For the record, I’m posting the speech notes I prepared for the presentation I gave Wednesday night at the Ship Inn Function Centre in South Brisbane on economic policy issues in the 2015 Queensland election. My slides are available via slideshare. Many thanks to Dr Alex Robson from Griffith University for having organised the event, which was a lot of fun.  Note that, while I prepared these speech notes prior to the releases of the costings documents from the Government and Opposition, the substantive points in my speech notes are unaffected by these documents.

The black hole election

There has been much talk of black holes this election campaign, thanks in part to the efforts of the Courier-Mail [SLIDE 2]. The Government has accused the Opposition of creating a $1.3 billion black hole, but the Government has been criticised by Professor John Quiggin for creating its own budget black hole.

Tonight I will consider these so-called black holes, and attempt to come to a balanced assessment of where the truth lies. This means I’ll consider the fiscal strategies of both major parties. Unfortunately, in their proposed fiscal strategies, neither the Government nor the Opposition gets a high distinction, as I’ll explain below.

In examining the fiscal strategies, I’ll particularly focus on the merits of the Government’s privatisation proposal—to lease out (rather than sell) State assets, including electricity businesses, ports and dams. The main point I’ll make is that, while the proposal is generally a good one, a full assessment of its merits requires consideration of how the proceeds will be spent. Alas, according to the Government’s plans, there is a risk the money won’t be spent well.

First, which debt are we talking about?

Important context for the fiscal debate is Queensland’s $80 billion of debt, or is it less than $50 billion as suggested by the Opposition? Well it depends on the type of debt. [SLIDE 3]

Unfortunately, although general government debt is a lot lower than $80 billion, the ratings agencies that we need to restore our AAA credit rating focus on the debt of the total government sector, which is the $80 billion. I understand that, to get our AAA rating back, we need to trim this back to the $50-60 billion range, around 100 per cent of revenue.

The Government’s fiscal strategy – The Strongest and Smartest Choice?

I trust by now we’re all familiar with the Government’s fiscal strategy, which is largely focussed on the task of reducing Queensland’s $80 billion of debt. The Government will lease out the assets of government-owned corporations [GOCs], such as Energex, Ergon, Gladstone Port, et cetera, and use the $37 billion of proceeds—which it will receive up-front—to pay back $25 billion of debt. It will use the remainder of the proceeds to fund $8-9 billion of infrastructure and to pay for the solar feed-in tariff via a $3-4 billion Cost of Living Fund [SLIDE 4].

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. [SLIDE 5]

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 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 to pay for the solar feed-in tariff and for non-commercial infrastructure that will not directly return money to the Budget, as pointed out by John Quiggin.

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.

The Opposition’s fiscal strategy

Like the Government, the Opposition doesn’t get a high distinction for its fiscal strategy either. The Opposition gets marked down on its fiscal strategy because it has committed to a very slow path of debt reduction that is unlikely to restore our AAA credit rating any time soon. 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 key features of the Opposition’s Strategy are:

• Allocating two-thirds of earnings from government-owned corporations (GOCs) to debt reduction from 2018-19, channeling the money via a Debt Reduction Trust [SLIDE 6]; and
• Relying on savings of $150 million from the merger of Energex, Ergon and Powerlink into one big network business and CS Energy and Stanwell into one big generator.

Now, there may well be savings in the future if these mergers were to occur, but in the short-run there would be very high implementation costs from a merger, particularly in consultancy fees, that the Opposition doesn’t appear to have considered. These costs are likely in the order of hundreds of millions of dollars, based on analysis undertaken by the Independent Review Panel on Network Costs a couple of years ago.

Also, as noted by former Treasury colleague Joe Branigan and the Grattan Institute’s Tristan Edis, the merger of Queensland’s two State-owned power businesses would massively reduce competition among Queensland generators and could result in power price increases [SLIDE 7]. Tristan Edis compared the merger to one between Coles and Woolworths.

The Opposition 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 Courier-Mail’s front page. 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. 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.

