Monday, 17 February 2020

Will Hodgman's legacy

The first task of the Hodgman government when it won the 2014 election was to request Treasury to report on State finances. The subsequent report, Analysis of Budget Risks, in April 2014, was essentially an update of the Revised Estimates Report for the 2013/14 year prepared in February 2014.

Budget reports always cover a four-year period, the budget year plus three years of forward estimates. The April 2014 report noted by the end of the forward estimates the  State was facing net debt of $400 million. The deterioration in net debt over the four-year period was $600 million. Net debt increases when spending is greater than receipts. Cash deficits totalling $600 million were projected over four years.

After whipping up outrage at the incompetence of the previous government, then Treasurer Peter Gutwein reassuringly told Parliament on 8th May 2014: “We are committed to fixing the Budget”. Will Hodman’s resignation speech of 14th January 2020 made the claim that “….we have delivered our plan…to manage our Budget, taking it from deficits to surpluses.” The release this week of the Revised Estimates Report for 2019/20 makes now a convenient time to check.

In its first four years the Hodgman government did manage to improve its cash position by $650 million by continuing with employee reductions started by the previous government in the 2011/12 Budget, underfunding health and deferring infrastructure spending. However the cash run down commenced in the 2018/19 year as the chickens started coming home to roost. How long can one postpone the inevitable? That year saw a cash deficit of $160 million. Yet the government still claimed a surplus, or more accurately a net operating balance, of $66 million.

The Revised Estimates Report (RER) for 2019/20 issued on 11th February 2020 indicates cash deficits will increase markedly.  Over the next four years, including the current year 2019/20, the Gutwein government will spend $1.8 billion more than it will receive. This year for every $100 received we will spend $108. Next year the figure will be $110. That’s three times more than the projected level of overspend inherited in 2014. That’s the Hodgman legacy.  The budget has not been fixed. Problems have been papered over and the can kicked down the road for six wasted years.

The mischievously titled surpluses conveniently ignore a lot of capital spending, including large equity contributions into government businesses, many sourced from capital grants from the Feds which are included as income when received. 

A pretend surplus doesn’t provide a buffer as Mr Gutwein is always claiming, the latest time  being just the other day when he released the RER and told us  how he’s  “kept the budget in surplus – forecasting for the fifth year in a row – and that means more money to invest in essential services that Tasmanians need.” Only a cash surplus does that as any Accounting 101 student knows.  The graveyard is full of countless supposedly profitable companies who had negative cash flows. Profits for a service deliverer like the State government is irrelevant anyway. Sustainability is the key.

In any event the alleged surplus is tiny. The latest estimate in the RER is a surplus of $10 million for 2019/20, down from $57 million in the original budget. It’s a figure that’s easily massaged. Take TTLine for instance. It has been accumulating funds to pay a deposit on the new ferries , but as part of a shameless accounting fiddle it  paid a $40 million dividend this year to boost the surplus, even though the government will hold the money on deposit and return it when the deposit needs to be paid, at no cost to the surplus because the surplus calculation conveniently excludes equity contributions into government businesses. But for one dodgy transaction we would have been in deficit. That’s a fragile existence.

The projected ‘surplus’ of $10 million for 2019/20 is also inflated by a change in accounting standards. In past years all federal grants were included as income regardless of whether the amounts were spent in the year of receipt. In 2018/19 for instance $56 million was received as part of Project Marinus. By year’s end almost all was unspent. This stroke of fortune boosted the surplus for 2018/19. Beginning in the 2019/20 year it was decided, in the case of National Partnership Payments (NPPs), which are specific purpose grants as distinct from general purpose grants such as the State’s GST distribution, to include them as income when spent,  not when received. This is in line with conventional accounting standards, to match the timing of income with its spending where the grant is for a specific purpose. The net effect of the change in accounting policy in 2019/20 is to include $135 million of grants received in prior years as income in 2019/20. It had already been included in 2018/19. Never has two bites of the cherry been so rewarding. The 2019/20 ‘surplus’ improved by $135 million. The impacts of the change in accounting standards was mentioned in passing in the 2019/20 budget but the government nevertheless persisted with boasting about a surplus figure of $57 million that was only achieved by double counting income. Without the change in accounting standard the deficit would have been $77 million.

