- Budgeted Deficit Reduction
- Economic Outlook
- The Uncertainty Issue
- Estimated Budget Expenses
- Arts and Culture in the Budget
- The Environment Budget
- Australia Council Funding
The environment and culture were not the only sectors of the Australian economy to take a king hit in the 2014-15 May Budget, but they are highly vulnerable to damage from actions taken by others in the domestic and international economy. The most notorious example is atmospheric and other environmental pollution perpetrated by a few and damaging everyone, but there are also numerous ways that cultural traditions and institutions can be hurt. These factors are discussed elsewhere on the Knowledge Base in connection with our major project for 2014 — to use scenario planning to build a better understanding of the risks and opportunities affecting Australia’s cultural future over the coming 10-20 years.
It is a fair assumption that weakening of the cultural and environment sectors will make it harder for them to respond to change, due to lack of funds, loss of human resources, and intangible factors such as diminished resilience.
This article analyses the budget measures with a focus on cultural and environmental issues, based on the government’s 2014-15 budget papers including the main Australian arts funding body, the Australia Council. It has its own section towards the end of this article, but there is good reason to bring two findings forward to this introduction.
The trend in the Australia Council’s expenses from 2009-10 to the end of the forward budget estimates in 2017-18 was estimated by combining the 2014-15 budget papers with the most recent annual report from the Australia Council.1
Despite some uncertainties in the trend calculation, Chart 1 represents an acceptable picture of the trend in funding through the Australia Council. At constant values as all tables are in this article, the trend is barely positive, and then only due to two higher-than-average years, 2012-13 and 2013-14. The annual trend increase is $565,000, which at best represents a tiny annual increment of less than 0.3% (point three of one percent) in the total Australia Council budget of more than $200m. Moreover, the correlation measured by r2 is poor, suggesting that the real trend is not statistically different from zero.
The 2014-15 budget itself completes the perspective: following 2013-14 which is expected in the budget to end up with a total of $219.2m, the budgeted year of 2014-15 will see a 4.3% drop in real terms, and a flat trend in subsequent years.
Based on the 2012-13 annual report from the Australia Council, a stronger upward trend in funding might have been expected, or at least hoped for. If the more generous funding level set in 2012-13 had continued, the annual trend would have been more than $3m — though even this modest growth rate of about 1.5% per annum may contain a dash of wishful thinking, since it depends on a single year’s growth (2012-13).2
Following the budget speech on 13 May, the Australia Council’s CEO Tony Grybowski told the ABC’s national arts reporter Anne Maria Nicholson that while he was “relieved” that funding for the 28 major arts organisations (half of which are classified as music) would be maintained, the $10m annual reduction in the total Australia Council budget would mean smaller grants to individual artists and cuts to small arts organisations.
Other commentators included David Berthold, incoming director of the Brisbane Festival who said, “The danger is that the most affected will be the grassroots: a major source of innovation and adventure.” Tamara Winikoff of the National Association of Visual Arts (NAVA) noted that the budget “impacts most adversely on those who can least afford it. It’s short-termism at its clearest because all the up and coming talent is going to be severely curtailed. The Australian community is the loser because new talent will be squashed.”
For music, Richard Letts blogs in Fidget with the Budget: “Consistent with the rest of the budget, this means it will hit small music organisations, musicians and composers big time. I don’t have complete figures but am guessing 20%.”
The statistics in Chart 2 suggest that this is a good guess. Given that funding to major organisations will not be affected (meaning an unchanged average of $98.7m over the next four years for what was 58% of the Australia Council’s funding and will now be more), the $10m drop affects the remaining categories, causing a 12.3% reduction from $81.6m to $71.6m. But “key organisations” ($21.9m) are smaller versions of the major arts organisations, and covered by triennial arrangements. If that means unchanged future grants, the total remaining programs which used to take up 29% of Australia Council grants would be reduced by 17.7% from $56.6m to $46.6m. If the board grants are indeed the most vulnerable, relative to government initiatives and council initiatives, the 20% reduction could well be a reality for this category.
There are many uncertainties. Government initiatives averaged almost $18m in the four years to 2012-13. They include regional touring programs, Creative Australia Artists Grants (described as a five-year, $10m program in the annual report, going to 2015-16), artists in residence, major festivals, and the Australia Council’s major export initiative Sounds Australia which is managed by the Australasian Performing Right Association (APRA). There may well be different priorities attached to some of these programs.
