Budget denialism

 

WHEN Premier Gutwein undertakes not to sugar-coat the message, you can guarantee that’s what he will do. Introducing the 2020-2021 Tasmanian state budget he said: “This year the deficit will be $1.1bn, before improving to a deficit of $281m in 2021-22. Importantly as our economy returns to growth, there is a pathway back to the black with a return to a modest surplus in 2022-23.”

Announcing “the largest and most significant infrastructure program in the state’s history” then failing to include that spending in the deficit calculation is deceptive. The actual cash deficit for this year will be $2.1bn. In 2021-22 the cash deficit will be $1.07bn followed by $656m the year after. That’s a whole lot different to what the Premier might like us to believe. The Premier uses the generic term “deficit” for the Net Operating Balance figure. As its name suggests the latter only includes operating expenses, wages for instance, not capital outlays, roads and schools for example. This is not a semantic quibble. The point that needs to be understood is that a positive Net Operating Balance does not mean there will be cash surpluses to reverse the growth in net debt. There is little prospect of that occurring any time soon.

“In this budget we will continue to leverage our strong balance sheet to stimulate our economy,” the Premier said. More sugar coating. The balance sheet at June 2020 was the smallest for more than 15 years and it’s about to get a whole lot smaller. By June 2021 the government’s net worth will be $6bn. Of that figure, $4.7bn is the net worth of government businesses. Aside from them the government’s net worth will only be $1.3bn, smaller than the Hobart City Council. So let’s not pretend we have a strong balance sheet when a cursory glance reveals the exact opposite.

Mending payroll tax

 

Tasmania’s state budget next week is a wake-up call that our tax system won’t deliver the revenue we need.

Even before COVID-19 the budget was in trouble. For the past three years, spending has exceeded receipts despite a relentless pattern of infrastructure deferrals and underfunding of crucial services.

The recent federal budget sent a clear message that the Feds were content to leave states to fend for themselves whilst they pursued their own plans to direct most budget assistance to private businesses to resurrect the flailing economy.

Encouraging businesses to buy new plant and equipment is ill directed when existing plant is idle due to insufficient demand. A lot of new plant will be labour-saving and sourced from overseas. The stimulus effects will be muted. The jobs recovery is premised on shaky assumptions.

Lower personal taxes are also seen as the way for people to spend more with local businesses. Unfortunately, this misses the crucial point that what a lot of people would prefer is more public goods, like better health, aged care and social housing. Not only that but more jobs will eventuate as the multiplier effects are superior.

All states are facing similar revenue shortfalls. Payroll tax is the largest contributor to states’ taxation revenue, comprising about one-third. The origins, history and the underlying rationale of payroll tax have largely been forgotten as it has evolved to only apply to larger employers at a higher rate.

To make matters worse, the taxable base now includes superannuation contributions as well as ordinary labour remuneration.

If payroll tax is a disincentive to employ, as most people believe, it’s only because a fair and efficient tax has been spoiled by policymakers. It is not a coincidence that the voluminous 2010 Henry Tax Report included payroll tax in the chapter on Consumption Taxes. Despite using labour income as its tax base, a uniform tax on all labour income is a pre-consumption tax. As a tax it is more closely related to GST than most people think. With a low rate it would be fair and efficient.

Hydro's shrinking balance sheet

 HYDRO Tasmania’s recently released 2019-2020 annual report revealed a significant write-down of generation assets due to reductions in future expected revenue.

The business case for Marinus, the second Bass Strait interconnector, which is based on estimates of future electricity prices, will need to be revised.

Downturn demands bigger spend

 

The penny has finally dropped that increased public debt is not a burden, but spending in this year’s Federal Budget should have been better directed.

UTAS a law onto itself

 

As published in The Mercury 26^th September 2020. It's an abridged re-write of the previous blog Where to UTAS?)

IF annual reports were marked like university assignments, the University of Tasmania’s latest effort would receive one out of 10.

