The $17.4 billion debt binge by NSW over the next four years will put
our largest state on a similar footing to the mess left behind by the
disastrous Cain-Kirner government in Victoria, but few commentators
have yet comprehended the gravity of Morris Iemma’s financial crisis.

Jeff Kennett and Alan Stockdale inherited a basket case in October 1992 because
Victoria had a $2 billion budget deficit, public sector debt of $32
billion and unfunded superannuation liabilities of $18 billion. In
broad terms that was $50 billion in liabilities rising at $2 billion a
year.

In balance sheet terms, NSW is not yet that bad because its gross debt
is about $22 billion and unfunded super is about $15 billion although
we’re waiting to see how much the commodities boom and stockmarket
surge has improved the situation in 2005-06. However, adding $17.4
billion to debt will put the total liabilities figure above $50 billion.

The NSW budget situation is now actually worse than in
Victoria because increasing debt by $17.4 billion over 4 years is the
equivalent of running an overall deficit of $4.35 billion a year – more
than double what John Cain and Joan Kirner managed in their disastrous third term.

It’s amazing that normally economically rational commentators such as
Terry McCrann and Ross Gittins keep coming out and saying there is
nothing wrong with debt or deficits. Sure, but isn’t borrowing more
than $4 billion a year at the top of an economic boom utterly
irresponsible? The Feds are more than $10 billion in overall surplus – including capital and recurrent items.

The thing that destroyed Victoria’s public finances was the reckless
spending during the late 1980s boom which left no buffer to handle the
downturn from Paul Keating’s recession we had to have. Bob Carr has
done precisely the same thing and now Morris Iemma is cranking up the
spending rather than winding it back as any sensible administrator
would do. NSW public finances are in no position to cope with a
recession or a major property bust in Sydney.

McCrann wrote in The Weekend Australian that Morris Iemma still
has the luxury of owning his state’s electricity industry – something
which generated “nearly $30 billion” for the Kennett Government. This
isn’t strictly correct because Victoria fetched $29.8 billion from its
state-owned “energy” assets, but this included about $8 billion from
gas and the NSW gas industry is already privately owned by the likes of
AGL. The great Crikey power industry sell-off list provides all the details.

Similarly, NSW doesn’t have the luxury of owning a lucrative compulsory
third party insurance monopoly like the Transport Accident Commission –
which has literally delivered a $7 billion windfall to Victoria’s
budget since 1993. The NSW debt spiral also comes after it has flogged
off assets such as the TAB and most of its interstate rail assets
through Pacific National.

One advantage that NSW does have is a booming coal industry because
state royalties have doubled to almost $400 million over the past
couple of years and more rises will no doubt be predicted in tomorrow’s
budget papers.

However, its fundamental problem has come from granting too many
public sector wage rises for NSW teachers, nurses, coppers and the
like without productivity trade-offs. NSW has led the country in this regard and its budget is now
fundamentally stuffed unless some hard decisions are taken – but don’t
expect those to come from a decaying third term administration with a
former Labor Council secretary as state Treasurer.

Peter Fray

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Peter Fray
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