Saturday, 30 May 2015

State budget luck

THE sudden turnaround in the state’s fiscal fortunes as revealed in Treasurer Peter Gutwein’s Budget this week has everyone wondering.

Is it good management or good luck?

Only one more deficit, in 2015-2016, before we return to surplus in 2016-2017. Can this be true?

It depends on how one calculates a deficit. If one does so on a cash basis as the Federal Government does, then Tasmania will be in deficit for the next two years at least.

To most observers it is misleading to proclaim a surplus when cash outlays exceed cash receipts. That’s what Mr Gutwein has done. Cash outlays are 2 per cent more in 2015-2016 and 1 per cent more in 2016-2017.

With the State Government operating a cash in/cash out operation, it’s the only sensible prudent way to assess our situation. Thereafter cash surpluses are predicted.

But with each successive year the reliability of the forward estimates diminishes exponentially.

Even with blue sky forward estimates, the Government’s actual cash position only improves by $90 million over the next four years.

Let’s not get too carried away with the call of an imminent surplus. One third of all public servants who are members of the state’s now-closed, defined benefits super scheme don’t have any employer contributions set aside on a monthly basis as do other employees.

This saves the Government an estimated $70 million each year. Imagine the Government having to find that amount.

Deficits are likely to be with us a little longer than Mr Gutwein says.

It’s not that deficits are necessarily bad. It’s just that the Government refuses to raise revenue and struggles to service its existing $220 million of borrowings. This means increased borrowings aren’t sustainable which further implies deficits aren’t sustainable either.

Each year the Government anxiously waits, collection plate in hand, to find how much it has to spend in the next year. This year the gods were kind. The GST windfall landed in the plate.

The Budget papers detail changes compared with last year, either resulting from policy decisions or changed circumstances, cost blowouts for instance, called parameter changes. Policy changes over the four years from 2015-2016 have resulted in $420 million of new spending. Parameter changes will account for a further $100 million. All new spending has been covered by the GST increases.

In addition, there will be increased tax amounts from government businesses of about $50 million a year, almost all from the electricity entities (government businesses pay income tax equivalent payments to governments rather than tax to the Australian Taxation Office).

Increased tax payments usually imply increased dividends, but not this year.

Last year, the Government tried to boost its sagging revenue in the forward estimates by proposing a $75 million dividend from Hydro Tasmania even though the company was projected to be an over-leveraged loss-maker reeling from the abolition of the carbon tax and an extra $205 million of debt from Aurora Energy’s Tamar Valley Power Station. The dividend has been removed from the forward estimates, partially replaced by smaller dividends following Hydro’s return to profitability.

Tas Networks will take over some of Hydro’s debt, but despite this is still expected to increase profits and pay higher income tax equivalent payment to government. It will, however, be given a dividend holiday worth over $50 million over the next three years, no doubt to ease the cash flow pressures from having to pay $30 million to clear Forestry Tasmania’s overdraft in July, 2015, and money to prop up TasRail.

The GST windfall means that over the next four years 65 per cent of government revenue will come from the Federal Government. Before the global financial crisis in 2008 the percentage was usually less than 60 per cent.

State taxes are of concern. Stamp duties will raise slightly more than anticipated last year. The reverse is true of guarantee fees from government businesses and payroll tax. The latter is not what one expects in a growing economy. Any growth is clearly occurring in businesses below the payroll tax threshold. If businesses are reluctant to expand once they approach the threshold, we have a resource allocation problem.

This Budget highlights the non-sustainability of our state tax system. The Treasurer included a table detailing the inequities resulting from concessions such as having a high tax-free threshold for payroll tax and only levying land tax on one third of all properties. The estimated value of the tax concessions is $442 million for the Budget year 2015-2016.

The Budget papers also included the estimated outcome for the current year 2014-2015. The actual cash position shows an $185 million improvement compared with the original Budget. More GST helped as did increased stamp duties. But the biggest variation was $110 million less spent on infrastructure mainly deferment of hospital and school upgrades. For the first time in years the government spent less than it received, no doubt preparing for the Royal Hobart Hospital upgrade in the next few years.

The past three years has seen infrastructure spending barely equal to the impairment of existing assets as measured by depreciation. It’s only the belated hospital upgrade that make future infrastructure spending look respectable.

The Treasurer didn’t engage in too much hype. He let the figures do the talking. But his only plan is being more disciplined and resolute than his predecessors.

The so-called $315 million jobs package is a bit of an overstatement. It’s not a package per se. It’s a subtotal of a rag-bag collection of spending promises. The $100 million additional funding to frontline health and the $60 million Northern Cities initiative, yet to be fully explained, strike one as 11th-hour additions to the Budget following the good news on the GST front rather than as part of a plan.

There are always caveats with Budgets. They’re not audited, hence governments can be a little loose with numbers. The proposed Hydro dividend last year is a case in point. Also the more distant the forward estimate, the less reliable is the estimate.

The Budget highlights our complete and utter dependence on the federal government, and emphasises the importance of the federation review. The Premier must be at the top of his game to put Tasmania’s case at July’s leaders’ retreat.

There’s scant evidence in this Budget that Tasmania has anything new to offer.

It looks like good luck rather than good management at this stage.


(Published in The Mercury 30th May 2015. This version contains minor edits following a recheck of numbers)

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