How did the Qld government accumulate so much debt?

One of Queensland Deputy Premier-Treasurer Jackie Trad’s biggest challenges in her first state budget, to be delivered next month, is to demonstrate a credible debt reduction strategy. She needs to show how she can reduce state debt from its current level of $71 billion, or at least prevent it from blowing out to nearly $81 billion, as currently projected for 2020-21. In this regard, she will be helped by healthy royalty and payroll tax revenues, but she also has to cope with a fall in Queensland’s share of GST revenue and the legacy of the past debt build up, which costs the general government budget $1.5 billion in interest expenses each year.

When chatting with people about my forthcoming book Beautiful One Day, Broke the Next, to be published by Connor Court later this year, I am often asked how the state government accumulated so much debt. To answer this question, I analysed the cash flow statements of the Queensland government over 2006-07 to 2015-16, the ten year period in which total state debt increased by over $54 billion. I am looking at the whole Queensland government, including government-owned corporations (GOCs), because it’s the total debt figure that the rating agencies such as S&P and Moody’s focus on, and also because the lines between the general government sector and GOCs have been blurred in Queensland (see my post Qld state debt debate is challenging for both sides).

The main driver of the additional borrowing over the ten years to 2015-16 was capital outlays in excess of cash available. On its operating activities, the Queensland government, both general government and GOCs, ran cash surpluses over the period. But there were large cash deficits overall taking into account capital expenditure (see figure below). Also, adding to the total borrowing requirement were additional interest expenses incurred because of all the additional borrowing. This accounted for a substantial share (around 30%) of the cash deficits over the period. Note also:

  • the state government’s commitment over most of this period to pre-funding some of its liabilities (e.g. defined benefit superannuation and long-service leave) added to the borrowing requirement (i.e. the block labelled “Financial investments for liquidity purposes”); and
  • asset sales and leases (which are negative “Financial investments for policy purposes”), largely by the Bligh government in 2010 and 2011, substantially reduced the overall borrowing requirement.

psbr_waterfall_chart

I noted above it was additional capital outlays that were to blame. What types of infrastructure were invested in? While the drought resilient infrastructure spending on dams and recycled water and desalination plants are often brought up, they were only a fraction of the total capital outlays over the period. Capital outlays were widely spread-e.g. there were large capital outlays on roadworks (see the figure below, based on my collation of data from the Queensland government’s capital works statements over the period). I should note the Australian government contributed to the funding of a significant amount of these capital works, e.g. Building the Education Revolution (BER) and natural disaster support, but the huge growth in capital outlays began in the late 2000s, before BER and the 2010-11 natural disasters.

capex_0607_1516

Arguably, some of the additional capital outlays were necessary, as the Queensland economy and population had grown strongly in the 2000s, particularly due to the mining boom. In its 2015 Review of State Finances for the Palaszczuk government, the Queensland Treasury tried to look on the bright side of the debt build up:

Successive Queensland governments implemented policies aimed at raising service levels towards national standards in key areas and addressing infrastructure deficits. The benefit of that investment today (beyond the obvious service delivery benefits) is that Queensland is not facing the major infrastructure pressures now being experienced in many other states.

The Treasury also noted the imbalance between Queensland’s desire to be a low tax state and the need to provide a decent level of services. While the Treasury made some fair points, it was constrained by the necessity of it being seen as non-partisan, and it could not deliver much deserved criticism of the quality of Queensland government decision making in the mid-to-late 2000s, which is a major theme of my upcoming book. Needless to say, the quality of business case development and decision making in this crisis-prone period was substantially below par.

So where are we now? Queensland has a much higher state debt per capita than most other states and territories (see figure below). I am very much looking forward to Deputy Premier-Treasurer Trad’s debt reduction strategy in her first state budget. It’s not completely out of the question that Queensland could regain a AAA credit rating in the next five years, with strong budget management and with a continuation of favourable economic conditions. We wish the Deputy Premier-Treasurer well in this endeavour.

debt_per_capita

N.B. I have made some minor adjustments to this post since it was originally posted to make it clearer.

