Queensland Treasury’s forecasting record on royalties

I’ve written before about the big fiscal challenges facing the Queensland Government, and about how concerning it is that the Queensland Treasury is now as reliant as it is on volatile revenues such as royalties (see Qld Govt increasingly dependent on volatile royalties revenue).  The volatility of royalties adds additional difficultly to developing the State Budget, because the Government can’t be confident future royalties estimates will be realised. Forecasting royalties can be challenging because the Treasury needs to make assumptions about variables that are difficult to forecast such as coal production, international coal prices and the exchange rate. So, I don’t intend to criticise Treasury, but rather would like to point out that the Government needs to consider that some of the money it thinks it has to spend might not actually turn up.

Consider the revisions in royalties estimates that occur within just one Budget year. The chart below compares Queensland Treasury’s forecast of royalties at the time of each Budget (typically held in June) with the revised estimate for that Budget year roughly six months later, and then with the actual royalties figure that eventuated. Unfortunately, at Budget time, typically, the Treasury appears to have been significantly over-estimating the royalties that would be available for governments to spend.

Treasury_royalties_forecasts

The chart shows that, even over six months, Treasury’s estimates of royalties can change by hundreds of millions of dollars. Indeed, between June and December last year, the previous Government revised the royalties estimate for 2014-15 from $2.85 billion to $2.51 billion, a downward revision of $340 million. Given the downturn in the resources sector, it is possible the 2014-15 estimate could be revised down further at Budget time later this year. And the Treasury must certainly be starting to worry about how robust those forecasts of $3-4 billion per annum in royalties from 2015-16 onward are now.

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2 Responses to Queensland Treasury’s forecasting record on royalties

  1. Jim says:

    Gene

    Aren’t many ad valorem royalties for resources (e.g. coal) now progressive (i.e. higher rates at higher sales price points)? I don’t think they used to be progressive, so the change in royalty regime would explain some of the volatility in forecasting in recent years.

    Also, I think petroleum and gas royalties are calculated on production values at the wellhead (which is net of many input costs). Hence, the royalties are more like a % of operating profit, and are therefore highly susceptible to changes in commodity prices (small changes in price can make a big change in profit in industries with high fixed costs). This too will also contribute to the volatile royalty revenues, particularly as gas becomes a more dominant revenue source within the mix of royalty revenues.

    Given the difficulty in forecasting royalty revenues, do we need to restructure the way budgets are established and avoid the problem of spending money based on incorrect assumptions about royalties revenues? For example, core responsibilities (education, health etc.) are funded from expectations for more certain revenue sources (e.g. Commonwealth grants, GST revenue). Budgets for activities that may be more discretionary (e.g. industry department, the arts etc.) could have their funding tied to historic actual royalties revenue. If the royalties don’t eventuate, the money is not spent on discretionary activities.

    • Gene Tunny says:

      Jim, thanks for your comment. Yes, I certainly think it has implications for budget management. I’ll have to think about your idea a bit more, as I’m not a big fan of tying expenditures to particular revenue items. I’d prefer that the Government restrain its spending a lot more and aim for bigger surpluses in recognition of the volatility of revenues.

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