1 October 2016
David Uren Economics Editor Canberra
Falling world interest rates have pushed up the cost of servicing the lucrative public service defined-benefit superannuation pensions by $66 billion over the past year.
The final budget outcome for 2015-16 shows a sum of $314bn would be required to cover public sector superannuation liabilities at the government bond rate of 2.7 per cent, up from $248bn a year ago.
The government’s deteriorating financial position is also shown by the rise in net debt, up by 18.5 per cent to $296bn over the past year.
The final budget outcome shows the overall deficit for 2015-16 was $39.6bn, worse than the $35.1bn predicted when it was announced by Joe Hockey in May last year but $300m better than the most recent Treasury update in this year’s budget papers.
Both spending and revenue dipped in the final six weeks of the financial year; however, the gains on the spending side of the budget were largely one-offs, such as Victoria’s failure to get its application for funds from the asset recycling fund in on time, whereas weakness in revenue will carry into this year’s budget.
Deloitte Access Economics partner Chris Richardson said the budget outcome contained worrying trends as the government started work compiling its mid-year budget statement scheduled for December.
“Yet again, we’re seeing signs that income weakness is eating not just into the most high-profile bit of the budget — the company tax take — but also the personal income tax take as well,” he said. “A hit to wages is continuing to weigh on the budget.”
The government closed the major defined-benefit pension scheme to new entrants in 2005 and set up the Future Fund to help cover outstanding liabilities. However, falling global interest rates are pushing up the amount the government is required to set aside in its financial accounts and making it harder for the Future Fund to meet its growth targets.
The Future Fund holds $122bn and is unlikely to get any further government contributions until the budget returns to surplus.
The final budget outcome’s measure of the public service superannuation liability is 50 per cent bigger than the estimate contained in the budget, which was based on an actuarial calculation that assumes inflation returns to 2.5 per cent and an average 6 per cent return is achieved.
This is similar to the Future Fund’s mandate, which requires it to earn 4.5-5.5 per cent more than the inflation rate, a target fund chairman Peter Costello said could only hope to be achieved by taking excessive risks.
The final budget outcome, similar to a company’s annual report, has to follow accounting standards which say the cost of meeting the generous fixed public sector superannuation pension payments needs to be based on the cost for the government to borrow the funds required.
Mr Richardson said that while interest rates were falling it made investment returns look good because share and bond prices were pushed higher. But ultimately, the low returns made it harder to meet fixed commitments, a problem shared by insurance companies, aged-care homes and retirees.
“We have made promises that are now more expensive to fulfil because the future returns are horrendous,” he said.
The final budget outcome shows it will be difficult for the government to meet its revenue forecasts.
Company tax raised only $62.9bn, $1.8bn less than predicted and the lowest since 2009-10. BHP Billiton and Rio Tinto, two of the largest taxpayers, have reported a halving in profits since the end of the financial year, so company tax will struggle to achieve the 9.7 per cent growth required to hit the $69bn revenue predicted in the budget.
Personal income taxes were $1.3bn lower than Treasury predicted in the budget, mainly because of lower pay-as-you-go tax deductions in large companies. Refunds were also higher than Treasury expected, which Mr Richardson said could reflect cash-strapped employees pushing harder with their tax claims.