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A beginner’s guide to the Federal Budget


Hungy Ye

By

May 14th, 2013


The Australian federal budget comes out tonight, detailing the government’s financial performance and future plans. Hungy Ye has the rundown on what to expect, and why this whole budget thing is important in the first place.


When asked what the biggest organisations in the world are, you might think of large corporations such as ExxonMobil, Microsoft, Toyota and the like. But the truth is, only the largest of companies can even come remotely close to matching the size of national governments in terms of the size and scale of the operations undertaken each day to keep a country running. ExxonMobil, the world’s largest corporation, has revenue of US$453 billion. Compare this to the largest government in the world. The US federal revenue is on the order of US$ 2.9 trillion — an entire order of magnitude in difference.

Governments provide for a vast array of services from defence to education to keeping the tap in your house running. Unsurprisingly then, it takes an enormous amount of resources to keep it running all year round. And just like any other large organisation, the Australian government has income and expenses to fund and pay for all of these activities. The government’s accounting statements, which keep track of its revenue sources and expenditure directions, are collectively known as the budget.

Figure 1: Revenue Comparison between largest companies vs. largest governments

Figure 1: Revenue Comparison between largest companies vs. largest governments. Source: CIA world Factbook.

These statements are prepared each year by the treasurer (currently Wayne Swan) and presented to Parliament and the general public at the end of each financial year, on the second Tuesday of May (the 14th this year). Traditionally the budget is delivered starting at 7:30PM on ABC so you can watch it live to follow the entire delivery.

Significance

You might ask what the big deal surrounding the budget is all about then, if it’s just an accounting statement about the government’s activities. Just like any large company’s annual reports, the budget includes detailed information on the amount and sources of revenue the government has collected during the year. It also details how much and where the said money has been spent. Being a democracy, this is where those interested can hold the government accountable for the choices it has made throughout the year. Has the government fulfilled its election promise of creating a Carbon ETS to combat climate change? It’ll be in the budget. Education system overhaul? In the budget. Roll out of the NBN? You get the idea.

What differentiates the government budgets from your company annual reports though is the presence of a 3 year forecast of the revenue and expenditures, the government’s objectives and priorities, and how it intends to deploy its resources to achieve these. This is broken down in various ways, such as by government portfolio (Health, Infrastructure/transport, Education etc.) and serves as the government’s short to medium term strategic plan which is a key part of understanding the short to medium term plans of the political party in power.

Figure 2: Consolidated Revenue and Expenses statement for the year 2011-2012. Source: Budget office.

Figure 2: Consolidated Revenue and Expenses statement for the year 2011-2012. Source: Budget office.

This is significant because it allows taxpayer-voters to evaluate whether or not the government is steering the country down a path which is a) what they’ve promised and b) desired by said citizen. Much of the discussion that arises from budget releases will be centred on what the government plans to do. In an election year such as this one, what’s written in the budget will have a large influence on whether or not a party in power will get the votes, hence all the scrutiny.

State of Affairs

Since the Labor government came to power, they have been fixated with the idea of producing a ‘surplus’, which is when the government spends less than the revenue it collects. This is now in doubt with an estimated $20bn shortfall in revenue, and thanks to repeated promises by the PM and Treasurer in the past this has caused a massive uproar amongst pollsters. The Labor government is unable to meet their election ‘promise’ of delivering a surplus, with the key reason identified as the strong Aussie dollar dampening business activity, and thus reducing the revenue despite the fact the spending has been kept in check.

According to Economist and previous ESSA contributor Stephen Koukoulas this is entirely irrational as Australia is in a far better financial position to handle a deficit compared to other countries around the world faced with the same problem. Nonetheless he notes that the opposition will definitely pounce on this broken promise and that it might be more interesting to watch the response of Mr. Abbott after the budget speech is given. This is particularly important as most interested parties are already predicting a landslide victory for the Liberal party regardless of the budget.

If Labor really wanted to ‘balance’ the budget, they face some tough choices. For a quick rundown, the Sydney Morning Herald provides an interesting interactive which shows the range of options and their effects that you might like to try. As for what the Labor Government actually plans to do, we will have to wait for the announcement on Tuesday evening to find out!

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The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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