Pets, Airbnb and Management Rights: Strata policy challenges for the incoming Queensland Government

I am grateful for another guest post, this time from Dr Stephen Thornton of BG Economics. Views expressed are Stephen’s, and should not necessarily be attributed to me. GT

Pets, Airbnb and Management Rights: Strata policy challenges for the incoming Queensland Government

by Dr Stephen Thornton

The apartment construction boom in Queensland in the last few years has been astonishing and unprecedented. The number of strata lots is now quickly approaching 500,000, mostly apartments and townhouses (465K, October 2017). By 2020 around one million people in the state will call them home.

A strata review is being finalised by the QUT Commercial and Property Law Research Centre as part of a wider Queensland property law review commissioned by the former Newman government, with a number of recommendations recently made. Some of these recommendations go to procedural matters like the calling of AGMs, electronic communications and the like, while others are around by-laws and, importantly, scheme termination.

Given jobs and health budget savings are always high priorities, the incoming government should give serious consideration to one of the Centre’s recommendations around the keeping of pets. The recommendation would make it much less likely that pets would be banned in strata complexes, as it would limit the prohibition of pets to new buildings where the developer sets it as a by-law or if a body corporate adopts it by way of a resolution without dissent.

In my submission to the review (in which I argued that giving developers and bodies corporate the power to adopt ‘no pet by-laws’ is contrary to Queensland’s economic interests), I calculated that allowing pets in strata properties is likely to result in 1,000 new jobs in the longer term in Queensland’s $1B – $2B pet industry (currently estimated at 10,000+ jobs). Importantly, these new jobs would be in both high-skilled employment areas (e.g. vets, pathologists, radiologists) and lower skilled employment areas (e.g. retail stores, pet grooming, dog walking), and would be right across the state including high youth unemployment places like Townsville and Cairns.

In more recent work for the Mars Keep Australia Pet Friendly campaign, I have estimated the recurrent public healthcare savings due to pets for the Queensland budget to be $172 million annually (total Qld/federal public saving of $435M; total all state/federal public saving of $2B). More pets in strata properties would increase these savings.

However, there are a number of major issues not covered by the Law Centre which were outside the scope of the review but are important in terms of the cost of living for strata owners. I’ll briefly discuss two that government might turn its mind to in 2018: ‘management rights’ and peer-to-peer short-term accommodation.

Management Rights

Simply put, management rights are the contractual rights to manage medium to large apartment complexes and to provide exclusive onsite letting and ancillary services. These are sold by the developer to caretaking companies (some as large as JLL), often for millions of dollars, with a maximum 25-year contract locked in for bodies corporate from the get-go. The MRs are periodically ‘topped up’ to the original maximum contract term at AGMs by uninformed lot owners as the contract runs down, and they are on-sold every three to five years via industry brokers.

The fixed ‘salary’ for caretaking and management duties, often over $300,000 in the large strata complexes (with mandatory annual CPI increases), typically comprises 20% – 30% of lot owners’ strata levies, making it the single largest expense item by bodies corporate.

There is little doubt that larger complexes require onsite management and the current model has many positive aspects. Still, after a few decades in operation, a new comprehensive review is required to bring about much needed reform in this space. An article by a Gold Coast law firm Is it Time to Change the Management Rights Model? makes some interesting observations and suggestions.

Peer-to-Peer Short-Term Accommodation

Most people have heard of Airbnb. In a similar way to how Uber disrupted the traditional taxi industry, it and similar companies allow potential tenants to directly deal with dwelling owners by cutting out the ‘middleman’, which in strata is the local real estate agent or onsite resident manager (see above). State governments have struggled over the appropriate public policy response to ride-sharing disruptors like Uber given the investments in taxi plates. This is also an issue for owners of management rights in Queensland, who have similarly invested in an asset at risk from technological disruption and regulatory change.

