EXHIBIT (c)(iii)

Budget Papers of the Co-Registrant for 2015-16.

FORWARD-LOOKING STATEMENTS

This exhibit contains forward-looking statements. Statements that are not historical facts, including statements about the State of Queensland’s (the “State” or “Queensland”) beliefs and expectations, are forward-looking statements. These statements are based on current plans, budgets, estimates and projections and therefore you should not place undue reliance on them. The words “believe”, “may”, “will”, “should”, “estimate”, “continue”, “anticipate”, “intend”, “expect”, “forecast” and similar words are intended to identify forward-looking statements. Forward-looking statements speak only as of the date they are made, and neither the Queensland Treasury Corporation nor the State undertake any obligation to update publicly any of them in light of new information or future events.

Forward-looking statements are based on current plans, estimates and projections and, therefore, undue reliance should not be placed on them. Although the Queensland Treasury Corporation and the State believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such beliefs and expectations will prove to have been correct. Forward-looking statements involve inherent risks and uncertainties. We caution you that actual results may differ materially from those contained in any forward-looking statements.

A number of important factors could cause actual results to differ materially from those expressed in any forward-looking statement. Factors that could cause the actual outcomes to differ materially from those expressed or implied in forward-looking statements include:

• the international and Australian economies, and in particular the rates of growth (or contraction) of the State’s major trading partners;

• the effects, both internationally and in Australia, of any further global financial crisis, any subsequent economic downturn, the ongoing economic, banking and sovereign debt crisis in Europe and any stalling of the protracted United States recovery;

• increases or decreases in international and Australian domestic interest rates;

• changes in the State’s domestic consumption;

• changes in the State’s labor force participation and productivity;

• downgrades in the credit ratings of the State and Australia;

• changes in the rate of inflation in the State;

• changes in environmental and other regulation; and

• changes in the distribution of revenue from the Commonwealth of Australia Government to the State.

Queensland Budget 2015-16

Budget Speech

Budget Paper No. 1

2015-16 Queensland Budget Papers

1. Budget Speech

2. Budget Strategy and Outlook

3. Capital Statement

4. Budget Measures

5. Service Delivery Statements

Appropriation Bills

Jobs Now, Jobs for the Future - Queensland Government employment plan

Budget Highlights

The suite of Budget Papers is similar to that published in 2014-15.

The Budget Papers are available online at www.budget.qld.gov.au

© Crown copyright

All rights reserved

Queensland Government 2015

Excerpts from this publication may be reproduced, with appropriate

acknowledgement, as permitted under the Copyright Act.

Budget Speech

Budget Paper No. 1

ISSN 1445-4890 (Print)

ISSN 1445-4904 (Online)

Appropriation Bill 2015

(First reading speech, 14 July 2015)

Treasurer

The Honourable Curtis Pitt MP

Treasurer, Minister for Employment and Industrial Relations

Minister for Aboriginal and Torres Strait Islander Partnerships

Appropriation Bill 2015

(First reading speech, 14 July 2015)

Treasurer

The Honourable Curtis Pitt MP

Treasurer, Minister for Employment and Industrial Relations

Minister for Aboriginal and Torres Strait Islander Partnerships

Mr Speaker

I move that the Bill be now read for a first time.

Mr Speaker,

The 31st of January 2015 was a victory for the Queensland we know we can be, and a defeat for the kind of Queensland we’d long left behind.

Labor governments will always believe that our most valuable economic assets are our people and our communities. When a measured and responsible approach is needed and fairness must be restored – we’re there to put in the hard work.

Labor Budgets reflect this.

Labor Budgets are positive.

They are optimistic.

They seek to challenge, to extend, to grow new industries, to tackle the enduring tests with optimism about the future.

A Better Way

Mr Speaker, today I introduce a Budget that delivers on the plan that Labor took to Queenslanders.

Consistent with our approach to responsibly manage the State’s finances, the Palaszczuk Government’s first Budget delivers on all of the commitments we made at the election.

And as promised, we have more than offset that spending.

On final analysis, our election commitments have been estimated by Treasury to cost $1.97 billion over the next four years.

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Through offsets and reprioritisations, funding of $2.31 billion was identified, providing a net fiscal improvement of $340 million.

This has been achieved without redundancies – forced or voluntary.

Mr Speaker, we told the people of Queensland, that we would improve front line services.

This Budget delivers.

We said we would have an operating surplus and that we would not introduce new taxes, fees and charges.

This Budget delivers.

We said we had a plan to grow the economy and to deliver jobs – jobs now, and jobs for the future.

We said there was a better way – one that did not involve selling the State’s income-generating assets.

This Budget keeps that promise.

Budget Strategy

Mr Speaker, we also said we would manage the State’s finances responsibly.

Today I can confirm that for the 2014-15 year, the Palaszczuk Government expects a $962 million surplus.

And I am proud to advise that for 2015-16, we are forecasting a surplus of $1.2 billion.

Queensland has not achieved a surplus of this size in nearly a decade - not since 2006-07.

What’s more, the Palaszczuk Government is forecasting surpluses above $2 billion for both 2016-17 and 2017-18.

The combined surpluses over the next four years will be $6.9 billion.

These surpluses are achieved notwithstanding a forecast reduction of royalty revenue since the Mid Year Fiscal and Economic Review and a $396 million write-down in payroll tax.

These surpluses are achieved through a measured, responsible approach to balancing the books.

More importantly, these surpluses represent the underlying strength of the Queensland economy and position the State to capture sustainable economic growth.

Operating expenses – excluding natural disaster payments – are forecast to grow on average by 4.1% across the forward estimates.

This is a sustainable rate which is lower than forecast revenue growth of 4.3%, even with the significant revenue write downs seen in this Budget.

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Economic outlook

Mr Speaker, Queensland has an economy that faces the world and trades with all parts of it.

And while enormous benefits come with such an outlook, there are also impacts.

The global economic outlook has softened over the last year, with continued financial uncertainty in the Eurozone and sharp declines in world commodity prices.

What happens to oil prices as a result of decisions made in Saudi Arabia, matters to Queensland.

What happens to steel production in China, impacts upon the Queensland economy and the Queensland Budget.

And what we have seen as a result of global conditions is a $3.2 billion write-down in royalties since the MYFER.

There is no doubt our revenues have taken a hit.

Overall, revenue growth has fallen from 6.1% last year to a forecast 3.2% in 2015-16.

Mr Speaker, this is partly because Queensland has an economy in transition.

Not just from resource sector construction to production – although this is a big part of our journey.

When Labor was last in government we set out a blueprint for the establishment of a $60 billion LNG industry.

This investment was both historic and significant, and as a result a new industry is now a reality.

$648 million worth of LNG exports have left the Port of Gladstone so far in 2015.

The success of this new industry underscores the duty of responsible Governments to always be seeking out ways to diversify the economy, rather than rely on past successes.

Mr Speaker, we are transitioning to a multi-faceted service economy, with growth industries in health and human services, particularly disability services, education exports, bio-technology and a burgeoning tech sector.

As Labor helps to facilitate this transition, our economic growth and labour market will strengthen.

Mr Speaker, I can announce today that Queensland’s economic growth is forecast to improve, from 2% in 2014-15 to 4 ¹⁄₂% in 2015-16 and 2016-17.

As a testament to the Queensland economy’s enduring strength, this is stronger growth than any other State in the country.

Mr Speaker, as the economy grows, we need jobs to follow.

In 2014-15, employment growth slowed to half a percent.

This was the weakest result since 2012-13 when the previous government undertook severe cuts to the government workforce.

But employment growth is forecast to improve to 2% by the end of this term.

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This reflects improving domestic activity, including an increase in household spending, dwelling investment and the lower Australian dollar improving the competitiveness of the services export sector.

This will encourage more Queenslanders to participate in the labour market.

Unemployment, however, is forecast to remain around 6% over the coming years.

Mr Speaker, this is too high.

Putting downward pressure on the unemployment rate will be the enduring challenge of this term.

There is nothing more important for each and every Queenslander than to have the opportunity to gain work.

Labor believes in Queensland, and in Queenslanders.

We believe in the value and dignity of work, in opportunity, equality, and fairness.

It is the very reason why the success of our $1.6 billion Working Queensland jobs measures in this Budget are so critical.

Jobs now, jobs for the future

The Palaszczuk Government went to the election promising jobs now and jobs for the future.

This Budget delivers for those Queenslanders seeking a job by implementing our commitment to the Working Queensland jobs plan.

More Queenslanders in work means a more prosperous and inclusive future for us all.

Our Working Queensland jobs plan will help create the conditions for growing jobs and building new businesses.

Specifically, it will focus on five key priorities:

1. Improving skills and training

2. Enhancing business productivity

3. Boosting Government services

4. Fostering emerging and innovative industries

5. Building our regions.

A key element of this Budget’s $1.6 billion jobs plan is the Skilling Queenslanders for Work initiative, which will support some 32,000 Queenslanders back into work.

A return of around $8 into the economy from every $1 invested.

Skills improvement will be crucial and the role to be played by the revitalised TAFE sector is significant.

Additional funding of $34.5 million will be provided over four years to restore TAFE to its rightful place – delivering more foundation courses, more TAFE qualifications through schools and more TAFE teachers.

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To better align skills demand and long-term workforce planning, we will also allocate $40 million to the establishment of Jobs Queensland as an independent statutory authority.

And Government will play its part, with 10% of the workforce on all Government projects required to be apprentices and trainees.

This now applies for the first time to Government-owned businesses and for public-private partnerships over a certain size.

Mr Speaker, this is a budget that will support business.

It factors in our legislated payroll tax rebate for apprentices and trainees, resulting in an estimated $45 million in tax savings for businesses to reinvest.

Small business will be supported via initiatives such as the Entrepreneurs of Tomorrow fund, which will help stay-at-home parents grow their home-based businesses.

Like Elise Easdown, a Brisbane ‘mumpreneur’ with three young children and a growing online business called ‘What’s On 4’, which she started from home.

It is now an international business providing an online directory for family friendly events, and kids party planning worldwide.

Local infrastructure for local jobs

Mr Speaker, Labor Governments recognise that there are times when economic uplift is required, in order to deliver jobs now.

In a decentralised state like Queensland, Government building projects help deliver employment when and where it’s most needed.

Today’s Budget includes an estimated $10.1 billion spend on infrastructure across Queensland, supporting an estimated 27,500 direct jobs.

This year’s capital works Budget is higher by nearly $400 million, compared to the estimated actual spend last year.

The infrastructure priorities in this Budget are about getting value for money from the delivery of real and tangible local projects right now.

Mr Speaker, today I can announce that this year’s Budget includes an injection of $500 million of new money over four years for a Statewide Schools and Hospitals Fund.

Real Labor Budgets have education and health at their heart, and these will be the sorts of local hospital and school refurbishments that support local jobs and families.

$180 million of this $500 million package will be spent on enhancing regional hospitals.

Essential improvements will be made to hospitals including Caloundra, Roma, Hervey Bay and Gladstone.

This is in addition to the nearly half a billion dollars that will be spent this year alone to continue delivery of the Sunshine Coast University Hospital.

Education maintenance will receive a crucial $300 million boost over the next four years.

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This is new funding over and above Education Queensland’s base budget for maintenance.

These funds will start to address the education maintenance backlog left over recent years.

The $300 million education maintenance boost will give Queensland families access to quality educational facilities.

Mr Speaker, the Auditor-General has recommended that Queensland invest 1% of the value of its education asset base – per annum – in improving school facilities.

This Budget meets that baseline.

We will see schools refurbished across the length and breadth of Queensland.

Our State Schools, High Schools and Special Schools.

Local projects that will benefit painters, carpenters, tilers and floorers, electricians, plasterers, plumbers and other trades right around the State.

Local tradespeople will be able to register their interest and become an accredited supplier of works, as part of this $300 million education maintenance boost.

An example of where this government is taking a new approach to education maintenance, is a trial currently underway to upgrade all state schools in the Roma area.

This involves refurbishing classroom spaces, some built in the 1950s for a 1950s curriculum, into modern facilities for a modern curriculum.

The Department of Education is giving preference to regional contractors to support local employment, with a focus on apprentices and trainees.

This will help ensure the economic and social benefits of local projects stay in the region.

Early indications from the Roma trial are that these changes will achieve at least 20% savings, compared to the traditional way of doing things.

Mr Speaker, I can also announce today, with funds set aside in this Budget, that three new future schools will be built in regional Queensland.

A new $25 million Special School will finally be built in Cairns, in time for the 2017 school year.

In North West Townsville, $50 million will be spent on a new primary school to be built in time for the 2018 school year. While $40 million will enable construction to begin on a new Townsville high school to open by 2020.

These will be schools fitted with the technology required to prepare our next generation for the knowledge-economy.

Advance Queensland

Mr Speaker, the Palaszczuk Government wants Queensland workers of today to have access to the new jobs of the future.

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Queensland’s geographical proximity, our shared time zone with Asia and our shared tropical climate with around half the world’s population, positions us perfectly as a gateway to the fastest growing regions in the world.

This presents Queensland with immense global opportunities by:

• building on our world recognised expertise in areas such as medical science, biotechnology and robotics – sharing our tropical expertise with the world

• unlocking our untapped startup potential to turn innovative ideas into new products and services.

The source of Queensland’s enormous potential continues to be our people – our human capital.

The Palaszczuk Government is positive about Queensland’s future because we believe in the ability of this and the next generation to drive innovation, build a stronger economy and create jobs.

We need to act now if we want to remain and thrive as a global innovation hub.

Advance Queensland is the next important step.

Our Advance Queensland strategy was a key point of difference for Labor during the January election.

One of the centrepieces of this Budget is that Advance Queensland has been boosted, from an election commitment of $50 million, to a $180 million investment.

An investment in innovation, in skills, in education, in business development and in a startup culture to deliver knowledge-based jobs now and into the future.

Without a focus on science and innovation in Queensland, Professor Ian Frazer would not have developed the world’s first cervical cancer vaccine here.

And without the Translational Research Institute, we would not be able to keep researchers employed in Queensland, exporting future breakthroughs to the world.

We want to attract and develop the best and brightest talent in Queensland, translate our science and technology ideas into commercial and employment outcomes, and play our role in supporting a thriving startup eco-system.

This Advance Queensland investment is expected to co-leverage funding and generate total investment of $300 million.

Advance Queensland will include a $50 million Best and Brightest Fund to develop, attract and retain world-class talent – both scientific and entrepreneurial.

Mr Speaker, Advance Queensland will also see $46 million invested through a Future Jobs Strategy that will open the door to new industry and research collaborations, tackle the big innovation challenges, focus on translation and deliver 10-year roadmaps for industries with global growth potential.

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Three partnerships have already been identified following the Premier’s overseas trade mission to the United States:

• the Queensland Emory Drug Discovery Initiative

• a new Siemens Innovation and Translation Centre at the Translational Research Institute, and

• the Government will support the establishment of a Johnson & Johnson Partnering Office to be located within QUT.

As a Government, we know that the real drivers of economic change are entrepreneurs and ambitious businesses.

That’s why Advance Queensland will deliver a $76 million Business Investment Attraction package.

To encourage a new wave of Queensland startups, to provide new opportunities for small business, to support proof-of-concept projects and attract co-investment.

Currently only seven per cent of Australia’s tech startups are in Brisbane.

Tech startups are vital to job creation and prosperity.

Studies have found that each technology job created leads to five additional jobs in other sectors.

Halfbrick Studios is a Brisbane tech startup success story.

Without it, the world wouldn’t have ‘Fruit Ninja’.

Brisbane also wouldn’t have the global headquarters of one of the world’s most powerful App developers, employing 85 Queenslanders, with a further 11 positions advertised on their website right now.

To build on successes like Halfbrick, this Budget delivers a $24 million Startup Queensland program, as part of the Advance Queensland Business Investment Attraction package.

We will be examining opportunities to offer a time-limited research and development tax credit matching program for technology startups establishing or relocating to Queensland.

We will also provide a three year payroll tax exemption for new companies established in Queensland as part of Advance Queensland research programs.

Mr Speaker, the Advance Queensland Business Investment Attraction package will include $52 million to improve access to finance and management support for start-ups and SMEs with ambition to grow in international markets.

This will include a $12 million Queensland Commercialisation Program to support proof-of-concept projects designed to lead to new products and services.

And a $40 million Business Development Fund to provide seed co-investment, to encourage greater angel and venture capital investment in Queensland businesses, to help turn good ideas into a commercial reality.

Mr Speaker, across a spectrum of initiatives, the $180 million Advance Queensland package will provide a roadmap for diversifying our economy and growing the jobs of the future.

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Building our regions

Mr Speaker, I’m proud to be a Treasurer from regional Queensland – the first since the late 1980s.

During the election we promised that the Building Our Regions fund would commence from 2016-17.

However, in light of the need for jobs-generating infrastructure projects to help provide economic uplift to Queensland sooner, I can announce today, Mr Speaker, that this funding has been brought forward by a full year to commence in 2015-16.

Over the next two years, local councils in rural and regional Queensland will share in an additional $200 million in infrastructure, through the Building Our Regions fund.

$55 million of this commitment will be set aside for royalty producing local government areas to improve infrastructure in the communities where royalties are actually generated.

From our regional centres to the outback, this Budget recognises that some parts of Queensland are doing it particularly tough.

That’s why we will provide $52 million of drought relief in this Budget, including emergency rebates and freight subsidies.

We will also provide mental health support and bio-security initiatives such as wild dog eradication.

In addition, $9.5 million will support the bio-security response to the detection of Tropical Race 4 Panama disease – to protect the future of North Queensland’s banana industry.

In the North West and South West of our State, we will deliver a $40 million Western Roads Upgrade Program, to improve roads and keep road crews on the job.

Central Queensland has also been doing it tough in the aftermath of Tropical Cyclone Marcia.

The final damage bill was around $750 million but there have been untold impacts on those communities.

Today I can announce the provision of $25 million to revitalise the Yeppoon Foreshore and $15 million to restore the Rockhampton Riverbank.

We have stepped in to fund these cyclone recovery projects, despite the Federal Government rejecting our request for assistance.

Infrastructure

Mr Speaker, this is an infrastructure Budget – one which delivers over $10 billion in capital investment, supporting 27,500 direct jobs.

This investment includes a $4 billion Transport and Roads program to build and upgrade the key transport arteries that will keep Queensland moving:

• upgrading of the Gateway Motorway North to six lanes

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• the commencement of the Toowoomba Second Range Crossing

• a suite of roads projects on the Gold Coast in preparation for the Commonwealth Games, and

• further duplication works on the Bruce Highway.

The capital program includes $300 million for rail improvements, including early spending to deliver 75 new trains by December 2018.

And business can have certainty that a pipeline of all major infrastructure projects will be properly sequenced through the State-wide Infrastructure Plan and properly costed through Building Queensland to deliver maximum value for money.

Restoring frontline services

Mr Speaker, I am proud this is also a Budget that will restore frontline services, with record investment in health and education, to repair the neglect of the last three years.

We will spend more on health and education than ever before, ensuring that the quality of our hospitals and schools are returned to the level Queenslanders expect and deserve.

Health

Queensland Health’s budget will grow by 4% to $14.2 billion this year, the largest on record, and continue to grow across the forward estimates.

This increase includes growth funding of $2.3 billion over four years for Queensland Health to deliver frontline services and improved health outcomes for all Queenslanders.

Mr Speaker, the previous Government had chronically underfunded Queensland Health.

Today’s Budget redresses this.

In addition, $361 million is provided over four years to implement the Outpatient Long Wait Reduction Strategy to finally address what the former Government wouldn’t admit to…

The ‘wait for the wait list’.

This funding has been provided in difficult circumstances, given the Commonwealth’s $11.8 billion in cuts to health have not been restored.

And make no mistake, the Commonwealth’s cuts are still expected to place considerable pressure on the Health budget in the out-years.

Mr Speaker, the Palaszczuk Government made a commitment to our State’s tireless nurses that we would support them to offer the best in patient care.

Today’s Budget includes the funding required to deliver on our election commitment to support up to 4,000 new graduate nursing places, as well as employ 400 Nurse Navigators across our Hospital and Health Services to work with patients, assisting them to navigate across the health system.

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As a government that looks to address the challenges of the future, we will invest in tackling preventable conditions like type 2 diabetes and heart diseases.

We will do this by partnering with peak bodies to deliver dynamic and proven preventative health programs.

Education

Mr Speaker, ours is a Government that cares for Queensland families and recognises the importance of investing in our next generation.

That’s why we have ensured Queensland’s education and training budget is also a record spend, growing by over 7% to $12.4 billion in 2015-16.

Instead of cutting resources to our schools, we are investing in our schools and our children.

Additional funding of nearly $250 million over four years is provided to lower class sizes and to provide an extra 875 teachers – including 275 specialist teachers for high schools.

An additional 45 guidance officers will be provided for Queensland secondary schools so that every high school over 500 students will have access to a full-time equivalent guidance officer.

We are providing additional funding to our teaching principals who work in our small schools across the State to enable them to better manage the running of their schools.

We will provide enhanced middle management in our primary and special schools to help deliver the curriculum of the future

As well as increased teacher release time to facilitate greater planning, curriculum co-ordination and collaboration time.

If we want our children to be equipped for the jobs of the future, we need to resource and support our principals, teachers and support staff to get the job done.

Public Safety

Mr Speaker, the Palaszczuk Government values the safety of the community and is investing in that safety.

The Government has allocated $31 million over four years as a preliminary response to the Not Now, Not Ever Report.

We will soon release a draft Queensland Domestic and Family Violence Prevention Strategy for public consultation.

Funding of $32 million over four years is allocated in this Budget to address alcohol-fuelled violence across the State.

A further $20 million over four years will be provided to the Police Service to target organised crime, alcohol fuelled violence and the drug ICE.

And having seen first-hand their importance, $6 million has been allocated over three years for body worn cameras to improve safety for our police officers.

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Frontline services will be bolstered with:

• 266 new police officers

• 977 new and replacement police vehicles

• 155 new and replacement ambulances, and

• 75 additional paramedics.

$65 million has also been allocated for new and upgraded fire and emergency services facilities and equipment.

Tourism

Mr Speaker, when it comes to tourism, Queensland is where Australia shines.

Under the previous Government, however, no funding certainty was provided for the tourism Budget beyond 2014-15.

The former Government budgeted to cut funding for Tourism and Events Queensland to around half its 2014-15 level by 2018-19, which would have had a real impact on major events, marketing campaigns and on regional tourism operators.

It potentially put a question mark over major events such as the V8 Supercars, Australian Festival of Chamber Music – even the Cairns Amateur Racing Carnival.

All of which support thousands of jobs and generate millions of dollars for the Queensland economy.

The Palaszczuk Government is determined to grow tourism in our state because we know it supports more than 131,000 direct Queensland jobs.

Today’s Budget restores tourism and events funding, providing a total budget of around $400 million over four years so the industry can move forward with confidence.

This funding certainty will help grow the capacity of Tourism and Events Queensland, to promote our destinations and drive our tourism growth.

The Environment

Mr Speaker, no government in history has been more committed to protecting the Great Barrier Reef than the Palaszczuk Government.

This commitment has been recognised by UNESCO and the World Heritage Committee.

We will provide an additional $100 million over five years to protect the iconic Great Barrier Reef.

This funding will enable investment in water quality initiatives and scientific research, together with helping businesses to transition to better environmental practices.

We will also improve coordination of existing Reef water quality spending through annual investment plans and reports.

This addresses the deficiencies recently highlighted by the Auditor-General.

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Communities

Mr Speaker, one of the fundamental social reforms of this generation is the National Disability Insurance Scheme – a Labor initiative that I’ve supported since my first term.

Queensland deserves a launch site to ensure that we are ready to participate in the NDIS from 1 July 2016.

Funding of $1.9 million has been set aside for the launch, which will enable up to 600 people with a disability to progressively commence access to reasonable and necessary services in preparation for the NDIS.

Mr Speaker, families will be supported in this Budget with $6.6 million over two years to deliver an innovative program of parenting support.

The Positive Parenting Program will include a state-wide free service, providing face-to-face and online training to help improve parenting skills.

Seniors too will be supported in this Budget, with the provision of $233 million in concessions over the next four years for electricity, water and transport that were cut by the Commonwealth Government.

Innovative approaches

Mr Speaker, when it comes to tackling complex social and economic challenges, the Palaszczuk Government is committed to innovation.

We intend to take a collaborative approach to working with the private sector and NGOs on financing solutions to difficult problems.

After several months of investigation, I can announce that the Government will pilot three Social Benefit Bonds.

These Bonds will examine ways to partner with service providers and the private sector in the areas of re-offending, homelessness and Indigenous disadvantage.

This initiative will aim to source funds from private investors and provide a return when agreed social outcomes are met – improving service delivery and saving money.

I can also announce today that the Government will launch a new Market-Led Proposals framework to enable the private sector to submit projects for potential partnership with the State.

The business community will be encouraged to propose solutions to major infrastructure challenges, and submit these for coordinated assessment via a Market-Led Proposals portal.

We want to engage more seamlessly with industry to secure new projects – proposals which can capture economic uplift and job opportunities.

Market-led proposals will allow Queensland to look beyond the Commonwealth’s failure to help fund Queensland’s next-generation infrastructure projects.

It could allow us to consider a genuine partnership with the private sector to deliver projects like Cross River Rail.

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Responsible Debt Management

While Queensland’s operating position is back in the black, it is clear that the level of debt we are carrying remains too high.

Mr Speaker, it is time to take the politics out of debt. It’s time to roll up our sleeves and systematically set about reducing the State’s debt levels.

Today I hand down the first Queensland budget in 16 years to reduce debt.

Our Debt Action Plan will deliver $9.6 billion in debt reduction by 2017-18.

This is the first Queensland Budget since 1999-2000 to project a reduction in General Government debt across the forward estimates.

Total borrowings are forecast to be lower over every year of the forward estimates, compared with those forecast by the previous Government.

After factoring in revenue write-downs and critically needed funding for health and education, General Government borrowings are still forecast to be more than $3.7 billion lower in 2017-18, than they were in 2014-15.

This debt reduction is achieved without selling assets.

It is achieved through a Debt Action Plan, prompted by the Review of State Finances.

Review of State Finances

Mr Speaker, in accordance with our 2015 election commitment, the Government commissioned Queensland Treasury to undertake a review of the State’s finances, for publication as part of the first State Budget of the term.

We saw no need to employ highly paid external people – certainly not a former federal Treasurer.

We had confidence in the independent officers of Treasury for such a task.

The Review of State Finances made recommendations for a revised set of fiscal principles that will see the Government direct its focus towards targeting a reduced General Government debt-to-revenue ratio over this term.

In 2014-15, Queensland’s debt-to-revenue ratio was 87%.

The Review of State Finances advised that a reduction to between 70-80% over the next decade was desirable.

Today I can confirm that as a result of measures taken in this Budget, Queensland’s debt to revenue ratio will be reduced to around 70% – not over the next decade, but over the forward estimates.

Debt Action Plan

Achieving these fiscal principles requires a new approach.

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The Government’s Debt Action Plan will refocus the State’s balance sheet through three initiatives.

A $4.1 billion reduction in General Government debt is achieved from re-gearing our energy network businesses.

This is the first step in merging these businesses as committed at the election.

It was recommended by the independent Treasury’s Review of State Finances, and is supported by analysis by KPMG which states that there will be no impact on electricity prices.

With these assets staying in government ownership, we have an obligation to make them work harder and more efficiently for the people of Queensland.

This will result in lower General Government interest expenses of around $600 million over the forward estimates – without the need for asset sales.

The second measure of our Debt Action Plan will see total State debt reduced by a further $3.4 billion, through meeting Long Service Leave obligations on an ‘as required basis’, rather than holding a central investment allocation.

This measure was also identified by the Review of State Finances.

Queensland is the only Australian jurisdiction to fund long service leave in this manner.

The standard practice of all other States and Territories is to fund long service leave when the leave is taken.

The Government considers the current approach of holding significant financial assets – at the same time as significant levels of debt – is no longer appropriate.

Importantly, there will be no change for employees, who will not experience any difference in the way their long service leave is paid.

Long service leave entitlements are guaranteed by legislation, and will be paid when claimed.

This measure will allow us to reduce interest repayments by just under $600 million over the forward estimates – without the need for asset sales.

The third element of our Debt Action Plan will see total State debt reduced by $2 billion over five years, through a time-limited suspension of annual employer contributions to the Defined Benefit Scheme.

The Scheme will remain 100% fully funded at all times.

Mr Speaker, Queensland is the only Australian jurisdiction to fully fund its defined benefit superannuation liabilities.

The Palaszczuk Government made an election commitment that we would target full funding of long-term liabilities – such as superannuation and WorkCover – in accordance with actuarial advice.

And we have confirmed this commitment again as a fiscal principle in today’s Budget.

Recent valuations by the State Actuary indicate the defined benefit scheme currently has a funding surplus of more than $10 billion.

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On the more conservative accounting basis, the scheme currently has a surplus in the range of $2 billion to $2.5 billion.

Given the size of the surplus and the importance of reducing the State’s debt, the Government will suspend employer contributions in the defined benefit scheme for up to five years.

No money is taken out.

Nothing is being raided.

To suggest anything else is playing politics and scaremongering.

The degree to which employer contributions need to be increased or decreased is assessed every three years by the boards of most superannuation funds – based on actuarial advice.

In this case, the State Actuary has provided written advice that this measure can be undertaken, with the scheme remaining fully funded for its approximately 50,000 members – as is guaranteed by legislation.

Again, importantly, there will be no change in entitlements for defined benefit members and the scheme will remain at least 100% fully funded.

There will also be absolutely no change to the accumulation superannuation scheme to which the vast majority of the Queensland public service belong.

