Ten years since Queensland lost its AAA credit rating

Ten years ago, on 20 February 2009, then Queensland Treasurer Andrew Fraser released the Economic and Fiscal Update which forecast lower revenues, large deficits and burgeoning debt. S&P promptly downgraded the state of Queensland from a AAA credit rating to AA+ (see this Brisbane Times report). Ten years later, while we have an ever increasing state debt, on a trajectory to around $83 billion by 2021-22, there is little hope of regaining a AAA rating any time soon.

In my book published at the end of last year, Beautiful One Day, Broke the Next, I tell the story of Queensland’s public finances since the late 1980s, and the loss of the AAA credit rating is an important part of that story. I should note that, since the book was published, I have received many comments from readers regarding people or topics I now wish I had covered in the book.

For example, I wish I would have mentioned some of the outstanding Queensland public servants in the post-war era outside of the Treasury who were Sir Leo Hielscher’s contemporaries, such as Sir Sydney Schubert, who served as the state’s Coordinator-General during the 1970s and 1980s, those critical decades in Queensland’s economic development.*


Also, if I were writing the book again, I would have a closer look at the Bligh government’s massive $15 billion privatisation program in 2009-10, after it finally realised the need to correct its fiscal course. What has been referred to as a fire sale of state assets may have resulted in some of the assets being sold or leased out for much less than their fair values, costing Queensland taxpayers millions. The 99-year lease of Queensland’s forest plantations has been identified by a former forestry official as a bad deal for the Queensland taxpayer. In 2010, the Gympie Times reported:

QUEENSLAND taxpayers have been dudded with the sale of major forestry assets, including in the Gympie Region.

That is the view of ex-Gympie resident, private forestry advocate and environmental academic, Gary Bacon…

…He said the government in May announced the sale of a 99-year lease on Forestry Plantations Queensland freehold property to the North American based Hancock Timber Resource Group.

While the land will remain in government hands, the right to grow and harvest trees on it is worth an estimated $1370 million, according to Prof Bacon.

The sale price to Hancock was $603 million, he said.

This could be a very interesting case study with major lessons for what makes a successful or unsuccessful privatisation program, and I would certainly cover it if I get the chance to produce a revised edition. So I’d encourage any reader who hasn’t purchased my book yet to buy a copy, so the publisher can sell out of this print run and we can print a revised edition.

*Please note that in my book I do acknowledge the high level of corruption that Queensland was notorious for in the post-war years up until the Fitzgerald Inquiry reforms. 

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Housing industry round table with Treasurer Frydenberg at Parliament House on Monday 18/2/19


I felt honoured to attend a housing industry round table with federal Treasurer Josh Frydenberg and Assistant Treasurer Zed Seselja at Parliament House in Canberra on Monday 18 February 2019. Prime Minister Scott Morrison opened the round table but had to leave after a short address. He left a small group of industry body leaders, from the Property Council, Master Builders, Real Estate Institute, and others, along with business magnate Mark Bouris and the Queensland contingent, Noel Whittaker and me. I imagine I was invited because I have written about negative gearing and the taxation of capital gains (e.g. Untangling the debate on negative gearing) and last year appeared on Emma Griffiths’s 612 ABC Brisbane Focus program discussing the topic.

As has been reported in the media, much of the round table discussion concentrated on the Opposition’s proposed changes to negative gearing and capital gains taxation, particularly the expected adverse impacts on the property market (i.e. lower property prices, higher rents), the building industry, and the broader economy. The proposed policy changes will have adverse economic impacts, particularly as they may well be imposed while the Australian economy is in the middle of a downturn.

The proposed restriction of negative gearing to newly built housing makes little sense. It is based on a misunderstanding of the logic behind negative gearing. It is not a rort, but is a logical feature of the tax system. It means there is a consistent treatment of debt and equity financing, as noted by the Treasury in its 2015 tax discussion paper and lucidly explained in this 2004 Agenda article by Fane and Richardson: Negative Gearing Redux.

