Friday, 31 May 2013

Budget highlights structural woes

(Published in Crikey 31st May 2013)

The month of May is budget time for most jurisdictions. Most attention focuses on the Federal Budget but State Budgets help complete the fiscal mosaic.

On a State by State comparison it’s pretty easy to have a cheap shot at Tasmania for being a basket case, but adjusted for scale and rural location factors Tasmania is little different from other areas in Australia.

The budgetary problems facing Tasmania throws into stark relief the problems facing all States.

The preoccupation with debt and deficits that afflicted the discussion about the Federal Budget has carried over to the State Budget.

Despite there being sound reasons for running deficits, Tasmania has no option but to move to surpluses as it has little cash remaining and cannot borrow because as presently structured it can’t service any more than the current amount of $220 million and has by its words and actions undermined its capacity to raise more of its own revenue.

The wholly owned Government businesses, specifically the three electricity monopolies covering generation, distribution and retail functions, are loaded with debt and will struggle to support more borrowings.

When declining revenues from GST and State taxes smashed the State’s bottom line, the Government upped the % taken as dividends from the electricity companies, which fortunately coincided with rosier future profits given the carbon tax bestowed relative cost advantages upon Tasmania’s largely hydro based generation network.

But electricity demand patterns are changing and the carbon tax likely to disappear after September 14.

Federally the doctrine of surpluses being good and deficits bad adopted by both major political parties means that as we are forced from deficits to surpluses as soon as politically possible, each budget will be contractionary relative to its predecessor and when Government surpluses eventuate the iron law of sectoral balances means the private sector will inevitably be in deficit. Just another problem for the Tasmanian economy as it attempts to move forward from a situation where Tasmanian Gross State Product is estimated to have contracted by 0.75% during 2012/13.
The  estimated outcomes for 2012/13 saw a further run down in the State’s cash reserves. Next year 2013/14 will see them disappear altogether. Over the past two years the only cash on hand have been from grants paid in advance by the Federal Government. This has been used as working capital to fund the ordinary operations of Government.

In the current year 2012/13, 98% of operating revenues (excluding tied capital grants) were spent on operating expenses, a further 5% paying the costs of unfunded superannuation to retired public servants and a further 5% on new plant equipment and infrastructure. Fortunately the costs of servicing borrowings were negligible.

Next year 95% of operating revenues will be spent on operating expenses, 5% paying pensions and benefits and 6% on new plant infrastructure and injections into Government businesses. The cash tin will then be empty.

The following years will be break even or better, but if the pattern of the recent past is repeated the estimates for future revenues are optimistic.

Hence the situation is a little precarious, especially as the Federal capital grants received in advance and used for working capital will have to be ‘repaid’ when it’s time to spend as intended.

Tasmania has elected to become a cork in the ocean, at the mercy of the elements. Batten down the hatches, reef the sails and pray the GST rate will increase is essentially the Government’s plan.

Despite the Liberal’s virulent criticism of the Government’s Budgets, in releasing its alternative Plan for a brighter Future it accepted all the Government revenue projections and fiddled with a few expenses and proclaimed ‘our bottom line is better than yours’ and ‘we will reach a surplus a year earlier’.

Removal of the carbon tax will hurt Tasmania because of the dominance of existing renewables, but the Liberals only accounted for the change in the first year of their Plan. No need to worry about the other three years we were told because any costs will be offset by the dividends from a growing economy. How was not explained. The risks and sensitivity section in the Budget offered no basis for the Liberals’ ebullient view of the future. An increase in employment of 1% will only lead to payroll tax rising by $4 million, hardly enough to offset declining returns from the electricity companies.

The Liberals also reaffirmed its commitment to tearing up the recent Forest Agreement bankrolled by the Federal Government. Amounts to be spent were removed and treated as savings despite retaining the incoming grants as income.

The Government owned Forestry Tasmania is insolvent and propped up with a Letter of Comfort from the Government, hasn’t produced operating cash surpluses for years even when woodchipping was rife, has pawned it’s motor vehicle fleet, sold its softwood plantations, has hardwood plantations that are cash flow negative, has spent Federal grants money paid in advance on operating expenses and whatever it earns barely covers overheads. It therefore needs a Government lifeline of $25 million pa to pay wages. The Liberals disagree with the views of the newly constituted Board and say the injection is not needed because they will grow the industry. Again, how was not explained.