NSW is currently finalising a review of Short-term Holiday Letting with their July 2017 options paper outlining three broad policy response options to amend strata legislation, being:

  • By-laws to manage visitor behaviour
  • By-laws to receive compensation for adverse effects
  • By-laws to prohibit short-term holiday letting (STHL)

(see pp.15-17 for more detail & p.27 for a chart summary)

The benefits of providing a legislative green light to strata owners in this space, however, must also be appreciated. Deloitte Access Economics this year released a report Economic effects of Airbnb in Australia: Queensland in which they estimated that ‘Airbnb guest expenditure is associated with $217.4 million in value add to the Queensland economy, and supports 2,115 FTE jobs across the state’ (see p.22).

Strata living is no longer simply a stepping stone to owning a house in the suburbs. Given Queensland’s increasing urbanisation, smaller families and ageing population, we can expect a greater proportion of the population living in this type of housing in the future. In this respect, the Body Corporate and Community Management Act 1997 should increasingly be viewed by government as an important piece of legislation to be regularly reviewed to keep pace with changing technologies, demographics and public expectations.

Dr. Stephen Thornton is a social economist and principal of BG Economics. Disclosure: Stephen owns a strata investment property in Brisbane.

Woolworths_site_development

Proposed mixed-use development on the old Woolworths site in central Toowong. Includes 533 apartments (594 resident carparks), 1,728m2 gross retail area (73 retail carparks). Source: BCC planning & development online portal, accessed 11.11.2017

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Qld Greens policies would increase State Gov’t spending by $8-9BN p.a.

Queensland’s Deputy Premier Jackie Trad is under threat of losing her seat of South Brisbane to the Greens candidate Amy MacMahon, who is benefiting politically from a range of utopian policies disconnected from economic reality (see Friday’s Courier-Mail on the political situation in South Brisbane). I first heard about the Greens’ proposed $1 public transport fares policy while waiting in the green room of ABC Studios at the same time Ms MacMahon was on air discussing the policy with Steve Austin, who would interview me later that morning. Obviously this would be a very costly policy and one without economic merit, especially given the large subsidies already provided to public transport by the Queensland Government. But the $1 public transport fares policy would represent just a fraction of the total cost that Greens policies would impose on Queensland taxpayers.

Based on my interpretation of the policies currently presented, Greens policies could increase total annual Queensland Government expenditure by an incredible $8-9 billion or 13-14% (see chart below). Of course, this is unlikely to ever happen, given the Greens couldn’t possibly win government in their own right, but it is interesting to consider what a Greens budget would look like.

Qld_Greens_spending

The most egregious Greens policy is the Queensland Housing Trust:

A new Queensland Housing Trust will be established to finance the construction of one million homes over the next thirty years. In the first ten years, the Queensland Housing Trust would invest $60 billion to finance the construction of 200,000 affordable homes. The revenue raised from the rent on these 200,000 homes would then be invested into the construction of 40,000 homes each year for the next twenty years.

This policy suggests a Greens Queensland Government would increase the stock of public housing in Queensland by over 300% in ten years. It would mean dwelling construction in Queensland would have to increase by over 40% per annum, with massive implications for the demand-supply balance in the building industry and likely resulting in construction cost spikes. The Greens’ policy would massively increase the supply of rental properties which have already been boosted by the apartment building boom. It would suppress market rents and increase vacancy rates for properties. Unsurprisingly, the Property Council and REIQ are highly critical of the proposed Queensland Housing Trust (see today’s Sunday Mail article Greens’ social housing plan slammed).

Another large part of the increased spending that would result under Greens policies is due to the so-called Queensland Public Infrastructure Bank. This would not really be a bank, but a fund that would invest in non-commercial infrastructure. The Greens’ media release on Friday noted:

Under the Greens the State government will establish a Queensland Public Infrastructure Bank to invest $10 billion in public infrastructure over five years.

Queensland Greens lead spokesperson and candidate for South Brisbane Amy MacMahon said:

“Queensland is facing a critical shortage of public infrastructure, so the Greens will create a $10 billion Public Infrastructure Bank funded primarily by making sure mining corporations and property developers pay their fair share.

