Tasmania's debt: Should we worry?

 

Viewing problems facing State governments through the same lens used to look at Federal budgets run the very real risk of erroneous conclusions.

The Australia Institute wrote an opinion piece titled Tasmania's fear of Government debt is hurting the State published in The Mercury on 22^nd March reassuring Tasmanians that deficit spending was fine because our assets are growing. “That does not sound like a government about to go broke“, it was said, ignoring the fact  insolvency isn’t triggered by a lack of assets, rather an inability to service liabilities.

There followed an assertion because our per capita net debt was lower than other States, despite other financial liabilities such as the much larger unfunded defined benefit scheme for government employees, Tasmania was sitting pretty. Our biggest challenge is to unshackle ourselves from a restrictive self-imposed borrowing constraint.

The pro-forma response to the Tony Abbott-Joe Hockey debt and deficit doomsday scenario was trotted out. Most economists agree with this knowing the Australian government is not revenue constrained and more significantly, controls its own currency, neither of which are true in the case of state governments.

The weeties choking moment came when it was stated: “Tasmania currently is able to meet its spending commitment to pay teachers, nurses and other public sector workers. The “cash flow” of the government is actually in surplus “.

That statement shows a complete misunderstanding of Tasmanian government financials. The suggestion that operating revenue is enough to cover operating spending is simply wrong.

This blog will pinpoint the errors whilst also having a look at the way State governments report their budget outcomes compared to the way the Federal government does.

State governments use their Income Statement. In the past Tasmanian governments have used the Net Operating Balance from the Income Statement as a measure of a budget’s outcome. But it was a misleading measure because it didn’t account for the all-important capex outlays, a crucial part of State governments’ activities, far more so than is the case with the Federal government. Finally, after years of using a narrowly defined figure to hoodwink Tasmanians, readers of financial statements have started to cast their eyes further down the Income Statement to a measure termed the Fiscal Balance which is a measure of a budget outcome including operating and capex spending. The Income Statement is prepared on an accruals basis, what is earned rather than received and what is incurred rather than paid. The Fiscal Balance is an accruals measure.

The Federal government’s budget outcome each year is from the Cash Flow Statement. When the Federal government talks about a surplus or a deficit it uses a figure called the Underlying Cash Balance from the Cash Flow Statement. This includes operating and capex spending (labelled in government accounts as non-financial assets).

There’s a further figure termed the Headline Cash Balance which includes transfers into government businesses (eg the NBN) and into other statutory funds which governments increasingly appear to think is the hallmark of prudent budget management.

Apart from the inevitable timing differences between accruals and cash measures, as a rule the Fiscal Balance (an accrual measure) is similar to the Underlying Cash Balance (a cash measure).

To assert “the ‘cash flow’ of the government is actually in surplus “suggests the Australia Institute is referring to the government’s Cash Flow Statement. So, let’s look at the latest from the Revised Estimates Report (RER) for 2023/24 issued in February 2024.

 

Cast you eye halfway down the Table and you’ll find a figure representing net cash flows from operating activities. It is positive in all years which suggests there’s enough revenue to cover operating spending. But it’s a bogus operating figure for the following reasons:

1.     Although described under the label cash received from operating activities, grants include capital grants. These are listed on page 28 of the RER and vary from $500 million in 23/24 to $391 million in 26/27.

2.     Dividends tax and rate equivalent payment are the returns from government businesses. They include the drawdown of a special fund known as the Mersey Hospital money at the rate of approximately $100 million pa except in 26/27 when the bucket runs dry. The funds were lodged with the State-owned finance company, Tascorp and are drawn down and paid as a dividend each year. As a consequence, it gets picked up as an operating receipt. Structuring drawdowns of special funds as dividends has been used on other occasions by Tasmanian governments to boost a budget ‘operating’ figure. When TTLine was given a dividend holiday so it could save for two new ferries, from time to time the government requested a dividend be paid which was then returned as an equity contribution. The round robin transaction had the welcome effect of increasing operating cash flows. The return of capital was not an operating expense and didn’t affect the bottom line when repatriated. It was an accounting trick to put lipstick on a pig.

