Inner Brisbane Cross River Rail CAPEX comparable to statewide education CAPEX

Just before I appeared on 612 ABC Brisbane’s Breakfast program last week, one of the presenters Bec Levingston asked Deputy Premier Treasurer Jackie Trad what it would cost to air condition every classroom in Queensland, a question she obviously couldn’t answer without notice. Having spent the bulk of my schooling in un-air-conditioned classrooms in tropical Townsville, it struck me as a peculiar question, and I though air conditioning every classroom in the state would be a massive extravagance. That said, it did prompt me to look at what the state government currently spends on education capital works and compare it to what it spends on other priorities.

In state budget paper 3, the Capital Statement, we are starting to see the huge cost of the number one extravagance in the state at the moment, Cross River Rail. Total spending on property, plant and equipment for Cross River Rail, which is part of the Treasury portfolio, is estimated to be $733 million in 2018-19. This $733 million spent in inner city Brisbane on Cross River Rail is greater than total property, plant and equipment purchases for the Education portfolio of $674 million across the whole of Queensland! To be fair, I should note that if you add in $99 million of capital grants to other entities (which I suspect includes private schools and universities), total estimated education capital spending comes to $773 million in 2018-19. Still, the fact Cross River Rail’s total capital spending is of the same scale as education capital spending across the whole state should raise eyebrows. Incidentally, the region benefiting the most from education CAPEX is inner city Brisbane (see chart below). Political commentators would observe the government is worried about a Greens takeover of inner city seats.

Capital spend by region for top 5 portfolios

In per capita terms, regions other than inner city Brisbane doing very well out of the state government’s capital budget include Toowoomba, the Queensland outback, and Central Queensland (see maps below). Toowoomba, of course, is benefiting from the Second Range Crossing, on which an estimated $534 million is allocated to be spent by Transport and Main Roads in 2018-19.

Qld per capita

SEQ per capita

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My ABC radio interviews on the Qld state budget for 2018-19

Budget balances

I made two trips to ABC’s South Brisbane studios yesterday. On the Breakfast program, hosts Bec Levingston and Craig Zonca and I chatted about Queensland’s growing state debt, the distinction between good and bad debt, and the state’s credit rating. I spoke after the Deputy Premier-Treasurer had chatted with Bec and Craig, and you can hear me from around 2 hours, 34 minutes into the recording:

http://www.abc.net.au/radio/brisbane/programs/breakfast/breakfast/9839236

On Steve Austin’s Drive show in the afternoon, Steve and I chatted about my impressions of the budget, released just three hours earlier. I told him I thought the projected operating surpluses were too thin and actually negligible when compared with gross state product (see chart above based on data published in the budget as well as ABS data). I also noted that, even according to the metrics the government prefers, the budget projects a deterioration in Queensland’s fiscal position. For example, on p. 48 of Budget Paper 2 we discover:

  • the general government debt to revenue ratio is projected to increase from 54 percent in 2017-18 to 68 percent in 2021-22, meaning the government is not expected to comply with the fiscal principle to “Target ongoing reductions in Queensland’s relative debt burden…”; and
  • the proportion of general government net investments in non-financial assets financed by net operating cash flows will fall below 50 percent to 40 percent in 2019-20 and 44 percent in 2020-21, meaning the government is not expected to comply with the fiscal principle that it will “ensure any new capital investment in the General Government Sector is funded primarily through recurrent revenues rather than borrowing.”

You can hear Steve and me chatting from around 1 hour, 1 minute and 50 seconds into the recording:

http://www.abc.net.au/radio/brisbane/programs/drive/drive/9839250

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What I’m expecting from the 2018-19 Qld state budget

This coming Tuesday, 12 June, Queensland Deputy Premier-Treasurer Jackie Trad will deliver her first state budget. It is her best chance to establish her economic credibility. Trad is fortunate the state economy is performing reasonably well, albeit not strongly across all sectors and still too reliant on the public sector, as suggested by the March quarter national accounts data released by the ABS last Wednesday (see chart below). Another favourable circumstance for Trad is that coal prices remain high, with coking coal at around $US200 per tonne, boosting royalty revenues. As my colleague Nick Behrens commented in his Qld state budget preview, the revenue gods are smiling for Queensland.