Budgeted Deficit Reduction
Table 1 shows two measures of the budgeted path towards balance. The reduction in the cash balance will culminate in 2013-14 at almost $50 billion while the fiscal balance is expected to total $45 billion in that year. These deficits are budgeted to be substantially reduced in 2014-15, and an approximately balanced budget is expected, or hoped for, by 2017-18.3
The basic economic forecasts are shown in the second section of Table 1. They should be read in conjunction with the government’s own overview in Budget Paper 1, Statement 2:
“The Australian economy is in the midst of a major transformation, moving from growth led by investment in resources projects to broader-based drivers of activity in the non-resources sectors. This is occurring at a time when the economy has generally been growing below its trend rate and the unemployment rate has been rising. During this transition, the economy is expected to continue to grow slightly below trend and the unemployment rate is expected to rise further to 6¼ per cent by mid-2015.
In this environment, the Government is focused on implementing measures to support growth and jobs while putting in place lasting structural reforms to restore the nation’s finances to a sustainable footing. …
The near-term outlook for the household sector has improved. Leading indicators of dwelling investment are consistent with rising activity, while household consumption and retail trade outcomes have improved recently, consistent with gains in household wealth. This is partly offset by weaker business investment intentions, particularly for non-resources sectors.
The outlook for the resources sector is … still expected to detract significantly from growth through until at least 2015-16, as reflected in the outlook for investment in engineering construction which is forecast to decline by 13 per cent in 2014-15 and 20½ per cent in 2015-16. Rising resources exports are only expected to partially offset the impact on growth. Overall, real GDP is forecast to continue growing below trend at 2½ per cent in 2014-15, before accelerating to near-trend growth of 3 per cent in 2015-16.
The labour market has been subdued since late 2011, characterised by weak employment growth, a falling participation rate and a rising unemployment rate, although outcomes since the beginning of 2014 have been more positive. The unemployment rate is forecast to continue to edge higher, settling around 6¼ per cent, consistent with the outlook for real GDP growth. Consumer price inflation is expected to remain well contained, with moderate wage pressures and the removal of the carbon tax.
The outlook for the global economy has improved gradually since the end of 2013, led by a pickup in activity in advanced economies, most notably the United States. While activity has moderated in emerging market economies, these economies are still expected to contribute nearly three quarters of global growth over the forecast period.
Despite continued solid growth in China, prices for Australia’s key commodity exports have fallen sharply since the start of the year. Coal prices are expected to remain weak while iron ore prices are expected to ease further in line with growing world supply. In light of a further expected decline in the terms of trade and subdued domestic price growth, nominal GDP is forecast to remain historically weak, growing by only 3 per cent in 2014-15 before strengthening somewhat to 4¾ per cent in 2015-16.
Sustained softness in nominal GDP growth is a recent phenomenon, emerging over the past two years. Given the importance of nominal GDP to income growth, this continuing weakness contributes to ongoing subdued growth in a number of major areas of revenue.
There are both upside and downside risks to the economic outlook. Most notably, non-resources business investment could pick up earlier and more rapidly than expected following a prolonged period of caution, while some trade-exposed sectors would benefit from a lower exchange rate, which is historically an outcome associated with a fall in the terms of trade. Conversely, the fall in resources investment is likely to be lumpy, while the associated rise in exports also has uncertain timing. International risks are more balanced than previously, though still to the downside as economies continue to deal with legacy issues from the financial crisis.”
The Uncertainty Issue
The government’s statement on the economic outlook refers to two main uncertainty indicators:
- Treasury’s own forecasting performance. Over 20 years to 2011-12, the accuracy of forecasts of real GDP growth generally remained within a range of ½ to 1 percentage points. The accuracy was less in the three years following the global financial crisis but has since returned to within that range.
- The dispersion of current economic forecasts of the Australian economy.
An inaccuracy range of, say ¾ percentage points, still means that a 2.5% forecast of real GDP for 2014-15 might fall between 1.75% and 3.25% growth, which is not meant to belittle the government’s foremost economic forecaster but only to show that the uncertainties remain considerable even in Treasury’s forecasting performance.
This impression is reinforced by analysis of forecasts of key macroeconomic variables collected by Consensus Economics from prominent economists. For the calendar year 2014, real GDP forecasts collected in April 2014 (a mere eight months from the end of the year) range from 2.0% to 3.2% growth. The range for calendar 2015 is from 2.4% to 3.2%. Treasury’s estimate for both years is close to the mean consensus forecasts — perhaps due to the consensus process of its own forecasting personnel which adds weight to the impression of quality.
