This
note explains in a bit more depth the measures commonly used to describe a
government’s performance, what they imply and what they hide.
The
measures are:
Net operating balance
This
is what the Tasmanian government NOB looks like since the Libs took over in
2014.
(Figures
for 2018 and prior years are from the Treasurer’s Annual Financial Reports and
from 2019 onwards from the Revised Estimates Report 2018/19).
The
NOB is a profit measure. It includes all government receipts as income including
capital grants from the Australian government. Asset sales and loans received
aren’t included as is the case with any P & L statement. Operating expenses
include depreciation on plant equipment buildings and infrastructure assets
(capex). Also included is the estimated annual cost of the government’s employer
contributions on behalf of current members of the unfunded defined benefit
scheme. No amounts are paid because the government only pays its share on an
emerging cost basis, in other words when an employee retires, dies or moves on,
but because accruals accounting is used, these amounts are included as expenses
in the NOB calculation. Superannuation paid on behalf of retired members are
not operating expenses per se and aren’t included. Instead the cost of the
unfunded super liability is included courtesy of an amount for nominal
superannuation interest.
Hence
the NOB is a conventional profit measure.
Needless to say it doesn’t include capital outlays on new plant equipment buildings and infrastructure
(capex)and equity contributions into government businesses.
NOB
gives a profit result, but it overlooks all the crucial capital outlays.
Underlying NOB
The
second measure that always appears towards the front of any set of budget papers
is the underlying NOB. This is the picture since 2015:
The
underlying NOB is simply the NOB less capital grants for specific projects
received from the Feds.
The
underlying NOB will always be less than the NOB.
Removing
capital grants makes sense if you want an operating figure. Subsequent spending
of the grants aren’t included, but nor are all other capital outlays.
Also,
it might make sense to remove the distorting impact of a one-off grant, but many
of the capital grants, for roads, rail and water infrastructure are ongoing.
The
underlying NOB is not of much use in measuring the performance of a government,
being like NOB, a profit figure which ignores capital outlays.
Fiscal balance
The
fiscal balance is a figure included at the bottom of any income statement in
the budget papers. This is the pattern since 2015:
The
fiscal balance is the NOB except the depreciation amount is swapped for net capex.
If plant equipment buildings and infrastructure exceeds the run down in value
of the existing stuff, then the fiscal balance will be less than NOB. This has
been the case in all years except 2015, the government’s first full year in office.
Cash surplus/(deficit)
The
fiscal balance picks up all the outlays except for capital outlays represented
by equity contributions into government businesses. A cash surplus/(deficit)
figure, the conventional measure used in financial statement on the other hand
picks up all outlays. This is the cash/(deficit) figure since 2015:
The
Tasmanian government makes regular equity contributions int Tas Tail, Tas
Irrigation, and more recently TTLine. They are, in effect no different to
spending within the government itself. It makes sense to treat such outlays in
a similar way. Governments can also make equity contributions to government
businesses rather than showing them as operating grants which would affect the
NOB figure for instance. The cash surplus/(deficit) picks up all outlays and
arguably gives a more meaningful measure of a government’s performance.
Other comments
Just
going back to the fiscal balance measure for a moment. As stated, it will be
less than NOB if we spend more on new capex than the old stuff is wearing out.
Which we should be doing. It’s one of the government’s fiscal strategies that
it needs to meet.
The
first four years of the current government saw it pursue a strategy which can
be best gleaned from the following chart:
In
every one of the four years from 2015 to 2018 the cash surplus was greater than
the fiscal balance. This came about principally because of underfunding capex.
It saved cash.
The
cash position of the government since it took over in 2014 is shown here:
Cash
was built up to reach $1,033 million by 2018. However over the next 4 years it will
plummet to a negative $224 million. A negative figure means external borrowings
will be needed. Until then internal borrowings are needed, from special
deposits and trust accounts that have been set up to hold funds for specific
purposes and which must be repaid at some stage. This is what the cash on hand
figure and the internal borrowings looks like from 2014:
Back
in 2014 there was only $389 million cash on hand. The previous government had
borrowed $920 million internally to fund its overspending. For the next four
years, cash was built up as the internal borrowings were gradually repaid. But
as of now, for the next four years, we will see a complete run down in cash. If
the pattern continues it will be no different to what the current Treasurer claims
we were facing before he rescued us in 2014.
Nothing
has changed.
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