The Opposition is essentially committing itself to very tightly managing government expenditure, and maintaining relatively low capital expenditure, which I think is commendable, but won’t be popular with Labor voters. [SLIDES 8 AND 9]

As I mentioned to Ben Davis on 4BC on the day the Opposition’s Strategy was released, 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. It’s unclear at this stage how exactly it will attain the surpluses it is promising.

Privatisation

After having considered the fiscal strategies of the major parties in broad terms, I’d now like to focus on the issue of privatisation. I’ve previously spoken in this room on the case for privatisation in Queensland and I’m sure many of you are familiar with the arguments. For example, privatised businesses have greater incentives to become more efficient which is good for keeping prices down and the productivity of the economy. The evidence, reported by a range of independent observers such as the Productivity Commission, Grattan Institute and the World Bank, suggests that privatised businesses are more efficient than publicly-owned businesses. [SLIDE 10]

But there are a lot of fears about privatisation—partly justified, given some poorly implemented privatisations around the world, such as British Rail. Unfortunately, so far, the Government hasn’t really addressed the fears that people have over privatisation. Let’s consider some of these fears.

A lot of Queenslanders are worried about having to pay higher power prices after privatisation, even though there is a large amount of economic regulation and oversight of the sector, particularly by the Australian Energy Regulator (AER). The Government has had trouble on this point because it can’t really point to power prices being significantly higher in Queensland than States with privatised networks—that is, Victoria and South Australia [SLIDE 11]—based on data from the Australian Energy Regulator, which are different from figures presented recently by big four consulting firm Ernst & Young, a.k.a. EY [SLIDE 12]. The data source and assumptions for the EY figures aren’t clear so I’ve decided to prefer the AER data.

So given that comparative power prices don’t tell a nice, clean story about the benefits of privatisation, the Government has had to rely instead on a finding by EY regarding the growth of power prices and network charges (i.e. the charges by Energex, Ergon and Powerlink for the use of poles and wires, and other bits of kit such as transformers at sub-stations) since the late nineties (SLIDE 13). This of course doesn’t tell us prices will be lower after privatisation. It only tells us that, based on historical experience, prices shouldn’t increase as fast as if the assets remained operated by the government-owned business.

The estimated electricity bill saving of $570 per annum that was reported in the Courier-Mail is from an historical simulation of power prices, covering 1997 to 2013, assuming Queensland experienced Victorian growth rates in network costs. Unfortunately, consumers won’t get this $570 p.a. back if the businesses are privatised (technically, if their assets are leased out). The inefficiency is already largely baked in, due to network investments that have already occurred. That said, under privatisation, I expect bills will be lower than they otherwise would be, as private operators would more ruthlessly control costs, running “lean and mean.”

Furthermore, the Queensland Government is intending to force a fall in power prices through its $3.4 billion Cost of Living Fund, which is funded out of lease proceeds. The Government has committed to cutting retail prices by 6% in 2015-16, saving a typical household $577 over five years. In one sense, this can be seen as reversing the bad policy that was the solar feed-in tariff. But, if the Government wanted to provide this relief, it should find the money in its existing Budget rather than using lease proceeds which would be better used for debt reduction.

Another common fear regarding privatisation relates to job losses. GOCs such as Ergon and Gladstone and Townsville ports are significant employers in regional communities across Queensland. Undeniably there will be job losses if assets are leased out, as international evidence shows efficiency gains from privatisation typically come from shedding under-utilised labour, but this labour would be better employed in other industries anyway. It’s no longer the role of Government to act as an employer of last resort.

Conclusions

In conclusion, I have reservations about the economic strategies of both major parties. Unfortunately the imperatives of politics, and the need to win marginal seats, has meant the Government has compromised what would otherwise have been very good economic policy (although selling the assets outright would have been even better). By not using all lease proceeds for debt reduction, it would create a longer-term budgetary challenge. At the same time, the Opposition isn’t exactly clear on how it will fund its proposed debt reduction. Queenslanders have been poorly served by both major parties in this election campaign.