“The Queensland Public Infrastructure Bank will invest in the schools, hospitals, green space and public transport our State desperately needs…”

The Greens claim they would pay for their additional spending through “a series of major revenue raising measures which target the billionaires and big corporations”, particularly miners and property developers (see https://greens.org.au/qld/powerpeople). But the Commonwealth controls income taxes, so it is unclear exactly how the Greens would raise the huge amount of additional revenue required (noting the rent from the new social housing properties would only provide a very small fraction of the additional revenue required). The Greens could only increase mining royalty rates so far before higher royalty payments had a deleterious effect on the industry. If sufficient revenue could not be raised from the proposed sources, a hypothetical Greens Government would have to sharply increase taxes and charges on all Queensland households and businesses, or we would see total Queensland Government debt grow to over $100 billion.

Note that, in the chart above, I have assumed all the new Greens capital expenditure would occur in the general government sector, based on the descriptions of the type of non-commercial infrastructure the Greens would fund. While the Greens would deliver its housing policy via a Queensland Housing Trust, this would probably be part of the general government sector because it would not earn a commercial rate of return on its investments. Regardless of whether the new Greens infrastructure spending is classified as occurring in the general government or public non-financial corporations sectors, it would still represent a massive increase in total government capital spending (see chart below), and one which would very likely lead to crowding out, skills shortages and sharp cost increases in construction projects across Queensland.

Greens_capital

I should note that I find some of the Greens’ proposed policies attractive, such as building a green bridge from Toowong to West End and investing in cycling infrastructure, but we should always be mindful of budget constraints, and any major expenditure proposals should be subject to a cost-benefit analysis. The Greens have presented a utopian policy platform that can only be paid for by much higher taxes and charges on all Queenslanders (and not just on billionaires and big corporations). Otherwise it would result in total Queensland Government debt rising to $100 billion or more. The Greens’ utopian policies warrant much greater scrutiny from commentators and the electorate.

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Queensland State Election 2017: Week 2 review from Joe Branigan

I am again very grateful for Joe Branigan’s review of the previous week in the Queensland election. The views expressed in the guest post are Joe’s, and they should not necessarily be attributed to me. GT

Winner must target the fiscal balance, buy global and avoid mega-projects – Week 2 Queensland election highlights from Joe Branigan

There was Tim Nicholls hurtling down the Movie World rollercoaster at terminal velocity – coincidentally a speed soon to be seen on the M1 thanks to the political battle being fought from Logan to the NSW border. And there was the One Nation candidate cornered by a junior Channel 7 reporter and his quest for a stunning scoop. But the image of the week was surely Pauline and the Battler’s Bus broken down on the Bruce Highway barely out of Rocky.

Beneath the bluster and non-verbal communication stunts so vital to election campaigns in a place where life is long and concentration spans are short, there are a number of important policy issues that will affect whether or not the good times continue to roll on.

The first and most important is that we need to live within our means, and that means targeting the fiscal balance not the net operating balance. The difference between the two measures is that the fiscal balance includes net infrastructure investment but the net operating balance does not. It is a public finance accounting identity that if you have a fiscal deficit your debt is rising, even if you have a net operating surplus.

My colleague John Quiggin made this point last week*, although I think he overstated what that would mean for LNP spending policies, in part because he has assumed that the LNP’s M1 duplication policy (and therefore its cost) is the same as Labor’s when it is not: LNP’s $500 million 4-lane arterial versus Labor’s $2.5 billion 6-lane highway. Based on work I’ve previously done for the Queensland Government (with my SMART Infrastructure Facility hat on), my Saturday night ‘back of the envelope’ calculation for the LNP’s M1 duplication (based on the SEQ Council of Mayors specifications) is [36.5 km * $14.7 million per km =] $536.6 million. However, the per km cost might be lower in the post mining boom economy, as the cost of engineering, design and construction services have fallen relative to the ‘mining boom’ data set I used to produce a median cost of $14.7 million per km. Therefore, I don’t think the $500 million LNP estimate is unreasonable.

In any case (back to Quiggin’s point), a man is innocent until proven guilty, so let’s see what the LNP costings say (yes, released way too late).

Labor have convinced themselves that targeting a net operating surplus is ok and they have demonstrated that commitment by bequeathing to the LNP (if it wins government) what can only be described as a kale and quinoa sandwich of $11.5 billion in fiscal deficits in the General Government sector over the forward estimates (see chart below).

