million for aircraft loans originally scheduled for 1979-80. Other reductions on Budget estimates included $4 million on account of additional capital repayments from the Postal Commission (reflecting the greater than expected profitability of the Commission) and $3 million in respect of the railway mainline upgrading program (because of delays in implementation).
These shortfalls were partly offset by a number of expenditure overruns. An additional $5 million was paid to the Australian National Railway (ANR) to accelerate work on the construction of a standard gauge railway between Tarcoola and Alice Springs. In addition, new financial arrangements approved after the Budget resulted in an increased provision of S 1 1 million for ANR's operating losses. (These new financial arrangements require interest payments by ANR on borrowings from the Commonwealth, and generated offsetting receipts of S 1 1 million which are recorded in Receipts under Interest, Rent and Dividends). Recoveries from the air transport industry were S18 million less than projected, partly because the decision to introduce additional revenue measures (estimated to raise S8 million in 1978-79) to facilitate full cost recovery from the domestic trunk sector was not proceeded with and partly because the disposition of airport rental receipts held in trust was not determined in 1978-79. An additional $6 million was provided to the Department of Transport for civil aviation services to enable it to maintain service and safety standards.
Industry Assistance and Development- down S28 million
Overruns on Budget estimates occurred in respect of fertilizer bounties (S7 million) and the petroleum products subsidy scheme (S8 million), the latter reflecting a larger than assumed freight cost differential.
These were more than offset by shortfalls in beef industry assistance payments (down $9 million, largely because residual payments for this scheme were less than estimated); net outlays on cattle disease eradication (down S6 million, mainly because of lower than estimated slaughter compensation payments and higher collections from the livestock slaughter levy); price support for dairy products (down $5 million, reflecting improved export market returns for skim milk powder and reduced butter production); and rural adjustment assistance (down $2 million). Other shortfalls occurred in respect of payments for the Ranger uranium project and for coal research (down $3 million in each case). Improved copper prices resulted in net payments to the Mount Lyell company being S2 million less than the Budget estimate.
Labour and Employment- down $10 million
Outlays on apprenticeship training under the CRAFT Scheme fell short of the Budget estimate by $10 million, mainly because of fewer than expected claims by employers for technical education rebates. Payments under the NEAT System were $4 million lower than estimated.
On the other hand, payments to the Stevedoring Industry Finance Committee were $2 million greater than the estimate; this reflected a mid-year rate increase in the industry levy, the proceeds of which the Commonwealth passes on to the Committee.
Foreign Affairs and Overseas Aid
Overall, total outlays for these purposes were close to the Budget estimate. Within the total, however, major variations included an increase of $5 million in payments to the UN High Commissioner for Refugees by way of additional assistance to Indo-Chinese refugee relief, offset by a shortfall of $5 million in the budgeted provision for the International Development Association which occurred because that organisation did not seek all the funds originally anticipated.
Administrative Services- down $14 million
Although an additional $8 million was required for greater than estimated expenses associated with the flotation of overseas loans, this was more than offset by shortfalls in expenditure on the construction and maintenance of Commonwealth offices ($4 million); expenditure on Construction Services ($4 million); and by a $5 million reduction in rental costs of civil departments.
Payments to or for the States, the Northern Territory and Local Government Authorities nec- up $14 million
The overrun under this heading was associated mainly with greater than estimated expenditure in respect of natural disasters ($11 million). States' tax sharing entitlements were $2 million greater than originally estimated because of revisions to earlier projections of the wage and population parameters used in calculating guaranteed levels of payment.
Public Debt Interest- up $65 million
The increase of $65 million for public debt interest payments is attributable mainly to greater than estimated sales of Treasury Notes. The interest liability for such securities is recorded in the year of issue so that changes in net sales of Treasury Notes have substantial and immediate implications for interest payments.
RECEIPTS
The differences between the Budget estimates and actual receipts in 1978-79 are set out in the table below; the accompanying notes comment briefly on the main variations.
