Questions and Answers about Concessional Loans
What is a concessional loan?
A concessional loan is a loan that has more favourable terms and conditions than those offered by the commercial finance market. The most common favourable term is a lower interest rate. Favourable terms may also include deferred or income-contingent repayments.
Nevertheless, concessional loans are still loans, and the government expects them to be repaid according to the terms and conditions of the loan.
Why does the government issue concessional loans?
The government issues concessional loans as part of achieving relevant government policies.
Are concessional loans by government a recent development?
No. Concessional loans have been used in public policy in Australia for many decades.
Are there credit assessments carried out on applicants?
Normally, yes. The government expects the loans to be repaid according to the loan terms and conditions.
As a result, it may undertake a credit assessment of applicants. An example of an exception is income-contingent student loans, where the government can require repayment through the taxation system.
What are the biggest concessional loan programs?
The biggest concessional loan programs are those for students, such as the Higher Education Loan Program (HELP). These make up about three-quarters by value of all government policy loans.
How does the government approve a new loan program, or modify an existing loan program?
New loan programs are approved by Cabinet as part of the budget process. Approvals of modifications to existing programs depend on how the program was implemented. Modifications may require Cabinet approval, legislative change or approval by the relevant Minister.
What terms and conditions apply to concessional loans?
Terms and conditions, including interest rates, are set individually for each program. Information about the terms and conditions of open concessional loan programs can be sought from the relevant department or entity.
How does the government record concessional loans in its accounts?
Concessional loans are a loan type, and so they are a government asset in the same way that any other lender would record loans made as assets. Loans are financial assets, which distinguishes them from non-financial assets, such as land or computer equipment.
Does making a concessional loan affect the budget underlying cash balance
Providing a concessional loan to a borrower does not affect the underlying cash balance. The underlying cash balance is measured as government revenue receipts, less government operating expense payments, less net payments to buy non-financial assets (and less net Future Fund receipts until 2020), and so does not include transactions in financial assets. Similarly, when a borrower makes a concessional loan repayment, it does not affect the budget underlying cash balance.
Does any aspect of a concessional loan affect the underlying cash balance?
Yes. The interest received on the loan is government revenue, and improves the underlying cash balance. The repayment of the principal of a loan has no effect on the underlying cash balance.
The interest on money the government borrows to finance the loan is a government expense, and worsens the underlying cash position. The government, however, borrows globally and not for individual programs, so the interest expense for concessional loans is not separately itemised.
How is the concessional aspect of a concessional loan treated in government accounts?
Concessional loans provide a benefit to the borrower, in the form of favourable terms and conditions. Financially, this benefit is the difference between the payment pattern under the concessional loan and the payment pattern under an equivalent commercial loan. This difference can be calculated, although sometimes the measure is a close estimate if there is not a commercial loan equivalent with exactly the same terms and conditions.
This difference affects the value of the loan to the government, even though it does not involve a cash payment and so does not affect the underlying cash balance. It does, however, affect a measure of the government’s borrowings called net debt. Net debt is the amount the government has borrowed (called “gross debt”), less any cash held and amounts lent by the government. The reduction in value of a loan made by the government, including a concessional loan, compared to a commercial loan, makes net debt higher than it would have been if no concessional arrangement was in place.
How is the risk of concessional loan defaults accounted for?
The government expects loans it makes to be repaid according to the loan terms and conditions. However, like other lenders may experience, there is some risk that loans may not be repaid in full. This can happen more frequently with income-contingent loans such as student loans, because the borrower may not earn the level of income in the future that is required for mandatory repayment.
Concessional loans are not treated differently from other types of loans. For example, loan defaults are accounted for as a reduction in the value of the loan assets held by government, except in very limited circumstances when an expense is recorded.
This change in value does not result in a cash receipt or payment, so it does not affect the underlying cash balance. However, as explained in the previous section, a reduction in value does make the measure of net debt worse, and the amounts written-off are included in the government’s financial statements.
A future budget surplus or deficit may be affected if a default means that the government will not receive the amount of interest revenue that it has budgeted for.
What assurance is there that the government correctly accounts for concessional loans?
The government’s accounts, including concessional loans, are required to comply with accounting standards, which are set independently.
The Auditor-General audits the government’s accounts every year, including concessional loans. The audit examination includes both loan values and the interest received from them.
The Auditor-General also has the power to undertaken audits of the performance of government programs.
Where do concessional loans appear in the Budget Papers?
Information about major policy loan programs, including concessional loans, is included in the Statement of Risks, which appears as Statement 8 in Budget Paper No 1, and is updated at the Mid-Year Economic and Fiscal Outlook (MYEFO). This information includes the expected loan balance at the following 30 June.
Amounts expected to be lent and repaid under major loan programs – that is the new amounts lent or repaid each year - are included in a table in Statement 3 of Budget Paper No 1.
Australian Government budget financial statements also appear in Statement 9 of Budget Paper No 1. Financial statements of the actual outcomes appear in the monthly financial statements, Final Budget Outcome and Consolidated Financial Statements. Since the government has many millions of transactions each year, the financial statements provide a high-level summary of those financial transactions to present a concise overall picture of government finances. As a consequence, concessional loan programs are not separately itemised. The following is a quick guide to the lines in government budget financial statements in which the most common transactions and balances in concessional loans are included:
The amount of loans outstanding – “Advances paid” in the Balance sheet, with some additional detail in Note 13;
The amount of loans advanced/repaid during a year – “Net cash flows from investments in financial assets for policy purposes” in the Cash Flow Statement;
Interest revenue received – “Interest receipts” in the Cash Flow Statement;
Interest revenue due each year (accrual accounting) – “Interest income” in the Operating Statement, with some additional detail in Note 5;
Amounts written off each year – “Net write-downs of assets (including bad and doubtful debts)” in the Operating Statement; and
Concessional aspect of loans - “Interest expense” in the operating statement.