The State’s net debt?
What is it?
Apart from being a measure thrown into Government media releases whenever convenient?
Premier Giddings was at it again the other day reassuring us that the $15 million to be spent at Blundstone Arena (nee Bellerive Oval) would be responsible adding it “is not until the 2014-15 year after we've come out of net debt”.
Let’s have a look again at the latest Treasurer’s Annual Report for 2011/12.
Net debt is narrowly defined to be ‘borrowings’ less ‘cash/deposits’ and ‘investments’. For the General Government GG sector this means net debt was a negative $408 million at 30th June 2012. The assets exceeded the liabilities in other words.
As we saw in Part 1 the borrowings of $896 million included the overnight borrowings of $650 million which temporarily boosted ‘cash’ by $650 million.
The overnight loan and cash deposit therefore had no effect on the measure of net debt.
By the end of 2012/13 the State will experience net debt of $37 million.
This is actually an improvement from the original Budget in May 2012 of net debt of $134 million. However it’s a little misleading to say things have improved in this financial year, it’s just that the cash position improved after the 2012/13 Budget in May 2012 when extra Fed grants such as the Hobart Railyard funding were received and some expenses deferred, resulting in the opening cash balance for this financial year, as at 1st July 2012 being better than estimated in the Budget six weeks earlier.
At the end of 2013/14 we are expected to emerge from net debt with a small surplus figure of $8 million.
For the remainder of the forward estimates period the net debt position will improve markedly to a surplus figure of $532 million by 2016.
Additions to Blundstone Arena beckon.
When one looks at the pattern of ‘cash’ balances in each year, the figure hardly changes. The improvement in net debt is brought about by a rapid reduction in borrowings in the 3 years of the forward estimates, not so much a reduction in the Fed housing loan owing (approx $200+ million), more due to the fact that the need for the overnight borrowing will disappear over the period as cash builds up in Government coffers.
At least that is the plan. Dependent on favourable GST outcomes essentially but that’s a story for another day.
If the Government pulls it off it will be quite an achievement.
Usually a reference to net debt is a reference to net debt for the GG. When all the GBE’s are included we have a figure for net debt of the Total State Sector TSS. From the above Statement of Financial Position as at 30th June 2012 (circled in blue) the net debt for TSS is $1201 million.
However included in the $4,199 million of TSS investments we know from Part 2 that $1,101 million are funds invested to meet MAIB’s future claims estimated at $894 million, a figure included as an ‘other liability’ not a ‘borrowing’.
Hence the TSS net debt figure has little real world relevance as the MAIB investments are included but not the specific liability for which the investments are intended to cover.
Measures such as net debt have relevance, as a rule, as a uniform measure that allows comparisons between States.
As a descriptor for a State’s situation at one point in time care needs to be exercised.
We could have nil net debt but other liabilities requiring servicing that make the State cash flow negative. Net debt in this instance is a measure of limited relevance.
A similar but more comprehensive measure of the State’s situation is the measure of net financial liabilities. Essentially it’s a measure of the financial liabilities less the financial assets. The following tells the tale.
All liabilities for both GG and TSS are counted as ‘financial liabilities’. The non-financial assets excluded from the calculation are fixed assets such as roads, infrastructure, and buildings and in the case of GG, the net value of its interest in the GBE/SOCs.
The net financial liabilities at 30th June 2012 for GG were $6,123 million and for TSS $11,042 million.
The most notable liability included in addition to ‘borrowings’ is unfunded superannuation, $6,925 million for GG and $7,748 million for the entire TSS.
The net financial liabilities of GG excludes the net value of GBE/SOCs but it does include, as we saw in Part 1, $1,045 million in ‘other financial assets’ being deferred amounts due from GBE/SOCs which logically form part of the GG’s net interest in its wholly owned subsidiaries.
Hence the measure does have some serious definitional problems.
The Government is less keen to use the measure of net financial liabilities when describing GG’s situation preferring instead the smaller figure of net debt.
In the case of the broader State sector the measure of net financial liabilities is used more often, but again usually as a means of comparison between States.
However it is used to calculate a measure of sustainability, revenue as a % of net financial liabilities for the Non Financial State Sector (TSS minus the financial entities MAIB and Tascorp), a measure of debt serviceability, reputedly used by S&P the rating agency.
In the year 2011/12 the ratio of revenue to net financial liabilities ballooned from 100% to 131% but this was all due to a sudden increase in the unfunded superannuation liability.
Therefore the measure of net financial liabilities too needs to be treated with caution.
Before we have a closer look at this and other Government fiscal strategies a little more background on the large unfunded superannuation liability may be warranted, particularly
· has the large increase in the latest year put the State in a shakier situation
· the confusing use by the Government of two different ways for calculating the unfunded liability each relying on a different accounting standard, one used in the Treasurer’s Annual Financial Report and the other in Budget papers, preliminary and revised estimates reports.
It is crucial to understand the unfunded super liability and how it will impact the State’s fiscal future.
This will be covered in the next post.