Customs Duty - Imports- down $99 million
The shortfall was the net result of a higher level of imports (clearances of potable spirits being an exception) and a lower ratio of duty to dutiable imports than anticipated at Budget time.
Excise Duty- down $40 million
Revenue from levies on crude oil and LPG was $41 million higher than the Budget estimate, reflecting the increased parity price of indigenous crude oil following the OPEC price increases announced in December 1978. Budget estimates for beer, potable spirits and tobacco products, on the other hand, proved to be too high, reflecting: o inadequate allowance for the reduction in sales following the duty increases; o a higher proportion of clearances at pre-Budget rates of duty than had been assumed; and o post-Budget revisions to some 1977-78 clearance figures on which the estimates were based.
The following table compares the 1978-79 revenue outcome for individual commodities with the Budget estimates and the revenue outcome for 1977-78:
Sales Tax- down $31 million
Lower sales of commodities in the27½ per cent category largely accounted for the shortfall in sales tax collections. Sales of commercial vehicles were a little lower than estimated at the time of the Budget but sales of motor cars and station wagons exceeded the Budget estimate.
Income Tax on Individuals - Pay-As-You-Earn- up $57 million
The net increase in PAYE collections over the Budget estimate reflects underestimates of gross PAYE receipts (by $107 million) and refunds (by $50 million). At the time of the Budget it was assumed that average weekly earnings would increase by 7½ per cent in 1978-79 and employment by i per cent. In the event earnings increased by an estimated 83- per cent and wage and salary earner employment rose slightly more than projected.
Income Tax on Other Individuals- down $193 million
A major part of the shortfall is attributable to lower collections on current assessments because of increased recourse to tax avoidance schemes. This is estimated to have reduced collections by about $110 million more than the allowance incorporated in the Budget estimate. Property incomes and incomes of 'other businesses' in 1977-78 (on which tax was paid in 1978-79) were also lower than estimated at the time of the Budget.
Income Tax on Companies- down SI 85 million
The Budget estimate for company tax collections in 1978-79 assumed a small overall increase in income subject to tax in 1977-78; in the event, returns indicated a small decline. In addition, it is estimated that tax avoidance schemes resulted in a loss to revenue of about $70 million.
Estate Duty- up $12 million
The main reason for the variation here is that the average duty on assessments was greater than estimated at the time of the Budget.
Interest, Rent and Dividends- up $1 million
A shortfall of $13 million in interest received on general purpose advances from the States was largely offset by a receipt of $11 million from the Australian National Railways Commission which was not allowed for in the Budget figures. This receipt reflected the' new financial arrangements instituted in 1978-79 which require the Commission to pay interest on previous advances. The 1978-79 receipt represented interest charges from 1 July 1975.
Sale of Existing Assets- down $9 million
Receipts from the Department of Administrative Services for the sale of property and materials were $6 million less than estimated, mainly because of delays in sales of some properties. The remainder of the shortfall was largely accounted for by receipts from the sale of leases in the ACT, which were $2 million less than estimated.
FINANCING TRANSACTIONS
The manner in which the Budget deficit in 1978-79 was financed is summarised in Tables 1 and 2.
Table 1 is the presentation of Budget financing transactions, as published monthly in the Statement of Commonwealth Government Financial Transactions, rearranged to indicate the concept of Domestic Borrowings and its composition; see Statement No. 5 attached to the 1977-78 Budget Speech. While this presentation is useful for purposes of describing aggregate financing transactions and, in particular, the securities (financing instruments) involved in those transactions, it does not bring out the net changes in the holdings of government debt of the various sectors with which the Budget sector transacts. This further information is relevant to analysis of the monetary implications of the financing transactions. Portfolio movements, reflecting both net proceeds (subscriptions to new issues less redemptions) and subsequent market transactions in government securities, are shown in Table 2. The link between the tables is Domestic Borrowings.