Treasury’s open and honest analysis is a reminder that failure to make precise numerical statements about the economic future remains a significant factor in any forecasting effort. Uncertainty is also reflected in the wider economic assumptions in the Budget Papers:
- Major transformation of the economy is forecast from the resources boom towards greater reliance on non-resource projects – when?
- Unemployment continuing to rise on current forecasts, but will 6¼% be the ceiling reached in that politically crucial statistic and will it be in 2015?
- The decline in the resources sector will detract from total Australian economic growth, but how much and until when?
- How long will the interim period be between Australia’s disproportionate dependence on resources exports and the emergence of alternative exports?
- How important in the total analysis is the decline in coal and iron ore prices — and for that matter the price of other raw materials?
- When will our international economic partners recover from dealing with legacy issues from the global economic crisis?
These are some risks that will face the government in its effort to deal with the massive dual task, with its apparent inconsistencies, outlined in the 2014-15 Budget:
- Implementing measures to support growth and jobs in a period of major transition, and simultaneously dealing with the main challenge it set itself:
- Putting into place major structural reform quickly, to reduce the deficit it sees as the major issue.
The adverse reaction during the initial two to three weeks after the budget was announced have been strong, not least from students and young people generally. Getting the budget measures through the Senate in their entirety seems a nearly impossible task, and the desired outcome to balance the budget will be postponed.
The arts, culture, heritage and the environment, however, are likely to remain under threat unless a stronger consensus to protect them is generated. They have not been prominent in the media and general public debate.
Estimated Budget Expenses
Table 2 lists the “functions” of the budget according to the percentage change in expenses between 2013-14 and the budget year, 2014-15 (second-last right column). The extreme right-hand column shows the change between the forward estimate of 2017-18, and 2013-14. By 2017-18, only six functions are budgeted to have increased expenses in real terms: education (4.8%), fuel and energy (5.5%), health (10.1%), social security and welfare (14.5%), defence (14.8%), and “other purposes” which are largely debt servicing (34.2%). Removing “other purposes”, the total forward estimate in Table 2 for 2017-18 reaches $351.4 billion at 2013-14 values, compared with $340.9 billion in 2013-14 — an total increase of 3.1% over four years.
The largest item in Table 2, social security and welfare, will reach $161 billion and gain share of total expenses, as will the second-largest item, health ($71 billion), despite the adjustments in the 2014-15 budget which have been subject of much public debate. Education has also received a modestly growing budget between 2014-15 and 2017-18 (reaching $31 billion).4
The largest budgeted reduction is in housing and community amenities (-47.6% in 2014-15 and flat at the reduced level in subsequent years). The notes to Table 2 show that the drop was almost entirely due to environment protection (the so-called “community amenities”) being immediately slashed from $4.5 billion in 2013-14 to $910m in 2014-15 — an 80% cut in real terms. The reduction is associated with the planned abolition of the carbon tax, while any increase in the environment protection budget in subsequent years is associated with the government’s alternative environment protection scheme, called the Emissions Reduction Fund. In real terms, however, there is hardly any increase in the total housing and community amenities budget from 2014-15 onwards, despite the non-environment items of housing and urban and regional development not deviating from a flat trend during those years.
The second-largest budget reduction is in general public services (-32.4% in 2014-15). This has sound financial reasons, since the reduction follows a one-off grant of $15 billion in 2013-14 to secure the assets of the Reserve Bank (see notes to Table 2). Transport and communication, and mining, manufacturing and construction, were also given significantly reduced budgets, causing the change in 2017-18 relative to 2013-14 to become minus 16.5% and minus 24.3%, respectively. Transport and communication expenses are estimated to decrease from 2014-15 due to the completion of a number of major projects. For mining, manufacturing and construction, the major reductions include the research and development tax incentive and programs specific to the automotive, textile, clothing and footwear industries.
The relatively small recreation and culture function (less than $4 billion) has its total budget reduced by 6.2% in 2014-15 and by 14.8% in 2017-18 relative to 2013-14. The notes to Table 2 show broadcasting with a constant budget in 2014-15, and losing 2% in 2017-18 compared with 2013-14. Arts and cultural heritage loses 1.5% in the budget year and 14% comparing 2017-18 with 2013-14. The cut is greater for the national estate and parks: 10.6% in 2014-15 and 18.3% in the comparison of 2017-18 and 2013-14. The most savage cut, however, is in sport and recreation, down 31% in 2014-15 and with the forward estimate for 2017-18 cut in half compared with actual expenses in 2013-14.
