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Charter of Budget Honesty - Costing Election Commitments

Guidelines issued jointly by the Secretaries to the Departments of the Treasury and of Finance and Deregulation 2007.

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Contents

Introduction

The Charter of Budget Honesty Act 1998 (the Charter) outlines arrangements under which the Secretaries to the Treasury and of the Department of Finance and Administration (the Secretaries) may be requested to cost Government and Opposition election commitments during the Caretaker Period prior to a general election.

The Charter also provides that the responsible Secretaries may, jointly, issue written guidelines recommending approaches or methods to be used in the preparation of policy costings.

This document provides such guidelines. It aims to inform those requesting policy costings of the general methodology that is to be applied, what information will need to be supplied when requesting a policy costing, and what will be produced.

The guidelines are not intended to give detailed indications about how individual policies are costed. Rather, they outline the principles and processes to be followed by the Department of the Treasury (Treasury) and the Department of Finance and Deregulation (Finance), with the aim of achieving consistent and transparent policy costings. This document has four parts:

Appendices A to C provide further details on standard costing conventions and details the information required for costing requests.

Ken Henry
Secretary to the Treasury

I J Watt
Secretary to the Department of Finance and Deregulation

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Part 1: Statutory Provisions - Summary

Part 8 of the Charter sets out the arrangements for the costing of election commitments.

The provisions apply only during the Caretaker Period following the issuing of a writ for a general election. They relate to the costing of publicly announced policies of the Government and the Opposition. The obligations of the Charter are independent of, but have precedence over, the Caretaker conventions. The Charter makes no provision for costing publicly announced election commitments made by minority parties and independent Senators or Members.

Requests for Costing of Election Commitments

The Charter, under Clause 29, details how requests for the costing of election commitments are to be made. It provides that, during the Caretaker Period prior to a general election, the Secretaries may be asked by the Prime Minister, or the Leader of the Opposition through the Prime Minister, to cost their publicly announced policies.

A request is to:

A request from the Leader of the Opposition is to be provided to the Prime Minister, who may then refer it to the responsible Secretaries. Secretaries are not obliged or authorised to take action in relation to any request, unless the Prime Minister has referred the request to them. The Prime Minister or the Leader of the Opposition may withdraw a request at any time. A withdrawal by the Prime Minister must be in writing to the Secretaries. A withdrawal by the Leader of the Opposition (in writing) is to be given to the Prime Minister, who will then notify the Secretaries of the withdrawal.

How Policy Costings are Prepared

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 (see Part 2 and Appendix A). It also divides responsibility for costings between the Secretaries: the Secretary to the Treasury is responsible for costing policies affecting revenue; while the Secretary of the Department of Finance and Administration is responsible for costing policies that affect government outlays and expenses. If necessary, in order to fully cost a policy, the relevant Secretary may request in writing more information from either the Prime Minister or the Leader of the Opposition.

Public Release of Costings

The Charter, under Clause 31, outlines the requirements for the public release of policy costings. The Charter requires the relevant Secretary to publicly release a costing as soon as practicable after the request is received and before polling day. If the costing cannot be undertaken before polling day, either due to insufficient information or time constraints, the relevant Secretary is to publicly release a statement to that effect. Secretaries are not obliged or authorised to take any further action in relation to a policy costing request on or after polling day.

Commonwealth Bodies Assistance in Preparation of Costings

Clause 32 provides for Australian Government bodies to provide information to help prepare costings at the request of either Secretary.

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Part 2: Costing Protocols and Methods

Secretary's 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

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 a proposal, encompassing both revenue and expenses. They will be produced in a manner consistent with normal Budget costing methodologies. A list of costing conventions is at Appendix A.

Costing estimates will be provided for the forward estimates period (that is the current financial year plus the following three years). Where a revenue/expense cost is likely to be significantly different beyond the 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. Where a measure is specified to run for a finite period that extends beyond the forward estimates years (for example, 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 expenses elements only. However, where relevant the revenue and expenses 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.