This measure will reduce State debt by $2 billion over five years and result in lower interest expenses of around $150 million over the forward estimates.

Again, without the need for asset sales.

Mr Speaker, the combined impact of these three initiatives is General Government debt reduction of $9.6 billion over this term

And a reduction in our total interest bill of around $1.35 billion over the forward estimates.

All without the need to massively raise taxes, fees and charges, and without the need for the asset sales that we were told by the former government were our ‘only choices’.

This is a responsible step-change in approaching the State’s debt, and one that should be supported by all members of this House.

This Government will always be vigilant about the quality of our credit and responsibly managing the finances.

Next steps

Mr Speaker, while this may be the Palaszczuk Government’s first Budget, it will not be the last to pay down debt over the forward estimates.

The measures announced today cannot simply be one off measures.

The importance of strong fiscal discipline going forward cannot be understated.

We will continue to look at ways to improve the State’s finances, consistent with both our core principles and our fiscal principles, and our commitment to grow a vibrant Queensland economy.

16

Over the next six months we will work with Treasury to examine ways for Queenslanders to invest in Queensland.

This due diligence work may include enabling the defined benefit scheme to invest in growing Queensland infrastructure through our energy GOCs.

The defined benefit fund currently invests Queensland money in a range of interstate and overseas infrastructure, including Thames Water in the UK and the Ohio University car parking system in the US.

The fund is also currently carrying historically high levels of cash that could be responsibly invested in Queensland to deliver much needed employment and economic growth.

Our guiding principle will always be no sales and no leases of our income-generating assets.

These assets will always be 100% owned by Government, 100% controlled by Government and 100% of all dividends continuing to be paid to the Government.

But we will look at new approaches, new partnerships and better ways of doing things – to create jobs and deliver growth.

Unlike the previous Government, we will grow our way to prosperity.

Not take the easy option of austerity measures and asset sales.

That hasn’t worked elsewhere in the world and it won’t work for Queensland.

Conclusion

Mr Speaker, we are a collaborative and consultative government.

We’ve listened to the concerns of Queenslanders and we’ve acted to heal the wounds opened by the former government.

Their approach was about asserting the primacy of fiscal austerity, over compassion and consideration for the whole community.

They were more concerned about bankers than battlers.

More concerned about meeting the needs of company executives, than the needs of everyday Queenslanders.

The former government missed a fundamental truth.

That is, the crucial role people play, and that the economy is part of the overall framework by which we live.

The economy is simply a description of our circumstances, and the finances are but a tool to build a community.

People must always be seen as more than simply a number.

I am unashamedly a Treasurer who likes people.

And we are a government that will work to see society and the economy fit together for the greatest benefit.

17

Mr Speaker, this is a responsible and measured Budget – pro-growth and pro-jobs – which delivers vital funding for health and education.

The Budget demonstrates our responsible fiscal management.

It is the first Budget in 16 years to reduce debt every year of the forward estimates.

Mr Speaker, this Budget demonstrates that there is a better way.

It sets Queensland on a new course.

A return to growth.

A return to optimism.

As Queenslanders get back to work, as businesses get back to hiring, as we get on with the job of growing the economy.

And as we secure Queensland’s most priceless natural asset for future generations – the Great Barrier Reef.

This is a Budget that’s prepared to undertake long overdue balance sheet measures.

Paying down debt.

Keeping our State-owned businesses in public hands, but operating them like businesses should be.

These are financially responsible reforms.

Reforms that are fair, that promote growth and create jobs.

Jobs now, and jobs for the future.

The jobs we want our children and grandchildren to have.

Hi-tech, knowledge-based jobs.

Jobs that rely on innovation and creativity, and our strengths in education.

Jobs that attract international visitors, that promote export growth, that attract inward investment.

We’re building a diversified Queensland economy for the future. One that will thrive – no matter what the global economic conditions.

This is what Queenslanders do.

We believe we can once again lead the way for growth in this country.

Mr Speaker, this Palaszczuk Labor Government will never forget why it was elected:

To get Queenslanders back to work and to grow our economy.

With the next generation always in our minds and in our hearts.

I commend the Bills to the House.

18

Queensland Budget 2015-16  Budget Speech  Budget Paper No. 1

Queensland Budget 2015-16  Budget Speech  Budget Paper No. 1  www.budget.qld.gov.au

Queensland Budget 2015-16

Budget Strategy and Outlook

Budget Paper No. 2

2015-16 Queensland Budget Papers

1. Budget Speech

2. Budget Strategy and Outlook

3. Capital Statement

4. Budget Measures

5. Service Delivery Statements

Appropriation Bills

Jobs Now, Jobs for the Future - Queensland Government employment plan

Budget Highlights

The suite of Budget Papers is similar to that published in 2014-15.

The Budget Papers are available online at www.budget.qld.gov.au

© Crown copyright

All rights reserved

Queensland Government 2015

Excerpts from this publication may be reproduced, with appropriate

acknowledgement, as permitted under the Copyright Act.

Budget Strategy and Outlook

Budget Paper No. 2

ISSN 1445-4890 (Print)

ISSN 1445-4904 (Online)

Budget Strategy and Outlook 2015-16

State Budget

2015-16

Budget Strategy and Outlook

Budget Paper No. 2

Budget Strategy and Outlook 2015-16

Contents

1	Fiscal strategy and outlook	1
1.1	Context	2
1.2	Key fiscal aggregates	8
1.3	Fiscal principles	17
1.4	Achievement of fiscal principles	21
2	Economic performance and outlook	22
2.1	External environment	23
2.2	Queensland economy	28
3	Revenue	44
3.1	2014-15 estimated actual	45
3.2	2015-16 revenue by category	46
3.3	Queensland’s revenue trends	47
3.4	Election commitments	54
3.5	Taxation revenue	54
3.6	Queensland’s competitive tax status	60
3.7	Grants revenue	62
3.8	Sales of goods and services	64
3.9	Interest income	66
3.10	Dividend and income tax equivalent income	66
3.11	Other revenue	67
4	Expenses	69
4.1	2014-15 estimated actual	70
4.2	2015-16 Budget and outyears	70
4.3	Expenses by operating statement category	71
4.4	Operating expenses by purpose	79
4.5	Departmental expenses	80

Budget Strategy and Outlook 2015-16

5	Balance sheet and cash flows	87
5.1	Context	87
5.2	Balance sheet	88
5.3	Cash flows	94
5.4	Reconciliation of operating cash flows to the operating statement	96
6	Intergovernmental financial relations	97
6.1	Federal financial arrangements	98
6.2	Australian Government funding to the states	104
6.3	Australian Government funding to Queensland	107
6.4	GST revenue payments	109
6.5	Payments to Queensland for specific purposes	114
7	Public Non-Financial Corporations Sector	120
7.1	Context	120
7.2	Finances and performance	121
8	Uniform Presentation Framework	132
8.1	Context	132
8.2	Uniform Presentation Framework financial information	132
8.3	Reconciliation of net operating balance to accounting operating result	142
8.4	General Government Sector time series	143
8.5	Other General Government uniform presentation framework data	145
8.6	Contingent liabilities	151
8.7	Background and interpretation of uniform presentation framework	151
8.8	Sector classification	153
8.9	Reporting entities	154

Budget Strategy and Outlook 2015-16

Appendix A: Tax expenditure statement	157
Context	157
Methodology	157
The Tax Expenditure Statement	158
Discussion of individual taxes	160
Appendix B: Concessions statement	164
Context	164
Focus	165
Explanation of scope	166
Concessions by agency	173
Appendix C: Revenue and expense assumptions and sensitivity analysis	190
Taxation and royalty revenue	191
Taxation revenue assumptions and revenue risks	192
Royalty assumptions and revenue risks	193
Sensitivity of expenditure estimates and expenditure risks	194
Appendix D: Fiscal aggregates and indicators	196

Budget Strategy and Outlook 2015-16

1 Fiscal strategy and outlook

Features

• The 2015-16 Budget delivers the Government’s election commitments, with key measures to revitalise the State economy and frontline service delivery, especially in the areas of health, education and training.

• At the same time, this Budget delivers on the Government’s commitment to reduce General Government debt without selling government-owned corporations, without increasing taxes and without cutting services.

• Weaker commodity prices and a subdued labour market present challenges for the State Budget, in a similar way that they present challenges for the Queensland economy and national economy.

• Nonetheless, Queensland’s economic growth is forecast to rise from 2% to 4 ¹⁄₂% in 2015-16, the strongest economic growth of any state or territory across Australia, with much of this growth driven by liquefied natural gas exports.

• The Government’s Debt Action Plan will reduce General Government debt by approximately $7.5 billion in 2015-16, compared to the level of debt in the absence of measures. Further reductions across the forward estimates result in a debt reduction of $9.6 billion by 2017-18.

• This is the first Budget since 1999-2000 that has projected a reduction in General Government borrowings across the forward estimates, such that debt will be lower in 2018-19 than it was in 2014-15.

• General Government debt, which incorporates the impact of the Debt Action Plan, as well as all other budget movements, is expected to fall from $43.268 billion in 2014-15 to $39.532 billion in 2017-18. This is $7.5 billion lower than the projection for 2017-18 at the time of the 2014-15 Mid Year Fiscal and Economic Review (MYFER) and $8.9 billion lower than projected in the 2014-15 Budget.

• Following consideration of the Review of State Finances, the Government is introducing revised fiscal principles that target an ongoing reduction in Queensland’s debt burden, as measured by the General Government debt to revenue ratio.

• This will be supported by the Government’s principle of targeting net operating surpluses that ensure any new capital investment is primarily funded through recurrent revenues, rather than borrowing.

• Reflecting the Government’s commitment to responsible and measured management of the State’s finances, the General Government Sector is forecast to deliver a net operating surplus of $962 million in 2014-15, rising to $1.213 billion in 2015-16.

1

Budget Strategy and Outlook 2015-16

• Net operating surpluses are expected across each year of the forward estimates, despite royalty revenue forecasts being revised down by $3.186 billion across the period 2014-15 to 2017-18 since the MYFER, and downward revisions to payroll tax.

• Consistent with the position taken to the 2015 Election, the Government is implementing reprioritisations and specific measures that more than offset the cost of election commitments. Across the period 2014-15 to 2018-19, there is a net budget improvement of $340 million as a result.

• Additional net funding for service delivery of $1.85 billion is being provided over the period 2014-15 to 2017-18, particularly to restore frontline capacity for Queensland Health and improve health outcomes.

• There has been an increase in the net cost of rebuilding in response to natural disasters, including the incorporation of the cost of Tropical Cyclone Marcia. While there continues to be a mismatch between the timing of revenue and expenditure, the scale of this variation is less pronounced than in previous budgets.

• Operating expenses are forecast to grow at a sustainable rate, averaging 4.1% per annum across the forward estimates, excluding disaster recovery expenses. This is less than the forecast rate of revenue growth of 4.3% per annum, excluding disaster recovery revenues, supporting stronger operating surpluses.

1.1 Context

The Palaszczuk Government announced a number of key policy positions in the lead-up to the January 2015 Election. These positions and the associated commitments included:

• paying down General Government Sector debt of $5.4 billion over six years, with a target of paying down $12 billion of General Government Sector debt over 10 years, while retaining assets in public hands

• implementing election commitments, reprioritisations and specific measures that deliver an improvement in the net operating balance

• bolstering frontline service delivery, particularly in the key areas of health and education

• boosting skills and training to provide improved employment and economic outcomes for all Queenslanders

• commissioning Queensland Treasury to prepare a full review of the State’s finances

• not increasing royalties, tax rates, or the rate of growth of fees and charges.

The 2015-16 Budget delivers on each of these commitments.

2

Budget Strategy and Outlook 2015-16

The Palaszczuk Government has responded to the significant fall in royalties since the MYFER by enhancing the pre-election Debt Action Plan to include further modest and responsible measures refocusing the balance sheet to lower debt. These additional balance sheet measures will contribute towards General Government Sector debt being $7.5 billion lower by 2017-18, relative to the MYFER, compared with a pay down of $2.1 billion by 2018-19 under the pre-election Our State Our Assets Fiscal Strategy and Debt Action Plan. The Palaszczuk Government remains committed to merging energy government-owned corporations to increase dividends and further lower debt as set out in the pre-election Debt Action Plan.

The Government’s Debt Action Plan will deliver a reduction in General Government Sector debt without requiring the sale of government-owned corporations, without increases in taxes and without cuts to services. Further detail on the Debt Action Plan is provided in Box 1.1.

The Government’s election commitments focussed on the key service areas of education, training, health and environmental protection, as well as providing additional funding for regional development and supporting the tourism industry. These commitments are more than offset by specific measures and the reprioritisation of agency funding, with a net positive impact on the budget of $340 million across the forward estimates. Agencies have been instructed that there will be no forced or voluntary redundancies associated with these reprioritisations. Further detail on the Government’s election commitments is provided in Budget Paper 4 – Budget Measures.

The Review of State Finances, released concurrently with the 2015-16 Budget, has confirmed the importance of delivering substantial net operating surpluses to ensure that the General Government Sector capital program can be funded primarily from recurrent revenues, rather than borrowings. The Review has also confirmed the importance of managing General Government Sector debt through targeting an ongoing reduction in the ratio of debt to revenue.

Following consideration of the Review of State Finances, the Government has adopted five fiscal principles aimed at improving the sustainability of the State’s finances. These principles are:

• target ongoing reductions in Queensland’s relative debt burden, as measured by the General Government Sector debt to revenue ratio

• target net operating surpluses that ensure any new capital investment in the General Government Sector is funded primarily through recurrent revenues rather than borrowing

• the capital program will be managed to ensure a consistent flow of works to support jobs and the economy and reduce the risk of backlogs emerging

• maintain competitive taxation by ensuring that General Government Sector own-source revenue remains at or below 8.5% of nominal gross state product, on average, across the forward estimates

• target full funding of long term liabilities such as superannuation and WorkCover in accordance with actuarial advice.

Further discussion of the fiscal principles, and the Government’s progress in meeting its targets, is provided in Sections 1.3 and 1.4.

3

Budget Strategy and Outlook 2015-16

The fiscal environment facing the State remains challenging. A softening of the outlook for the global economy, particularly in the key coal export markets of China and Japan, has contributed to a sharp decline in the outlook for coal prices. Weaker oil prices are weighing on the State’s coal seam gas royalty revenues (as liquefied natural gas export prices are linked to oil prices).

Reflecting these factors, which have only been partly offset by a slight decline in the exchange rate, royalty forecasts have been revised down by $3.186 billion since the 2014-15 MYFER.

Box 1.1 Debt Action Plan

The Queensland Government recognises that the current level of General Government debt restricts the State’s capacity to respond to shocks, whether in financial markets or by way of natural disasters. The Government received independent advice in the Review of State Finances about measures available to immediately reduce General Government debt, in order to deliver a material improvement in the State’s debt to revenue ratio.

The following measures have since been adopted as part of the Government’s Debt Action Plan. These debt reduction measures will be achieved while retaining 100% state ownership of the Government’s income-generating assets and maintaining 100% funding of superannuation liabilities.

General Government debt increased by $14 billion over the past three years and the Government made a decision that a policy response was required to take a whole-of-balance-sheet approach to managing the State’s assets and liabilities and to reduce risks associated with the current structure of the State’s balance sheet. This will enable better use of the capital available to the State.

The measures being implemented as part of the Government’s Debt Action Plan will reduce General Government debt by approximately $7.5 billion in 2015-16, compared to the level of debt in the absence of measures, with further reductions across the forward estimates resulting in a reduction of $9.6 billion in 2017-18.

Revising the capital structure of the Government’s energy network businesses

The State’s energy network businesses are currently geared at a net debt to Regulated Asset Base ratio of approximately 55%, on average. In comparison, the industry average gearing ratio is around 80%, which means that the equity (of the owner) is only used to fund around 20% of the asset.

The Review of State Finances, informed by the Queensland Treasury Corporation’s assessment, identified that there is capacity to increase the gearing levels of the network businesses towards more commercial levels. The re-gearing plan was recommended by the Independent Review of State Finances. In addition, analysis by KPMG shows that this measure is consistent with industry practice which supports efficient capital management and enables shareholders to ration their equity across a wider range of investments with no impact on prices or charges, which are independently determined by the regulator.

4

Budget Strategy and Outlook 2015-16

The Government has given consideration to the revised outlook for the capital expenditure requirements of the energy network businesses, the benefits of the forthcoming merger, and the advice regarding the capacity to move towards more commercial gearing levels.

Taking each of these factors into account, the Government has decided that the level of the State’s equity committed to assets in the businesses will be reduced, consistent with targeting a gearing ratio of 70% for Ergon Energy and Energex and 75% for Powerlink, measured with reference to net debt as a proportion of the Regulated Asset Base.

The lower capital expenditure requirements of the network businesses will allow for future dividends to be increased from 80% to 100% whilst still allowing for gearing levels to remain at the target ratios of 70%-75%.

The energy network businesses will be closely monitored to ensure that their financial position remains consistent with a standalone investment grade credit rating, and that the businesses will be able to service their borrowings without requiring Government support. Revising the capital structure will have no impact on electricity transmission and distribution costs, which represent approximately 40% of the electricity price paid by consumers and are independently regulated by the Australian Energy Regulator. The State will retain full ownership and control of the businesses.

As a result of these changes, an additional $4.1 billion will be remitted from the energy network businesses to the General Government Sector across the forward estimates. Approximately $600 million of this will be recognised as operating receipts, with $3.5 billion being a withdrawal of equity.

The General Government Sector will also benefit from lower interest expenses associated with using these funds to reduce General Government debt.

Funding long service leave on an emergent basis

The Review of State Finances also makes reference to the current arrangements where the State sets aside assets to match the value of long service leave liabilities as they accrue. Amongst Australian jurisdictions, this arrangement is unique to Queensland. The standard practice is to fund long service leave entitlements on an emergent basis, when the leave is paid. Queensland’s arrangements reflect a decision made in 1998, when the State’s debt levels were low and the State had surplus financial assets.

With relatively high debt, compared with other Australian jurisdictions, the Government considers that the current approach, which results in the State holding significant financial assets at the same time as significant levels of debt, is no longer appropriate. Accordingly, the Government has decided that the State’s investments currently set aside to match accrued long service leave liabilities will be drawn down, with the proceeds used to repay General Government debt.

This will result in a debt reduction of approximately $3.4 billion, which will take effect during 2015-16.

5

Budget Strategy and Outlook 2015-16

There will be no change for employees, with all long service leave entitlements being maintained and met when claimed. There will also be no change to the administrative arrangements under which Government departments currently contribute to, and draw down from, the Long Service Leave Central Scheme.

This measure will align Queensland’s long service leave arrangements with standard practice across Australia.

Temporary suspension of investment of defined benefit employer contributions, whilst maintaining fully-funded status

Queensland is the only Australian jurisdiction to fully fund its defined benefit superannuation liabilities, consistent with long-standing fiscal principles maintained by successive governments.

Recent valuations by the State Actuary indicate that the defined benefit scheme is currently in a surplus position of over $10 billion on a funding basis. On the more conservative accounting valuation basis, (which uses Australian Government bond rates rather than expected returns in calculating the future value of scheme assets) the surplus is considered to be in the range of $2 billion - $2.5 billion.

The surplus represents additional cash and investments above the actuarially assessed level required to meet payment obligations to members of the defined benefit scheme (primarily current or former Queensland Government employees). Any surplus funding in the scheme returns to the State when all funding obligations to members have been met.

The Government has decided that, taking into account the size of the surplus in the defined benefit scheme and the magnitude of the State’s debt, the investment of defined benefit employer contributions will be suspended for a period of five years. These contributions will instead be directed to paying down General Government debt.

Rather than investing further in an over-funded scheme, General Government debt will be reduced by approximately $2 billion across the forward estimates. If there are any significant risks to the scheme remaining in surplus, the State will resume investment of contributions to maintain the commitment to targeting full funding of the scheme.

There will be no change to the entitlements of defined benefit members and the scheme is expected to remain in surplus. The Government’s commitment to full funding of long term liabilities, such as superannuation and WorkCover will be maintained. The State Actuary has advised that the defined benefit scheme is well placed to accommodate the Government’s decision, while retaining consistency with the principle of fully funding superannuation entitlements.

Further debt reduction

The Government will continue to consider opportunities for further reducing General Government debt, while maintaining its commitments to retaining ownership of government-owned corporations and fully funding superannuation.

6

Budget Strategy and Outlook 2015-16

One option available to Government is to consider whether the level of equity held in other government-owned corporations remains appropriate, or if there is potential to move these corporations towards more commercial gearing levels. This would ensure that corporations have efficient capital structures, having regard to their peers, while retaining sufficient capital to meet the ongoing needs of their organisation.

In addition, the opportunity for Queensland’s defined benefit superannuation scheme to invest in the State’s government-owned corporations will be closely examined.

Specific options are still to be developed, and will be subject to extensive due diligence and Government consideration. However, there would appear to be potential to provide the defined benefit scheme with the opportunity to share in the growth potential of Queensland’s government-owned corporations where commercial returns are available.

This plan will also provide the State with capacity to further reduce debt and also invest in productivity-enhancing infrastructure projects that will be identified and prioritised by Building Queensland.

All options would ensure that government-owned corporations would continue to be 100% controlled and 100% owned by the Government, with all dividends continuing to be paid to the Government.

Further debt reduction proposals, and associated infrastructure investment, will also be consistent with the Government’s fiscal principles, in particular the commitments to ongoing reductions in the General Government debt to revenue ratio and fully funding the State’s superannuation and WorkCover liabilities in accordance with actuarial advice.

Details of the outcome of the next phase of the Government’s Fiscal Strategy and Debt Action Plan will be provided in the 2015-16 MYFER.

These additional measures are considered necessary in order to implement a structural and sustained reduction in debt over the long-term.

7

Budget Strategy and Outlook 2015-16

1.2 Key fiscal aggregates

The key fiscal aggregates of the General Government Sector for the 2015-16 Budget are outlined in Table 1.1 and are discussed in detail in this chapter.

Table 1.1 General Government Sector – key fiscal aggregates¹

	2013-14 Actual2 $ million			2014-15 MYFER $ million			2014-15 Est. Act. $ million			2015-16 Budget $ million			2016-17 Projection $ million			2017-18 Projection $ million			2018-19 Projection $ million
Revenue		46,734			49,149			49,578			51,186			54,010			55,486			55,748
Expenses		46,115			49,213			48,615			49,973			51,784			53,354			54,421
Net operating balance		619			(64	)		962			1,213			2,226			2,132			1,327
Capital purchases		6,322			5,903			4,987			5,374			5,832			6,125			5,851
Fiscal balance		(2,581	)		(2,842	)		(896	)		(1,162	)		(968	)		(881	)		(1,101	)
Borrowing		41,403			45,801			43,268			38,151			38,818			39,532			40,724
Borrowing (NFPS)3		72,716			77,553			75,535			74,113			75,714			77,119			78,802

Notes:

1. Numbers may not add due to rounding. Bracketed numbers represent negative amounts.

2. Reflects published actuals.

3. NFPS: Non-Financial Public Sector.

1.2.1 Net operating balance

Consistent with the Government’s fiscal principles, substantial operating surpluses are projected in each year of the forward estimates. This will ensure that the General Government Sector capital program is primarily funded from recurrent revenues, rather than borrowings.

As identified in Table 1.1, the anticipated 2014-15 operating surplus of $962 million compares with a forecast deficit of $64 million expected in the 2014-15 MYFER. This $1.026 billion improvement is largely the result of lower than forecast expenses.

Specific drivers for the improvement in 2014-15 are:

• re-profiling expenditure in the Health portfolio, which will assist in funding sustainable growth in health expenditure from 2015-16 onwards

• revisions to the timing of natural disaster expenses and reimbursements, resulting in higher revenues and lower expenses in 2014-15.

Further details on revenue and expenses are contained in Chapters 3 and 4 respectively.

The net operating surplus in 2014-15 represents only the second surplus since 2008-09, as shown in Chart 1.1. The operating surplus in 2015-16 is estimated to be the largest operating surplus since 2006-07.

8

Budget Strategy and Outlook 2015-16

Chart 1.1 Net operating balance

The estimated 2015-16 General Government Sector operating surplus of $1.213 billion is weaker than the forecast surplus of $3.078 billion in the 2014-15 MYFER. This is primarily a result of weaker royalty revenue, along with increases in Natural Disaster Relief and Recovery Arrangements (NDRRA) expenses and revisions to NDRRA reimbursements from the Australian Government. Revisions to NDRRA expenses and revenue in 2015-16 are expected to detract $885 million from the operating balance compared to MYFER.

Royalty revenue estimates have been revised down by $891 million in 2015-16, primarily because of substantially lower coal prices, as well as revisions to the timing and value of liquefied natural gas exports.

Taxation revenue has been revised down by $89 million in 2015-16 relative to MYFER. This is primarily because of reductions in the rate of growth in payroll tax, offset, to some extent, by stronger transfer duty.

Goods and services tax (GST) revenue has been revised up by $489 million since MYFER, reflecting an increase in Queensland’s share of GST, as recommended by the Commonwealth Grants Commission (CGC).

Funding of $558 million, in addition to election commitments, is being provided in 2015-16 to improve service delivery, primarily to restore frontline capacity for Queensland Health and improve health outcomes.

Downward revisions to operating surpluses in 2016-17 and 2017-18 compared to the 2014-15 MYFER primarily reflect substantial revisions to royalty revenue, with the cost of new policy measures broadly offset by increases to GST revenue in these years.

9

Budget Strategy and Outlook 2015-16

Table 1.2 General Government Sector – net operating balance forecasts¹

	2013-14 $ million			2014-15 $ million			2015-16 $ million		2016-17 $ million		2017-18 $ million		2018-19 $ million
2014-15 Budget		(2,298	)		188			3,188		3,534		2,968		n/a
2014-15 MYFER		619			(64	)		3,078		3,120		3,011		n/a
2015-16 Budget		619			962			1,213		2,226		2,132		1,327

Note:

1. Bracketed numbers represent negative amounts.

Despite the deterioration in the operating position since MYFER, which has been driven by a weaker outlook for commodity prices, Queensland’s operating position remains stronger than that of other states, as shown in Chart 1.2.

In aggregate, Queensland is projecting surpluses of $6.9 billion across 2015-16 to 2018-19, with the next strongest projection being $5.8 billion in Victoria.

Chart 1.2 Net operating balance – aggregated 2015-16 to 2018-19¹

Note:

1. New South Wales figures exclude the impacts of the Transport Asset Holding Entity.

10

Budget Strategy and Outlook 2015-16

Table 1.3 provides a breakdown of the movements in the net operating balance since the 2014-15 MYFER.

Table 1.3 Reconciliation of net operating balance, 2014-15 MYFER to 2015-16 Budget¹

	2014-15			2015-16			2016-17			2017-18
	$ million			$ million			$ million			$ million
2014-15 MYFER net operating balance		(64	)		3,078			3,120			3,011
Taxation revisions2		108			(89	)		(71	)		(89	)
Royalty revisions		(279	)		(891	)		(1,042	)		(974	)
GST revisions		11			489			613			669
Natural disaster revisions3
Change in revenue		213			(722	)		163			200
Change in expenses		271			(163	)		(278	)		(32	)
Net change		484			(885	)		(115	)		168
Election commitments4		—			(43	)		103			182
Measures5		314			(558	)		(763	)		(847	)
Net flows from PNFC and PFC Sector entities6		181			474			99			(542	)
Australian Government funding revisions7		2			(528	)		226			625
Other parameter adjustments8		205			166			56			(71	)
2015-16 Budget net operating balance		962			1,213			2,226			2,132

Notes:

1. Numbers may not add due to rounding. Numbers indicate impact on the operating balance. A number in brackets indicates a negative impact on the operating balance.

2. Represents parameter adjustments to taxation revenue.

3. Represents movements in revenue, expense and capital for natural disaster restoration. Largely represents the State’s cost of damage from Tropical Cyclone Marcia and revisions to expected reimbursements.

4. Represents the net impact of election commitments on the operating balance. This number is lower than in Budget Paper 4 – Budget Measures as Budget Paper 4 also incorporates capital expenditure.

5. Reflects the value of Government decisions since the 2014-15 MYFER, excluding election commitments. This number is lower than in Budget Paper 4 – Budget Measures as it excludes measures funded by the Australian Government and funds held centrally for these measures.

6. Represents revisions to dividends and tax equivalent payments from, and community service obligation and Transport Service Contract payments to, Public Non-Financial Corporations and Public Financial Corporations.

7. Represents the net impact of funding provided by the Australian Government primarily for Specific Purpose Payments and National Partnership payments (mainly for transport infrastructure).

8. Refers to adjustments largely of a non-policy nature, primarily changes in interest paid on borrowings, depreciation, growth funding, swaps, deferrals and administered revenue, as well as changes in expenses resulting from Australian Government funding decisions.

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Budget Strategy and Outlook 2015-16

1.2.2 Natural Disaster Relief and Recovery Arrangements

The timing of revenue and expenditure in relation to natural disasters continues to significantly impact Queensland’s budget position. Table 1.4 outlines the impact of natural disaster arrangements on Queensland’s net operating balance.

Table 1.4 Impact of Natural Disaster Relief and Recovery Arrangements funding on the net operating balance¹

	2014-15		2015-16		2016-17		2017-18		2018-19
	$ million		$ million		$ million		$ million		$ million
Published net operating balance		962		1,213		2,226		2,132		1,327
less Disaster revenue		1,163		1,106		245		200		—
add Disaster expenses		750		496		278		32		—
Underlying net operating balance		549		603		2,259		1,964		1,327
Disaster related capital2		469		197		10		—		—

Notes:

1. Numbers may not add due to rounding.

2. Excludes loans provided through the State.

The cost of all disasters is $2.232 billion over the period 2014-15 to 2017-18, of which the estimate of the NDRRA-eligible cost of Tropical Cyclone Marcia is $577 million. The total expenditure across the period is $343 million greater than in the 2014-15 MYFER, with the additional cost of Tropical Cyclone Marcia partly offset by downward revisions to the cost of previous events.

