Sunday, 26 May 2019

Unsustainable budget Part 2

This is a follow up blog to the previous post on the unsustainability of the Tasmanian State Budget. Trying to see the wood for the trees in a set of budget papers is hard, even for those with some accounting knowledge.

There’s only one place to start. The beginning. And that is with the cash flow statement. The Tasmanian government is a service provider. Nobody should care too much if it doesn’t make a profit. The things that matter are:

·       Is it paying its way?

·       If not how is it financing the shortfall?

·       Is it spending enough on infrastructure?

·       Are financing costs strangling the budget?

Below is an abridged version of the cash flow statement from the 2019/20 Budget papers. Cash flow statements traditionally are broken up between:

·       Operating activities. All revenue is included here as are operating expenses, which includes just as the word implies, wages and other running costs. Not included are capital outlays such as infrastructure,  and financing costs

·       Investing activities. Net outlays on infrastructure and other capital items are included here, as are cash equity contributions into government businesses. NB some amounts paid to government businesses are operating grants. These are included with operating activities.

·       Financing activities. This category traditionally contains loan repayments and loan receipts. In this case payments made in respect of unfunded superannuation for retired public servants has also been included (transferred from operating activities as per the Budget papers). This is because they are not operating expenses per se, rather financing costs ie the costs of paying prior years' debt/liability. They are not current operating costs. Also included in financing activities are interest payments (transferred from operating activities) and the repayment of a Federal housing loan. These amounts together give the amount of government financing costs. The government has a Fiscal Strategy (Number 2 in the Budget papers) which aims to keep financing costs below 6% of revenue.

The biggest adjustment that has been made to the cash flow statement as it appears in the budget papers is to exclude overnight borrowings made on 30th June each year to repay the internal borrowings. This is always reversed on 1st July. It is a cosmetic transaction which confuses most people, and unfortunately prevents them from understanding the true situation of the government’s financial accounts.

After the adjustments outlined above the following table is what the government’s cash flow statement look like. The 2018/19 figures are the Estimated Outcomes for this year. The 2019/20 figures are next year’s budget estimates.

$ million
$ million
Total receipts
Employee costs
Total Expenses
Net operating cash
Infrastructure, plant etc
Government businesses
Total investing  cash
Unfunded super
Other loans & interest
Total finance cash

Looking at operating activities, revenue comprises about 60% from Federal government grants (GST and specific purpose grants), about 20% from of our State based taxes (payroll tax, duties etc) and about 20% from other sources (returns from government businesses, sale of goods and services, other fees and charges etc).

With regard to operating expenses, employee costs here include superannuation amounts paid in respect of current employees. Super for past employees is, as mentioned above, included with financing activities. Superannuation for current members of defined benefit schemes are not paid until they retire and hence are overlooked. To that extent, true operating expenses are understated. Employee costs are around 45% of revenue.

This leaves net operating cash at around 10%. (11% in 2018/19 and 9% in 2019/20).

The amounts spent on investing activities including infrastructure, other capital items and contributions into government businesses is 12%. This is higher than it has been in the more recent past. On the matter of contributions into government businesses these include capital grants for irrigation and rail (included in revenue) that are subsequently paid into Tas Irrigation and Tas Rail as equity contributions to be spent on capital infrastructure as required by the terms of the grant.

After operating and investing, all the cash has already disappeared.

Financing costs, mainly paying unfunded super amounts, are 5% of receipts. This leaves the overall cash deficit at 6% of revenue for 2018/19 and 8% of revenue for 2019/20. The question is how is this to be serviced?

To return to the original questions:

·       Is the government paying its way? No

·       If not how is it financing the shortfall? At this stage the government is just proposing a line of credit with Tas Corp.

·       Is it spending enough on infrastructure? Yes, if the budget figures are achieved. The spending is in excess of depreciation which means that it is at least being replaced faster than the old stuff is wearing out. This is essentially the government’s Fiscal Strategy No. 5.

·       Are financing costs strangling the budget? No. Overall financing costs at 5% of revenue are reasonable.

So what’s the problem? Perhaps we need to turn our gaze to the top line? Revenue.

Page 51 of Budget Paper No.1 has a chart.

The Commonwealth Grants Commission has assessed that Tasmania is only raising 90% of the revenue it could have raised had it applied the Australian average level of effort to its available revenue base.

It looks like the ball is firmly in Tasmania’s court. We won’t get much of a hearing from the rest of the Federation if we don’t get our own house in order.

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