On the other hand, Trad has to deal with an ever growing public service and insatiable demands for public expenditures from her ministerial colleagues, industry peak bodies, and community groups. Alas, Trad appears to have given in to some of these demands. The Government has already announced a $45 billion infrastructure budget, and the Courier-Mail’s Steven Wardill reports today that total state debt is now projected to reach $83 billion in 2021-22 (Infrastructure spree will see debt explode to $83 billion in four years). This is no doubt an example of a government getting the bad news out early, so the budget day reporting focuses on the positive surprises. Incidentally, regular readers will know I am very concerned about the level of state debt and the government’s interest bill, and I was quoted on this issue by Steven Wardill in one of his previous articles this week:

Car registration cost could be cut for same price of interest on Queensland debt

Despite today’s bad news regarding state debt, I remain hopeful there will be some positives in the upcoming budget. The 2018-19 state budget undoubtedly offers the Deputy Premier-Treasurer her best chance to check the ever expanding public service and to impose restraint on operating expenses, both to fund additional infrastructure and to demonstrate a path back to a AAA credit rating over the longer-term. So here are a few things I’m expecting (or rather hoping for) from the 2018-19 state budget.

  1. Public service efficiency measures. I expect Trad to impose efficiency measures such as a freeze on senior appointments or efficiency dividends (e.g. a 1% reduction per annum in operating budgets) on many public service agencies, in recognition of the fact public service numbers have over shot their optimal levels. I have previously commented on the excessive growth in senior public service positions (My comments on excessive growth in senior public service jobs in today’s Courier-Mail).
  2. A path back to the AAA credit rating. At the very least, I would like the budget to show a 5-10 year projection of the state’s debt-to-revenue ratio back to around 100% (and preferably to a much lower level), at which time Queensland would have a good case for regaining its AAA credit rating. To achieve this will require ongoing fiscal restraint on the part of the government, obviously, and an efficiency dividend may be one way of demonstrating this. Last December, the Treasury was projecting the critical debt-to-revenue metric was on its way to around 120% (see my post Critical Qld Gov’t debt metric still projected to worsen). With total state debt now projected to continue growing, the debt-to-revenue ratio will no doubt remain on a path to 120% or more.
  3. Conservative economic and fiscal forecasts. I will be checking the Treasury has not veered too far from the relatively conservative economic forecasts it made last December at the time of the Mid Year Fiscal and Economic Review (e.g. 3% GSP growth and 2.5% wages growth in 2018-19). It’s best to be conservative, lest governments start spending money they will never realistically ever have.

I am very much looking forward to the release of the state budget on Tuesday, and I am lucky enough to have been invited to the lunchtime stakeholder briefing at the Parliamentary Annexe, which occurs prior to the Deputy Premier-Treasurer handing down the budget in the Parliament. The 2018-19 state budget is a great test of the Deputy Premier-Treasurer’s economic credibility, and I will be paying very close attention to her justification, reportedly based on Queensland’s growing population, for letting state debt continue to accumulate, on its way to $83 billion in 2021-22.

sfd_Mar18

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Better to let the private sector risk money on a new Brisbane theatre

In a November 2015 post New 1,500 seat theatre would likely be a waste of taxpayers’ money, I questioned the desirability of a state government-funded $1.3M business case to investigate a new 1,500 seat theatre for Brisbane. At the time, I was criticised by the Courier-Mail’s Paul Syvret for seeing things through a “coldly commercial prism” (see this post). But based on today’s news, I feel even more strongly that my comments at the time were justified. Following Premier Palaszczuk’s announcement yesterday of a new $150M theatre being tacked on to QPAC, today’s Courier-Mail reports:

A market-led proposal by Sydney-based Foundation Theatres for a $100 million theatre on the old State Library site adjacent to Queen’s Wharf has been with the State Government since last year. Foundation Theatres, which runs the hugely successful Capitol and Sydney Lyric Theatres in Sydney, would have required only $25 million from the Government.