Thankfully, the round table was more than just an opportunity for industry representatives to criticise the Opposition’s policies, and it included discussion of positive measures to promote housing affordability. Peak bodies called for cooperation between the three levels of government to bring down taxes and charges including stamp duty.

At the round table, I suggested the Treasurer should commission the Treasury to undertake a detailed study of how changes to negative gearing and capital gains taxation would impact different groups in the community. Earlier in the meeting, the Treasurer himself had noted that a lot of people who negatively geared couldn’t be described as rich or wealthy.

The Treasury should also be asked to advise on any expected macroeconomic impacts given the current outlook for the housing market and the broader economy. Alas, that outlook is not encouraging. Indeed, the UDIA representative at the round table disclosed preliminary estimates of double digit percentage declines in land sales in capital city markets so far this year. The UDIA is intending to publish its estimates in the coming weeks and no doubt they will add to growing concerns about the economic outlook.

I noted that, given Treasury’s attitude to negative gearing (i.e. it is not a rort) and concerns over the economic outlook, in its incoming government brief for a new government (the red book), the Treasury may well recommend a delayed introduction of the policy. Certainly it appears impossible that a Shorten government could enact the policy in time for it to start on 1 July this year, so a 1 July 2020 start date seems more likely.

Treasury may also recommend a watering down of the Opposition’s policy. Indeed, one well-informed member of the Canberra press gallery I spoke with after the round table suggested that, because of the views of some of the cross-bench senators, Labor won’t be able to fully implement its proposed changes to negative gearing. Instead of restricting negative gearing to newly built housing as it is currently proposing, it may instead have to impose a cap of some kind (e.g. on the number of properties that can be negatively geared or the amount of net rental property loss that can be deducted from taxable income).

The housing industry round table was extremely interesting and I’m glad I travelled down to Canberra to attend it. Many thanks for the invitation to attend the event from the Assistant Treasurer’s office and particularly to Teaghan George in his office for her assistance. No doubt the debate around negative gearing and capital gains taxation will intensify as we get closer to election day, widely expected to be 11 or 18 May.

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Economic impacts of the North & North West Qld floods – Initial views

All week we have been hearing the awful news about all the dead cattle in North and North West Queensland as a result of the recent floods. An estimate of around half a million dead cattle has been suggested, although some sources are suggesting it could be much higher. At this stage the ultimate impacts are still unclear, although I understand the state government and industry peak bodies are currently developing estimates of the economic impacts. Given all the figures and claims that are currently being heard in the news, I thought readers may be interested in some facts that can usefully inform economic impact estimates.

In Queensland, beef cattle numbers are typically around 11-12 million, averaging 11.5 million over 1999-00 to 2016-17. A loss of 500,000 cattle would represent a 4-5% loss of the stock of beef cattle in the state. Of course, the economic impact in the affected regions would proportionately be much higher, particularly if you take into account backward and forward supply-chain linkages (e.g. backward to farm supplies and forward to abattoirs). In the Northern and Southern Gulf regions and the NQ Dry Tropics regions which appear worst affected, there were an estimated 3.2 million head of cattle in 2016-17, so at least one-in-six head of cattle in these regions may have perished based on an assumed loss of at least 500,000 head (see chart below and the map at the bottom of the post so you can see where the Natural Resource Management regions are).


What could this mean for the state economy as a whole? Consider that the Queensland Government’s handy AgTrends publication forecasts a gross value of production of cattle and calves of just over $5 billion in 2018-19. Additionally, it forecasts value added from meat processing at $2.3 billion, the vast bulk of which (at least 80% I would assume) would relate to beef. For simplicity, let’s scale that up by 50% to allow for value added in the transport, wholesale and retail sectors, and let’s say the floods result in a 5-10% loss in activity over 2019. My back-of-the-envelope calculation is that the economic impact of the loss of cattle related to the floods will be around $500 million to $1 billion this calendar year. Queensland gross state product (GSP) in 2019 will be in the $370-380 billion range I expect, so the loss of cattle could shave 0.1 to 0.3% off GSP depending on just how bad the losses are. And given the loss of calves, part of this impact will persist into 2020.