As defined here, Domestic Borrowings is that portion of the Budget deficit financed by the issue of Commonwealth securities to domestic non-Budget sectors or by the use (running-down) of Commonwealth cash balances with the Reserve Bank (see footnote (c) to Table 2). Subject to minor qualifications set out in
Statement No. 5 attached to the 1977-78 Budget Speech, Domestic Borrowings thus represent the increase in the indebtedness of the Commonwealth to domestic non-Budget sectors arising from Budget financing.
Economic effects of financing transactions depend importantly on which of the non-Budget sectors hold the stock of government debt and the changes in those holdings. Private sector holdings of Commonwealth debt constitute the bulk of the liquidity base of the economy (see also footnote (b) to Table 2). Private sector take-up of Commonwealth debt instruments reflects a large number of influences on domestic liquidity conditions, including the size of Domestic Borrowings, interest rates, private sector external transactions and Reserve Bank transactions with the private sector. Other things being equal, take-up of government securities by the non-bank private sector provides an offset to the direct increase in banking sector liquidity and the volume of money that would otherwise accompany an increase in the domestic liquidity base. Table 2 therefore distinguishes between banks and non-banks and, within each category, the major institutional groups which it is useful, and possible with available data, to identify.
Changes in debt by the main forms of security are also shown. This too is relevant information for the analysis of the economic impact of Budget financing transactions, although a full exposition would go beyond the fairly direct effects of those transactions reflected in Table 2. Other relevant effects include those on the maturity structure of the stock of government debt in private portfolios, the level and structure of interest rates and associated expectations.
Brief comments on the main items in Table 1 are provided below.
Net Overseas Borrowings
In July 1978 a syndicated bank loan was undertaken in the Swiss capital market, the proceeds of which amounted to $194 million. In August $120 million was raised through a direct bank loan from Algemene Bank in the Netherlands. Two borrowings were completed in Germany in September: a $108 million public bond issue and a $22 million Schuldscheindarlehen (a form of direct bank loan offered by German commercial banks). In October, the Commonwealth completed * two Yen institutional borrowings on the Japanese capital market, the proceeds of which were $186 million and $184 million, respectively. The Commonwealth's third public bond issue in Japan was undertaken in November and raised a total of $220 million in two tranches.
In January the Commonwealth finalised a $132 million syndicated bank loan in the Netherlands. The first two components of a SF750 million borrowing package in Switzerland - a $132 million syndicated bank loan and a $132 million private placement - were finalised in February. In March negotiations were completed for the final component in the package - a $132 million public bond issue on the Swiss capital market.
Repayments during the year of previous drawings on behalf of Qantas and TAA amounted to $91 million and $1 million, respectively. Repayments of $1 million were also made to Eximbank. Other securities to the value of $96 million were redeemed in the USA, UK, Canada, Switzerland, Germany, the Netherlands and Japan. In addition, repayments of $4 million were made on borrowings from the International Bank for Reconstruction and Development, with repayments amounting to $15 million also being made on borrowings previously undertaken for defence purchases in the USA.
In summary, total gross overseas borrowings amounted to $1557 million'1'; total redemptions and repayments amounted to $208 million, giving net overseas raisings of $1349 million.
Other Financing Transactions in Australia
The major components of this category were: $28 million as proceeds from Australia's share of gold purchased from the IMF under its third redistribution (at the official price of 35 SDR per ounce) and sold to the Reserve Bank at prevailing market prices; $24 million in net proceeds from coinage transactions; $25 million received from the Commonwealth Superannuation Fund towards the
(1) The amounts shown in the text as the proceeds of individual raisings are the SA equivalents of the principal amount (at face value, where applicable) calculated by applying the exchange rate used by the Reserve Bank at the time of receipt of proceeds. The total gross overseas borrowings figure represents cash proceeds and therefore includes an adjustment for the issue of any securities at a discount/premium from face value and is net of any commissions. liability assumed by the Government in respect of the Fund's share of the liability for benefits existing at 1 July 1976; and net payments of $12 million by the Postal and Telecommunications Commissions, representing the Commissions' employer contributions to the Commonwealth superannuation scheme deposited with the Commonwealth. These transactions were partly offset by the investment of $30 million by the Income Equalisation Deposits Trust Account with the Primary Industry Bank of Australia in the form of deposits; and an amount of $19 million resulting from the operation of the Health Insurance Fund. Following changes to the health insurance arrangements effective from 1 November 1978 the Fund is being phased out. The reduction in its outstanding balance represents a catch-up of previously unpresented cheques.