The new projected surplus of $10 million following the recent RER still includes the $135 million of grants received in 2018/119. No mention was made in the RER of the double counted income. The government could have at least admitted that the new accounting standards meant it had overstated surpluses in past years. But it didn’t. It has been a less than fulsome explanation of a significant change. We deserve better.

All governments face problems. That’s the nature of the job. The problems inherited by the Hodgman government in 2014 were largely caused by GST receipts taking a hit, like has happened this year as noted in the latest Revised Estimates report, and by the loss of three years of income from Hydro Tasmania totalling almost $200 million following Prime Minister Abbott repeal of the carbon tax. Many problems that befall governments are not problems of their making. In Trumpian style however, the Hodgman government claims to have righted the ship of State. It may have been present, but to claim responsibility for the State’s improved performance is stretching things. Cause and coincidence are separate. Which austerity measure or infrastructure deferral helped right the ship? Or has the relentless PR campaign about the purported surpluses been pivotal?

There were, however, a couple of bright spots in the latest Revised Estimates Report.  Conveyancing duties are projected to rise by 20 per cent although two years ago similar increases were pencilled in before drastic revisions six months later. Also, payroll tax is projected to show increases of around five per cent. Governments need to capture some of rewards from increased activity if it wishes to contribute to that increased activity.

In 2019/20 the Tasmanian Health Service, which runs public hospitals with about 80 per cent of the health budget, received a budget allocation of $1,612 million, $62 million less than the actual spent in the previous year. The extra spending of $118 million promised in the Revised Estimates Report takes its budget this year to $1,730 million, an increase of 3 per cent above the previous year’s actual.  With health demand increasing at a much faster rate, with backlogs and unmet demand and with RHH K Block yet to be staffed, playing catch-up is a forlorn exercise with a predetermined result. It won’t work. It is not as media reports suggest a bag of money that is about to be handed over that will ensure more services. In all likelihood, given the pattern of budget overruns in past years, the extra for 2019/20 has already been spent and the Revised Estimates increase is simply a retrospective recognition of that reality.

The 2019/20 budget tabled in May 2019 was predicated on finding $450 million of cost savings over four years. The Revised Estimates Report indicates $300 million of savings were found. The government couldn’t find the remaining $150 million.  Health was let off the hook for $90 million and the remaining $60 million will be taken from government businesses over four years. Hydro drew the short straw this year and will have to pay $15 million in addition to its usual dividend and a special dividend of $70 million. This cost savings exercise highlights the State’s dilemma. Even if a similar level of savings is found for each ensuing four year period, which is doubtful, the State will still be spending far more than it is receiving.

Treasury has recently published a report on our fiscal sustainability, by  updating a flawed report prepared in 2016, and which the Public Accounts Committee of parliament is currently examining. There appears to be a growing acknowledgement that Net Operating Balance, the government’s surplus measure, is a poor measure of sustainability. Movements in net debt is a better and easier way of measuring a fiscal outcome because it includes all government outlays. If spending exceeds receipts then net debt will increase. That’s an easy concept for most punters to understand.

The government’s cash reserves are fast diminishing. Soon it won’t be able to fund operations by internal borrowings. The government is postponing the inevitable external borrowing until 2020/21, in part by continuing to squeeze government businesses by forcing them to pay special dividends whenever it can. The government is requiring Hydro to pay special dividends of $85 million this year. The overall State situation is the same regardless of whether a subsidiary business borrows or whether the government does. However, getting a government business to borrow (or refrain from paying debt) and then remit dividends to the government, rather than the government borrowing itself, boosts the sacred surplus.

The slavish worship of a false idol is Will Hodgman’s legacy. The current forward estimates show much larger future cash deficits than in 2014. The State’s problems have been kept well hidden. Six years of obfuscation about our true fiscal position is Will Hodgman’s crowning achievement.
(An abridged version was published in The Mercury on 17th February 2020)

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