5.1	EXPENSES AND FORWARD ESTIMATES
Total expenditure in the General Government Sector is $2.8 billion (2005‑06 estimated outcome).  Approximately 47 per cent of the total expenditure relates to employees’ wages and superannuation.  Functionally, 42 per cent of the total expenditure relates to health and education portfolios.
The Territory’s expenditure needs are close to the national average.  Its socio‑demographic composition (factors such as, younger, and healthier population) and geographic compactness cancel out diseconomies of small scale.  Relative to national average, the ACT therefore receives only a small net benefit (around $22 per capita) from the Commonwealth Grants Commission’s assessment of expenditure needs.
The actual expenditure in the ACT is considerably above the assessed level of need, and has remained so (in the order of 20‑25 per cent) since self‑government.  A higher than assessed level of expenditure could be due to a higher level (and/or quality) of service, or inefficient service provision.  In the case of ACT, its origins are in the service and administrative structures from self‑government, and community expectations of a higher level of service.
The Territory’s revenue effort is close to its capacity to raise revenue, that is, close to the national average.  Once again, this mismatch in revenue and expenditure efforts has existed since self‑government.
To address this long‑term fiscal imbalance, the Government is undertaking a broad ranging structural reform program.  This includes both revenue and expenditure measures (further detail is included in Chapter 2).  A range of measures will result in growth in expenditure across the budget and forward estimates period being limited to less than the growth in revenues.
The forecast outcome for expenditure in 2005‑06 is $8.6 million below the original budget.  The 2006‑07 budget is for expenditure to increase by 3.1 per cent.  This is underpinned by an increase of only 1.8 per cent in employee expenses – a decrease in real terms.  
Across the forward years (2007‑08 to 2009‑10), employee expenses are budgeted to remain broadly at the 2006‑07 level in real terms, reflecting the flow‑on effects of the saving measures introduced in this budget, and any significant wage rises in real terms largely being offset by productivity gains.
Total expenses across the forward years grow at an average annual rate of 3.7 per cent.  Expenditure on health, however, is budgeted to grow at an average rate of 6.4 per cent per annum, reflecting both growth in demand and excess health inflation.
This chapter provides the 2005‑06 estimated outcome and 2006‑07 Budget and forward estimates for expense items.  A discussion of the main expenditure items is also included.

Table 5.1.1
General Government Expenditure – Australian Accounting Standards
 	 	 	 	 	 	 	 	
2005-06		2005-06	2006-07		2007-08	2008-09	2009-10	
Budget		Est.Outcome	Budget	Var	Estimate	Estimate	Estimate	
$'000	 	$'000	$'000	%	$'000	$'000	$'000	
							 	
	  Expenditure							
								
988,618 	Employee Expenses	975,728 	992,807 	2 	1,008,952 	1,038,859 	1,069,194 	
319,568 	Superannuation Expenses	350,620 	365,994 	4 	378,109 	400,128 	421,373 	
590,187 	Supplies and Services Expenses	570,501 	610,928 	7 	640,756 	678,838 	725,111 	
172,488 	Depreciation Expenses	168,736 	179,702 	6 	188,897 	190,009 	189,875 	
49,401 	Borrowing Costs	53,509 	52,718 	-1 	52,919 	53,959 	55,985 	
40,423 	Cost of Goods Sold	15,716 	16,359 	4 	17,718 	18,976 	20,253 	
516,077 	Grants and Purchased Services	501,832 	514,321 	2 	528,288 	546,347 	563,201 	
98,078 	Other Expenses	129,864 	124,005 	-5 	161,112 	139,167 	125,618 	
32,611 	Transfer Expenses	32,334 	31,828 	-2 	32,265 	32,706 	33,201 	
								
