Neither party gets a high distinction in fiscal policy

In their proposed fiscal strategies, neither the Government nor the Opposition gets a high distinction. The Government gets marked down because it is not allocating all asset lease proceeds to reducing debt and (thus) interest payments, which means there is an adverse impact on the Budget in the order of $1 billion per annum in the next few years, according to John Quiggin’s estimates. And the Opposition gets marked down because it has committed to a very slow path of debt reduction that is unlikely to restore our AAA credit rating. Also, there are no details yet of how it intends to maintain the tight expenditure control implied by its planned debt reduction, which largely occurs beyond 2017-18 (the final year of the State Budget forward estimates).

The Government is right to prioritise reducing the $80 billion debt and getting our AAA credit rating back. Leasing out assets is a good way to do this, and will yield wider benefits, such as more efficiently run assets, lower power prices than otherwise, and less risk on the Government’s balance sheet. However, the Government has potentially opened up a hole in the Budget by using some of the lease proceeds for infrastructure that will not directly return money to the Budget, as pointed out by John Quiggin earlier in the week. Initially, I was sceptical of John’s estimates, but after an explanatory comment from John on my Monday post Better off allocating all lease proceeds to debt reduction, I now mostly accept his estimates. I would note, however, that John has not included the potential budgetary benefits of getting our AAA credit rating back, which would reduce but not eliminate the budgetary loss John has estimated.

The Opposition’s fiscal strategy is not great either. It is proposing a very slow path of debt repayment that offers little hope of getting our AAA credit rating back over the next decade. It also has yet to provide full details of its future expenditure and revenue raising plans, meaning it is open to criticism from the Government that it has a hole in its budget estimates—the $1.3 billion black hole referred to on the front page of today’s Courier-Mail. This is a bit of a beat up, but the Opposition left itself open to it. Technically, the Opposition didn’t propose allocating money to debt reduction that was already allocated to funding services, because it wasn’t earmarking income from Government-owned businesses to debt reduction until 2018-19 – i.e. outside of the forward estimate years for which the State Budget currently plans (2014-15 to 2017-18). However, it is not yet clear how it will fund debt reduction of the proposed scale from 2018-19.

The Opposition is essentially committing itself to very tightly managing government expenditure, which I think is commendable, but won’t be popular with Labor voters. As I mentioned to Ben Davis on 4BC on Friday afternoon, the Debt Reduction Trust is a gimmick. To pay back debt, the Opposition, if it wins government, would still have to do the hard work of creating surpluses, by keeping expenditures below revenues. Treasurer Tim Nicholls was correct to point out the Opposition’s plan to earmark money from the earnings of government-owned businesses doesn’t create any new money.

That said, the Treasurer is still vulnerable to the Quiggin critique—that the Government has its own $1-2 billion budget hole, largely created by allocating lease proceeds not to debt reduction, but to non-commercial infrastructure investments and its cost of living fund. Frankly, much of the money not allocated to debt reduction is simply being allocated to chasing votes in marginal seats—for example, the Government’s $150 million commitment to the Townsville Super Stadium, to which, alas, the Opposition has also committed money.

My regular reader Jim nicely summed up the problem with the Townsville Super Stadium in a brilliant comment on the post I referred to above last week:

The white elephant for today is $150 million for a new stadium in Townsville (subject to privatisation of course). The existing stadium has a capacity of about 27,000 and is rarely full even when the NQ Cowboys make the finals. OK. The existing stadium doesn’t have a roof. But the use of the stadium is almost exclusively in the dry season anyway. There is no way in the world that this project stacks up.

The ALP have also promised $100 million for this white elephant. Townsville needs a new mega-stadium like a hole in the head. I’m sure there are other infrastructure projects and services that would provide a much greater benefit to the region.

This demonstrates poor economic thinking by both parties. We deserve better.

Absolutely, Jim. Neither major party is covering itself in economic glory.

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2 Responses to Neither party gets a high distinction in fiscal policy

  1. Jim says:

    Gene

    There is a story in the Brisbane Times today that indicates that the LNP is proposing a $400 million injection into the railway line for Adani (must admit I was wondering why Adani had lots of propaganda ads on the TV at the moment). Running the LNP line on investment (which makes no economic sense anyway), this capital could only be available if other assets are privatised.

    Why would the LNP privatise commercially viable businesses and invest in projects that, as I understand it, cannot secure sufficient private sector funding because they are not commercial? Like the stadium in Townsville ($150M), or the inland highway ($375M), is this just another investment “own goal”?

    Irrespective of the pros and cons of privatisation, I’m beginning to think the strongest argument against privatisation is that it will reduce the likelihood of investment own goals.

    • Gene Tunny says:

      Thanks for the comment, Jim. I’m a bit unclear about the reasons for investing in Adani myself. But it could pass a cost-benefit analysis if it the Govt investment just gets it over the line of commercial viability and the Govt gets a large stream of royalties. I’d certainly like to see a cost-benefit analysis done, but I’m sure it would be labelled commercial-in-confidence and never released, alas.

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