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. beachcomber

    “Just like your family budget, we need to tighten our belt….” Campbell Newman is not tightening his belt. He is sacking the children and selling the dog.

  2. cpds

    Correction! Comments are here

  3. sottile6

    Michael Crook’s characterisation of the Bligh government’s infrastructure spending is not correct. Campbell Newman is responsible for the road tunnels, except for Airport link which was the only road tunnel the state government planned and built. However they constructed busways to the south east, the north and to the eastern suburbs of Brisbane which can also be converted to a tram system if necessary. This infrastructure spending was necessary. I can only speak about Brisbane as that’s where I live. I am very glad they invested this much in public transport and planned and organised the cross river rail project which is also necessary. The idiots in charge now have scaled back this project so that it will be less functional. More could be done on public transport but the backward looking LNP will certainly not do it.

  4. Ian

    Personally. I think it’s terrific to see the big bucket of slime that Qlders voted to hang over their heads start to drip, drip, drip. When it really tips it’s gonna get ugly, but entertaining.

  5. Edward James

    Tax payers have voted to dismiss Labor political grubs, do not fear the green slime it is no surprise to anyone who watched alien or the exorcist we know when you destroy parasites there is heaps of green slime! We may even drown in it, but to survive we must keep fighting, disregard the concerns about cats and dogs, exercise your vote and dismantle Labor to the very end ! Edward James

  6. Ian

    The LNP and those deluded enough to vote and support them will end up choking on the very pond scum they create. It’s gunna be fun to watch.-

  7. Dogs breakfast

    “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.”

    It’s a good article Ben, but don’t the states own the minerals?

    Isn’t Qld one of the gangbuster mining states?

    Are they actually getting a fair return form the royalties, or is it the case, as pretty much everyone suspects, that we basically give our mineral wealth away.

    Qld should be swimming in revenue, and quite frankly mining companies are sufficiently cashed up to be providing their own infrastructure. Building coal loaders etc on the public teat should either be a money making venture (charging a profitable return on investment) or they should be built by the mining companies without public assistance.

    I don’t know whether, as one contributor puts it, a lot of the mining royalties are put back into mining infrastructure, but if so they are just being played by the mining giants.

    Nothing new there.

    Given that this is prima facie evidence that state governments of both persuasions couldn’t make a profit selling a nugget of gold they found in there back pocket, it certainly adds weight to the need for a mining profits tax.

    I wonder why the Feds haven’t thought to bring in a mining profits tax.

    Oh, that’s right! D’oh!

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