Of course, these are just the losses related to beef cattle. It is expected there will also be losses in the resources, manufacturing and other sectors. For example, Incitec Pivot, which manufactures chemicals and fertilisers, has already announced a hit to earnings from the closure of the rail line between Townsville and its Phosphate Hill source of supply (see this SMH report and SBS report). Such losses will be an additional drag on economic growth. I expect these negative impacts will, in the short-term, only partly be offset by repair and reconstruction activities.

That said, repair and reconstruction activities are expected to be substantial. I’ve just seen an estimate of $606 million of damages associated with the Townsville floods reported by the Courier-Mail. The related repair and reconstruction expenditures will occur over a few years as suggested in the article.

Queensland Treasury is currently forecasting economic growth in 2018-19 at 3%. Given these floods and all the discouraging economic data we’ve seen lately, I expect Treasury would revise this forecast down, to either 2.75 or 2.5%. Given the adverse economic impacts, as well as the costs of repairing infrastructure, the Queensland Government’s fiscal deficit in 2018-19 will probably increase from the $2.6 billion currently forecast by the Treasury.


Update: Since I published this post I have noticed an estimate from AgForce of a $500 million loss of livestock associated with the floods, as reported in the Brisbane Times:

Qld floods damage bill estimates top $1 billion

In a future post I will explain how we need to be careful when discussing economic loss and economic impact estimates, as they are not necessarily comparable. A good explanation in the context of US Hurricane Harvey can be found here:

How natural disasters affect US GDP

This Brookings post by eminent US economist Martin N Baily is also useful:

Can natural disasters help stimulate the economy?

Posted in Agriculture, Floods, Mining, North Queensland, Uncategorized | Tagged , , , , , , , , | 15 Comments

The North West Minerals Province – A Better Public Sector Investment than the Capital City

The North West Minerals Province – A Better Public Sector Investment than the Capital City

Guest post by Craig Wilson*

Townsville received the lion’s share of the media coverage in Australia and around the world from the recent flood events. But north west Queensland was also severely affected. As floodwaters recede, the recovery phase has begun. This recovery in north west Queensland is important not just to those local economies stretching along the Townsville to Mount Isa corridor, but also to the state and national economies and treasuries.

It is often under-recognised just how important these economic centres are, most significantly Mount Isa and the wider North West Minerals Province. For example, the Mount Isa economy sends around $1 billion annually to state and federal treasuries and acts as a service centre to a huge portion of northern Australia. This is an enormously productive part of the country. Income per capita in Mount Isa is close to twice the Queensland average. And Mount Isa’s economic activity underpins distant economies, Townsville particularly so and, to a not inconsequential extent, Cairns and Brisbane.

Rail Head Area

A rendering of a future multi-modal transport and logistics facility in Mount Isa

Investments by governments in this part of Australia pay dividends. While so much recent media coverage about mining has been negative, saturated by stories about coal and Adani, many other metal miners have been going efficiently about their business.  Mount Isa Mines has been operating for almost 100 years and continues to anchor the economy in north west Queensland.  The Australian economy and national strategic planners are lucky to have it.

But local elected leaders know that they must constantly look to strengthen and diversify their economic bases; and their economies have been hurt in the not-too-distant past by commodity price volatility and adverse boardroom decisions. A relevant example is a new initiative from Mount Isa City Council – www.discovermountisa.com.au. It is clear that local government leadership matters in the midst of national economic settings. Local governments such as Mount Isa City Council with limited resources are getting on with things – tourism promotion, investment attraction, and branding.

It is natural that these remote but productive economic centres lament the big public sector expenditures occurring in capital cities while they, as regional economic engine rooms, feel unrewarded and rely almost exclusively on private capital. As central policy-makers turn their minds to the recovery phase, both the state and federal governments should look to fast-track projects in the north west minerals province of Queensland.