Yesterday the Premier insisted that proposal was “still in play”.

“If they still want to pursue that they can,” she said.

But by announcing the new theatre as an extension of QPAC she has effectively killed off that proposal.

This is another good example of government activity crowding out private sector activity. Government activity is generally only justified where there is market failure or equity concerns (in which case transfer payments are typically more efficient than public provision of a good or service). Given the market-led proposal from Foundation Theatres, where is the market failure in this case?

The private sector appears willing to have met the bulk of the cost of the new theatre. The private sector proponent Foundation Theatres isn’t totally pure, as it was asking for a $25M contribution from the state government, but this would have been a much smaller outlay than the $150M the government will now spend building the theatre itself. Of course, one would need to consider what exactly the state government would have received for its $25M investment in the Foundation Theatres venture. That said, based on the limited information in the public domain, it is difficult to understand the logic behind the Government’s $150M investment in a new theatre at QPAC.

QPAC_Exterior

By Joe Gatling from Ho Chi Minh City, Vietnam – Queensland Performing Arts Complex, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=11983514

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Upcoming AIIA talk on Asian tiger & tiger cub economies and impacts on Qld and Australia

When I first started studying economics in the early nineties, the international economies that mattered most to Australia were Japan, then beginning its lost decade, and the US, the winner of the cold war and the undisputed global economic and political leader. We learned that China was emerging from decades of failed communism to embrace the market—or rather its so-called socialism with Chinese characteristics—and progress was good, although I didn’t appreciate then just how pivotal to the world economy China would become. Recall that earlier this week the global macroeconomic risk posed by China’s debt-ridden economy was the most reported part of RBA Governor Philip Lowe’s latest speech (see this SMH report).

IMF_WEO_GROWTH

Regarding South East Asia, while Singapore was a beacon of economic progress, the most populous economies of Indonesia, the Philippines and Vietnam were still largely desperately poor in the early nineties and had very little macroeconomic impact on Australia. Strong economic growth in these economies since then (e.g. see the latest forecasts in the chart above), with the exception of the Asian financial crisis period in the late nineties, has lifted many millions in these economies and throughout Asia out of poverty.

So now a broad range of Asian economies, the North East Asian economies of China, Japan, Korea and Taiwan, and increasingly South East Asian economies such as Indonesia and Vietnam, are developing strong economic and social linkages with Australia. The most visible example to me is international education, which dominates the local economy around my office on Boundary St, Spring Hill. Hence, I was delighted and felt I was well positioned to accept an offer to address the Australian Institute of International Affairs—Queensland on the linkages between Asia’s tiger and tiger cub economies and the Queensland and national economies:

Surf the wave or crash on the rocks

What are the opportunities and threats from booming Asian Tigers and are the Australian and Queensland economies geared to secure the benefits?

Presented by Gene Tunny

In this presentation, Gene will highlight the extraordinary growth coming out of Asian economies – particularly the three “tigers” of China, Indonesia and Vietnam. Are the Australian and Queensland economies adequately equipped to take advantage of this boom? Are we selling what they want or are we competing with them? In what sectors will that demand grow? Are we doing better than our competitors in Canada, New Zealand, the USA and Europe?  Are we sufficiently diversified to protect ourselves against inevitable cycles in, say, China? Gene’s presentation will include a case study of the opportunities and challenges arising from international education.

The presentation in on Tuesday 12 June from 6:00 to 7:30pm at ACU Leadership Centre, Level 3, Cathedral House, 229 Elizabeth St, Brisbane CBD. It is free for AIIA members, $15 for non-members, and $10 for student non-members.

Many thanks to Paul Lucas, who is a member of the state council of AIIA and a UQ International Development colleague of mine, for suggesting me as a speaker and for also suggesting the topic.

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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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