STATE BUDGET 2012

OUR FINANCIAL FUTURE AND THE TREASURER’S & TREASURY’S CREDIBILITY DOWN THE TOILET TOGETHER AND IN EQUAL PROPORTIONS

Introduction

Much has been made in the commentary and spin in relation to last week’s State Budget about the blow out in debt due to reduced GST revenues and that investment shall triumph over cuts and credit ratings. What has been missed hitherto is the extraordinary transformation (for the worse) in the condition of this State’s financial position over just 12 months when supposedly we have a competent Treasurer and Treasury boffins solving the quadratic equations that allow us to sleep soundly at night. Let’s start with the big stuff.

Huge Debt Blowouts

Table B2 of Budget Paper 3 summarises the important numbers for the ‘General Government’ sector. This shows that from the end of this financial year (end of June) to that three years (end 2015 FY) hence, our Net State Debt will increase from $4.28b to $6.51b. Last year’s budget papers predicted the same period to decrease from $3.8b to $3.62b. So, in 12 months we are worse on Net State debt to the tune of $2.9b or a 25% blowout.

Throw in the unfunded superannuation liability and consider the whole of Government, and the State’s Net Financial Liabilities will grow from an estimated $23.0b this June 30 to $25.65b three years hence. Compare that to last year’s budget and the change expected was from $19.47b to $19.58b. So again, in 12 months, the estimate of the State’s net financial liabilities has grown from over $6b. Six billion dollars!

But how?

As we have heard repeatedly, the Treasurer says the write down of future GST and other tax revenues is $2.8b over four years. But in the period to the end of 2015, the GST portion of this is a touch over $1b. To help the financial position, all sorts of useful public works have also been cut. But at the end of the day, the situation gets worse by over $6b across all of government! By the end of 2016, the situation is $8b worse than the 2012 estimate made just 12 months ago.

One explanation for the cock-up (put nicely at this juncture) for last year is the great faith shown by the Treasurer and the boffins who advise him on State taxation. As our article before the mid-year budget review in December showed (Kryztoff Mid Year Budget Review Link), there were around $2.5b in adjustments that were required and this preceded the Federal Government reductions in future GST revenues (announced in its budget in May.)

So how clever am I? No, the adjustments made were done ‘on the back of an envelope’ applying pure common sense and a little arithmetic to what the Treasurer had stated. In essence (and as noted then), there is a strong case to be made that the budget presented last year was a work of fiction that dressed up the real situation for both short term political gain (ie the credibility of Snelling in his first budget) and for the ratings agencies. For, it seems from my discussions with one of these agencies, incredibly they take budget numbers presented to them by Governments at face value. (So, you can see how they got the GFC hopelessly wrong and nobody much takes them seriously any more.)

Is This As Bad As It Gets?

So, have we now got the ‘real numbers’, has all the bad stuff come out? Well, No again. First, there has been no discussion about both the size of the problems set out above, how they get explained away given the headline $2.8b number and how all this changed in just 12 months.

But as this Labor Government has been doing throughout its terms, forward estimates are there as spin and not for genuine reflection and use.

In the 2015 and 2016 years, this budget predicts a great fiscal rebound, supposedly due to Roxby Downs.

In the period to the end of 2014 FY (two years), State taxation is estimated to grow by 10% but in the two years following by 15%. Even though housing continues to suffer from declining values and the number of transactions, revenue from this source is estimated to go up by 8.6%. Payroll tax, incredibly is estimated to go up by 17%. Having got last year’s estimate so wrong (see Mid Year article), you would think a little conservatism might be useful – not so!

Then, there is the GST revenue. At present, SA’s share of the national pool of GST sits at 9.3% but in 2015 and 2016 it climbs to 9.9%. That may not sound a lot but in 2016 that uplift amounts to over $330m. As explanation for why this might occur, the budget papers list the following factors – ‘a declining population share and movements in South Australia’s projected relativities (which are particularly impacted by different state taxation growth rates compared to other states …)’

I have no idea what that means (at best it sounds like the share should down not up) but the combined impact of the forecast return to prosperity and this GST kicker in 2016 has the budget not in surplus in 2016 by $540m (as the Treasury states) but in (another) deficit by $1.4b.

Public Service ‘Cuts’

Another part of the fiction of the budget is the grief expressed over the size of the public service cuts announced. We have all heard for ever about the ‘1,000 public service jobs that will go (by natural attrition over the next four years) which are on top of the 4,500 cuts already announced.’ What complete piffle!

