Tell us about Basslink before approving Marinus

THERE’S an eerie feeling of deja vu about Project Marinus, the second electricity interconnector proposed for Bass Strait.

Both major political parties at the federal level announced support for the project before the May election. The recently released business case contains media releases from Prime Minister Morrison and then opposition leader Shorten. One can’t help but feel the business case is really a search for reasons for doing something that has already been decided.

It was the same story 20 years ago. Both the Bacon government and the previous Rundle government supported Basslink. In early 2000, Hydro Tasmania signed a preliminary agreement for the construction of Basslink which was built by Basslink Pty Ltd (BPL). At this early stage it was not an irrevocable commitment, but Hydro proceeded as if it was.

The workers' shrinking pie

The current anaemic growth in wages will have far reaching effects. Our economy is structured around large levels of consumption spending. Our State government’s precarious fiscal position is largely dependent on GST receipts which are directly impacted by slower wages growth.

Yet most of the discussion about low wage growth glosses over the fact that labour’s share of national income, as distinct from the share going to the owners of capital, has been in decline for years. Sharing the spoils was a feature of the 1950s and 1960s as labour’s share of the national pie grew. However, over the last 40 years, labour share of the pie has fallen by almost ten percentage points.

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.

If it is a priority, we can afford it

SAYING we cannot afford something is code for saying it’s not a priority. We are a rich society. We have all the resources we need to deliver better housing, health, education and infrastructure, but we choose not to. We are constantly told we cannot afford them and we need to live within our means.

Imagine for a moment Australians were shipped to a desert island, a new paradise. All facilities were there, infrastructure, schools, hospitals, even a new K Block. Lots of people with all the required skills are ready to start working, but nobody has any money. Neither does the government nor its bank, the Reserve Bank. Nor do private banks or any residents or businesses. The government cannot raise taxes or borrow money because there’s no money to pay the taxes or lend to the government. Gridlock. What would happen?

One practical solution would be for the government to simply start spending money by crediting accounts. Hospitals would be paid enough to operate. So too schools and other government departments. Workers could then be employed and paid. Money would start circulating. Some will return to the government via taxes. Businesses and residents would start borrowing and spending. Without government spending in the first instance none of this would not be possible.

Most of us have been led to believe the opposite, that the Australian government must raise money before it can spend.

It’s not true.

Some people would regard this solution as heresy.

Tripartisan blindness

The complete and utter failure of the Tasmanian political class to articulate and discuss policy options for the State has never been more apparent than with the State budget in May and the ensuing parliamentary Estimates hearings.

After two weeks of tribal conflict the combatants appeared together, in a mock tri-partisan display of support for a Tassie based AFL side. Their sheepish demeanour was tacit acknowledgement that the public is tiring of their inability to solve problems.

The Labor Party’s budget response was predictably tightly scripted. Every wearisome contribution focused on the State’s impending debt position.  ‘At least we didn’t go into net debt’ was the gist of Labor’s position. But that’s a red herring, a complete furphy. Former Labor Treasurer Michael Aird when asked why the State’s unfunded superannuation liability, now $8 billion, wasn’t included in the net debt calculation, used to respond by saying “it’s a liability, not a debt”. The current Labor leadership is continuing with the same convenient hair-splitting approach.

Unsustainable budget Part 2

This is a follow up blog to the previous post on the unsustainability of the Tasmanian State Budget. Trying to see the wood for the trees in a set of budget papers is hard, even for those with some accounting knowledge.

There’s only one place to start. The beginning. And that is with the cash flow statement. The Tasmanian government is a service provider. Nobody should care too much if it doesn’t make a profit. The things that matter are:

·       Is it paying its way?

·       If not how is it financing the shortfall?

·       Is it spending enough on infrastructure?

·       Are financing costs strangling the budget?

Unsustainable budget

It’s not a plan for the future.

This year’s State Budget is base jumping without a parachute.

In this current year 2018/19, the government will spend $380 million more than it will receive. That’s what the Budget papers indicate.

Yet Treasurer Gutwein tells the world the surplus will be $41 million. What he omitted to say is that his surplus is an operating balance figure. The operative word is ‘operating’. It only includes operating expenses. It doesn’t include capital outlays on infrastructure. Nor does it include additional capital contributions into government businesses or Federal housing loan repayments. They all come out of the same pot.