Defence has already been mentioned among the winners with a 5.4% increase in 2014-15 growing continuously until the 2017-18 level is almost 15% above 2013-14. The “other purposes” item, approaching $100 billion by 2017-18 is budgeted to service the public debt.
Arts and Culture in the Budget
The Australia Council is the largest arts and culture related institution included in the Attorney-General’s portfolio.5 It loses some funds in the 2014-15 budget with the allocation down by 4.3% compared with 2013-14, but it then resumes a flat trend as discussed in the initial sections of the paper.
The total arts and culture budget in the Attorney-General’s portfolio loses 3.5% in 2014-15 and 6.4% comparing the forward estimate for 2017-18 with 2013-14. The worst hit is Screen Australia, the Federal Government’s primary agency for supporting Australian screen production. It was charged in November 2012 with administering a new $20m Interactive Games Fund to build a sustainable base for the Australian interactive entertainment industry. This allocation was withdrawn by the new Coalition government after its election in September 2013.
The National Archives of Australia is the only one of the 11 arts and culture institutions in the Attorney-General’s portfolio budgeted to receive increasing grants following the 2014-15 budget.
Percentage changes are not biased against arts and culture in the Attorney-General’s portfolio statement. Budget allocations for the rest of the department are 12% lower in the 2017-18 forward estimate than in 2013-14. The largest item is the Australian Federal Police which receives a 14% cut, followed by the Australian Security Intelligence Organisation (a 2.6% gain). The High, Federal, and Family Courts (cuts between them add to 3%) are also part of the Attorney-General’s portfolio together with a range of other legal service organisations.
Charts 3 and 4 provide a graphical image of trends (the log scale gives a visual impression of percentage rates of change). Chart 3 shows the four components of the total recreation and culture budget, displaying the difference between the gentle decline for broadcasting compared with arts and cultural heritage, and especially the rapid decline for sport and recreation. Chart 4 shows the rapid decline in funding of Screen Australia compared with the Australia Council and other arts, cultural and heritage institutions.
The Environment Budget
The environment is worse off with a 9.1% decline in the total budget in 2014-15 and a 30% reduction in the forward estimate for 2017-18 from $1.12 billion in 2013-14 to just over $1 billion in 2014-15 and $790m in 2017-18. The department itself has new government programs for a “green army” of young people to help cleaning up the environment, planting 20 million trees by 2020, improving the national landcare program and observing the deterioration of the Great Barrier Reef in a “Reef 2050” program. This might all seem well and good, but there will still be a 27% decline in the budgeted net cost of services by the department “due to savings measures announced since last budget”.6
The Bureau of Meteorology is budgeted to lose 14% in 2017-18 compared with 2013-14, the Clean Energy Regulator 21.7% (assuming the carbon tax is abolished as planned and the Emissions Reduction Fund is enacted), the Director of National Parks 21.4%, which leaves the Great Barrier Reef Marine Park Authority (GBRMPA) as the relative “winner” with a loss of 11.6% compared with 2013-14.
The Murray Darling Basin Authority will lose almost all its funding over the period of forward estimates, ostensibly because major projects will be concluded but apparently also because of reduced contributions to joint programs by three states (see notes to Table 4). The budget allocations to the National Water Commission from 2015 will be discontinued, adding to steps already taken to axe Climate Change Australia (which had a very small budget allocation) and to abandon Low Carbon Australia (see notes to Table 4 describing how this organisation applied to join the Clean Energy Finance Corporation and how the government was subsequently defeated when attempting to abolish the CEFC).
Australia Council Funding
The Australia Council is, as noted, the foremost funding body for the arts. Salient findings from the 2014-15 budget were discussed in the introductory sections of the article, but it is appropriate to put together the main past data in conclusion. Table 5 shows average funding (at constant 2012-13 prices) in five classifications, adding to total funding averaging $170.3 million over the four year ended June 2013.
The top section shows the five major programs of the Australia Council which was discussed in relation to Chart 2 in the introductory sections. They are dominated by the 28 major performing arts organisations which between them accounted for an average of 58% of the total funding by the Australia Council between 2009-10 and 2012-13. This is the part of the budget which is not going to be reduced, thus putting the brunt on other programs as the reductions hit home. Key organisations on triennial funding schemes, with about 22% of total funding, may also be able to escape the cuts, at least in full. Some government initiatives (10%) may be in a similar situation.7
All this is uncertain and subject to internal negotiations on fund allocations within the Australia Council, but commentators have been unanimous in warning that the most vulnerable program is the board grants, which accounted for 16.3% of total Australia Council grants in the four years ended 2012-13, and provide major stimulus to new ideas moving forward in the Australian arts sector. The loss of board grants following the 2014-15 budget could reach 20% of the $27 million or so which was handed out as grants in 2012-13.
