Thursday, 6 February 2014

The Hodgman plan: Will it work?


 
Will Hodgman’s future plans are at last coming under a little more scrutiny.

The coming election, we are told, is a once in a generation event, a turning point for Tasmania.

The Liberals have, to their credit, unveiled a plan in each of the past few years in response to the government’s budget.

The latest plan titled a Plan for a Brighter Future issued in May 2013 contained the Libs’ plans for 2013/14 and the next 3 years of the forward estimates.

The plan is based on the governments’ budgets for those years. In essence the Libs are planning to cut outlays by about 1% and redirect about 1.5% of wasteful spending to other initiatives.

That’s all.

It’s sometimes touted the Libs have identified $500 million worth of savings. But that’s the four year total. Each year it’s about $125 million.

The government have no plan, we are told. Only the Libs have, a fully costed plan, a once in a generation change to fix the Labor Green Budget mess.

Will it work?

Only the Libs have a plan?

This statement is untrue.

As already mentioned the Libs’ plan is based on the government’s plan. Only 2.5% of outlays are different.

Furthermore the only revenue increases proposed by the Libs are increased fines of $3 million per annum and $750,000 of levies on persons convicted of criminal offences. These increases however are more than offset by reductions in taxes from motor vehicles in the second and third year of the forward estimates.

Is the plan up to date?

No, it’s already one year out of date and according to media reports Mr Hodgman doesn’t plan to make any changes regardless of the outcome of the Mid Year Financial Report due by 15th February 2014.

The plan is fully costed

This is untrue.

The Libs plan is presented in a truncated profit and loss form and contains round numbers that have changed little over the past few years. A fully costed plan would be based on a cash flow statement showing cash savings in each year.

Are accrued leave payments and additional superannuation payouts included?

No, these are payments in respect of amounts accrued in earlier periods and therefore do not appear in a profit and loss statement when paid. They only appear in a cash flow statement and then only if fully costed.

The Libs have given no indication of additional cash outlays required to meet accrued leave,redundancy and superannuation benefit payments for unfunded employees.

For instance the Libs plan to reduce the public service workforce by 500 workers. The savings described as ‘a more efficient public service’ show savings of 500 workers at the public service rate of $86,000 per head for 2014/15 and $92,000 per head for the following two years. The plan implies all workforce reductions will occur on 1st July of the relevant year. This is highly unlikely.

What are the Libs’ other major savings initiatives?

The second largest of the Libs’ savings initiatives is to withhold payments of $25 million pa from Forestry Tasmania, needed to pay wages to the 300+ employees, as canvassed in a recent ABC 7.30 report Forestry Tasmania jobs on the line

Forestry Tasmania is currently unable to sell timber at a price that covers direct costs of sales let alone the costs of overheads, wages and capex such as access roads to enable timber extraction and replanting which is a statutory requirement.  Without certification it will be impossible to double the average stumpage price for timber, the minimum required to make FT profitable. This is made even harder by existing long term contracts.

Without the proposed injection of government funds FT directors will have no alternative but to cease trading.

In which case the Libs plan needs to allow for retrenchment and unfunded superannuation benefit payments.

The implied statement that the Libs’ plan for FT is fully costed is untrue.

Are there any other major savings initiatives?

The Libs plan to cut supplies and consumables by $18.5 million pa. For a few years the plan was to save $13 million each year. The latest fully costed plan has increased the amount to $18.5 million without any explanation for the increase.

Supplies and consumables are essentially the residual expenditure amounts in the income statement after employee costs and payments of grants and subsidies.

The only clue as to what constitutes supplies and consumables is from the Treasurer’s Annual Financial Report. The latest detail is shown below.

 

The actual figure for 2012/13 of $1,013 million was below the budgeted figure of $1,022 million and below the estimated outcome figure of $1,069 million for 2012/13 contained in the May 2013 budget, used by the Libs in formulating their plan. Nevertheless the Libs haven’t felt the need to revise their plan.