2,807,451 	  Total Expenses	2,798,840 	2,888,662 	3 	3,009,016 	3,098,989 	3,203,811 	
Note: Totals may not add due to rounding
Factors Affecting Expenditure Levels
Employee Expenses
For 2005‑06, employee expenses are $13 million or 1 per cent below the original Budget.  This is partly due to the reclassification of the Land Development Agency from the General Government Sector.
Employee expenses will grow by $17 million or 2 per cent in 2006‑07 from the 2005‑06 estimated outcome to the 2006‑07 Budget.  This increase is largely due to the annual increase in wage costs, offset by savings measures introduced in this budget.
The forward estimates are budgeted to remain broadly at the 2006‑07 level in real terms, also reflecting the flow‑on effects of the saving measures introduced in this budget, and a requirement that significant wage rises in real terms be offset by productivity gains.
Superannuation
For 2005‑06, superannuation expenses are $31 million or 10 per cent above the original Budget.  This relates to an increase of $42 million due to the actuarial review of the Territory’s defined benefit employer superannuation liabilities, which was conducted in December 2005.  This is offset by $13 million due to a reduction in the discount rate at which the liability is valued.  
Superannuation expenses will increase $15 million or by 4 per cent in 2006‑07 from the 2005‑06 estimated outcome to the 2006‑07 Budget.  The increase is due to the estimated growth in superannuation liabilities as a result of the latest actuarial estimates.
Supplies and Services Expenses
For 2005‑06, supplies and services expenses are expected to decrease by $21 million or 3 per cent below the original Budget.  This is mainly due to the underexpenditure of the Treasurer’s Advance of $6 million and the reclassification of the Land Development Agency from the General Government Sector (reducing supplies and services expenses by $8.4 million).  The 2005‑06 Restructuring Fund was also underspent by $8 million in 2006‑07.
Supplies and Services expenses are projected to increase by $40 million or 7 per cent from the 2005‑06 estimated outcome.  The variance partly relates to the one off reductions in expenditure in 2005‑06 discussed above and the impact of additional funding for a further Restructure Fund of $14 million in 2006‑07.  
The variance is also due to the impact of CPI increases.
Depreciation and Amortisation
Depreciation and amortisation expenses are estimated to increase by $11 million or 6 per cent in 2006‑07 from the 2005‑06 estimated outcome reflecting the scheduled completion of capital works.  
This is mainly due to the increase in the level and value of the asset base.
Borrowing Costs
Borrowing costs are expected to marginally decrease by $1 million or 1 per cent in 2006‑07 from the 2005‑06 estimated outcome.  Borrowing costs are estimated to increase by $4 million or 8 per cent in 2006‑07 reflecting the impact of borrowings undertaken on behalf of ACTEW.  These borrowings will also have corresponding interest revenue.
Cost of Goods Sold
The estimated outcome for 2005‑06 is expected to be $25 million lower than the original budget due to the reclassification of the Land Development Agency out of the General Government Sector.  Cost of goods sold is expected to increase marginally in 2006‑07 from the 2005‑06 estimated outcome.  
Grants and Purchased Services
For 2005‑06, grants and purchased services will decrease by $14 million or 3 per cent.  This decrease is mainly due to the overestimated Australian Government grants for non government schools of $12 million in the original budget and the underexpenditure of a number of grants.  The overestimation of the non government schools grant is budget neutral as revenue is similarly reduced.
The forecast increase in grants and purchased services of $12 million or 2 per cent is due to increased payments for additional policing strength of $4 million and the rollover of various programs from 2005‑06 of $7 million.
Other Expenses
For 2005‑06, other expenses will increase by $31 million or 32 per cent from the original budget.  This is due to the unexpected one‑off cost of the $11 million write‑off of the Ginninderra District High School, and a significant legal compensation expense of $7.5 million, in the 2005‑06 estimated outcome.
Other expenses are estimated to decrease marginally by $6 million or 5 per cent in 2006‑07 from the 2005‑06 estimated outcome.  This is due to the one‑off cost of the $11 million write‑off of the Ginninderra District High School, and a significant legal compensation expense of $7.5 million mentioned above.  A further write‑off of $8.6 million is included in 2006‑07 as a result of the schools rationalisation program.
The forward years also contain further write‑off of $40.5 million in 2007‑08 and $16.4 million is included in 2008‑09 as a result of the continuing schools rationalisation program.
Transfer Expenses
Transfer expenses relate to appropriation payments to the PTE Sector.
Transfer expenses are estimated to decrease marginally in 2006‑07 from the 2005‑06 estimated outcome.  
Community Service Obligations
Community Service Obligations (CSOs) primarily relate to Public Trading Enterprises.  The definition adopted by the ACT Government is the one proposed by the Steering Committee on National Performance Monitoring of Government Trading Enterprises, established under the aegis of the Special Premiers’ Conference in 1991, which states:
“A Community Service Obligation arises when a government specifically requires a public enterprise to carry out activities relating to outputs or inputs, with identified public benefit objectives, which it would not elect to do on a commercial basis, and which the government does not require other businesses in the public or private sector to undertake, or which it would only do commercially at higher prices.”
In the ACT, the Government agreed to extend the policy to other business units regardless of whether the unit is formally a Territory Owned Corporation or a Statutory Authority, and irrespective of its organisational structure. 
The separate identification of CSOs provides transparency on the full costs of services, and the financial implications of government decisions in the provision of services to specific targeted groups in the community.
Table 5.1.2 lists Community Service Obligations funded in the 2006‑07 Budget.
Table 5.1.2
CSOs Funded in 2006‑07 Budget
Policy/Purchasing Department
	CSO Provided by	2006‑07 Price
$’000	Description	
Exhibition Park in Canberra	
	Exhibition Park Corporation	321	Compensation for charging below market rates, as a result of Ministerial direction, or in agreements entered into by the ACT Government.	
Department of Urban Services	
	Yarralumla Nursery	145	Free plant issue scheme.	
	ACT Forests	2,138	Provision and upkeep of public use areas within ACT Forests.	
	ACTION	54,655	Funding provided to ACTION to operate network services.	
Department of Disability, Housing and Community Services	
	ACTEW	1,257	Half cost of water use for schools and churches.	
	ACTEW	2,748	Half cost of sewerage services to churches and hospitals.	
	ACTEW	 48	Compensation for water and sewerage rates for lease granted under the (repealed) Church Land Act 1924.	
	ACTEWAGL	5,123	Rebates on electricity bills to pensioners.	
	ACTEW	3,623	Rebates on water and sewerage charges to pensioners.	
	ACTEW	161	Administration cost for rebates.	
	Community Health	780	Part subsidy to taxi fares for eligible persons with disability.	
Public Trustee for the ACT	
		415	Financial management under Guardianship Management and Property Tribunal’s determinations and under power of attorney, welfare funerals.	
Total		71,414