Wednesday, 2 February 2011

Bartlett's mess

It’s not uncommon for people from all walks of life to take credit for the favourable decisions and blame the rest on circumstances beyond their control.

Politicians are probably keener than most to take credit for the good stuff.

Each year’s Budget sets out a plan and it also reports estimated outcomes for last year’s plan.

One of the most revealing statements in the Budget Papers is the Summary Policy and Parameter (P&P) Statement. Each year this statement reveals why things are different from the predictions in the previous Budget.

Parameter changes occur due to circumstances beyond the direct control of the State Government, for instance a fall in GST revenue or a rise in wages both cause parameter changes. The change in the timing of outlays and receipts also results in parameter changes.

On the other hand policy changes occur as a result of Government decisions, for instance, granting land tax exemptions to owners of certain properties will cause land tax revenues to fall and paying for election promises will cause an increase in outlays.

A Budget typically will contain estimates of receipts and outlays for the ensuing year plus a further 3 years of forward estimates, a total of 4 years. The following year the P&P Statement will detail the parameter variations for the 4 years in the previous year’s budget. The policy changes will cover the same period plus an additional year of forward estimates, a total of 5 years.

The period leading up to the 2009/10 Budget handed down in June 2009 was a tumultuous time. The GFC was in full swing following the collapse of Lehman Brothers. Bewilderment was exacerbated by our economically illiterate politicians jostling to appear relevant. All we learnt from them was there was a black hole of indeterminate size caused by a reduction in revenues. Thanks for the piercing analysis guys.

State Government revenue comprises, roughly, 60% from the Feds (general purpose GST revenue plus other tied specific purposes grants), 20% from State taxation, 10% from sale of goods and services and 10% other including GBE payments, fines, interest.

The P&P Statement in the 2009/10 Budget revealed total parameter changes of $2,118 million. That is the total of changes over the 4 year period of revenues less running expenses and capital outlays, due to changed circumstances (NB excluding policy changes). Almost all the changes can be explained by reductions in untied revenue—-State taxes down $550 million, dividends and returns from GBEs down $112 million, GST revenue down $1,028 million and interest down $271 million.

Policy changes of $812 million managed to reduce the effect on the Budget bottom line over the period of the forward estimates. Even so total cash was projected to fall as low as $292 million in 2012. The original 2008 Budget projected cash to grow to $1,914 million by 2012.

By the time of the Mid Year Financials in December 2009 things were looking slightly rosier with projected cash of $414 million by 2012.

But not that rosy. Not rosy enough to allow a renewed spending assault on the public purse.

However an election beckoned. All political parties, without exception, engaged in a frantic, at times obscene auction for our votes seemingly oblivious to the perilous state of the State’s finances. The Charter of Budget Responsibility was more honoured in the breach than the observance. All parties deferred instead to Michael Polley’s Guide to Parish Pump Politics.

It was always going to be a close contest. None of the parties had a mortgage on competency. Spending more was the chosen way to elicit votes. But spending more will only worsen the State’s predicament which then gives rise to further questions about competency.

What’s the answer?

More spending was the answer. Economists sometimes refer to this pattern as a negative feedback loop.

The end result is often a form of disaster, which we are now witnessing.

It shouldn’t be the preferred path for a service delivery entity like the State Government.

That’s what happened during the election campaign.

Often election promises are lost in the sands of time. Preparing the 2010/11 Budget it emerged that the effects of the GFC were less pronounced than expected and the Feds responses meant we escaped a near death experience in much better shape than anticipated.

The P&P Statement in the 2010/11 Budget revealed that the parameter variations were in our favour by $1,122 million. That is, we were better off over the 4 year Budget period by $1,122 million, simply on the basis of the changed circumstances, not taking into account any policy changes of Government. The predicted falls in State taxes and GST revenue were only about 40% of previously predicted and receipts from GBEs regained all of their lost ground (which may say something about GBEs as a stable revenue source).

We were given a get-out-of-gaol-free card.