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2018 Budget: Party like it’s 1999!

Guest post by Dr Andreas Chai, Economic Policy and Analysis Program, Griffith University

1999 was a great year to be alive in Australia. Apart from Prince hitting the airwaves again, Powderfinger were still playing and topped the hottest 100, the first Matrix movie was released and you could still get a flat white for under three dollars. In terms of the Federal budget, 1999 marked the start of a remarkable period in which the Federal budget accumulated approximately $90 billion dollars between 1999-2008.

2018 is starting to look a lot like 1999, at least in terms of international commodity prices. While global growth remains sluggish and domestic business investment is stuck in a low gear, the underlying cash balance of the Federal government is projected to reach surplus in the coming quarters thanks to the strong performance in commodity prices, such as an iron ore.

Rising iron ore prices drive up earnings in the resource sector and therefore tax revenues. The chart below highlights the link between commodity prices and the Federal budget. The shaded area highlight phases in which there was significant returns to surplus in 1985-1987, 1999-2007 and 2016 to present.

com_prices

These phases of fiscal recovery coincided with a significant upward jump in the commodity prices. The only period where the fiscal position improved in the absence of rising commodity prices was immediately after the 1991-92 recession.

While a recovering fiscal position is warmly welcomed by politicians, especially with a federal election just around the corner, it is worth reflecting on the fact that much of these new spending opportunities are not due to sound economic management but are rather due to global market forces that are extremely volatile in nature and hard to predict. It is much too tempting for Governments to view these upward movements as permanent. Any new spending initiatives are thus likely to be built on shaky foundations. New spending initiatives should be tagged with the big asterisks flagging “funding initiatives will only last as long as global commodity prices keep surging.”

A much deeper issue is how the Australian economy can evolve to grow in a more balanced manner and reduce its exposure to falling commodity prices. This fundamental question has bedeviled Australian politicians for centuries since the Gold rushes in the 1800s. Having recently emerged from a commodities super-cycle between 2004 and 2013 (see figure above), it’s funny how some of the lessons from the last commodities boom have already been forgotten.  In 2013, there was much agreement that Australia had squandered the mining boom mainly due to having spent the windfalls during the boom, raising inflation and debt levels.

A more strategic approach would consist of getting a national response to rising commodity prices right by setting up Sovereign Wealth Funds that can translate short terms gains into long term investments in health (e.g. NDIS), education and infrastructure that will help hedge Australia’s economy against future downturns in commodity prices. A good start was made in this direction as some of the mining boom surplus from the last super-cycle was put into investment funds (e.g. the Future Fund, Education Investment Fund). However, we are still far behind other countries such as Norway, Singapore and the UAE in terms of developing a sophisticated long term strategy to leverage future surges in commodity prices (and improvements in the Terms of Trade) to diversify the economy and support long run productivity growth. While the long run return to surplus is good news, it’s time we take heed of the lessons from the recent past.

Dr Andreas Chai is Senior Lecturer in Economics and the Director of the Economic Policy and Analysis Program at Griffith University. Andreas has previously worked at the Productivity Commission (Melbourne) and the Commonwealth Treasury (Canberra). Andreas is an applied microeconomist with expertise in consumer behaviour and demand analysis, skills shortage projections, tourism economics and innovation economics. He has published in the Journal of Economic Perspectives and the Cambridge Journal of Economics. 

This post is expected to be cross-posted at Griffith University’s Policy Innovation Hub. 