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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 4, 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 best possible. 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 Charter requires the public release of a pre election economic and fiscal outlook report within ten days of the issue of the writ for a general election. This 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 uncertain, ambiguous, difficult to quantify or of small magnitude. In these situations behavioural effects will not be included and this will also 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.

Moreover, 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 different assumptions.

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Part 3: Requests for Costings and Processing

Requests for Costings - Procedures and Standards

Further to Part 1, requests for costings can be made during the Caretaker Period prior to a general election. They must be made by either the Prime Minister or the Leader of the Opposition through the Prime Minister. The Secretaries are not obliged to take any action on requests unless these are received through the Prime Minister.

The provision of full information to the Secretaries at the outset will help to minimise unnecessary delays. Requests for costings are to: be in writing; fully outline the policy to be costed, giving relevant details, including any underlying assumptions; and state the purpose or intention of the policy. Appendix B contains a pro forma indicating the information normally required for a costing to be prepared.

A request should fully outline the design features of the policy. 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. However, it should be noted that all assumptions used in the costing will be those of the Secretaries. Where there is an inconsistency between the stated intention of the policy and its design features, the policy will be costed on the basis of its design features.

If no allowance is made for departmental expenses necessary to support a policy, a costing will only be undertaken if requested by the party. Where a costing of departmental expenses is requested, the written request from the requesting party should clearly specify an assumption as to their absorption or supplementation, otherwise a departmental costing will not be provided. If no allowance is made for departmental expenses and if a departmental costing is not requested the published costing will indicate that departmental expenses are not included. Key assumptions underpinning the departmental costing should also be specified by the requesting party. In undertaking these costings existing programmes/policies of a similar nature will be used as a guide.

Department of the Treasury/Department of Finance and Administration Responsibilities

Under the Charter, the Secretary to the Treasury is responsible for costing aspects of policies affecting revenue, while the Secretary of the Department of Finance and Administration is responsible for costing aspects of policies that affect government outlays and expenses.

Since the Charter was framed, Budget responsibility for costing non taxation revenue policy proposals has been passed to Finance. Accordingly, the Secretary to the Treasury will refer non taxation revenue costings to the Secretary of Finance and Administration for costing under these guidelines.

A policy may have implications for both revenue and expenses. In these cases the Secretaries will jointly cost the policy. Costing requests received will be divided between the Secretaries on a case by case basis. In some cases, it may not be clear if a policy will affect only revenue or expenses. Therefore, to facilitate timely and accurate costings, costing requests should be forwarded to both Secretaries simultaneously. In all cases, the Secretaries will ensure close consultation between their departments in administering the costing process in order to minimise delays.

Upon receiving a request from the Prime Minister (or the Leader of the Opposition through the Prime Minister), the relevant Secretary (or Secretaries jointly) will issue a press release to inform the public they have been asked to cost a policy. The press release will broadly outline the policy to be costed.

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Timelines for Submitting Costing Requests

Costing requests should desirably be submitted to the relevant Secretaries during working hours, preferably by 5.30 pm on a weekday. Working hours for the purpose of these guidelines are the weekday hours from 8.30 am to 5.30 pm. Requests received outside working hours will be taken as having been received the next working day, unless otherwise specifically agreed in advance with the relevant Secretaries. These timing conventions will apply to both the public release of information regarding the request, as well as commencement of work on the costing.

Election costing requests should be received by the responsible Secretaries no later than 5.30 pm on the sixth working day prior to polling day for the election (that is Thursday in the penultimate week before the election), to enable the public release of the policy costings by 5.30 pm on the Thursday before polling day for the election. This will allow time for costings to be publicly scrutinised before polling day. Should requests be received later than the specified time, the Secretaries will endeavour to cost the policy and release the costing. However it may not be possible to complete the costing in time for release on the Thursday before polling day for the election. The Secretaries will send a letter early in the campaign reminding both parties of the submission deadline.