Changes to the expected timing of Australian Government reimbursements for previous disasters has brought revenue forward from 2015-16 into 2014-15. However, revenue across 2016-17 and 2017-18 is projected to be $363 million greater than forecast in MYFER, primarily because of revisions to the quantum and timing of claims.

1.2.3 Cash flows and balance sheet

General Government Sector

Cash surplus/(deficit)

The General Government Sector is expected to record a cash deficit in 2014-15 of $487 million, compared to a $2.434 billion deficit forecast in the MYFER. The smaller than expected cash deficit primarily reflects higher operating receipts and reduced recurrent and capital expenditure.

A cash deficit of $584 million is expected for the General Government Sector in 2015-16, improving to a surplus of $132 million in 2016-17 before returning to modest cash deficits in each of the following years. Across the period 2015-16 to 2018-19, cash deficits equate to 8% of purchases of non-financial assets.

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Budget Strategy and Outlook 2015-16

Capital purchases

The State’s 2015-16 capital program comprises $8.574 billion of capital purchases ($404 million above the 2014-15 estimated actual) and $1.531 billion of capital grants. Budget Paper 3 – Capital Statement provides details of budgeted 2015-16 capital outlays by portfolio.

Within the General Government Sector, purchases of non-financial assets (capital spending) in 2014-15 are estimated to be $4.987 billion. This is $916 million less than forecast in the MYFER, largely due to a range of deferrals associated with transport and health infrastructure.

General Government Sector capital purchases of $5.374 billion are budgeted for 2015-16, $715 million less than the $6.089 billion forecast in the 2014-15 MYFER. This primarily relates to the deferral of Commonwealth-funded transport infrastructure, consistent with the 2015-16 Commonwealth Budget.

Over the period 2015-16 to 2018-19, purchases of non-financial assets in the General Government Sector of $23.182 billion are planned.

Borrowings

Gross borrowings (the stock of borrowings outstanding as stated in the Balance Sheet) of $43.268 billion at 30 June 2015 are $2.533 billion less than forecast in the 2014-15 MYFER and $4.873 billion less than forecast in the 2014-15 Budget. The significant reduction since MYFER is due to the lower cash deficit and an improved utilisation of cash balances across the General Government Sector.

A net borrowing repayment of $5.514 billion is budgeted for 2015-16, with the $7.5 billion achieved from the Debt Action Plan being partly offset by lower net cash inflows from operating activities, driven by the reduction in royalty forecasts.

A further net borrowing repayment of $182 million is projected in 2016-17, driven by the Debt Action Plan. Net borrowing requirements are modest across the remainder of the forward estimates, ensuring that the benefits of the reduction in debt resulting from the Debt Action Plan are maintained, particularly in terms of the debt to revenue ratio, as demonstrated in Table 1.5.

Table 1.5 General Government Sector gross borrowings as a proportion of revenue

	2014-15			2015-16			2016-17			2017-18			2018-19
	Est. Act.			Forecast			Projection			Projection			Projection
	$ million			$ million			$ million			$ million			$ million
Gross borrowings		43,268			38,151			38,818			39,532			40,724
Revenue		49,578			51,186			54,010			55,486			55,748
Borrowings/revenue ratio		87	%		75	%		72	%		71	%		73	%

General Government Sector borrowings are expected to be $2.544 billion lower in 2018-19 than in 2014-15. This represents the first budgeted reduction in General Government Sector borrowings across the forward estimates period since 1999-2000.

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Budget Strategy and Outlook 2015-16

Chart 1.3 compares the 2015-16 borrowing projections with those in the 2014-15 MYFER. The chart also demonstrates that General Government Sector borrowings are expected to be substantially lower in 2018-19 than in 2014-15.

Chart 1.3 General Government Sector borrowings

Table 1.6 identifies that General Government Sector borrowings are estimated to have peaked at $43.268 billion in 2014-15. In comparison, the 2014-15 Budget projected General Government Sector borrowings would reach $48.421 billion in 2017-18, with the 2014-15 MYFER projecting borrowings of $47.072 billion.

Table 1.6 Revisions to General Government Sector borrowings

	2014-15		2015-16		2016-17		2017-18
	$ million		$ million		$ million		$ million
2014-15 Budget		48,141		48,023		48,216		48,421
2014-15 MYFER		45,801		46,097		46,630		47,072
2015-16 Budget		43,268		38,151		38,818		39,532

Public Non-Financial Corporations Sector

The Public Non-Financial Corporations (PNFC) Sector is comprised of the State’s commercial entities, such as those that operate in the energy, transport and water industries. Further detail on the PNFC Sector is provided in Chapter 7.

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Budget Strategy and Outlook 2015-16

The PNFC Sector is expecting net borrowings of $826 million in 2014-15, an increase from the $651 million 2014-15 MYFER estimate, largely reflecting higher than expected cash holdings in the sector at 30 June 2015. Gross borrowings in the PNFC Sector are estimated to have been $32.268 billion at 30 June 2015, somewhat above the MYFER estimate of $31.752 billion.

Borrowings in this Sector are expected to increase to $38.078 billion in 2018-19, with the increase partly attributable to the Government’s decision to increase the targeted gearing ratios of the energy network businesses.

Non-Financial Public Sector

The Non-Financial Public (NFP) Sector is the combination of the General Government and PNFC Sectors, with transactions between these sectors being eliminated.

Gross borrowings of $75.535 billion are estimated at 30 June 2015 in the NFP Sector, $2.018 billion less than the 2014-15 MYFER estimate as a result of the improvement in the General Government Sector. By 2017-18, borrowings are expected to reach $77.119 billion, $2.673 billion less than projected in the 2014-15 MYFER, as demonstrated in Chart 1.4.

Chart 1.4 Non-Financial Public Sector gross borrowings

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Budget Strategy and Outlook 2015-16

Table 1.7 identifies the revisions to NFP Sector borrowings since the 2014-15 Budget.

Table 1.7 Revisions to Non-Financial Public Sector borrowings

	2014-15 $ million		2015-16 $ million		2016-17 $ million		2017-18 $ million
2014-15 Budget		79,956		80,619		81,234		82,070
2014-15 MYFER		77,553		78,241		78,840		79,792
2015-16 Budget		75,535		74,113		75,714		77,119

The NFP Sector debt to revenue ratio is estimated at 136% in 2014-15 (down from 140% estimated at MYFER). This ratio is forecast to decline to 123% in 2017-18, compared with a ratio of 126% projected at MYFER, as shown in Chart 1.5.

Chart 1.5 Non-Financial Public Sector debt to revenue ratio

Purchases of non-financial assets (capital spending) of $8.170 billion is estimated in the NFP Sector in 2014-15, $1.159 billion less than the 2014-15 MYFER estimate. This decrease is largely due to deferred capital expenditure particularly in the areas of transport and health as well as reductions in the capital program of the PNFC Sector.

Over the period 2015-16 to 2018-19, purchases of non-financial assets in the NFP Sector of $35.4 billion are planned.

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Budget Strategy and Outlook 2015-16

1.3 Fiscal principles

In the lead-up to the January 2015 Election, the Government set out five fiscal principles for the responsible and measured management of the State’s finances. Following consideration of the Review of State Finances, prepared by Queensland Treasury, the Government has refined the principles that relate to General Government Sector debt and the size of the net operating surplus. These refinements are intended to ensure the fiscal principles present a consistent strategy to underpin the development of the State Budget and financial decision-making.

Fiscal principles

Principle 1 – Target ongoing reductions in Queensland’s relative debt burden, as measured by the General Government debt to revenue ratio

The Government has consistently identified that its primary focus is on managing the debt of the General Government Sector, which must be serviced from General Government Sector revenues such as taxes (either state or federal), charges and royalties. In contrast, the debt of government-owned corporations is serviced from the operating cashflows of these businesses.

In managing General Government Sector debt, a debt to revenue ratio is a key measure of the sustainability of a jurisdiction’s debt levels. With Queensland’s General Government Sector debt to revenue ratio currently higher than that of other jurisdictions, it is important to seek ongoing reductions in the ratio to continue to improve the State’s fiscal sustainability.

Queensland’s debt to revenue ratio is expected to have peaked at 91% in 2012-13 (compared with a peak of 100% expected in 2013-14 in the 2014-15 Budget and 93% in 2014-15 projected in the 2014-15 MYFER). This ratio is expected to fall substantially in 2015-16, to 75%, as a result of the Debt Action Plan, with the improvement maintained across the forward estimates such that the ratio is projected at 73% in 2018-19, as shown in Chart 1.6.

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Budget Strategy and Outlook 2015-16

Chart 1.6 General Government Sector debt to revenue ratio

Principle 2 – Target net operating surpluses that ensure any new capital investment in the General Government Sector is funded primarily through recurrent revenues rather than borrowing

Consistent with the position in other states and territories, the Queensland Government considers that the net operating balance is the appropriate measure of the State’s annual operating position. Further, the Government recognises that the size of the operating surplus must be large enough that recurrent revenues, rather than borrowings, are the primary funding source for capital investment in the General Government Sector.

This was a significant factor in the position the Government took to the January 2015 election of more than offsetting all election commitments with reprioritisations and specific measures, providing an overall improvement in the net operating balance.

The most direct way of identifying the sources of funding of capital investment is in the General Government Sector Cash Flow Statement (Table 8.7). This Statement identifies that net cash inflows from operating activities equate to 83% of the funding required for the 2015-16 capital program. Across the period 2015-16 to 2018-19, this proportion fluctuates between 77% and 99%, with an average of 88% of capital purchases funded from net operating cashflows as shown in Chart 1.7.

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Budget Strategy and Outlook 2015-16

Chart 1.7 General Government Sector net operating cashflow as a proportion of capital expenditure

Principle 3 – The capital program will be managed to ensure a consistent flow of works to support jobs and the economy and reduce the risk of backlogs emerging

The General Government Sector capital program peaked in 2009-10, reflecting a significant State infrastructure program bolstered by the Australian Government’s stimulus program in response to the Global Financial Crisis. In the 2014-15 MYFER, the capital program was expected to continue to decrease across the forward estimates.

While the value of the capital program can fluctuate across individual years, due to the lumpy nature of large projects and the timing of Commonwealth-funded projects, the 2015-16 Budget provides for an increase in General Government Sector capital purchases from $4.987 billion estimated in 2014-15 to an average of $5.8 billion across 2015-16 to 2018-19.

Principle 4 – Maintain competitive taxation by ensuring that General Government Sector own-source revenue remains at or below 8.5% of nominal gross state product, on average, across the forward estimates

Government has a clear role in providing an economic environment that supports business and jobs growth and does not place undue strain on households. In addition to measures of interstate tax competitiveness (as discussed in Chapter 3), there are a range of other own-source revenues, such as user charges and royalties, which are also relevant for businesses and households.

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Budget Strategy and Outlook 2015-16

General Government Sector own-source revenue is forecast at 8.1% of nominal gross state product in 2015-16 and an average of 7.7% across the period 2015-16 to 2018-19.

Principle 5 – Target full funding of long term liabilities such as superannuation and WorkCover in accordance with actuarial advice

Consistent with the long-standing practice of successive governments, the Queensland Government is committed to ensuring that the State sets aside assets, on an actuarially determined basis, to meet long term liabilities such as superannuation and WorkCover.

As a result of strong investment returns in financial markets in recent years, the value of the assets held against superannuation liabilities significantly exceeds the value of those liabilities. As set out in the Debt Action Plan, the Government intends to suspend making further investment of employer contributions against superannuation liabilities for five years. Actuarial advice confirms that the current funding position accommodates this suspension.

As at 30 June 2014, the most recently available assessment, the WorkCover scheme was fully funded.

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Budget Strategy and Outlook 2015-16

1.4 Achievement of fiscal principles

Table 1.8 demonstrates that the 2015-16 Budget projections are consistent with achieving the Government’s fiscal principles.

Table 1.8 The fiscal principles of the Queensland Government

Principle	Indicator
	General Government Debt to Revenue Ratio
			2014-15 MYFER %		2015-16 Budget %
Target ongoing reductions in Queensland’s relative debt burden, as measured by the General Government debt to revenue ratio		2014-15		93		87
		2015-16		87		75
		2016-17		86		72
		2017-18		84		71
		2018-19		n/a		73
	General Government Operating Cashflows as a proportion of the Capital Program
			2014-15 MYFER %		2015-16 Budget %
Target net operating surpluses that ensure any new capital investment in the General Government Sector is funded primarily through recurrent revenues rather than borrowing		2014-15		53		82
		2015-16		105		83
		2016-17		113		99
		2017-18		112		94
		2018-19		n/a		77
	General Government Capital Program
			2014-15 MYFER ($ million)		2015-16 Budget ($ million)
The capital program will be managed to ensure a consistent flow of works to support jobs and the economy and reduce the risk of backlogs emerging		2014-15		5,903		4,987
		2015-16		6,089		5,374
		2016-17		5,768		5,832
		2017-18		5,496		6,125
		2018-19		n/a		5,851
	General Government own-source revenue to GSP
		2015-16:				8.1	%
Maintain competitive taxation - own-source revenue to remain at or below 8.5% as a proportion of nominal gross state product		Average across the forward estimates:				7.7	%
Target full funding of long term liabilities such as superannuation and WorkCover in accordance with actuarial advice		As at last actuarial review (released June 2014), accruing superannuation liabilities were fully funded. The State Actuary reviews the scheme every three years. The WorkCover scheme was fully funded as at 30 June 2014.

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Budget Strategy and Outlook 2015-16

2 Economic performance and outlook

Features

• Economic growth and labour market conditions in Queensland continue to be influenced by the transition from the historic surge in resources investment towards growth driven by the household and trade sectors. Reflecting this, following two years of subdued outcomes, growth in Queensland gross state product (GSP) is forecast to strengthen to 4 ¹⁄₂% in both 2015-16 and 2016-17, driven by the surge in liquefied natural gas (LNG) exports.

• The global and national economic outlook has softened over the past year. This has prompted the Reserve Bank of Australia (RBA) and central banks in key Queensland export markets, such as China, Japan and Korea, to support growth by easing monetary policy.

• A more subdued global outlook, combined with stronger global supply, has contributed to sharp declines in world commodity prices, including for coal – the State’s single largest export – and oil (which the price of Queensland’s LNG exports is linked to).

• While tempered by lower A$ exchange rates, weaker commodity prices have flowed through to the Queensland domestic economy via several channels. In particular, lower returns have seen coal producers cut operating costs to sustain profitability, weakened prospects for new investment in the sector, and resulted in softer household income growth.

• Slower income growth, subdued labour market conditions and ongoing consumer caution suggest growth in household consumption will remain below average over the forecast period, despite lower domestic interest rates and improvements in household wealth.

• With investment outside the resources sector taking longer to recover than expected, the step-down in LNG construction will result in declines in business investment in both 2014-15 and 2015-16, before returning to a more sustainable growth path from 2016-17 onwards.

• Lower interest rates, solid house price growth and rising investor interest are driving a sustained recovery in dwelling investment, particularly in medium-to-high density housing.

• With the long-anticipated growth boost from LNG exports now expected to be spread across 2015-16 and 2016-17, and imports falling due to the step-down in investment, the trade sector will be a key driver of growth in these years.

• Queensland’s overseas tourism exports are also expected to grow at a healthy pace in coming years, reflecting increased outbound tourism from China, the rising popularity of working holidays in the wider Asian tourism market and lower A$ exchange rates.

• Employment growth slowed to 0.5% in 2014-15, with weak household income growth constraining jobs growth in labour-intensive service industries and lower commodity prices and ongoing drought impacting the mining and agriculture industries respectively.

• Looking ahead, as the full impact of the Government’s employment measures flow through and the domestic economy strengthens, labour market conditions are expected to improve.

• Employment growth is expected to improve from a low base, reflecting the forecast acceleration in dwelling investment and the lower A$ improving the competitiveness of services export sectors such as tourism and education.

• A modest recovery in employment is expected to see the unemployment rate remain around 6 ¹⁄₂% over the next two years, before easing to 6% by 2018-19 as domestic activity strengthens.

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Budget Strategy and Outlook 2015-16

2.1 External environment

2.1.1 International conditions

Global economic conditions deteriorated over the past year and forecasts for growth have been downgraded. While long-term bond yields in most major economies have risen in recent months, they remain somewhat lower than a year earlier, particularly in Europe, where deflationary pressures have emerged. Further, long-term forecasts for industrial production in Queensland’s major export markets have been substantially downgraded (see Chart 2.1). Reflecting weaker global demand and increased supply, commodity prices, including those important to Queensland, have declined substantially. Meanwhile, the sharp decline in crude oil prices since September 2014 is expected to provide some offsetting impetus to net importers of oil.

Chart 2.1 Industrial production growth forecasts, 2013 to 2019

Note:

1. India’s industrial production growth profile is on its fiscal year basis (April to March).

Source: Consensus Economics.

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Budget Strategy and Outlook 2015-16

Policy settings in major economies remain remarkably accommodative and the response to potential changes in monetary conditions over the period ahead, particularly in the US, will be a key determinant of global economic conditions. The outcome of negotiations between Greece and its creditors remain uncertain at the time of printing. Failure to reach a lasting agreement on debt refinancing will have significant implications for Greece’s economy and potentially the fragile Euro Zone recovery.

Economic growth in Queensland’s major trading partners is expected to be 4% for 2015, slightly stronger than the 3.7% recorded for 2014, but still below pre-Global Financial Crisis rates. Growth is forecast to improve to 4 ¹⁄₄% in 2016, largely due to stronger forecast growth for Japan, the State’s second largest trading partner. Although uncertainties remain around its implementation, a second consumption tax increase in Japan is scheduled for April 2017 and this is expected to pull consumption spending forward into 2016. Major trading partner growth is forecast to subsequently moderate due to slower growth in China, India and Japan (see Table 2.1).

Table 2.1 Queensland’s major trading partners’ economic outlook¹

Actual

Forecasts

2014

2015

2016

2017

2018

2019

Major trading partners

3.7

4

4 1⁄4

3 3⁄4

3 3⁄4

3 3⁄4

Non-Japan Asia

5.6

5 1⁄2

5 3⁄4

5 1⁄2

5 1⁄4

5 1⁄4

China

7.4

7

6 3⁄4

6 1⁄2

6 1⁄2

6 1⁄4

India2

7.3

7 3⁄4

8

7 1⁄2

7 1⁄2

7 1⁄2

Japan

-0.1

1

1 3⁄4

3⁄4

1

1

Europe

1.3

2

2

1 3⁄4

1 3⁄4

1 3⁄4

US

2.4

2 1⁄4

2 3⁄4

2 1⁄2

2 1⁄2

2 1⁄2

Notes:

1. Annual % change. Decimal point figures indicate an actual outcome.

2. India’s economic growth profile is on its fiscal year basis (April to March).

Sources: Consensus Economics and Queensland Treasury.

The performance of the US economy has significant flow-on effects to growth prospects for Queensland’s larger export markets, despite it being a relatively small direct trading partner. While recent severe weather conditions temporarily slowed growth in March quarter 2015, the outlook for the US economy has strengthened over the past six months.

The US Federal Reserve (the Fed) has made significant purchases of US Treasury and mortgage-backed securities since the Global Financial Crisis and the value of assets held on its balance sheet is large by historical standards. While the third phase of the quantitative easing program (QE3, which began in September 2012) was halted in October 2014, monetary policy in the US remains historically accommodative. Implications of an increase in official interest rates and the eventual reduction in assets held on the Fed’s balance sheet remain uncertain.

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Budget Strategy and Outlook 2015-16

The US housing sector remains an important element in the recovery, with housing starts improving so far in 2015, albeit from a low base. With increases in real disposable income, personal consumption expenditure is making a moderate contribution to growth. While US business investment has grown solidly over the past few years, the significant decline in the oil price has resulted in recent cut-backs to energy-related investment. Meanwhile, ongoing weakness in corporate profits may pose some uncertainty for the timing of the first interest rate increase, anticipated by many to occur in September 2015.

The US labour market, which has been a key obstacle to tighter monetary policy in recent years, continues to improve. Employment growth is accelerating, the unemployment rate is at its lowest since mid-2008 and growth in real wages appears to be picking up, following four years of lacklustre outcomes. However, the participation rate has declined throughout most of the recovery and across most age cohorts. This suggests some of the improvement in the unemployment rate is a result of potential workers exiting the labour force and, combined with persistent underemployment, is an indication of somewhat softer underlying conditions.

The Chinese economy, Queensland’s largest trading partner, is slowing. The Chinese Government announced a more modest 7% economic growth target for 2015, compared with the 7.4% growth recorded in 2014. The moderation in growth partly reflects the planned transition to a more sustainable growth trajectory, reducing the reliance on investment and exports in favour of consumption. As part of its transition to a more sustainable longer-term growth path, Chinese authorities continue to manage local government debt, address income inequality and target a reduction in pollution. Meanwhile, with house prices continuing to fall nationwide, China’s real estate sector presents an ongoing risk, as does volatility in China’s equity markets.

China’s coal production and imports fell in 2014, and a continuation of this trend may have flow-on effects to Queensland’s coal exports. In recent years, growth in Queensland coal export volumes has been driven by strong demand from China, but this started to slow in 2014-15. In an attempt to counter slower economic growth and moderating inflation, the People’s Bank of China has cut interest rates several times. However, China’s economic growth is still expected to continue to moderate over the majority of the forecast period.

The stock market in China has fallen by over 30% since mid-June 2015, unwinding a large part of the significant gains made over the past year. While Chinese authorities responded with an interest rate cut in late-June, falling share prices have triggered margin calls with investors having to sell other assets to meet these calls. A substantial number of companies have reacted by suspending trading in their shares. The People’s Bank of China is working with the China Securities Finance Corporation in an attempt to steady the stock market and the Government has announced new economic stimulus measures.

Following the April 2014 consumption tax increase, the Japanese economy went into recession, resulting in lower economic output in 2014 than in the previous year. While a depreciation of the Yen has improved its trade performance, Japan’s overall growth trajectory remains unclear and a consistently declining and ageing population has been constraining economic growth. Stimulus packages are yet to boost growth and allay deflationary fears as intended. The Bank of Japan expanded its quantitative easing program in October 2014 and economic growth is expected to improve in 2015 and 2016, before moderating to around 1% per annum for the remainder of the forecast period.

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Budget Strategy and Outlook 2015-16

Korea’s trade performance is crucial to its economic outlook. With Japan and Korea sharing a similar mix of goods exports, the depreciation of the Yen is adversely impacting Korea’s economic growth prospects. As a result, further stimulus may be needed to boost growth in Korea, whether in the form of fiscal policy or monetary easing.

Economic growth in Europe has been weak and inflation is extremely low, partly reflecting lower oil prices. In an attempt to lift the path of inflation, boost economic growth and reduce the Euro area unemployment rate, the European Central Bank recently expanded its asset purchasing program (targeted at around €1.1 trillion). The expanded liquidity is likely to weigh on the Euro exchange rate, which should assist Euro area export competitiveness. Despite the stimulus, growth in the Euro area is forecast to remain subdued in the near term.

At the time of printing this Budget, negotiations between Greece and its creditors were yet to be finalised. Failure to reach a lasting agreement will have significant implications for Greece’s economy, and potentially the fragile European recovery.

2.1.2 National conditions

The Australian economy has experienced a significant fall in the prices received for key commodity exports, although its terms of trade remain above the historical average of the last three decades. As is the case with the Queensland economy, the transition from the resources sector investment boom to broader based growth is likely to take longer than originally expected. Australian Treasury forecasts gross domestic product (GDP) to grow 2 ³⁄₄% in 2015-16, before accelerating to 3 ¹⁄₄% in 2016-17, close to trend growth (see Table 2.2).

After holding the cash rate steady at 2.5% since August 2013, the RBA responded to softness in economic activity by cutting the cash rate, by 25 basis points in both February and May 2015, to an historic low of 2%. The associated fall in the A$ in recent months is expected to support export oriented and import competing businesses. The Australian Treasury also expects lower oil and electricity prices to support growth.

Growth in household consumption started to pick up during 2014-15, assisted by increases in household wealth, and is expected to return to just below trend over the forecast period. Growth in dwelling investment has been strong and is expected to remain so, largely driven by investor rather than owner occupier activity. However, business investment is now forecast to be weaker than previously expected, with recent data suggesting firms in non-mining sectors of the economy are yet to commit to significant additional investment in 2015-16.

As a result, the Australian Treasury forecasts employment growth to remain subdued, with the national unemployment rate expected to rise to 6 ¹⁄₂% by June quarter 2016 and then edge back to 6 ¹⁄₄% by June quarter 2017. In line with below trend economic growth, inflation and wages growth are expected to remain contained.

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Budget Strategy and Outlook 2015-16

Table 2.2 Australian Treasury national economic forecasts

	Actual1		Forecasts
	2013-14		2014-15		2015-16		2016-17
GDP2		2.5		2 1⁄2		2 3⁄4		3 1⁄4
Employment3		0.7		1.8		1 1⁄2		2
Unemployment rate4		5.9		6.0		6 1⁄2		6 1⁄4
Inflation5		3.0		1 3⁄4		2 1⁄2		2 1⁄2
Population6		1.4		1 3⁄4		1 3⁄4		1 3⁄4
Terms of trade		-3.7		-12 1⁄4		-8 1⁄2		3⁄4

Notes:

1. Calculated using original data unless otherwise indicated.

2. Per cent change on previous year. Chain volume measure (CVM), 2012-13 reference year.

3. Seasonally adjusted, through-the-year growth rate to the June quarter. Actual outcome for 2014-15.

4. Seasonally adjusted rate for the June quarter. Actual outcome for 2014-15.

5. Through-the-year growth rate to the June quarter.

6. Through-the-year growth rate to 31 December.

Sources: ABS 3101.0, 6202.0, 6401.0 and the 2015-16 Australian Government Budget.

2.1.3 Assumptions

Forecasts for the Queensland economy are based on a number of assumptions, including the RBA’s monetary policy stance, the A$ exchange rate, the crude oil price and seasonal conditions over the forecast period:

• The RBA is assumed to maintain an easing bias in 2015-16, with the official cash rate beginning to move gradually upwards in 2016-17.

• At the time the Budget forecasts were prepared, the A$ was trading at a little below $US0.80. Since then, the A$ has fallen further in response to volatility in financial markets.

• Crude oil prices have fallen substantially since mid-2014. Consistent with current pricing of futures markets, it is assumed that oil prices will gradually rise over the next few years.

• Dry seasonal conditions and other adverse weather events relating to the current El Niño weather pattern have been factored into estimates of agricultural exports in 2015-16. Seasonal conditions are assumed to gradually improve from 2016-17.

This chapter ends with a discussion of the risks related to the global economy, financial markets and other assumptions driving the Queensland outlook.

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Budget Strategy and Outlook 2015-16

2.2 Queensland economy

2.2.1 Summary of conditions and outlook

Queensland economic growth is forecast to strengthen to 4 ¹⁄₂% in both 2015-16 and 2016-17, before moderating to 3 ³⁄₄% in 2017-18 (see Table 2.3). As a result, growth in Queensland is forecast to be stronger than that of all other states over the forecast period (see Chart 2.2).

Chart 2.2 Economic growth, by state¹

Note:

1. CVM, 2012-13 reference year. 2014-15 are estimates and 2015-16 onwards are forecasts.

Sources: ABS 5220.0, various state Budgets and Queensland Treasury.

The Queensland economy is now well into a transition period, as the investment phase of the large LNG projects nears completion and production and exports of LNG are underway. However, the ramp up in these exports and the recovery in most other sectors of the domestic economy is expected to take longer than originally anticipated.

Household consumption growth has been subdued in recent years and is estimated to remain so in 2014-15. Sustained low interest rates and rising asset prices have not been sufficient to offset the impact of weak growth in household income. Consumption is also being restrained as households save to rebuild their balance sheets. The recovery in dwelling investment gained further momentum in 2014-15, driven by strong activity in medium-to-high density housing.

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Budget Strategy and Outlook 2015-16

However, growth in consumption and dwelling investment is not sufficient to compensate for the large step-down in LNG investment, which is driving a fall in business investment and overall state final demand in 2014-15 (see Chart 2.3). The step-down in LNG construction is also driving a significant decline in overseas imports, while overseas exports are experiencing moderate growth. As a result, the contribution from net exports is expected to underpin economic growth of 2% in 2014-15, slightly below the outcome of 2.3% in the previous year.

In 2015-16, a continuation of accommodative monetary policy is expected to support household consumption and dwelling investment. However, business investment will be lower in 2015-16 as it returns to more sustainable levels. As a result, state final demand is forecast to grow only marginally. Recent company guidance suggests the ramp up of LNG exports is expected to be later than originally anticipated, making a more even contribution to economic growth across 2015-16 and 2016-17. Nonetheless, total overseas exports are forecast to grow by a strong 11 ³⁄₄% in 2015-16. With the fall in business investment driving a further fall in overseas imports, net exports are forecast to drive GSP growth of 4 ¹⁄₂%.

Overseas export growth will continue to be strong in 2016-17, as LNG plants approach full operational capacity. With expected moderate consumption growth, continued robust dwelling investment growth and a small rebound in business investment, GSP growth is forecast to remain solid at 4 ¹⁄₂%. Looking further ahead, GSP growth is expected to be more balanced across its major components. However, there is emerging evidence that population growth in Queensland has moved onto a lower trajectory and so GSP growth is projected to ease back to 3 ¹⁄₄% by 2018-19, below the historical average of around 4%.