The right investments will be rewarded.  In the case of the Queensland Government, this includes programs under its existing Strategic Blueprint for that part of the state, including initiatives for common user infrastructure such as the proposed Mount Isa Transport and Logistics Centre, as well as electricity transmission line projects such as Copper String II which will shortly be subject to additional feasibility studies.

The Australian Government should reinvigorate its focus on its northern Australia program – including its excellent work on resource identification by Geosciences Australia, the super basin assessments by the Department of Environment and Energy, and infrastructure strategy led by Infrastructure Australia – and ensure the logical interface of the laudable forthcoming Barkly Regional Deal throughout the economic corridor from Tennant Creek to Mount Isa.

The economics of public sector investment in the north west minerals province is as solid as anywhere in the country, but the political equation has been less favourable and this has meant that opportunities have been overlooked. Hopefully the state and federal governments can reward the good local leadership that is occurring along the Townsville-Mount Isa-Tennant Creek corridor with targeted public sector investments which leverage existing and future private capital.

Craig Wilson is Managing Director of DeltaPearl Partners. DeltaPearl Partners recently contributed to Infrastructure Australia’s 2019 national infrastructure audit, is economic advisor to the Mount Isa City Council, leads the Australian Mining Cities Alliance and provides secretariat support to the Tennant Creek–Mount Isa Cross Border Commission which next meets in Canberra on 12 February 2019.

*I am delighted to publish this guest post from my former colleague at Marsden Jacob Craig Wilson. Craig will be well known to many QEW readers given his extensive experience in economic policy in Queensland and throughout Australia and internationally. For instance, he is a former Executive Director of Economic Policy at the Queensland Department of Premier and Cabinet. It goes without saying that the views expressed in this article are Craig’s and should not necessarily be attributed to me, Gene Tunny.

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YIMBY, self-fulfilling prophecies, Cairns tourism & Qld GSP growth: Comments & questions on my outlook presentations

I’ve had several interesting comments and questions regarding my economic outlook presentations last week.

YIMBY – Yes in my backyard

In my Brisbane Club presentation last Wednesday Qld: Hot or not? I commented on Brisbane City Council’s temporary planning instrument to restrict apartment and townhouse developments in low-density residential areas (e.g. see this Urban Developer article), saying I thought it was bad policy. Unsurprisingly, given I had an audience filled with property developers and real estate professionals, this was a popular opinion! After my talk, one seminar attendee told me about a group she had set up promoting higher-density development, YIMBY QLD, with YIMBY standing for “Yes in my backyard”. What a fantastic initiative. A good summary of the problems with planning policies discouraging higher-density development is contained in Brad Rogers’s excellent 2013 guest post Old Queenslanders in a New City.

Talking down the economy

After my QMCA presentation, I was asked whether all the negative talk from economists about the economic outlook could actually reduce business and consumer confidence so much that it brings about a downturn. That is, can economists deliver a self-fulfilling prophecy? I replied that I doubt it, given that economic commentary is contestable and that anyone without a sound basis for what they were saying would be shouted down and eventually ignored. Moreover, the economy tends to follow its own path and ignores the prognostications of even the most eminent economists. I noted one of the most infamous economic forecasts of all time, one which clearly had no real impact on the economic outlook, that of esteemed US economist Irving Fisher. In his classic account of the 1929 stock market crash, The Great Crash 1929, John Kenneth Galbraith commented:

That autumn Professor Irving Fisher of Yale made his immortal estimate: ‘Stock prices have reached what looks like a permanently high plateau.’ Irving Fisher was the most original of American economists. Happily there are better things—his contributions to index numbers, technical economic theory, and monetary theory—for which he is remembered.

Cairns tourism

Cairns-based financial commentator Mark Beath questioned whether tourism was “hot” in Cairns. Having had a closer look at the data for Cairns I can report that, while tourism in Cairns from domestic sources has experienced strong growth, there is a lot of concern over international visitor numbers. The Cairns Post reported at the end of last month:

Conus Business Consultancy Services partner Peter Faulkner has crunched the numbers and found an 8 per cent year-on-year drop in Chinese visitation to the region.

