The Australian dollar continues to soar ever higher as global investors reflect on the best terms of trade in our history, so why is it that every level of government is borrowing heavily at the top of a boom?
It’s called democracy and the irresistible urge of politicians to spend their way to popularity.
While next Tuesday’s estimated $50 billion federal budget deficit is the big one, we did get budgets from Victoria, the ACT and the Northern Territory yesterday, which all confirmed the debt-funded proclivities of Australia’s public sector.
Ted Baillieu’s first Victorian budget was in stark contrast to the first Kennett budget handed down on April 6, 1993, which remains unprecedented in Australia with its 10% spending cuts across the board.
Debt was the dominant theme of today’s newspaper coverage. The Australian Financial Review went with “Debt soars in Baillieu’s first budget” on page one, while The Age splashed with “Baillieu set to double state debt“.
However, as usual, there was confusion in the reporting of gross and net debt, along with budget sector and public sector debt.
Jeff Kennett inherited $33 billion of gross debt and $18 billion of unfunded superannuation liabilities from Joan Kirner in 1992.
Seven years later he had sold about $35 billion worth of assets and handed back to Labor a public sector balance sheet with gross debt and unfunded super reduced to about $20 billion.
The Age reported on page one today that Victoria’s “debt is expected to almost double from $11.9 billion in 2011 to $23.2 billion in 2015”.
That’s not the full picture as the Herald Sun’s Stephen McMahon correctly wrote that gross “debt is expected to hit $38.6 billion in the next four years”. Terry McCrann referred to “a huge unfunded superannuation liability” without actually quoting the latest figure of $22.7 billion. Victoria’s total unfunded liabilities are just passing Kirner’s $50 billion now and will hit $60 billion in four years.
Treasury Corporation of Victoria, the central borrowing authority, is yet to inform the market of its 2011-12 program as the website is still focused on the $4.44 billion of new borrowings that were required in 2010-11.
Unlike the federal government, which now publishes gross borrowings on its debt agency home page every week and also releases the results of every bond tender, the various state and territory governments are very poor when it comes to debt disclosure.
The best thing that can be said about Victoria is that its financial position was strong enough to resist the need for the federal government to guarantee its debt during the global financial crisis. Unlike NSW and Queensland, which needed guarantees covering tens of billions.
Ted Baillieu is known to be a left-wing progressive Liberal, but who would have thought his budget would look governments in other places. Today’s budget editorial in The Canberra Times was far removed from Monday’s page-one beat up, which claimed the ACT bureaucracy was to bear the brunt of “savage spending cuts”. Compare that with this more sober editorial assessment today:
“One of the budget’s more contentious announcements — that the already well-staffed ACT Public Service is to be increased by about 320 full-time equivalent staff — has been offset to some extent by the government’s stated promise to reduce overall numbers by 210, but only by normal staff turnover and targeted voluntary redundancies.”
The Canberra Times editorial also claimed that ACT borrowings are forecast to rise to about $650 million, about $200 million more than forecast, but remain in a comfortable band considering this is a $4.1 billion budget.
Huh, go to page 225 of the budget papers and you will see that ACT debt is set to rocket by a record $530 million to $2.04 billion in 2011-12.
That’s a whopping 33% increase in total debt in one year — at the very top of a boom. Yes, the little old ACT government is embarking on a course that can only end with Queensland-style privatisation, most notably of ACTew Corp, which owns 50% of the main water, gas, waste and electricity utility in Canberra and is already loaded up with $830 million in public debt.
Finally, we have yesterday’s Northern Territory budget, which also produced a debt-focused lead story in the Northern Territory News, especially seeing as Treasurer Delia Lawrie is projecting a recurrent deficit of $387 million in 2011-12 before even considering capital spending.
Lawrie dismissed as “scare mongering” claims by the Opposition that soaring public debt was unmanageable. The Territory’s net debt is projected to double from $1.1 billion to $2.2 billion over the next four years. And that’s after receiving per capita handouts from Canberra that are more than five times higher than most states. So much for riding the resources boom into surplus.