The Government appropriates amounts each year into the Treasurer’s Reserve to meet unforseen expenditures. It is not included in the bottom line calculation, because it is only a contingency. But that didn’t stop the Liberals removing the contingency and counting it as a bottom line savings.

A recent opinion poll taken before the Budget revealed the undecided vote heading towards the March 2014 State election had risen to 30%.Whilst the Premier resorts to Pollyanna imitations rather than adequate explanations of the State’s situation and a way forward, the Opposition’s response is little more than a hoax unlikely to restore much needed trust amongst the growing numbers of disaffected and disillusioned.



  1. John,
    I thought you would appreciate this page:
    It puts a lot of other issues into perspective in my view.

  2. Actually Karl I'm starting to warm to the Modern Monetary Theory view of the world which postulates a different view of credit creation and the role of money. In the case of fiat currency issuers such as US (and Australia for that matter)the mainstream view of Government debt being an overwhelming problem completely misunderstands how money is created and the role and effects of Government borrowings.

  3. Thanks for pointing me to MMT and fiat money. With governments issuing currency and demanding taxes are paid in the same currency then the rest of the economy has to comply with them. I accept that. I have no idea what happens with government to government credit and debt. Seems China has a big advantage if they can be the government, the banks and the rest of the economy, which in theory they are supposed to be. I guess the debt clock is just a lot of very big numbers with no glimpse of the people behind those numbers. Banks I guess.

  4. Karl good to hear you tackled MMT.

    MMT makes a bit of sense to accountants ‘cos it always refers to the other side of the entry as double entry bookkeepers do.

    It’s commonly believed that Governments need to borrow to finance deficits. MMTers say no, that’s not how it works; the Government via Treasury can ‘receive’ any funds they require from the central with just a mouse click from the central bank, out of thin air. Just credit the Government’s cheque a/c and debit the money supply. Is it inflationary? Maybe (see below). Does it have to be repaid? No.

    I am just reading a book on the GFC by Alan Blinder who is a mainstream economist who has served at top levels in the US government who discusses QE in a bit of detail. QE is commonly referred to as money printing. That is misleading. The Fed in the US simply takes over assets (bonds, some safe, others more toxic) and puts money in the cheque a/c of the banks. All with the click of a mouse. But it’s all done via repurchase arrangements (Steve Keen had a recent article in Business Spectator on this very point) so down the track the arrangement can simply be reversed. Bonds are included in the broader money supply so there no increase in money supply when the bonds for cash swap occurs. Mr Blinder is not concerned about the inflationary possibilities of QE.

    And nor should we necessarily be concerned about the Government ‘receiving’ funds with the click of a mouse from the central bank. But there will be an increase in money supply. Is it inflationary? MMTers say inflation may be a problem if too much money chases too few goods. But where there is an output gap, where there are unemployed resources everywhere, inflation shouldn’t be a problem. It’s not at the current time. If it becomes a problem then remove some of the money from the system. That is the role of taxation according to MMTers.

    MMTers remind us that most of the expansion in the money supply leading up to the GFC was as a result of bank lending. In the US I’ve seen a figure as high as 85% being created this way. Making a loan creates a liability to a bank but when spent simply ends back in the banking system as a deposit. But the money supply (which includes deposits) has increased. Obviously the unregulated banks round the world were out of control but most of the policy makers were unconcerned about the levels of private debt.

    But private debt has to be repaid unlike Government debt. Even the debt owing to the private sector by Governments can simply be repaid with the click of a mouse by the central bank.

    But there is no prima facie reason why we should be afraid of Governments spending with ‘credit’ from its central bank rather than with borrowings.

    Private debt is much more of a problem than public debt.

    We need to be more sanguine about the latter. We have been taught too much crap for too long about money and Government deficits. Ever since the abandonment of Bretton Woods in the early 70s in the US and the floating of $AUD in the 80s, the economics profession has failed to revise some of their folksy theories.