As I’ve been forecasting for months now, the Queensland state budget is in much better shape than the state Treasury forecast back in December. Higher royalties, stamp duty, and other taxes helped deliver a $1.9 billion operating surplus in 2021-22 and a much lower deficit of around $1 billion in 2022-23 than forecast last December (see chart 1 comparing current budget estimates in magenta with estimates from the December Mid Year Fiscal and Economic Review, the MYFER, in blue). Total 2021-22 royalty revenue was a stunning $9.1 billion and royalties from coal were $7.3 billion, compared with the estimates made back in December of $6.3 billion and $4.6 billion, respectively.
The better revenue outlook is due to both the war in Ukraine driving up commodity prices to incredibly high and unsustainable levels, and a better performing economy overall. As I told Kate O’Toole on 612 ABC Brisbane this morning (from 43:30), it’s surprising that even with all the revenue revisions Treasurer Cameron Dick still needs to add new marginal royalty rates on coal so the state government can share in future windfall profits at high coal prices (i.e. a 20% rate from A$175-225/tonne, 30% from A$225-300, and 40% on A$300/tonne and above). This was a much bigger change to royalty rates than I expected, with much higher marginal royalty rates applying at lower value thresholds than I expected.
While it’s legitimate that the state government should seek the best outcome for taxpayers regarding the use of the mineral resources we own, when I saw the revised royalty rates I became more sympathetic to QRC supremo Ian Macfarlane’s warnings about what this might mean for future investment in the sector. Of course, QRC is going to push back on the royalty rate increase and may be exaggerating the economic impact, but the government’s royalty rate increase is quite extraordinary and doesn’t reflect well on the stability of our policy settings here in Queensland. I’ll aim to come back to this issue in a future post.
As I suggested to Kate on Brisbane ABC radio, rather that changing coal royalty rates, perhaps the state government could manage its expenses better and think about whether it really needs to be spending so much money getting ready for the Olympics. Couldn’t we do it much more cost-effectively and save a few billion there, so we don’t jeopardise the outlook of such an important industry for our state budget and regional economies?
While the net operating budget (i.e. revenue less operating expenses) is projected to go into surplus in 2024-25, there are still overall deficits in terms of the fiscal balance (i.e. revenue less operating and capital expenses) in the range of $4-6 billion annually over the forward estimates to 2025-26 (Chart 2). The fiscal deficits are substantially higher in 2023-24 and 2024-25 than forecast back in December, largely due to higher capital expenditures.
So, despite the substantial upward revisions in revenue, government debt still increases over the forward estimates. The debt of the general government (i.e. the departments of state) is projected to increase to $87 billion in 2025-26, while the total debt of the state government, comprising the general government and the government-owned corporations (collectively referred to inelegantly as the non-financial public sector), will increase to nearly $129 billion (Chart 3).
With growing debt and rising interest rates, the government’s interest bill is rising and this is likely to significantly constrain budget options in future years. By 2025-26, the general government sector will be paying nearly $2.9 billion per year in interest expenses, up from $1.6 billion in 2021-22. This will increase further as the government continues to run fiscal deficits, increasing the debt, and as maturing debt needs to be refinanced at higher interest rates in the future. Cameron Dick has been a lucky Treasurer, but his successors may not be.
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Hi Gene, I agree that the new royalty rates are way out off the mark and more like what would be imposed by a socialist South American country that is not concerned about the appearance of sovereign risk on investment. One must understand that these rates are applied to revenue less only some minor offsets not profit. So with inflation hitting costs the profit line is very much lower. The comment about only hurting foreign shareholders is out of line as well. My superfund has been significantly hit after the drop in share price and expected reduction in dividends as one QLD small miner is highly represented. Many other Australians will be effected by the profit hit on BHP to their superfund. I was expecting say 20% on over $200/t and 25% over $300 which would have been acceptable and reasonable. This change will also hit federal tax income as taxable profit drops considerably and company tax take is reduced. I think a high court challenge might be in order.
Good points Russell, esp. re. super fund impact. Thanks for the comment.
Thanks Gene. My super fund has Terracom which has risen from almost nothing with enormous debt to paying off the debt being very profitable. There was a real risk of it going broke. Most shareholders would be local and we were about to reap the benefits of taking a real risk in investment only to have the QLD government steal a lot of this. Governments and others sit back and ignore the risk in investments and only focus on the rewards. Stanmore just made a very big investment and took on a large debt load and capital raising to buy the BMC coking coal mines only to have that investment decision now look shaky. NSW coal miners will receive new investment over QLD miners I would think. Whitehaven Coal is looking very good to me now.