Include all outlays and the deficit this year will be $380 million.

Over the next four years Mr Gutwein’s operating surpluses will total $567 million. Including all outlays however gives cash deficits of $1.2 billion.

The spin says ‘surpluses’ will amount to $567 million. The reality indicates actual cash deficits will total $1.2 billion.

Infrastructure spending is front and centre of this Budget.  For the Treasurer to then use a budget performance measure that excludes the amount of infrastructure spending is a tad disingenuous.

Disingenuity however is the least of our problems right now. More serious is that structurally our Budget is unsustainable. Mr Gutwein might characterise it as “maintaining the momentum”. In a sense he’s right. We’re in a luge heading downhill.

Mr Gutwein was quoted as saying surpluses were “an important element of our responsible financial management” — so the government has cash on hand to deal with emergencies; to “sandbag” the economy in uncertain times. If Mr Gutwein believes that, he doesn’t understand his own financials. There will be no cash on hand. It will all be spent. Cash supposedly sitting in special deposit accounts will all be internally borrowed and spent by 2020/21 necessitating the need to start operating a line of credit with Tascorp, the governments finance arm.

The government is a self-insurer. It sets aside cash to meet future liabilities, personal injury and medical liability for instance. In four years’ time there is supposed to be $314 million in that account. How much cash will there be? Zero. If an insurable event occurs the government will have to borrow. There won’t be any spare cash on hand as Mr Gutwein says.

It’s like spending the Xmas Club account and the legacy Grandma left for the kids, before pulling out the credit card. Debt is fine. As the government points out, debt is needed in a growing economy. But there is no plan to pay interest. In four years’ time the interest will be $35 million per year. It will simply be added to the debt. Even the internally borrowed amounts will need to be repaid. And when they are it will need to come from current revenue at the time.

Infrastructure spending is like motherhood. Criticise it at your peril. “Investing for growth” is the latest slogan. But where are the returns from this investment? There’s no plan to capture any of the increased value. Tiny increases in payroll and land tax but not enough to cover the interest. If the government doesn’t capture any of the returns from growth how it is supposed to continue to operate?

The Federal government is committed to running a surplus which simply means it plans to take more out of the economy that it puts back. Which puts extra pressure on state governments. The idea that a state government such as Tasmania can run cash surpluses and service our growing needs is fanciful nonsense. That is the reality we must face. Forget about Mr Gutwein’s paper surpluses. They are meaningless. We are destined to run cash deficits for quite a while. This is neither good nor bad. It’s the reality. Facing reality is the first step on a recovery journey.

The government’s record on infrastructure spending is pretty ordinary. Over five completed years since assuming office in 2014 the government’s underspending on infrastructure has been $508 million. The 2017/18 year was a record breaker. The Budget proposed $610 million in spending. The outcome was $436 million, a shortfall of $174 million. One cannot be too confident about this Budget given the government’s record. Infrastructure is the first choice for any spending deferral. The record spend in this Budget reflects the build up of projects as the government has deferred projects in order to preserve cash. It’s a piecemeal approach not part of a suitably funded co-ordinated plan. Just like the hospital rebuild. K Block is almost ready. But that will be like finally taking delivery of a new car ordered ten years ago which we can’t afford to fill up with petrol. Not yet anyway. We’ll staff the place when we can. Give us a break. We’ve only had ten years notice of the impending building completion.

Little more needs to be said about the government trying to run a health budget that scarcely differs from the previous year’s actual spending. There is now widespread understanding of the illusion the government has tried to construct, that by comparing this years’ budget with what was proposed a year ago and which was soon found to be severely wanting, does not mean extra spending. Extra spending to Joe Public means extra compared to what was actually spent.

Commonwealth Grants Commission data reveals the state is not spending as much to provide comparable services to other States as the GST equalisation formula allows. It’s not because we’re more efficient. Government policy is the reason. We are continually playing catch up, repaying internal borrowings and building long life assets from current income, whilst on the other side of the ledger not raising as much revenue as we should.