*Stephen Mayne was press secretary to Victorian Treasurer Alan Stockdale from 1992-1994 and was refused accreditation for yesterday’s budget lock-up.
I’ve just returned from the Victorian Treasurer’s lunchtime budget promo, where the Age’s Tim Colebatch asked whether the Victorian Government would adopt the recommendations of the independent review of State finances panel chaired by Michael Vertigan that Government investment in infrastructure be 0.5% of the 5 year rolling average of gross State product but that Government net debt be zero on average over a rolling decade.
I didn’t quite understand the answer, but I think it was ‘no’.
Governments can lend money to their citizens to pay for infrastructure like the building of roads, or hospitals, or the building of water supply systems, etc. The citizens use the loans to build the infrastructure and repay the loans and the interest from the charges they pay for those infrastructure services like water. The governments could come to an arrangement with a bank to use the large amount of money they have sitting in long term investments as collateral for loans. (The ACT government has over $2billion in such securities and cash) They do not have to use those investments or put them at risk because they use them as collateral to satisfy the banking regulations. As the bank would not pay interest on the deposits created from the loans and as the risk of the loan defaulting is zero because it is secured by the government the bank need only charge a handling fee for the service. In effect the government lends money to its citizens who repay the loans from fees and charges on the infrastructure built with the loans. The government debt goes away and the government collects the interest instead of the interest going to private persons. Stephen Mayne is happy because the government debt has gone, the citizens are happy because the costs of their services do not go up because interest charges either go away or go to the government who in turn can reduce charges. The banks don’t care as they get fees for no risk transactions. The only ones who lose are speculators who cause asset bubbles like the Australian dollar increase, or house price increases or stock market increases as the way to create the money that builds the infrastructure.
It appears there is a shortfall in GST revenue for states that is disrupting infrastructure development and causing debt proliferation. If states had the power to adjust taxes like the GST they could elect politicians who could campaign on such a platform for improved services, reduced debt or vice versa. The impacts shown above appear that State treasurers have few levers if they need to increase state revenue beyond praying for economic cycles to turn their way and on handouts from Canberra.
Perhaps our 2001 politicians have locked in a large tactical error in that changing GST from 10% requires a hugely fortuitous alignment of the stars if we ever want to move it a single fraction of a percentage point.
‘As GST revenue will be directed to the States,
the Commonwealth Government would not only have to agree
to introduce legislation to increase the GST rate,
but the request for such a change would have to be
unanimous among State Premiers and Territory Chief Ministers.
Legislation would then need to be passed by both Houses of
the Federal Parliament.’
States also now have little power to increase their tax revenue target if they need to invest in infrastructure or services or reduce debt. The states are barred from directly accessing the GST tax base by successive High Court judgments, and GST rates cannot be adjusted by an individual jurisdiction.
Rather than fortifying the position of states as autonomous political entities in the federation, the GST reform has effectively extended the reach of Canberra into state affairs to address these issues. Witness the intrusion of health controls and funding requiring sacrifice of GST revenue to the federal government in order to secure basic health funding.
If states had the power to adjust up or down their revenue intake based on circumstances we could preserve the autonomy of state governments to deliver local state based services or reduce debt rather than the cap in hand approach we currently have to improve health, education and infrastructure.
Instead they are addicted to payroll tax, road traffic fines, fees and pokie revenue as blunt tools and inferior supplements to legitimate taxation.
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No, the 2001 pollies at least were correct in the inhibition of GST increase.
Victoria does not get its equitable share of the GST – from memory Qld and Cb are over supplied. However, Victoria retained some taxes to compensate, thus double dipping the locals.
But, to a more important matter – the ability to easily increase the GST % would only serve to allow inefficiency and bureaucracy to continue unabated and probably grow. The States are full of duplication of federal matters and of bureaucracies that add no real value in terms of their operating cost versus value output.
I’m not going to go through it on a blow by blow basis but the first action needed is to bring back the Phillip Lynch razor gang, and also decide which layer goes – the State governments or the shires. While businesses around the world have been “right sizing” and looking for efficiencies the bureaucracies have blossomed quietly to our detriment.