3.     Cash payment for superannuation ($717 million in 23/24) include pension and lump sum payment for retired members of the government defined benefits (DB) scheme ($352 million in 23/24). Governments for the last 30 years have chosen not to set aside any amounts for current DB employees not even the mandatory super guarantee levy (SGL) amounts presently 10.5% of salary. Governments have chosen to spend the cash rather than borrow and to pay benefits on an emerging cost basis when they eventually fall due. Hence, for all intents and purposes outlays to meet DB super commitments are not operating outlays, rather they are debt servicing costs.

4.     As per 3 above superannuation payments do not include the SGL portion for current DB employees. In 23/24 this is estimated to be $60 million. Hence the operating cash figure needs to be taken with a grain of salt if used as a measure of budget wellness.

Let’s now proceed to

·        adjust operating revenue by reallocating capital grants so they net off against capex spending.

·        Remove the draw down of the Mersey money as it overstates operating cash revenues (NB it exhausts in 3 years’ time.)  

·        Rearrange interest/borrowing costs and DB super outlays as debt servicing costs to emphasise the current precarious budgetary position.

Presenting the cash flow statement in a similar format to the Federal budget with an underlying cash position and a headline cash position might help readers understand Tasmania’s predicament.

[NB Some of the capital grants may become equity contributions into government businesses, Tas Irrigation for example, before being spent for their intended purpose. To that extent the underlying cash balance may be overstated. The headline cash balance remains unaffected.]

 

CASH FLOW STATEMENT $ million
	2023/24	2024/25	2025/26	2026/27
Operating receipts	8,190.1	8,306.6	8,470.9	8,725.7
Operating payments excl debt servicing	-8,251.0	-8,173.2	-7,968.7	-8,097.5
Cash operating balance before debt servicing	-60.9	133.4	502.2	628.2
Less debt servicing
DB super payments	-352.0	-371.1	-380.4	-393.0
Interest	-127.9	-204.2	-259.6	-302.5
Total debt servicing	-479.9	-575.3	-640.0	-695.5
Operating cash after debt servicing	-540.8	-441.9	-137.8	-67.3
Less purchases non-financial assets (net)	-590.6	-623.5	-738.3	-596.5
Underlying cash balance	-1,131.4	-1,065.4	-876.1	-663.8
Less net cash outflows financial assets(policy)	-317.3	-227.4	-116.0	-62.2
Headline cash balance	-1,448.7	-1,292.8	-992.1	-726.0

 

By way of comparison estimated Federal government receipts for 23/24 total $685 billion. The underlying cash deficit is only $1.1 billion. In the above Table Tasmania’s underlying cash deficit for 23/24 is $1.1 billion  on receipts of $8.2 billion.  

Just to service Tasmania’s debt requires borrowings. Paying for capex (non-financial assets) not covered by capex grants requires more borrowings. Equity contributions into government businesses (financial assets for policy purposes) requires even more borrowing. Government businesses are borrowing at the same rate as the government to service aging assets in companies that have been used as ATMs by governments, thereby constraining those companies from continuing with existing high levels of returns to government as their debt will have to repaid. There’s no plan to raise extra revenue. Real operating outlays are falling whilst demand is increasing. There are no feasible future scenarios where extra borrowings won’t be needed. If in doubt read Treasury’s Fiscal Sustainability Reports. Growing assets is the easy bit. Servicing the liabilities used to acquire the assets is the challenge. We haven’t even started looking for the $300 million of budget savings already embedded in the budget, or how to fund the $1.7 billion of election promises by the Liberals assuming they form a government, or the programs not included in forward estimates because deals with grant recipients weren’t finalised, not to mention the stadium deal or UTAS which is looking increasingly likely to require a bail out.

To suggest Tasmanians stop worrying is the dumbest thing I’ve ever read from the Australia Institute with whom I usually find myself in agreement.

It’s going to be a long hard road forward when there’s such widespread misunderstanding of the fiscal position of states like Tasmania.