Loan Raisings in Australia
Australian Savings Bondsraised $531 million gross in 1978-79; redemptions of these securities amounted to $186 million, and redemptions of the superseded Special Bonds $58 million, resulting in net proceeds of $287 million.
Gross proceeds from the issue of Treasury Notes amounted to $4245 million; redemptions amounted to $3198 million. As at 30 June- 1979 total Treasury Notes on issue (including Reserve Bank holdings) amounted to $1410 million, an increase of $1047 million over the year.
One Government public cash loan was held in 1978-79 (August), resulting in cash raisings of $781 million. Public conversion loans were held in August, November, February and May with conversions totalling $1492 million (face value). Total redemptions and repurchases amounted to $122 million.
An amount of $33 million was received into Income Equalisation Deposits (IED's) in 1978-79; redemptions of IED's amounted to $20 million.
States' domestic loan raisings were $36 million, bringing net proceeds of domestic loan raisings in 1978-79 (excluding Australian Savings Bonds and Treasury Notes but including IED's) to $702 million.
The Loan Council has recently agreed to the introduction of tender arrangements for selling Treasury Notes and a 'tap' issue system for selling Commonwealth Treasury Bonds. Formal implementation of these new arrangements will occur during 1979-80 following completion of necessary legal and technical processes. These arrangements will replace the present system whereby Treasury Notes are on continuous issue and Treasury Bonds are issued through periodic cash loans.
Residual Financing
Borrowings from the Reserve Bank in the form of Treasury Bills amounted to $500 million. At the same time, cash balances held by the Commonwealth increased by' $454 million; this largely reflected proceeds from Commonwealth loans raised overseas in 1978-79 which were not drawn on in 1978-79.
Table 2 indicates that private sector holdings of government securities increased by $1599 million over 1978-79; Treasury Note holdings rose by $794 million while other securities (mainly Treasury Bonds and Australian Savings Bonds) rose by $805 million. A brief descriptive account of factors affecting these portfolio movements is contained in the Monetary Conditions section of Statement No. 2; Table 1 1 of that Statement provides quarterly data in the format of Table 2.
Total private non-bank take-up of $713 million was equivalent to 32 per cent of the Budget contribution to private sector LGS assets.
RELATIONSHIP OF DEFICIT TO NET MOVEMENT IN SECURITIES ON ISSUE
As is evident from Table 1, most financing transactions involve the issue, repurchase, redemption or acquisition of Commonwealth Government securities, although some involve or are represented by changes in other assets or liabilities of the Commonwealth Government. A reconciliation of the deficit with the net movement in securities on issue can therefore be made. (Details of securities on issue are published in Budget Paper No. 6).
For this purpose, total financing can be disaggregated as:
Net sales of Commonwealth Government securities (new issues, less redemptions, less net purchases from balances(1) in the Trust Fund), less net purchases of other investments from Commonwealth Government balances in the Trust Fund, plus other items of indebtedness (such as transactions of superannuation funds, and transactions associated with the issue of coin), less net additions to cash balances and borrowings from the Reserve Bank.
The relationship between the items which finance the deficit and the net movement in securities on issue for years prior to 1977-78 is shown in Budget Paper No. 10 issued in August 1977.
(1) A distinction is drawn in this connection between Commonwealth Government and other balances in the Trust Fund. Commonwealth Government balances are those which record the receipt, expenditure and investment of Commonwealth Government money, while other balances are those which record moneys held in trust and invested on behalf of other sectors. The latter include the insurance deposits fund and a number of smaller funds: their transactions do not affect the size of the deficit, as any increase in liability for moneys received is matched by purchases of investments or additions to cash balances.