Timelines for Provision of Costings

As noted in Part 2, the Secretaries will endeavour to complete and release a costing within five working 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.

Further Information Required for 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, as appropriate, in writing. Secretaries will endeavour to ask for such additional information within two working days of receiving the costing request. Further discussion between Finance and/or Treasury officials and advisers in the offices of the Prime Minister or the Leader of the Opposition 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.

Withdrawal of Request for Costing

As noted in Part 1, withdrawal of a request for a costing may be made at any time. A withdrawal by the Prime Minister must be in writing to the Secretaries and a withdrawal by the Leader of the Opposition is to be in writing to the Prime Minister, who is then to notify the Secretaries of the withdrawal in writing.

Security Arrangements

Security arrangements will be similar to those applied at Budget time and the confidentiality of the costings will be protected until they are publicly released.

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Part 4: Reporting - Public Release of Policy Costings

As noted in Part 1, the Charter requires that costings be publicly released as soon as practicable after a costing request has been made and before polling day.

Reasons for Non Release of Policy Costings

Where a policy costing is not possible, the Secretaries will issue a press release, no later than the close of business on the last working day before polling day, stating reasons why the policy cannot be costed.

The non release of a policy costing may be due to:

Secretaries are not obliged or authorised to take any further action in relation to a policy costing received on or after polling day.

Published Policy Costing Report: Contents And Protocols

When a policy costing is published, the published report will include the request submitted under Clause 29(2) of the Charter; any request for further information made by the Secretaries; and any further information forwarded to the Secretaries or obtained in discussions with parties.

The report will also include the following:

Appendix C outlines the pro forma that will be used by the Secretaries when releasing a policy costing.

Informing Parties of the Public Release of Costing and Delivery of Costing Reports

The offices of both the Prime Minister and the Leader of the Opposition will be forewarned up to eight working hours in advance of the expected public release time of all costings, but not of the content of the reports. The requesting party will also be informed of the hand delivery arrangements and public release approximately one hour prior to the release. When a costing is to be released, hard copy costing reports will be provided to the Parliament House offices of both the Prime Minister and the Leader of the Opposition at approximately the same time, with the costing provided to the requesting party first. Shortly after the delivery of the document, costings will be publicly released to the press and on the joint Finance Treasury election costings website. As noted in Part 2 (Page 4), the Secretaries will aim to produce a written report that provides a full explanation of the costing. However, a further statement may be issued if the Secretaries judge that further clarification of a costing and the methods used is required.

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Summary key protocols, processes and timelines

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Appendices

Appendix A: Costing Conventions

The following are standard conventions for the preparation of fiscal costings:

In conducting costings, Departmental expenses will be costed upon request. The assumption as to their absorption or supplementation will need to be clearly specified in the written request for costing. Key assumptions underpinning the departmental costing should also be specified by the requesting party. In undertaking these costings existing programmes/policies of a similar nature will be used as a guide. If no allowance is made for departmental expenses and if a departmental costing is not requested the published costing will indicate that departmental expenses are not included.

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Appendix B: Request for Costing an Election Commitment - Pro Forma

Name of policy:

Description of policy. What are the key assumptions that have been made in the policy including:

NOTE: it will be up to the professional judgment of the relevant Secretary as to whether these assumptions are adopted in a Treasury or Finance costing of the policy.

Administration of policy

Appendix C: Public Release of Costing - Pro Forma

Financial implications (outturn prices)(a)
Impact on Current financial year Current financial year + 1 Current financial year + 2 Current financial year + 3
Underlying cash balance ($m)        
Fiscal balance ($m)        

(a) A positive number for the fiscal balance indicates an increase in revenue or a decrease in expenses or net capital investment in accrual terms. A positive number for the underlying cash balance indicates an increase in revenue or a decrease in expenses or net capital investment in cash terms.

Background information

Costing methodology used:

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© Commonwealth of Australia 2007 ISBN 0 642 74406 8
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Last Modified: 24 July, 2008