I am quoted in today’s Courier-Mail in an article on Queensland state debt, which for the whole Queensland Government (incl. government-owned businesses) is on its way to over $80 billion (see chart below). The paper reports on the Premier’s failure to answer a tricky question regarding how much dividends from government-owned corporations have contributed to debt reduction:
Qld election 2017: Palaszczuk draws a blank on state debt
The Courier-Mail reported my comments as follows:
Economist Gene Tunny, principal of Adept Economics, said the state was at risk during future downturns and could face a fiscal crisis if government failed to adopt a disciplined approach to debt reduction. Debt was approaching $80 billion and needed to be below $50 billion to win back a AAA credit rating, he said.
“That’s a direct saving in interest costs and that could be used to pay for education or health services or it could be used to further reduce debt.”
He said there had been a loss of financial discipline since the mid-2000s that had allowed debt to balloon.
The point I was trying to make was that if we do not get our debt under control, then it will keep creeping up and will compromise our ability to respond to future economic downturns and crises. As a former Australian Treasury official, I will always remember the financial crisis in 2008-09, during which the Australian Treasury had to temporarily provide a guarantee of state borrowings, largely to support the huge financing task faced by a nervous Queensland Treasury. I would like the Queensland Government to get its budget and debt under control so the state does not end up in that unfortunate situation again.
If the Queensland Government could reduce total borrowings to $50 billion or less, the aspiration I suggested to the Courier-Mail, then the state would certainly get its AAA credit rating back. I should have been clearer in my comments to the Courier-Mail and noted we may even be able to get a AAA rating back if we can reduce debt to around $60-65 billion. The critical ratio the ratings agencies (e.g. S&P, Moody’s) appear to look at is the debt-to-revenue ratio, and they get worried when it is over 100 percent. Currently, total revenue for the state non-financial public sector is around $63 billion. So if we could reduce total borrowings to $50 billion or less, we would definitely get back the AAA rating and provide a buffer that could help us absorb future shocks.
Finally, I should mention the Courier-Mail got in touch with me after it noticed I was a co-signatory to a letter organised by Graham Young at the Australian Institute for Progress regarding critical issues for the Queensland election, one of which obviously was state debt:
Queensland election issues: open letter from 7 public policy professionals
I am so glad the debt issue was finally raised by the CM and comments from yourself Gene, it seems very few others are interested in this most pressing issue, already we see the Premier announcing thousands of extra nurses, hundreds of extra police, I am sure the teachers, ambulance, transport, tourism and schools will all be promised many more millions, not one single reporter has asked where the funding is coming from until yesterday, where are our priorities.
Thanks Glen. Great comment. Yes we need to think about where the money is coming from. At the moment, given the government is running a fiscal deficit, any additional dollar of spending means more debt.
I can understand the arguments for fiscal conservatism, but I can¹t understand the arguments for AAA ratings. Of course other things being equal a triple A ring is better than a worse rating. But other things aren¹t equal. If one can use greater borrowing wisely one would generally want to have a lower rating and more debt.
None of this is to support the Queensland Government which as I recall forfeited its AAA not by design, but because it ran out of other options.
Nicholas Gruen Lateral Economics
Thanks NG. I largely agree, but the problem we’ve had in Qld is a lot of the money borrowed wasn’t used wisely, in my view. And whether the government of the day ran out of options is debatable. It voluntarily went ahead with a massive capital works program, so it could support the Rudd Government’s nationwide stimulus, even though it knew it would lose the AAA rating. So it depends on whether you think the stimulus we had at the time was appropriate or excessive. Based on how things turned out, it probably was excessive.
Note Peter Beattie’s comments:
“There is no doubt the GFC belted Queensland. The state’s massive capital program should have been cut back when the crisis hit. I retired before the GFC in 2007 but I would have slowed the program until the budget improved.”
Now that arguably would be perverse fiscal policy in a downturn, but it goes to show there was widespread recognition the capital works program at the time was excessive.
Not “at the time” (he’s writing in 2016) and very much like the kind of thinking that emerges when a drought breaks before we need to use expensive desal plants, or saying you lost money on insurance if your house didn’t catch fire.
Certainly, given that the Chinese also undertook a big fiscal stimulus, we might have got off OK with a smaller one, but it would have been crazy to take the risk. Look at what happened to the countries that switched back to austerity prematurely.
Thanks John. I wouldn’t argue for austerity. At the national level, I would have let the automatic stabilisers work and have had a smaller discretionary stimulus than we had, noting we had a strong monetary policy response coming from the RBA. At the state level, I wouldn’t argue for contracting spending, just not increasing it by such a large amount. I do acknowledge, however, that at the time, especially in late 2008 after Lehman’s collapsed, Australian officials, like others around the world, were very worried about the economic outlook and a big stimulus package seemed justifiable. I was there in the federal Treasury building and can recall it all rather vividly. But, as with the water crisis and the previous energy and health crises in Queensland, I wonder if we over-reacted in these crises and made poor policy choices due to a lack of calm and methodical policy development.