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Charter of Budget Honesty - Policy Costing Guidelines

Guidelines issue jointly by the Secretaries to the Treasury and the Department of Finance and Deregulation 2012

Table of Contents

Part 4: Costing protocols and methods

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:

Costing variables

In costing policies, the Secretaries will use standard approaches and conventions that are consistent with normal Budget costing methodologies. Key approaches and conventions are set out in more detail below. A list of costing conventions is at Appendix B.

Costing estimates will be provided for the current financial year plus the following three years. Where a revenue/expense cost is 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 in the relevant years beyond the forward estimates. For instance, where a measure is terminating after the four forward estimates years (for example, after a 10 year period), the Secretaries will endeavour to provide their best estimate of the cost of the policy in the relevant years beyond the forward estimates.

Policies will be costed in accrual and cash terms, with both the impact on the fiscal balance and the underlying cash balance reported as well as the impact on the headline cash balance as appropriate. It is expected that most costings will involve revenue elements only or expense elements only. However, where relevant, the revenue and expense components of a policy will be identified separately.

As with existing arrangements, individual costings may take account of direct behavioural responses, but will generally not incorporate second round effects. The costing will focus on first round effects and the direct budgetary consequences of policies. Similarly, 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.

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.

Where there is a difference between a costing request and the publicly released policy, an effort will be made to clarify the difference. If that is not possible, the costing will be based on information provided in the costing request.

Costing assumptions

Consistency and transparency of costing assumptions

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. As noted in Part 6, 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.

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. 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. 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.

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 to be used in costing election commitments.

Assumptions regarding behavioural responses of the people affected by policies will be taken into account where it is normal practice to do so. In some instances, behavioural effects will be a significant element of the costing. Where there are significant behavioural effects, the assumptions used in the costing will be clearly identified in the publicly released costing report. In some cases, behavioural responses will be highly uncertain, ambiguous, difficult to quantify or of small magnitude. In these situations, the treatment of behavioural effects, if any, will be made clear in the costing report. The inclusion of behavioural effects in costings will reflect the best professional judgment of the Secretaries and will be decided on a case by case basis. Where appropriate, sensitivity analysis will be undertaken to demonstrate the impact of different assumptions regarding behavioural responses.

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.

Variations in assumptions from those specified by parties

Where a Treasury/Finance or a joint costing uses different assumptions to those specified in a party costing request, the costing advice will explain the reason for using those different assumptions.

Next section: Part 5: Requests for costings and processing


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© Commonwealth of Australia 2012
ISBN 978 0 642 74829 4

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Last Modified: 5 July, 2012