UTAS reports on a calendar year basis. The Auditor General signed off the 2019 report in February. The Board (known as the Council) adopted the report in May and sent it to the government as required. The government released the report in late August, eight months after year’s end. Were it a listed company it would have been suspended.

Apart from the financials it’s a pretty skinny report. The overview for the year occupied only six pages. Even then it contained a cut and paste from a previous offering, a Strategic Plan dated July 2019. UTAS is “not long-term economically sustainable and being economically sustainable is no easy task … At an operating level, we break even. Still, there is no surplus to see our facilities renewed for the next generation.”

The brief review continued with a pastiche of proper nouns and acronyms which only an insider could possibly comprehend. Four paragraphs on risk management described how UTAS had worked collaboratively, reviewed, planned and implemented recommendations. Exactly what was implemented to address what risks wasn’t disclosed.

Essentially UTAS’s chosen transition to sustainability requires more students and that requires more student accommodation. Property development is now the tail wagging the education dog.

Where to UTas?

 

The University of Tasmania’s 2019 Annual Report has finally been released.

The university reports on a calendar year basis. The Auditor General signed off the 2019 report in February 2020. The Board (known as the Council) adopted the report in May and sent it to the government as required by its governing Act. It’s been sitting in someone’s in-tray for the last 3 months. Another Covid victim no doubt.

Apart from the financials it’s a pretty skinny report.The overview for the year occupied only six pages. Even then it was a cut and paste from previous offerings, from the now outdated Strategic Plan 2019-2024 dated July 2019 for instance. UTas is “not long-term economically sustainable and being economically sustainable is no easy task…….At an operating level, we break even. Still, there is no surplus to see our facilities renewed for the next generation.” If there were sustainability questions in July 2019, they would have been more evident when the Council signed the report in February 2020. Even more so today in a pandemic world.

Serious as it was, sustainability didn’t get another mention. The rest of the overview degenerated into a public relations pastiche with more proper nouns and acronyms that you could poke a stick at…… The Ways of Working project, the People Strategy and College People plans, the Academic Leadership Development Program, which led to the Lean (sic) and simplification momentum continuing to build across the University via a new process improvement tool called Go-See-Fix, the unsuccessful attempt to satisfy the international Athena SWAN charter atho’ UTas did get a Bronze Award accreditation and is committed to continue commitment to the SAGE initiative. It might as well have been written in Swahili. If a student served up drivel like that in an assignment, you’d fail them. Irrelevant twaddle especially when there are pressing matters of sustainability.

The brief overview concluded with two pages describing UTas’ building program which is fitting perhaps because more than ever UTas is a property developer with a side hustle in education.

The financials confirm this.

 

The magic and mystery of money

 

If nothing else of enduring benefit survives post Covid, let us hope it is a better understanding of money, where it comes from and how we can better use it for public good.

 

Energy policy and Project Marinus

 

The absence of a coordinated transparent energy policy at the Federal level means trying to find a place for Project Marinus in Tasmania’s future is like a search without a map. That unfortunately has been the adhoc pattern of energy policy in Tasmania over recent years.

The unbundling of Hydro into generation, transmission and retail businesses in the late 1990s was driven by the ethos at the time; that corporatised businesses run like those in the private sector, doing deals with the private sector, was the way to unlock value, encourage efficiencies and deliver a better deal for all of us.The report card to date indicates this hasn’t occurred..

Over the last 20 years or so our State’s energy businesses have largely remained in public hands. Tasmanians have a special attachment to Hydro. We refrained from selling grandma as many others did, but with three government electricity businesses pursuing their own ends with no overall plan , and with private companies searching out and finding niche areas to get access to regulated and at times guaranteed revenue streams, has meant that Tasmanian taxpayers have been paying a huge price.

 

Future of gaming in Tasmania

This paper was written in March 2020 as a submission to Treasury's Public Consultation process into Future Gaming Market policy. The process was deferred due to Covid. It is expected to resume during the spring 2020 parliamentary session.