Labour market conditions in Queensland are expected to be softer than previously anticipated, and similar to those forecast nationally. With economic growth being driven by less labour intensive sectors of the economy, employment is forecast to grow moderately in 2015-16 and 2016-17. This is expected to keep the unemployment rate elevated through that period, before an improvement in domestic activity sees it ease back to 6% by 2018-19.

Table 2.3 Economic forecasts/projections, Queensland¹

Actual

Estimate

Forecasts

Projection

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

Gross state product

2.3

2

4 1⁄2

4 1⁄2

3 3⁄4

3 1⁄4

Employment2

1.4

0.5

1 1⁄4

1 3⁄4

2

2 1⁄4

Unemployment rate2

6.0

6.5

6 1⁄2

6 1⁄2

6 1⁄4

6

Inflation

2.8

2

2 1⁄4

2 1⁄2

2 1⁄2

2 1⁄2

Wage Price Index

2.6

2 1⁄2

2 1⁄2

2 3⁄4

3

3 1⁄4

Population

1.6

1 1⁄2

1 3⁄4

1 3⁄4

1 3⁄4

1 3⁄4

Notes:

1. Annual % change, except for unemployment rate.

2. Actual outcome for 2014-15.

Sources: ABS 3101.0, 5220.0, 6202.0, 6345.0, 6401.0 and Queensland Treasury.

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Budget Strategy and Outlook 2015-16

Chart 2.3 Contributions to growth in Queensland’s gross state product¹

Note:

1. CVM, 2012-13 reference year. 2014-15 are estimates and 2015-16 onwards are forecasts.

Sources: ABS 5206.0, 5220.0 and Queensland Treasury.

Household consumption

Growth in household consumption spending has been below its historical average in recent years, driven by weak household income growth (see Chart 2.4) and increased saving. As LNG investment has wound down and coal prices fallen, resource related employment has also declined. Drought conditions have affected farm production and incomes, leading to further reductions in agricultural employment. These impacts have flowed through to other sectors of the economy, including the retail sector.

While rising equity and house prices have driven strong growth in nominal household wealth over the last two years, it remains below its long-run trend. There is evidence to suggest that consumption is being restrained as households rebuild wealth in the wake of the Global Financial Crisis, for example, by using income to pay down debt more rapidly than required.

These influences continued in 2014-15, with a subdued labour market, slow wages growth and weaker commodity prices offsetting the benefits of increasing wealth and low interest rates.

Over the forecast period, growth in household spending is expected to pick up, as employment conditions begin to improve and dwelling investment recovers further. However, consumption growth is expected to remain well below its long-term average of over 4%, also reflecting in part the additional impact of slower expected population growth.

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Budget Strategy and Outlook 2015-16

Chart 2.4 Nominal household consumption and employee income, Queensland

Note:

1. First three quarters of 2014-15.

Sources: ABS 5206.0 and Queensland Treasury.

Dwelling investment

Dwelling investment in Queensland grew 4.8% in 2013-14, the first increase in six years. This recovery accelerated in 2014-15, supported by record low interest rates and increased activity by investors. However, unlike previous growth phases in Queensland, investment in new dwellings is being driven by strong demand for the construction of medium-to-high density dwellings (flats, units or apartments), particularly in Inner City Brisbane (see Chart 2.5).

A moderation in approvals in mining regions, which had previously benefited from strong demand (particularly for houses) as a result of resource-related investment, is only partly offsetting growth elsewhere in the State. Renovation activity across the State is growing at a softer pace, and is expected to remain subdued, as a result of slower household income growth and a subdued labour market.

Looking ahead, investor interest in Queensland is expected to strengthen as house prices are comparatively low compared to major southern states. Recent large gains in Sydney house prices will prompt interstate and overseas investors to seek more attractive rental yields. As a result, dwelling investment is forecast to continue to grow at a robust rate in 2015-16 and then moderate as the RBA moves towards a more neutral monetary setting.

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Budget Strategy and Outlook 2015-16

Chart 2.5 Dwelling approvals¹ by type, Queensland

Notes:

1. 12 months to May 2013 and May 2015.

2. Mining regions are Fitzroy, Mackay, Queensland Outback and Townsville.

Sources: ABS 8731.0 and Queensland Treasury.

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Budget Strategy and Outlook 2015-16

Business investment

As construction of the three large LNG projects winds down, business investment in Queensland has fallen from the historically high levels of the past few years. With combined capital expenditure exceeding $60 billion, the unprecedented scale of these projects means that a substantial fall in investment has been anticipated for some time, regardless of the pipeline of projects to follow (see Chart 2.6).

Chart 2.6 Non-dwelling construction and work yet to be done, by sector¹

Notes:

1. Nominal, private. Work yet to be done in stacked bar, original. Non-dwelling construction in line, trend.

2. March quarter 2015 non-residential work yet to be done not available at time of printing.

Sources: ABS 5206.0, 8752.0 and 8762.0.

Considerable falls in key commodity prices have prompted resource companies to focus on improving productivity of existing operations and to implement cuts to their exploration and capital investment budgets, including the deferral or cancellation of projects.

An anticipated pick-up in non-resource investment has yet to materialise, and a rebound is unlikely in the short term. Subdued household consumption and the downturn in the resources industry are serving to sustain spare capacity created by recent projects in several sectors, including retail, commercial offices and warehouses.

With around 80% of the State currently drought declared, the agricultural sector is also unlikely to contribute to growth in investment.

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Budget Strategy and Outlook 2015-16

Business investment is expected to fall further in 2015-16, due primarily to the staged completion of the LNG projects. However, as non-resources investment gradually strengthens in line with improving household sector activity, business investment is expected to return to a more sustainable longer-term growth path from 2016-17 onwards.

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Budget Strategy and Outlook 2015-16

Table 2.4 Queensland economic forecasts¹, by component

	Actual 2013-14		Estimate 2014-15		2015-16		Forecasts 2016-17		2017-18
Economic output2
Household consumption		2.1		2		2 1⁄2		2 3⁄4		3
Private investment		-3.6		-11 3⁄4		-6		4 3⁄4		5 1⁄2
Dwelling investment		4.8		9 1⁄4		7		6 1⁄2		4 1⁄2
New and used		7.2		15 1⁄2		10		8 1⁄4		5
Alterations and additions		2.0		1 1⁄2		3		4		4
Business investment		-6.4		-20		-13 1⁄4		3 1⁄2		5 3⁄4
Non-dwelling construction		-3.0		-26		-16 1⁄2		3 1⁄4		6
Machinery and equipment		-14.0		-5		-6 1⁄2		4 1⁄4		5 1⁄2
Private final demand		0.1		-2 1⁄2		0		3 1⁄4		3 3⁄4
Public final demand		0.8		0		1 1⁄4		1 1⁄2		1 3⁄4
State final demand		0.3		-2		1⁄4		3		3 1⁄4
Net overseas exports3,4,5		3 1⁄2		2 1⁄2		3		1 3⁄4		1⁄2
Overseas exports of goods and services4		6 3⁄4		2 3⁄4		11 3⁄4		9		3 3⁄4
Overseas imports of goods and services5		-10 1⁄4		-10 3⁄4		-3 3⁄4		1 3⁄4		3
Gross state product		2.3		2		4 1⁄2		4 1⁄2		3 3⁄4
Nominal gross state product		2.8		4 1⁄2		7		7 1⁄2		6 3⁄4
Other economic measures
Employment6		1.4		0.5		1 1⁄4		1 3⁄4		2
Unemployment rate (%, year-average)6		6.0		6.5		6 1⁄2		6 1⁄2		6 1⁄4
Inflation		2.8		2		2 1⁄4		2 1⁄2		2 1⁄2
Wage Price Index		2.6		2 1⁄2		2 1⁄2		2 3⁄4		3
Population		1.6		1 1⁄2		1 3⁄4		1 3⁄4		1 3⁄4

Notes:

1. Unless otherwise stated, all figures are annual % changes.

2. CVM, 2012-13 reference year, except nominal GSP. Components not separately reported are other investment (cultivated biological resources, intellectual property products and ownership transfer costs), the balancing item (including interstate trade and inventories) and the statistical discrepancy.

3. Percentage point contribution to growth in gross state product.

4. Adjusted to include re-exports and Queensland’s confidential exports (largely raw sugar).

5. Adjusted for the imports of capital goods for major resource projects.

6. Actual outcome for 2014-15.

Sources: ABS 3101.0, 5206.0, 5220.0, 6202.0, 6345.0, 6401.0 and Queensland Treasury.

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Budget Strategy and Outlook 2015-16

Public final demand

Consistent with the Government’s responsible and measured approach to managing the State’s finances, public final demand (the sum of federal, state and local government consumption and investment) is expected to grow moderately over the forward estimates period.

Overseas exports and imports

The volume of overseas goods exports is expected to grow by 3 ³⁄₄% in 2014-15, following an 8.1% rise in the previous year. Growth in coal export volumes has been driven by demand from China and, to a lesser extent, India. Meanwhile, exports of base metals are expected to be relatively flat. In the rural sector, drought conditions have driven growth in beef exports as farmers reduce herd sizes, while unfavourable growing conditions have contributed to lower cotton and other crop exports.

Growth in the nominal value of overseas exports is expected to be lower than volume growth, mainly due to falling coal prices. In the first 11 months of 2014-15, unit export prices of hard coking, thermal and semi-soft/PCI coal fell 9.8%, 9.3% and 9.1% respectively compared to the same period a year ago. In contrast, total coal export volumes increased by 5.1% over the same period.

Coal export volumes are forecast to grow moderately from 2015-16 onwards (see Chart 2.7). In China, which has been a significant source of growth for Queensland’s coal exports, the pace of economic growth is expected to be constrained by the ongoing effort to rebalance the economy and reduce pollution. On the supply side, the ramp up of production in a number of Queensland mines will continue to support export growth across the forecast period. However, weaker global demand and increased world supply of coal products is expected to keep coal prices subdued.

The projections of relevant coal parameters are shown in Appendix C.

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Budget Strategy and Outlook 2015-16

Chart 2.7 Queensland coal exports¹

Note:

1. 2014-15 are estimates; 2015-16 onwards are forecasts.

Sources: ABS unpublished trade data and Queensland Treasury.

While the ramp up of new mines supported base metals exports in 2013-14, a decline in the quality of remaining deposits, prospective closures of depleted mines and the absence of significant new projects is expected to result in a fall in the volume of base metals exports over the forecast period.

The first shipment of LNG from the Queensland Curtis LNG plant was exported in January 2015. This will be followed by the commencement of LNG exports from the Gladstone LNG and Australia Pacific LNG plants towards the end of 2015. Construction and commissioning of these projects has taken longer than previously anticipated, causing delays to the expected commencement of LNG production and, consequently, the ramp up in exports. While expectations for the total export capacity of these projects once fully operational is largely unchanged, their contribution to Queensland’s economic growth is now expected to be more evenly spread across 2015-16 and 2016-17 (see Chart 2.8).

37

Budget Strategy and Outlook 2015-16

Chart 2.8 Queensland’s forecast LNG exports

Sources: Company reports and Queensland Treasury.

Beef export volumes increased by 6.8% in the first 11 months of 2014-15, when compared with the same period a year ago. Demand for Australian beef has been supported by a sharp fall in supply in the US, which has led to a rise in export prices over the past year. Combined with ongoing drought, this encouraged producers to increase slaughter rates. However, stock numbers are in decline, and will continue to fall over the next few years unless climatic conditions improve. Lower stock levels are expected to limit the supply of cattle available for slaughter and reduce the volume of beef exported in 2015-16 and 2016-17.

Cotton exports are forecast to fall in 2015-16 as a result of dry seasonal conditions. Subdued prices are expected to result in a continued fall in nominal exports in 2016-17.

Sugar producing regions have been less affected by drought and were not affected by the natural disasters that hindered production in previous years. Moderate growth in exports is expected for 2014-15. However, production is anticipated to increase only marginally in the medium term, reflecting limited capacity to increase the area of plantation.

Overseas tourism exports are estimated to recover in 2014-15, after declining in 2013-14. Moderate improvement in global economic conditions, the lower A$ and the rising popularity of overseas travel by Chinese tourists are expected to drive growth in Queensland’s overseas tourism exports over the forecast period. In addition, the Commonwealth Games, which will be held on the Gold Coast in April 2018, will boost tourism exports in 2017-18.

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Budget Strategy and Outlook 2015-16

Overseas education exports increased strongly in the first half of 2014-15, driven by a substantial increase in commencements in vocational education and training courses and an increase in higher education enrolments. Australian Government reforms implemented since late 2011 appear to have had a positive impact on education exports and overseas enrolments are expected to continue to grow.

An unwinding of the current high levels of LNG-related imports, as well as a broader decline in business investment outside the LNG sector, is expected to result in lower total goods imports in 2014-15. Weaker household expenditure growth is also expected to constrain imports of consumption goods in that year. As conditions in these sectors improve, Queensland imports are forecast to rise from 2016-17 onwards.

Labour market

Employment growth in Queensland moderated to 0.5% in 2014-15, and has averaged just 0.9% per annum since the Global Financial Crisis. The recent weakness in employment highlights the importance of the Government’s Working Queensland jobs plan, which is outlined in the Government’s Jobs Now, Jobs for the Future paper.

Weak household income growth as a result of the fall in the terms of trade is constraining employment growth in labour intensive service industries such as retail trade. Meanwhile, drought conditions impacting Queensland’s agricultural industry are expected to be sustained by the current El Niño weather pattern.

Employment supported by the construction of major resources projects is expected to continue to decline in 2015-16 as these projects are completed. In an environment of low commodity prices, mining operators have reduced their workforces and continue to target efficiency gains to maintain profitability. This is also having an impact on employment in industries servicing the resources sector, such as professional services and equipment hiring.

The forecast acceleration in Queensland’s economic growth in 2015-16 is expected to be driven largely by LNG exports, which is unlikely to provide a significant boost to employment. LNG production and exports are less labour-intensive than both LNG construction and economic activity more generally. As a result, employment and labour income growth will be more subdued than in other periods of similar economic growth.

Employment growth is expected to improve from a low base, partly reflecting the forecast acceleration in dwelling investment as work on the significant pipeline of medium-to-high density projects is undertaken. Improved competitiveness for trade exposed sectors outside of mining, such as tourism and education, should also support jobs growth.

Further ahead, employment outcomes are forecast to continue to improve as non-resources investment gradually recovers and domestic demand strengthens. Labour market outcomes are also expected to be supported by the roll out of the Government’s $1.6 billion Working Queensland package, which aims to help grow the State’s economy and create real and sustainable jobs for Queenslanders. More details of this package are available in Jobs Now, Jobs for the Future.

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Budget Strategy and Outlook 2015-16

Queensland’s unemployment rate is forecast to remain around 6 ¹⁄₂% over the next two years. From 2017-18, the unemployment rate is forecast to gradually fall as employment begins to grow faster than population (see Chart 2.9). Queensland’s participation rate is expected to be marginally lower over the period ahead, having already fallen significantly from its peak. The ageing of the population is expected to continue to place downward pressure on the participation rate as more people enter age cohorts that tend to be less reliant on employment related income.

Chart 2.9 Labour market, Queensland¹

Note:

1. Year-average. 2014-15 are actual outcomes, 2015-16 to 2017-18 are forecasts and 2018-19 are projections.

Sources: ABS 6202.0 and Queensland Treasury.

Prices and wages

After accelerating to 2.8% in 2013-14, Brisbane consumer price inflation is expected to moderate to 2% in 2014-15. This slowing in headline inflation can be largely explained by two temporary factors. First, a significant fall in global oil prices since mid-2014 led to a sharp decrease in domestic automotive fuel prices. Second, a range of factors canvassed by the Australian Energy Regulator have combined to result in slower growth in electricity prices. Partially offsetting these effects, the cumulative depreciation of the A$ over recent years has led to higher prices for imported goods.

With lower oil prices and slower growth in electricity prices largely impacting 2014-15, a modest acceleration in inflation is forecast for 2015-16. Despite a reduction in the main residential electricity tariff for the typical household in 2015-16, higher prices for imported goods are expected to gradually filter through to retail prices in that year and beyond.

40

Budget Strategy and Outlook 2015-16

Wage growth has moderated over the past couple of years and is currently at an historically low rate. Consistent with ongoing spare capacity in the labour market, little improvement in nominal wage growth is expected in the near term. As employment growth strengthens and the unemployment rate falls, wage growth is expected to pick up.

Population

With the surge in resources investment unwinding and Queensland’s unemployment rate remaining above the national average, Queensland’s annual population growth slowed to 64,000 in 2014. This reflects a decline in net inflows from both overseas and interstate migration (see Chart 2.10).

The slowdown in net overseas migration has also occurred nationally and resulted in a slowing in Australia’s population growth rate. Queensland’s share of the national migration total has also fallen below its long-run average. At the same time, Queensland’s net interstate migration has persisted at historically low levels. Notably, net inflows from New South Wales have declined considerably and there has been a sustained period of net outflows to Victoria for the first time on record.

Looking ahead, national net overseas migration is expected to be subdued, but net overseas migration to Queensland is assumed to pick up towards its long-run average share. Net interstate migration is forecast to recover only slightly in coming years, as soft labour market conditions in Queensland offset the attraction of greater housing affordability in Brisbane relative to Sydney and Melbourne.

Overall, Queensland’s population growth is expected to be 1 ¹⁄₂% in 2014-15, broadly in line with that expected nationally. Population growth in Queensland is then expected to strengthen to around 1 ³⁄₄% per annum over the remainder of the forecast period, also in line with expected national growth.

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Budget Strategy and Outlook 2015-16

Chart 2.10 Population growth, by component, Queensland

Source: ABS 3101.0.

2.2.2 Risks to the economic outlook

Internationally, a key risk for the economic outlook is any disruption to the economic recovery in the US and Europe.

In relation to Greece, Australia’s trade and direct financial connections are minor. Consequently, the impact of the Greek debt crisis will only become significant if there are flow-on effects to the Euro Zone as a whole or global financial markets are destabilised. The impact on Australia and Queensland would then depend on how much this affects growth in the US and China. Given the current uncertainties it is difficult to predict the ultimate impact of this crisis.

In Asia, the Chinese Government’s focus on rebalancing growth, consolidating local government debt, addressing corruption and containing pollution means that China’s economic growth may be weaker than currently anticipated. If this is the case, China’s demand for energy and mineral products may weaken, with adverse implications for the Queensland economy, particularly commodity prices.

With the Chinese economy already slowing, the recent substantial correction in the Chinese stock market could further impact the real economy. This could then flow through to other Asian economies with strong links to China, as well as to the Australian economy, and drive further falls in commodity prices.

42

Budget Strategy and Outlook 2015-16

Uncertainty related to the pace of the completion of LNG investment and the transition to the production and export phase, as well as the possibility that non-mining investment remains weaker for longer, present risks to the growth outlook.

The emergence of an El Niño weather pattern means that any relief from the current drought conditions may take longer than previously thought.

Population growth, both nationally and in Queensland, has slowed in recent years. At the national level, this has been driven by a slowdown in net overseas migration. Australian Government forecasts currently imply a moderate recovery in net overseas migration. However, if this does not occur, both national and Queensland population growth could be lower than currently forecast. Further, if Queensland’s share of net overseas migration does not recover toward longer-run average levels, Queensland’s population growth rate may not recover from its current level.

If some of these risks were to eventuate, the forecast recovery in domestic activity and labour market conditions may be slower than currently anticipated.

This heightens the importance of the Government’s $1.6 billion Working Queensland package. The full suite of measures to grow jobs now and jobs for the future is expected to strengthen the labour market and put downward pressure on unemployment. These measures are outlined in the supplementary Jobs Now, Jobs for the Future paper.

43

Budget Strategy and Outlook 2015-16

3 Revenue

Features

• The Government has met its commitment to no new taxes, fees and charges in this Budget.

• Queensland will retain its competitive tax status, with per capita state tax estimated at $2,666 in 2015-16, compared to an average of $3,343 for the other states and territories.

• Total General Government Sector revenue is estimated to be $49.578 billion in 2014-15, $2.844 billion (or 6.1%) higher than in 2013-14. This is largely attributable to an increase in current grants from the Australian Government (including $941 million of specific purpose payments and $920 million of goods and services tax (GST) revenue) and $862 million in taxation revenue.

• The revenue outlook is challenging. Total revenue is expected to grow at an average annual growth rate of 3.6% over the period 2013-14 to 2018-19 (or 4.3%, excluding Natural Disaster Relief and Recovery Arrangements (NDRRA) payments). This is significantly less than the 7.9% average growth over the period 2001-02 to 2013-14.

• Total General Government Sector revenue in 2014-15 is estimated to have been $542 million (or 1.1%) lower than was estimated in the 2014-15 Budget. A major driver of this decrease has been a $762 million reduction in grants from the Australian Government and a $619 million reduction in royalty revenue due to the impact of falling commodity prices, partially offset by higher taxation and dividend revenue.

• Since the 2014-15 Budget, forecasts for royalty revenue have been downgraded by $4.635 billion over the period 2014-15 to 2017-18. This reflects significant reductions in the expectation for commodity prices, including the average coking coal price being 28.3% lower over the period and oil prices being 30.1% lower over the period. The reduction since the 2014-15 Mid Year Fiscal and Economic Review (MYFER) is $3.186 billion over the comparable period.

• Total General Government Sector revenue is estimated to be $51.186 billion in 2015-16. The increase of $1.608 billion (or 3.2%) on 2014-15 estimated actual revenue is primarily driven by grants from the Australian Government, including an increase of $1.174 billion in GST revenue.

• Liquefied natural gas (LNG) exports commenced in 2014-15, with the first shipment of LNG from the Queensland Curtis LNG plant occurring in January 2015. Other proponents are expected to begin exporting during 2015-16, contributing significantly to strong growth in royalty revenue in that year. Coal seam gas royalties are discussed further in Box 3.1.

• To encourage businesses to employ apprentices or trainees, the Government has introduced a 25% rebate on payroll tax on the wages of each apprentice and trainee employed. This rebate is in addition to apprentice and trainee wages being exempt from payroll tax and is offset against the tax payable on the wages of other employees.

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Budget Strategy and Outlook 2015-16

This chapter provides an overview of General Government Sector revenue for the 2014-15 estimated actual outcome, forecasts for the 2015-16 Budget year and projections for 2016-17 to 2018-19.

Table 3.1 General Government Sector revenue¹

	2013-14 Actual $ million		2014-15 Budget $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million		2016-17 Projection $ million		2017-18 Projection $ million		2018-19 Projection $ million
Taxation revenue		11,845		12,455		12,707		12,926		13,607		14,289		15,007
Grants revenue
Current grants		19,172		20,610		20,962		21,895		23,555		24,592		24,820
Capital grants		2,583		3,433		2,411		2,660		2,744		2,385		1,241
Sales of goods and services		5,048		5,187		5,350		5,430		5,444		5,565		5,769
Interest income		2,460		2,429		2,467		2,372		2,274		2,289		2,302
Dividend and income tax equivalent income
Dividends		1,568		1,515		1,752		1,632		1,636		1,283		1,233
Income tax equivalent income		407		633		658		762		800		639		618
Other revenue
Royalties and land rents		2,537		2,846		2,220		2,444		2,857		3,329		3,614
Other		1,114		1,013		1,051		1,065		1,093		1,116		1,146
Total revenue		46,734		50,120		49,578		51,186		54,010		55,486		55,748

Note:

1. Numbers may not add due to rounding.

3.1 2014-15 estimated actual

General Government Sector revenue in 2014-15 is estimated to be $49.578 billion, which is $542 million (or 1.1%) less than the 2014-15 Budget estimate.

Significant variations from the 2014-15 Budget estimates include:

• a $1.035 billion (or 31.1%) decrease in capital grants from the Australian Government largely due to payments for disaster recovery in 2014-15 being lower than estimated (with 2013-14 being higher due to an early payment from the Australian Government)

• lower royalty revenue, by $619 million (or 23.2%), due to significant decreases in oil prices and coal contract prices

• a $252 million (or 2.0%) increase in taxation, primarily associated with higher transfer duty receipts.

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Budget Strategy and Outlook 2015-16

3.2 2015-16 revenue by category

General Government Sector revenue in 2015-16 is estimated to be $51.186 billion, $1.608 billion (or 3.2%) higher than the 2014-15 estimated actual revenue of $49.578 billion. This is largely due to growth of $1.225 billion in grants from the Australian Government and modest increases in royalty and taxation revenue.

The significant increase in grants from the Australian Government is largely due to the $1.174 billion increase in GST. Total NDRRA payments for 2015-16 are estimated at $1.106 billion. After adjusting for natural disaster payments, the underlying growth in revenue is $1.665 billion (or 3.4%) in 2015-16, compared to $3.196 billion (or 7.1%) in 2014-15.

Major sources of General Government Sector revenue in 2015-16 are grants revenue (48.0% of revenue) and taxation revenue (25.3%). Chart 3.1 illustrates the composition of General Government Sector revenue.

Chart 3.1 Revenue by operating statement category, 2015-16^{1, 2}

Notes:

1. Numbers may not add due to rounding.

2. The major component of other revenue is royalties and land rents (4.8% of total revenue).

Chart 3.2 compares 2015-16 estimates with 2014-15 estimated actuals. The main driver of revenue growth in 2015-16 is increased GST revenue of $1.174 billion.

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Budget Strategy and Outlook 2015-16

Chart 3.2 Revenue by operating statement category for 2014-15 and 2015-16

3.3 Queensland’s revenue trends

Chart 3.3 examines the contribution of the key revenue sources of GST, taxation and royalties to revenue growth. As shown, the primary driver of the growth in these three key revenues in 2015-16 is GST revenue distributed to Queensland by the Australian Government.

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Budget Strategy and Outlook 2015-16

Chart 3.3 Contribution to growth of key revenues¹

Note:

1. GST, royalties and taxes are annual percentage point contribution to growth of the aggregate of the three categories. Total is the annual % growth in revenues of the aggregate of the three categories.

3.3.1 GST revenue

Queensland’s GST revenue grew by an average rate of 7.5% across 2001-02 to 2007-08, primarily due to strong growth in national GST collections. Growth in GST was supported by strong growth in household consumption and dwelling investment activity, which were sustained by high levels of consumer confidence and partly funded by increases in household borrowings.

Queensland’s GST revenue is expected to grow by 9.9% in 2015-16 compared to the 2014-15 estimated actual. This is due to the Commonwealth Grants Commission (CGC) assessment that Queensland should receive a higher per capita share of the GST pool in 2015-16 than 2014-15, and growth in the overall GST pool. This reflects the relative weakness in Queensland’s revenue base between 2011-12 and 2013-14 resulting in a higher relativity in 2015-16. Additionally, in its 2015-16 Budget, the Australian Government’s forecasts of total GST collections were revised upwards by $1.570 billion over the period 2014-15 to 2017-18 since the 2014-15 Mid Year Economic and Fiscal Outlook (MYEFO).

The 2015-16 relativity reflects the application of the CGC’s assessment to state budget outcomes from the period 2011-12 to 2013-14. Queensland’s single year relativity for 2013-14, which enters the assessment for the first time is historically high, reflecting short-term factors such as expenses relating to natural disaster events in 2011 and 2012, and strong mining revenue in Western Australia in 2013-14. As GST shares are based on a three year lagged average of relativities, the 2013-14 result will continue to affect Queensland’s GST share up to 2017-18.

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Further discussion of Queensland’s share of GST is provided in Chapter 6.

3.3.2 Taxation

Annual growth in transfer duty averaged 22.6% over the seven years to 2007-08, driven by a range of factors including Queensland’s relative affordability of housing, high population growth and the impact of the burgeoning mining sector. This was a key contributor to total taxation growth of 12.1% per annum over this period, with revenue from transfer duty effectively offsetting a number of reductions in other taxes.

Looking forward, the expected average annual transfer duty growth of 6.7% over the period 2013-14 to 2018-19 is modest relative to that experienced between 2000-01 and 2007-08. While low interest rates and a solid economic outlook are expected to support recovery in the property market, this is expected to occur at a gradual pace, particularly in the non-residential sector.

Although transfer duty is expected to have grown by 30.7% in 2014-15, this has been boosted by several extraordinary large business transactions.

Residential turnover has been strong in 2014-15 with investor activity a particular driver, and relatively modest price growth anticipated.

Since the Global Financial Crisis, payroll tax has overtaken transfer duty as the key contributor to Queensland’s tax revenue collections. In 2007-08, these two taxes contributed around $2.5 billion each, but in 2014-15 payroll tax is expected to be $3.8 billion while transfer duty will reach $3.1 billion.

The growth in payroll tax is due to the relatively stable base and relationship to the underlying strength in economic conditions compared with the volatility associated with transfer duty. Slower than historical growth in employment and wages, along with changes in the composition of the payroll tax base (including relatively low growth in the resources sector) is moderating growth.

Hence, payroll tax is expected to grow by 4.0% on average across the period 2013-14 to 2018-19, well below the 9.4% average across the period 1999-2000 to 2013-14.

3.3.3 Royalty revenue

Royalty revenue grew strongly between 2000-01 and 2007-08, with growth of around 50% in both 2004-05 and 2005-06. In contrast to the other key discretionary revenues, royalty revenues reached a peak in 2008-09, as coal prices had been contracted at record levels prior to the onset of the Global Financial Crisis (see Chart 3.4). Royalty revenue then fell significantly in 2009-10, along with coal contract prices, and has not returned to the levels of 2008-09.

Royalty revenue is estimated to be $619 million lower in 2014-15 than was estimated in the 2014-15 Budget. Although coal export volumes have increased with mining companies pushing for productivity increases, weaker than anticipated coal and oil prices have more than offset this.

