1.2	FISCAL STRATEGY – FINANCIAL OBJECTIVES AND KEY MEASURES
Fiscal Strategy
The Government continues its commitment to the principles of responsible financial management in the 2007-08 Budget, with the presentation of budgeted and future net operating surpluses.  The financial objectives and key measures below outline the Government’s financial policy.  
The 2007-08 Budget has been developed to build on the work undertaken in the 2006‑07 Budget to put the Territory’s finances on a sound and sustainable footing.  In particular, last year’s Budget aimed to maintain capacity for investment in physical and social infrastructure, preserve the ACT’s high quality services and the outcomes they deliver in priority areas such as health and education, as well as creating a buffer against future cost pressures and possible future risks.  The 2007-08 Budget builds on that disciplined focus and takes the Territory forward.  It delivers spending in areas of high need, and in areas that mean the most to Canberran’s – in places where they work, live and play. 
With this in mind, the Government has developed its strategic financial priorities for 2007‑08, summarised as follows:
•	to achieve a General Government Sector net operating surplus; 
•	to maintain operating cash surpluses;
•	to maintain a AAA credit rating;
•	to manage debt prudently and maintain net financial liabilities within the range of all AAA rated jurisdictions;
•	to fully fund the Territory’s unfunded superannuation liability by 2030; 
•	to maintain quality services and infrastructure; and
•	to maintain taxation revenues at sustainable levels.
Objective: Achieve a net operating budget surplus
An accrual operating surplus provides an indication of the sustainability of the Budget: it shows that revenues are greater than expenses, even if the associated cash flows will not occur until some time in the future.  The Government’s objective is to achieve an operating surplus: temporary deficits must only occur if they are offset by surpluses at other times.
The key measure of the budget operating position in the GFS system of reporting is the net operating balance.  There are two major areas where this measure differs from the Australian Accounting Standards operating result:
•	the GFS net operating balance excludes gains from the sale of land, as these are classified as asset sales; and
•	the GFS standard generally treats gains and losses on the value of assets as “other economic flows” and excludes these from the calculation of the net operating balance.
The sale of land has traditionally been an important source of funding for the ACT’s Budget.  However, the GFS treatment highlights the fact that land sales cannot be used to support operating expenditures indefinitely.
An important element of the Government’s strategy in the 2006‑07 Budget was to move the ACT away from its reliance on land sales revenue to finance the operating budget.  In particular, the Government indicated that it would seek to achieve net operating surpluses without land sales by 2008-09.  The 2007‑08 Budget achieves this strategy two years early, with net operating surpluses from 2006-07 onwards.
This does not mean that the Budget does not benefit from the sale of land.  As with any usual asset sale, cash will be received.  In this instance, the general government sector receives cash from the sale of the raw land to the Land Development Agency (LDA), which is in the public trading sector.  This does not impact on the Net Operating Balance.
The general government sector also receives the benefits of dividends back from the LDA, in the same way as dividends are also received from other trading enterprises, such as ACTEW.  Dividends are recorded as revenue in the general government sector.
The ACT’s superannuation investments are structured in a form that makes the ACT’s GFS net operating balance, as presented in the Uniform Presentation Framework statements at Appendix F, appear weaker relative to other jurisdictions.  This difference arises because state governments generally hold their superannuation investments in forms that allow the expected capital gains on these investments to be implicitly included in the calculation of their GFS net operating balances.  
This is a significant matter for the ACT as the long term capital gains on superannuation investments are around $90 million to $130 million per annum.
In order to ensure that the ACT’s Budget is measured on a consistent basis with state governments, it is necessary to adjust the GFS net operating balance reported in the UPF statements in Appendix F, for expected capital gains on its superannuation investments.
It should be emphasised that this adjustment is not simply required to ensure consistency with the GFS results reported by state jurisdictions, it is also required to provide an accurate assessment of the longer term sustainability of the budget position.
This is because the operating budget each year takes into account the accruing expenses on long term superannuation liabilities.  These superannuation expenses will be paid over the next forty to sixty years.  The Government’s superannuation investments held in the Superannuation Provision Account (SPA) are intended to help fund these future cash payments.  Clearly, long term capital gains on investments (for example, increases in the prices of shares) provide a source of funding for the long term superannuation liabilities.  Consequently, it is necessary that these long term average gains be taken into account when assessing the underlying budget operating position.
Therefore, the primary measure of the Budget is the net operating balance which represents the GFS net operating balance adjusted for long term expected capital gains on superannuation assets (consistent with a long‑term expected rate of return of 7.5 per cent).  This measure allows the ACT Budget to be compared on a “like for like” basis with the GFS balances reported by state governments.
Table 1.2.1
The Budget Operating Deficit / Surplus
	2006-07
($m)	2007-08
($m)	2008-09
($m)	2009-10
($m)	2010-11
($m)	
						
GFS net operating balance (UPF statements*)	-29.0	13.5	-56.7	-54.7	-28.8	
plus:  Expected long term capital gains on superannuation investments**	
68.2	
89.5	
108.3	
119.0	
130.2	
						
