Surplus myth lives on

Who remembers the Budget slogan?

Every budget is sold with a particular message and this year’s State budget in May 2019 was no exception.

“Maintaining the momentum…. investing for growth” was the chosen catch cry.

The massive infrastructure spend of $2.8 billion over four years was set to lay the foundations for the future.

With the year almost over, the infrastructure spend for the full year 2018/19 was expected to be $699 million, The preliminary outcomes report for the completed year released last week showed spending was only $582 million, $117 million less than expected a month earlier.

The pattern of recent governments is to consistently spend less on infrastructure than budgeted, on average roughly $100 million each year. In that sense the momentum has been maintained.

Looking for the positives the underspending does represent an improvement over the previous year. In 2017/18 the government’s infrastructure spending was a massive $174 million less than budgeted. That’s the problem with this government. It doesn’t deliver on infrastructure.

How come the preliminary outcomes report managed a surplus figure of $100 million for 2018/19?

To start with, the supposed surplus figure doesn’t include infrastructure spending. Capital spending isn’t included.

Secondly if Federal grants are received but not spent as planned, the bottom line improves.

Grants for the National Disability Insurance Scheme (NDIS) of $102 million were received in 2018/19. But the preliminary outcomes report indicates NDIS spending was $65 million less than expected. That’s a $65 million addition to the surplus, which is misleading because it’s only a deferral. The grant will have to be spent. This is where the government accounting rules need overhauling. Specific purpose grants should only be reported as income when spent not when received.

In a similar vein the receipt of a grant for Project Marinus (the second Bass Strait interconnector) of $56 million went straight to the bottom line even though little or no spending occurred. Even when spending occurs it will probably be done by Tas Networks so it won’t affect a surplus in future years. How good is that?

It was a tumultuous year with bushfire expenses and additional monies for Out of Home Care and Police Fire and Emergency Management. Another $150 million had to be found for the deliberately underfunded Health budget. The only possible reason for this peculiar practice is so the government can produce a budget bottom line it can sell, whilst it spends the next 12 months working out ways to find the inevitable extra funds needed, unspent grants from other areas and deferred infrastructure spending being regular targets.

Despite the tough year, the preliminary outcomes show an improved surplus compared to estimated outcomes in the May Budget. Unspent grants certainly helped. The cash position also improved due to the unspent grants and deferred infrastructure spending. However as is slowly becoming more widely acknowledged, a surplus figure which ignores capital outlays is irrelevant. When all spending is considered cash deficits are occurring and will continue to occur over the forward estimates.

Despite the improved cash position, the preliminary outcomes report still shows a cash deficit of $154 million for the year. Just to repeat this point, even with significant unspent grants and deferred infrastructure spending, the government still spent $154 million more than it received in 2018/19. Furthermore, the cash savings are only temporary. Deferrals don’t solve problems, just postpone them. As it is, cash deficits totalling $1 billion are expected over the next four years. That assumes the unspecified savings of $450 million as per the recent budget are found. The deferred amounts from 2018/19, when spent, and expense savings that can’t be achieved will add to the deficits. It’s a toss-up between austerity and disaster.

Procrastination is becoming endemic. Neither of the opposition parties has made the slightest attempt to address our serious budget problems. The Treasurer has bullied everyone into submission. He controls the agenda. The myth of government surpluses still has widespread support because no one is prepared to question it for fear of having to put up an alternative. Which they can’t do because they’ve made no effort to understand current reality.

That reality is we don’t raise enough revenue. Even allowing for our disadvantages (which the Commonwealth Grants Commission call disabilities) we only raise 90 per cent of the average across all States. This leads to an even larger gap between our revenue and what we should spend to deliver average services. We solve this problem by spending less than is necessary to deliver average services.

There is considerable unmet demand for government services already but the projected growth in state government revenue is less than the rate of inflation. It must be remembered that the nature of government services is different to other areas of the economy. A lot of government services have a large labour content, nurses, teachers, child safety officers for example. Labour productivity growth is less because of the nature of their tasks, often non-routine one-on-one interactions with clients. It is certainly less than the growth in the number of tasks. Economist William Baumol described the dilemma over 50 years ago when he observed that the same number of musicians is needed to play a Beethoven string quartet as was required in the 19th century. How do you impose an efficiency dividend on those guys? Make them play faster?

The path we’re on is not one of this government’s choosing. It’s the path we’ve been on for years. A change is needed. Slowly but surely state government finances are becoming unsustainable. Selling off public businesses to reduce the unfunded superannuation liability will deprive the budget of more revenue than it saves in costs. A rapid run down of the sale proceeds is a big risk. Even if there were benefits for the government, they are likely to be overshadowed by additional private costs. Overall the community is unlikely to benefit.

The current government needs to abandon its misleading drivel about running surpluses. External borrowings in the next year or two are unavoidable. The longer we postpone the discussion about what level of government services we want and how we fund them the harder it will be.
(Published in The Mercury 22nd August 2019)