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Budget Strategy and Outlook 2015-16

After falling by 13.7% in 2014-15, royalties are expected to grow by 10.9% in 2015-16, supported by increased LNG export volumes as production ramps up, and a depreciating exchange rate. However, coal prices are expected to remain around their current low levels for the first half of 2015-16, with hard coking coal prices for 2015-16 expected to be around US$36 per tonne (or around 26%) lower than estimated in the 2014-15 MYFER.

Although a gradual recovery in coal prices is expected from early 2016, coking coal prices are forecast to be significantly lower in 2017-18 than they were in the 2014-15 MYFER (see Chart 3.5 below).

Across the forward estimates, a modest recovery in commodity prices, combined with growth in export volumes (especially from LNG) is expected to see royalty revenue pick up.

Chart 3.4 Coking coal price

Sources: Consensus Economics and Queensland Treasury.

The exchange rate is assumed to remain flat across the forward estimates to be in line with the International Monetary Fund methodology for estimating fair value.

There is a significant degree of uncertainty associated with estimates of commodity prices and the A$-US$ exchange rate, both of which have significant impacts on royalty revenue. Budget coal price forecasts are generally consistent with the forecasts contained in the Consensus Economics reports issued just prior to finalising the Budget.

Coal price forecasts have been significantly downgraded since the 2014-15 MYFER but as shown in Chart 3.5, this is consistent with revisions in the outlook by Consensus Economics forecasters.

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Budget Strategy and Outlook 2015-16

Chart 3.5 Coking coal price forecasts, by iteration¹

Note:

1. The Consensus Economics estimates represent the most recent releases to the published Budgets and MYFER.

Sources: Queensland State Budget 2014-15 and 2015-16; 2014-15 MYFER and Consensus Economics Energy and Metals April 2014, October 2014 and June 2015.

As explained in Chapter 2, although the first exports of LNG occurred in January 2015, the construction and commissioning of these projects has taken longer than previously anticipated. This has caused delays to the commencement of LNG production, and consequently, a slower ramp up in coal seam gas (CSG) production and royalty revenue.

Royalties on CSG used as feedstock for LNG production are calculated the same way as other petroleum in that it is based on wellhead value. However, as explained in Box 3.1 there can be additional complexity in determining the CSG value at its first point of disposal. Royalties are expected to be lower in the early stages of production when claimable capital costs are spread across a lower production volume.

While expectations for the total export capacity of these projects once fully operational is largely unchanged, their contribution to royalty revenue is now expected to be more prominent in 2016-17.

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Box 3.1 LNG process and CSG royalties

Queensland has abundant CSG reserves that are underpinning the development of Queensland’s LNG industry. In coming years, the expansion of CSG production and the LNG industry in Queensland will make an increased contribution to Queensland’s exports, gross state product and royalty revenue.

CSG is extracted from the Bowen and Surat Basins before either being sold on the domestic market, or being piped to plants on Curtis Island, where it is processed into LNG. The LNG is then shipped out of the Port of Gladstone in specially designed LNG tankers. The LNG value chain in Queensland covers the surveying, drilling, extraction, processing and compression of CSG and the transmission of CSG via high pressure pipelines to the Gladstone LNG plants for CSG conversion into a liquid form for storage and shipping.

The three LNG projects on Curtis Island near Gladstone are moving towards full scale production. Queensland Curtis LNG has entered into production, with Santos GLNG and APLNG projects expected to enter production during the second half of 2015. Capital expenditure for construction of these projects is in excess of $60 billion. The partnerships behind the LNG projects include significant international and domestic energy companies. The three LNG processing plants will have a combined capacity of 25.3 million tonnes of LNG per annum.

In Queensland, royalties are calculated at the rate of 10% of the wellhead value of CSG produced as LNG feedstock and for other purposes. Calculating the wellhead value of CSG involves determining the market value of the CSG at the first point of disposal, and then deducting from this the value of certain expenses related to getting the CSG from the wellhead to that point.

Most of the LNG produced by the three Queensland LNG plants will be sold under long-term contracts to customers in Asia with prices linked to oil prices. There is no single global price for LNG. Across different regions there are variations in LNG markets and pricing. In East Asian markets, LNG contracts can be linked to the Japanese Customs-Cleared (JCC) average price for crude oils delivered into Japan. Historically, there is a correlation between the JCC price and the Brent oil price. On this basis, the outlook for the Brent oil price is an important input for the 2015-16 Budget assumptions regarding LNG prices and in turn the expected royalties from CSG.

The expansion of Queensland’s CSG sector in response to the emergence of the LNG industry will have a significant positive effect on Queensland’s royalty revenue. At this early stage of the Queensland LNG industry, forecasting royalties from the CSG used for LNG production faces a number of complexities in relation to several variables, including:

• the timing for the remaining LNG projects to enter production

• the rate at which the three LNG projects ramp up to full production

• the outlook for the Brent crude oil price

• the correlation between the Brent crude oil price and the JCC price

• the relationship (if any) between the LNG export price and the producer’s initial CSG disposal price

• the extent and variability of deductions allowed to determine wellhead value.

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Budget Strategy and Outlook 2015-16

As discussed above, oil prices are a significant driver of LNG prices and therefore potentially royalties collected. Oil prices have fallen significantly since mid-2014 but consistent with current pricing of futures markets, it is assumed that oil prices will gradually rise over the next few years as the supply of oil starts to rebalance with demand (see Chart 3.6).

While somewhat below the latest Consensus Economics forecasts, the 2015-16 assumptions for the oil price are similar to the current pricing of futures markets, consistent with a conservative approach.

Chart 3.6 Revisions to Brent Oil price forecasts¹

Note:

1. The Consensus Economics estimates represent the most recent releases to the published Budgets and MYFER.

Sources: Queensland State Budget 2014-15 and 2015-16 and 2014-15 MYFER and Consensus Economics Energy and Metals April 2014 and October 2014 and June 2015.

Further details of the assumptions underlying the royalty estimates, and the impact of changes in the assumptions are contained in Appendix C.

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3.4 Election commitments

3.4.1 Payroll tax rebate for apprentices and trainees

Since 1 July 2015, in addition to being exempt from payroll tax, the Government is providing a 25% rebate on payroll tax on the wages of eligible apprentices and trainees. This measure, a component of Working Queensland, and an election commitment, recognises that apprenticeships and traineeships provide a great employment pathway, particularly for younger Queenslanders.

3.4.2 Payroll tax threshold

Queensland’s current payroll tax arrangements are very competitive. Queensland has the highest exemption threshold of any mainland state, and the lowest tax rate of any jurisdiction (see Table 3.2).

The threshold will remain at $1.1 million from 1 July 2015.

Table 3.2 Comparison of payroll tax rates and thresholds

	QLD		NSW		Vic.		SA		WA		Tas.		ACT		NT
Exemption threshold ($000)		1,100		750		550		600		800		1,250		1,850		1,500
Tax rate (%)		4.75		5.45		4.85		4.95		5.5		6.10		6.85		5.5

Source: Other jurisdictions State Revenue Offices.

3.4.3 No new or increased taxes, fees or charges

The Government considers that the business community needs certainty and as such has committed to not increasing current or introducing new taxes, fees or charges.

Already scheduled increases in annual indexation of certain fees and charges will continue. The 3.5% rate of indexation was determined by the former Government, with the associated revenue factored into forward estimates at the time of the 2014-15 MYFER.

3.5 Taxation revenue

Total revenue from taxation is expected to grow by 1.7% in 2015-16, following estimated growth of 7.3% in 2014-15. The strong growth in 2014-15 was partly due to the transfer duty on large commercial transactions. The main components of taxation revenue are shown in Table 3.3.

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Budget Strategy and Outlook 2015-16

Table 3.3 Taxation revenue¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million		2016-17 Projection $ million		2017-18 Projection $ million		2018-19 Projection $ million
Payroll tax		3,914		3,836		3,955		4,194		4,462		4,751
Duties
Transfer		2,403		3,140		3,009		3,130		3,224		3,320
Vehicle registration		486		488		495		520		546		573
Insurance2		767		833		882		938		998		1,062
Other duties3		28		44		46		48		51		53
Total duties		3,684		4,505		4,433		4,636		4,818		5,009
Gambling taxes and levies
Gaming machine tax		608		648		677		707		739		772
Health Services Levy		51		61		67		73		81		89
Lotteries taxes		240		240		247		255		262		270
Wagering taxes		40		14		14		14		15		15
Casino taxes and levies		83		94		97		100		103		106
Keno tax		22		21		21		22		23		23
Total gambling taxes and levies		1,044		1,076		1,123		1,171		1,222		1,275
Other taxes
Land tax		986		977		1,016		1,067		1,132		1,200
Motor vehicle registration		1,543		1,583		1,654		1,728		1,806		1,887
Emergency Management
Levy4		391		436		461		487		515		544
Guarantee fees		230		238		232		269		278		283
Other taxes5		53		56		53		55		56		58
Total taxation revenue		11,845		12,707		12,926		13,607		14,289		15,007

Notes:

1. Numbers may not add due to rounding.

2. Includes duty on accident insurance premiums.

3. Includes duty on life insurance premiums.

4. Prior to 1 January 2014 this was the Fire Levy.

5. Includes the Statutory Insurance Scheme Levy and Nominal Defendant Levy.

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Budget Strategy and Outlook 2015-16

Chart 3.7 indicates the composition of estimated State taxation revenue for 2015-16.

Chart 3.7 Taxation by tax category, 2015-16¹

Note:

1. Percentage may not add to 100% due to rounding. “Other duties” includes vehicle registration duty, insurance duty and other minor duties. “Other taxes” includes the Emergency Management Levy, guarantee fees and other minor taxes.

The largest sources of taxation revenue are payroll tax and transfer duty, which together represent around 54.0% of the State’s total taxation revenue in 2015-16.

Payroll tax (30.6% of total tax revenue in 2015-16) has a stable base with growth driven by the underlying strength of the State economy. In contrast, revenue growth from transfer duty (representing 23.3% of tax revenue) can vary significantly from year to year due to the volatility of both the residential and non-residential segments of the property market.

Land tax represents 7.9% of total tax revenue in 2015-16. While also subject to the volatility of price movements in the property market, this impact is moderated by a relatively stable base and the effect of three year averaging of land values for assessments.

Gambling taxes and levies represent 8.7% of tax revenues in 2015-16. Motor vehicle registration represents 12.8% of total tax revenue.

Other duties, including registration duty and insurance duty represent 11.0% of total tax revenue.

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Budget Strategy and Outlook 2015-16

3.5.1 Payroll tax

Payroll tax is chargeable at a rate of 4.75% when the total yearly Australian taxable wages of an employer, or those of a group of related employers, exceed the exemption threshold of $1.1 million.

The overall payroll tax rate of 4.75% is the lowest in Australia and the exemption threshold of $1.1 million is the highest threshold of any mainland state. Queensland employers with total yearly Australian taxable wages between $1.1 million and $5.5 million also obtain a partial deduction, with the deduction withdrawn at a rate of $1 in every $4 of taxable wages.

Payroll tax collections are estimated to be $3.955 billion in 2015-16, representing growth of 3.1% on the 2014-15 estimated actual. The decline in mining investment has seen a reduction in payroll tax receipts in 2014-15 and this is expected to continue to weigh on 2015-16 as the construction of resources projects is completed.

Payroll tax is now forecast to be $1.191 billion lower over the period 2014-15 to 2017-18 than was estimated in the 2014-15 Budget, reflecting the significant deterioration in employment growth and rising unemployment prior to the 2015 State election. These reductions would have been larger if the previous Government’s scheduled threshold increases had been progressed.

In an environment of low commodity prices, mining operators have reduced their workforce and continue to target efficiency gains to maintain profitability. This is also having an impact on employment in industries servicing the resources sector, such as professional services and equipment hiring.

The forecast acceleration in Queensland’s economic growth in 2015-16 is expected to be driven largely by LNG exports, which are less labour-intensive than both LNG construction and the economy more generally. As a result, employment and labour income growth will be more subdued than in other periods of similar economic growth and payroll tax is expected to grow only moderately. The average annual payroll tax growth of 4.0% remains well below the average of 9.4% from the period 1999-2000 to 2013-14.

The Government has committed to fully fund their election commitments by finding savings or reprioritisations and given the competitiveness of Queensland’s payroll tax regime has decided not to progress the annual threshold increases planned by the previous Government (noting this was previously also deferred in the 2013-14 Budget). The savings from this decision will be utilised to meet election commitments including those focused on jobs and training programs.

From 1 July 2015, in addition to their wages already being exempt from payroll tax, a 25% payroll tax rebate applies to the wages of eligible apprentice and trainees.

3.5.2 Duties

Duties are levied on a range of financial and property transactions. The major duties include transfer, vehicle registration and insurance duties.

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Budget Strategy and Outlook 2015-16

Transfer duty

Transfer duty is charged at various rates on the transfer of real and business property. The Queensland Government offers extensive concessions for the transfer of land where the property is purchased as a home. For example, eligible home buyers pay a 1% concessional rate on dutiable values up to $350,000, rather than the normal schedule of rates between 1.5% and 3.5%. If a first home buyer purchases a property up to $500,000 they will pay no duty, with reduced rates available up to $550,000.

Revenue from transfer duty is expected to be 4.2% lower in 2015-16 than in 2014-15, following strong growth in 2013-14 and 2014-15 that was supported by a number of large commercial transactions. Underlying growth was 12.0% in 2014-15 and is estimated to be 4.4% in 2015-16 once the impact of these large transactions is removed.

The forecasts are based on the expectation that the growth in the number of transactions experienced during 2014-15 will moderate, but that modest improvements in house prices will continue and offset a subdued outlook for non-residential activity.

Over the period 2013-14 to 2018-19 transfer duty is estimated to grow by on average 6.7% per annum. Again this modest rate of growth reflects the strength of 2014-15.

Vehicle registration

Vehicle registration duty is charged at rates of between 2% and 4% of the dutiable value of a motor vehicle on the transfer or initial registration of the motor vehicle, with the rate generally depending on the number of cylinders or rotors of the vehicle.

Revenue from vehicle registration duty is expected to grow by 1.5% in 2015-16, reflecting a modest recovery in the value of sales following a flat 2014-15.

Insurance duty

Insurance duty is charged on contracts of general insurance (for example, insurance for house and contents, vehicle, professional indemnity), life insurance, compulsory third party insurance and accident insurance. Revenue from insurance duty is expected to grow by 5.9% in 2015-16.

3.5.3 Gambling taxes and levies

A range of gambling activities are subject to State taxes and levies. Total gambling tax and levy collections are estimated to grow by 4.3% in 2015-16, and 4.1% on average over the period 2013-14 to 2018-19.

3.5.4 Land tax

Land tax is levied on the taxable value of the landowner’s aggregated holdings of freehold land owned in Queensland as at midnight on 30 June each year. The principal place of residence is deducted from this value.

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Budget Strategy and Outlook 2015-16

Resident individuals are generally liable for land tax if the total taxable value of the freehold land owned by that person as at 30 June is equal to or greater than $600,000. Companies, trustees and absentees are liable for land tax if the total taxable value of the freehold land owned as at 30 June is equal to or greater than $350,000.

Land tax is estimated to grow by 4.0% to $1.016 billion in 2015-16 reflecting a modest recovery in land values. The three year averaging process dilutes the impact on tax collections which is reflected by the moderate annual growth of 4.0% over the period 2013-14 to 2018-19.

3.5.5 Motor vehicle registration

Motor vehicle registration fees are expected to grow by 4.5% in 2015-16, reflecting an increase in the number of motor vehicles as well as the annual indexation of fees.

3.5.6 Emergency Management Levy

The Emergency Management Levy revenue, which is used to partly offset the costs of emergency management in Queensland, is expected to grow by 5.7% in 2015-16.

3.5.7 Guarantee fees

Guarantee fees are revenues collected by Queensland Treasury Corporation (QTC) on behalf of the State and comprise competitive neutrality fees and credit margin fees. These fees promote competitive neutrality between public sector agencies and those in the private sector, and ensure that the benefits accruing from the financial backing of the State (through QTC) are shared between the borrower and the State.

3.5.8 Other taxes

Other taxes represent revenue from taxes such as the Statutory Insurance Scheme levy and the Nominal Defendant levy.

3.5.9 Tax expenditures

Tax expenditures are reductions in tax revenue that result from the use of the tax system as a policy tool to deliver Government policy objectives. Tax expenditures are provided through a range of concessions, including tax exemptions, reduced tax rates, tax rebates, tax deductions and provisions which defer payment of a tax liability to a future period. Appendix A provides details of tax expenditure arrangements currently provided by the Queensland Government.

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Budget Strategy and Outlook 2015-16

3.6 Queensland’s competitive tax status

Taxation can impact on business decisions regarding investment and employment, and also household investment and home ownership. Maintaining the competitiveness of Queensland’s tax system provides a competitive advantage to business and moderates the tax burden for its citizens, and is therefore fundamental to the Government’s commitment to job creation and sustainable development.

One of the Government’s Fiscal Principles is to maintain competitive taxation by ensuring that General Government Sector own-source revenue remains at or below 8.5% of nominal gross state product (GSP), on average, across the forward estimates. Own-source revenue is derived from total State revenue less any grants received from external sources, mainly the Australian Government.

As Chart 3.8 shows, this principle is expected to be met over the forward estimates period.

Chart 3.8 Own-source revenue¹ as a proportion of nominal GSP

Note:

1. Own-source revenue derived from total revenue less grants revenue.

Source: Queensland Treasury.

As Chart 3.9 shows, taxation per capita in Queensland is significantly lower than the average taxation per capita in the other states and territories. In 2015-16, it is estimated that Queensland’s taxation per capita will be $676 per capita less than the average of other jurisdictions.

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Budget Strategy and Outlook 2015-16

Chart 3.9 Taxation per capita, 2015-16

Sources: 2015-16 Budgets for all jurisdictions. Population data from 2015-16 Commonwealth Budget.

Table 3.4 demonstrates using various measures of tax competitiveness that the Queensland tax system remains amongst the most competitive in Australia.

Queensland’s tax effort, as measured by the Commonwealth Grants Commission, was more than 11% below the national average in 2013-14. A third measure of competitiveness, taxation as a share of gross state product (GSP), also confirms that Queensland’s taxes are competitive with other states.

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Budget Strategy and Outlook 2015-16

Table 3.4 Queensland’s tax competitiveness

	Qld		NSW		Vic.		WA		SA		Tas.4		ACT5		NT4		Avg6
Taxation per capita1($)		2,666		3,626		3,170		3,631		2,659		1,986		3,777		2,500		3,343
Taxation effort2 (%)		88.9		105.5		102.1		98.8		103.8		93.7		96.1		86.8		100.0
Taxation % of GSP3 (%)		3.91		5.14		4.97		3.36		4.34		3.80		3.91		2.50		4.44

Notes:

1. 2015-16 data. Sources: 2015-16 Budget for all jurisdictions. Population data from Commonwealth 2015-16 Budget.

2. 2013-14 data. Source: Commonwealth Grants Commission 2015 Review – total tax revenue effort for assessed taxes (payroll, transfer duty, land tax, insurance duty and motor vehicle taxes). Revenue raising effort ratios, assessed by the Commonwealth Grants Commission, isolate policy impacts from revenue capacity impacts and are an indicator of the extent to which governments burden their revenue bases. Queensland’s tax revenue raising effort is well below the Australian policy standard (equal to 100%).

3. 2015-16 data. Sources: 2015-16 Budget for all jurisdictions. GSP derived using 2013-14 ABS 5220.0 and published GSP growth rates.

4. Low taxation per capita primarily reflects the lower revenue raising capacity of those jurisdictions.

5. Figures include municipal rates.

6. Weighted average of states and territories, excluding Queensland.

3.7 Grants revenue

Grants revenue is comprised of Australian Government grants, grants from the community and industry, and other miscellaneous grants. The growth of $1.183 billion (or 5.1%) in 2015-16 largely reflects the $1.174 billion increase in GST revenue.

Table 3.5 Grants revenue¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Current grants
Australian Government grants		18,841		20,580		21,578
Other grants and contributions		331		382		317
Total current grants		19,172		20,962		21,895
Capital grants
Australian Government grants		2,574		2,398		2,625
Other grants and contributions		9		13		35
Total capital grants		2,583		2,411		2,660
Total grants revenue		21,755		23,373		24,555

Note:

1. Numbers may not add due to rounding.

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Budget Strategy and Outlook 2015-16

3.7.1 Australian Government payments

Australian Government payments to Queensland comprise:

• general purpose payments, consisting of GST revenue grants and associated payments. General purpose payments are ‘untied’ and are used for both recurrent and capital purposes

• payments for specific purposes, including grants for health, schools, skills and workforce development, disabilities and housing. These grants are used to meet Australian Government and shared policy objectives.

Australian Government payments to Queensland in 2015-16 are expected to total $24.203 billion, representing growth of $1.225 billion (or 5.3%) compared to payments in 2014-15. This significant increase is due to growth of $1.174 billion in GST revenue and $227 million in capital grants. Changes made in the 2014-15 Commonwealth Budget to the provision of health and education growth funding have resulted in $18 billion worth of Federal funding cuts that will impact on the Queensland Budget in the outyears of the forward estimates and beyond. These significant cuts were not restored in the 2015-16 Commonwealth Budget.

Table 3.6 Australian Government payments¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
GST revenue grants		10,896		11,816		12,990
Total payments for specific purposes2		10,519		11,162		11,213
Total Australian Government payments		21,415		22,978		24,203

Notes:

1. Numbers may not add due to rounding.

2. Differs from Chapter 6 due to the inclusion of direct Australian Government payments to Queensland agencies for Commonwealth own purpose expenditure.

Chapter 6 provides detailed background on federal-state financial arrangements, including an analysis of Queensland’s share of GST revenue and details of Australian Government payments to Queensland.

GST revenue grants and associated payments

GST revenue grants and associated payments to Queensland in 2015-16 are expected to be $12.990 billion, which represents growth of $1.174 billion on the 2014-15 estimated actual.

GST revenue projections are based on expected growth in economic parameters, such as household consumption and dwelling investment, which have a strong link to the GST base. In the 2015-16 Budget, the Australian Government has increased their estimate for the GST pool by approximately $1.570 billion over the period 2014-15 to 2017-18 since the 2014-15 MYEFO.

The distribution of GST revenues is based on the recommendations of the Commonwealth Grants Commission in accordance with the application of horizontal fiscal equalisation principles.

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Budget Strategy and Outlook 2015-16

Queensland’s share of GST funding (relativity) increased in the 2015 update from the Commonwealth Grants Commission. Chapter 6 provides further detail on Queensland’s expected GST revenue.

Payments for specific purposes

Australian Government payments for specific purposes to Queensland in 2015-16 are estimated at $11.213 billion.

3.7.2 Other grants and contributions

Other grants and contributions are funds received from other state and local government agencies, other bodies and individuals where there is no direct benefit to the provider. Contributions exclude Australian Government grants and user charges. The main sources of contributions are:

• those received from private enterprise and community groups to fund research projects and community services, including the contributions of parents and citizens associations to state schools

• contributed assets and goods and services received for a nominal amount.

Table 3.7 Other grants and contributions

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Other grants and contributions		340		394		352

Revenues will vary from year to year based on the number and size of research projects, assets transferred between the Government and the private sector, and contributed assets and services.

3.8 Sales of goods and services

Sales of goods and services revenue comprises cost recoveries from providing goods or services. Table 3.8 shows a breakdown of the sales of goods and services category.

The Government provides concessions in the form of discounts, rebates and subsidies to improve access to and the affordability of a range of services for individuals or families, based on eligibility criteria relating to factors such as age, income and special needs or disadvantage. Appendix B provides details of the concession arrangements provided by the Queensland Government.

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Budget Strategy and Outlook 2015-16

Table 3.8 Sales of goods and services¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Fee for service activities		2,057		2,207		2,220
Public Transport: South East Queensland		374		384		391
Rent revenue		482		549		536
Sale of land inventory		160		126		112
Hospital fees		718		765		776
Transport and traffic fees		356		376		378
Other sales of goods and services		901		942		1,017
Total sales of goods and services		5,048		5,350		5,430

Note:

1. Numbers may not add due to rounding.

3.8.1 Fee for service activities

Major items of fee for service activities across the General Government Sector include:

• recoverable works carried out by the Department of Transport and Main Roads and the commercialised arm of the department

• fees charged by Technical and Further Education (TAFE) colleges

• fees charged by CITEC to commercial clients for information brokerage services.

3.8.2 Other sales of goods and services

As shown in Table 3.8, there are a variety of other types of sales of goods and services and these are discussed in more detail below:

• Revenues arising from the arrangements associated with South East Queensland integrated ticketing and public transport arrangements, which commenced in July 2004. The Department of Transport and Main Roads collects revenues from the operation of public transport services in South East Queensland to assist in funding public transport services in the region. These revenues are estimated at $391 million in 2015-16.

• Rent revenue is earned on the rent or lease of Government buildings, housing, plant and equipment and car parks. Major items under this category include public housing rentals and rents charged for Government buildings.

• Sale of land inventory includes property transactions where it is a core business of the agency, such as Economic Development Queensland’s role to facilitate land to unlock economic growth opportunities. As such, it is distinct from business as usual transactions undertaken by most Government agencies.

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• Hospital fees are collected by public hospitals for a range of hospital services. Fees include those received from private patients and other third party payers, as well as payments received from the Australian Government Department of Veterans’ Affairs for the treatment of veterans.

• Transport and traffic fees comprise state transport fees, the Traffic Improvement Fee, drivers’ licence fees and various marine licence and registration fees.

• Other sales of goods and services include items such as Title Registration Fees, recreational ship registrations and other licences and permits.

3.9 Interest income

Interest income accounts for 4.6% of total General Government Sector revenue in 2015-16. Interest income is expected to decline, reflecting a reduction in the value of financial assets held as a result of the implementation of the Debt Action Plan (refer to Box 1.1 of Chapter 1 for more detail).

Table 3.9 Interest income

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Interest income		2,460		2,467		2,372

Interest income primarily comprises interest earned on investments including those held for superannuation and insurance purposes.

3.10 Dividend and income tax equivalent income

Dividend and income tax equivalent income account for 4.7% of total General Government Sector revenue in 2015-16. Much of this income would have been lost had the previous Government sold the State’s assets.

Table 3.10 Dividend and income tax equivalent income¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Dividend		1,568		1,752		1,632
Income tax equivalent income		407		658		762
Total dividend and income tax equivalent income2		1,975		2,410		2,395

Notes:

1. Numbers may not add due to rounding.

2. Does not match tables 7.3 and 7.4 in Chapter 7 because it includes dividends and tax equivalents from outside the Public Non-Financial Corporations Sector such as QIC Limited.

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Dividends are received from the State’s equity investments in Public Non-financial Corporations and Public Financial Corporations, for example, the Queensland electricity supply industry, QIC Limited, Queensland Treasury Corporation, port authorities and Queensland Rail. Income tax equivalent income comprises payments by government-owned corporations in lieu of state and Australian Government taxes and levies from which they are exempt. These payments arise from an agreement reached between the Australian Government and state governments in 1994 to establish a process for achieving tax uniformity and competitive neutrality between public sector and private sector trading activities.

Dividends and income tax equivalent income do not represent the full extent of financial arrangements between the Public Non-financial Corporations Sector and the General Government Sector. As discussed in Chapter 7, General Government Sector expenditure on community service obligations and Transport Service Contracts are expected to be over $2 billion in both 2014-15 and 2015-16.

3.11 Other revenue

Other revenue, including royalty revenue, accounts for 6.9% of total General Government Sector revenue in 2015-16.

Table 3.11 Other revenue¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Royalties and land rents		2,537		2,220		2,444
Fines and forfeitures		398		402		484
Revenue not elsewhere classified		716		650		581
Total other revenue		3,650		3,271		3,509

Note:

1. Numbers may not add due to rounding.

3.11.1 Royalties and land rents

Royalty estimates

The State earns royalties from the extraction of coal, base and precious metals, bauxite, petroleum and gas, mineral sands and other minerals and land rents from pastoral holdings, mining and petroleum tenures. Royalties return some of the proceeds of the extraction of non-renewable resources to the community.

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Table 3.12 Royalties and land rents¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million
Coal		1,947		1,610		1,684
Petroleum2		69		51		129
Other royalties3		363		392		463
Land rents		158		167		167
Total royalties and land rents		2,537		2,220		2,444

Notes:

1. Numbers may not add due to rounding.

2. Includes CSG.

3. Includes base and precious metal and other minerals royalties.

Revenue from royalties and land rents in 2014-15 is expected to be $286 million lower than forecast in the 2014-15 MYFER. This weakness is largely due to export coal prices being significantly lower than expected, partially offset by an improvement in the A$-US$ exchange rate.

Royalty and land rent revenue is expected to grow by 10.1% in 2015-16 due to moderate increases in export coal volumes, and the A$ depreciating slightly against the US$. Further, 2015-16 represents the first year with multiple proponents exporting LNG although the low price of oil has offset some of this volume impact.

3.11.2 Fines and forfeitures

The major fines and infringements included in this category are issued by the Department of Transport and Main Roads and Queensland Police Service, incorporating fixed and mobile camera offences, speeding and tolling offences. The expected increase of 20.3% in fines and forfeitures in 2015-16 relates to increased referrals of tolling fines to the State Penalty Enforcement Registry for collection, an increase in failure to vote fines following the State election and the 3.5% increase in the penalty unit.

3.11.3 Revenue not elsewhere classified

The $68 million decrease in 2015-16 includes an expected decline in asset transfers from non-Queensland Government entities and reductions in sundry revenue across a number of departments.

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4 Expenses

Features

• The Government has fully funded its election commitments, totalling $1.975 billion over the forward estimates from departmental savings, reprioritisations, contingencies and revenue measures.

