Fiscal reality will drive the next reform agenda – guest post from Joe Branigan

I’m delighted to present a guest post from my old friend and former Treasury colleague Joe Branigan. It goes without saying that the views presented below are Joe’s and not necessarily mine. That said, I agree broadly with Joe regarding the fiscal reality that will face the new Government. 

Fiscal reality will drive the next reform agenda

What a week in Australian politics! And the upheaval is still not over.

It would seem that the most likely election outcome in Queensland is a minority Labor Government of 44+2+1=47, with perhaps Peter Wellington elected Speaker and the two KAPs agreeing to vote on the floor with Labor to guarantee its government.

The price of that guarantee will be billions in new capital expenditure in the regions, primarily on roads. Without asset leasing, this money will need to be borrowed. KAPs proposal to defer or cancel the BaT tunnel in Brisbane and the Townsville Stadium won’t help because no money has been allocated to these projects in the current budget’s forward estimates.

And maintaining KAPs new inland highway will cost an additional tens of millions annually, which must be factored into the forward estimates. Without additional borrowing, we are about to see the deferral of infrastructure projects in SEQ that benefit millions of people to fund projects that benefit thousands of people – just imagine how that affects overall state productivity.

Queensland’s fiscal realities will hit the new Palaszczuk minority government like a hammer to the back of the head in a matter of weeks as the Expenditure Review Committee wrestles with Labor’s campaign promises, union demands for more public servants and higher pay rises, and the fact that our royalty revenues and other state taxes are at an ebb through the bottom of the resources cycle. And don’t expect LNG to save us as global supply rapidly expands.

If Labor chooses to put its collective head in the sand, by the 2018 election, state gross debt could again be approaching $80 billion and with the demands of KAP, the public service unions and the Greens (that remember lifted Labor’s primary vote above the LNP’s), it will prove impossible for Palaszczuk to maintain a firm grip on the state’s finances. Remember that the LNP actually cut spending in real terms in its first two budgets and limited the spending increase to just 1.5% in real terms in its third budget, and yet it still did not achieve a surplus in its first term. How Labor could possibly achieve a surplus is a question for greater minds than me.

There will, therefore, be an enormous temptation for Labor to increase taxes, fees, levies and charges, and permanently defer the stepped increases in the payroll tax threshold – anything that can close the gap between spending and revenue. I expect environmental levies to make a comeback (remember the Kate Jones $373 million Waste Levy?) and a new round of climate-change and animal-protection red and green tape to strangle the private sector economy but grow the public service.

But by 2018 the need for reform will be more urgent and more obvious than in 2012-2015. Labor will not deliver a budget surplus in its first term because it will not address the structural deficit that is causing the difference between spending and revenue, and as a result our net and gross debt will rise. Asset sales will again be back on the agenda and central to fiscal and economic reform. The election of a Labor minority government has simply delayed the inevitable by 3 years.

Will the LNP be ready to fight for good policy in 2018? Of course not! The LNP will draw the wrong lessons from its defeat and looks set to throw not only good policies overboard but its chief remaining advocate, former Treasurer Tim Nicholls. While Nicholls will be looked on favourably by history, having achieved the greatest fiscal consolidation since Keating in 1987-88, the next lot of LNP leaders will not.

Under new leadership, the LNP will almost certainly abandon its commitment to fiscal and economic reform and return to the old Nationals/Labor style of big government, industry assistance and barrels of pork. Yet, their quickest way back to government would be to stand their ground on economic and fiscal reform, elect Tim Nicholls as leader who will sell the message clearly and without aggro, and sit back and watch Labor’s magic pudding melt in the harsh Queensland sun.

Joe Branigan is Senior Research Fellow at the SMART Infrastructure Facility and a former Regulator at the Queensland Competition Authority. In an earlier incarnation, he was one of Brisbane’s greatest pizza delivery drivers in the 1990s, and perhaps of all time.

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7 Responses to Fiscal reality will drive the next reform agenda – guest post from Joe Branigan

  1. You seem to use the words ‘reform’ and ‘good policy’ as if the reader knows what that is. Also, you seem to take for granted that a budget surplus is somehow an objective target for government to pursue.

    Do you think privatisation is ‘reform’ or ‘good policy’? Because even if it is, is doesn’t necessarily help meet the objective of budget balance and is likely to hamper efforts.

    My view is that if if a budget balance is desirable there is plenty of scope of the revenue side from land taxes, which are a complete muddle of exemptions and loopholes. A few billion from that alone would meet the budget balance objective and probably stimulate construction and land sales, which again would increase stamp duty revenues etc.

  2. Jim says:

    Joe

    A useful post. Thanks.

    The budget is important and needs to be in broad balance over the economic cycle, but it is not the only economic imperative for the State Government. The privatisation agenda was not demonstrated well at all by the LNP. The LNP then shot themselves in their fiscal foot by announcing much of the proceeds would then be wasted on a shopping list of infrastructure projects that did little (if anything) for productivity and a cost of living slush fund. It was a wasted opportunity.

    What could a ALP minority Government do to keep the budget, the Greens and KAP in check? A few thoughts…

    The PC estimate there is a lazy $850 million in industry assistance being provided. Sounds like some low hanging fruit to reduce expenditure to me. This is where the ALP should start their budget repair activities.

    There will be further opportunities to enhance regulatory approaches, but approaches like counting regulatory requirements (a current popular measure of the benefits of reducing regulation) are purely illusory. Some robust analysis is required. There will be opportunities to enhance productivity via regulatory change, but we need to be honest about the benefits.

