Qld Government increasingly dependent on volatile royalties revenue

The current resources sector slowdown is resulting in hard times for many businesses and workers, and it will make the new Queensland Government’s budget management task a lot harder, especially if projected royalties revenues don’t eventuate. Over the last ten years, the Queensland Government has become much more dependent on royalties paid by resources companies (see chart below), and that dependence is projected to increase.

Royalties_chart1The increase in the relative importance of royalties is due mainly to a surge in royalties, but is also partly due to a slowdown in the growth of Queensland’s two major revenue sources: grants revenue and taxation revenue (which excludes royalties), which have not grown as fast as the expenses of the Queensland Government (see chart below). This reflects factors such as slower economic growth since the financial crisis, meaning, for example, slower growth in stamp duty revenue due to a less buoyant property market, and a slowdown in GST revenue (returned to Queensland as Commonwealth grants). Also significant is that a growing proportion of consumption is on GST-exempt items such as health and education.

Royalties_chart2

If it weren’t for royalties revenues, Queensland’s State Budget would likely remain in an operating deficit over the forward estimates (see chart below), based on Treasury projections provided in the previous Government’s 2014-15 Mid Year Fiscal and Economic Review. (Note that, according to their election costings, the new Government’s election commitments don’t really change the Budget forward estimates a great deal.)

Royalties_chart3

The Queensland Government’s increasing reliance on royalties, which can prove volatile, must be exercising the minds of Queensland Treasury budget officials. The increased volatility of revenues makes it harder to plan, and makes it more likely that Treasury forecasts will be embarrassingly wrong. Officials will have to be more strident in their briefings to the Cabinet Budget Review Committee when arguing against new expenditures, because revenue projections are less reliable, and the Government may not end up with the money it thinks it’s getting. The Treasury should also be briefing the Government on the merits of broadening or increasing the rate of the GST, given the slowdown of the growth of taxation and grants revenue.

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2 Responses to Qld Government increasingly dependent on volatile royalties revenue

  1. Jim says:

    Gene

    The “grants” revenue has dropped back significantly. Is that the general untied grants from the Commonwealth determined by the Commonwealth Grants Commission? Looks to me like the CGC (and probably Queensland Treasury) simply overestimated Queensland’s own-source revenue, and Queensland’s share of the general grants revenue simply reflects those (now incorrect) forecasts.

    • Gene Tunny says:

      Jim, good question. I’ll need to investigate further. The large drop in grants funding in 2012-13 is largely due to the timing of natural disaster relief payments. Regarding the trend in untied grants (which are roughly half of total grants), it doesn’t appear we can blame the Grants Commission. Qld Treasury notes in the 2012-13 Budget papers that:

      “Queensland’s share of GST funding (relativity) increased in the 2012 Update from the Commonwealth Grants Commission. This increase was primarily due to a decline in the
      relative strength of Queensland’s revenue base between 2007-08 and 2010-11.”

      Also, in the 2014-15 Budget:

      “Queensland’s share of GST funding (relativity) increased in the 2014 Update from the
      Commonwealth Grants Commission. Relative to other states, Queensland’s capacity to
      raise revenue declined since the previous update. As a result, Queensland’s share of GST funding will be above its population share in 2014-15.”

      So it appears the relatively slow growth in grants funding is related to the slow growth in GST revenue across Australia. I’ll look into this a bit further and try to post on it at a later date. Thanks for your comment.

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