Election 2024: The Labor Fiscal strategy

 

Just when one thinks things can’t get any worse the Tasmanian Labor Party put out its Fiscal Strategy Statement with an accompanying media release declaring Treasurer Ferguson “simply has no idea what he’s doing.”

It’s a classic case of a kettle being called black by a particularly sooty pot.

The Fiscal Strategy is a statutory requirement of the Charter of Budget Responsibility Act 2007. Opposition parties need to lodge a Strategy with the Treasury Secretary ten days after an election is called.

The Tasmanian Labor Party outsourced the preparation of its fiscal strategy to its media minders. As a consequence, the strategy is a flawed document replete with dubious and at times incorrect assertions.

In short Labor maintains:

·        the ballooning deficits are principally caused by wasteful spending rather than any other structural problems.

·        the Liberals record debt is largely due to Treasurer Ferguson’s “inability to manage infrastructure projects on budget.”

Both claims disregard a few salient facts.

First let’s have a closer look at what Labor accepts as a deficit calculation. A chart showing Liberals’ deficit confirm it uses the net operating balance (NOB) measure for deficits which knowingly understates the cash deficits required to run a State government.

Labor is vowing to return the NOB to a slim surplus by 2026/27. It has identified spending on consultants, advertising and travel and reckons it can trim these by $50 million pa with a view to saving “hundreds of millions of dollars over the medium term”. Even if that were true and lots of other wasteful areas could also be identified and acted upon, enough to bring the NOB into surplus, Labor doesn’t seem to grasp the basic reality there will still be  ballooning cash deficits. The reasons for this are fourfold:

1.     The NOB as a profit figure includes a figure for depreciation expense. But the rate of spend on new capex must be more than the rate of depreciation on existing capital, infrastructure etc else we go backwards, particularly if our population continues to increase. Even when the Libs were deferring capex for as long as possible this was achieved – capex spending exceeded depreciation. The takeaway is :  NOB understates the cash effect of infrastructure spending.

2.    Although purportedly a profit figure NOB includes capex grants from the Feds. Some of these grants are to be spent by the general government (road grants say), some are directed via equity contributions into government businesses (Tas Rail, Tas Irrigation etc) Either way when spent they are not included in the NOB figure. The takeaway is : NOB overstates the cash effect of capital receipts.

3.     The NOB does not include other equity contributions required by government businesses. NB NOB ignore the cash effects of topping up government businesses.

4.     The NOB does not include the full cash effects of paying defined benefits superannuation. This will have an increasing cash effect over the next 10 years compared with the NOB effect as most members will retire and peak outlays will reach $500 million in the early 2030s. NB NOB understates the cash effect of funding defined benefit superannuation.

So even if Labor manages to engineer a small NOB surplus by 2026/27 (which is impossible for reasons presented below) there will still be a huge cash deficit. To understand this dichotomy the 2023/24 estimated outcomes as per the latest Revised Estimates Report show the NOB at $521 million deficit but the cash deficit will be $1,352 million. That’s a difference of $831 million.  How’s Labor going to turn that around? It talks about stabilising the debt position but then completely overlooks how it will fund cash needs over and above those included in the narrow NOB figure.

If Labor is having trouble identifying cash deficits from government accounts, look no further than the net debt calculations. The movement in net debt each year is a good proxy for the cash deficits each year.

Labor says the debt we now have can be easily explained as follows:

”A big part of the problem is Michael Ferguson’s inability to manage infrastructure projects on budget.”

It’s true that a universal feature of State budgets over the last 10 years is that year after year actual capex spending has been less than budgeted amounts.  But that means debt is lower. To think that getting projects out the door on time will lead to lower debt show a fundamental misunderstanding of basic accounting.

One of the reasons for deferring capex spending is because of cash constraints. It was the easiest way to conserve cash.

The other way of conserving cash was by not setting aside anything for defined superannuation benefit members, not even the mandatory super guarantee levy amount currently 10.5 per cent of salary. Since 2014 the Liberal have conserved $1.2 billion that way. Labor did the same prior to 2014. It never funded current employees. Both parties adopted the emerging cost method, paying the amounts when due, either as a lump sum or pension upon retirement or cessation of fund membership. The chickens are now flocking home to roost and the effect is that more cash needs to be found for defined benefit super amounts which are now included in debt servicing costs.

None of the claims and solutions Labor proposes with its Fiscal Strategy have much validity. Debt servicing costs are taking an increasing share of government revenue. Once you exclude them, spending on operations such as wages and other costs of delivering services, in real terms, are projected to fall.

The promises from the last 2 elections in 2018 and 2021 both added $1.4 billion to budget spending. Then there’s $300m of budget efficiency dividends yet to be found, plus lots of other outlays yet to be quantified according to the Pre-Election Financial Outlook PEFO Report.

If we spend more, debt servicing costs will go up further leaving even less to spend on operations. Treasury has made it clear any growth won’t raise enough revenue to offset the increased debt servicing costs. Diverting funds from one project to another won’t make any difference.

Pretending there’s millions in Hydro that can be raided to prop up the government is delusional. The government gets most of the profits each year as it is, leaving Hydro with insufficient funds to look after its aging assets.

And there aren’t any pots of gold in other government businesses either. The net debt of the general government is estimated to reach $6.1 billion as Labor points out. The net debt of government businesses is as much again. This will make it harder for those businesses to keep paying returns to government. They have debts that need servicing. Debt servicing must include loan reduction otherwise the businesses will be left with aging assets with debt still owing.

Most governments get away without reducing the level of debt. Which may be fine for State governments if they can pay the interest each year hopefully by capturing a little more revenue from the expanded capital structure.

But Tasmania can’t.

Tasmania has reached the tipping point.

Labor deludes itself when it says, “ten years ago Tasmania’s fiscal position was the envy of the nation”. That’s simply not the case. While net debt was low our unfunded super liabilities were very high compared to other states on a proportionate basis.

Tasmania’s problems are not the fault of one party. They are Tasmanian problems to which we collectively have repeatedly turned a blind eye.

The Labor Fiscal strategy offers no hope.