By artform, orchestras were (and are) the major component of Australia Council grants, receiving 30.7% in the four years to 2012-13. Opera received another 13% and other music 7.6%, so music collected over half the funding from the Australia Council. Much of this went to the major arts organisations, but music also shares in the board grants.8
New South Wales accounted for 35.4% of total grants followed by Victoria (23.4%). Queensland, South Australia and Western Australia followed. About 9% of total grants were classified as national or overseas.
Hans Hoegh-Guldberg. Entered on Knowledge Base 30 May 2014. Corrections and supplementary comments and notes added 8 June 2014.
- The main uncertainty in the trend estimates is associated with the gap between 2012-13, the last year in the Australia Council’s latest annual report, and the initial budget year, 2013-14. The previous federal budget (2012-13) suggested there would be only a small increase in 2013-14. — The figures shown in this article relating to the 2014-15 budget are the net cost of services, which is the difference between total budgeted expenses and income from “own sources” which cover a variety of items including grants and interest received. All estimates are at constant 2013-14 values using the nonfarm GDP deflator published in the budget papers (see Table 1).↩︎
- The different levels shown in Chart 1 suggests that direct funding activities accounts for about 80% of the total budgeted expenses of the Australia Council. We have assumed this in our “backcast” of the budget in Chart 1.↩︎
- The underlying cash balance is a cash measure that shows whether the Government has to borrow from financial markets to cover its activities. A difference to the fiscal balance arises because of the Government’s decision to report the underlying cash balance net of Future Fund earnings from the 2005-06 Budget onwards as the earnings will be reinvested to meet future superannuation payments and are therefore not available for current spending. (Commonwealth Department of Finance)↩︎
- It is not the role of this article to enter criticism of the detailed budget measures for these functions, which are receiving ample public debate mainly associated with numerous specific cuts such as replacing free visits to the doctor with a $7 charge. Basically, the government justifies the social security and welfare budget referring to the ageing population’s need for age, disability and carer payments; the health budget being driven by the ageing and growing population’s increased requirements for medical and pharmaceutical services and benefits, and assistance to states for public hospitals. The increased education budget is largely associated with Commonwealth assistance to students. The bulk of education expenditure is through the states, which have their own big budgetary problems (which have given rise to debate on raising the GST rate from 10% or making it more universal across the range of goods and services).↩︎
- The Attorney-General, Senator George Brandis, is also the Minister for the Arts in the Abbott government which assumed office in September 2013.↩︎
- These savings are associated with abandoning measures which overwhelming scientific evidence suggests would be required to have sufficient effect on the build-up of greenhouse gases. The scientific evidence is not considered decisive by the present government and have yielded to short-term politically motivated concern for rising energy costs for consumers and industry, epitomized in the campaign to remove the carbon tax.↩︎
- Funding of council and government initiatives in 2012-13 increased by $9.9m, when the total of Australia Council funding increased by $7.7m and other funding consequently decreased by $2.2m.↩︎
- We are still looking for a total for 2012-13.↩︎
Hans founded his own consulting firm, Economic Strategies Pty Ltd, in 1984, following 25 years with larger organisations. He specialised from the outset in applied cultural economics — one of his first major projects was The Australian Music Industry for the Music Board of the Australia Council (published in 1987), which also marks his first connection with Richard Letts who was the Director of the Music Board in the mid-1980s. Hans first assisted the Music Council of Australia in 2000 and between 2006 and 2008 proposed and developed the Knowledge Base, returning in an active capacity as its editor in 2011. In November 2013 the Knowledge Base was transferred to The Music Trust, with MCA's full cooperation.
Between 2000 and 2010 Hans also authored or co-authored several major domestic and international climate change projects, using scenario planning techniques to develop alternative long-term futures. He has for several years been exploring the similarities between the economics of cultural and ecological change, and their continued lack of political clout which is to a large extent due to conventional GDP data being unable to measure the true value of our cultural and environmental capital. This was announced as a major scenario-planning project for The Music Trust in March 2014 (articles of particular relevance to the project are marked *, below).
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