Mid year prognosis

The Premier’s Mid Year update revealed an unsustainable budget position. No policy prescriptions were offered. Likewise Mr Hodgman’s plan, offers no solutions. The government plans to spend more in 2013/14 as a % of operating revenue than it did in 2012/13. The forward estimates reveal cash deficits in the future. The government hasn’t detailed how future deficits will be funded. The government is unlikely to meet any of its key performance indicators (KPIs) over the next 4 years. Nor has it announced any policy changes to help satisfy KPIs in the future. Mr Hodgman’s plan offers no comfort as 97.5% of outlays are the same as those of the government. He has refused to issue his revised costings following the Premier’s update. Both parties intend to spend an unacceptably low amount on infrastructure. Even with the most important election in a generation the Libs are yet to publicly announce their KPIs, their fiscal strategies, as required. Electors are being presented with alternative plans, neither of which will lead the government onto a sustainable pathway.

What did the Mid Year update reveal?

The Mid Year report or Revised Estimates Report 2013/14 to give it its correct title confirms what we already knew, the GST pool has further shrunk and the likely abolition of carbon pricing will cause serious reduced dividend payments from electricity companies.

Most of the changes incorporated in the revised estimates result from changes in circumstances (parameter changes) rather than policy changes.

The government will have total outlays of $1.07 for each $1 of operating revenue for 2013/14.

The original budget planned to spend $1.04 for each $1 of operating revenue.

How does this compare to last year 2012/13?

Total outlays in 2012/13 were $1.04 for each $1 of operating revenue. This was only achieved with severely reduced infrastructure spending with less than 50% of budgeted amounts being spent.

How about the forward estimates?

The forward estimates, usually contain blue sky promises, but for each of the years 2014/15 to 2016/17 the government plans to spend more than it will receive in operating revenue.

How will it fund the cash deficits?

This is an unknown at this stage.

Over the past 4 years the government has funded cash deficits by internally borrowing amounts from funds intended for other purposes, and then arranging temporary overnight borrowings to repay missing amounts on each balance day.

Soon there won’t be any more such funds to borrow and the government will need a more permanent line of credit.

One can only assume the line of credit will come from Tascorp and the rate of interest will be zero as there doesn’t appear to be increased borrowing costs over the forward estimates in the Mid Year update.

The Premier has at last stopped crowing about the government being net debt free.

Is a cash deficit the same as the government’s measure of net operating deficit?

No, the latter is a profit and loss measure which excludes capex and loan repayments for instance. It also includes one off capital grants from the Australian Government which makes the resultant figure an inappropriate measure of sustainability.

Whether the government makes a profit or a loss is largely immaterial. Whether or not there are cash surpluses or deficits is more relevant. Cash surplus/deficits include all ins and outs including capex and loan repayments.

Sometimes there is little difference between the two measures but sometimes there are.

Take 2010/11 for example, the year which started with Mr Bartlett in charge and ended with Ms Giddings holding the fort. The net operating balance for that year showed a $23 million deficit. Lots of one-off Nation Building capital grants were received which when spent didn’t appear in the net operating balance calculation. The cash deficit which included all ins and outs was a whopping $338 million.

Arguably cash flow information is simpler and easier to understand. It’s how the Australian government describes its fiscal position. When the Feds talk about a $18 billion deficit they mean cash outlays exceed cash inflows by $18 billion.

Will the government be able to reduce internal borrowings?

Only marginally, and only because funds already received from the Australian Government to rebuild the Royal Hobart Hospital (RHH) will be needed as intended. Either cash surpluses or external borrowings are required.

Internal borrowings will be approximately $963 million by 30^th June 2014. Three years later the figure is estimated to be $768 million.

What do the government key performance indicators reveal?

The KPIs for a sustainable budget position and the government net debt free status will not be achieved in the foreseeable future.

In other words the government admits its budget position is unsustainable.

The KPI covering  the level of infrastructure spending, to spend more on new assets than the old ones are depreciating, looks like being met but only because of the RHH upgrade.

What is the government’s plan to remedy the failure to meet KPIs?

Unknown at this stage.

When Ms Giddings first took over mid way through 2010/11 a series of savings measures were implemented.

This time given the cash position is even worse it was surprising to see no policy changes.

No desire to frighten the horses so close to an election?

A stoic acceptance of our lot?