TABLE OF CONTENTS

Introduction

Executive summary

Sharing the EGM spoils: Pubs and clubs

Transition

Gifts and perpetual licences

Community support levy and EGMs in casinos

Keno

Conclusions

Hydro's wheeling and dealings

FORMER US Defence Secretary Donald Rumsfeld famously distinguished what is known from what isn’t.

There are some things that straddle both categories — things the government knows but we don’t, but should.

The circumstances surrounding the second Bass Strait interconnector Marinus is a case in point.

Legislative Council independent Ruth Forrest finally managed to get an answer to a Question on Notice as to why Hydro Tasmania’s balance sheet lost $200 million — or about 10 per cent of its value — in the 2019 year. Such a large amount begs an explanation.

 

Recovery bonds

How governments address funding  of the forthcoming fiscal stimulus  is yet to be seriously tackled. My last blog Staving off recession concluded with the observation:

The future will be one where if governments aren’t directly funded by the RBA, the RBA will own some government debt. And that should include State government debt. Money owed to ourselves won’t be a burden. It’ll be our salvation.

Bill Kelty former Australian Council of Trade Unions (ACTU) secretary and former Reserve Bank board member, was reported to be working on a recovery plan.

Staving off recession

WITH the release of the Economic and Fiscal Update Report on Friday, Premier Gutwein didn’t try to sugar-coat the economic reality the state is facing. But he persisted with the myth that he had fixed the budget prior to COVID-19.

The government’s own Revised Estimates Report in February painted a very bleak picture. Cash deficits for this year, 2019-2020, and the next three years were estimated at $1.8 billion.

The latest update shows how much the situation has deteriorated in three months.

This year spending is expected to exceed revenue by $1.2 billion. Next year, 2020-2021, the cash deficit is projected to be $1.7 billion. This year we’ll spend $1.19 for every $1 in revenue. Next year the figure will be $1.29.

Don't forget the States

DON’T FORGET THE STATES

All the post Covid-19 recovery talk centres on the Commonwealth government’s fiscal position and its unprecedented deficits for the foreseeable future.  How are States going to fund their share of the required spending? Hoping the current Commonwealth government will continue to run deficits to help fund State budgets seem somewhat forlorn at this stage.

The Commonwealth provides 40 per cent of State government revenues with approximately half of that coming from GST. Local governments receive 10 per cent of their revenue from the Commonwealth, not directly, most comes via the States.

The Commonwealth government being in control of the currency, with a central bank (RBA) to assist, and with fiscal policy that raises over 80 per cent of the nation’s taxes, can easily attend to its own needs. If it wasn’t for the States that is.

State government do not have the same flexibility as the Commonwealth and are more inclined to austerity. Erring on the side of austerity is likely to make any recovery slower and more painful for all those affected, potentially scarring a whole generation.

Where the money will come from in the case of State governments needs to be addressed at the same time as for the Commonwealth.

We need a plan for the Federation.

The starting point for a discussion about any entity’s future must include an understanding of existing balance sheets. If that entity is a country then it must include an understanding of the nation’s balance sheet, its assets and liabilities.

The only balance sheet item that gets mentioned is the debt figure for the Commonwealth. In other words, the level of borrowings of the general government sector. So, we’ll start by having a look at the balance sheet for the Commonwealth General Government. This will lead to a look at the consolidated balance sheet for the Commonwealth, which includes government businesses, particularly its wholly owned bank, the RBA. It is crucial to include the RBA in any discussion about Commonwealth finances.

The consolidated balance sheet leads to a closer look at the Commonwealth’s debt and borrowing, how spending, money creation, debt and QE (quantitative easing) impacts the Commonwealth’s balance sheet. Understanding the mechanics of the system must be a prerequisite for policy making.

