The use of alternative financing arrangements to deliver policy outcomes has been increasing…
Under successive governments there has been a shift toward delivering more government policies using alternative financing arrangements rather than direct payments. These arrangements usually involve the government undertaking an equity investment, loan or guarantee.
…the full cost of which is not captured in the underlying cash balance.
The underlying cash balance is the metric by which the government’s fiscal position is frequently assessed in public commentary. In most cases this is appropriate, since the impact of policy decisions on the fiscal position is broadly in line with the impact on the underlying cash balance. But this is not the case for policies that are funded using alternative financing. For these policies, understanding the fiscal impact also requires an understanding of the value of assets acquired.
Revaluation-related costs from alternative financing arrangements can be substantial…
Recent experience has shown that these arrangements can have a significant impact on the fiscal position through revaluation-related costs. For example, successive governments’ equity investments in NBN Co had resulted in a $20.8 billion deterioration in the balance sheet as at 30 June 2019, which is not captured in the underlying cash balance. Similarly, a material share of loans issued under the Higher Education Loan Program (HELP) is never expected to be repaid – partly by design. The debt that is not expected to be repaid is not fully captured in the underlying cash balance, yet was worth $1.2 billion for new HELP loans issued in 2018–19.
…and such costs are not clear from current budget reporting, which could be enhanced.
While detail is provided in budget documents about most government spending and taxation, very limited information is provided about revaluation-related impacts. This makes it difficult to understand the balance sheet impact of policies using alternative financing arrangements when they are announced and to assess their performance over time. There are a number of ways in which the transparency of budget reporting could be improved, with some possible enhancements set out in this paper.
Providing accessible information on the full fiscal costs and risks (whether estimated or realised) for all significant areas of spending would assist parliamentarians and the broader public to make informed judgements about policies. If the use of alternative financing arrangements continues to grow without a change to reporting practices, a larger share of government spending would be difficult to scrutinise, which could pose risks to the Commonwealth Government’s fiscal position over the longer term.
The underlying cash balance should not be relied upon as the sole indicator of the fiscal position.
The use of different financing arrangements reinforces the importance of reviewing a range of budget indicators in order to form an assessment of the overall fiscal position. There is a risk that focusing only on the underlying cash balance (or fiscal balance) may distort government decision making to the extent that it is guided by the impact on these aggregates alone.
The fiscal and underlying cash balances should be viewed together with other published indicators, such as net financial worth and net debt, to provide a more complete picture of the health of the balance sheet. It is important to note that Australia’s fiscal position is significantly stronger than many other countries and could reasonably be considered sustainable by any budget metric.
Download the full report above.
A short fact sheet by the Tax and Transfer Policy Institute draws on this report and summarises how alternative financing is used, how its use has changed over time, and its impact on the budget.