Great news about Abbot Point expansion given need for royalties and boost to mining & Qld economy

Posted on March 12, 2015 by Gene Tunny

I was very pleased to see the announcement about the Abbot Point expansion going ahead yesterday, given the boost it will provide to Queensland’s ailing mining industry (see chart below), royalties revenue for the Government, and the Queensland economy. North Queensland, in particular, has been struggling in recent years, with the Townsville unemployment rate at 8.6%, for example. Hopefully many NQ residents will get jobs on the Abbot Point expansion project.

mining_employment_Nov14

The likely boost to royalties will be very welcome in the Queensland Treasury. As I wrote in a post on Monday, our Government is much more reliant on volatile royalties revenue than ever before. The Government currently receives around $2 billion per year in coal royalties. Given the enormous size of the Galilee basin projects, the potential boost to royalties per annum must be in the order of many hundreds of millions of dollars. Media reports have suggested the Carmichael mine alone could produce 60 million tonnes of coal per year, which my back-of-the-envelope calculations suggest could earn the Government in the vicinity of $200-400 million per annum in royalties, depending on future coal prices. (For the royalties formula see the Office of State Revenue’s website.)

Of course, these benefits won’t come overnight. For example, construction work on the Carmichael project won’t start until later this year, and coal production won’t occur until 2017, according to a press release from Downer.

Posted in Mining | Tagged , , , , , , , | 7 Comments

Qld Govt faces big budgetary challenges from unreliable revenues and soaring health costs

Posted on March 10, 2015 by Gene Tunny

In yesterday’s post I noted that the Queensland Government has become increasingly reliant on volatile royalties revenue, and that its major revenue sources of Commonwealth grants and taxation revenue have been growing significantly slower than expenses in recent years. I discussed how slower growth in grants revenue is related to slower GST revenue growth, and reinforces the case for broadening the GST to include currently exempt health, education and fresh food items. Regarding taxation revenue, I referred to a drop in stamp duty revenue from property transactions (referred to as transfer duty in the Budget papers). The taxation revenue data (see chart below) show transfer duty is a rather volatile revenue item, and it is regrettable that the State Government is so reliant on such volatile revenue items as transfer duty and royalties. (Also, they are highly inefficient ways to raise revenue.)

Qld_Govt_taxes

The volatility and unreliability of a substantial fraction of Queensland Government revenue is a major concern given the large spending pressures facing the Government, particularly in the health portfolio, in which expenses are growing at a relatively high rate of around 6% per year. And the situation could be even worse if the Commonwealth Government’s proposed policy on future hospital funding is eventually implemented. In an excellent article analysing the Intergenerational Report (IGR) last week, Peter Martin noted that according to the Government’s proposed policy modelled in the IGR:

Beyond 2017-18 Commonwealth grants to states for hospitals will increase only in line with the population and the consumer price index. But the cost of running hospitals is continuing to climb. Not meeting that cost is unrealistic (unless the states meet it by doing something such as lifting the goods and services tax) but it holds back the projected deficit.

Given all the budgetary risks that the Queensland Government is facing, I would encourage the Queensland Treasury to undertake its own IGR modelling exercise for the State Budget this year, and to release the report with the Budget papers to inform public discussion and debate over policy options.

Posted in Budget, Health, Tax | Tagged , , , , , , , , | 2 Comments

Ok to investigate options for Executive Building, although keeping it unlikely to be sensible

Posted on March 10, 2015 by Gene Tunny

Although I doubt it makes sense to keep the Queensland Government Executive Building, I have no problem with the Government investigating options for the future of the building, which was to be demolished to make way for the new casino. Given the new casino is still expected to go ahead, although perhaps its footprint won’t be quite as massive, I’m unclear exactly how the Government investigating options for the Executive Building will “erode business confidence”, as reported in the Courier-Mail this morning. This is a pretty minor issue compared with bigger issues such as environmental regulation that business groups will need to engage with the new Government on.

The Government will have to undertake a cost-benefit analysis (taking into account all future costs and benefits) of whether it makes sense to keep the Executive Building and not to take up the equivalent amount of space in 1 William St that it has committed to leasing, which it would then need to sub-let to the private sector. Obviously, the Government would then forgo whatever compensation it would get from the casino developer for giving up the Executive Building, and this would need to be considered.