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BCC residential parking permit zone in West End & Highgate Hill is bad policy

I have previously posted on the high cost of free parking, the problem identified by UCLA economics professor Donald Shoup that arises when councils do not properly price access to on-street parking (see Another example of the high cost of free parking in Toowong). Now the Brisbane City Council (BCC) is proposing to cover the parts of West End and Highgate Hill in the vicinity of the City Cat ferry terminal with a residential parking permit zone, which will allow local residents to park on local streets almost for free and restrict the parking options of non-local residents, as reported by the Brisbane Times yesterday:

Inner city commuter parking is about to get a lot harder

This is really bad policy. The most efficient (and arguably equitable) solution is for the car parks to be allocated to those people with the highest willingness to pay, which will include many commuters catching the City Cat. This also means the council can raise more revenue, if it properly meters on-street parking in the area. If it finds that, at the metered charge it sets, demand is high relative to the supply of car parks, it should raise the charge. In this way, the community will get a good idea of the true willingness to pay for car parking in the area, and BCC or private investors might well realise it would be optimal to build a multi-storey car park for the City Cat terminal, for example. I should add that having commuters drive to West End to catch the City Cat is preferable to those same commuters instead driving to the CBD or University of Queensland, both big attractors of traffic and major locations of congestion.

Local residents should not be exempt from on-street parking charges, as they typically are under residential parking permit schemes. Contrary to what appears to be popular belief, property boundaries don’t extend on to local streets. But, by granting a residential parking permit at a very low annual fee of $10 per vehicle (see the BCC website), BCC confers a valuable additional property right to local property owners. Given the inner city precincts that residential parking permit schemes cover, local residents are typically reasonably well off and don’t need an extra benefit handed to them by the council. (Incidentally, this is why I don’t think residential parking permit schemes are equitable.) If local residents are conferred such a valuable benefit by council, they should pay for it, through a much higher residential parking permit fee, in the order of at least $1,000 I would suggest and possibly much more.

WEHH_permit_zone

New residential parking permit area in West End & Highgate Hill, Brisbane. The square jutting out into the river is the City Cat terminal. 

N.B. I have amended this post slightly since first posting it.

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Economics of online dating: upcoming WEN/ESA event at Alliance Hotel, 16 May

The news that Facebook is expanding into online dating reminded me of an upcoming event on the Economics of Online Dating at the Alliance Hotel, Spring Hill on Wednesday 16 May featuring QUT economist Stephen Whyte, and hosted by the Women in Economics Network (WEN) and ESA Queensland, of which I am a vice-president. Here’s the blurb:

Women, Men, and the Economics of Online Dating

Presentation by Behavioural Economist Stephen Whyte, QUT

Choosing a mate is arguably the largest decision a human can make. This presentation will be about mating and what can be learned from new data sources such as online dating platforms. It will provide insights into economic choices related to couple and family formation in the presence of new matching technologies and will illustrate how men and women differ in their strategies to look for a partner. These findings are important to inform policies related to psychological healthcare and economic support services, as well as legislative frameworks that seek to combat sex, gender and sexuality based discrimination and inequity.

Stephen’s research has covered the issue of assortative mating, the fact we tend to partner with people similar to ourselves. The proverb that opposites attract is not well supported by the data. For example, people typically partner with people with the same level of education. This has meant, for example, that it has become harder for less educated men to find partners as women have surpassed them in educational attainment.

Not everyone is so picky, however, as Stephen has discovered in his analysis of online dating data. Bernard Salt would say it’s a numbers game. When the pool of potential partners is relatively smaller, standards will fall. In one of his recent studies using online dating data, Things change with age: Educational assortment in online dating, Stephen found:

Younger males and older females are more likely to contact those with less education.

Younger males face the problem of intense competition with each other for partners and also the fact some young women will partner with older men. And older females find that many older men, vainly attempting to recapture their lost youth, chase after younger women.

I encourage you to attend Stephen’s presentation on the evening of Wednesday 16 May for a range of fascinating insights into human behaviour gleaned from online dating data.

stephenwhyte

Stephen Whyte, QUT behavioural economist who has extensively studied the economics of online dating

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Are public servants overpaid on average?

