1.4	statement of THE sensitivity of budget estimates
This statement of sensitivity is made in line with Section 11(1)(c) of the Financial Management Act 1996.
Sensitivity of Budget Estimates
The following sensitivity analysis has been applied to economic parameters used in the formulation of the revised forward estimates.  
Territory revenues are sensitive to changes in economic conditions, both in the ACT and nationally (for example, through GST revenues).  
Territory expenses are less sensitive to economic conditions.  However, over time, changes in parameters such as population, the age profile of the population or other demographic variables may affect the demand for government services.  In response policy decisions may be taken to vary expenditure levels to accommodate the change in demand.  
Sensitivity of Economic Assumptions
Consumer Price Index
A change in the Consumer Price Index (CPI) parameter will affect the forecasts for revenues such as general rates, conveyance, general insurance, hiring duty, leases, fees, Commonwealth grants, user charges and various other duties and revenue.  If the CPI was to increase by 1% more than the forecast in each year of the budget period, forecast revenue would increase by the amounts shown in the table below.  General rates, fees and user charges are linked to the actual CPI change in the previous year and therefore a higher than expected CPI increase in 2005-06 would affect rates in 2006-07 rather than in 2005-06.  
It is expected that CPI increases would generate cost increases for agencies’ budgets.  It is expected that agencies would adjust mid‑year expenditure plans to absorb immediate cost increases within the 2005-06 year, but in forward years budgets should change for adjustments in the CPI.  An estimate for the impact of 1% increase in CPI is shown in the following table.
Table 1.4.2
Impact of CPI on General Government Sector Revenues and Expenses
	 2005-06 
$’000	 2006-07 
$’000	 2007-08 
$’000	 2008-09 
$’000	
Taxes +1%	589	2  544	4  647	6  907	
Fees, user charges, grants* and other revenue +1%	0	8  219	17  142	26  656	
Expenses + 1%	0	14  950	31  552	49  774	
* refers to Specific Purpose Payments only.

Interest
The impact of a change in interest rates on earnings on the General Government Sector investment portfolio and on borrowing costs on floating rate borrowings is presented below.
In regard to the General Government Sector investment portfolio, the impact of a 1% increase in the estimated interest rate returns assumed in the Budget estimates for interest revenue is shown in the following table.
Table 1.4.3
Impact of interest rate change on General Government Sector  investment portfolio: 
Interest Revenue
	2005‑06	2006‑07	2007‑08	2008‑09	
	$’000	$’000	$’000	$’000	
+ 1%	 6  673	 4  768	 4  294	 4  692	

The impact of a 1% increase in the assumptions used to calculate the interest costs on the ‘floating rate borrowings’ is shown in the following table.
Table 1.4.4
Impact of interest rate change on borrowing costs
	2005‑06	2006‑07	2007‑08	2008‑09	
	$’000	$’000	$’000	$’000	
+ 1%	 2  724	 2  856	 2  856	 2  856	

State Final Demand
A change in the State Final Demand (SFD) parameter will affect the forecasts for revenues, such as payroll tax.  If SFD was to increase by 1% more than the forecast in each year of the budget period, forecast revenue would increase by the amounts shown in the following table. 
Table 1.4.5
Impact of SFD on General Government Sector Revenue
	 2005-06 
$’000	 2006-07 
$’000	 2007-08 
$’000	 2008-09 
$’000	
Total impact +1%	2  061	4  612	7  771	11  674	

Sensitivity of Other Assumptions
Employee Wage Negotiations
Wages make up the single largest cost in providing government services.  Significant funding was provided through the 2003‑04 Appropriation Act No.3 and the 2004‑05 Appropriation Act No.2 for wages growth.  The 2005‑06 Budget and forward estimates takes into account estimated wages growth.  
Residential conveyance volume and price
The following table shows the revenue increases that would result from:
•	the volume of residential transactions growing by 1% more than the forecast in each year of the Budget period; and
•	the average residential price growing by 1% more than the forecast in each year of the Budget period.
Table 1.4.6
Impact of Change in Volume and Price on Conveyance Revenue
	 2005-06 
$’000	 2006-07 
$’000	 2007-08 
$’000	 2008-09 
$’000	
Residential transaction volume +1%	1  322	2  888	4  753	6  957	
Residential price +1%	2  082	4  491	7  275	10  478