Marc Robinson
Public Financial Management Results
Go to content

Australia Reforms Accrual Budgeting

(Originally published 14 April 2010)

When Australia adopted accrual budgeting in the late 1990s, it adopted a very peculiar system of parliamentary authorization of capital expenditure in the annual budget. This system had ideological roots – it was intended to mimic the way businesses operated. In practice, however, it was not only completely incomprehensible to non-experts (including parliamentarians), but also represented a major reduction in democratic parliamentary control over the budget. Australia has now, fortunately, decided that it will abandon this system and move back to a more conventional approach to authorizing capital expenditure.

The standard approach to parliamentary approval of capital expenditure is simple: parliament authorizes capital budgets for ministries which represent limits on their capital expenditure during the coming year. Such an approach works – with some subtle differences – equally well under accrual budgeting as under cash budgeting. The UK and New Zealand accrual budgeting systems, for example, take an essentially traditional approach to the parliamentary authorization of capital expenditure.

The Australian approach was totally different to this.* When accrual budgeting was introduced, the straightforward parliamentary capital expenditure appropriations in the annual Appropriation Acts were abandoned. In their place was a new system under which the budget legislation provided three sources of funds for capital expenditure purposes.

The first, and most important, source of capital funding under this system was the depreciation component of the new accrual-based expenses appropriation. The expenses appropriation is the accruals counterpart of a current expenditure appropriation under a cash budgeting system. It included an amount to cover depreciation. This depreciation “funding” amount was not required to meet any “current” expenditure (I use these terms very loosely for explanatory purposes). Instead, under the Australian accrual budgeting system, depreciation funding was to serve as a source of funding for capital expenditure. Ministries were not, however, bound to use it in the year when the appropriation was made, but could “save up” this depreciation funding for use to fund capital expenditure at any stage in the future.

This depreciation funding was accompanied by a second, and generally subordinate, funding source – so-called “equity injections” appropriations by the Parliament. The primary purpose of these was to provide additional funding for capital expenditure when the accumulated depreciation was not sufficient. Again, equity injection funding was not required to be used in the year in which parliament approved it, but could be legally spent at any time in the future.

In addition to depreciation funding and equity injections, there was a third, relatively minor source of funds – repayable loans made by the ministry of finance to the spending ministry.

Clearly, a very complex system! And one in which there was no relationship between parliamentary budget appropriations in any year and the quantum of capital expenditure undertaken by government in that year. Ministries built up often quite large pools of capital funding which they could draw on legally at any time without further parliamentary approval.

In fact, control over the level of capital expenditure passed from parliament to executive government, with the cabinet now approving annual ministry capital expenditure plans. This transfer of power from parliament to the executive was not initially understood by parliamentarians. But when they came to understand what had happened, strong criticisms were raised (particularly in a notable parliamentary committee report).

There is no space here to explain the convoluted rationale of this system. I have done this elsewhere*. But in brief, the idea was two-fold. By funding depreciation, ministries would be given sufficient funding to maintain their capital stocks. Secondly, the arrangement would supposedly make them like businesses which retained some of their revenue to replace capital and then when to the capital markets for additional equity or borrowings when their retained profits were not sufficient to fund their capital investment plans.

Australia now regards this system as a complex blunder. This is why, following a major financial management reform initiative of the present government – “Operation Sunlight” – it has been decided to move in the coming budget back to the traditional system of capital appropriation. This is a long overdue move, which Australia is to be congratulated on.

*For more detail on this see my 2009 IMF Working Paper on “Accrual Budgeting and Fiscal Policy” (downloadable at and the paper mentioned in the next note.
**Marc Robinson “Financial Control in Australian Government Budgeting”, Public Budgeting and Finance, 22(1), 2002.
Back to content