What an exciting first week of the election campaign! I am very pleased that state government debt is a prominent issue in the campaign, and I must say I’m surprised by the Queensland Treasurer’s recent description of the total state government borrowing figure projected by the Treasury at $81 billion in 2020-21 as “magical or mythical” (see today’s Courier-Mail). The Treasurer argues it is only general government debt we should worry about. The argument is that the debt owed by GOCs is serviced by the GOCs themselves rather than by taxpayers, and it is offset by revenue-generating assets that the borrowings have been used to purchase. In a perfect world, where the GOCs were well-functioning commercial businesses fully separated from government, this would be correct, but, as I told Steve Austin on his wireless show on 612 ABC Brisbane on Wednesday morning, this is not the case and we really do need to be concerned about the total debt.
Total government debt is not “magical or mythical”, and we do need to keep an eye on it, as there are blurred lines between the general government sector and the GOCs in Queensland. The current Queensland Government effectively treats its GOCs as extensions of the general government and not as independent entities. It has engaged in clever accounting practices such as shifting $3-4 billion of debt on to the GOCs to help reduce debt in the general government sector. This debt shift gave the electricity GOCs extra debt without extra assets to help pay the extra debt off. It was effectively an attempt to hide general government debt in the books of the GOCs. The ratings agencies (i.e. S&P and Moody’s) are aware of the blurred lines that exist worldwide between governments and their businesses, and hence they keep a close eye on the total debt-to-revenue ratio.
You can listen to my Wednesday morning interview with Steve Austin at this link (from around 38’30””):
Also, on Steve’s show, I gave listeners an update on the current level and forecasts of state debt, and Steve and I discussed the huge challenge of reducing debt in the current political environment, when a government cannot cut spending, raise tax rates or sell assets. Unless the economy starts going gangbusters, there is no way a Queensland Government can pay down debt without cutting spending, raising taxes or selling assets.
So the Opposition may be considered courageous for having committed, in its economic plan Getting Qld Back in Business, to targeting the fiscal balance, rather than the less strict operating balance, which only includes recurrent revenues and expenses, not capital spending. The Together union, which represents public servants, argues in a media release published yesterday that the Opposition’s plan would involve significant expenditure cuts:
Certainly, if the Opposition has ruled out asset sales and tax increases, then given current economic forecasts they would need to massively cut spending if they were to achieve at least a fiscal balance next financial year. But I suspect that, if the Opposition wins the election, the incoming government would specify a very gradual return to fiscal balance, avoiding the large spending cuts that did so much political damage to the Newman Government.
Also released yesterday was the 2016-17 Report on State Finances, which revealed general government debt at the end of 2016-17 at $33.3 billion was slightly lower (by around $677 million) than it was expected to be a few weeks earlier when the budget was published on 13 June. Before the end of financial year, the Queensland Treasury engaged in some clever cash management to bring about this reduction in borrowing. The reduction in borrowing was not due to any improvement in the underlying budget situation. Indeed, the net operating surplus was more-or-less constant and the fiscal surplus for 2016-17 actually turned out to be lower than expected (see chart below).
What appears to have happened is the Government has received more money in advance from its government-owned corporations such as Energy Queensland than it was previously expecting. It has again taken advantage of the blurred lines between government agencies and the GOCs I mentioned to Steve Austin on Wednesday morning. The advances received item in the general government balance sheet turned out to be $1.831 billion in 2016-17 compared with the $1.328 billion expected 2-3 weeks earlier at budget time. I expect this increase of $503 million explains a large part of the lower state general government debt amount reported as at 30 June. So it appears the government has engineered this slightly lower debt figure by extracting more money out of its electricity GOCs. This obviously isn’t sustainable, and it means less can be extracted in future years, so I still expect government debt to remain on its previous upward trajectory to $41 billion for the general government and $81 billion in total by 2020-21.
The Report on State Finances also confirmed the large revenue surprise and high expenses growth in 2016-17. My old friend and former Treasury colleague Joe Branigan, now a Senior Research Fellow at SMART and an economic consultant, texted me the following insightful commentary on the Report:
Employee expenses growth is running at 6%, which is plainly not sustainable. The general government books look good thanks to a massive $5.4 billion increase in revenue, due to above-average growth in Commonwealth Grants and royalties, and that’s not sustainable either. Eventually, governments run out of accounting tricks or luck or both…The non-financial public sector debt is plainly too high to withstand a sustained economic downturn.
Joe’s last point is consistent with my comments in the Courier-Mail on Tuesday. Let’s hope the budget and debt debate continues into week 2!