Jun 25, 2012

Newman swimming in a budget that’s a sea of red

Campbell Newman's public service cuts reflect a nation-wide crisis of revenue for the states, but also a political perspective on the danger of debt.

Ben Eltham — <em>Crikey</em> arts commentator

Ben Eltham

Crikey arts commentator

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.

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17 thoughts on “Newman swimming in a budget that’s a sea of red

  1. michael crook

    What a good article, very informative. While I appreciated the point that Queensland actually was spending money on infrastructure, sadly it is the way in which this was spent that is the problem.

    Large road and tunnel projects, even though some of these were nominally “private” cost the Queensland Government a lot of money and the tendering processes on some of them were very very questionable. Even more questionable was the need for some of them such as “airportlink” which will doubtless experience the same problems of underuse as the Clem 7. The addiction of Queensland to providing a capital city built for cars instead of people has turned Brisbane into a carbon copy of every US city. It is not pretty. The public transport is abysmal and expensive.

    The cash from the sale of assets and royalties has not only been poured back into some very dodgy projects (eg Ted Smout Bridge, airport roundabout, infrastructure for mines access) but in the case of royalties has gone back to aid the miners who paid it. We have nothing to show for the sale of ports, rail, forests and electricity retail, and, further have lost the income stream forever.

    The historians may well decide that the Beattie and Bligh Labor governments reached levels of corruption and incompetence unseen since the Joh days. As an ex ALP member I can attest to the refusal of elected ALP Members of Parliament to even consider governing according to their own objectives and policies. They were, with very few exceptions, devoid of any ideology except that of personal enrichment.

    Until the AWUs factional hold on the party is removed there is no coming back for the Queensland ALP.

  2. Edward James

    How the hell do pay as you go tax payers grapple with the fact that elected reps like Kevin Rudd spend time on line engaging in social chit chat, while sitting in our Federal Parliament? I don’t know! Vertical fiscal imbalance…. What??? Sounds like garbage to me. Living beyond our means is simple enough for Australian taxpayers to grasp. It won’t work! Incomes and outgoings. Seriously why are Australians being saddled with interest payments on our government borrowings ? On and on it goes. Capacity to pay ? What I have never accepted this garbage from our elected representatives. Am I alone in my dissent? Why must we be a nation of borrowers ? We have all sorts of wealth, we have the capacity to feed ourselves, WTF is going on? Edward James

  3. Edward James

    G day, Michael Crook. Your use of the words Personal enrichment is a good discription of why our democratic process Nationally and top to bottom has become so dysfunctional. I note you have left the ALP. Was that because you are tired of the number of members who are deaf dumb and blind to what is actually happening in our grass roots communities? Edward James

  4. michael crook

    Hi Edward. no, the “Left” faction actually threw me out because I had the temerity to stand for preselection against a (right faction) sitting member. I was supporting the ALP’s own policies on Industrial safety and working hours, but sadly noone on the left had ever worked in industry so they didn’t know what I was talking about. Sad, but they lost an activist, two actually, because while I went to Venezuela and immediately on returning joined Socialist Alliance, (love the Chavez reforms, especially the empowerment of women) my wife left the ALP and is now on the Q!ueensland Greens management committee, and very very active. There aren’t too many activists left in the ALP sadly.

  5. Edward James

    Thanks Michael. I expect you may have perceived the reason I stand alone, is because I am some what limited in my understanding of how politics serves the proletariat! That would be correct. I am a part of that class of people, who have realised they have been deceived into believing our elected representatives exercise their influence in the best interest of we the peoples! I am reasonably politically aware I have spent a few years savings running political ads. We are none of us well represented! Edward James 0243419140

  6. Hamis Hill

    If Health and Education are the “Superior Goods” that Ross Gittins declares them to be then surely they increase the income of those who purchase them, which income then gets spent on goods which do increase GST revenue. Oh for the days when the economy was the domain of moral philosophers from the Age of Enlightenment who actually cared to write for the whole population and not just a few, blinkered “experts” who cannot communicate with ordinary citizens.
    There was a book published a few decades ago called “The New Science of Complexity” in which a Nobel Prize winner in Physics, Gell Mann?, was able to get a team of physicists and economists together in the same room and they actually spoke to each other after some initial resistance.
    They formed the Santa Fe Institute with the objective of actually understanding the economy.
    Whatever happened it is clear that the economy can no longer be left in the hands of the economists.
    And the Good of Education as Adam Smith pointed out is indispensable to the proper running of a free Market economy. This cannot happen while ever economists are incapable of enlightening the general public and one doubts whether they even care to educate the public at all, where is the incentive?
    Now it seems that for the sake of partisan ideology the conservative State administrations seek to contract their economies, an incoming Abbott administration will do the same and a Depression will automatically follow. Capice!

  7. mattsui

    One way of increasing revenue would be to endorse mining tax reform and carbon credit trading. The Qld Government could easily make a packet in the next decade……. it won’t happen because a certain coal barron bankrolled Newman and co’s campaign.
    The Queensland Government is the thin end of the Tea Party/ US Republican wedge. Complain loudly about debt and spending while bringing the local economy to a grinding halt at the expense of future generations and refusing to levy taxes on those who can actually afford to pay.

    Expect more behaviour like this from the “right” of Oz politics in the near future.

  8. Hugh (Charlie) McColl

    In Townsville, Clive Palmer is a nickel/cobalt baron.

  9. Pitt Peter

    Just keep in mind that QLD State accounts include the cost of public servants superannuation entitlements and other States do not. So when you compare QLD debts with (say) NSW remember that QLD numbers include this gigantic liability whereas NSW keeps it off balance sheet (just pretending it doesn’t exisit.

  10. Gavin Moodie

    I agree with MATTSUI: the states have considerable scope to raise new revenue. In addition to MATTSUI’s proposals I propose a proper land tax and joining the rest of the OECD in restoring probate tax.

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