Mr Gutwein’s bravado and bluster needs to be quarantined. It is infecting the body politic. It is masking the true state of affairs and preventing the community from having a sensible discussion. Our current budget system is unsustainable.
(Published in The Mercury 25th May 2019)

Surplus obsession

Death and taxes are often cited as two of life’s certainties.

There’s one other. If the Federal government runs a surplus, then the private sector must run a deficit.

“I am pleased to announce a budget surplus of $7.6 billion” Treasurer Frydenberg proclaimed on Budget night. He was of course referring to an expected figure for 2019/20.

It would have been equally valid if he had said:

“Next year we expect the private sector to run a deficit. We know the household sector is one of the most heavily indebted in the world, largely due to the string of surpluses run by my esteemed predecessor Peter Costello and the reckless greed of the banking sector as recently identified by Commissioner Kenneth Hayne, but we believe the time is right for the private sector to borrow even more”.

A surplus means the government is taking more out of the economy that it is putting back. The private domestic sector is already burdened by servicing an overseas current account deficit. Government surpluses will make this worse. Private domestic debt, needed to operate the real economy is constantly rising, due also to the rapid growth of the finance sector’s cash cow loans for residential housing which must be serviced by the real economy.

The government is selling the return to surplus as a magnificent achievement but  with a weakening economy, stagnant wages growth and a labour underemployment rate of 15 per cent, is this the right time to add to the debt burden of the private sector struggling to service the overseas current account deficit plus the rapacious demands of the finance sector?

Budget predicament

The large revenue write downs foreshadowed by Treasurer Gutwein ahead of this year’s May State budget pre-empts the question is this just bad luck or a case of those who ignore the lessons of history getting clobbered.

The metaphor ‘black hole’ has once again been summoned to describe estimated reductions in State government revenue of $560 million over the next four years.

It’s familiar territory. We’ve been there before. At the time of the 2009/10 budget in May 2009 the financial world was in turmoil. The revenue write-downs were more than $2 billion over the ensuing four years. GST reductions comprised one-half and State revenue one-quarter. Policy changes were made, which still left an estimated $292 million cash in the tin at the end of the forward estimates.

The surplus that never was (part3)

This note explains in a bit more depth the measures commonly used to describe a government’s performance, what they imply and what they hide.

The measures are:

·       Net operating balance NOB.

·       Underlying NOB.

·       Fiscal balance.

·       Cash surplus/(deficit).

The surplus that never was (part 2)

“We have delivered on our commitment to fix the Budget” were the words of Treasurer Gutwein when handing down the government’s 2018/19 budget.

The Treasurer’s surplus fetish has obscured the reality that the 2018/19 budget outlined spending far in excess of receipts over the four-year period of the budget and the forward estimates.

This note outlines in more detail the actual cash position of the government before and after the Revised Estimates Report described in the last blog.

The surplus that never was

The Treasurer’s Revised Estimates Report for 2018/19 released on Wednesday 30^th January reveals we are on the brink of a disaster.

The Treasurer still says otherwise. “(W)e will remain in surplus this year and across the forward estimates”, according to his media release.

How can the government be running surpluses if its net debt position worsens by $1.2 billion over the forward estimates? That’s because they’re not real surpluses. The Treasurer is not entitled to describe his bottom line as a surplus, because that term implies a cash surplus. Most people think the government is running cash surpluses. The reality is the exact opposite. For example, in the current year, the government will spend $522 million more than it will receive.

This is not a temporary blip caused by the Hobart hospital. Even after Revised Estimate changes, spending on the rebuild will only be $210 million this year (and $80 million in 2019/20 to complete the job).

In the next year or two the government will finance its excess spending by internal borrowings. In three years’ time however the cupboard will be completely bare. Even the $270 million that the government has supposedly set aside to cover insurance (the government is a self-insurer) will be gone.

Labor's tax policy

A system supposedly to avoid double taxation, has become a tax deferral system for the privileged. Company tax has become a withholding tax to be refunded later.

Lies, damn lies and budgets

A new year provides the opportunity to start with a clean slate. Health Minister Ferguson missed his chance. His Talking Point article Rolling out the health fix for growing needs (published January 2^nd) continued with the disingenuous claim that the current government is spending” an additional $757 million over the next 5½ years”.

Whilst not an outright lie, the claim nevertheless fits comfortably into the broader category of a Trumpian untruth.