Tuesday, 10 July 2012

Tasmania's decisions

Matthew Denholm’s short opinion piece in the latest Weekend Australian on Tasmania titled ‘Governance, the economy and culture need a total overhaul’, was a welcome addition to the discussion about our future.

It was a short piece so it would be unfair to criticise the lack of supporting arguments but there were three points which warrant a comment.
Tasmania cannot afford to spend almost half its budget on public service salaries.
This is oft repeated assertion. Presumably it refers to half the operating outlays as per the Income Statement which doesn’t of course include capital and infrastructure spending.

Employee expenses plus superannuation do make up roughly one half of budget outlays (46% for 2012/13). So what should the correct % be?

Looking at the Income Statement the next highest outlay is ‘grant expenses’ at 22%. That is essentially the spending of specific purpose grants received from the Feds.

The next highest outlay is’ supplies and consumables’ also at 22%. Should this be increased at the expense of salaries?

The point really is, not the % spent on employee costs but the % of outlays spent on operating, in other words delivering services.

I have argued on previous occasions that the best way to look at a split of government outlays is to look at the cash outlays, not the outlays as per the Income Statement. Arguably 85% to 88% should be spent on operating, 5% is sufficient to service our liabilities, principally unfunded superannuation for retired employees, 5% to 7% on infrastructure spending, leaving  the balance for a rainy day.

Stop trying to pick winners via grants and subsidies to inefficient sectors. Redirect these funds to slashing business taxes to stimulate the private sector allowing the market to pick the winners.

I assume the writer is proposing to cut assistance to all sectors not just the inefficient sectors? Tourism? First home buyer’s grants?

Does it include tax expenditures and concessions to industry as well as direct budgetary outlays? The latter represent only a fraction of overall assistance to industry.

A tax expenditure occurs when a specified activity or class of taxpayer is granted a different tax rate compared to the 'standard' rate that would apply, employers with payrolls less than $1 million escape payroll tax for instance. Primary producers’ land tax is another example.

A concession occurs when a good or service is sold at a lesser price to certain individuals or businesses.

Redirecting savings to slash business taxes is yet again an oft repeated goal. But only if tax expenditures and concessions to industry were removed would there be sufficient to ‘slash business taxes’ as proposed, and then that would principally apply to cutting rates of payroll and land tax.

We would then end up with a commendably broadly based low rate tax system and would be the envy of other States.

Open the monopoly energy sector to full competition and privatisation with proceeds placed into a future fund to invest in ageing infrastructure.

The Tasmanian Government has structured its affairs to be excessively dependent on dividends and income tax equivalent payments from the electricity businesses.

This dependence can be best seen by looking at this year’s Budget.

Payments from electricity entities into Government coffers this year are expected to be $180 million. Ignoring these payments and also capital grants from the Feds the net operating cash flow is a negative $135 million. Repeat, a negative $135 million.

This includes payment in respect of the unfunded super liability but is before capital and infrastructure payments which really need to be at least $250 million pa.

The proposed future fund won’t last long at that rate, about as long as the $300 million proceeds from the Hobart Airport sale.

Then how are we going to pay the unfunded liability?

Proponents of the privatisation (see for example http://www.themercury.com.au/article/2012/05/26/331845_opinion.html) suggest we will be better off, but it requires a leap of faith to agree.

The Government via its compulsory super for all plus attractive concessional treatment for higher income taxpayers has successfully corralled about $1.4 trillion for the funds management industry to administer.

This has meant while fund managers have managed to clip the ticket for $15 billion each year, fund members have had endure zero real returns over the last decade.

Quite an achievement.

Looking around for suitable investments to boost flagging returns the funds management industry have starting urging governments to monetise the remainder of their infrastructure assets, especially if the latter are accompanied with returns guaranteed by Governments and set by Regulators. The ex post rationalisation is that this will free up funds for governments to ‘invest in aging infrastructure’.

In other words sell the good stuff and invest instead in low yielding assets instead.

The problem with infrastructure assets is the problematic returns. Infrastructure can range from bike tracks, roads, schools and hospitals, dams and irrigation assets to assistance with industrial developments at Longreach.

In some cases possible returns to governments can be modelled via increased revenues, but in most of these cases there is a fair time lag.

But with much infrastructure the benefits accrue privately via increased house prices in affected locations, but few want to share their gains with Governments.

Recently there was an article http://www.theage.com.au/victoria/doncaster-railway-line-could-be-built-for-840m-20120723-22kpg.html which suggested infrastructure returns to Government be via a small land tax to capture some of the private gains that accrue as a result of Government outlays.

We all agree that we need to maintain and update our infrastructure, but it has to be done in a way that is sustainable for Governments and equitable for all Tasmanians.

Next time opinions from Messrs Fox, Kennett and even Lennon are sought, it would be instructive to ascertain the last time they bothered to read a set of financial statements for the State of Tasmania.

Tasmania’s circumstances are peculiar to Tasmania. Applying a universal solution would pose more problems than envisaged.

Tasmania has resorted to Plan X and outsourced additional revenue collection to the electricity GBEs. To sell them would deprive it of the last vestige of flexibility from a budgetary viewpoint, as well as disposing of assets at below their long term value requiring regulated prices to attract buyers, and which almost certainly would markedly reduce the life expectancy of the State of Tasmania as we know it.

The overall State sector would, as a result, consist principally of the General Government sector, departments and agencies in other words. It would soon end up being little more than a municipal council.

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