Monday, 1 May 2017

Good vs bad budget nonsense

It’s good that the Federal Treasurer has raised the possibility of legitimising more government debt. 

The Federal government budget papers are to be revamped, we are told, to more realistically reflect good and bad debt.

What does all this mean?

From an accounting viewpoint nothing will change. Financial statements in the budget papers won’t change. The same uniform government reporting standards that mandate the form of financial statement for both Federal and State governments haven’t changed. The basic statements are similar to what appear in the financial accounts for an entity listed on the ASX. There will still be a profit and loss statement (or income statement), a balance sheet and a cash flow statement.

It’s the particular statement selected and the headline figure plucked from that statement that varies between what the Feds do and what the States do

The Federal government traditionally uses the cash flow statement when speaking about whether the budget is in surplus or deficit. The States on the other hand traditionally use the profit and loss statement to determine a surplus/deficit.

I wrote a blog titled Budget Myths in April 2016. One of the myths was that the profit and loss measure was a reliable way of measuring fiscal sustainability for Tasmania:

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 Federal government is said to be heading towards using a profit and loss figure to measure whether the budget is in surplus or deficit.

No one particularly cares whether governments make profits or not. They’re service deliverers. On the contrary people are concerned with where the money comes from and where it goes. And the cash flow statement is the best indicator. It includes not only operating revenue and expenses but capital amounts (spending on new submarines for instance) as well as financial cash flows (proceeds from borrowings and payment of existing borrowings, dividends, equity withdrawal etc). It should be the basis for any budget reporting as the Federal government now does.

Where it needs a little adjustment is to reallocate capital grants to the States from operating expenses to capital outlays (maybe even as financial outlays but we’ll come to that in a minute). Most of the Federal Governments infrastructure spending is done this way, via capital grants to the States, in the case of Tasmania, for roads, irrigation and hospitals. It is quite misleading to categorise these amounts as operating expenses. Former Treasurer Joe Hockey struggled to understand this basic accounting issue.

In the 2015 Budget Treasurer Hockey proposed cutting $80 billion of grants to States for health and education via scaling back expiring National Partnership Agreements, changes to indexation and the cancellation of increases promised by the previous Labor government.

The states were still in quite a good financial position the Treasurer was reported as saying. “Some of the states are running surpluses, we’re not running a surplus,” he said. “Don’t shed a tear for the states.”

If the Federal government always includes capital grants to States as contributing to its deficit and the states on the other hand include the receipt of capital grants as a boost to their surpluses you’re not comparing like with like so  the public policy discussion gets off to an ill informed start.

A quick look at the figures from last year’s Federal budget (Mr Morrison’s first budget) will emphasise the point. The figures are from the cash flow statement.

The cash surplus/(deficit) figures are the headline figures used to describe the budget outcome, essentially the net result before borrowings. If we subtract the capex grants to states (for roads rail water etc), the Australian government’s nonfinancial assets (submarines for example) and the financial assets (investment in government businesses mainly NBN) there is a surplus in every year but the current one. This I suspect is what the Treasurer will try to project in this year’s budget.

The capex definition is a little arbitrary but it’s a starting point to understand the accounting issues. Lots of spending on health and education has a capital component, helping to skill the workforce for instance.

Capex grants to States could even be treated not as capital outlays but as financial outlays (equity withdrawals) which are then treated as equity contributions when received by States, not as grants which boost the States’ bottom lines as we saw above.

Either way better explanations are needed.

It seemed scarcely possible that someone else would grab Joe’s mantle as the Worst Treasurer Ever but along came new Treasurer Scott Morrison with the parable about the family holiday, comparing the deficit to being stuck in a car on a family holiday. "[It's like] the family saying, 'are we there yet, are we there yet?'" Mr Morrison said."The path back to budget balance is similar to that. We need to take a safe and careful route and one that does not put at risk our jobs and growth."

The accounting 101 work experience kid must have finally got through to the Treasurer that maybe the headline figures he has been using give the wrong impression. Yet whoever dreamt up the good vs bad debt explanation probably also planned the metaphoric family holiday.

All that’s required is a better explanation of the figures already provided. People can make up their minds whether they favour a budget or not. They don’t need a preacher to tell them what’s good or bad. Everything goes in and out of the consolidated fund. To start a system of hypothecation by assigning debt to one particular outlay will only derail the public debate and make every expenditure decision a battle between good and evil. It won’t advance the cause one iota.

At least it’s thrown a glimmer of light on the way politicians at both the Federal and State levels essentially interpret the same figures in different ways to suit their own purposes.

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