Thursday, 7 April 2016

Budget myths

(Published in The Mercury 6th April 2016)

Treasurer Gutwein is no exception. All State Treasurers no matter what party affiliation will perpetuate four myths whenever a budget or a budget update is released.

Myth number one is if the State economy grows so too will State government revenue.

The second myth is the budget forward estimates for the years beyond the current year can be reliably estimated.

Myth number three is the misplaced focus on the general government rather than the total state sector which includes government businesses.

The fourth myth is that budget sustainability is best measured using a flawed profit figure.

Mr Gutwein when releasing the Revised Estimates Report for 2015/16 said “reflecting our strengthening economy, tax receipts are projected to increase by $10.1 million across the Budget and Forward Estimates period”.

Ugh? Tax receipts run at $1 billion per year, total annual receipts are over $5 billion, so a total change of $10 million over 4 years barely registers. In fact the last two years of the updated forward estimates show tax receipts falling from previous guesses.

The original 2015/16 budget handed down in May 2015 predicted increased growth yet reduced payroll tax receipts, evidence that the link between growth and increased State taxes is tenuous.

Budget year figures are usually based on careful estimates. Forward estimates however are notoriously unreliable. The latest lot look like designer estimates, arrived at by a process of induction rather than deduction, in other words by selecting a preferred end result and working backwards. Budgets and forward estimates aren’t audited. Guesses can always be justified.

Further evidence that forward estimates are rubbery is from Ms Giddings’ last budget as revised a few weeks before the 2014 election. It included employee costs of $2,211 million for 2015/16. Mr Gutwein, despite last year’s downsizing trauma is on track for employee expenses of $2,237 million, an increase of $26 million.

The original 2015/16 budget predicted the total state sector will make tiny, almost identical, cash surpluses in each year of the forward estimates.

The revised estimates for 2015/16 and beyond issued last week surprised with almost identical cash surpluses for the total state sector in the beyond years. With no predicted change in borrowings, it’s either masterful management or contrivance.

The same pattern occurred with the 2014/15 budget.

The audited Treasurer’s Annual Financial Report issued on 31st October is the only indication how the total state sector has fared but it doesn’t contain budgeted figures to enable a comparison. It’s too late by then anyway as the Treasurer has already issued another set of forward estimates with the same panglossian veneer.

The reporting system currently suppresses information on the wider State sector and allows the perpetuation of myth number three that we need only to focus on the general government.

It seems unlikely that all government departments, agencies and 20+ government businesses with a combined turnover of $8 billion facing a myriad of challenges, produce the same combined cash outcome for the ensuing three years in each of four reports prepared over a two year period?

Reinforcing the third myth Mr Gutwein talked only the general government when he assured us “we are well placed to weather unexpected financial challenges.”

It was a baseless assertion. Half the assets and most of the borrowings are with government businesses and, as we are now discovering with the Basslink debacle, lots of risks.

It is instructive to look at the general government and government businesses side by side. The government receives dividends and income tax equivalent payments from government businesses and it returns some, but not all, back to other government businesses to help fund operations, to Metro, Tas Racing, Tas Rail and Aurora Energy just to list the largest recipients.

When transfers between government businesses and the government are eliminated, the government is consistently in a negative cash flow position for this and the next three years. The reverse is true of government businesses, which is why the combined total state sector ends up with small cash surpluses across the forward estimates.

Hence the government sector is on the back foot, dependant on government businesses, and not as the Treasurer suggests, ready for unexpected challenges.

The Treasurer asserts the government will return to surplus earlier than expected.

The Federal government when it talks about surpluses and deficits refers to the cash position, the difference between receipts and expenditure.

Tasmania’s Treasurer on the other hand refers to a profit figure. For instance capital grants for irrigation, road and rail  ($121 million in the current year) are included as revenue but when spent they are capital amounts and not operating expenses and hence excluded from the profit calculation, the measure of sustainability.

The final capital grant of $50 million for the Royal Hobart Hospital will now be received sooner than originally expected, enabling the Treasurer to proclaim an earlier surplus.

It’s a nonsense proposition.

The profit figure includes a few book entries; depreciation expenses for instance, almost $300 million per year.

In May 2011 a new budget containing estimated outcomes for the 2010/11 year was tabled. A couple of months later in the dead of the night when no one was looking Ms Giddings as Treasurer decided to write off an additional $800 million from the value of roads because they weren’t being depreciated fast enough. It didn’t affect the profit measure, yet had it been done as extra depreciation over a number of years, it would have.

The profit measure used by the state government is not a reliable indicator.

The Treasurer assures us that everything is under control, but this is due almost entirely to the GST windfall which contributed an extra $620 million to the bottom line over a four year period in the May 2015 budget. Because the GST split-up is impacted by the revenue raising capacity of each State, the massive decline in mineral royalties in the mining states will soon affect Tasmania’s share of the pool. When that happens we will be back to square one, comforted only by a few budget myths.

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