The Libs also plan to cut travel transport and IT costs but it appears these are included in supplies and consumables. It looks as if the Libs have double counted savings. At least they should have said they propose to cut supplies and consumable by $18.5 million in addition to the specific supplies and consumables savings listed elsewhere.

It is an overstatement to say cutting $18.5 million from supplies and consumables has been fully costed.

At best it’s a target.

Savings from cutting the Treasurer’s Reserve?

Under the existing Public Account Act, the Treasurer has at his disposal an amount of $10 million each year for unforseen expenses. It’s a statutory available amount that doesn’t require appropriation every year.

Each year another $10 million is appropriated just in case.

In total $20 million in the Treasurer’s Reserve. This not much to have immediately available for emergencies given the complexities of government especially when one considers budget outlays are $5 billion pa.

Even so the Reserve is only a contingency.

The extra $10 million if not appropriated, as the Libs plan, can’t be counted as a savings in the income statement because it’s not there in the first place. It is simply an appropriation. It’s a contingency only.

How can electors be confident election proposals are fully costed?

The option of full costing by Treasury pursuant to the Charter of Budget Responsibility Act is available once the election is called and the government is in caretaker mode. It is rarely used.

What is the budget mess that the Libs have identified?

At no stage have the Libs told us exactly what’s wrong, in their opinion, with the budget that the proposed minor expenditure shuffle will fix?

Is there a budget mess?

The fiscal problems of the Tasmanian government are quite simple:

·        We spend more than we receive.

·        We will not countenance tax increases.

·        We cannot borrow because we cannot service loans because we already spend more than we receive.

·        We have only survived by slashing capex and spending amounts intended for other purposes via a system of internal borrowings, a total of $90o million.

How long has this situation existed?

Former Premier Bartlett spent $1.06 for every $ of revenue in before the 2010 election but cranked it up to $1.08 with a post election celebration. But revenue was soft and the looming crisis coincided with a desire to spend more time parenting.

Ms Giddings took over and in her first year despite the budget emergency spent $1.03 for every $ in revenue.

In the 2012/13 year just completed, it was $1.05.

Were capex budgets spent, outlays would have been $1.10.

If the government was required to set aside superannuation guarantee contributions for those employees who are members of the now closed defined benefits scheme, outlays would have increased by a further 1.5 cents for each $ of revenue, making  total outlays $1.115 for each $ of revenue.

Spending funds intended elsewhere, slashing capex, and deferring superannuation guarantee payments is not a long term recipe for survival.

At least there’s bipartisan support on two issues: to refuse to acknowledge what’s happening and to continue to hoax the electorate that budgets and plans as presented will work.

Do the forward estimate offer some hope?

Yes, but forward estimates are notoriously unreliable. They are rarely achieved.

The Mid Year budget update due by 15th February will reflect the worsening situation.

The system of internal borrowings to spend funds elsewhere has an inbuilt problem that funds will have to be found for their intended purpose at the same time as funds are needed for ordinary operations and that is extremely difficult if more than $1 is being spent for every $ of revenue.

The classic case in point is the Royal Hobart Hospital. Most of the funds have been received from the Australian Government. Yet over $500 million will need to be found over a 2 to 3 year in addition to other infrastructure spending that should be at least $250 million per annum.

Is growing the economy the solution to government finances?

The mantra of growing the economy is put forward as the solution to budgetary woes.

Whilst there is correlation between growth and government revenue the direction of causation is very much a moot point.

The likely direction is more government spending will increase growth not the other way around, at least in the critical short to medium term for Tasmania.

Government revenue increases from increased economic growth are only likely in the long term.

What are the Libs’ benchmarks?

The Libs fiscal strategies are similar to those of the government, or at least they were in 2012. At that stage the plan as presented titled a Roadmap to Recovery listed strategies that the plan failed to achieve.

Some plan.

