Accounting “tricks” behind the federal budget surplus

Treasurer Wayne Swan is chuffed about the surplus, but it pays to take a deeper look at the numbers. AAP

Government budgets are increasingly becoming more political documents. This has been particularly evident with the federal government’s pledge to return the budget to surplus.

However, budget numbers are calculated pursuant to accounting principles, and a number of accounting “tricks” can be identified behind the $1.5 billion surplus number.

Some relevant observations on the Commonwealth budget from an accounting perspective are outlined below.

Will the surplus actually be delivered?

While the government is budgeting for a 2012-13 bottom line surplus (underlying cash balance) of $1.5 billion, the question is whether this will actually be achieved. The budget is merely a forecast of what is expected for the ensuing financial year.

Take the 2010-11 budget year as an example. The government originally budgeted in May 2010 for a deficit of $57.1 billion. However, some 16 months later in September 2011, the actual final outcome was a deficit of $47.4 billion - a 17% difference. Similarly, the 2011-12 deficit, originally forecast to be $22.6 billion, is now expected to blow out to $44.4 billion.

The government is making much of the return to surplus at this point in time, but we will not know whether that will actually be achieved until around September 2013. And the budgeted surplus of $1.5 billion provides only a very thin margin for error.

If the past is any guide, the final outcome due for reporting around September 2013 will not receive anywhere near the same attention as the budget now, especially as a further budget will have been released in May next year.

Shifting of spending out of the 2012-13 budget year

Given its commitment to announcing a surplus, the government has had an incentive to move spending out of the 2012-13 budget year. What is especially evident is the extent to which the government has made “policy decisions” that have taken spending out of the 2012-13 year and brought it forward into the current financial year (ending 30 June 2012).

The commencement of this strategy was evident in the government’s Mid-Year Economic and Fiscal Outlook (MYEFO) released in November 2011. Under the heading “Fiscal reprioritisation”, the government indicated that in the six-month period between the release of the 2011-12 budget in May 2011 and MYEFO, the net budget impact of policy decisions was to provide a $2.9 billion improvement to the 2012-13 bottom line. A further $3 billion saving to the bottom line has been achieved with policy decisions made between MYEFO and this budget. The net effect has been an improvement of $5.9 billion in the budget bottom line. Without these decisions, the 2012-13 budget bottom line would have been a $4.4 billion deficit.

A particular trick evident here is that the aggregate amount of the shift ($5.9 billion) can only be detected by examining both the MYEFO documents and the current budget.

Increase in dividends from public corporations

A particular feature of this year’s budget is the expected increase in the “efficiency dividends” from government public corporations. These dividends are budgeted to provide revenue of $1.1 billion for the 2012-13 budget year.

However, in terms of the whole-of-government sector, these public corporation dividends represent a fiddle, as they are merely distributions from one sector of government to another.

The announced budget surplus of $1.5 billion is that for the general government sector (GGS). The GGS comprises the government units and non-profit institutions controlled and financed by the government. The GGS budget figures represent taxation and other receipts and spending through the various government portfolios and departments.

However, the whole-of-government sector, representing a government’s total operations and finances, is comprised not only of the GGS but also includes various public corporations. These public corporations represent government-controlled companies and quasi-corporations, examples of which include Medibank Private, the Reserve Bank of Australia, Australia Post, the NBN Co, Airservices Australia and the Australian Rail Track Corporation.

Dividends from public corporations are akin to a dividend paid to a parent company by a subsidiary in a wholly owned group of companies. Such a dividend makes no difference to the wealth of the group as it does not reflect a transaction with an external entity. In consolidation accounting terms, these dividends would be eliminated as an intra-group transaction in any financial statements prepared at the whole-of-government level.

Given their inclusion, though, another interesting observation is that the government is budgeting for a one-off increase in these public corporation dividends in the year of the return to surplus. From an amount of $374 million for 2011-12, these dividends are budgeted to increase to $1.1 billion for 2012-13 and then return to $446 million and $476 million respectively for the following two years. Of course, it is the government that controls these public corporations and determines the annual dividends, so the figures suggest the government has deliberately increased these dividends to assist in budgeting for a 2012-13 year surplus. This increase in dividends above their normal level provides benefits to the budget bottom line of around $0.7 billion - almost half the amount of the surplus.

National Broadband Network

A further issue stemming from the use of public corporations can be illustrated by the example of the National Broadband Network (NBN). As the NBN will be undertaken by the NBN Co Ltd, a public corporation, this expenditure and the related borrowings will not appear in the general government sector budget. Accordingly, the $40 billion or so of NBN spending that has commenced and that will continue into future years will never appear in the budget bottom line.

Perusal of the NBN Co’s annual report for the year ended 30 June 2011 reveals that the 2010-11 budget bottom line would have been adversely affected to the extent of approximately $0.7 billion had the NBN spending been undertaken through the GGS rather than a separate public corporation. As the NBN spending is ramped up over future years, the effect of this omission from the budget bottom line will become greater and greater.

Underlying cash balance versus accrual accounting

Unlike the states and territories, the Commonwealth government uses a cash-based measure - the underlying cash balance - in announcing its budget bottom line. A cash-based measure is subject to manipulation by the types of adjustments to spending patterns outlined above. If an accrual-based measure of the budget bottom line was used, consistent with the surplus/deficit announcements of the state and territory governments, a $202 million “net operating balance” deficit - not a surplus - would have been announced. What is of interest here is the rhetoric that accrual accounting has been adopted throughout the public sector. But the Commonwealth government’s budget announcements are an obvious exception.


Isn’t it lucky we have a “Charter of Budget Honesty”!