Alternative ways of reporting budget outcomes
The Commonwealth Government will report the outcome of the Budget in three different ways. These are the headline cash outcome, the underlying cash outcome and the fiscal outcome.
The headline cash outcome
The headline cash outcome is the total cash received by the Federal Government less the total cash paid. However, this outcome can provide a misleading picture about the stance or impact of budgetary policy because it includes cash flows that do not directly impact on the economy.
The underlying cash outcome
The underlying cash outcome seeks to exclude the cash flows that are included in the headline cash outcome but that do not directly impact on the economy. Therefore, the underlying cash outcome is the most commonly referred to budget outcome. It provides the best indicator of the budgetary policy stance (or position) of the Federal Government and the impact it is likely to have on the economy over the short term. The underlying cash outcome is simply the headline cash outcome, but excluding the following transactions:
These items are excluded because they have no direct or immediate impact on the economy and their inclusion in the headline outcome only serves to distort the true cash flow position of the Government. For example, the Future Fund earnings are mandated to be reinvested into the Future Fund and cannot be used for general government expenditures. Accordingly, a surplus that is inflated by Future Fund earnings will give the false impression that the government has extra funds to spend in the short to medium term. Similarly, any sale of equities (e.g. shares) in a government business enterprise (GBE) only serves to inflate the headline balance, but does not directly add to economic activity. The sale (or purchase) of equities or debt (such as loans to State Governments) simply represents a transfer of ownership in a financial asset and has little direct impact on the economy. In addition, they are ‘one off’, non-recurring transactions that will not feature as cash flows in future budgets. Their inclusion will further distort the true position of government finances or the Government’s fiscal stance.
To illustrate the difference between the headline and underlying outcomes, we will use some hypothetical figures. Assume that Australia estimated the following receipts and outlays for the financial year ahead:
Headline cash surplus 20B
Assume that part of this $20B surplus has been achieved via the part sale of Australia Post for $10B. It should be clear that the $20B surplus both flatters the Government budget position and overestimates the (contractionary) effect the surplus is likely to have on the economy. Accordingly, the surplus should really be reported as $10B (the underlying cash surplus). Assume further that $3B of this $20B surplus has been achieved via earnings from the Future Fund. This $3B is not available for general government expenditure and is instead further invested in the Future Fund. Once more, the headline surplus overstates the true change to the Government’s financial position. The table below summarises the differences between the hypothetical headline and underlying cash outcomes:
Headline cash surplus 20B
Less net cash flows IFAPP 10B
Less Future Fund earnings 3B
Underlying cash surplus 7B