FB_Qld

It will be a long road back, but better financial management is the first task of the next government because, without it, Queensland will be unable to effectively respond to natural disasters and adverse economic shocks without help (and therefore control) from the Federal Government. In simple terms, if you control your debt you control your destiny. If Labor scrapes back in, it should take a very serious look at its own fiscal principles and tighten them up in the interests of best-practice public financial management.

Given the lessons of the Newman Government, the LNP Opposition has promised not to make large cuts to public service employment to levels that might be considered by some (including me) more efficient, better for the Queensland economy and financially sustainable. A long road back indeed, but I suspect the modern democratic principle of real-time public support has been learned or perhaps burned into the political and policy minds at the LNP.

The two necessary conditions to slowly and gently stabilise the debt and eventually achieve fiscal balance are to: (i) keep overall annual spending growth below the long-run average annual growth in revenue (which is highly volatile and therefore impossible to predict year-on-year); and (ii) avoid committing to mega-infrastructure projects (think Cross River Rail), but rather commit to sensible incremental improvements in our roads, passenger rail, hospital and school networks that provide the most community benefit at the lowest cost.

This is not to say the infrastructure projects being proposed by all sides in this election campaign wouldn’t be popular and beneficial to those who would use them. Who wouldn’t like a 12-lane highway to the Gold Coast, a 4-lane minimum dual carriageway along the full length of the Bruce Highway, not to mention a world-class underground metro for Brisbane and an international airport at Airlie beach, but (unlike the unconstrained demands made by the RACQ, CCIQ and others this week), budgets are limited and projects must be prioritised based on greatest potential benefit.

On this, governments need good independent advice based on evidence. In my view, this required independence is not being provided by Building Queensland, which is conflicted and will need to be reformed. The LNP’s policy to set up advisory bodies (aka ‘Planning Commissions’) to recommend the most beneficial projects has merit so long as they are truly independent of the government and are sufficiently resourced to do the job.

Unlike the regulated electricity sector where Government Owned Corporations can confidently borrow billions to fund new capital investment knowing that they’ll get the money back via regulated electricity charges, Queensland roads (apart from the odd toll road) don’t generate any revenue for the government (rego revenue is not currently hypothecated to road investment). Therefore, roads, hospital and school infrastructure spending must be funded almost entirely from recurrent revenue with borrowings kept to a minimum so that interest payments are kept to a manageable level and General Government debt is stabilised.

An infrastructure investment budget that uses 80% from net operating surpluses and 20% from borrowings is generally considered to be appropriate when the debt in the General Government sector is sustainable. However, when the debt is unsustainable and/or increasing, a better target is to fund 100% of infrastructure spending from the operating budget so that debt can be reduced with fiscal surpluses. It is a mathematical certainty that fiscal deficits lead to higher debt and only fiscal surpluses can lead to lower debt.

We all need to live within our means. Targeting the fiscal balance over the economic cycle will stabilise the debt, ensure only the most beneficial spending and infrastructure investments proceed and put Queensland on a path to regaining its AAA credit rating. Buying global (not local) and avoiding mega-projects will make it a lot easier to eventually achieve fiscal balances, but that won’t happen until well into next decade.

Policy of the week

It has to be ‘Buy Local’. In my own region of Albany Creek there is plenty of surplus land in the Aldi carpark to set up our local coal-fired power station and car manufacturing plant. We can build the new trains at Bunnings up at Brendale (ok we’ll need an FTA with Brendale), and the Queensland Submarine Corporation can set up on that vacant lot beside the Albany Creek Cemetery and Crematorium.

Joe Branigan is a Senior Research Fellow at the SMART Infrastructure Facility UOW and an independent economist based in Brisbane.