• Total expenses are projected to grow on average by 3.4% over the period 2013-14 to 2018-19 or 4.1% per annum across the forward estimates excluding disaster recovery expenses.

• Interest on General Government Sector borrowings is an estimated $963 million less than projected in the Mid Year Fiscal and Economic Review (MYFER) for the period 2014-15 to 2017-18, largely as a result of the Government’s Debt Action Plan.

• Expenses for 2014-15 are estimated to be $48.615 billion, an increase of 5.4% from 2013-14. The increase is mainly due to growth funding to support ongoing demand for health services, education expenditure for enrolment growth and Australian Government funding for the Students First program and an advance payment of Financial Assistance grants to local governments by the Australian Government in 2014-15.

• Compared to the 2014-15 MYFER, General Government Sector expenses for 2014-15 were $598 million lower, reflecting:

• re-profiling of $320 million of health expenditure as part of the Government’s growth funding package

• changes to the quantity and timing of Natural Disaster Relief and Recovery Arrangements (NDRRA) expenditure of $271 million

• deferral of $124 million of Commonwealth funded expenditure for various National Partnership Agreements (NPs) including Skills Reform and Universal Access to Early Childhood Education.

• In 2015-16, General Government Sector expenses are expected to increase by $1.358 billion (or 2.8%) over the estimated actual for 2014-15. This primarily is a result of increased service delivery including funding to support the ongoing growth in demand for health and education services and deferrals of Commonwealth funding from 2014-15.

• The average growth in employee expenses over the forward estimates period is 4.0%.

• The major areas of expenditure are health and education, which together constitute approximately 52.7% of General Government Sector expenses.

This chapter provides an overview of General Government Sector expenses for the estimated actual for 2014-15, forecasts for the 2015-16 Budget year and projections for 2016-17 to 2018-19. The forward estimates are based on the economic projections outlined in Chapter 2.

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4.1 2014-15 estimated actual

General Government Sector expenses in 2014-15 are estimated to be $48.615 billion, $598 million lower than the 2014-15 MYFER. Downward revisions to other operating expenses and grant expenses are the key contributions to lower overall expenses in 2014-15.

Other operating expenses have declined $478 million from 2014-15 MYFER due in part to:

• the re-profiling of $320 million of health expenditure to be redirected to support Outpatient Waiting Lists strategy

• the deferral of Australian Government NPs including Skills Reform and Universal Access to Early Childhood Education.

Grant expenses are estimated to be $303 million less than 2014-15 MYFER largely reflecting:

• lower than expected natural disaster reimbursements to local governments of $271 million as the extensive program of works in relation to the pre-2015 disasters nears completion and ineligible expenditure is identified

• lower community service obligation payments to Ergon Energy

• offset in part, by the Australian Government’s advance payment of Financial Assistance grants to local governments in 2014-15 for 2015-16 of $225 million.

4.2 2015-16 Budget and outyears

Table 4.1 General Government Sector expenses¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million		2016-17 Projection $ million		2017-18 Projection $ million		2018-19 Projection $ million
Employee expenses		17,817		18,938		19,937		20,567		21,135		21,648
Superannuation interest costs		963		872		803		848		886		898
Other superannuation expenses		2,277		2,359		2,553		2,564		2,554		2,588
Other operating expenses		13,114		14,158		14,980		16,075		16,931		17,451
Depreciation and amortisation		2,946		3,116		3,264		3,443		3,525		3,628
Other interest expenses		2,201		2,265		2,115		1,873		1,914		1,956
Grants expenses		6,796		6,907		6,320		6,414		6,409		6,252
Total Expenses		46,115		48,615		49,973		51,784		53,354		54,421

Note:

1. Numbers may not add due to rounding.

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General Government Sector expenses of $49.973 billion in 2015-16 represent an increase of $1.358 billion (or 2.8%) over the 2014-15 estimated actual. Factors influencing the growth in expenses include:

• growth in funding to Queensland Health through the $2.3 billion Growth Funding package to support growing demand and critical service needs, funding for Sunshine Coast Public University Hospital Transition program and new initiatives including the Outpatient Long Wait Strategy

• growth in education expenditure for student enrolment growth and the impact of increases in Australian Government funding for the Students First program and National Partnership programs for Skills Reform and Universal Access to Early Childhood Education

• expenditure on venues in the lead up to the Commonwealth Games

• costs associated with enterprise bargaining agreements.

4.3 Expenses by operating statement category

As outlined in Chart 4.1, the largest expense categories in the General Government Sector in 2015-16 are employee and superannuation expenses (46.6%), followed by other operating expenses (30.1%) that reflects non-labour costs of service.

Chart 4.1 Expenses by operating statement category, 2015-16¹

Note:

1. Percentages may not add to 100% due to rounding.

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Chart 4.2 compares the 2014-15 estimated actual expenses for each operating statement category with the 2015-16 Budget. Growth in the two largest categories, employee expenses and other operating expenses, is contributing most to growth in 2015-16.

Chart 4.2 Expenses by operating statement category

4.3.1 Employee expenses

Employee expenses include salaries and wages, annual leave, long service leave and redundancy payments.

In 2015-16, employee expenses are expected to be $19.937 billion, $999 million or 5.3% higher than the 2014-15 estimated actual. Much of the increase in employee expenses in 2015-16 is in the key front line service areas of health and education.

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Full time equivalents

Chart 4.3 shows actual Full Time Equivalents (FTEs) from 2003-04 to 2013-14 and estimated FTEs from 2014-15 to 2018-19.

Chart 4.3 Departmental FTEs¹

Note:

1. Does not match Table 4.2 because additional funding for frontline services has not been allocated across specific agencies.

This chart demonstrates the significant impact of the previous Government’s austerity program.

FTEs are expected to grow modestly, at a rate similar to expected State population growth over the period to 2018-19. This largely reflects the Government’s commitment to deliver quality frontline services and public sector job security in a manner that is financially sustainable.

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Table 4.2 shows the total funded FTE positions by department and is consistent with agency Service Delivery Statements. In 2015-16, FTEs are expected to grow by just over 3,000. Eighty per cent of this growth is attributable to frontline services in the areas of health and education.

Table 4.2 Total funded FTE positions by Department^{1, 17}

	2014-15 Adjusted Budget		2014-15 Est. Act		2015-16 Budget
Aboriginal and Torres Strait Islander Partnerships		343		335		341
Agriculture and Fisheries2		2,168		2,168		2,030
Communities, Child Safety and Disability Services		5,937		5,937		5,994
Education and Training3		65,653		66,633		67,641
Electoral Commission of Queensland		52		52		52
Energy and Water Supply		225		207		217
Environment and Heritage Protection		1,026		1,050		1,056
Housing and Public Works4		2,805		2,989		2,915
Infrastructure, Local Government and Planning5		428		444		521
Justice and Attorney-General6,14		8,456		8,726		8,228
Legislative Assembly		473		478		479
National Parks, Sport and Racing7		1,346		1,357		1,371
Natural Resources and Mines		2,440		2,440		2,440
Office of the Governor		44		44		44
Office of the Inspector-General Emergency Management		21		21		21
Office of the Ombudsman		63		63		63
Premier and Cabinet8		849		826		821
Public Safety Business Agency9		2,435		1,994		1,994
Public Service Commission		74		74		86
Queensland Audit Office		190		183		190
Queensland Fire and Emergency Services10		2,941		3,001		3,077
Queensland Health11		72,595		73,982		75,442
Queensland Police Service12		14,029		14,431		14,582
Queensland Treasury13		969		972		1,790
Science, Information Technology and Innovation14		2,861		2,744		2,757
State Development15		585		609		588
The Public Trustee of Queensland		578		567		584
Tourism, Major Events, Small Business and the Commonwealth Games		121		126		130
Transport and Main Roads16		7,290		7,266		7,333
Total		196,997		199,719		202,787

Notes:

1. Explanation of variations in departmental FTEs can be found in the Service Delivery Statements. Departmental totals may include multiple tables from Service Delivery Statements, due to separate FTE tables being provided for Commercialised Business Units.

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2. FTEs for the 2014-15 Budget and estimated actual were nominal thresholds for the department’s budget management purposes. The actual number of occupied positions during this period was less. Following extensive reviews, the 2015-16 staffing budget has now been recalibrated to better reflect the department’s requirements. The budgeted FTE resources will be supported by short term labour hire capacity as required, providing the department with greater flexibility to meet surge, seasonal and emergency response demands across the State. Reductions between 2014-15 estimated actual and Budget also relate to positions transferring to the University of Southern Queensland and funding arrangements for National Cost Sharing having yet to be finalised.

3. Includes TAFE Queensland. The increase between 2014-15 adjusted budget and 2014-15 estimated actual primarily relates to state schools utilising the additional Australian Government Students First funding to employ more teachers and support. Also contributing are increases associated with Early Childhood Education and Care (ECEC) and reflects the department’s increased focus on regional frontline services to the ECEC sector and families, and working with schools to support children’s successful transitions into Prep. The increase in the 2015-16 Budget is mainly related to the impact of election commitments for the first year of an additional 875 teachers and 45 guidance officers over 3 years and forecast school enrolment growth.

4. Variance between 2014-15 adjusted budget and 2014-15 estimated actual is mainly due to the deferral in outsourcing of the tenancy and maintenance function in Logan City until 2015-16, a number of Procurement Transformation projects finishing in 2014-15, and the planned transition of some apprentices and field staff to the private sector no longer progressing. Variance between 2014-15 estimated actual and 2015-16 Budget is mainly due to a number of apprentices completing their training in 2015-16, as well as the outsourcing of the tenancy and maintenance function in Logan City in 2015-16.

5. Represents the transfer of Planning and Infrastructure functions from the Department of State Development on 1 March 2015. In addition, Building Queensland has been established to provide independent, expert advice on infrastructure priorities. In addition, the Government has provided additional funding to the department to deliver a better planning system.

6. Variance between 2014-15 adjusted budget and 2014-15 estimated actual is mainly due to the establishment of the Commission of Inquiry into Organised Crime, reinstating the Sentencing Advisory Council, the departmental response to Domestic and Family Violence, additional staff to accommodate growth of youths and prisoners in detention, and to commission and operate additional prison capacity. The decrease in the 2015-16 Budget is due to the Office of Industrial Relations being transferred to Queensland Treasury from 1 July 2015. This is partly offset by the reinstatement of the Courts and Youth Justice Conferencing diversionary process, additional staff to accommodate growth in prisoner numbers and to commission and operate additional prison capacity.

7. The increase in the 2014-15 estimated actual is mainly due to the Queensland Greyhound Racing Industry Commission of Inquiry, staff employed on the Nest to Ocean program and filling of vacancies within Sport and Recreation. The increase in 2015-16 Budget is due to staff required for managing newly acquired National Park estate as well as Cape York Peninsula Aboriginal Land National Parks.

8. Reduction is mainly due to fewer support staff required as a result of the reduction in the number of Ministerial Offices.

9. The decrease in the 2014-15 estimated actual is due to police officers being seconded from, and included in the numbers for, the Queensland Police Service.

10. Increase largely to due to expansion in the number of district (Area) offices.

11. This represents Health Consolidated, which consolidates Queensland Health controlled, the Queensland Ambulance Service and the Hospital and Health Services (HHSs). The 2015-16 Budget for HHSs may change due to updates to the 2015-16 Service Agreement throughout the financial year. Variations between 2014-15 adjusted budget and 2014-15 estimated actual are mainly due to commissioning of new services and additional activity purchased from HHSs through amendments to the 2014-15 Service Agreements. Increases in FTEs for the 2015-16 Budget reflect commissioning of new services, additional activity purchased from HHSs and election commitments.

12. Relates to increases in projected recruit numbers and police officers being seconded from the Public Safety Business Agency.

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13. The increase in the 2015-16 Budget relates to the transfer of the Office of Industrial Relations (formerly Office of Fair and Safe Work Queensland) transferring from Justice and Attorney-General on 1 July 2015, the filling of vacancies and graduate intakes.

14. Reduction in 2014-15 estimated actual is mainly due to a reduction in staff delivering externally funded projects and increased efficiencies due to automation and process improvements.

15. Includes the transfer of planning and infrastructure functions to the Department of Infrastructure, Local Government and Planning on 1 March 2015. The increase in the 2014-15 estimated actual and subsequent decrease in 2015-16 Budget is due to temporary staff engaged for Commonwealth Games venue projects and other high priority projects.

16. The forecasted increase in 2015-16 Budget is due to RoadTek accommodating apprentices and trainees into the workforce and continuing to reduce long term reliance on labour hire and transitioning temporary resources to support maintenance delivery.

17. The estimate of 195,612 FTEs in Table 4.2 of the published 2014-15 Budget did not include approximately 1,500 lower than shown in this table because certain smaller departments. The additional departments are the Electoral Commission, Legislative Assembly, Office of the Governor, Office of the Inspector-General Emergency Management, Office of the Ombudsman, Public Service Commission, Queensland Audit Office, and The Public Trustee.

4.3.2 Superannuation expenses

The superannuation interest cost represents the imputed interest on the Government’s accruing defined benefit superannuation liabilities.

In determining the State’s defined benefit superannuation liabilities, AASB 119 Employee Benefits requires the discounting of future benefit obligations using yield rates on Government bonds net of investment tax. Interest costs are calculated on a net liability approach by applying the discount rate to both the gross liability and superannuation plan assets.

In 2015-16, superannuation interest costs are projected to decrease by $69 million over the estimated actual to $803 million due to the lower estimated actuarial valuation of superannuation liabilities as at 30 June 2015. The defined benefit scheme, which is closed to new members and subject to interest rate fluctuations, will decline over time as members leave.

Other superannuation expenses represent employer superannuation contributions to accumulation superannuation and the current service cost of the State’s defined benefit obligation (or the increase in the present value of the defined benefit obligation resulting from employee service in the current period).

The Government’s decision to suspend future investment in the over-funded defined benefit superannuation scheme will not impact on employee entitlements. Accordingly, these expenses are not impacted by the investment suspension.

4.3.3 Other operating expenses

Other operating expenses comprise the non-labour costs of providing goods and services, including services to government and non-government organisations, repairs and maintenance, consultancies, contractors, electricity, communications and marketing.

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Other operating expenses have decreased $478 million from the 2014-15 MYFER mainly as a result of Queensland Health’s estimated $320 million re-profiling and deferrals of Australian Government National Partnership programs for education, including Skills Reform.

In 2015-16, other operating expenses are expected to be $14.980 billion, an increase of $822 million or 5.8% over the 2014-15 estimated actual. Significant movements from the 2014-15 estimated actual outcome are due to:

• health growth funding for frontline services and new initiatives including Outpatient Long Wait Reduction Strategy

• anticipated student enrolment growth, and the impact of increases in Australian Government funding for the Students First program and National Partnership programs (including deferrals) for Skills Reform and completion of the Fixing Our Schools program

• introduction of Skilling Queenslanders for Work and Jobs Queensland initiatives

• expenses for Commonwealth Games venues

• increased funding for child protection and family and parenting support systems and disability services, including preparing Queensland for the National Disability Insurance Scheme.

4.3.4 Depreciation and amortisation

Depreciation and amortisation expense is an estimate of the progressive consumption of the State’s assets through normal usage, wear and tear and obsolescence. Growth in this expense category primarily reflects asset revaluations and the size of the State’s capital program.

4.3.5 Other interest expenses

Other interest expenses include interest paid on borrowings to acquire capital assets and infrastructure such as roads and government buildings.

In 2015-16, the General Government Sector has total debt servicing costs forecast at $2.115 billion, a decrease of 6.6% over the 2014-15 estimated actual.

Interest expenses are expected to be an estimated $963 million less than projected in the MYFER for the period 2014-15 to 2017-18 due to the implementation of the Government’s Debt Action Plan. Details of the Government’s Debt Action Plan can be found in Chapter 1 - Fiscal Strategy and Outlook.

4.3.6 Grants expenses

Current grants include grants and subsidies to the community (such as schools, hospitals, benevolent institutions and local governments) and personal benefit payments. Community service obligations (CSOs) are provided where Public Non-financial Corporations (PNFCs) are required to provide non-commercial services or services at non-commercial prices for the benefit of the community (for further details refer Chapter 7).

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Grant expenses have decreased $303 million from the 2014-15 MYFER as a result of the timing of NDRRA payments to local councils, lower CSO payments to Ergon Energy and lower levels of Australian Government grant assistance to non-state schools, offset in part by the Australian Government’s advance payment of Financial Assistance grants to local governments in 2014-15 for 2015-16.

Table 4.3 provides a breakdown of grants by category and recipient type.

Table 4.3 Grant expenses¹

	2014-15 Est. Act. $ million		2015-16 Budget $ million
Current
Grants to local government		858		404
Grants to private and not-for-profit organisations
State funding for non-state schools		694		757
Australian Government funding for non-state schools		2,107		2,249
Other		809		599
Grants to other sectors of government
Community service obligations to PNFCs		640		444
Other payments to PNFCs		24		23
Other		4		4
Other		208		283
Total current transfers		5,345		4,764
Capital
Grants to local government		1,004		829
Grants to private and not-for-profit organisations		427		566
Payments to PNFCs		13		25
First Home Owner Grant schemes		95		92
Other		22		44
Total capital transfers		1,561		1,556
Total current and capital transfers		6,907		6,320

Note:

1. Numbers may not add due to rounding.

Current grants are estimated to decrease by $581 million in 2015-16. This decrease is due to lower CSO payments to Ergon Energy under the Uniform Tariff Policy, the Australian Government’s advance payment of Financial Assistance grants to local governments in 2014-15 in relation to the 2015-16 financial year (thereby reducing 2015-16) and other grants to private and not-for-profit organisations. These reductions are partly offset by increases in State and Australian Government funding for non-state schools.

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Capital transfers represent grants to PNFCs, local governments, not-for-profit institutions and other non-government entities, such as businesses and households (including the Great Start Grant) for capital purposes.

Capital grants are estimated to decrease $5 million to $1.556 billion in 2015-16. The decline in capital grants to local government is largely represented by re-profiling natural disaster grants to local governments for the rebuilding of roads, bridges and transport infrastructure related to pre-2015 natural disaster events. This finalisation of natural disaster payments has been mainly offset by the Government’s new Building Our Regions initiative and higher level of expenditure for the Royalties for Regions program (fourth and final round).

4.4 Operating expenses by purpose

Chart 4.4 indicates the proportion of expenditure by major purpose classification for the 2015-16 Budget. Health accounts for the largest share of expenses (28.5%) followed by Education (24.2%).

Chart 4.4 General Government Sector expenses by purpose, 2015-16

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4.5 Departmental expenses

Data presented in Tables 4.4 and 4.5 provide a summary drawn from financial statements contained in the Service Delivery Statements (SDS). Further information on the composition of expenses, outputs delivered and factors influencing the movement in expenses can also be obtained from the SDS.

Table 4.4 Departmental controlled expense^{1, 2}

	Notes		2014-15 Budget $ 000		2014-15 Est. Act. $ 000		2015-16 Budget $ 000
Aboriginal and Torres Strait Islander Partnerships		3, 5		154,284		118,303		118,719
Agriculture and Fisheries		6		408,579		426,524		437,986
Communities, Child Safety and Disability Services		3, 7		2,521,217		2,563,177		2,684,004
Education and Training		8		8,552,849		8,327,596		9,003,741
Electoral Commission of Queensland		9		54,124		54,317		39,640
Energy and Water Supply		10		50,729		46,029		50,087
Environment and Heritage Protection		11		175,034		176,684		207,651
Health Consolidated		4, 12		13,621,951		13,560,255		14,182,562
Housing and Public Works		3, 13		1,851,318		1,737,534		1,777,427
Inspector General Emergency Management				4,495		4,504		4,607
Infrastructure, Local Government and Planning		3, 14		223,380		196,841		318,350
Justice and Attorney-General		3, 15		1,436,188		1,448,574		1,386,142
Legislative Assembly		16		86,484		89,195		86,093
National Parks, Sport and Racing		17		420,049		335,200		404,318
Natural Resources and Mines		18		450,002		439,345		449,187
Office of the Governor				6,263		6,148		6,575
Office of the Ombudsman				8,602		8,350		8,719
Premier and Cabinet		3, 19		166,319		169,570		239,347
Public Safety Business Agency		20		610,265		621,289		680,760
Public Service Commission				17,025		17,107		17,762
Queensland Audit Office		21		38,372		42,922		42,704
Queensland Fire and Emergency Services		22		620,024		616,561		647,682
Queensland Police Service		23		2,070,324		2,046,282		2,084,895
Queensland Treasury		3, 24		203,033		241,940		330,415
Science, Information Technology and Innovation		3, 25		408,355		421,825		390,300
State Development		3, 26		396,264		251,701		620,138
The Public Trustee of Queensland				87,705		81,207		84,723
Tourism, Major Events, Small Business and the Commonwealth Games		27		107,441		52,015		205,186
Transport and Main Roads		28		5,390,333		5,388,419		5,482,261
Total expenses				40,141,008		39,489,414		41,991,981

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Notes:

1. Total expenses by department does not equate to total General Government Sector expenses in Uniform Presentation Framework (UPF) terms reported elsewhere in the Budget Papers as General Government Sector expenses include a wider range of entities including State Government statutory authorities. In addition transactions eliminated between entities within the General Government Sector are excluded in the preparation of whole-of-government UPF financial statements.

2. Full explanation of variations in departmental controlled expenses can be found in the SDS. A summary of major variances is provided below.

3. 2014-15 Budget figures have been adjusted to reflect machinery-of-government changes.

4. This represents Health Consolidated in the Service Delivery Statement, which consolidates Queensland Health controlled and the Hospital and Health Services.

5. The decrease from the 2014-15 Budget to the 2014-15 estimated Actual relates to the timing of land and infrastructure-related works undertaken by the department under the National Partnership Agreement on Remote Indigenous Housing (NPARIH).

6. The increase from 2014-15 Budget to 2014-15 estimated actual is principally due to additional expenses for pest and disease emergency responses during 2014-15, increased expenses for research and development projects, and increased expenses in relation to Drought Relief Assistance Scheme Payments. This is partially offset by a reduction in expenses due to the deferral of funding from 2014-15 to 2015-16 to realign with anticipated expenditure.

7. The increase from 2014-15 Budget to 2014-15 estimated actual is mainly due to Commonwealth revenue for the National Partnership Agreement (NPA) for pay equity for the social and community services sector (SACS) being received in 2012-13 and 2013-14 and spent in 2014-15; additional funding transferred from the Department of Housing and Public Works for Youth Housing and Reintegration and Post Care Support programs; and the repurposing of prior years’ grant refunds, received from non-government organisations through the annual acquittal process, to respond to disability and child safety demand pressures. The increase from 2014-15 estimated actual to 2015-16 Budget is primarily due to population growth and indexation funding to meet increased demand for services and cost pressures; increased expenditure on National Disability Insurance Scheme related activity and to continue implementing the child and family reforms (Stronger Families – the Government’s response to the recommendations of the Queensland Child Protection Commission of Inquiry); Commonwealth revenue relating to the NPA for pay equity for SACS; and new funding provided as part of the 2015-16 Budget for parenting support programs, the Alcohol Fuelled Violence Program, an extension of existing drought relief arrangements, and multicultural initiatives.

8. The decrease from 2014-15 Budget to 2014-15 estimated actual is partly due to deferrals of funding for various Australian Government National Partnership Agreement payments, with the remaining difference mainly due to lower actual expenditure incurred by state schools and delays in delivery of numerous minor programs. The increase from 2014-15 estimated actual to 2015-16 Budget is mainly due to expenses associated with student enrolment growth, new education and training initiatives, and increases in employee expenses attributable to Enterprise Bargaining Arrangements.

9. The expenditure profile reflects election activity, including the 2015 State Election and 2016 local government quadrennial elections.

10. The decrease from the 2014-15 Budget to the 2014-15 estimated actual include the lapse of $3.3 million due to finalisation of the Dam Spillway Upgrade Program, plus energy related deferrals of $2.9 million to fund the Government’s election commitments relating to renewable energy initiatives. The deferred funding will now be directed towards the Government’s solar and other renewable initiatives in 2015-16. In addition, funds for a consumer education campaign ($3.3 million) related to the reform of SEQ electricity tariffs will now be expended in 2015-16 rather than 2014-15 following the Government’s decision to delay the reform by one year.

11. The increase from the 2014-15 Budget and 2014-15 estimated actual to 2015-16 Budget reflects new funding for Saving the Great Barrier Reef and Climate Change Adaptation initiatives; additional funding for underground coal gasification investigations, the NatureAssist program, wildlife management activities and environmental impact assessments; and the impact of the deferral of funding from 2014-15 to 2015-16.

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12. The decrease in expenditure from the 2014-15 Budget to the 2014-15 estimated actual mainly relates to the deferral of a Queensland Health surplus across the forward estimates partly offset by equity to output swaps for capital items that are required to be expensed under the accounting standards. The increase from the 2014-15 estimate actual to the 2015-16 Budget mainly relates to existing enterprising bargaining costs, the More Beds for Hospitals program, election commitments and growth funding to support ongoing increases in demand for health and ambulance services offset by a decrease in Commonwealth funding due to expired National Partnership Agreements.

13. The decrease in 2014-15 estimated actual is mainly due to the deferral of funding for various Indigenous housing programs including the Indigenous Rural and Remote, Indigenous Community Housing Organisations and Deed of Grants in Trust (DOGIT) programs; the transfer of expenses from capital grants to capital works for the DOGIT program; and the deferral of funding for some Public Works programs, in particular the Office Accommodation program and ICT projects. The increase between the 2014-15 estimated actual and the 2015-16 Budget is driven primarily by increased expenditure on grants under the renewed two year National Partnership Agreement on Homelessness commencing in 2015-16 and increased costs associated with the re-instatement of the Tenant Advisory and Advocacy Service.

14. The decrease from the 2014-15 Budget to the 2014-15 estimated actual is primarily due to the deferral of funding for the Royalties for the Region program (due to delays in round four projects commencing), the Torres Strait Major infrastructure program, Local Government capacity building programs and flood studies. This is partially offset by increased recurrent expenditure on the Commonwealth Games Athletes Village as a result of a revised funding profile across the forward estimates following the finalisation of a development agreement. The increase between the 2014-15 estimated actual and the 2015-16 Budget is primarily due to new funding for the establishment of the Community Resilience Fund and Building Queensland; increased funding to deliver a better planning system for Queensland; increased expenditure on the Commonwealth Games Athletes Village; and machinery-of-government changes. This is partially offset by decreased funding for the Natural Disaster Resilience program.

15. The increase from 2014-15 Budget to 2014-15 estimated actual reflects additional funding to accommodate growth in prisoner and young offender numbers, depreciation and the Commission of Inquiry into Organised Crime. The decrease in funding from 2014-15 estimated actual to 2015-16 Budget is mainly due to the machinery-of-government transfer of the Office of Fair and Safe Work Queensland from the Department of Justice and Attorney-General to Queensland Treasury in July 2015, finalisation of the revitalisation program for the Registry of Births, Deaths and Marriages, the whole-of-Government reprioritisation program, partially offset by additional funding provided to accommodate growth in young offender and prisoner numbers, wage costs and Budget measures.

16. The increase from 2014-15 Budget to 2014-15 estimated actual is largely due to additional one-off expenses related to the January 2015 State election, including transition allowances for departing Members and Electorate Officer severance payments. The decrease in expenses in the 2015-16 Budget reflects the impact of these one-off expenses in 2014-15 as well as the savings from the reduction in the number of Ministers and Assistant Ministers ($1.909 million ongoing from 2015-16).

17. The decrease from the 2014-15 Budget to the 2014-15 estimated actual and the increase from the 2014-15 Est. Actual to the 2015-16 Budget mainly relate to the timing of expenditure under major grant programs, including Sport and Recreation grant programs, the Racing Industry Capital Development Scheme and the Racing Infrastructure Fund.

18. The decrease in the 2014-15 Est. Actual is mainly due to revised estimates for Australian Government programs such as the Water for the Future and Murray Darling Basin programs and the timing of payments for various other programs.

19. The increase from 2014-15 estimated actual and 2015-16 Budget is primarily related to the machinery-of-government transfer of Arts Queensland to the Department of the Premier and Cabinet. Expenditure related to the transfer includes an increase in grants and subsidies primarily due to restoration of arts grant funding and the additional funding for the Visual Arts and Crafts Strategy, Backing Indigenous Arts and Queensland Art Gallery exhibitions, and an increase in depreciation and amortisation primarily due to the funding realignment of Cultural Precinct non-land assets to match annual depreciation expense. Further departmental expenditure includes activities focussed upon reducing Domestic and Family Violence and impending Cultural Precinct capital maintenance works. Expenditure is partially offset by the completion of G20 activities, Queensland Health Renewal Taskforce and Our Community Newsletter.

20. The increase in the 2014-15 estimated actual expenses over budget reflects the finalisation of the machinery-of-government transfer of corporate services from the Queensland Police Service (QPS), partly offset by project deferrals, including the human resource and payroll systems replacement project. The spike in 2015-16 expenses reflects expenditure on major projects including for QPS mobile services and capital works, improved safety equipment, and the machinery-of-government transfer of the community helicopter providers from Queensland Health.

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21. Increase from 2014-15 Budget to 2014-15 estimated actual is mainly due to underestimation of contracted-out audit work for 2014-15 Budget. Decrease from 2014-15 estimated Actual to 2015-16 Budget mainly reflects lower contracting and travel expenses, partly offset by increases in employee expenses due to Enterprise Bargaining Arrangements.

