Tuesday, 16 April 2019

Budget predicament

The large revenue write downs foreshadowed by Treasurer Gutwein ahead of this year’s May State budget pre-empts the question is this just bad luck or a case of those who ignore the lessons of history getting clobbered.

The metaphor ‘black hole’ has once again been summoned to describe estimated reductions in State government revenue of $560 million over the next four years.

It’s familiar territory. We’ve been there before. At the time of the 2009/10 budget in May 2009 the financial world was in turmoil. The revenue write-downs were more than $2 billion over the ensuing four years. GST reductions comprised one-half and State revenue one-quarter. Policy changes were made, which still left an estimated $292 million cash in the tin at the end of the forward estimates.

The revised estimate report for 2009/10 issued just before the 2010 elections showed a slight pick up with a projected $414 million in the tin in four years’ time. Unfortunately, the 2010 election was as embarrassment of extravagant promises. When the subsequent 2010/11 budget was prepared in May 2010 the picture looked rosier. The predicted revenue losses were only 40 per cent of what was predicted a year earlier. GST losses were less and other Federal government grants in the aftermath of the global financial crisis were greater.

The government felt emboldened and spent to celebrate the election victory. Had the other side won there’s every chance the same spree would have eventuated, as the election promises were of similar magnitude. The 2010/11 budget proved to be a coup de grace for Premier Bartlett and Treasurer Aird as both resigned within eight months. Premier Giddings limped on until dumped in the March 2014 election.

It’s been well over 15 years since the State government borrowed from third parties to finance its operations.  If it needs working capital it borrows internally from amounts in special deposits accounts awaiting spending for a designated purpose. Sensible policy maybe except when cash had to be found to repay the borrowed funds so spending on the intended purpose could proceed.

During this period the government used to appropriate amounts into what was called the Superannuation Provision Account (SPA) with the aim of building up an amount that could be used to extinguish the State’s unfunded superannuation liability. But appropriation doesn’t mean cash is being set aside. There was never enough cash for that. Even the interest ‘earned’ on the SPA was appropriated. It was just a paper entry. It didn’t earn any actual interest because there was never any cash there in the first place. When the Treasurer lambasts the current Labor opposition for spending the amounts set aside for future superannuation when in government, at best he’s telling a half truth. Mr Gutwein was fooled at the time seeing the SPA account in the budget papers each year ‘earning’ interest, into believing there was an account loaded with cash. He learned the full story when he came to government. It was Clayton’s account.

What does the government now do? It can’t be accused of spending future superannuation because it doesn’t set it aside in the first place. Even the 9 ½ per cent superannuation guarantee amount isn’t set aside for the defined benefit members. Defined benefit funds such as RBF have special rules. That saves the government $60 million per year.

Nothing has changed over the years. The previous government ‘set aside’ amounts for future superannuation liabilities without there being any cash. The current government doesn’t bother to set any aside in the first place. There’s no real difference.

The pattern of internal borrowing has continued. When Labor left office in 2014 there was still cash of $389 million, after $920 million had been borrowed from accounts that should have had balances totalling $1,309 million.

By 2018 $660 million of the internal borrowing had been repaid, by battening down the hatches, underspending on infrastructure and persistently trying to budget health spending at a lower level than the previous year. The amount of real cash grew to $1,033 million by June 2018.

The Revised Estimates report issued in February this year shows the tide ebbing in a hurry with cash reserves estimated to reduce over the next four years by $1,257 million. Negative cash will result, in other words third party borrowings will be needed.

This of course was before the black hole that emerged after the recent Federal budget which will makes it worse. There’ll be no point raiding special deposit accounts as Labor has predicted, because they’ll find nothing but a few IOUs.

That’s the challenge facing Tasmania. Trying to ascribe blame to one side of politics is pointless. Each faced difference circumstances. Their approach to fiscal challenges has been identical. Rob Peter to pay Paul and hope and pray future revenue will provide the funds needed to repay when the time comes.

The trend in the level of cash reserves is clearly pointing downwards. If depleting cash reserves is the problem then third-party borrowings are one answer, but only if we can work out a way to service the loans.

Another possibility is to continue to raid government businesses. But special dividends over the years, often requiring the businesses to borrow, has left them with little scope for further generosity.

The third alternative is austerity, or “cutting our cloth to suit our circumstances”, as the Treasurer puts it. Infrastructure and health needs makes this a difficult option to pursue unless social havoc is the aim.

There are many ways for paper surpluses to mask underlying cash problems. Treasurer Gutwein has mastered most of them. Putting lipstick on a pig won’t sustain the State. Bluster bravado and blame shifting clouds the real picture. Commentators and observers need to ignore claims about paper surpluses and focus on the underlying cash position.

The current budget approach has failed. The upcoming State budget on May 23rd  promises to be a watershed moment.

Published in The Mercury 16th April 2019

For a more detailed look at the budget predicament in 2009 see Bartlett's mess.

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