* Joe is referring to John Quiggin’s widely reported analysis demonstrating that the LNP’s currently stated fiscal principles imply large cuts in government spending and public service jobs (e.g. see this Guardian article). Given the LNP have probably learned that large public service job cuts are politically toxic, they will no doubt have to moderate the very strict fiscal principles in their economic plan if they win government. GT

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Guest post: 2018 State Election – week 1 highlights from Joe Branigan

I am delighted to publish this guest post regarding the first week of the Queensland election campaign from my old friend and former Treasury colleague Joe Branigan. GT

2018 State Election – week 1 highlights from Joe Branigan

Letterboxes stuffed with glossy blue, red and burnt orange policies, matte-grey images of Campbell Newman haunting a matte-grey Tim Nicholls, a ban on 15-yr old kids in Townsville seeing the 8.30pm movie at Event Cinemas on a Friday night, 4 dams, 2 Planning Commissions, 2 M1s, 1 Report on State Finances, 1 red helicopter with a 5-million watt halogen searchlight (to find the stray 15-yr old kids), several outbreaks of coal panic syndrome (CPS) most notably from the Premier, and an LNP electricity policy to gazump all electricity policies.

That was week 1 of the Queensland State Election campaign.

On a more serious note, perhaps the most revealing (and surely the most bizarre) event of week 1 was the Premier walking away from supporting Adani’s NAIF concessional loan application to the Commonwealth Government, to underwrite the building of a rail line that connects the Galilee Basin’s thermal coal reserves to Adani’s Abbot Point Terminal near Bowen in North Queensland. The Adani loan debacle has left the Government appearing confused, incoherent and indecisive, and has added to the perceived sovereign risk involved in investing in Queensland.

Given that this has happened in the middle of the State Election campaign, I doubt the Adani issue is about the economic and broader public policy principles around whether to offer a concessional federal loan to a foreign (or domestic for that matter) private company, or about the need to avoid a conflict of interest. The only logical explanation for the Premier’s decision to veto a NAIF loan to Adani, rejecting the advice of her own Integrity Commissioner, who said all she needed to do was recuse herself from relevant CBRC meetings, is that Labor thinks its best path to victory is to trade regional seats for SEQ seats. Could the Premier be as cunning as a fox who’s just been appointed Professor of cunning at Oxford University (thank you, Blackadder)? Perhaps too cunning by half, but we will see. Labor will need to regroup fast, unless it thinks it can get away with narrow-casting one message into regional Queensland and the opposite message into SEQ.

Despite the recent surge in revenues, it has been difficult for the Government to gain any traction on economic management. Again, being too cunning by half has exposed Labor to criticism in its public financial management. Pretending that the overall state debt doesn’t matter, and that money can be transferred from funds outside of the general government sector (such as from GOCs and public servant’s superannuation and leave funds) indefinitely and without consequence, has left Labor wide open to criticism from policy experts, commentators and the LNP. I have described Labor’s fiscal policy, whereby there are multiple uses for the GOC dividends, as utilising the latest advances in quantum entanglement theory, such that the Treasurer can make the same public dollar appear in two places at once.

Controlling the growth in employee expenses (i.e. number of public servants * wages) is critical. Unless expenses growth is at or below the long-run average growth in revenue, things will go backwards quickly. The 8-year moving average for revenue growth reported in the 2017-18 State Budget is 5.6% per year, with a low of -8.8% in 2012-13 and a high of 11.9% in 2013-14. Revenue growth in Queensland is highly volatile and extremely hard to predict. Whoever wins this election would be well advised to request detailed analysis and advice from Treasury about how to deal with these fluctuations in revenue.

Reviewing the 60-odd policies on the LNP website, a number of things stand out. First, they’ve clearly done their homework and it’s hard to find a policy that hasn’t successfully weathered the 24-hour news cycle. Second, the LNP’s overall philosophical direction is clear: economic development in both SEQ and the regions, address high unemployment in the regions, fix the electricity debacle, and be tougher on crime than Labor. And third, there is a strong focus on things that matter right now, such as reducing electricity prices asap, reducing road congestion and reducing high unemployment in regional Queensland. Still, much of the Opposition’s economic credibility will come down to whether its policy costings statement withstands external scrutiny (presumably in the last week of the campaign), and aligns with its stated objective to target the fiscal balance (rather than the ‘looser’ net operating balance target).

