Qld Treasury right that paying down State debt is a huge challenge

debtprojection

Queensland Treasury’s new Economic and Fiscal Challenges report reiterates the huge challenge ahead in paying down debt and restoring Queensland’s AAA credit rating, which isn’t a likely prospect this decade. The projection that debt levels will stabilise at around $80 billion in a few years’ time and then increase to $120 billion in the 2020s is plausible given trends in government spending, particularly on health services (see chart above from the report).

That said, I doubt we’ll ever see State debt at $120 billion, given it assumes current expenditure and revenue trends, and the Government at the time will have the opportunity to prevent debt from blowing out further. The Treasury projection is a bit like assuming a ship’s captain sees an iceberg ahead and simply lets the ship run into the iceberg without attempting to steer it away. Either the Government will cut expenditure, raise taxes, or sell assets to reduce debt, as flagged by the Treasurer (Queensland Treasurer flags increased taxes and fewer services, as well as asset sales). I’ve previously commented on how asset sales are necessary and desirable:

Qld Government should sell assets – further spending cuts would weaken economy further

Link to my interview on Commission of Audit on ABC Brisbane radio this morning

Qld budget surplus delay not a big deal, but reinforces need to consider Energex & Ergon sell off

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5 Responses to Qld Treasury right that paying down State debt is a huge challenge

  1. KT says:

    Gene, I agree with your asset sales pitch. It’s not only reducing debt but relieving the need for the public sector to provide Capex for future marginal projects. However, this government is terrible at sending the message – all the public hears is bad news

  2. Jim says:

    Gene

    Correct me if I’m wrong, but as I understand it, the States finances are in a pickle because the State has a structural deficit problem – simply expenditure will probably exceed revenue even during boom times. The way to fix this problem is to address long-term cashflow imbalances (raise revenue, reduce expenditure, or both). Asset sales are really only relevant to the extent that they impact on government revenues and costs (including interest payments)???

    I’m not a government budget guy, just a simple environmental economist, so perhaps you can shed some light on how asset sales will actually improve the State’s structural budget deficit in the medium to longer term.

    Here is the fiscal conundrum in my head.

    Asset sales will reduce gross debt and interest payments. No arguments there.
    But asset sales will also mean the State’s revenue will permanently fall as no dividends will be received from Government owned businesses. Given the fact that most State owned assets of any real value to investors not only cover their costs (and the interest on their own debt), but also provide a source of revenue for the State (dividends), asset sales could actually make the structural deficit worse than it already is.

    Perhaps you can shed some light on how decisions to keep or sell assets should be made, given the debate seems to be purely the fiscal fix of asset sales. Surely it should be on a case-by-case basis, but with some sort of consistent decision rule (e.g. net sales revenue exceeds the present value of future dividend stream). If the dividend streams don’t match the opportunity cost of government’s capital, this is probably due to a mix of (initial poor investment decisions, deliberate pricing policies, deliberate dividend policy).

    Furthermore, the LNP has been saying that some of the revenue from asset sales is required to free up capital for investment on other economic infrastructure (roads, schools, hospitals etc.). The rationale is to improve economic productivity. Again, no arguments there. The problem for the State’s budget from this strategy is that economic infrastructure like roads doesn’t generate any net revenue for the State. The significant ongoing costs of maintenance will be borne by Queensland, while the benefits of the productivity gains will go the private businesses (higher profits) and the Commonwealth Government (higher taxes on profits and higher GST revenues). The State coffers might benefit from a bit of extra payroll tax ands some of the GST revenue filtering back at best. Selling revenue generating assets and investing the money in other economic infrastructure possibly makes the structural deficit worse.

    I’m failing to see how selling assets does any more than provide some short-term budget relief at best. The perverse outcome of this could be that the State has less urgency to properly address the structural deficit, and that the structural deficit is made worse in the medium to longer term.

    • Gene Tunny says:

      Thanks Jim. Good points. Broadly speaking, I support privatisation because I think it’s more appropriate for many of these assets to be in the private sector and they’ll be better run. At the same time, I agree the benefits of privatisation to the budget can be oversold for the reasons you mentioned. But we need to consider also that by privatising assets we can get the money to pay down a large amount of debt and get our AAA credit rating back, which will lower our borrowing costs and save us hundreds of millions of dollars.

  3. Katrina drake says:

    $80b for 4.56million Queenslanders – approx $17,500 per capita is state debt.

    About the price of 1 year private school education, or one large backyard shed, or a second hand family car.

    As I sit at south bank, after a day in the Queensland performing arts centre, practicing with the cast of rigoletto , looking across to the new go between bridge and Kilapa bridge , not far from the new Princess alexandra hospital, and the new children’s hospital . i at least I feel I have received my money’s worth. If I had to pay for a spot as a QLD citizen i would think $17,500 was very good value for money.

    What I don’t like, is to see tax payer money wasted. There is a lot of waste in the provision of recurrent health services. Health services are out of control in Queensland. People need to take more responsibility for their own health, and not expect money to be thrown at treating preventable diseases, from obesity, alcohol and smoking.

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