Given 1 William St’s location away from the Golden Triangle centred on Eagle St, the portion of the building’s office space that would now not be needed for former Executive Building staff may be relatively unattractive to private sector businesses, particularly given CBD vacancy rates are high and may remain so for some time (see Brisbane CBD vacancy rate hits a new high). So the Government might have trouble finding private sector tenants for all of the vacant space and could end up with an even larger surplus of relatively poorly-utilised office space. 1 William St would still be housing other public servants and they might then expand their work areas to take up space that would have gone to staff re-locating from the Executive Building.

Considering the above factors, I suspect that keeping the Executive Building probably isn’t a sensible idea, but at the same time I have no objection to the Government exploring options.

Posted in Queensland Government | Tagged , , , | 2 Comments

Qld Government increasingly dependent on volatile royalties revenue

Posted on March 9, 2015 by Gene Tunny

The current resources sector slowdown is resulting in hard times for many businesses and workers, and it will make the new Queensland Government’s budget management task a lot harder, especially if projected royalties revenues don’t eventuate. Over the last ten years, the Queensland Government has become much more dependent on royalties paid by resources companies (see chart below), and that dependence is projected to increase.

Royalties_chart1The increase in the relative importance of royalties is due mainly to a surge in royalties, but is also partly due to a slowdown in the growth of Queensland’s two major revenue sources: grants revenue and taxation revenue (which excludes royalties), which have not grown as fast as the expenses of the Queensland Government (see chart below). This reflects factors such as slower economic growth since the financial crisis, meaning, for example, slower growth in stamp duty revenue due to a less buoyant property market, and a slowdown in GST revenue (returned to Queensland as Commonwealth grants). Also significant is that a growing proportion of consumption is on GST-exempt items such as health and education.

Royalties_chart2

If it weren’t for royalties revenues, Queensland’s State Budget would likely remain in an operating deficit over the forward estimates (see chart below), based on Treasury projections provided in the previous Government’s 2014-15 Mid Year Fiscal and Economic Review. (Note that, according to their election costings, the new Government’s election commitments don’t really change the Budget forward estimates a great deal.)

Royalties_chart3

The Queensland Government’s increasing reliance on royalties, which can prove volatile, must be exercising the minds of Queensland Treasury budget officials. The increased volatility of revenues makes it harder to plan, and makes it more likely that Treasury forecasts will be embarrassingly wrong. Officials will have to be more strident in their briefings to the Cabinet Budget Review Committee when arguing against new expenditures, because revenue projections are less reliable, and the Government may not end up with the money it thinks it’s getting. The Treasury should also be briefing the Government on the merits of broadening or increasing the rate of the GST, given the slowdown of the growth of taxation and grants revenue.

Posted in Budget, Mining | Tagged , , , , , , | 2 Comments

Intergenerational Report shows the problem, but offers no solutions

Posted on March 5, 2015 by Gene Tunny

The Intergenerational Report is a useful document in that it reinforces the need for tough fiscal measures to avoid ever-increasing budget deficits and debt – a need that has been apparent for some time – but alas the IGR offers no solutions to Australia’s fiscal challenge. It will certainly help the Government make the case for tough budget measures, but the Government will need to find a new set of savings that the public considers fair, to use the word that has been prominent in political debates recently, if it is to have any hope of getting changes through the Senate. It’s unclear whether that set of savings exist, as any policies that significantly improve the long-term budget position will almost certainly involve cutting payments or tax concessions to particular groups in the community – groups that will then argue they are being treated unfairly.

Nonetheless, the Government will need to find (in its judgment) the least unfair set of budgetary savings to repair the budget, and a good place to start would be the Grattan Institute’s excellent report on budget pressures on Australian Governments, which I commented on in a post in May last year. The Government appears to have failed in its higher education reforms, which would have led to substantial savings, so perhaps now it’s time to turn to other measures suggested by Grattan, such as cutting back superannuation tax concessions and having a tougher assets test for the age pension (e.g. possibly by including the value of the family home above a certain threshold). Also the Government should review rules around negative gearing and capital gains taxation and determine if any tightening would be worthwhile. Negative gearing is fine as a principle, but arguably it, in combination with the current concessional treatment of capital gains, is diverting too many investment dollars into property. So tightening the rules could save taxpayers’ money and improve the allocation of capital in the economy.

The IGR gives the Government some useful facts with which to illustrate the budgetary challenge Australia faces. It is now up to the Government to identify large savings and convince cross-bench Senators of their merits.  The IGR has set the scene, but now the Government must really perform.

