Qld Budget doesn’t tell the full story on government’s borrowing costs

State Treasurer Cameron Dick, who handed down the 2020-21 Queensland Budget earlier this week, has impressed me with his chutzpah, demonstrated, for example, by this audacious statement in his Budget speech (on p. 38):

Not only are our interest costs lower than the peak of 4.7% they reached in the 2013-14 financial year during the term of the Newman LNP Government, they are also more than offset by our interest income.

Criticising the Newman Government for having to pay a large interest bill on borrowings it largely inherited from the Bligh Government was a bold play to say the least. It also ignores the fact that interest rates that governments borrowed at were several percentage points higher back then.

The chart of general government borrowing costs to revenue presented in Budget Paper 2 (p. 68) conveniently starts the time series at 2013-14, at the peak. But it leaves out the large increase in the annual interest bill which occurred during the late-2000s, when the Bligh Government abandoned the state’s previous commitment to sound fiscal principles and went on a debt-funded spending spree, a story I told in my 2018 book Beautiful One Day, Broke the Next. So, in the chart below, I present the same chart as shown in the Budget with the time series extended back to the early 2000s. We should also consider how much higher interest expenses, which are approaching $2 billion annually by 2023-24, will be if interest rates rise in the future.

What about the second element of the Treasurer’s bold statement, that interest costs “are also more than offset by our interest income”? Here, interest income refers to the income the government receives on its investments (excluding earnings from government-owned corporations). Regarding the statement, I would say, sure, but so what? The state government has always received income from its investments which historically were made to match the state government’s defined benefit superannuation liability. That is part of the legacy of Queensland’s legendary former Under Treasurer Sir Leo Hielscher. Furthermore, Queensland Government interest income is now a lower percentage of revenue than it has been in the past (see the chart below), partly because the current Queensland Government has drawn down on the state’s investments to support its budget.

Note how the earlier years in the time series are more volatile than later years. That is because the interest income on assets managed by QIC is now guaranteed to be a certain rate by the Queensland Treasury Corporation which assumes the risk of investment earnings differing in any year from what it has promised to pay the general government sector. Here’s what the 2019-20 Queensland Treasury Corporation Annual Report says about this arrangement (on p. 30):

QTC also holds a portfolio of assets that were transferred by the State Government in 2008 (the Long-Term Assets). These assets are held to fund the long-term superannuation obligations of the State…

…In return for the transfer of assets, QTC issued the state government fixed rate notes with an interest rate currently at 6.5 per cent (2019: 6.5 per cent) on the book value of the notes.

Prior to 1 July 2018, that interest rate was set at 7%, but the rate was reduced to reflect slightly lower expected annual returns. This arrangement reduces the volatility of government revenue which is good for the Government in developing its budgets. I don’t necessarily have a problem with this arrangement, as there is some logic to it, but I’ll try to consider it in more detail in a future post.

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