Net operating balance	39.3	103.0	51.6	64.3	101.5	
* The Uniform Presentation Framework Statements are presented in Appendix F.
**This component of the Territory’s overall returns from superannuation assets varies with assumed changes in the strategic allocation of assets held in the Superannuation Provision Account (SPA).  However, in all years this adjustment, together with interest and dividend revenues, provides for expected returns on the total superannuation asset portfolio of 7.5 per cent per annum.
Objective: Maintain strong operating cash surpluses
The Government’s objective is to maintain strong operating cash surpluses in the general government sector at all times.  The operating cash balance is the cash counterpart to the accrual net operating balance.  It measures all operating cash receipts each year (for example, taxes, fees and fines, and operating grants from the Australian Government) less all operating cash payments (including wages and salaries, cash superannuation payments and payments for goods and services).
Figure 1.2.1 below shows that the general government sector operating cash surplus is expected to be $426 million in 2007‑08, with similar balances across the forward estimates.  A revised operating cash surplus of $360 million is estimated for 2006‑07.  A strong operating cash balance ensures that there is sufficient cash generated from operations to cover the net outlay of the capital works program, to repay debt, and to put aside to address unfunded superannuation liabilities. 
Figure 1.2.1
Net Cash Flows from Operating Activities: General Government Sector

Objective: Maintain a strong balance sheet
The ACT has one of the strongest balance sheets of any government in Australia.  The measures announced in the 2006‑07 Budget and, continued in the 2007‑08 Budget, will ensure that the balance sheet remains strong and the ACT continues to maintain the capacity to support high priority investments in the future.
The GFS system provides several key measures of a government’s balance sheet.
Net debt
A key balance sheet measure in the GFS system is net debt, which takes into account gross debt liabilities as well as assets (such as cash reserves and investments).  The Australian Government, for example, highlights net debt as the key measure of government debt.
Figure 1.2.2 below shows that the ACT is estimated to have negative general government sector net debt in 2007‑08.  This indicates that the Territory’s general government sector cash reserves and investments are greater than its gross debt liabilities.
As indicated in the figure, net debt for some states, including the ACT and Queensland, is reduced because of the impact of investments held to fund superannuation liabilities.  However, even if these assets are excluded, the ACT has negative net debt (equivalent to around 15 per cent of revenue).
Figure 1.2.2
Net Debt Ratio
General Government Sector: 2007-08

	Source: the above graph is populated from data sources from the 2007-08 Budget Papers of other jurisdictions where available.
Where budget data is not available, 2006-07 Mid Year Review data has been used.
Net financial liabilities
While net debt is widely used as a measure in the GFS system, it does not take into account all financial liabilities.  Most particularly, it does not take account of unfunded superannuation liabilities.  These unfunded superannuation liabilities are also a form of debt.  As a consequence, a number of jurisdictions focus on a broader measure of debt, net financial liabilities, as a key balance sheet indicator.
Net financial liabilities is calculated as total liabilities less financial assets (such as cash reserves and investments).  It takes into account all non-equity financial assets but excludes the value of equity held by the general government sector in public corporations (for example, ACTEW).
Figure 1.2.3 below compares the ACT’s net financial liabilities as a proportion of revenue with other jurisdictions.  It shows that the ACT has a lower level of net financial liabilities than most jurisdictions (and below the weighted average level for all AAA rated jurisdictions).
Figure 1.2.3
Net Financial Liabilities to Revenue Ratio
General Government Sector: 2007-08
	Source: the above graph is populated from data sources from the 2007-08 Budget Papers of other jurisdictions where available.
Where budget data is not available, 2006-07 Mid Year Review data has been used.
A key question for governments is whether they should borrow to invest in new capital assets.
It is widely recognised that it is appropriate for governments with strong balance sheets to incur some debt, provided that debt is used to finance high quality assets in areas of community need.  This is because these assets (for example, new roads and hospital facilities) provide benefits to the community over a long period of time.  
It is important, however, that the level of debt is sustainable.  The ratio of net financial liabilities to revenue provides an indicator of the sustainability of a jurisdiction’s debt.  
The Government’s objective is to maintain this ratio within the range of all AAA rated jurisdictions in Australia.  While this ratio is subject to volatility (in particular, net financial liabilities can fluctuate, sometimes substantially, from year to year depending on the condition of financial markets and actuarial valuations), it is desirable that it remains broadly stable over time.  
Net worth
The broadest measure of a jurisdiction’s balance sheet is net worth, which measures the total value of all assets less all liabilities.  The ACT has strong positive net worth - and as a proportion of revenue, one of the strongest of all Australian jurisdictions.
Figure 1.2.4
Net Worth to Revenue Ratio
General Government Sector: 2007-08
	Source: the above graph is populated from data sources from the 2007-08 Budget Papers of other jurisdictions where available.
Where budget data is not available, 2006-07 Mid Year Review data has been used.