Posted in Budget | Tagged , , , , , , , , , | 6 Comments

Qld economy hit by declines in both private and public sector capital spending

Posted on March 4, 2015 by Gene Tunny

It was unsurprising that the National Accounts data released by the ABS today showed the Australian economy continuing to grow at a sub-trend rate (2.5% through-the-year), and that Queensland was enduring a large shock from a decline in resources sector capital spending (see Pete Faulkner’s post GDP +0.5%/+2.5% broadly in line with expectations. QLD falls again). However, it was a bit surprising that a drop in public sector capital/investment spending, particularly by the State and Local General Government sector, was also a big driver of the 1% drop in State Final Demand recorded in the December quarter (see chart below, noting the first five columns add up to the sixth, and represent percentage point contributions to the quarterly change in State Final Demand of -1%).

SFD_contributions_Dec14

Much of State and Local General Government investment spending would comprise roads and other civil infrastructure built by Transport and Main Roads and local councils. Such spending has obviously been in decline, and it will be interesting to see what happens in future quarters, given there will now be no boost from funds that would have come from leasing out assets.

Finally, Queensland Treasury has produced an excellent information brief on the latest State Final Demand data, setting out contributions to the decline in State Final Demand in more detail than I have done. The brief also makes it clear that the actual performance of the Queensland economy over December quarter 2014 may not have been as bad as the State Final Demand numbers suggest, because they don’t account for exports (or imports), and there is data to suggest Queensland’s export performance over 2014 improved markedly. This would be as expected, as past resources sector investments will have translated into increased production and exports. That said, in my view, it seems reasonable to conclude that December quarter was still a poor one for the Queensland economy, particularly when one considers recent increases in unemployment.

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Apartment & townhouse approvals double in January – catch up or over-shoot in supply?

Posted on March 3, 2015 by Gene Tunny

Building approvals Jan 15

The massive surge in apartment and townhouse approvals in January reported by the ABS today (chart above) is welcome news for the Queensland building industry and people looking to buy or rent an apartment in inner city Brisbane, where much of the development is likely to occur. At the same time, some developers may be concerned about the number of apartment developments there will be competing for buyers, and the implications for the prices of apartments. I expect the supply boost will severely constrain the growth of apartment prices, but I note that consultancy firm Urbis and other commentators last month were more optimistic, arguing the expected supply boost was catch up growth and prices would continue to increase (see New hotspot for Brisbane apartment development). Pete Faulkner has a nice summary of today’s data in his post Queensland leads a building approvals surge:

The scale of volatility in the seasonally adjusted data can be seen in relief when we consider the Queensland data. Here we see an unbelievable 47.8% increase for the month and a 50.8% jump over the year. These exceptional numbers are all down to unit approvals. In Queensland we saw an extra 1564 unit approvals (up 103.2% m/m!); these approvals alone more than account for all the increase seen nationally over the month. House approvals were up just 63 (+3.3% m/m).

Based on Urbis’s research referred to in the article linked to above, it’s possible that we could see a continuation of high rates of approvals for apartments and townhouses in coming months. This is great news, but I doubt it will do much to offset the large negative shock coming from the downturn in the resources sector that I commented on in a post last week. I expect the Queensland economy will still struggle through 2015 with weak growth in output and employment.

Posted in Housing | Tagged , , , , , , , , | 6 Comments

Upcoming event on Steel on Steel – inside story of privatisation of QR’s freight arm

Posted on March 3, 2015 by Gene Tunny

In a post earlier this year, I discussed Stephen Baines’s excellent insider’s account of the privatisation of Queensland Rail’s freight arm, Steel on Steel. Not coincidentally, the Economic Society of Australia’s Queensland branch, of which I’m Deputy Secretary, has arranged for Stephen (photo below) to give a presentation on his new book at a lunchtime seminar on Wednesday 18 March. The event is to be held at Morgans on Level 29 of the Riverside Centre, Eagle St, Brisbane. You can find further details at ESA Qld’s website: Sandwich lunch featuring Stephen Baines. If you would like to do some pre-reading for the seminar, I would encourage you to purchase a copy of Steel on Steel from UQ Press.

