The Charter, under clause 30, details how the policy costings are to be prepared. It provides for the Secretaries to issue written guidelines (this booklet) recommending approaches or methods to be used in preparing costings.8
Division of responsibilities
The Charter divides responsibility for costings between the Secretaries:
- the Secretary to the Treasury is responsible for costing policies affecting taxation revenue; and
- the Secretary of Finance is responsible for costing policies that affect government outlays and expenses and non-taxation revenue.9
Policies that have implications for both taxation revenue and expenses will be jointly costed by the Secretaries. The costings for these policies will separately identify the revenue and expense components.
Secretaries' obligations in costing policies: clarity and timeliness
The Secretaries will aim to be clear, transparent and timely in costing policies. In undertaking policy costings, the Secretaries will:
- endeavour to provide their best estimate of the full cost of a policy (including departmental expenses where requested and feasible);
- cost policies in a manner consistent with methodologies used to prepare the Budget statements and fiscal reports required under the Charter;
- cost Government, Opposition and minority party policies in a consistent manner;
- only provide financial costings, and not provide policy advice or assessments of the economic impact of policies; and
- produce a self-contained written report on the costing that fully justifies the published costings.
The Secretaries will endeavour to complete and release a costing within five business days of receiving a request. However, this may not be possible in the case of complex costing requests where data is difficult to obtain, or where more detailed information needs to be provided by the party. In such cases, a public statement to that effect will be made by the relevant Secretary at the outset, or when it becomes clear that the costing cannot be completed within the time frame. Where additional information is required, the five days will exclude the time taken to obtain the additional information.
For requests made after polling day, where the caretaker period extends after that day, the Secretaries are to publicly release costings as soon as practicable after the request is received.10
Policy costings will focus on the effect of a policy on the Australian Government's key Budget aggregates (both cash and accruals) and include both the estimated cost and savings associated with the proposal. The estimates of the policies will show both the impact on the fiscal balance and the underlying cash balance in current dollars, as well as the impact on the headline cash balance as appropriate.
A request for a policy costing should fully outline the design features of the policy to be costed. It will assist in the preparation of costings if detailed information is provided on the assumptions that parties may have used in making their own assessments regarding the cost of policies. If necessary, in order to fully cost a policy, the relevant Secretary may request, in writing, more information from the Prime Minister, the Leader of the Opposition or the Leader of a minority party.11 Appendix C contains a pro-forma indicating the information normally required for a costing to be prepared.
Estimates are provided for the current financial year and the forward estimates period using the most recent set of published estimates under the Charter as the benchmark. For election costings, these will be the forward estimates published in the Pre-Election Economic and Fiscal Outlook (PEFO). The financial years used in costings ends in June. Where necessary, full year, part year and one off effects will be distinguished in the advice.
Where revenue and expense costs are likely to be significantly different beyond this forward estimates period — for example, because the measure is not scheduled to commence or reach ‘maturity' until after the forward estimates period — it may be necessary to include a statement about the financial impact of the policy beyond the forward estimates.
In the case of costing a policy package, both the cost of individual components and the overall cost of the package will be undertaken and, where feasible to do so, the effect of one component of a package on another will be taken into account and reported.
While costings will generally be the Secretaries' best assessment of the cost of a policy, in cases where assumptions are particularly uncertain, Secretaries may choose to publish costings as a range of possible outcomes.
Public Debt Interest12
Costings will generally not account for the impact on Public Debt Interest (PDI) payments, unless it is an explicit policy objective to affect the level of interest payments, or the policy involves transactions of financial assets (such as loan schemes). PDI costings will normally assume no change to the debt management strategy.
Further information on the budget treatment of balance sheet transactions, including government investment funds and financial asset transactions can be found in Appendix A.
Departmental expenses will be included where analysis of the policy shows that these are material. Existing programmes/policies of a similar nature will be used as a guide to determining these expenses.
Consistency and transparency of costing assumptions
Any economic data or forecasts used in costings will be consistent with the most recent publicly released estimates. The PEFO will be the basis of the economic parameters used in costing election commitments.
Other assumptions used in costings (for example, the numbers of people making use of a particular rebate or estimates of taxable incomes) will be the most appropriate available, based on the best professional judgment of the Secretaries.
The nature of assumptions used will be made clear by the Secretaries when publicly releasing costings and any caveats associated with the assumptions will be outlined. To maintain consistency, assumptions used in one policy costing will generally be used again for costing similar policies.