The strategies are missing from the latest plan.

The strategies included a bottom line figure and negative net debt figure(ie a surplus of financial assets over financial liabilities).

Rather than bother with benchmarks the Libs simply assert our-bottom-line-will-be-better-than-yours.

Will it work and will it be enough?

No and no.

Will rearranging a few deck chairs and changing course by 1 degree avoid the iceberg.

The Titanic is an overused metaphor.

Maybe the Costa Concordia is more appropriate?

The Mid year results and budget update due by the 15th February will indicate a worsening situation.

Majority government won’t solve the budget crisis. It needs broader support. Making changes in an adversarial environment is well nigh impossible as Tasmania’s recent political history has shown.

Let’s start by telling a few home truths.

 

13 comments:

  1. Hi John,

    Great article, depressing reading! If it's the case that Tas Govt is on the verge of defaulting on its debts (internal borrowing? lol!), presumably it will go cap in hand to Uncle Joe at the Treasury Dept in Canberra. Could you put forward any guesses as to what punitive conditions could/would be applied for such a bailout? Is there any precedent? Pulp mill as national economic priority project? Forced local government amalgamations? Does the government have any assets left to sell?

    Thanks so much for your insights.

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    1. To me a bailout occurs when a State receives specific purpose funds which are not taken into account when splitting the GST pool.

      The IGA funds are a bailout. The Macquarie Point redevelopment is another example, as was the recent extra health funding.

      Tasmania already receives, on a pro rata basis a much higher level of these types of specific purpose grants.

      The Tasmanian government plus all its subsidiary GBEs and state owned corporations (the total State sector) actually has $2 billion sitting in a bank a/c in Tascorp’s name.

      Tascorp, in rough terms has borrowed about $5 billion, $3 billion of which is lent to the subsidiary companies( mainly electricity cos and the water corp) with the other $2 billion is sitting in the bank, ready to pay off some of the existing debt.

      It is done this way to minimise the refinance risk, the risk of having to borrow at prevailing market rates when the existing loans mature.

      It is doubtful the Feds will keep bailing Tassie out given the current scenario and given that Tascorp has plenty of cash.

      Whilst it is a problem for the government to borrow from Tascorp because as things now stand, it can’t even afford to pay interest, I’m sure the Feds would insist on Tassie trying a bit harder to get its own house in order before it handed over too much more.

      From a strict accounting viewpoint, selling electricity cos is likely to be a bad move at this time.

      The abolition of the carbon price has just lopped billions off the value of the generation assets and there was little interest shown recently in the electricity retail assets. Hence the price would be pretty low.

      The dividends and income tax equivalent payments from the electricity cos is what has just kept Tassie government’s head above water from a revenue viewpoint in the last two years.

      Without them Tassie would be little more than a large municipal council.

      The shareholders of the water corp are councils. Even if the corp was sold it seems likely the proceeds would end up with shareholders.

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  2. The hydro, and the nicely packaged Tas Water Corp are clearly in their sights. Never, ever believe that Liberal and Labour oppose each other. Their masters just like it to look that way.

    Thanks for the clear and concise explanation.

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  3. Thanks Unknown, forgot about the Hydro - there's been talk about selling it for as long as I can remember, I suppose I stopped paying attention. Presumably, given the featherweight economic plan presented above, the Tas Libs would go a country mile to avoid answering any direct questions on the subject of privatising public assets?
    As for Libs+Labs, agreed: two faces of the same worn-out coin!

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  4. More insight and thanks John.

    One basic problem is that government has no useful focus in Tasmania except itself. Recent revelations of blatant revenue raising from tourism businesses without providing any added value are indicative (Merc Sat 8 Feb). It is clear that government in Tasmania has degenerated into a host of rent seekers who can only get in the way and charge to move, there is no leadership or any imperative to help the private sector become more productive or the citizens more capable. Government now exists to help itself.

