Aug 1, 2012

Quiggin: Qld isn’t Greece or Spain — acting like it could hurt

Campbell Newman’s hyperbolic claims that Queensland is on the verge of becoming the "Spain of Australia" have been rightly derided. So how do the books really look?

Campbell Newman's hyperbolic claims that Queensland is on the verge of becoming the "Spain of Australia", is on a "slide into bankruptcy" and about to execute a "power dive into the abyss" have been rightly derided. Queensland has a strongly growing economy, unemployment rates at near 40-year lows and a budget that is close to balance, and likely to return to surplus, even without drastic cuts. Credit ratings agencies are overrated, but they are paid to estimate the likelihood that a given bond will go into default as a result of corporate or state bankruptcy. Despite some egregious failures, they are more often right than wrong. The comparison between Queensland’s AA+ ranking (the same as that of US Treasury bonds) and Spain's BB- speaks for itself. Unfortunately, Newman’s silliness is an echo of the interim report of the Commission of Audit, headed by Peter Costello, which the Liberal-National Party government commissioned on taking office. The recommendations of the commission are drafted as if Queensland is facing a Spanish-style crisis, and propose austerity measures similar to those adopted in Spain. The key statistic that drives the recommendation is the ratio of gross public sector debt to government income, which is projected to peak at 132% in 2013-14. That might sound alarming, when you consider that Spain has run into difficulty with debt/GDP ratios of only 80%. On the other hand, almost any Australian household with a new mortgage owes more than one year’s income, which is what is meant by a debt/income ratio of 100%. It’s crucial to look at the numerator and the denominator here. Let’s start with the denominator. In looking at the sustainability of government finance, it’s reasonable to focus on the ratio of debt to revenue, rather than debt to GDP, since governments can only command part of GDP. That’s particularly true of state governments, which have limited revenue flexibility. Equally though, it's important not to be misled by comparisons with the more widely quoted figures. European governments usually command around 40% of national income, so Spain's 80% debt/GDP ratio translates to a debt/revenue ratio of around 200%. Even the eurozone's official target of 60% (which Spain was meeting before the financial crisis) implies a debt/revenue ratio of about 150%. The real problem though is with the commission's use of "gross total government debt" as the denominator in its analysis. The use of gross rather than net debt measures is economically unsound. Queensland has huge financial assets, totalling $41 billion in 2010-11. The largest single component is the fund accumulated to meet future superannuation obligations, an asset which few other governments hold. The audit commission proposes a gross debt measure on the basis of the purely circular reasoning that (under current government policy) the investments held to meet superannuation liabilities cannot be used to reduce gross debt. Apart from being entirely circular, this claim ignores the fact that the governments financial assets exceed its superannuation obligation by a substantial margin. Net government debt, taking account of both financial assets and the superannuation liability, is only $41 billion. The inclusion of the debt associated with government business enterprises represents an even larger error. This debt is fully serviced by the earnings of the enterprises concerned. The most relevant single measure of the state's fiscal position is net worth, the difference between the value of assets and debts. Net worth is currently $171 billion, compared to $60 billion at the beginning of the 2000s. It's true that net worth declined slightly in the aftermath of the fiscal crisis and natural disasters. but the overall trend remains strongly positive. Maximising net worth is not, however, the best route to get AAA credit-rating. Ratings agencies represent the interest of bondholders, and for them more debt is almost always bad, even if it is used to finance productive investments. The commission displays an uncritical acceptance of this goal. Its report contains no discussion at all of whether the cuts it proposes will enhance the economic and social welfare of Queenslanders: the desirability of pleasing bondholders and ratings agencies is taken as self-evident. None of this is to say that Queensland has no fiscal problems (could that ever be said of any state government?). As the commission correctly points out, Queensland used to be, in the Bjelke-Petersen era, a low-tax, low-service state. Over the past 20 years or so, service levels have approached the national average. For example, Queensland students used to get only 12 years of school education, whereas everywhere else, on a K-12 system, there were 13 years. Historically, this was reflected in lower-than-average rates of participation in tertiary education, low wages and other negative outcomes. Over the past 20 years or so, services have been improved to the point where they are now about equal to the national average. But there has been no corresponding increase in tax effort. The Labor government sought to maintain Queensland’s low-tax status while delivering high-quality services.  While real estates markets were booming, the revenue they generated filled the gap. But, as the commission correctly argues, this can't work in the long run. Queenslanders must either pay the same taxes in other states or accept lower-quality services. Unfortunately, the commission's report pays almost no attention to the feature in which Queensland differs most from other states, that of low tax effort. A serious attempt to address the budget problem would look at tax concessions and public expenditure, and seek eliminate those items whose costs exceed the benefits. The commission has focused only on public expenditure and has been particularly critical of the increasing funding for "front line" public services such as education, healthcare and police under the Labor government. No such criticism was heard from Campbell Newman before the election: on the contrary, the LNP platform makes much of their plans to improve front line services. An honest public debate would assess the mix of revenue increases and expenditure reductions needed to achieve a sustainable budget balance over time. The best time to have such a debate would have been before an election -- the LNP was certain to win in any case, and could have afforded a bit of honesty. But even if pre-election honesty is too much to ask, it ought to be possible to have the debate now. Instead, we are seeing unplanned cuts rammed through in an atmosphere of spurious crisis. There's nothing in Queensland's actual situation that resembles Spain or Greece. But the panic-stricken policies being pursued by the Newman government will have similar effects, if on a smaller scale, to those of the austerity policies adopted by Spanish and Greek governments. The difference is that those governments are acting under duress -- Newman’s follies are all his own.