Behavioural, direct and indirect effects
Wherever possible, costings will take into account the impact of a change in policy on the behaviour of certain groups, where this impacts on the cost of a measure. For example, a new taxation concession will advantage an activity receiving the concession over those which do not. This is likely to result in resources (capital and labour) moving to activities which receive the concession from those which do not. The movement of resources will affect the likely response to a policy change and can affect the costing.
Costings will therefore consider the impact of resource constraints and where the resources for an expected policy response will come from. For example, resource constraints will be particularly apparent in an economy near full employment, but can still exist in a less than fully employed economy. Failure to take account of resource constraints is likely to result in an overestimate of the impact of the behavioural response on the costing. However, reliable information on the effects of a particular policy change is often unavailable. As such, estimates of behavioural responses are the element of costings which require the greatest exercise of judgment.
Behavioural responses may be estimated from previous experience with similar changes; academic and other studies of response effects or price elasti
cities; input from consultations or submissions; econometric modelling and studies; and sensitivity analysis estimating the scope for variations and taking a point estimate within the range.
An assumption of no behavioural change may be necessary where the impacts of policy changes cannot be estimated due to a lack of information.
While costings will take into account behavioural effects, they will generally only take into account the direct behavioural effects of a policy change, and not reflect so–called ‘second-round' or indirect effects.
Second-round effects occur where a policy measure affecting one market has flow-on effects to broader markets, sometimes even to the macroeconomic level. This may include: potential changes in industry structure; a change in aggregate employment; or changes in investment or saving.
Second-round effects are generally not included in costings for a range of reasons, including uncertainty in estimating the magnitude and timing of the effects and because second-round effects are likely to be small relative to the direct financial impact of a measure. Second-round effects are also likely to take longer to arise than the immediate costs of a new policy proposal, and often may not occur within the forward estimates' timeline.
Second-round effects have been included in costings rarely. The few occasions were: the 1994 Working Nation policy; the 1999 Review of Business Taxation; the 2000 New Tax System; the 2005 Welfare to Work package; and the 2010 Stronger, Fairer, Simpler package. These packages included estimates of second-round effects because the broadly based nature of the packages meant that they were expected to produce unambiguous second-round benefits for the whole economy rather than shifting resources from one activity to another. Moreover, the magnitude of the reforms meant that the second-round effects were likely to be measurable over the forward estimates timeframe.
Commonwealth bodies' assistance in preparing costings
The Charter allows the Secretaries to request an Australian Government body (for example, other government departments or agencies) to provide information to assist in the costing.13 An Australian Government body is required by the Charter to comply with such a request in time to allow the information to be taken into account in the preparation of the policy costing, unless it is not practicable for the body to do so, or where providing the information would contravene another law of the Commonwealth.14 The Secretaries will ensure consultations take place with other relevant departments or agencies, at senior management level, as a matter of course in producing a costing, so as to help ensure the assumptions chosen are the most appropriate. However, the final responsibility for the assumptions used will remain with the Secretaries.
Further information required for the completion of costings
If the Secretaries consider that further information is required, they may request information from the Prime Minister, or from the Leader of the Opposition, or the Leader of the relevant minority party, as appropriate, in writing.15 Secretaries will endeavour to ask for such additional information within two business days of receiving the costing request. Further discussion between Treasury and/or Finance officials and advisers in the offices of the Prime Minister or the Leader of the Opposition or the Leader of the relevant minority party may be necessary as part of that process. Additional information provided in such discussions should be followed up in writing and forwarded to the Secretaries.
Requests for clarification will be noted in the final costings advice where the information materially affects the costing outcome.
Variations in costings from those specified by parties
Where there is a difference between a costing request and the publicly released policy, the Secretaries will seek to clarify the difference by seeking further information as outlined above. If that is not possible, the costing will be based on information provided in the costing request.
The difference may be due to variations between the assumptions made by the parties and those made by the Secretaries. Where a costing uses different assumptions to those specified in a party costing request, the costing advice will explain the reason for using those different assumptions.
8 Subclause 30(1) of Schedule 1 to the Charter.
9 Subclause 30(2) of Schedule 1 to the Charter.
10 Paragraph 31A(3)(c) of Schedule 1 to the Charter.
11 Subclause 30(3) of Schedule 1 to the Charter.
12 PDI is the cost of servicing the stock of Australian Government debt incurred to meet budget financing and other borrowing requirements.
13 Subclause 32(1) of the Schedule to the Charter.
14 Subclause 32(2) of the Schedule to the Charter.
15 Subclause 30(3) of Schedule 1 to the Charter.