Stephen-250x300Stephen Baines – Chief Innovation Officer & Executive Advisor to the Chairman of Aurizon

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MOOCs a game changer for universities – UQ lecture by Roly Sussex OAM

Posted on March 1, 2015 by Gene Tunny

The_Great_Court_at_UQ

Our very own University of Queensland is a world leader in MOOCs. (Image attribution: By James Dover (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)%5D, via Wikimedia Commons)

Last Thursday night, at the University of Queensland’s Customs House in Brisbane, Emeritus Professor Roly Sussex OAM gave a terrific lecture on a recent “game changer” for universities: the rise of Massive Open Online Courses, abbreviated to MOOCs. What makes MOOCs special is that anyone around the world can enroll in a MOOC – so long as they can access the internet and download the lectures and course materials – and they are free. The promotional webpage for the lecture provides a nice summary of the importance of MOOCs:

In 2013 the University of Queensland joined edX, the international consortium led by Harvard and MIT whose goal is to create and deliver learning through MOOCs, or Massive Open Online Courses. UQx, the University of Queensland’s title for its MOOCs, was born. By the end of 2014 there were nearly a quarter of a million enrolments from more than 250 countries and regions in UQx courses. That is nearly five times the University’s current regular enrolment.

I was very impressed by the innovation and quality displayed in UQ’s MOOCs, particularly a recent MOOC that UQ has developed called Denial101x: Making Sense of Climate Science Denial. The video promoting the course is brilliantly produced and gives you a sense of the quality of course content for UQ MOOCs, which typically cost an estimated $50,000 to $100,000 to produce.

The economics of MOOCs are fascinating. The delivery of MOOCs appears to be coming at a significant cost to UQ, and it isn’t recovering the costs of delivery via course fees. So is the university just engaging in a philanthropic endeavour, spreading knowledge to people who previously wouldn’t have been able to access it around the world? In part, the university’s motivations may be philanthropic, but the business case for MOOCs depends on MOOCs exposing the university to potential international students, and those students eventually enrolling in real degrees on campus and paying tens of thousands of dollars in course fees. Time will tell whether this strategy is successful.

MOOCs may also contribute to more efficient and effective teaching at universities. Emeritus Professor Sussex suggested MOOCs may redefine the role of the campus. MOOCs reinforce the trend towards students watching lectures online. This provides flexibility and saves transport costs for students. It also means contact time with teachers can be spent on interpreting and exploring course content, as is done in tutorials, which will increasingly become more important than lectures. With students increasingly being responsible for reviewing course content prior to class (e.g. by course reading or watching a recorded lecture), students may no longer have to attend lectures on campus in the future. This would be consistent with the so-called flipped classroom model. This trend would reduce the need for large lecture theatres, and would free up space at our universities – space that comes at a high opportunity cost, given the prime real estate that, for example, both UQ and QUT occupy.

Posted in Education | Tagged , , , , , , , | 8 Comments

New Qld Government should allow plenty of time for thorough review of spending

Posted on February 27, 2015 by Gene Tunny

I noticed that former Olympian Kieren Perkins has cast doubt on Queensland’s ability to host an Olympic Games and has pointed to the Queensland Government’s lack of a clear strategy to pay down debt (see today’s Courier-Mail). While the Queensland Government could probably borrow the money to pay for Olympics-related infrastructure spending, I agree that would be undesirable from the perspective of paying down Queensland’s debt and eventually restoring our AAA credit rating.

Regarding the Government’s fiscal strategy, while it did produce a high-level strategy for repaying debt before the election, it didn’t present the firm measures required to generate the multi-billion dollar surpluses it will need. As I’ve commented previously, the new Government did ask the public to take a lot on faith, as the bulk of its proposed debt reduction was occurring beyond the forward estimates – i.e. beyond the years that can be properly considered to be budgeted for – from 2018-19 onwards (see my speech on the black hole election). Now the then Opposition is now the Government, it will have to formulate budget measures that will allow it to run the multi-billion dollar surpluses it will need from 2018-19 to repay debt according to its fiscal strategy.

Hence it may be desirable for the Premier to slightly postpone the Budget, usually presented in early June, if it means the Government can give fuller consideration to budget savings measures. A good place for the Government to look for budgetary savings would be the hundreds of millions of dollars that is currently provided annually as industry assistance, and I hope the Government has received a full briefing on the progress and findings of the QCA’s industry assistance review (see my post Government should wait for QCA report before committing to new industry assistance).

Finally, on the merits of hosting the Olympics in Brisbane in 2028, hosting the Olympics would probably fail a cost-benefit analysis even if the State had massively paid down debt by then, as the experiences of past Olympic host cities, most notably Montreal and arguably Sydney, have shown. Queensland’s current fiscal situation makes the case for not going ahead with the Games bid even more compelling.

Posted in Budget, Uncategorized | Tagged , , , , , , , | 4 Comments