Last year, the budget predicted that at the end of June this year, there would be 79,859 FTE in the public service. This year the number is stated to be 82,214. So far from those 4,500 of previously announced cuts, the size of the public service has actually grown in 12 months by over 2,000. And so of course, the cost of the public service continues to go up and in 2012, the extra cost will be $130m and $230m next year (over last year’s predictions). (Of course, this is before the consultancy expense line that acts as a supra public service and which blows out each year.)

But what are these public servants doing? Well, it seems they are doing less and less.

The ratio of Public Sector employee expense to ‘other operating expenses’ (a proxy for services and programs delivered to the public) will rise from 2.18 to 2.49 by 2016. That’s 14%. Sir Humphrey Appleby would break open the champagne with these numbers knowing that as his public service grows its members are delivering ever fewer useful services to the community.

The True Position

So where are things really at? Well, basically the financial position of this State is out of control and it has been since the GFC. In that time, we have gone from no state debt to now $4.2b and by 2016, $8.8b, with the net financial liabilities of the State up from $9.5b to now $23b and $27.8b by 2016 – that is nearly $20b! The State Bank debacle has got nothing on this.

So, while the public service just keeps on growing, the net lending of the State each year keeps going up by over $1b a year as it has every year since 2010 and in 2016, it will increase by $2b.

But do we have great new infrastructure to show for it? (Yet) again, No.

Even the discredited Centre for Economic Studies paper justifying the Adelaide Oval redevelopment turned negative once you included interest costs on the associated state debt. The duplication of the southern expressway will never pay its way economically as the one way version we have now caters for 80% of all potential traffic. And the new RAH, only just appearing on the forward estimates now, will cost the State over $12b in years to come when a refit of the present site would have been under $1b.

Useful things like the bringing the rail system into the 1970s have been postponed (probably for forever) and all those other hospital projects (including to the Queen Elizabeth) have also gone in favour of the massive white elephant the new RAH will be and the mistaken belief about centralised medicine.

The footbridge over the Torrens? Please!

Targets Trashed

But if one needs one final piece of evidence about the chaos that now underpins the State’s finances, compare last year’s state budget objectives with this year’s.

Last year, there were eight targets, previously announced, against which the Government was prepared to measure itself. They were:

• To achieve a net operating balance in the general government sector in every year.
• To achieve net lending outcomes that ensure the ration of net financial liabilities to revenue contribution continues to decline towards that of other triple A rated states.
• To ensure the state has an effective tax regime having regard to the government’s social and economic objectives
• To provide value for money community services and economic infrastructure within available means.
• To fully fund accruing superannuation liabilities and progressively fund past service superannuation liabilities.
• To ensure that risks to state finances are managed prudently to maintain a triple-A rating.
• To ensure public non-financial corporations will only be able to borrow where they can demonstrate that investment programs are consistent with commercial returns.

These were once laudable, even if only observed in the breah rather than the observance since the GFC. But with all of them now in complete tatters, the fiscal objectives of the State have been restated as:

Target 1                a net operating surplus by the end of the forward estimates.

Target 2                once surplus is achieved operating expenditure growth will be limited to trend growth in household income

Target 3                achieve a level of general government net debt that remains affordable over the forward estimates – a maximum ratio of net debt to revenue of 50.0 per cent.

Do these mean much? Our analysis is that Target 1 is only achieved four years hence by another accounting fix. Target 2 is no target unless you have a surplus – so at best five years hence. Target 3 replaces the commitment to maintaining the triple A rating and getting the unfunded state super down. But as we know, the triple A has gone (and, note, no commitment to getting it back) and unfunded state super just continues to balloon – now over $11b and an incredible $3b more than the estimates of 12 months ago.

The Bottom Line

What we have is a Labor Government that spent away the good years on nothing but public servants. Now, when the financial clouds have turned dark, they continue to ignore what is actually in the interests of the state (you and me) by continuing with show piece projects that are both massively expensive and without economic benefit.

At the Spring Labor Conference in 2010, the delegates voted for Rann and Foley to go because of the proposed cuts to the public service. Within 12 months both were indeed gone. Obviously neither Jack Snelling nor Jay Weatherill want to be on the receiving end of the same treatment and so amongst all the feigned grief and bits of bloodied cloth shown to the media, nothing is done to reign in the public service which forever grows and which delivers less and less.

Our analysis previously suggested that relative to our population in 2002 when Labor came to power, there are over 10,000 extra public servants, costing around $800-900m annually we can no longer afford. (And that is before the cost of the extra leave granted to the senior public servants in this year’s budget.)

The day of reckoning looms but unlike with the State Bank when it comes there will be nothing left to sell to pay back the indulgences. $27b of new financial liabilities by 2016 plus a further $12b for the new RAH after that.

This is Greece all over again. Sadly, we don’t have a media able to understand and explain this mess to the masses.