    We need government whose purpose is to make our lives easier, government that measures its performance and rewards itself only when community outcomes are achieved. Of course that implies actual work and talent available in both the public services and the elected group. So far there appears little hope of seeing any of that.

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  5. Capture a few larger Victorian country towns, bundle them together and then build a 200km moat around them. Call it Tasmania 2. How would it perform financially? Socially? Better than Tasmania 1?
    Of course not. Comparing Tasmania with the Mainland States and expecting similar outcomes is ludicrous.

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  6. What are your thoughts on the sale of TOTE Tasmania?

    Sale price of just over $100m for a business that Tattsbet announced to ASX the next day would make $15m annually. 100s of Tasmanian jobs gone and the $100m has disappeared down drain. Surely we would have been better off to keep the TOTE, and the jobs and even if the profit was $10m a year the racing industry would not be on its knees. Instead we have no TOTE, no jobs and declining racing industry.

    It looks like the govt has sold a profitable asset to make a credit card payment, and then gone straight out and maxed out the card again!

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    1. TOTE became such a badly run business. In the last few years turnover was bought at the expense of margin. From memory the gross margin fell from about 12% to around 7% because of the rebates given to the big syndicates.

      When the sale was first attempted a few years ago, profits were higher even tho’ turnover was lower and with a multiple of 10x earnings a $300m sale price was mentioned.

      At that time the government legislated to give the racing industry $27 m indexed for 20 years, which in hindsight was not a bad deal.

      TOTE was sold at the second attempt but by that time the company was on a downward spiral, declining margins, outdated computer systems, facing the prospect of losing access to the SuperTAB pool and retaliatory action from competitors due to the rebates offered to big punters.

      The government was committed to selling it ‘cos they had already spent the proceeds.They got picked off by Tatts.

      It was a jumbo fiasco. Little credit to the Directors or the shareholder ministers and advisors who were supervising at the time.

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  7. Happy to have found your blog and thank you for the analysis. I appreciated your closing observation that fiscal reform/economic regeneration requires being frank about the situation and demands more than just majority government. A plurality of views is vital yet adversarial politics trumps honest discourse in Tasmania’s polity far too often.

    Any incumbent government’s posture in relation to COAG is also key in this; not only the political posture but also the ability to offer financial options to the commonwealth and show perseverance where it matters. Tasmanian governments have oriented themselves for too long in stale patterns with regard to federal grants and negotiation. In some ways I feel we are still wading through the hangover of the pre-COAG period when 60-70% of commonwealth grants were directed to hydro-industrialisation. Without overestimating our power in COAG negotiations (typically Tasmania’s position pales against the relative/perceived financial strengths of other states) we still have the capacity to offer new ideas to such forums that work to our current strengths, and opportunities for diversification.

    Remodelling the economy without growth for growth’s sake is a tantalising opportunity.

    What is your opinion of a levy system for example, collected nationally, for specific application to areas of Tasmania that are held in trust for the nation and in the portfolios of those who have grown forests as investments? I imagine a $1 to $2 per annum per taxpayer levy (perhaps over an agreed number of years) to base-load the restructure of forest and park management via a differentiated, better resourced forestry, parks and wildlife sector that operated cooperatively with the private sector, and science and research, to realise the financial and environmentally sustainable use of these natural resources. This would have to operate discretely from the current levy on forest products that is directed to Forest and Wood Products Australia.

    Are levies workable? And what other creative options are valid?

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    1. Restoring the parliament is vital too. The current portfolio overload is unhelpful - but that's another story.

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    2. I’m not much of a believer in taxation via levies. Rather than levies, surcharges and co-payments I prefer to see just a few taxes, in particular the four that Henry talks about to provide a stable tax base :

      • Taxes on individuals
      • Business taxes.
      • Taxes on property and resources
      • Consumption taxes

      A levy as you suggest would probably be fair but the costs of collecting such small amounts would probably exceed the revenue gained?

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