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13 thoughts on “Quiggin: Qld isn’t Greece or Spain — acting like it could hurt

  1. zut alors

    Newman is a simple man with simpleton solutions.

  2. John Bennetts

    This same article, edited to replace the word “Newman” with the word “Abbott”, will be true in 18 months in the federal arena.

  3. klewso

    Simple – When it really isn’t in that bad a shape :- “Talking it down makes turning it round an even greater “feet”.”

  4. Finoosa

    Thank you for excellent analysis and for giving us a fact based view
    of Queensland’s financial position. I had tried to source figures myself but
    found this very difficult. This is exactly the kind of information I was
    looking for and I also appreciate the historical context at the end of the article – th
    transition from low tax low services state to low tax higher level services state
    and the failure of governments to address the revenue shortfall.

  5. Gavin Moodie

    The mayor of Queensland should reverse that great public policy vandalism perpetrated by his predecessor Bjelke-Petersen and join the rest of the OECD in introducing probate duty.

  6. Bill Hilliger

    To envisage the LNP and honesty is akin to seeing North Korea a humanitarian democracy.

    Campbell Newman will rank as an amateur compared to when Tony (the accomplished l-i-a-r) gets into office.

    According to the polls the Australian people just want to be shat on by the coalition government in waiting – they want Tony.

  7. Dogs breakfast

    Fine work as usual Prof Quiggin. Nothing less expected from such an eminent source.

    With so few journalists able to count past 10, a knowledgeable article such as this at least informs those who seek to be informed.

    Those few, those very few.

  8. Paddy Forsayeth

    My missus (in the publis service) said that Costello’s report was inaccurate. Thanks to teprof. her opinion seems to be confirmed. I am of the opinion that the doings of newman are tis the vindictiveness of the NP part of the LNP. I agree with Bill…Newman is the first act of a very nasty play.

  9. Scott Grant

    So Peter Costello headed the commission and came up with a (Prof Quiggin’s word) ‘silly’ set of recommendations. What a surprise! (NOT!)

    I am repeatedly astonished at the vastly over-rated reputation he has with conservatives.

  10. Bill Hilliger

    @Scott Grant: with regard to the Costello over-rated reputation with the conservatives. The conservatives look up to and admire those who almost achieved mediocraty, at best Costello was only ever a fair weather treasurer. The reason why post leaving politics the fellow never managed to snare a worthwhile and respectable post in the business world.

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