Saturday, 28 May 2016

Back on track?

(As published in The Mercury 28th May 2016)

Treasurer Peter Gutwein says we’re back on track.

So how come spending will exceed revenue for each of the next three years?

The claimed surplus of $77 million for 2016/17, an accounting figure derived after a few book entries, obscures the fact that the government will spend $134 million more than it will receive.

The next two years thereafter will see similar excesses. In each of those two years revenue will be less than for 2016/17. A few years ago we had a minor dip in one year but it’s been a long time since the dip stretched over three years.

The Treasurer was determined to deliver a surplus as promised, whether by hook or crook. Revenue was brought forward, additional capital grants from the Feds were negotiated and a transfer from TTLine was arranged. All are one off items that don’t indicate a sustainable position as implied by the ‘back on track’ reference.

Extra capital grants of $30 million for road and rail and $19 million for water infrastructure helped the cause. The Feds will also hand over $25 million of the final $50 million amount promised for the Royal Hobart Hospital upgrade earlier than expected. The government will also compel TTLine to hand over $40 million as a special dividend with a similar amount year after.

Ever since borrowings on Spirits 1 and 2 were finally paid off in the 2010/11 year cash surpluses have been allowed to build up in TTLine specifically to fund replacement vessels. TTLine was exempted from paying any returns to the Government.  Over that period cash at bank increased from $16 million to $90 million in 2014/15.

Why require TTLine to transfer the funds to the government where it will probably be invested via Tascorp at a lower rate of return?  Can’t the Board of TTLine be trusted to look after such a large amount of cash? For a government keen to cut red tape, this simple transfer will require special legislation preventing spending the funds on anything but new vessels. Why not leave the funds where they are? Simply because the special dividends are conveniently recorded as income by the government and boost the bottom line by the amount of the dividend. Yet when the replacement vessels are eventually purchased the accumulated funds will be transferred back to TTLine as an equity contribution which won’t affect the bottom line in the year of transfer. It’s just an accounting trick. So is the way capital grants are recorded, as revenue when received therefore boosting the surplus, and capital when spent which leaves the surplus unaffected.

All in all, a series of fortuitous coincidences for the Treasurer. It’s misleading to call the result a surplus because everyone thinks that means a cash surplus, the mere mention of which has interest groups thinking there’s spare cash. Rather it’s a profit of $77 million which can be deceptive.

Plenty of companies reveal profits only to soon disappear because of cash flow issues.

If the Treasurer persists in using his measure of surplus rather than a simple cash measure as the Feds do when discussing budget outcomes, the very least he should do is to highlight the underlying profit figure, free of one off and capital receipts. That would reveal we’re nowhere near the track to sustainability.

To be fair the Treasurer has had to deal with the recent bushfires and the loss of income from Hydro not to mention the major problem of trying to reduce the level of internal borrowings caused by spending amounts received for other purposes, notably the Royal Hobart Hospital grants of $290 million.

With the latter project underway the problem of finding the funds to repay internal borrowings and rebuild the hospital was solved with last year’s GST windfall. Alas the winds of change have seen those amounts disappear and the government is back to robbing Peter to pay Paul. Internal borrowings will increase again over the forward estimates. That’s why we’re spending more than revenue in the next three years at least.

The full impact of Hydro’s losses is not shown in the budget papers. Whilst income from Hydro has been curtailed, the full balance sheet losses due to the write down in the value of Hydro’s assets are yet to occur.

Not much news on the Forestry Tasmania front either, although tucked away in the balance sheet the value of Forestry’s trees reduce by $83 million in 2016/17. This change first appeared in the Revised Estimates report in February 2015. When the Treasurer was asked via a Question on Notice in March whether the reduced value was due to a write-down or sale, he answered that “no amount has been recorded in the Income Statement and no revaluation estimated.”

Whilst Prime Minister Turnbull has urged us to be innovative, few would have taken that to mean abandoning fundamental principles of double entry bookkeeping. We remain none the wiser about Forestry’s fate.

Despite the GST reduction we will receive more in Federal grants in 2016/17 than expected a year ago. As lower mining royalties in WA work their way through the system Tasmania can expect its share of the GST pool to reduce.

Paradoxically if specific purpose grants, which include national partnership payments, reduce then our share of general purpose grants via GST may also decrease. This is because specific purpose grants tend to be given on an equal per capita basis across the federation, so the less that’s given, the less our share of the GST pool needs to be in order to satisfy our overall more than per capita entitlement.

One could be forgiven for thinking the next State election is March 2017 rather than a year later. The government has chosen not to raise more revenue. Borrowings aren’t an option because they can’t be serviced with current settings.

It’s becoming a hand to mouth existence. If we’re back on track the Treasurer’s GPS might need an overhaul.

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