22. The decrease in 2014-15 estimated actual relative to 2014-15 Budget reflects lower than expected supplier expenses including on motor vehicle and property repairs and maintenance, operational equipment, professional services and contractor expense, communications and marketing. The increase in 2015-16 Budget reflects expected increases in employee and supplier expenses including for property repairs and to address critical digital communications requirements; and continuation of projects related to cultural change and the Police and Community Safety Review.

23. The decrease in 2014-15 estimated actual relative to the 2014-15 Budget is due to the finalisation of the machinery-of-government transfer of corporate functions to the Public Safety Business Agency, as well as the deferral of expenditure related to several projects budgeted for 2014-15 including Telecommunications Interception System Upgrade, ICT and Mobile Services. The increase from 2014-15 estimated actual to 2015-16 Budget reflects additional funding for police growth (266 new police officers in 2015-16), wage increases and additional resources for targeting organised crime, partly offset by finalisation of the G20 operation. In addition, rescheduling of Telecommunications Interception System Upgrade, ICT and Mobile Service programs also boosts 2015-16 expenditure.

24. The increase from the 2014-15 Budget to the 2014-15 estimated actual primarily relates to payment to Queensland Treasury Corporation to compensate for costs incurred during the preparation of assets for lease or sale under the direction of the former State Government. The increase from the 2014-15 estimated Actual to the 2015-16 Budget is due to the machinery-of-government transfer of the Office of Fair and Safe Work Queensland from the Department of Justice and Attorney-General to Queensland Treasury in July 2015.

25. The decrease from the 2014-15 estimated actual to 2015-16 Budget is mainly due to the impact of the Machinery-of-government transfer of Arts Queensland to the Department of the Premier and Cabinet in February 2015.

26. The decrease in the 2014-15 estimated actual relates to the deferral of approximately $40 million in funding to 2015-16 high priority projects (including the Mission Beach Safe Boating Infrastructure Project, the Bundaberg Gas Pipeline and Great Barrier Reef Ports Reform activities) and the transfer of Royalties for Regions funding to Transport and Main Roads and Infrastructure, Local Government and Planning. The increase in 2015-16 Budget relates to new funding for the Building our Regions program and Townsville Stadium; increased expenditure on Commonwealth Games Venue projects; the deferral of projects from 2014-15; and higher expenditure under Round 4 of the Royalties for the Regions program.

27. The decrease in expenditure from the 2014-15 Budget to the 2014-15 estimated actual is primarily due to the deferral of funding to 2015-16 to match the timing of anticipated expenditure on venues for the Gold Coast 2018 Commonwealth Games. The increase from 2014-15 estimated actual to 2015-16 Budget is almost entirely due to the increase in planned expenditure associated with the delivery of venues for the Gold Coast 2018 Commonwealth Games.

28. The increase in expenses in 2015-16 Budget mainly reflects increased expenditure under the Transport Service Contract with Queensland Rail, expenditure on the Lawnton to Petrie rail line project, and increases in road operations and maintenance costs. This is partially offset by decreases in expenditure on regional freight and livestock contracts.

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Table 4.5 Departmental administered expense^{1, 2}

	Notes		2014-15 Budget $ 000		2014-15 Est. Act. $ 000		2015-16 Budget $ 000
Aboriginal and Torres Strait Islander Partnerships		4		8,100		9,974		9,935
Agriculture and Fisheries		5		9,395		11,868		11,305
Communities, Child Safety and Disability Services		6		239,631		257,061		253,949
Education and Training		7		3,083,848		3,021,234		3,108,900
Energy and Water Supply		8		711,303		654,226		465,849
Health Consolidated				33,910		33,934		33,548
Housing and Public Works		9		3,452		8,061		3,468
Infrastructure, Local Government and Planning		3, 10		2,308,584		1,479,475		1,163,549
Justice and Attorney-General		11		308,257		296,744		313,987
National Parks, Sport and Racing		12		26,811		26,715		41,754
Natural Resources and Mines				51,625		51,625		51,625
Premier and Cabinet		3, 13		74,336		64,890		126,420
Queensland Treasury		14		6,500,940		6,397,817		6,305,214
Science, Information Technology and Innovation		3, 15		131,942		123,949		80,117
State Development		3, 16		27,433		27,433		2,500
The Public Trustee of Queensland				—		850		438
Tourism, Major Events, Small Business and the Commonwealth Games		17		119,393		127,662		170,386
Total expenses				13,638,960		12,593,518		12,142,944

Notes:

1. Total expenses by department does not equate to total General Government Sector expenses in Uniform Presentation Framework (UPF) terms reported elsewhere in the Budget Papers as General Government Sector expenses include a wider range of entities including State Government statutory authorities. In addition transactions eliminated between entities within the General Government Sector (for example payroll tax payments) are excluded in the preparation of whole-of-Government UPF financial statements.

2. Full explanation of variations in departmental administered expenses can be found in the SDS. A summary of major variances is provided below.

3. 2014-15 Budget figures have been adjusted to reflect machinery-of-government changes.

4. The increase in 2014-15 estimated actual reflects additional funding provided for the Western Cape Communities Trust under the Western Cape Communities Co-existence agreement and additional funding provided to the Family Responsibilities Commission for the expansion into Doomadgee during 2014-15.

5. The increase from 2014-15 Budget to 2014-15 estimated actual reflects the additional funding towards supporting service delivery for the Queensland Agricultural Training Colleges.

6. The increase from 2014-15 Budget to 2014-15 estimated actual is largely due to the recognition of expenditure incurred relating to natural disasters in 2013-14 and 2014-15. The decrease in the 2015-16 Budget is due to the winding down of spending on natural disasters and an increase in concessions due to growth and indexation.

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7. The decrease in administered expenditure from 2014-15 Budget to 2014-15 estimated actual is mainly due to an adjustment in expenses relating to the Central Queensland TAFE/Central Queensland University merger and lower expenses due to a decrease in Australian Government Students First funding. The increase from 2014-15 Budget to 2015-16 Budget is mainly due to increased Australian Government funding for non-government schools reflecting enrolment growth and indexation of per student funding, and the introduction of the Non-State Schools Capital Grants program.

8. Decreases in the 2014-15 estimated actual and the 2015-16 Budget are attributable to reduced expenditure required for the Government’s Uniform Tariff Policy. The large reduction in the 2015-16 requirement follows recent determinations by the Australian Energy Regulator, which have reduced allowable revenues of Ergon Energy by more than those of Energex. The decrease is also affected by the cessation of a smaller ($30 million) community service obligation payment to Energex, which was paid in 2014-15.

9. The increase in the 2014-15 estimated actual primarily reflects the cost of severance payments made to Building and Asset Services following the amalgamation of the former QBuild and Project Services Commercialised Business Units. This also explains the reduction in expenditure in the 2015-16 Budget.

10. The decrease in the 2014-15 estimated actual primarily relates to funding for the Queensland Reconstruction Authority and is due to a change in the profile of reconstruction expenditure by agencies.

11. The decrease from 2014-15 Budget to 2014-15 estimated actual relates to a realignment of the former Safe Night Out Strategy (to be replaced by the new Alcohol Fuelled Violence Program) and lower benefit payments under the victims of crime financial assistance and compensation scheme. The increase in 2015-16 Budget is primarily due to the funding profile under the National Partnership Agreement on Legal Assistance Services for Community Legal Centres, indexation for Gambling Community Benefit Fund grants, enterprise bargaining for statutory bodies and the new Domestic Violence Duty Lawyer Service.

12. The increase in the 2015-16 Budget relates to a capital grant payment to Stadiums Queensland towards the construction of a state netball facility.

13. The reduction in expenditure between 2014-15 Budget and 2014-15 estimated actual primarily relates to a decrease in Employee expenses and Supplies and Services in relation to the Government’s election commitment to reduce the number of Ministers and Ministerial Offices. The increase in expenditure from 2014-15 estimated actual to 2015-16 Budget primarily relates to an increase in grants and subsidies due to the machinery-of-government transfer of Arts Queensland to the Department of the Premier and Cabinet. Further expenditure relates to additional funding provided to statutory bodies for Enterprise Bargaining arrangements as well as to Queensland Family and Child Commission to develop a Customer Services Directory, Workforce Strategy, public education, an evaluation framework and a new records management system; Queensland Performing Arts Trust for the Out of the Box Festival; and to Screen Queensland.

14. The decrease in 2014-15 estimated actual largely relates to a decrease in borrowing costs due to lower than budgeted borrowings in 2013-14 which reduced the opening stock of borrowing for 2014-15. Additionally, new borrowings were lower than budgeted due to the improved operating position and lower capital purchases by the State. The decrease in 2015-16 Budget is largely due to the impact of the Government’s Debt Action Plan which is reflected in lower borrowing costs.

15. The decrease in expenditure from 2014-15 Budget to 2014-15 estimated actual is largely due to Queensland Shared Services (QSS) deferrals, a reduction in subsidy to account for payroll tax exemption for QSS and the transfer of Chief Technology Officer funding and functions to the Department from CITEC. The decrease in 2015-16 Budget relates mainly to the full year impact of the machinery-of-government transfer of Arts statutory bodies to Department of the Premier and Cabinet in February 2015 and a reduction in subsidies to QSS.

16. The decrease in 2015-16 Budget relates to funding for the management and operation of South Bank and Roma Street Parklands transferring to the Department of Infrastructure, Local Government and Planning as part of machinery-of-government changes.

17. The increase from 2014-15 Budget to 2014-15 estimated actual is the result of a deferral of funds by Tourism and Events Queensland (TEQ) from 2013-14 to 2014-15 which occurred after the publication of TEQ’s 2014-15 Budget. The increase from 2014-15 Est. Actual to 2015-16 Budget principally relates to an increase in grants to the Gold Coast 2018 Commonwealth Games Corporation for expenditure associated with event planning and preparation for the Gold Coast 2018 Commonwealth Games. Increased funding of $128.3 million over four years has been provided to TEQ to restore its funding and provide it with Budget certainty.

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Table 4.6 reconciles the departmental expenses set out above with General Government Sector total expenses.

Table 4.6 Reconciliation of departmental to UPF expenses¹

	2014-15 Est. Act. $ million			2015-16 Budget $ million
Departmental expenses per Service Delivery Statements
- Controlled (Table 4.4)		39,489			41,992
- Administered (Table 4.5)		12,594			12,143
Non-UPF departmental expenses and whole-of-Government schemes2		(4,078	)		(4,009	)
Other General Government entities (e.g. CBUs, SSPs, Statutory Bodies)		5,084			4,413
		53,089			54,540
Superannuation Interest cost		872			803
Eliminations and Other whole-of-Government adjustments
Elimination of payments to CBUs and SSPs		(2,795	)		(2,590	)
Other eliminations and adjustments		(2,551	)		(2,779	)
Total General Government UPF expenses		48,615			49,973

Notes:

1. Numbers may not add due to rounding and bracketed numbers represent negative amounts.

2. Certain expenses such as asset valuation changes are excluded from UPF reporting. In addition, this item removes the effect of cash payments for whole-of-government schemes such as the State’s share of superannuation beneficiary payments reported in Treasury Administered’s expenses. Costs associated with these schemes are accrued annually.

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5 Balance sheet and cash flows

Features

• The Government’s Debt Action Plan will reduce General Government Sector debt by approximately $7.5 billion in 2015-16, compared to the level of debt in the absence of measures. Further reductions across the forward estimates result in a debt reduction of $9.6 billion by 2017-18.

• This is the first budget since 1999-2000 that has projected a reduction in General Government Sector borrowings across the forward estimates, such that debt will be lower in 2018-19 than it was in 2014-15.

• General Government Sector debt, which incorporates the impact of the Debt Action Plan, as well as all other budget movements, is expected to fall from $43.268 billion in 2014-15 to $39.532 billion in 2017-18. This is $7.5 billion lower than the projection for 2017-18 at the time of the 2014-15 Mid Year Fiscal and Economic Review (MYFER) and $8.9 billion lower than projected in the 2014-15 Budget.

• Due to measures being implemented by the current Government refocusing the balance sheet to lower debt, Non-Financial Public (NFP) Sector debt by 2017-18 is projected to be $4.951 billion lower than the original 2014-15 Budget projections under the previous Government.

• In 2015-16, budgeted General Government Sector borrowings of $38.151 billion will be $7.946 billion lower than anticipated at 2014-15 MYFER. Meanwhile, budgeted NFP Sector borrowings will be around $4 billion lower as a direct result of the Government’s Debt Action Plan.

• Over 80% of General Government Sector capital purchases of $4.987 billion estimated for 2014-15 will be funded by operating cash flows. Over the period 2014-15 to 2018-19 around 87% of General Government Sector capital purchases are forecast to be funded by operating cash flows. This is consistent with the Government’s key fiscal principles of primarily funding capital from recurrent revenue, rather than borrowing.

5.1 Context

The balance sheet shows the projected assets, liabilities and net worth of the General Government Sector as at 30 June each financial year. It is important for the Government to maintain a strong balance sheet to provide it with the stability, flexibility and capacity to deal with emerging financial and economic pressures, and to provide a strong foundation for future economic growth.

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The Review of State Finances document, released concurrently with the 2015-16 Budget, has confirmed the need for the Government to have the capacity to respond to market and environmental shocks. The Government recognises that this capacity is restricted where there are high levels of General Government Sector debt. The Review of State Finances, and the resultant Debt Action Plan, will see General Government Sector debt reduce substantially over the forward estimates while retaining government-owned corporations in public hands.

5.2 Balance sheet

Table 5.1 provides a summary of the key balance sheet aggregates for the General Government Sector.

Table 5.1 General Government Sector: summary of budgeted balance sheet¹

	2014-15 Budget2 $ million			2014-15 Est. Act. $ million			2015-16 Budget $ million			2016-17 Projection $ million			2017-18 Projection $ million			2018-19 Projection $ million
Financial assets		66,962			67,920			61,798			61,965			62,096			62,397
Non-financial assets		197,556			183,503			187,058			191,285			195,428			199,034
Total assets3		264,518			251,423			248,856			253,250			257,525			261,431
Borrowings, advances and deposits		48,685			43,911			38,833			39,495			40,204			41,354
Superannuation liability		23,641			25,744			24,278			22,672			21,298			20,003
Other provisions and liabilities		13,101			11,760			12,044			12,495			12,893			13,308
Total liabilities		85,428			81,415			75,155			74,663			74,395			74,665
Net worth		179,091			170,007			173,701			178,588			183,130			186,766
Net financial worth		(18,466	)		(13,496	)		(13,357	)		(12,697	)		(12,299	)		(12,268	)
Net financial liabilities		43,495			35,891			35,885			35,654			35,611			36,174
Net debt		10,942			6,056			3,910			4,405			5,074			6,307

Notes:

1. Numbers may not add due to rounding and bracketed numbers represent negative numbers.

2. Numbers have been restated where subsequent changes in classification have occurred.

3. For UPF purposes, the State’s assets are classified as either financial or non-financial assets.

5.2.1 Financial assets

The General Government Sector holds the equity of the State’s public enterprises, principally its shareholding in government-owned corporations (GOCs) but also Public Financial Corporations like Queensland Treasury Corporation (QTC), in much the same manner as the parent or holding company in a group of companies. The estimated investment in public enterprises is included in the General Government Sector’s financial assets.

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Financial assets of $67.920 billion are estimated for 2014-15, $958 million higher than originally budgeted for 2014-15. This is due primarily to an increase in the value of holdings in Public Financial Corporations, principally as a result of the gain on divestment of Queensland Motorways Limited by the Queensland Investment Corporation Trust at 30 June 2014, which was not budgeted.

In the year to 30 June 2016, financial assets are projected to decrease by $6.122 billion over the 2014-15 estimated actual, attributable principally to the draw down of long service leave investments, temporary suspension of investment of employer defined benefit contributions and capital returns from the Government’s energy network businesses as part of the Government’s Debt Action Plan.

Chart 5.1 shows forecast General Government Sector financial assets by category at 30 June 2016. Investments held to meet future liabilities, including superannuation and the Queensland Government Insurance Fund, comprise the major part of the State’s financial assets.

Chart 5.1 Forecast General Government Sector financial assets by category at 30 June 2016

5.2.2 Non-financial assets

General Government Sector non-financial assets are estimated to total $183.503 billion at 30 June 2015, $14.053 billion lower than forecast at the 2014-15 Budget and $1.205 billion lower than in the 2014-15 MYFER.

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The decrease since the 2014-15 Budget reflects the first time implementation of AASB13 Fair Value Measurement and the flow through of downward revaluations at 30 June 2014 primarily for reserve and leasehold land. These downward revaluations were incorporated in the 2014-15 MYFER.

Non-financial assets in the year ending 30 June 2016 are expected to grow by $3.555 billion over the 2014-15 estimated actuals, to be $187.058 billion at 30 June. These assets consist primarily of land and other fixed assets of $180.775 billion, the majority of which are roads, schools, hospitals and other infrastructure used to provide services to Queenslanders. Other non-financial assets of $6.283 billion held by the State include prepayments and deferred tax assets relating to income tax equivalents collected primarily from GOCs.

Since the mid-1990s, the Queensland Government has invested in new infrastructure at levels well beyond that of the other states. General Government Sector purchases of non-financial assets per capita have exceeded the average of the other states and territories for well over a decade (refer Chart 5.2).

Chart 5.2 General Government Sector per capita purchases of non-financial assets

Source: ABS 5512.0, various state Budgets.

Following consideration of the Review of State Finances, the Government has established five fiscal principles, one of which aims to better manage the capital program to ensure a consistent flow of works to support jobs and the economy, and one that targets net operating surpluses that ensure any new capital investment in the General Government Sector is funded primarily through recurrent revenues rather than borrowing.

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Purchases of non-financial assets for the General Government Sector are forecast to increase from $4.987 billion in 2014-15 estimated actual to $5.851 billion in 2018-19.

Forecast capital purchases for the General Government Sector and Public Non-Financial Corporations Sector over the period 2015-16 to 2018-19 is $35.362 billion, which is an average of $8.840 billion per annum. While its primary aim is to facilitate service delivery to Queenslanders, infrastructure investment makes an important contribution to the economy and is a cornerstone of the Queensland job market, particularly in the construction industry.

In terms of ensuring new capital investment in the General Government Sector is primarily funded through operating revenues, forecast net operating cash flows from 2015-16 to 2018-19 of $20.492 billion are funding capital purchases of $23.182 billion. Over this period, almost 90% of capital spending is funded by operating revenues.

The State has also entered into a number of finance leases, mainly in relation to Public Private Partnerships, totalling $2.376 billion over the period 2014-15 to 2018-19. There is no cash impact at commencement of these leases, however they do increase the level of non-financial assets and gross borrowing to the same extent.

5.2.3 Liabilities

General Government Sector

Estimated General Government Sector liabilities of $81.415 billion in 2014-15 are $4.013 billion lower than the 2014-15 Budget. This is mainly due to the flow through from 30 June 2014 of lower than expected gross borrowing. In addition, better than expected operating results and lower than expected capital outlays estimated for 2014-15 are contributing to the lower debt. Offsetting this is the flow through of the impact of lower than expected bond yields on the actuarially assessed superannuation and long service leave liabilities at 30 June 2014.

Total liabilities in the General Government Sector in 2015-16 are budgeted to decrease by a further $6.260 billion from 2014-15 estimated actual. This is primarily due to measures being implemented to refocus the balance sheet to lower debt as part of the Government’s Debt Action Plan.

Liabilities relating to employee entitlements (principally superannuation and long service leave) are projected to total $29.482 billion at 30 June 2016, a 3.8% decrease on the 2014-15 estimated actual. The State’s superannuation liability can be seen to decline over the forward estimates as a result of the defined benefit fund being closed to new entrants from 2009. In addition, as interest rates return to more normal levels (following a period of historically low bond yields) it is expected that their negative impact on superannuation liabilities will start to reverse.

General Government Sector borrowings of $38.151 billion are budgeted for 2015-16, a decrease of $5.117 billion over 2014-15 estimated actual. This decrease is primarily due to the combination of aligning gearing ratios of Government energy network businesses with the industry average, the draw down of long service leave assets and the temporary suspension of the investment of employer defined benefit contributions, to repay debt.

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The remainder of the liabilities consist of payables and other liabilities such as unearned revenue and provisions.

The composition of the General Government Sector’s forecast liabilities at 30 June 2016 is illustrated in Chart 5.3.

The Government considers the General Government Sector debt to revenue ratio to be an important indicator consistent with its fiscal principle of targeting ongoing reductions in Queensland’s relative debt burden (refer Chart 1.6 in Chapter 1). Consistent with the practice of ratings agencies, less emphasis is now placed on the net financial liabilities to revenue ratio, which incorporates the superannuation liability.

Chart 5.3 Forecast General Government Sector liabilities by category, at 30 June 2016

Non-Financial Public Sector borrowings

NFP Sector borrowings of $75.535 billion are expected for 2014-15, $4.421 billion lower than expected at the 2014-15 Budget.

NFP Sector borrowings of $74.113 billion are budgeted for 2015-16, a further decrease of $1.422 billion over 2014-15 estimated actual, largely reflecting the draw down of long service leave assets in response to the Review of State Finances.

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5.2.4 Net financial worth

The net financial worth measure is an indicator of financial strength. Net financial worth is defined as financial assets less all existing and accruing liabilities. Financial assets include cash and deposits, advances, financial investments, loans, receivables and equity in public enterprises.

The net financial worth measure is broader than the alternative measure – net debt – which measures only cash, advances and investments on the assets side and borrowings and advances on the liabilities side.

The net financial worth of the General Government Sector for 2014-15 is estimated at negative $13.496 billion, an improvement of $4.970 billion over the 2014-15 Budget mainly as a result of the flow through of lower borrowing in the outcomes at 30 June 2014. Net financial worth is expected to stabilise and improve slightly over the forward estimates period.

5.2.5 Net financial liabilities

Net financial liabilities are total liabilities less financial assets, other than equity investments in other public sector entities. This measure is broader than net debt as it includes other significant liabilities, rather than just borrowings (for example, accrued employee liabilities such as superannuation and long service leave entitlements).

The net financial liabilities of the General Government Sector for 2014-15 are estimated to be $35.891 billion, $7.604 billion lower than 2014-15 Budget. This largely reflects the flow through of lower borrowings in the outcomes at 30 June 2014 and the increase in dividends receivable from energy GOCs as a result of the revisions to their capital structure and dividend policy.

Net financial liabilities are expected to stabilise from 2014-15 as movements in borrowings and financial assets offset each other.

5.2.6 Net worth

The net worth, or equity, of the State is the amount by which the State’s assets exceed its liabilities. This is the value of the investment held on behalf of the people of Queensland by public sector instrumentalities.

Changes in the State’s net worth occur for a number of reasons including:

• operating surpluses (deficits) that increase (decrease) the Government’s equity

• revaluation of assets and liabilities as required by accounting standards. For example, the Government’s accruing liabilities for employee superannuation and long service leave are determined by actuarial assessments

• movements in the net worth of the State’s investments in the Public Non-Financial Corporations and Public Financial Corporations sectors

• gains or losses on disposal of assets. Where the selling price of an asset is greater (less) than its value in an agency’s accounts, the resultant profit (loss) affects net worth.

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The net worth of the General Government Sector in 2014-15 is estimated to be $170.007 billion. This is $9.084 billion lower than forecast in the 2014-15 Budget primarily due to the downward revaluation of reserve and leasehold land at 30 June 2014 (under AASB13 Fair Value Measurement) and higher superannuation liabilities as a result of lower bond rates, offset by lower stocks of borrowings.

From 2015-16, net worth is projected to steadily increase mainly as a result of the growth in non-financial assets.

5.2.7 Net debt

Net debt is the sum of advances received and borrowings less cash and deposits, advances paid and investments, loans and placements.

Net debt for the General Government Sector in 2014-15 is estimated to be $6.056 billion, $4.886 billion less than the 2014-15 Budget. Net debt will reduce by a further $2.146 billion to be $3.910 billion in 2015-16 as a result of the Government’s Debt Action Plan.

In the Non-Financial Public Sector, net debt is estimated at $36.083 billion in 2014-15, $5.434 billion less than the 2014-15 Budget. Net debt is expected to increase to $38.201 billion in 2015-16 and then grow slowly in line with borrowings through to 2018-19.

5.3 Cash flows

The cash flow statement provides information on the Government’s estimated cash flows from its operating, financing and investing activities.

The cash flow statement records estimated cash payments and cash receipts and hence differs from accrued revenue and expenditure recorded in the operating statement. In particular, the operating statement records certain revenues and expenses that do not have an associated cash flow (for example, depreciation expense). The timing of recognition of accrued revenues or expenses in the operating statement may differ from the actual cash disbursement or receipt (for example, tax equivalents). A reconciliation between the cash flows from operations and the operating statement is provided in Table 5.2.

The cash flow statement also records cash flows associated with investing and financing activities that are otherwise reflected in the balance sheet. For example, purchases of capital equipment are recorded in the cash flow statement and impact on the balance sheet through an increase in physical assets.

The cash flow statement provides the cash surplus (deficit) measure which is comprised of the net cash flow from operating activities plus the net cash flow from investment in non-financial assets (or physical capital).

The Australian Bureau of Statistics Government Finance Statistics (GFS) surplus (deficit) is derived by including the initial increase in liability at the commencement of finance leases in the cash surplus (deficit). This measure is also used to derive the Loan Council Allocation nomination, provided in Chapter 8.

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The estimated General Government Sector cash deficit of $487 million in 2014-15 is $1.855 billion lower than that forecast at the time of the 2014-15 Budget. This is largely due to the lower than expected capital program and improved operating position.

After taking into account a capital program of $5.374 billion, a cash deficit of only $584 million is forecast for 2015-16, demonstrating the Government’s commitment to funding new capital investment primarily through net operating surpluses.

Net cash flows from investments in financial assets for policy purposes include net cash flows from disposal or return of equity, and net equity injections into GOCs. Cash flows from the return of equity in the energy network businesses as a result of the Debt Action Plan are expected to total $3.482 billion over the period 2015-16 to 2018-19.

Net cash flows from investments in financial assets for liquidity purposes represent net investment in financial assets to cover liabilities such as superannuation, other employee entitlements and insurance. The draw down of long service leave assets and suspension of employer defined benefit contributions as a result of the Debt Action Plan flow through this line in the Statement of Cash Flows.

Total General Government Sector capital purchases of $5.374 billion are budgeted for 2015-16 and, over the period 2015-16 to 2018-19, capital expenditure is expected to total $23.182 billion in the General Government Sector. As discussed in 5.2.2, this capital is funded to the extent of almost 90% by operating cash flows.

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5.4 Reconciliation of operating cash flows to the operating statement

Table 5.2 provides a reconciliation of the cash flows from operating activities to the operating result for the General Government Sector.

Table 5.2 General Government Sector: reconciliation of cash flows from operating activities to accrual operating activities¹

	2014-15 Est. Act. $ million			2015-16 Budget $ million
Revenue from transactions		49,578			51,186
Plus/(less) movement in tax equivalent and dividend receivables		(363	)		343
Plus GST receipts		1,921			1,764
Plus/(less) movement in other receivables		(318	)		(437	)
Equals cash receipts from operating activities		50,818			52,856
Expenses from transactions		48,615			49,973
(Less) non-cash items
Depreciation and amortisation expense		(3,116	)		(3,264	)
Accrued superannuation expense		(1,803	)		(1,750	)
Accrued employee entitlements		(613	)		(648	)
Other accrued costs		(155	)		(81	)
Plus superannuation benefits paid – defined benefit		1,856			1,943
Plus/(less) movement in employee entitlement provisions		386			275
Plus/(less) GST paid		1,847			1,786
Plus/(less) movement in other provisions and payables		(286	)		137
Equals cash payments for operating activities		46,731			48,372

Note:

1. Numbers may not add due to rounding.

The main difference between the accrual operating statement and the cash flow relates to the timing of cash payments and receipts and their recognition in accrual terms and the inclusion of non-cash expenses and revenues. The largest differences between accrual accounting and cash flows are in relation to depreciation and superannuation. Differences due to the timing of receipt or payment of amounts are recorded as either a receivable or payable in the balance sheet.

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6 Intergovernmental financial relations

Features

• The Queensland Government is committed to working with the Australian Government to achieve outcomes for Queenslanders. The fiscal constraints facing all levels of government are well understood, but the Australian Government’s plan to grow health funding in line with Consumer Price Index (CPI) and population, and education funding with CPI and enrolments is not sustainable. This is expected to result in $18 billion worth of Australian Government cuts over the next decade based on Queensland’s population share. This highlights the importance of the White Paper processes on Federalism and Tax Reform to ensure federal financial relations are sensible and sustainable, and do not simply cost shift to the states.

• The White Paper processes provide an opportunity to restructure federal-state relations, clarify roles and responsibilities, improve the long-term sustainability of government finances, create a fairer and simpler tax system and consider the merits of the current horizontal fiscal equalisation system.

• The 2015-16 Commonwealth Budget extended funding for a number of key agreements – early childhood education, homelessness and legal assistance services. However, funding cuts made to health ($11.8 billion) and education ($6 billion) in the 2014-15 Commonwealth Budget remain a significant ongoing fiscal challenge for Queensland. Not addressing these cuts in the 2015-16 Commonwealth Budget, combined with parameter adjustments to growth funding, only adds to these challenges. Equally concerning is the lack of advice on funding for mental health reforms and key Queensland infrastructure projects.

• The Queensland Government notes the Australian Government’s budget measures to assist development of infrastructure in northern Australia. North Queensland has the potential to be the growth engine of our State and the nation, and infrastructure is a key part of driving this growth. Queensland deserves our fair share of this funding.

• Estimated Australian Government funding in 2015-16 for Queensland is $23.747 billion. Queensland is estimated to receive $10.757 billion in payments for specific purposes, with $850 million as National Specific Purpose Payments, $3.229 billion as National Health Reform funding, $3.534 billion as Students First funding and $3.145 billion as National Partnership payments including Natural Disaster Relief and Recovery Arrangements.

