Budget buffer?

The Treasurer is winning the post budget arguments because those who question his mastery aren’t acquainting themselves with the true situation.

The Treasurer is setting the agenda. We have fixed the budget mess he claims. There are surpluses as far as the eye can see.  Are there surpluses? Yes. Does this mean the budget is fixed? No.

The corporate world is littered with the corpses of companies which showed profits one day and went belly up shortly thereafter. Profits or net operating surpluses in this case, often coexist with cash deficits. Yet most people, innocently accept the Treasurer’s claim about future surpluses thinking he means cash surpluses, and respond by saying why not spend them now?  The Treasurer’s answer is essentially to say, no, they are needed to provide a buffer for the future.

This is the point where the Treasurer crosses the line from an arguable position, namely the existence of surpluses, to a baseless assertion that he is creating a future buffer.

A buffer requires a build-up of cash reserves and/or increased ability to borrow and service borrowings. The opposite will occur. Cash reserves will decrease, and borrowings will increase.  This is not necessarily bad but is contrary to what the Treasurer is trying to get us to believe.  Past Estimates hearings show he doesn’t fully understand his own figures, not grasping the difference between profits and cash flow.

The only buffer currently being created by the Treasurer is one between fiction and reality.

The net operating surplus of the general government includes infrastructure grants from the Australian government as income when received but excludes the amounts as expenses when spent because they’re capital expenses. Only operating expenses are included.

To be fair the government is only following government accounting standards. The government however is taking advantage of the opportunity to mislead. Even more misleading is dragging $40 million per year out of TTLine as special dividends which becomes income to the government. These comes from cash which TTLine has been accumulating as a down payment on the new ferries. The latest budget papers show amounts being repaid in time to help pay for the ferries However the repayments are treated as capital outlays and conveniently don’t reduce the government’s net operating balance. It’s just an accounting trick, a round robin arrangement to boost the government surplus each year whilst returning funds back to TTLine when needed.

There are large capital outlays from non-financial government businesses (which includes TTLine) in 2020/21 and 2021/22 as well as large increases in borrowings. Although not explicitly stated it looks certain the amounts relate to the new ferries. The ferry borrowings appear to be about $700 million and the outlays possibly $860 million, funded by the borrowings plus the cash return of the round robin sham of $160 million. The trade-in/sale value of the old ferries is not apparent.

It’s quite amazing, the biggest outlay in the State’s history is buried in the forward estimates. We don’t even get a footnote detailing the size of the relevant amounts.

The run down in cash is also well hidden. A casual glance at the general government’s balance sheet reveals plenty of cash on hand each year, almost $1 billion. However, those figures result from a balance day boost when overnight borrowings replace all the money missing from the government’s various deposit and trust accounts used to keep the government afloat.  It’s there on 30^th June, Next day it’s gone. The overnight loan is repaid.

Colloquially this is the hay missing from the barn. At the end of June 2017, the amount missing was $350 million.  Buried in a footnote in Volume 2 of the budget papers this year is the revelation the missing hay will be $507 million by June 2019. When the Royal Hobart Hospital is fully paid for in 2 years’ time, the missing hay is expected to be almost $800 million. Let’s not forget Lara Giddings was much berated by the current Treasurer during her brief tenure as Premier, for presiding over $900 million worth of missing hay.

If more hay goes missing from the barn each year, ipso facto we are spending more than we are receiving. There is no other possible explanation. The Treasurer crows about his surpluses each year. But in 2017/18 the government will spend 103 per cent of what it receives. In the next two years, it will be 106 per cent. If you’re running down cash reserves with more and more hay taken from the barn, then clearly, you’re not building a buffer. The Treasurer is not necessarily being reckless. The problem is his pretence that operating surpluses fix the budget. They don’t.

Despite projected surpluses over the next four years, cash reserves in the general government will deteriorate by about $700 million. Borrowings by government businesses will increase by $900 million mostly due to the new ferries. Overall the net debt position of the total State sector, the government and all its subsidiaries, will worsen by $1.5 billion.  Again, not the end of the world, but vastly different to the rosy picture the Treasurer is trying to paint. There is a promised record spend on infrastructure. However, on average every government over the last ten years, including the current one, has underspent its infrastructure budget by $100 million each year. Governments are always starry eyed about infrastructure spending. Preserving cash always take precedence with infrastructure spending the first casualty. The next four years won’t be any different.

All the increased revenue in the budget papers is due to what are called parameter changes as distinct from deliberate policy changes. In other words, changes in circumstances. Good luck rather than good management. Revenue is assumed to increase, mainly from more GST, a bold assumption given the current review of GST distribution, and more stamp duties from the continuing property boom.

Both will be needed to pay for election promises included in the budget papers at $1.375 billion. It’s a shaky foundation for a Golden Age.

 (published in The Mercury on 20th June 2018)