Queensland Premier Campbell Newman is a go-ahead sort of a leader. So it should be no surprise that he is pushing ahead with significant spending cuts to the Queensland public service. Newman and his Treasurer Tim Nicholls campaigned openly on lower government spending before this year’s election. Now elected with a massive majority, the razor gang is sharpening its blades.
One of the things that Newman did on taking office was to commission an audit of the state’s finances, led by former treasurer Peter Costello and veteran mandarin Doug McTaggart. Last week, it delivered its interim report.
The Premier is now taking to the airwaves to explain to Queenslanders what the audit means for the state’s finances. “Just like your family budget, we need to tighten our belt and find ways to cut our spending,” Newman said.
The audit paints Queensland’s budget in a sea of red. The state is in deficit and will stay in the red until at least 2015-16. Queensland has therefore racked up a fair whack of debt, driven largely by the Beattie and Bligh government’s big infrastructure spend in the last decade. Gross borrowing will top out at around $91 billion in the latter half of this decade.
The reason? Revenue is flat, while costs are growing inexorably. All the states and territories have a narrow tax base, and Queensland is no exception. Highly reliant on the GST and stamp duty, the states have little flexibility when it comes to raising new revenue. But the GST has not been growing as fast as it used to. Australia’s consumers, gripped by a new savings habit, are spending far less than they did in the heady days of the mid-2000s. That means less GST revenue for the states.
Other state revenue sources have their own problems. Stamp duties on real estate transactions were a huge windfall in the go-go years of Australia’s housing boom, as housing inventory turned over at an impressive clip. But with house prices in Queensland stagnating even before the devastating 2011 floods, fewer properties are being sold.
On the expenses side of the ledger, state governments are being squeezed by the rising cost of basic services. Health and education in particular suffer from what economists call the “cost disease” — the tendency for wage rises in other industries to drive wages up in less productive sectors. Public sector wages have grown at above-inflation rates in NSW and Queensland in recent years.
The sorts of jobs that state government departments are offering have also changed. The Commission of Audit says there has been a significant increase in employment levels for top executives, and below-average growth in junior and entry-level positions. In other words, the wages bill is partly a result of the better educated nature of the modern public sector workforce. In times gone by, it was common to recruit public servants straight out of school at entry-level positions. These days, it is more usual to hire university graduates, who start in the public service in mid-level roles.
State governments have responded to the tough fiscal position with a bout of austerity. There have been significant job cuts in the public services of Victoria (4100 jobs), South Australia (5100 jobs) and NSW (up to 10,000 jobs). Queensland looks set to lose as many as 20,000 positions.
Are the states and territories justified in their savage job cuts? That depends on your view of the appropriate size of government, and how comfortable you are with state government debt. Even small governments like Tasmania have very safe credit ratings and low debt servicing costs. That didn’t stop Labor Premier Lara Giddings from delivering an austere state budget in May.
Even if their fiscal positions are negative, the states can easily service their debts. Indeed, all that state government debt on issue has been snapped up by investors, eager for safe returns in today’s uncertain economy. A 2011 paper by the Reserve Bank’s David Lancaster and Sarah Dowling tells us the “semi-government bond market has grown rapidly in recent years, with the market now similar in size to the Commonwealth Government bond market”.
Queensland and NSW are the two main state government borrowers, with $71 billion and $54 billion in gross borrowings at the end of June 2011. Of course, this is the total amount of debt that has to be repaid; both states’ net debts are much lower, reflecting the investment assets they own. And if we measure gross debt as a proportion of gross state product — the same measure often applied to indebted nations like Greece or Spain — then we can see that none of the states is dangerously indebted.
Queensland is the most indebted of all the states, and its gross debt tops out at about 20% of gross state product. This is uncomfortable for the current government, but it’s certainly not any kind of crisis. A state debt of around 25% of GSP is easily manageable for growing state like Queensland. In debt terms, Queensland is not Greece; it is not even the US.
Indeed, you could argue (though few have) that Anna Bligh and Andrew Fraser did the right thing for the long-term interests of Queensland by continuing to borrow to fund infrastructure investment throughout the 2000s, unlike the NSW government which deferred big picture infrastructure projects out of a fear of too much borrowing.
This underlines the point that debt and deficits are, first and foremost, a political issue. If you believe, as many Queenslanders clearly do, that a state budget running in deficit is a bad thing, and that too much debt is also bad, then you might agree with the Premier’s assertion that Queensland has “20,000 more public servants than the people of Queensland can currently afford”. The LNP in Queensland has campaigned aggressively on debt, repeatedly mentioning the figure of “$100 billion” in state debt — a figure that is actually a projection out to 2018-19.
And if you are a deficit hawk, there’s plenty of support for that view in the Queensland Audit Commission report, which states plainly that “the State has been ‘living beyond its means’”. In the period between 2006 and 2011, revenue grew at 6.9% a year on average. But expenditures blew out by 10.5% a year. With GST revenue growth expected to be moderate in coming years, Queensland will stay in the red until costs can be reined in.
Whatever your view of state spending, the narrow tax base and patchy revenue growth is the real take-home message of Queensland’s budget audit. It’s a hard truth all the other states and territories are trying to grapple with. As Ross Gittins pointed out last week, the trouble is that the GST is no longer the growth tax it was in the mid-2000s. GST is expected to grow at 4.5% out to 2015-16. The costs of public services like health and education are rising much faster than that. But it’s even worse than it looks, because health and education are excluded from the GST. As their share of private consumption rises, less and less GST revenue is captured. “Since health and education are ‘superior goods’ (we spend an increasing proportion of our income on them as our incomes rise), and costs in both areas grow significantly faster than other consumer prices, we can expect this erosion of the GST tax base to keep rolling on,” Gittins wrote.
Until someone can figure out how to solve the dreaded “vertical fiscal imbalance”, in which Canberra levies most of the taxes while the states and territories deliver most of the services, the austerity measures in state budgets will continue.