• The Queensland Government welcomes acceptance of the Commonwealth Grants Commission (CGC) 2015 Methodology Review recommendations for states’ goods and services tax (GST) shares in 2015-16. Increases to Queensland’s GST share duly recognise the impact of factors beyond the State’s control on its fiscal capacity, such as the significant rebuilding expenses following natural disasters in 2011 and 2012.

• Queensland is estimated to receive $12.990 billion of GST revenue in 2015-16, $1.509 billion more than its population share. Total GST revenue to all states is expected to be $57.050 billion in 2015-16, an increase of $3.050 billion or 5.6% on 2014-15.

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6.1 Federal financial arrangements

Federal financial relations in Australia are characterised by vertical fiscal imbalance (VFI). This is where the Australian Government’s own spending responsibilities are less than its revenue, and State and Territory governments’ spending responsibilities are greater than their revenue. The Australian Government collected the majority of taxation revenues (81%) in 2013-14, whilst the states collected 16% and local governments collected the remaining 3%.¹ The states and territories (states)² require grants from the Australian Government to meet their spending responsibilities. These grants represent 45.3% of all states’ revenues in 2015-16, based on the Australian Government budget estimates.³

VFI in Australia arises from a number of factors including:

• The Australian Constitution, which precludes states from levying customs duty or excise duty, or introducing taxes based on the value of goods produced, for example, a consumption or retail tax.

• Restrictions imposed by the Australian Government, particularly on the states’ levying of income tax. While the Constitution permits states to levy income tax, High Court decisions effectively allow the Australian Government to obstruct the states’ application of this power through its ability to reduce other grants to offset any revenue benefits to a state that chooses to raise its own income tax.

• Agreements with the Australian Government, which prevent reinstatement of taxes that were abolished under the arrangements associated with the introduction of the GST. These include a number of duties and financial taxes, such as debits tax.

In Australia, governments look to address VFI through a system of intergovernmental grants from the Australian Government to the states. Just over half these grants are untied ‘general revenue assistance’, mainly the proceeds from the GST. Most other grants are payments for specific purposes, provided to fund particular activities.

National tax reform and other changes since 2000 have led to an increase in VFI. Chart 6.1 shows that while the states received 35% of their revenues from the Australian Government in 1999-2000, this is forecast to increase to 45.3% in 2015-16. In contrast, the proportion of the states’ General Government Sector revenues from state taxes has declined from 39.8% in 1999-2000 to 32.4% in 2015-16.

¹  ABS Government Finance Statistics Cat No. 5506.0.

²  States refers to States and Territories unless otherwise specified.

³  National aggregates and interstate comparisons in this chapter will use Australian Government estimates for consistency. Queensland specific figures are consistent with Queensland Budget estimates.

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Chart 6.1 General Government revenue sources, all states, 1999-2000 and 2015-16¹

Note:

1. 2015-16 are estimates.

Sources: ABS Government Finance Statistics Cat No. 5512.0 and State and Commonwealth Budgets, 2015-16.

One of the outcomes of VFI has been overlap and duplication in roles and responsibilities relating to service delivery and infrastructure provision, particularly in the areas of health and education. This can result in excessive administration, unnecessary additional costs, blurred accountability and a misallocation of resources to areas of lower priority. Receiving a significant proportion of their revenue through Australian Government grants leaves states subject to unilateral decisions by the Australian Government affecting the stability and predictability of their finances. Reforms to address VFI are being explored as part of the Australian Government’s White Paper process.

Another important element of Australian federal financial arrangements is the process of horizontal fiscal equalisation (HFE). Like many federations, different Australian states have different capacities to raise revenue or deliver services due to factors largely beyond their control, such as demography, socio-economic status, geography and natural resources. The HFE process is designed to equalise states’ fiscal capacities. Under the process, GST revenue is distributed amongst state governments so they have the capacity to provide similar levels of services to their communities.

The CGC provides advice to the Treasurer of Australia on the distribution of GST revenue.

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6.1.1 2015-16 Commonwealth Budget

The 2015-16 Commonwealth Budget was released on 12 May 2015. The Commonwealth Budget provided short-term extensions of funding for a range of essential agreements including early childhood education, homelessness, legal assistance services and adult public dental services, but provided no advice on funding for mental health reforms. It is essential in the future that the renegotiation of National Partnership Agreements (NPs) is a genuine collaboration and not a unilateral decision to extend payments made just weeks before the Commonwealth Budget.

The implications of the 2014-15 Commonwealth Budget, including a number of revisions and reversals to funding agreements unilaterally determined by the Australian Government, remain an ongoing fiscal challenge for Queensland. Not addressing these issues in the 2015-16 Commonwealth Budget, combined with changes in parameter adjustments to growth funding (such as lower estimates of population and lower wage cost index), will have ongoing implications for the capacity of the State to fund growth in services to meet demand. More information on the implications of the 2014-15 Commonwealth Budget is provided in Box 6.1.

Despite the additional funding for some NPs, the 2015-16 Commonwealth Budget does not provide ongoing funding certainty, with most funding arrangements relatively short term (less than three years). This poses a considerable risk for Queensland to manage future service delivery responsibilities when faced with uncertainty around the Australian Government’s willingness to remain committed to longer term agreements. How these issues are addressed in the White Paper processes will be crucial to ensure Queensland has a sustainable revenue stream to meet our service delivery responsibilities.

Queensland will closely consider the potential impacts and implications for the State of the White Paper on Developing Northern Australia, and is keen to work with the Australian Government to identify north Queensland infrastructure needs and priority projects for targeted funding.

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Box 6.1 Reductions in Australian Government funding to health and education

In the 2014-15 Commonwealth Budget, the Australian Government announced revised funding arrangements for public hospitals (from 1 July 2017) and schools (from 1 January 2018), resulting in expected funding cuts to the states of over $80 billion in the period to 2024-25.

Based on Australian Government estimates, Queensland’s share of these funding cuts is expected to be around $11.8 billion for public hospital funding and around $6 billion in schools funding, in total across the period from 2017-18 to 2024-25 (as shown in Chart 6.2). The 2015-16 Commonwealth Budget continued this funding decision.

Chart 6.2 Reduced Australian Government funding for health and education

The reduction in health, education and other funding represents a significant cost shift from the Australian Government to Queensland’s budget, increasing the fiscal burden on Queensland if the State has to find the lost funding.

From 1 July 2017 the Australian Government’s funding contribution for public hospitals will grow in line with CPI and population growth only, irrespective of demand or activity. Similarly, from the 2018 school year, the Australian Government’s changes will index recurrent school funding by CPI only, with an allowance for changes in enrolments, resulting in a reduction of around $6 billion to 2024-25 compared with previous indexation arrangements.

The removal of billions of dollars of Australian Government funds from core services in Queensland highlights the volatility and vulnerability of the state revenue base to Australian Government actions. This underlines the importance of federalism reform to ensure an appropriate allocation of roles and responsibilities, supported by a sustainable revenue stream to meet our service delivery responsibilities.

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6.1.2 Opportunities for reform

The Australian Government’s ambitious economic and fiscal reform agenda includes the National Commission of Audit (NCoA) and White Paper processes on Federalism and Tax Reform.

The Queensland Government is supportive of the White Paper processes on Federalism and Tax Reform and is working productively with the Australian Government and other states to address the key challenges faced by the nation, including the need to restructure federal-state relations, make government finances more sustainable, and to foster robust and diverse economic growth across the nation.

Funding cuts in the 2014-15 Commonwealth Budget remain an ongoing fiscal challenge for Queensland, and not addressing these cuts in the 2015-16 Commonwealth Budget adds to these challenges, and highlights the need to secure sustainable financial positions for states.

The context for the White Papers was set by the NCoA report which was critical of the size of the federal bureaucracy and the duplication of state functions. The NCoA recommended a comprehensive review of roles and responsibilities of the Australian and state governments be undertaken.

To assist, a Steering Committee, chaired by the Australian Government and involving all state governments and the Australian Local Government Association, was established to oversee the development of the Federalism White Paper. The Tax Reform White Paper is being coordinated by the Australian Treasury.

The Federalism White Paper seeks to clarify roles and responsibilities to ensure states are sovereign in their own spheres and reduce duplication between levels of government. Broadly it will consider: (i) improvements to federation governance and accountability arrangements; (ii) improving allocation of roles and responsibilities across the key reform areas of Health, Education, and Housing and Homelessness; and (iii) federal financial relations, and addressing VFI and the merits of and potential reform to the current system of HFE.

The objective of the White Paper on Tax Reform is to achieve a better tax system that delivers taxes that are lower, simpler, and fairer – a system that supports higher economic growth and living standards, improves international competitiveness and is able to adjust to a changing economy. This is achieved by raising the revenue needed without imposing unnecessary costs on the economy.

As part of the White Paper processes, Queensland will be focused on ensuring state sovereignty over its policy and service delivery responsibilities is maintained and supported by sustainable revenue streams.

The Australian Government and states are committed to considering expenditure responsibilities across a range of areas, and the parallel consideration of tax reform means that appropriate revenue arrangements can also be addressed. Approaches that increase the likelihood of successful reform will inevitably involve better division of roles and responsibilities to reduce VFI, and a combination of Australian Government and state tax reform.

Further detail on the White Paper processes is provided in Box 6.2.

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Box 6.2 Federalism and Tax Reform White Papers

In 2013, the Australian Government announced the preparation of two White Papers on Federalism and Tax Reform, to be prepared collaboratively with states.

The White Paper processes present an opportunity for Queensland to ensure reforms align with the Queensland Government’s objectives, clarify federal-state relations, improve the sustainability and efficiency of Queensland’s revenue base, and address VFI.

Federalism White Paper

The Federalism White Paper seeks to clarify roles and responsibilities to ensure states are sovereign in their own spheres and reduce duplication between levels of government. Ensuring states have access to a sustainable and stable revenue base will also need to be considered and will link with the Australian Treasury led Tax Reform White Paper process. The key sectors under consideration for reform of roles and responsibilities are health, education, housing and homelessness.

The key principles that the federalism reform process aims to address include: subsidiarity; equity, efficiency and effectiveness of service delivery; national interest; accountability and outcomes; durability; and fiscal sustainability.

A number of issues papers have been released and public consultation forums held to consider the issues of federalism. A draft Discussion Paper was released in June 2015, to be followed by release of the Green Paper, and the White Paper by the end of 2015 or early 2016.

Tax Reform White Paper

On 30 March 2015, the Australian Government released the first Tax Reform issues paper “Re:think” for public consultation. The Australian Government’s issues paper has begun the consultation process for future directions of Australia’s tax system including state taxes.

The Queensland Government will take a lead role in shaping the direction of this process, including the special Treasurers’ Tax Summit in August 2015 with a view to providing options for the Green Paper which will be released in late 2015, followed by a White Paper later in 2016.

From this process the Queensland Government supports improved efficiency and equity of Australia’s tax system and a fair and sustainable model of distribution of all tax revenues to encourage economic growth, supported by a division of roles and responsibilities which reduces the current inefficient levels of VFI.

Queensland has undertaken tax reform over the past decade and a half, with reform of its mix, design and administration, and removal of a large number of less efficient taxes. However Queensland does not have the fiscal capacity to simply cut its own taxes given the need to ensure Queenslanders can access quality services.

States face significant spending pressures, reflecting rising community expectations about the breadth and quality of services delivered. States require reliable streams of revenue, but also capacity to adjust their levels of revenue to allow them to meet fiscal and economic challenges that arise.

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6.2 Australian Government funding to the states

The framework for federal financial relations is set out in the Intergovernmental Agreement on Federal Financial Relations (IGA). The IGA outlines the Australian Government’s commitment to provide ongoing financial support to the states through two types of grants - general revenue assistance and payments for specific purposes.

General revenue assistance grants are able to be used by the states for any purpose (untied funding). Payments for specific purposes are considered tied funding, where the state is restricted in how the funding can be spent (either by sector or for specific projects or reforms). Chart 6.3 outlines Australian Government grants to states.

Chart 6.3 Breakdown of Australian Government grants to states, 2015-16¹

Note:

1. NHR is funding under the National Health Reform. NPs is funding for National Partnership payments.

Source: Commonwealth Budget 2015-16 and Queensland Treasury estimates.

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Table 6.1 shows total Australian Government payments to the states in 2015-16 are expected to be $107.711 billion, an increase of $6 billion or 5.9% in nominal terms when compared with 2014-15. This increase is primarily driven by increases to the GST. These figures are based on 2015-16 Commonwealth Budget estimates.

GST revenue from the Australian Government to all states is expected to be $57.050 billion in 2015-16, an increase of 5.6% in nominal terms. In real per capita terms, GST is expected to increase by 1.3% in 2015-16.

Total payments for specific purposes in 2015-16 are expected to be $49.962 billion, a 7.4% increase in nominal terms and a 3.0% increase in real per capita terms compared with 2014-15.

Table 6.1 Estimated Australian Government payments to the states, 2014-15 and 2015-16¹

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million		Change Nominal Terms %		Change Real Terms %		Change Real Per Capita %
GST revenue		51,090		54,000		57,050		5.6		3.1		1.3
Payments for specific purposes
National Partnership payments		14,534		12,272		13,557
National Specific Purpose Payments		10,415		4,135		4,222
National Health Reform Funding		13,841		15,459		16,441
Students First – Education Reform Funding		6,766		14,664		15,743
Total payments for specific purposes		45,557		46,530		49,962		7.4		4.8		3.0
Other general revenue2		1,300		1,178		699
Total payments		97,948		101,708		107,711		5.9		3.3		1.6

Notes:

1. Numbers may not add due to rounding.

2. Include payments to the Australian Capital Territory for municipal services, compensation for reduced royalties, royalties and Snowy Hydro Limited tax compensation.

Source: Commonwealth Budget 2015-16 and Queensland Treasury estimates.

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Table 6.2 shows the expected shares of total Australian Government payments to each state for 2015-16 compared with each state’s population share.

Queensland is expected to receive payments above its population share, with above-population shares of payments for both general and specific purposes, for reasons explained in Section 6.4 and 6.5.

Table 6.2 Relative shares of Australian Government payments to the states, 2015-16¹

	Share of payments2 %		Share of population %		Relative share3 %
New South Wales		30.5		31.9		95.5
Victoria		23.0		24.9		92.4
Queensland		21.7		20.1		108.0
Western Australia		7.0		11.2		62.8
South Australia		8.5		7.1		120.1
Tasmania		3.2		2.1		149.0
Australian Capital Territory		1.8		1.6		106.8
Northern Territory		4.3		1.0		414.3

Notes:

1. Numbers may not add due to rounding.

2. Excludes payments unallocated among the states and territories in the Commonwealth Budget papers and royalties paid by the Australian Government to Western Australia and the Northern Territory.

3. A state’s relative share is measured as its funding share as a percentage of its population share (may not divide due to rounding).

Source: Commonwealth Budget 2015-16.

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6.3 Australian Government funding to Queensland

This section reflects the Queensland Government’s estimates of proposed Australian Government funding.

Queensland’s reliance on Australian Government funding is expected to increase from 34.8% in 1999-2000 to an estimated 46.4% in 2015-16 (see Chart 6.4). This is consistent with the national trend (shown in Chart 6.1), with states receiving 45.3% of their revenues from the Australian Government in 2015-16, compared to 35% in 1999-2000.

National tax reform and other changes since 2000 have led to an increase in vertical fiscal imbalance and reliance on Australian Government funding.

Chart 6.4 General Government Sector revenue sources, Queensland, 2015-16

Sources: Commonwealth Budget 2015-16 Paper No. 3 and Queensland Treasury estimates.

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Estimated Australian Government funding in 2015-16 for Queensland, included in the 2015-16 Queensland Budget, is $23.747 billion⁴, an increase of $1.733 billion or 7.9% compared with 2014-15 (as shown in Table 6.3).

Table 6.3 Estimated Australian Government payments to Queensland^{1, 2}

	2013-14 Actual $ million		2014-15 Est. Act. $ million		2015-16 Budget $ million		Change Nominal Terms %		Change Real Terms %		Change Real Per Capita %
GST revenue		10,823		11,746		12,990		10.6		8.2		6.2
GST balancing item3		73		69		—
Total payments for general purposes		10,896		11,816		12,990
Payments for specific purposes
National Partnership payments (excluding NDRRA4)		1,889		1,917		2,039
NDRRA		1,515		1,163		1,106
National Specific Purpose Payments		807		831		850
National Health Reform Funding		2,815		3,057		3,229
Students First – Education Reform Funding		2,926		3,231		3,534
Total payments for specific purposes		9,951		10,198		10,757		5.5		3.2		1.3
Total payments		20,847		22,014		23,747		7.9		5.5		3.6

Notes:

1. Numbers may not add due to rounding.

2. Does not include Australian Government funding direct to Local Governments.

3. The balancing adjustment accounts for differences between the GST paid to states and the final GST pool size and population outcomes in the prior year (2012-13 and 2013-14).

4. NDRRA is funding for the Natural Disaster Relief and Recovery Arrangements.

Sources: Commonwealth Budget 2015-16 Paper No. 3 and Queensland Treasury estimates.

Queensland expects to receive $12.990 billion of GST revenue in 2015-16, $1.509 billion greater than its population share. In the same year, total payments for specific purposes are forecast to be $10.757 billion, with $3.229 billion as National Health Reform funding, $3.534 billion as Students First funding, $850 million as National Specific Purpose Payments and $2.039 billion as National Partnership payments. Payments for Natural Disaster Relief and Recovery Arrangements (NDRRA) are estimated to be $1.106 billion in 2015-16.

⁴  This figure differs to Chapter 3 Australian Government grants estimates, due to the exclusion of direct Australian Government payments to Queensland departments for Commonwealth own purpose expenditure.

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6.4 GST revenue payments

Under the terms of the Intergovernmental Agreement on Federal Financial Relations (IGA), states receive the revenue collected by the Australian Government’s GST. The IGA also required GST revenue to be distributed on the basis of horizontal fiscal equalisation (HFE) principles. The application of HFE principles aims to give all states the same fiscal capacity to deliver services to their populations after the distribution of the GST, taking into account states’ capacities to raise revenue from their own sources, as well as their different expenditure needs.

The CGC is tasked with recommending state shares of GST funding to the Australian Government. The amount of GST revenue received by an individual state is determined by the national pool of revenue collected through the GST and the Australian Government’s determination of the distribution of that revenue amongst the states.

In April 2015, the Australian Government released the results of the CGC’s 2015 Review of Methodology (the 2015 Review) used to determine the distribution of GST among the states. The 2015 Review considered the recommendations of the 2012 GST Distribution Review, the implications of recent national reforms (such as the National Disability Insurance Scheme) on the GST distribution, and other improvements and simplifications to the methodology. More information on the 2015 Review is provided in Box 6.3.

The White Paper on Reform of the Federation is to consider the merits and potential reforms to the current HFE process.

6.4.1 Queensland’s share of GST revenue

The Australian Government has accepted the CGC’s recommendations of GST revenue sharing relativities as the basis for the distribution of the GST revenue to the states in 2015-16.

In the 2015 Review, the CGC recommended an underlying increase in Queensland’s share of GST revenue of $556 million in 2015-16, as shown in Table 6.4.

Table 6.4 GST share and underlying impact of relativities, 2015-16¹

	NSW			Vic.		Qld		WA			SA		Tas.		ACT			NT
Underlying impact of relativities2 ($ million)		(517	)		131		556		(494	)		284		225		(129	)		(56	)
GST Share ($ million)		17,295			12,730		12,990		1,915			5,518		2,236		1,032			3,335
GST per capita ($)		2,251			2,121		2,679		713			3,229		4,324		2,614			13,234

Notes:

1. Bracketed numbers represent negative amounts.

2. The underlying impact reflects the change to Queensland’s GST share from the CGC’s new relativities using estimated 2015-16 GST pool size and populations.

Sources: Commonwealth Budget 2015-16, Commonwealth Grants Commission Report on GST Revenue Sharing Relativities 2015 Review.

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Queensland’s share of GST for 2015-16 has increased due to:

• A higher level of NDRRA expenses, due to the high level of disaster spending in 2013-14 relating to 2011 and 2012 disaster events. NDRRA expenses are shared between the Australian Government and states, with the Australian Government providing reimbursement for a proportion of state expenses resulting from a natural disaster. The GST distribution takes into account the proportion of NDRRA expenses that are not reimbursed by the Australian Government, as these arise from circumstances beyond states’ control.

• Strong mining production value in Western Australia in 2013-14, which reduced the GST redistributed away from Queensland due to its mining royalties, and changes to the mining assessment methodology. As the CGC’s assessments are lagged by two years, this affects GST shares in 2015-16. These gains were partially offset by changes to the methodology for transport infrastructure and services expenses.

More detail on the outcomes of the 2015 Review is in Box 6.3.

For the last few years, Queensland’s single year relativity has been above 1.0, that is, Queensland has been assessed as having a lower than average fiscal capacity and requiring a greater than population share of GST. This reflects the relatively higher cost of service provision in the State.

In the 2015 Review Final Report, Queensland received its highest single year relativity since the introduction of the GST, a result that was driven primarily by short term factors outside of the State’s control such as the significant rebuilding following natural disasters in Queensland.

To determine the GST share of each state, the CGC uses a three year average of single year relativities (with a two year lag). This dampens the impact of single year relativity changes so that states’ GST shares are more predictable and less volatile.

As shown in Chart 6.5, Queensland’s three year average relativity has risen above 1.0 for the third consecutive year, meaning that Queensland will receive a greater than population share of GST in 2015-16. The impact of the historically high 2013-14 single year relativity is likely to keep Queensland’s three year average relativity above 1.0 for the next few years, but many of the factors driving the 2013-14 result are short term.

Net expenses for NDRRA are expected to be lower in 2014-15, and Western Australia’s mining revenue has been adversely affected by a fall in iron ore prices. Queensland’s share of GST can be expected to move closer to 1.0 once the short term impact of 2013-14 factors are removed from the averaging process.

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Chart 6.5 Queensland’s GST Relativity, 2000-2001 to 2014-15¹

Note:

1. GST shares have used a three year average of single year relativities since 2010-11. Previous average relativities were based on a five year average of single year relativities. Average relativities are calculated with a two year lag.

Sources: Commonwealth Grants Commission Report on GST Revenue Sharing Relativities 2015 Review, Queensland Treasury.

In general, the CGC assesses Queensland as having higher than average expenditure needs, due to the state’s higher proportions of remote and Indigenous populations. Other factors, such as a higher capacity to raise revenue from mining royalties and lower assessed public sector wage costs offset these additional needs.

In the longer term, Queensland’s fiscal capacity can be expected to be around the average of states (relativity of 1.0). However, many of the factors impacting Queensland’s relativity are volatile, such as transfer duty, mining revenue, natural disaster relief and other Australian Government payments.

Mining revenue is heavily influenced by volatile commodity prices, while Queensland’s relative capacity to raise revenue from transfer duty is driven by differences in the timing of property cycles between states and NDRRA expenses are driven by the incidence of large disasters.

The significant impact of volatile factors means that while Queensland’s relativity may be around the average of states in the longer term, on an annual basis it will continue to fluctuate, and be above 1.0 in some years and below in others.

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Chart 6.6 shows the impact of the volatile assessments.

Chart 6.6 Contribution of volatile assessments to Queensland’s difference from an equal per capita share of GST (three year average)^{1, 2}

Notes:

1. Contributions are scaled to the growth in the pool size from 2004-05 to 2015-16 to improve comparability.

2. NDRRA data for earlier years is not available.

Sources: Commonwealth Grants Commission and Queensland Treasury.

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Box 6.3 2015 Review of CGC methodology

In April 2015, the CGC released the Final Report of its 2015 Review of the methodology used to determine the distribution of GST among the states. The Final Report recommended that Queensland’s share of GST revenue be increased by $556 million in 2015-16. The 2015 Review outcome encompasses the impact of methodology changes on states’ GST shares, as well as the impact of changes to states’ circumstances and revisions to the data used in the CGC’s assessments. Table 6.5 shows the contribution of these factors to the overall impact.

Table 6.5 Underlying changes in GST allocations 2015-16 ($ million)^{1, 2}

	NSW			Vic.			Qld			WA			SA		Tas.			ACT			NT
Methodology change		(105	)		423			(186	)		(255	)		74		89			(93	)		53
Data revisions		(157	)		(44	)		(45	)		202			58		(7	)		(47	)		40
States’ circumstances		(254	)		(249	)		787			(441	)		152		144			10			(149	)
Total change		(517	)		131			556			(494	)		284		225			(129	)		(56	)

Notes:

1. Bracketed numbers represent negative amounts.

2. Numbers may not add due to rounding.

Sources: Commonwealth Grants Commission Report on GST Revenue Sharing Relativities – 2015 Review.

The increase to Queensland’s GST share was mainly driven by a weakening in Queensland’s circumstances relative to other states since the last CGC update in 2014 ($787 million increase). Updates to the CGC’s recommendations are designed to capture changes in factors beyond states’ control that impact their fiscal circumstances. For Queensland, high NDRRA expenditure (net of contributions from the Australian Government) as well as relatively weaker mining revenue have meant that Queensland has been assessed as requiring additional GST. The increase in Queensland’s share of GST in 2015-16 is not a windfall, rather, it recognises that Queensland has had higher expenses and weaker revenues than in previous updates.

Methodological changes made by the CGC in the 2015 Review have negatively impacted Queensland. This is largely due to a new assessment of states’ requirements for transport infrastructure. The new methodology places a larger emphasis on city size than on population growth, redistributing GST away from Queensland because it does not have a city the size of Sydney or Melbourne. Queensland has argued against this methodology, which does not have a robust evidence base, and considers that fundamental changes to this assessment should be a priority of the next CGC methodology review.

Along with the 2015 Review Final Report, the CGC also released its advice on the treatment of large volatile state revenues in its GST distribution methodology. This was in the context of large decreases in Western Australia’s iron ore royalties in 2014-15. Although the CGC found there were no grounds for special treatment of iron ore royalties, the 2015-16 Commonwealth Budget provided an additional $499 million of infrastructure funding to Western Australia. Queensland supports the CGC advice, noting there was no special treatment when Queensland faced similar circumstances when coal prices fell in 2009-10. The Australian Government should ensure that additional capital payments made to Western Australia are not at the expense of other states.

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6.5 Payments to Queensland for specific purposes

6.5.1 Structure of payments for specific purposes

Payments for specific purposes comprise National Specific Purpose Payments (SPPs), National Health Reform funding, Students First funding and National Partnership (NP) payments. These payments represent a significant source of revenue to Queensland, comprising 21.0% of total expected revenue in 2015-16 and 45.3% of Australian Government funding to Queensland.

Projections of specific purpose funding to Queensland

Funding for National SPPs is relatively stable across the forward estimates, with growth of 2.4% in 2016-17 increasing to 2.6% in 2018-19. Growth in National Health Reform (NHR) funding increases to 7.1% in 2017-18, but declines to 4.4% in 2018-19. Growth in Students First funding of 8.8% in 2016-17 is expected to decline to 2.9% in 2018-19. The decrease in growth in funding for health and education is mainly due to revised indexation arrangements from 2017-18 announced at the 2014-15 Commonwealth Budget. Total payments for specific purposes decreases in 2018-19 mainly due to current time limited NP agreements ceasing in 2017-18.

Chart 6.7 Payments for specific purposes to Queensland¹

Note:

1. Excludes Australian Government direct funding to local government.

Sources: Commonwealth Budget 2015-16 Paper No. 3 and Queensland Treasury estimates.

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The level of NP payments varies from year to year, depending on the nature and duration of agreements, and the value of new agreements. Chart 6.7 outlines how NP funding, including NDRRA, is expected to rise to $3.219 billion in 2016-17, before declining to $1.433 billion in 2018-19. This variability is primarily due to fluctuations in the timing of funding for NDRRA and infrastructure payments.

6.5.2 National Specific Purpose Payments

National SPPs are an ongoing financial payment to the states for service delivery in a particular sector. National SPPs are considered to be ‘tied’ payments since they must be spent in the relevant sector. Apart from this condition, states have total budget flexibility to allocate SPP funding within the relevant sector according to their priorities. In turn, states are accountable to their communities on SPP expenditure and the achievement of outcomes, as set out in the associated National Agreements.

In addition to funding for Health and Education, there are three National SPPs to the states for skills and workforce development, disability services and affordable housing. Chart 6.8 shows the breakdown of Australian Government funding across these sectors for SPPs, National Health Reform funding and Students First funding.

Chart 6.8 National Specific Purpose Payments by sector, 2015-16

Sources: Commonwealth Budget 2015-16 Paper No. 3 and Queensland Treasury estimates.

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National Health Reform funding

The National Health Reform Agreement (NHRA) commenced on 1 July 2012. Under this arrangement, growth in funding from the Australian Government was based on 45% of the efficient costs of additional hospital activity, increasing to 50% in 2017-18. In the 2014-15 Commonwealth Budget, the Australian Government revised the indexation arrangement and funding from 2017-18 will instead be tied to a combination of the CPI and population growth.

The 2014-15 Commonwealth Budget also removed the funding guarantees which were a feature of the NHRA that ensured a guaranteed level of additional funding would flow to the State irrespective of growth in public hospital activity. This revision has major implications for the State in managing the long term growth in hospital demand services. These changes to the NHRA were confirmed by the Australian Government in its 2015-16 Budget. Queensland is expected to receive $3.229 billion in 2015-16 ($14.093 billion over four years to 2018-19).

Students First – A fairer funding agreement for schools

Australian Government funding under Students First for Queensland Government schools will be $1.286 billion in 2015-16 ($5.827 billion over four years