Capital allowances
The FSR identified issues with, and stated there would be a review of, the capital allowance framework.[2] Box 1 sets out the Government's decisions following this review.
Box 1 - Review of the capital allowance framework
In 2019, the previous Government moved from a capital allowance for each future Budget, to a rolling multi-year capital allowance (MYCA) covering all four Budgets in the forecast period. The aim of the MYCA was to have more flexibility to move funding forward or back between Budgets, while staying within an envelope of funding. This was expected to support a longer-term view of capital investment.
However, the rolling forward of the MYCA's four-year funding envelope each year created the opportunity to make large annual increases to the MYCA and immediately commit them. In Budget 2023, for example, the previous Government topped up the MYCA by $17.6 billion and committed $17.4 billion in that Budget alone, leaving only $3.1 billion in the MYCA to cover new capital investments in the following three Budgets. This practice made the MYCA ineffective at supporting multi-year trade-offs and reduced the credibility of previously stated capital investment intentions.
The Government has decided to discontinue the MYCA framework. It will set capital allowances for each Budget in the forecast period, with flexibility to vary them in response to anticipated investment proposals, within the constraints provided by the fiscal strategy. Single-Budget capital allowances will be easier to understand and communicate.
Capital investment requirements can be large, uneven and sometimes unexpected. In some Budgets, the Government's new capital expenditure will be greater than the set capital allowance and in others it will be less. This flexibility makes the capital allowances a looser constraint than the operating allowances, and multi-year trade-offs can still be made. The capital allowance is an indication of future capital expenditure, but the ultimate financial constraint is the fiscal strategy, and particularly the Government's intention to reduce net debt as a percentage of GDP.
Capital expenditure is also constrained by the operating allowances, as capital projects typically have operating costs such as depreciation and maintenance.
As a transitional measure, in moving from the MYCA to single-Budget allowances, the Government has set the capital allowances for each of the next four Budgets at $3.625 billion, as this is the equivalent of topping up the existing MYCA by $7 billion (as anticipated in the FSR's fiscal projections) and dividing the total evenly over four Budgets. Compared to the 2024 Budget Economic and Fiscal Update (BEFU), this results in slightly higher capital allowances for Budgets 2025 to 2027.
Through the Budget 2025 capital initiatives process, more information about the capital needs and opportunities of government agencies will be provided to Ministers. The size of the capital allowances will therefore be reconsidered next year in the Budget.
Note
- [2] Capital allowances are amounts allocated in the forecasts for net new capital investment (above and beyond capital investment funded from agencies' existing balance sheets and baselines).