Election 2024: The debt balloon ahead

 

In the previous four blogs we looked at the fiscal landscape confronting Tasmania and the major flows in the current government’s budgets  - revenue, operating expenses and debt servicing costs. This blog will try to reconcile these flows with the increasing levels of borrowings that awaits any future government.

Let’s start with the latest figures for the current year as per the 2023/24 Revised Estimates Report (RER) issued 14^th February 2024.

Income Statement 2023/24	$m
Revenue	8,493
Expenses	-9,014
Net operating balance NOB	-521
Reconcile NOB with Fiscal Balance
Add depreciation	471
Less net outlays infrastructure, other capex etc	-1,018
Fiscal Balance FB	-1,069
Reconcile FB with cash deficit
Add non-cash amounts
Current cost DB super estimate	76
Nominal interest on unfunded super	310
Less other cash outlays
Employer cost of DB super payments	-352
Equity contributions to govt businesses	-284
Other loans	-34
Cash deficit	-1,352
Reconcile cash deficit with borrowings
Extra borrowings for 2023/24	-1,417
Add Increase cash on hand	64
Equals cash deficit	-1,352

The table presents revenue and expense figures used to calculate a net operating balance deficit (a $521m deficit), long used as the indicator of budget performance. Replacing depreciation with actual capex outlays on infrastructure, buildings etc gives us the Fiscal Balance (of negative $1,069 million) which is now used as a measure of budget sustainability in the government’s Fiscal Strategy.

But there are other outlays that aren’t picked up as the RER noted at page 52:

“While equity contributions do not impact the General Government Sector Net Operating Balance or the Fiscal Balance (due to their accounting treatment), they do impact cash balances and thereby also the level of Government debt.”

But there are other adjustments to the fiscal balance needed to reconcile with the overall cash deficit which will require extra borrowings each year. The most important relates to DB superannuation, with another minor adjustment relating to other loans, mainly small loans etc to businesses from Department of State Growth.

The Fiscal Balance includes amounts for annual cost of DB super for current employees and the nominal interest on the government’s unfunded portion. Both are non-cash amounts, book entries in other words, as advised by the State actuary.  Excluding these non-cash amounts and replacing them with cash contributions from the government required to fund its annual share of DB pensions and lump sums, gives a cash deficit figure, which in turn can be reconciled with extra borrowings, the difference being changes to cash on hand. The cash deficit for the 2024/25 year for the general government is estimated to be $1,352 million. Borrowings of $1,416 will allow cash on hand to increase by $64 million.

 In this year 2023/24 the DB adjustments have a positive effect on the cash deficit figure. The replacement of the non-cash amounts with cash outlays has a positive $34 million effect of the cash deficit compared to the fiscal balance. But these figures will gradually change over time. In 8 to 10 years’ time the current cost of super for DB members will be near zero as members retire. The government’s annual cost of its unfunded share of lump sum and pension payments will peak at approximately $500 million. The nominal super interest component will peak at roughly the same time at about $350 million. This will mean that the cash flow effect will be $150 million worse than the fiscal balance effect. That’s a $184 million turn around compared to the current situation.

Hence even if break even fiscal balance is achieved as per the current government's aim, annual borrowing will still be required to help pay unfunded super liabilities, plus fund equity contributions into government businesses (including Tas Water). Funds required for other ordinary operations of government will be squeezed even further. 

There’s challenges ahead at every turn. Meanwhile the lacklustre election campaign continues with scarcely any reflection of where we’re headed. We await the release of fiscal strategies from Labor and the Greens to check whether they’ve bothered to check the road ahead and tell us how they plan to navigate the obstacles.