    Fortunately the ALP announced that all projects over $100 million will be subject to a rigorous benefit-cost analysis. Personally I think the $100 million threshold is way to high, but the policy should kill off some of the sillier ideas like a new stadium in Townsville. The requirements for BCAs should constrain the economic own goals a little bit.

    Meeting a Green agenda without blowing the budget is a challenge, but not impossible. As far as I’m aware, the Greens number 1 priority is better management of runoff onto Reef (addressing externalities from land use). There is a large body of work already done that demonstrates how genuinely significant reduction in loads can be made without adverse impacts on farmer profitability. However, it does require a change in policy approach, and dear I say it, some soft regulation to force change by the worst offenders. The Greens’ other key issue is land clearing of remnant vegetation. Most land clearing is commercially marginal at best, but comes at a cost of lost biodiveristy and CO2 emissions. Vegetation management offsets provide an opportunity to farmers to reconfigure holdings to increase productivity, while maintaining the stock of biodiversity and carbon abatement.

    Meeting the KAP wish list may be harder (except dumping the Townsville stadium). As I understand it they want a mandate on ethanol, but we know the big winners out of a mandate in Queensland are the cheaper ethanol producers in NSW and Victoria. The outcome is more expensive fuel in Queensland and higher profits interstate. The inland highway is economic lunacy, but there are likely to be other (less stupid) things that could be done to assist regional centres. Has anyone actually asked regional communities whether they would prefer resources were channelled into a better education for their kids (long-term productivity measure) or a road that makes no difference and cost even more?

    Anone else got any ideas????

  3. mp says:

    I do not see how asset sales could have fixed any structural problems in the budget. Just creates another one. Revenue forgone less than interest saved then proceeds spent on non income producing assets ? Just delays the need or taxes or fees but then due to higher maintenance costs for new roads and less income so those taxes will need to be higher. Plus short term jobs isn’t reform in my way of thinking.

  4. Katrina Drake says:

    Gene, thank-you for the guest commentator. Joe’s detailed explanation does not go astray on a topic that has become so heavily politicised that Queenslanders don’t know who or what to believe.

    To date the only two options that are being presented without asset sales are to raise taxes, or cut services. I think there are other options that need to be explored, especially by clever commentators like you two.

    I think the public is rightly concerned about debt, and is not in the mood to put it’s head in the sand. I think the public are prepared to own the debt, and contribute to the solution, as we have all so far benefited from the services and infrastructure. Ashgrove voters resisted the temptation on a treasure trove of local improvements for the promise of ‘community values’.

    A possible alternative option for you to explore – increase our Social Capital – reducing our demand and reliance on Government Services. Improve our own health, increase our own self reliance, and help one another, that is invest in social capital.

    Politicians are often accused of telling lies – but if they told us the truth could we cope with it? What if we were told, that really the $14B annual Health budget, is not actually spent on health. A greater and greater proportion is being wasted on treating self-induced preventable sickness. Would the public still be screaming for more and more tax-payer funds to be allocated to the Sickness Budget?

    There are many other examples of where we, as a community waste government services across the whole spectrum of the budget.

    Simple things each of us could do to increase self reliance and reduce demand on government services.
    • Drink less alcohol
    • Eat more vegetables
    • Include activity in your day, 10,000 steps
    • Unburden ourself – loose a few kgs, and reduce your cancer risk.
    • Plan what we eat – Follow budgetbytes.com – cheap and nutritious food blog
    • Read to a child, or teach them a skill.
    • Make sure your children are ready for school,
    • Subscribe to Givit
    • Slip, slop, slap
    • Don’t smoke
    • Have our emergency plans in place.
    • Know our neighbours, build our social connections
    • Reduce waste, don’t litter, and pick up litter.
    • Don’t binge drink and turn up in A&E at 2am Sunday morning.
    • Keep a close eye on friends or family in hospital and help them recover.
    • Help your family, and friends, and be kind to strangers.
    • Support someone to give up smoking, or drinking while pregnant
    • Listen to Mahler 8 an expression of confidence in the eternal human spirit.
    • The list goes on and on – be creative and add your own ways to reduce your demand on government services. Remember the mud army saved households, insurers and government millions in clean up bills.

    Do just one or two of these things, and tax payer funds are freed up for other purposes.

    And of course, stop the rorts in every government program, training, visa, subsidies, stamp duty avoidance, recliner chairs, …..

    Politicians and Economists terrify us all with stories of the Billion Dollar Bogey man – but the structural deficit between revenue and expenses that is keeping us awake at night is around $500 per person per annum – and I can identify and eliminate my burden quiet easily.

    I am hopeful the key to the solution might be as simple as changing the units of the problem to numbers the public can understand. Over to you two.

    • Gene Tunny says:

      Katrina, great comment and I agree it would be good to encourage a lot of the things you mention-Mahler 8 never occurred to me though!. Unfortunately governments have so far failed miserably to get us to drink less alcohol and eat better. The campaign to stop smoking was successful but I think that was largely because there were obvious gains in the short-term as well.

  5. The Happy Hillbilly says:

    Refer to my last post following the election.

    Shorter Joe – people are just too stupid to know what is good for them. State assets will inevitably be flogged off before long because TINA. The collective will – that pesky thing called democracy – will not stand in the way.

    Both sides of politics have been dealt some of the biggest political hidings in history in the past three years because of that very attitude. The problem isn’t the sales pitch – PEOPLE DON’T WANT THE PRODUCT. Because all to often it has failed to deliver (except for fatcat stockholders).

    Could it not be more blindingly obvious that it will not be going ahead.

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