Tasmania's fiscal problems laid bare

 

THE chickens came home to roost last week with the latest five yearly  report by Treasury into the state government’s fiscal sustainability.

Premier Gutwein knew they were heading his way and what they were bringing.

That’s probably one reason he called the election when he did, to avoid pesky questions about how under every likely scenario over the next 15 years spending will exceed income, in most cases without narrowing the gap between what’s needed and what’s delivered.

Mr Gutwein said “the report confirms our finances are strong”. The report did not say that. The adjective “strong” was not used to describe our position. That the report said was “for all scenarios analysed, the results show projected fiscal outcomes that are manageable in the short to medium-term. However, the size of corrective action required to maintain fiscal sustainability increases over the projection period”.

This is a polite way of saying if you don’t start organising a survival plan soon, you’ll be in more trouble than Burke and Wills.

Mr Gutwein continued. “Importantly, the report does not take into account the strong plan we took to the recent election that will secure Tasmania’s future”.

The election plan was a spending plan so that won’t improve sustainability. The report busts the myth that a growing economy will provide the extra revenue the state needs. The current mantra is don’t worry, a growing economy will solve our budget problems. It won’t.

“We do have a fiscal strategy that will ensure the state’s fiscal position remains sustainable”, Mr Gutwein said.

Not so. The current strategy requires growth in operating expenses to be less than revenue. There will be shortterm ebbs and flows, in GST receipts for instance, but the primary drivers of outcomes over 15 years are long-term expenditure and revenue growth trends. In an area such as health, projected expenses will grow significantly faster than revenue.

The report uses three measures of sustainability. Two are measures of annual outcomes, the deficits each year. Neither include all spending. The operating balance figure, Mr Gutwein’s preferred measure is a profit figure, which excludes capital outlays. The fiscal balance figure includes infrastructure outlays but not investments into government businesses. Both measures exclude significant payments to retired members of the government defined benefit superannuation scheme which will increase over the next 15 years. The omissions mean the measures don’t tell the full story.

The third measure is a cumulative measure of net debt which increases each year as a result of the deficits expected to occur under every scenario. This measure includes effects of all spending, operating expenses, infrastructure spending, investment into government businesses and payments to retired public servants. This is easily the most relevant measure of our sustainability because changes each year reflect actual cash deficits, and the balance each year reminds us of our net liability.

If the intention is to explain sustainability to a wider audience, net debt should be used. It’s pretty easy to understand that if we spend more than we receive, debt will increase by the difference. Keep it simple. Put the other measures in an Appendix in case pedants and scholars are interested. The report contains projections for four scenarios. The historical trends scenario tells us what may happen based on the past 10 years, and the high expenditure scenario is a projection based on correcting the chronic underspending on health education and infrastructure which impact the historical trend scenario.

Based on historical trends over the past 10 years net debt will reach $20bn in 15 years’ time. Imagine an election campaign where it was revealed the status quo of failed policies would lead to an estimated $20bn of debt in 15 years? Would we have seen an offer to fix the problem for an extra $10bn over 15 years? That’s what the high expenditure scenario outlines. Little wonder all political parties avoided the issue.

They’re unprepared for the reality facing us. Current strategies won’t work.

Our own source revenue won’t keep pace. It’s not only the rise in health spending that’s the problem. The collapse in contributions from government businesses is just as significant.

The $7bn Marinus Link and Battery of the Nation projects are not included in projections but if they do proceed how will they add to the profits of Hydro and Tas Networks and flow through into government coffers? We deserve an answer. There might be better ways to spend the money.

Premier Gutwein has done the state a disservice by pretending the government’s election spending proposals and outdated fiscal strategy will help meet the challenges laid bare in the latest Fiscal Sustainability Report. Wilful blindness is endemic among the political class wedded to the election cycle. Our longer-term sustainability is conspicuously absent from the agenda. The state cannot afford another four years of inaction.

(Published in The Mercury 15th June 2021)