We were released on parole.

What did we do?

Were we chastened and/or rehabilitated by our near death experience? And change our ways as a consequence?

No way.

The policy changes in the 2010/11 Budget amounted to $1,420 million over the 5 year period. These were deliberate conscious decisions by Government to spend most of the available cash.

What about a rainy day provision?

Not required.

Revenue was reduced as land tax exemptions were granted to interest groups.

Policy induced expenses and capital outlays meant that the parameter windfall of $1,122 million was swamped by the policy decisions of $1,420 million.

At a time when we should have been consolidating we were spending. Mr Bartlett, Ms Giddings, all of them.

Not that it would have made any difference had the post election farce ended with a different Government. Neither Will nor Nick proposed a radically different Budget scenario. Less tax if anything, land tax and/or pokie tax reductions were proposed. Less outlays? None were enunciated. Only the Greens suggested the possibility of more borrowings? Both the Libs and Greens’ policies would have caused as many problems as those of the incumbent incompetents.

We are now told that GST receipts will fall further. In the 2008/09 Budget the Government (sneakily) unilaterally reduced expected GST receipts as advised by the Feds, by $50 million for one particular year only. Under questioning at Estimates Hearings it appeared that this was done to pre-empt a possible change in the Grants Commission formula for determining the State’s share of GST revenue.

But if the formula were to change then subsequent years would also have been affected so the explanation seemed a tad unconvincing.

More likely they were trying to paint a bleak picture that would suddenly improve in the Mid Year update just prior to the election.

It will be interesting to see if the State’s estimates of current GST reductions correspond to those provided by the Feds. And also interesting to learn why GST receipts are expected to reduce in the future. It’s not immediately evident why GST is being revised downwards. With the mining boom GDP is supposed to be still growing but GNExpenditure which excludes export and includes imports and is a more reliable predictor of GST receipts (expenditure as distinct from production) must be slowing.

Is this a portend?

Most economists and accountants understand Swahili better than some Government accounting practices. It required a moment of epiphany for me to realise, after struggling with a few Budget papers, that just because an amount has been appropriated by Parliament it doesn’t mean that a cash sum has been set aside for the intended purpose. Appropriation in this instance is merely obtaining Parliament’s approval to spend amounts from the Consolidated Fund, which is where all recepts are deposited. (Reserved by Law items can be taken from the Consolidated Fund without appropriation).

And it is probably fair to say that most people are not aware of the simple fact that appropriations are not cash transfers.

Most people assume that if provision has been made in a Budget then cash has been earmarked.

Not so.

Obtaining appropriation is only Stage 1. Finding the cash is the more difficult Stage 2. As many will discover in the next few months.

Lots of amounts have been appropriated in recent years that, as at June 2010 are yet to be spent—the Housing Fund with $47 million, Infrastructure Fund ($85 million), Water Infrastructure Fund ($48 million), Urban Renewal and Heritage ($11 million), Hospital Capital ($70 million), Economic and Social Infrastructure($29 million) and the Risk Management Fund ($169 million).

But the daddy of them all is the Superannuation Provision Account SPA with a balance of $1,364 million, comprised of some Reserved by Law amounts but mostly appropriated either via departments and agencies as contributions towards the Government’s share of superannuation for certain defined benefit members or as an interest component equal to what would have been earned by SPA were it a cash account.

That’s right, interest is appropriated to the SPA account, it is not earned per se because a separate cash amount has not been set aside.

Lots of money appropriated into the various Trust and Special Deposit Accounts, not to mention the department and agencies’ working accounts, add up in total to $2,376 million at 30th June 2010.

But there’s only cash on hand of $938 million. The difference of $1,438 million has been ‘borrowed’ and spent elsewhere, $282 million in the last year.

And this will get worse as the previous Treasurer told Ruth Forrest MLC in a belated answer to a question on 16th November 2010. The internal borrowings will increase by a further $399 million over the next 4 years to reach $1,837 million by 2014. At that stage there is supposed to be $2,443 million in the Trust and Special Deposit Accounts plus the department and agency working accounts, the largest amount being $1,771 million in SPA. However it is estimated there will only be $606 million in available cash. The Mid Year update due in February 2011 may bring even worse news.

