Queensland Economy Watch

The Queensland Commission of Audit report released yesterday contains a solid analysis of the risks facing the budget, some of which are highly probable (e.g. a blowout in the cost of the Commonwealth Games), and some of which are remote. A risk that I see as remote, but which is obviously exercising minds in the Queensland Treasury Corporation, is the risk that another financial crisis means investors shun Queensland Government Bonds, as noted in the Commission of Audit report (p. 25):

In the current fragile and volatile financial market environment, government debt raising can become very difficult at reasonable rates and conditions without a AAA credit rating. Queensland’s large ongoing funding requirement continues to be challenging, and Queensland has experienced increasing difficulty in accessing funds from international capital markets…

…Queensland has a very large program of bond maturities over the period to 2016 relative to other large states, and therefore faces a sizeable task in ‘rolling over’ existing Government bonds, even before sourcing new funds.

The risk of funding drying up for Queensland is very remote, however. If State Governments have difficulty borrowing money, as they did during the 2008 financial crisis, the Commonwealth Government would no doubt again step in to guarantee State debt or, in the worst case, borrow on their behalf. And as noted at Loose Change last week, investors have actually shown a healthy demand for Queensland Government bonds recently:

Mug investors buy up unsustainable queensland debt

So while there is a risk here, it’s very remote, and the best rationale for bringing down our debt is to restore our AAA credit rating to reduce our borrowing costs, which are around 30-40 basis points higher than other States (see p. 24 of the Audit report).

I’m unimpressed by the Commission of Audit’s findings that have been reported this morning, prior to the formal launch of its report later today. The Brisbane Times reports Debt paid Labor’s bills, which isn’t a revelation and wasn’t covered up by the previous Government. Indeed, some of the evidence cited comes straight from the Mid-Year Economic Review released in January.

The Courier-Mail has a marginally more interesting story, reporting Queensland’s debt headed for $100b in six years. The previous Government had projected that its gross borrowings would reach $85 billion in 2014-15, so there may be something interesting driving the $100 billion projection, but we’ll need to see the full report when it’s released this morning. If the Commission of Audit can show that previous capital expenditure projections by Government departments (e.g. Transport and Main Roads) or Government-owned corporations (e.g. ENERGEX) were under-done, this may be a cause for concern. Otherwise, it’s just a hypothetical number based on assumptions about what the previous Government might have done beyond 2014-15, which is now a pretty meaningless exercise.