In my previous post I commented on the excessive growth of senior Queensland public service positions over the last few years. Let us consider the hypothesis that this growth was related to public servants having significant influence over their own employment conditions, and being insulated from the market forces that keep private sector earnings broadly related to productivity. As the Newman government discovered at the 2015 election, public servants are a major voting bloc and have considerable political power. Hence, public servants could end up being overpaid relative to their private sector peers. Certainly, average earnings are higher in the public sector than in the private sector (chart below).

awe_chart

Of course, we need to compare like with like, and take account of the differing nature of jobs and worker characteristics between the sectors. The public service workforce contains a higher proportion of professionals, so you would expect higher average earnings in the public sector than in the private sector. Nonetheless, rigorous empirical studies, which adjust for differences in job and employee characteristics, show there still exists a public sector wage premium, by which public servants earn significantly more than comparable private sector workers. This phenomenon has been observed in many empirical studies across the world.

In a 2017 study Public-private sector wage differentials in Australia, published in Australia’s leading economics journal the Economic Record, eminent labour economist Sue Richardson and colleagues from Flinders University reported:

After controlling for observed characteristics and individual fixed effects, we show that on average workers in the public sector earn about 5.1 per cent more in hourly wages than those in the private sector. The wage premium is slightly higher for females than males. Using a panel data quantile regression model with fixed effects, we show that the positive wage effects of public sector employment are heterogeneous, with comparatively larger impact at the lower end of the wage distribution than at other parts.

That is, the study finds it is ordinary public servants who benefit most from the public sector wage premium. Senior public servants are more likely to be paid similar to what they would earn in the private sector, although there is still a small wage premium (2.4%) on average. The study also finds that, among senior public servants, women are the main beneficiaries of the wage premium, while among ordinary public servants it is men who are the main beneficiaries (p. 114):

…low-paid public sector jobs appear to be favouring post-school educated men and high-paid public sector jobs appear to be favouring women in general.

The findings by Sue Richardson and her colleagues suggest there could be some positive discrimination in favour of women in the hiring process for the senior public service. This would be controversial if true. Further research on this issue would be highly desirable.

In summary, the best Australian evidence, which is consistent with the international evidence, supports the hypothesis of a public service wage premium. We should ask what is responsible for this premium? Is it the political power of public servants, one aspect of which is the existence of strong public sector unions?

The US public choice school that came to prominence in the 1970s provocatively analysed bureaucracy as if public servants are self-interested empire builders, rather than dedicated servants of the public good. In the famous 1977 article The expanding public sector: Wagner squared, Nobel laureate James M. Buchanan and fellow public choice economist Gordon Tullock argued government tends to grow ever larger, and public servants more powerful and better compensated, because public servants vote. Bigger government is in the interests of public servants, so they vote for candidates who support it. This leads to bigger government and more public servants, who also vote for candidates who support bigger government. This is the Wagner squared hypothesis. (Adolph Wagner was the nineteenth century German economist who proposed a law of expanding state activity.)

In my view, the Wagner squared hypothesis is too pessimistic—it came before the Thatcher and Reagan revolutions, and Australia’s own micro-economic reforms which all suggested the situation is not completely hopeless. But it reminds us that there are significant non-market factors that influence public service salaries. When negotiating future enterprise bargaining agreements, governments should keep in mind that, on average, their public servants are overpaid relative to their private sector peers.

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My comments on excessive growth in senior public service jobs in today’s Courier-Mail

Steven Scott from the Courier-Mail has done a terrific job of revealing the huge growth in the senior echelons of the Queensland public service since the change of state government in early 2015 (see Palaszczuk Government’s massive senior public servant hiring binge). Over the last three years, the number of senior public servants, at senior officer and senior executive service levels, has increased by around 30% (see my charts below which split out SO and SES levels).