That compares to an 8 per cent increase Australia-wide.

Overall international visitor numbers were down 3 per cent in the Far North but up 6 per cent nationally.

Fortunately, domestic tourist numbers were up 15 per cent with expenditure rising 20 per cent, bringing the overall increase in tourism spending in the region to $3.4 billion year-on-year.

The Cairns Post’s description of the data isn’t entirely clear. Total spending in the Tropical North Queensland (TNQ)* tourism region was $3.4 billion in the 12 months to 30 September 2018, up around 12% from around $3 billion in the 12 months to 30 September 2017. These calculations are based on TEQ’s handy snapshots of domestic tourism and international tourism. Thanks to Mark for the question and for prompting me to have a closer look at the data.

Queensland’s economic growth rate

Luke Dixon from AMP Capital, who also spoke at the Brisbane Club event, was asked whether Queensland’s economic growth rate was permanently at a lower level than it was in decades past. It certainly appears to be the case from eyeballing the data (see my chart from my QCMA presentation below). From 1987 to 2000, Queensland’s average annual economic growth rate was 4.7%. Since then it’s been 3.6%.


I also replied to the question, referring back to the 3P’s framework that Ken Henry popularised while Treasury Secretary. That approach stresses the supply-side determinants of GDP, that is the factors that are relevant in determining long-run GDP growth (as opposed to demand-side factors which can push an economy away from its trend growth path in the short run). Those 3Ps are participation, productivity, and population. The major contributors to GDP growth over the long-run are productivity and population growth, so I focussed on those two Ps.

We know that the population growth rate in Queensland is now much lower than it was in the 1980s and 1990s when interstate migration was at its strongest (see my chart below based on ABS estimates). Also we suspect the productivity growth rate has fallen since 2000. For instance, in the original 2002 Intergenerational Report and in the 2007 IGR, Treasury assumed long-run productivity growth at 1.75% p.a., but it has since revised that assumption to 1.5% p.a. So with lower population and productivity growth, it’s natural that growth rates of Queensland gross state product (GSP), the state equivalent of GDP, would be lower on average than they were in previous decades.


There were a few more comments and questions I received which I hope to respond to in a future post.

*This region is essentially Far North Queensland and excludes Townsville which has its own tourism region.

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QEW week that was video – 3/2 to 9/2/19

Earlier today I recorded this wrap up of the past week, in which I discuss my recent economic outlook presentations (with the latest available at the QMCA website), Ken Henry’s resignation as NAB Chair, and Queensland’s state debt, among other issues.

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Qld: hot or not? My presentation at the Brisbane Club on Wednesday 6 February

It was a great day to give an economic outlook presentation, with RBA Governor Philip Lowe announcing a change in monetary policy guidance, from saying the next rate movement would most likely be up, to saying the cash rate may well go down rather than up.  I welcomed the announcement because, in addition to it being sensible given the discouraging indicators we’ve seen lately, it was consistent with the views I was expressing in my presentation. Thanks to Ross Elliott from APP Property and Infrastructure Specialists for hosting the seminar at the Brisbane Club I spoke at, along with Luke Dixon the head of Real Estate Research at AMP Capital. Ross seemed happy neither Luke nor I were “drinking the Kool-Aid”, and we were both measured and realistic about the economic outlook. You can download my presentation at this link:

Qld hot or not presentation 6 February 19

I started off by referring to recent disappointing indicators including the Suncorp-CCIQ Pulse business survey (see my post on the data) and the December 2018 retail trade data published yesterday by the ABS (see chart below). I also covered more positive indicators including international visitor expenditure and the coal price, now back over US $200/tonne for coking coal (see slide 8 in the presentation; thanks to QRC for the latest data).


Posted in Infrastructure, Macroeconomy, Uncategorized | Tagged , , , , , , , , , , , , | 2 Comments