The Parliamentary Budget Office has warned a growing percentage of government spending is becoming harder to scrutinise because of the increased use of alternative financing arrangements for major projects, rather than direct payments.
The PBO warned in a report released on Thursday, as the Morrison government prepared a second round of economic stimulus, that if the trend continued without a change to budget reporting practices to make the spending more transparent, this could “pose risks to the commonwealth government’s fiscal position over the longer term”.
The PBO was established in 2012 to give independent fiscal policy advice to federal parliamentarians. The office costs policy proposals and analyses the fiscal impact of election commitments by the major parties.
Alternative financing arrangements often involve the government undertaking an equity investment, loan or guarantee, rather than funding measures through direct payments, or through tax expenditures, that hit the budget bottomline in more explicit ways.
When governments issue loans or take equity injections, this lowers the net cash flow, because the amount of cash held on the government’s balance sheet is reduced. When equity stakes are sold and loans repaid, this increases the net cash flow.
The report notes a clear trend towards using alternative financing arrangements in the transport, energy and telecommunications portfolios.
It says between 2007–08 and 2016–17, the average proportion of the commonwealth’s annual investment in transport infrastructure funded through alternative financing arrangements was around 5%. But between 2017-18 to 2022-23, the proportion will balloon to an average of 20%.
The PBO warns these arrangements can have a significant impact on the commonwealth’s fiscal position through the costs associated with revaluations.
To illustrate the point, the report says equity investments by federal governments in NBN Co since the inception of the project had resulted in a $20.8bn deterioration in the commonwealth 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 report says. “The debt that is not expected to be repaid is not fully captured in the underlying cash balance, yet was worth $1.2bn for new Help loans issued in 2018–19”.
It says budget documents contain detail about expenditures and taxation but “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”.
The new report notes the net cash flow on the commonwealth balance sheet has remained negative since 2008–09 when the Rudd government was forced to respond to the global financial crisis, with the net outflow reaching 1.1% of GDP in 2017–18, “the largest negative outflow recorded since the 1970s”.
But it says the trend has accelerated post GFC, with major contributors being the NBN, higher education loans and a one-off investment in Snowy Hydro Ltd in 2017–18. Australia now faces a second substantial economic shock from the impact of the coronavirus.
The PBO says governments should consider providing more accessible information on the full fiscal costs associated with all measures in order to help the parliamentarians voting on the measures and the general public to make more informed judgments.
The PBO also argues it would be prudent to move away from focussing solely on the budget measure of the underlying cash balance as part of developing a more comprehensive snapshot of how the budget is travelling.
“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,” the report says.