PSchart2

Steven quoted me on the excessive growth in senior public service positions (on p. 7 of the Courier-Mail):

Former federal treasury official Gene Tunny said the rate of increase at the most senior levels of the public service appeared “excessive”, even when taking account of the extra senior managers needed to oversee frontline staff.

Mr Tunny, who runs Adept Economics, said the Government needed to look at ways to boost efficiency and should show how the extra numbers of staff were justified.

The state government claims that three-quarters of the additional senior positions comprise “doctors, nurses, health practitioners and other positions” in Queensland Health, but AMA President Michael Gannon, who is also quoted in the Courier-Mail article, suspects the additional senior Queensland Health positions are mostly in managerial rather than front-line roles.

One way to check whether it’s largely extra doctors and nurses or bureaucrats would be for the government to provide a breakdown of all the new Queensland Health SES and Senior Officer positions by specific occupation, and not just for a broad group such as professionals. Such disclosure does not have to identify individuals and raises no real privacy issues. (Even publication of the data at the ANZSCO Unit Group or Minor Group level would be revealing.) I know these data exist, because I extensively interrogated the public service database while working for the Beattie government’s Employment Taskforce in the early 2000s (see the public service database file specifications).

The government could provide much richer data on the public service than the limited cross-tabulations it currently provides. Also, the government should release a KPMG report it commissioned into recent public service growth. Much greater transparency on the Queensland public service is urgently needed.

PSchart1

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Titans threat to abandon Cbus confirms governments have wasted money on super stadiums

Based on the Courier-Mail report of a threat from the Gold Coast Titans to abandon the Cbus Super Stadium, over allegedly high charges imposed by Stadiums Queensland, the huge investments successive state governments have made in super stadiums (e.g. Suncorp, Cbus and now Townsville) may have been unnecessary. Hundreds of millions of dollars that would have been better spent on health or education priorities have been misdirected. The clubs can actually make do with smaller venues. The Courier-Mail reports:

The Courier-Mail has learnt that in a tense round of high-level negotiations, the Titans issued the explosive threat to sell home games to other venues both within Queensland and interstate, leaving Cbus Super Stadium as a $160 million white elephant…Titans officials got a taste of life away from the yoke of Stadiums Queensland when they went on the road to Toowoomba and Gladstone recently and were thrilled with the operational ease and commercial success of hosting those matches.

So the clubs don’t need the super stadiums after all! That would save the state government over $50 million in grants each year (see my Stadiums Qld post from yesterday). However, I expect the Queensland Government will find a more footy-friendly Stadiums Queensland board and it will reach a new deal with footy clubs so the government doesn’t suffer the political embarrassment of a $160 million white elephant. That, of course, would be a demonstration of the sunk cost fallacy. The government is losing money via Stadiums Queensland every year and it would be doing taxpayers a favour if it closed down the most uneconomic of its stadiums and sold them to the private sector to redevelop.

Incidentally, I had several excellent comments on my Stadiums Queensland post yesterday. Regular reader Brad suggests the governing bodies (e.g. NRL, AFL) could make a greater contribution:

One area of concern here is that the stadiums should be charging the national leagues much more money to recover costs. Each of the different leagues typically collect approximately 80% of their revenue from TV rights but those funds are not distributed to the clubs. Therefore, the leagues are getting rich while the government pays for the stadiums as the clubs have no money. The state government funding of stadiums enables the leagues to keep their money rather than them paying full cost recovery for the use of the stadiums.

Regular reader Jim noted it was a timely post:

…given the additions to the stocks of loss-making sporting assets on the back of the Commonwealth Games.

And Lateral Economics CEO Nicholas Gruen asked:

What is it with stadiums? All down the Eastern seaboard governments of both political persuasions seem to have lost their mind.

Finally, on the poor economics of the Townsville Super Stadium, see this excellent post from my old friend and former Treasury colleague Joe Branigan:

Townsville Super Stadium guest post by Joe Branigan

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