Happy to pass a plateful of problems to Mr Hodgman knowing he will be unable to do the things he is now promising?

In the past few years one solution to a failure to meet a KPI was simply to alter it.

This is yet to be attempted following the Mid Year report.

It will be a task for the May budget.

Is infrastructure spending apart from the RHH being neglected?

Yes, alarmingly so.

When cash is tight infrastructure spending is one of the first casualties. In 2012/13 budgeted capex was $434 million. Only $198 million was eventually spent. Depreciation for the year was $246 million. Capex was therefore $48 million short of the minimum required to satisfy the KPI.

Without RHH capex of $32 million during the year the shortfall would have been $80 million.

This low level of infrastructure spending is bound to cause future problems.

How does Mr Hodgman’s plan now sit in light of the Mid Year update?

Given that 97.5% of outlays are the same as those in the government’s budgets, Mr Hodgman’s Plan for a Brighter Future is looking gloomier.

The Libs’ planned savings over the forward estimates will not be enough to change course, even if the plan can be delivered in full at the intended time.

Cash deficits will continue.

Mr Hodgman plan reflects an unsustainable structure.

Media reports have suggested the Libs have updated their costings but Mr Hodgman has confirmed the figures will not be publicly released.

Maybe he’s borrowed a leaf from Scott Morrison’s media management handbook?

What are the Libs’ plans for infrastructure?

Only that they favour a more co-ordinated approach, little more than a motherhood statement.

The Hodgman detailed plan only covers a revised net operating balance calculation which is much the same as the government’s figure. It’s a P&L statement only and as a consequence there is no mention whatsoever of capital infrastructure spending.

One can only assume the amounts are the same as the appallingly low government figures.

If they are greater the Libs will need to explain the source of the additional funds and include some borrowing costs in their plan.

Even without increased capex, the Libs need to include some borrowing costs as the position they will inherit if successful has deteriorated since their plan was formulated nearly a year ago..

Costing of Election Policies

Rather than leave electors with nagging doubts about the costs of the Lib promises, the Charter of Budget Responsibility Act provides that Treasury undertake costing of an election policy where requested to do so by the Leader of an Opposition Party, from the date of the dissolution of the House of Assembly on 12 February 2014 to the date of the Election on 15 March 2014.

What are the Libs’ KPIs?

The KPIs or fiscal strategies are yet to be unveiled.

The Libs’ alternative budgets issued in response to the 2011/12 and 2012/13 budgets contained fiscal strategies, cut and pasted without amendment from a draft report prepared for the Victorian government by a committee which included former Treasury boss Don Challen.

The Libs didn’t bother to check the strategies against the plans.

Some were unachievable, another was pointlessly low. The infrastructure strategy was that net infrastructure spending be at least 0.5% of Gross State Product. That implies only $125 million per year which can be achieved simply with the RHH upgrade.

No need for other infrastructure spending.

Some strategy.

All strategies were removed from the Libs’ latest Plan for a Brighter Future.

Aren’t the Libs required to reveal their fiscal strategies?

Yes, the Charter of Budget Responsibility Act requires a Leader of an Opposition Party to publicly announce a fiscal strategy statement and provide a copy of that statement to the Secretary of Treasury within 15 (working) days of the commencement of the caretaker period for the election.

Given the commencement of the caretaker period on 12 February 2014, these fiscal strategy statements are required to be made public by 5 March 2014.

Better late than never, although given the government’s record over the past few years fiscal strategies don’t have to be achievable. They can be motherhood statements.

Are there other likely outlays overlooked by the major parties?

Aurora Energy’s atrocious mismanagement of the Tamar Valley power station led to a ministerial directive handballing the problem to an unwilling Hydro Tasmania, resulting in a loss to HT of $335 million as well as the burden of an extra $205 million in debt just when it had recapitalised the Woolnorth and Musselwroe wind projects.

At the time the government gave Hydro Tasmania an undertaking it would review its capital structure. This can only mean funds from the government to HT.

From where?

The reduction in dividends from HT implies reduced profits by HT and reduced debt serviceability.

Both parties are silent.

Where to?

The Mid Year update has conclusively confirmed that the government’s budgets are unsustainable.

Just as mountaineers rope themselves together, Ms Giddings’ and Mr Hodgman’s plans are linked.

If one is unsustainable so is the other.

That is the stark reality facing electors on March 15^th.