On Tuesday night I was on a panel discussing the Queensland state budget at an Australian Taxpayers’ Alliance (ATA) event held at the Paddington Tavern. One of the points discussed was the spin regarding the biggest-ever surplus for Queensland of $12.3 billion in 2022-23, even though the Net Operating Balance, the budget balance favoured by the government and reported by the media, swings into a $2.2 billion deficit next financial year, which is the financial year the 2023-24 state budget is actually for (Figure 1). And, after that, there are only small surpluses projected over 2024-25 to 2026-27 for the Net Operating Balance. Furthermore, there is another measure of the budget balance, the Fiscal Balance, which tells a different story, of substantial budget deficits over the budget forward estimates.
At the event, among other issues, we considered which is the most appropriate measure of the budget balance, the net operating balance or the fiscal balance?
The Net Operating Balance is the difference between revenue and expenses from transactions, that is operating expenses including wages and salaries and purchases of other goods and services. It also includes depreciation to account for the consumption of capital goods (e.g. from wear and tear) in the current period.
In contrast, the Fiscal Balance includes all current period capital expenditures in its calculation, not just depreciation. It is calculated as the Net Operating Balance less Net Acquisition of Non-financial Assets (i.e. which is more-or-less total capital spending less depreciation). Because the Net Acquistion of Non-financial Assets is typically positive, the Fiscal Balance is generally lower than the Net Operating Balance. For example, in 2022-23, Queensland’s Net Operating Balance is expected to be $12.3 billion, but the Fiscal Balance is expected to be $6.8 billion, because net capital expenditures are expected to be around $5.5 billion.
At the event, I said that from the perspective of judging the state government’s impact on aggregate demand and potentially inflation, as well as understanding the government’s need to borrow and accumulate debt, the Fiscal Balance is the most appropriate budget balance measure. ATA Chief Economist John Humphreys also expressed his preference for the Fiscal Balance over the Net Operating Balance, given it’s the closest to the underlying cash balance which is the preferred measure of the federal government’s budget balance.
Over the budget year and forward estimates, from 2023-24 to 2026-27, fiscal deficits (i.e. Fiscal Balance deficits) are expected to total $25 billion. Incidentally, over this period, general government gross debt will increase by $40 billion and net debt will increase by $41 billion. Debt increases by more than these fiscal deficits because the Queensland Government is borrowing so it can make equity contributions to government-owned businesses building renewable energy assets under the Queensland Energy and Jobs Plan. These equity injections are not considered transactions in goods or services and hence do not affect either of the budget balances. But they do create an additional need to borrow and hence the total increase in debt exceeds the total fiscal deficits.
All this is not to say that the Net Operating Balance is an unimportant measure. It tells us whether the government is doing the bare minimum for fiscal sustainability. The Golden Rule of Public Finance is not to borrow to cover operating expenses. That is, a government should aim to at least balance or run a Net Operating surplus. This should be interpreted as a rule applicable over the business cycle rather than in any single year, so governments don’t end up running perverse fiscal policies, cutting operating expenses when they are confronted with declining revenues in a recession, for example.
As long as it is running a Net Operating surplus or balaning the operating budget, a government can get away with a fiscal deficit to an extent. After all, the economy and government revenues expand over time. Depending on average interest rates and average growth rates, there is a fiscal deficit as a percentage of Gross State Product (GSP) that is compatible with a stable debt-to-GSP ratio. I’m referrring to GSP rather than GDP here because I’m talking about the state government, but the same principle applies for the federal government. Intuitively, it can make sense for governments to “borrow to build”, so to speak, borrowing to invest in capital expenditures that will benefit the community for years to come, rather than requiring them to be financed out of current revenues and compromising the delivery of government services in the current period.
Whether a particular series of fiscal deficits are acceptable or not depends partly on your view on the ROI from current government capital expenditures. If they don’t help expand the economy and the government’s revenue raising capacity, they may not be good investments. They won’t be helping to pay for themselves over time. One of my fellow panellists on Tuesday, David Goodwin, argued vigorously that much of current government capital spending, on Olympics infrastructure and renewable energy, was a waste of money and would not deliver an ROI to Queensland. This issue is beyond the scope of this post, but I’ll aim to return to it in a future post.
To summarise, from the point of view of fiscal sustainability, we need to consider the Fiscal Balance, which for Queensland is pointing to rapidly increasing gross and net debt levels. The Government’s preferred debt measure, general government net debt, is projected to surge from around $6 billion currently to $47 billion by mid-2027, an 8X increase. Gross debt will increase to $95 billion for the general government and to $147 billion for the Non-financial Public Sector, which is the general government and government-owned trading enterprises combined.
You can watch a replay of the ATA Queensland budget panel discussion and Q&A on Facebook via the link below.
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