Queensland State Election 2017: Week 2 review from Joe Branigan

I am again very grateful for Joe Branigan’s review of the previous week in the Queensland election. The views expressed in the guest post are Joe’s, and they should not necessarily be attributed to me. GT

Winner must target the fiscal balance, buy global and avoid mega-projects – Week 2 Queensland election highlights from Joe Branigan

There was Tim Nicholls hurtling down the Movie World rollercoaster at terminal velocity – coincidentally a speed soon to be seen on the M1 thanks to the political battle being fought from Logan to the NSW border. And there was the One Nation candidate cornered by a junior Channel 7 reporter and his quest for a stunning scoop. But the image of the week was surely Pauline and the Battler’s Bus broken down on the Bruce Highway barely out of Rocky.

Beneath the bluster and non-verbal communication stunts so vital to election campaigns in a place where life is long and concentration spans are short, there are a number of important policy issues that will affect whether or not the good times continue to roll on.

The first and most important is that we need to live within our means, and that means targeting the fiscal balance not the net operating balance. The difference between the two measures is that the fiscal balance includes net infrastructure investment but the net operating balance does not. It is a public finance accounting identity that if you have a fiscal deficit your debt is rising, even if you have a net operating surplus.

My colleague John Quiggin made this point last week*, although I think he overstated what that would mean for LNP spending policies, in part because he has assumed that the LNP’s M1 duplication policy (and therefore its cost) is the same as Labor’s when it is not: LNP’s $500 million 4-lane arterial versus Labor’s $2.5 billion 6-lane highway. Based on work I’ve previously done for the Queensland Government (with my SMART Infrastructure Facility hat on), my Saturday night ‘back of the envelope’ calculation for the LNP’s M1 duplication (based on the SEQ Council of Mayors specifications) is [36.5 km * $14.7 million per km =] $536.6 million. However, the per km cost might be lower in the post mining boom economy, as the cost of engineering, design and construction services have fallen relative to the ‘mining boom’ data set I used to produce a median cost of $14.7 million per km. Therefore, I don’t think the $500 million LNP estimate is unreasonable.

In any case (back to Quiggin’s point), a man is innocent until proven guilty, so let’s see what the LNP costings say (yes, released way too late).

Labor have convinced themselves that targeting a net operating surplus is ok and they have demonstrated that commitment by bequeathing to the LNP (if it wins government) what can only be described as a kale and quinoa sandwich of $11.5 billion in fiscal deficits in the General Government sector over the forward estimates (see chart below).


It will be a long road back, but better financial management is the first task of the next government because, without it, Queensland will be unable to effectively respond to natural disasters and adverse economic shocks without help (and therefore control) from the Federal Government. In simple terms, if you control your debt you control your destiny. If Labor scrapes back in, it should take a very serious look at its own fiscal principles and tighten them up in the interests of best-practice public financial management.

Given the lessons of the Newman Government, the LNP Opposition has promised not to make large cuts to public service employment to levels that might be considered by some (including me) more efficient, better for the Queensland economy and financially sustainable. A long road back indeed, but I suspect the modern democratic principle of real-time public support has been learned or perhaps burned into the political and policy minds at the LNP.

The two necessary conditions to slowly and gently stabilise the debt and eventually achieve fiscal balance are to: (i) keep overall annual spending growth below the long-run average annual growth in revenue (which is highly volatile and therefore impossible to predict year-on-year); and (ii) avoid committing to mega-infrastructure projects (think Cross River Rail), but rather commit to sensible incremental improvements in our roads, passenger rail, hospital and school networks that provide the most community benefit at the lowest cost.

This is not to say the infrastructure projects being proposed by all sides in this election campaign wouldn’t be popular and beneficial to those who would use them. Who wouldn’t like a 12-lane highway to the Gold Coast, a 4-lane minimum dual carriageway along the full length of the Bruce Highway, not to mention a world-class underground metro for Brisbane and an international airport at Airlie beach, but (unlike the unconstrained demands made by the RACQ, CCIQ and others this week), budgets are limited and projects must be prioritised based on greatest potential benefit.

On this, governments need good independent advice based on evidence. In my view, this required independence is not being provided by Building Queensland, which is conflicted and will need to be reformed. The LNP’s policy to set up advisory bodies (aka ‘Planning Commissions’) to recommend the most beneficial projects has merit so long as they are truly independent of the government and are sufficiently resourced to do the job.

Unlike the regulated electricity sector where Government Owned Corporations can confidently borrow billions to fund new capital investment knowing that they’ll get the money back via regulated electricity charges, Queensland roads (apart from the odd toll road) don’t generate any revenue for the government (rego revenue is not currently hypothecated to road investment). Therefore, roads, hospital and school infrastructure spending must be funded almost entirely from recurrent revenue with borrowings kept to a minimum so that interest payments are kept to a manageable level and General Government debt is stabilised.

An infrastructure investment budget that uses 80% from net operating surpluses and 20% from borrowings is generally considered to be appropriate when the debt in the General Government sector is sustainable. However, when the debt is unsustainable and/or increasing, a better target is to fund 100% of infrastructure spending from the operating budget so that debt can be reduced with fiscal surpluses. It is a mathematical certainty that fiscal deficits lead to higher debt and only fiscal surpluses can lead to lower debt.

We all need to live within our means. Targeting the fiscal balance over the economic cycle will stabilise the debt, ensure only the most beneficial spending and infrastructure investments proceed and put Queensland on a path to regaining its AAA credit rating. Buying global (not local) and avoiding mega-projects will make it a lot easier to eventually achieve fiscal balances, but that won’t happen until well into next decade.

Policy of the week

It has to be ‘Buy Local’. In my own region of Albany Creek there is plenty of surplus land in the Aldi carpark to set up our local coal-fired power station and car manufacturing plant. We can build the new trains at Bunnings up at Brendale (ok we’ll need an FTA with Brendale), and the Queensland Submarine Corporation can set up on that vacant lot beside the Albany Creek Cemetery and Crematorium.

Joe Branigan is a Senior Research Fellow at the SMART Infrastructure Facility UOW and an independent economist based in Brisbane.

* Joe is referring to John Quiggin’s widely reported analysis demonstrating that the LNP’s currently stated fiscal principles imply large cuts in government spending and public service jobs (e.g. see this Guardian article). Given the LNP have probably learned that large public service job cuts are politically toxic, they will no doubt have to moderate the very strict fiscal principles in their economic plan if they win government. GT

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