Extra GST revenue welcome, but Qld still faces big fiscal challenges

The Queensland Government must be pleased the Commonwealth Grants Commission (CGC) has recommended it receive an additional $520 million above what it might have expected from the GST revenue carve up for 2016-17 (see 2016 Update Report). The gain to Queensland is mostly due to a redistribution of GST revenue from NSW, which has higher revenue-raising capacity via stamp duty applied to higher property market turnover.

The Queensland Government is receiving additional GST revenue because, in recent years relative to other States and Territories, its revenue-raising capacity has worsened, primarily due to the mining downturn, and because its expenditure responsibilities have increased, primarily due to natural disasters (see chart below based on data in the CGC 2016 Update Report). Note the slight subtraction from the additional revenue due to Queensland’s lower population growth rate in recent years (the pink column below), a topic I have discussed with Steve Austin on 612 ABC Brisbane from time-to-time (e.g. ABC radio interview on population growth & State income tax proposal). Of course, there should be a matching reduction of expenditure by the State Government due to lower population growth, but that is not guaranteed.

CGCpost_1

The higher-than-expected GST revenue does not get Queensland out of its budgetary troubles, however, as the fiscal deficit for 2016-17 was projected at $1.7 billion at the time of the Mid Year Fiscal and Economic Review last December (see chart below). The extra GST revenue will reduce this deficit, but the Queensland Government will still run at least a billion dollar fiscal deficit. (Note the fiscal balance is equal to the net operating balance less net capital expenditure.)

CGCpost_2

The Queensland Government still does not have a realistic plan for paying down its large amount of accumulated debt, much of which was accumulated to fund, arguably, uneconomic infrastructure, such as water recycling and desalination plants. While the Government claims it is bringing down General Government debt, this is largely due to the debt switch sleight-of-hand I criticised last year, whereby the Government is transferring General Government debt to government-owned corporations (GOCs), but without corresponding assets that would allow them to earn an income to service the additional debt (see Qld Govt expenditure growth has resumed after extraordinary period of austerity). Indeed, total Government borrowings continue to rise over the forward estimates to 2018-19 (see chart below).

CGCpost_3

Clever accounting by State governments past and present means there is a significant amount of debt on GOC balance sheets that does not have matching revenue-generating assets. Hence it is difficult to rely on the General Government debt figures. For this reason, ratings agencies are justified in paying attention to total State government borrowings, not just borrowings accounted to the General Government sector. The Queensland Government needs to focus on restraining expenditures and generating fiscal surpluses, not just operating surpluses, so it can really get debt under control.

N.B. I clarify the comments in the last paragraph in the post Qld second biggest winner from GST redistribution.

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