What chance is there that amounts can be repaid into the SPA and other Trust accounts?

Virtually none.

Not in the next 4 years anyway.

The only repayment made in the last few years was $47 million in 2008 but that was the year where the cash surplus exceeded $500 million following the Hobart Airport sale.

Currently the Government has to find about $170 million pa as its share of unfunded pensions and benefits. This figure will peak in around 2030 at least $400 million pa. In the interim it will increase at about 4% to 5%, faster than revenues. While notionally any such payments are credited to SPA, the reality is the cash has to be found out of revenue each year. Not only that, if is still planned to fully fund the unfunded super liability by 2035 a fresh start will have to be made pretty soon. The amounts set aside over the last 10 years have all been spent so they’ll have to start afresh. It will be a Herculean task to set aside $5 billion by 2035 as well as paying for the ongoing pension and benefit costs of retired RBF members.

Treasury have recently issued a position paper titled Review of Tasmania’s Financial Management Framework which contains commentary on the existing structure of the Government’s financial framework. It is more than likely that the current dual fund system of a Consolidated Fund and variously named Trust and Special Deposit Funds will become a single fund model. Separate trust funds will only exist for genuine trust monies and provisions will ensure that money held in trust is protected. The SPA may just disappear. It’s only a book entry anyway. Also many of the trust funds which the paper states “provide opportunities for activities and expenditure to be effectively removed from the scrutiny of Parliament.” Mr Bartlett’s Water Fund is a case in point.

The Government won’t have to worry about repaying amounts borrowed from the various trust funds. It will be an impossible task anyway, thanks to the wanton recklessness of Mr Bartlett and his colleagues.

Stakeholders have been urged to respond to the paper’s recommendations. So far the public responses have been non-existent. Mr Hodgman? Mr Gutwein? Mr Morris? These are serious proposals on the table that warrant some reaction.

It may be that Ms Giddings will adopt some or all of the recommendations and appear proactive in getting on with the job and distancing herself from Mr Bartlett.

Regardless of any changes to the State’s financial management system, the 2010 election and the subsequent Budget have left the State in a precarious position. Little wonder both Mr Aird and Mr Bartlett were keen to find the exit.

All that talk about “ a line in the sand…...standing on the shoulders of giants….clever kind and connected…. we will see dry plains of slowly degrading soils turn into acre after acre of Australia’s most innovative and productive farm lands”. Never has so much meretricious nonsense passed the lips of just one person in such a short space of time.

Mr Bartlett’s rhetoric diverted attention from unpalatable realities.

Even so it’s a bit rich to hear that Ms Giddings “is said to have been horrified at the fiscal forecasts for the state”. She’s been one step behind Mr Bartlett all the way as he’s manoeuvred the State towards the edge of a precipice. What was she doing? What about her coterie of advisors? Publicly available Budget papers and the Treasurer’s Annual Financial Statements have been telling the same story for a while.

Ruth Forrest MLC is the only MP to articulate concerns about the State’s predicament. The Government hasn’t responded. The Greens as yet don’t appear to have a position even though two of them must be acutely aware of the problems as they sat at the Cabinet table during Budget deliberations.

And as for the Libs they appear to have adopted the position that if they can squeeze the words ‘Labor Green Government’ and ‘instability’ into the same sentence at least twice a day between now and the next election they might triumph at the polls, so why bother releasing any policy prescriptions? If indeed they exist?

All the carping, whingeing and petty political point scoring comes at a time when we need a frank public discussion about the many lessons to be learnt from the GFC and the ramification for future policy formulation in this State.

Back to basics Ms Giddings?

It’s got to be a little more than that.

As Queenslanders and Victorians work to repair their States we Tasmanians also have a daunting task.

To tidy the mess left by Mr Bartlett.

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