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In the previous chapter it was pointed out that a feature of modern budgeting is annuality. Budgets are set and reviewed each year.
This chapter is written for those who want to go a little
further into the development of budget proposals in the Commonwealth Government. It is
drawn from information in a Department of Finance training document, discussions with
Department of Finance Officials, and updated from the Commonwealth Financial Management
Handbook and from EPAC, following the 1994 change to an April budget.
Budgeting is a cyclical process, with one budget feeding
into the next. It is also a long process - work on the 1995-96 budget would have started
in late 1994.
Forward Estimates
Each item in the budget is prepared with three years' forward estimates after the budget year. This gives some protection against wedging - becoming committed to a program with small initial commitment with open-ended growing commitment down the track. Forward estimates are useful tools for budgeting cash outlays and receipts; they are of less use in program evaluation as we'll see in Chapter 9. They relate only to existing policy and to initiatives in the current budget; they are not projections of 'wish-lists' or scenarios. A major reform as from 1989-90 has been the simultaneous publication of budget appropriations and froward estimates.
The estimates are maintained and updated as necessary by the Department of Finance, in consultation with relevant departments, to reflect changes in economic and other parameters and the effects of government decisions taken outside the budget process.
As an example of a budgetary appropriation and forward estimates, the 1994-95 appropriation and forward estimate for Austudy was as shown below.
| Austudy | |||||
| 1993-94 Estimate | 1994-95 Budget | 1995-96 Estimate | 1996-97 Estimate | 1997-98 Estimate | |
| Austudy $ million | 1 450.2 | 1 525.7 | 1 488,2 | 1 511.6 | 1 573.5 |
Stages of The Cycle
The principal stages of the budget formulation processes are described below. This cycle is an 'ideal' one, and does not allow for changes because of elections and mid-year policy decisions (as happened in 1992 with the One Nation initiatives) which often follow unforeseen macroeconomic developments.
This shows the formal budgetary processes in Cabinet, in particular in the Expenditure Review Committee (ERC). It does not show what happens up to that stage; in fact in the period June to December there is a considerable amount of departmental work in research, interdepartmental discussions, meetings with affected groups and other activity ultimately leading to Cabinet deliberation.
| November/December | Cabinet and the ERC consider budget timetable and processes. |
| December - February | Ministers and their departments formulate summary submissions of new policies and savings. |
| February | Treasury gives Cabinet a report on economic outlook. Finance Minister submits to Cabinet forward estimates (as revised in the light of six months activity, and proposals for new policies and reviews. Fiscal framework paper is prepared and agreed to by Cabinet. This forms the basis for negotiations with minority Party Senate members. |
| March | Ministers submit summaries of new policy proposals and
any offsetting savings. After considering these the ERC calls for further submissions
addressing proposals to be examined further. Commonwealth convenes Premiers' Conference. |
| April | ERC considers proposals in more detail. Revenue Committee of Cabinet reviews revenue collections in current financial year and projections for coming year. |
| May | Budget is brought down. |
| House of Representatives debate begins. Senate Estimates begin. Key revenue bills introduced into Senate. |
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| June | Appropriation bills introduced into Senate |
The Treasury and Department of Finance prepare detailed documentation and the Appropriation Bills for tabling by the Treasurer on budget day. These include macroeconomic estimates (The Commonwealth Public Account 199X-9X), general budget statements (Budget Speech, Budget Statements 199X-9X), special reports (Australia's Development Cooperation Program 199X-9X, Women's Budget Statement 199X-9X), historical outcomes (Income tax Statistics 199X-9X), to name a few of the more important documents.
A notable feature of the process is the separation of revenue from expenditure proposals. This makes it difficult for Cabinet to consider interrelated "packages". For example, analysts may consider it desirable to increase taxes on motor spirit, and to spend the resulting revenue on new roads and on energy conservation. In general, however, such coordinated proposals do not fit with the process.
This formalization of process has taken much of the drama
out of the budget. Forward estimates tend to take many of the surprises out of budgeting,
as does the tendency to index major items of revenue collections to the consumer price
index. Tabloid headlines like "Beer up, cigs up" are a thing of the past. In
addition, major new policies are frequently announced before the budget; the 1994 Working
Nation package was a case in point.
Not every item of expenditure or collection is subject to the same level of scrutiny. At the top of the hierarchy are major new policy proposals, which are subject to rigorous scrutiny. At the bottom are firmly established programs, such as general purpose payments to the states. The amount of scrutiny an item receives is a function of the size of the expenditure and the extent to which it may be locked in by long term legislation or agreement. The broad hierarchy is:
New policy proposals:
1. Genuine new policy proposals, such as the $$6.5 Billion associated with the Working Nation proposals, or the $1.5 billion associated with the Land Fund in 1993-94.
2. Extensions of existing policies, such as relaxation of eligibility criteria for government programs (e.g. the 1992-93 extension of certain repatriation benefits to Korean and Vietnam prisoners of war).
Ongoing programs:
3. Technical new policy, needing funding at some stage because of updating or upgrading and requiring ministerial consideration. This often applies to unforeseen external events, such as wars, natural disasters, or unforeseen consequences of the interaction of policies.
4. Policies with provisional estimates, and an unclear level of funding. Many demand-driven programs come into this category, such as Medicare.
5. Firmly based estimates, approved for ongoing funding, such as interest payments and long term contractual payments to the states.
This is not a strict hierarchy. For example, a minor new
policy proposal which does not impact on other activities will receive far less scrutiny
than a blow out in an ongoing program. As a general rule flexibility is maximum at the top
of the hierarchy, decreasing down the line. The government has little choice but to pay
interest on government debt, for example. (Jack Lang attempted to treat interest as
discretionary in 1939.)
Monitoring is primarily the responsibility of departments. Formal reviews are normally carried out four times a year The first review is conducted primarily by Finance in consultation with Treasury, while the later reviews are more formal, requiring departments to examine estimates for every item in their ledgers.
The mid year review provides a basis for the 'additional estimates' process through which departments and agencies seek formal Parliamentary approval for supplementation for their budget estimates. For example, unforeseen deteriorating economic conditions will put extra pressure on social security and welfare budgets, or a currency devaluation will push up the price of imported defense equipment.
General References
Department of Finance Budget Processes and Systems (DoF 1989)
Department of Finance Commonwealth Financial Management Handbook (AGPS 1992)
