Budget Policy Statement

Budget allowances and the Climate Emergency Response Fund

Budget allowances

The operating allowance is the pool of net new operating funding available at each Budget for the Government to meet its fiscal priorities. The Government has decided to keep the operating allowances signalled at Budget 2022 unchanged. These were set at $4.5 billion average per annum for Budget 2023 and $3.0 billion average per annum for Budgets 2024 and 2025. The Budget 2026 operating allowance is now included in the forecast period and has also been set at $3.0 billion average per annum.

The economic context for Budget 2023 remains challenging, with high inflation and strong wage pressures driving up the cost of delivering government services. We are keeping the operating allowances unchanged at the Budget Policy Statement 2023 to ensure that fiscal policy remains contractionary and continues to support the Reserve Bank's monetary policy direction, while still ensuring sufficient new funding to maintain essential government services.

Some of the Budget 2023 operating allowance of $4.5 billion average per annum has already been allocated at Budget 2022, largely in part to the Government introducing a multi-year funding approach in a number of areas, including the 2023/24 health budget. The multi-year funding approach provides greater funding certainty to agencies, which will help to address complex, multi-generational challenges and facilitate long-term investments and strategic planning. This approach brings forward the funding decision rather than any costs, but reduces the overall size of funding available for future Budgets. This emphasises the importance of finding reprioritisation opportunities within existing baselines. Ministers are exploring options for reprioritisation to fund cost pressures and new spending priorities at Budget 2023, which will support the wellbeing objectives for this Budget as well as the Government's overarching policy goals.

Given the considerable global economic uncertainty, the Government will continue to monitor the need for any changes to the Budget 2023 allowance based on economic, tax, and fiscal forecasts, and as more information becomes available on the scale of cost pressures relative to the reprioritisation that is achieved.

Table 1 - Budget allowances before pre-commitments

Source: The Treasury

The multi-year capital allowance (MYCA) is a four-year rolling envelope for new capital investment that enables a longer-term approach to capital investment. Since Budget 2022, pre-commitments of $2.2 billion have been charged against the Budget 2022 MYCA allocation of $5.1 billion. The MYCA tends to be increased at the Budget Policy Statement, as the Treasury adds a new year to its forecast period. The Government has agreed to increase the MYCA to $12 billion at the Budget Policy Statement 2023, which represents an increase of $9.1 billion to the remaining balance of $2.9 billion. The increase in the MYCA in part reflects the inclusion of Budget 2026 within the forecast period, and signals the Government's capital pipeline through to Budget 2026. The Government acknowledges that capacity constraints will be a factor in determining the size of the capital investment package at Budget 2023.

These allowances have been incorporated into the Treasury's HYEFU 2022 fiscal forecasts.