A more nuanced view of debt will lead to a look at the consolidated balance sheet for the nation’s public sector. It is only with a more realistic view of debt that the Federation’s problems can be properly addressed.  The Commonwealth/RBA needs to allow States greater access to the RBA to organise debt and spending in the same way as is possible for the Commonwealth. If the government via the RBA can provide liquidity to private banks by acquiring their assets, if the RBA can led $90 billion to banks at 0.25 per cent to onlend to SMEs because the banking system is not up to the task, it can provide liquidity to States by acquiring their bonds. QE for States with RBA holding State government bonds will mean the overall total public sector debt need not produce insomnia for policy makers or burden our grandchildren.

Where's the money coming from?

Where’s the money coming from for the government’s $130 billion wage subsidy? How can it ever be repaid?

If the government borrows from its own bank, the Reserve Bank (RBA), when the money is repaid, it is repaid to itself. It is simply an institutional arrangement transferring funds from one pocket to another.

Will Hodgman's legacy

The first task of the Hodgman government when it won the 2014 election was to request Treasury to report on State finances. The subsequent report, Analysis of Budget Risks, in April 2014, was essentially an update of the Revised Estimates Report for the 2013/14 year prepared in February 2014.

Budget reports always cover a four-year period, the budget year plus three years of forward estimates. The April 2014 report noted by the end of the forward estimates the  State was facing net debt of $400 million. The deterioration in net debt over the four-year period was $600 million. Net debt increases when spending is greater than receipts. Cash deficits totalling $600 million were projected over four years.

After whipping up outrage at the incompetence of the previous government, then Treasurer Peter Gutwein reassuringly told Parliament on 8^th May 2014: “We are committed to fixing the Budget”. Will Hodman’s resignation speech of 14^th January 2020 made the claim that “….we have delivered our plan…to manage our Budget, taking it from deficits to surpluses.” The release this week of the Revised Estimates Report for 2019/20 makes now a convenient time to check.

Revised Estimates Report shows problems ahead

The government’s cheer squads are not quite as raucous as they once were.

There’s a growing awareness that all is not well with Tasmania’s fiscal position. The Revised Estimates report for 2019/20 released this week confirms the State’s vulnerabilities.

Needless to say Premier and Treasurer Gutwein was unwavering in his claim that the government fifth surplus in a row “means more money to invest in essential services that Tasmanians need”. This is a complete untruth. The surplus as measured by Mr Gutwein doesn’t provide more money. Only a cash surplus does.

A new approach to fiscal policy

It’s been twelve years since the global financial crisis brought the world’s economy to its knees. However, after the greatest setback since the Great Depression of the 1930s, there’s little evidence remedies are working.

At the Federal level the government is determined to produce cash surpluses, a supposed indicator of responsible economic management. Yet cash surpluses mean draining more out of the economy by taxation than is returned by spending. When an economy is weak, wages flat, unemployment and under-employment a growing problem, and State governments all struggling to fund services, taking more out of the economy is unlikely to resuscitate the patient.

At the State level the government pretends it is running a surplus when it clearly spends more than it receives.  The government uses the word ‘surplus’ to describe its Net Operating Balance figure. But as its name suggests, this only includes recurrent operating spending, and omits capital spending and equity contributions into government businesses. It’s a misleading measure of the government’s fiscal position.

Shadow Treasurer David O’Byrne ridiculed the government claims of being able to achieve a surplus but in so doing gave tacit approval of the government’s version of a surplus as a desirable goal. It’s not. The unassailable reality is that Tasmania will be running cash deficits for the foreseeable future. There is no alternative. To do otherwise would be grossly remiss. To pretend it’s not is misleading. To continue to conduct an adversarial political exchange on a false premise is derelict. The public discussion should focus on how to fund the inevitable cash deficits of the State government. It’s not a problem unique to Tasmania. It will affect all States.

Pokie gifts revisited

The economic benefits from breaking up Federal Group’s exclusive license to operate electronic gaming machines (EGMs) in pubs and clubs are an assortment of half-truths and baseless assertions.

Whilst the Federal Group holds an exclusive license, it does so as the lead member of an oligopoly which includes the pubs and clubs which provide premises for EGMs in the community.