Of course, there is the odd disproven, ineffective or unworkable policy lurking among the LNP policy manifesto, but in the scheme of things they are pretty harmless and hopefully short-lived. These include tracking 15-yr olds with a red helicopter, banning plastic bags, and the container deposit scheme. Incidentally, Labor also supports banning plastic bags and the container deposit scheme, so what’s the difference?

So that was Week 1. The LNP appears to have done their homework, while Labor looks off balance and deeply confused on its policy toward the Adani mega mine, but perhaps it’s all a cunning plan. Meanwhile, Pauline Hanson is back in town and the latest Galaxy poll looks ominous for Labor and the LNP.

Policy of the week

It’s a tough call between the red helicopter and the 4 public holidays…but who doesn’t enjoy a public holiday, so I’ve given the Week 1 policy award to the Greens.

Bring on week 2.

Joe

Joe Branigan is a Brisbane-based economist, Senior Research Fellow at the SMART Infrastructure Facility UOW and independent consultant. He is not a member of any political party.

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Qld state debt debate is challenging for both sides

What an exciting first week of the election campaign! I am very pleased that state government debt is a prominent issue in the campaign, and I must say I’m surprised by the Queensland Treasurer’s recent description of the total state government borrowing figure projected by the Treasury at $81 billion in 2020-21 as “magical or mythical” (see today’s Courier-Mail). The Treasurer argues it is only general government debt we should worry about. The argument is that the debt owed by GOCs is serviced by the GOCs themselves rather than by taxpayers, and it is offset by revenue-generating assets that the borrowings have been used to purchase. In a perfect world, where the GOCs were well-functioning commercial businesses fully separated from government, this would be correct, but, as I told Steve Austin on his wireless show on 612 ABC Brisbane on Wednesday morning, this is not the case and we really do need to be concerned about the total debt.

Total government debt is not “magical or mythical”, and we do need to keep an eye on it, as there are blurred lines between the general government sector and the GOCs in Queensland. The current Queensland Government effectively treats its GOCs as extensions of the general government and not as independent entities. It has engaged in clever accounting practices such as shifting $3-4 billion of debt on to the GOCs to help reduce debt in the general government sector. This debt shift gave the electricity GOCs extra debt without extra assets to help pay the extra debt off. It was effectively an attempt to hide general government debt in the books of the GOCs. The ratings agencies (i.e. S&P and Moody’s) are aware of the blurred lines that exist worldwide between governments and their businesses, and hence they keep a close eye on the total debt-to-revenue ratio.

You can listen to my Wednesday morning interview with Steve Austin at this link (from around 38’30””):

http://www.abc.net.au/radio/brisbane/programs/mornings/mornings/9086734

Also, on Steve’s show, I gave listeners an update on the current level and forecasts of state debt, and Steve and I discussed the huge challenge of reducing debt in the current political environment, when a government cannot cut spending, raise tax rates or sell assets. Unless the economy starts going gangbusters, there is no way a Queensland Government can pay down debt without cutting spending, raising taxes or selling assets.

So the Opposition may be considered courageous for having committed, in its economic plan Getting Qld Back in Business, to targeting the fiscal balance, rather than the less strict operating balance, which only includes recurrent revenues and expenses, not capital spending. The Together union, which represents public servants, argues in a media release published yesterday that the Opposition’s plan would involve significant expenditure cuts:

Nicholl’s radical plan involves massive job cuts – union

Certainly, if the Opposition has ruled out asset sales and tax increases, then given current economic forecasts they would need to massively cut spending if they were to achieve at least a fiscal balance next financial year. But I suspect that, if the Opposition wins the election, the incoming government would specify a very gradual return to fiscal balance, avoiding the large spending cuts that did so much political damage to the Newman Government.

Also released yesterday was the 2016-17 Report on State Finances, which revealed general government debt at the end of 2016-17 at $33.3 billion was slightly lower (by around $677 million) than it was expected to be a few weeks earlier when the budget was published on 13 June. Before the end of financial year, the Queensland Treasury engaged in some clever cash management to bring about this reduction in borrowing. The reduction in borrowing was not due to any improvement in the underlying budget situation. Indeed, the net operating surplus was more-or-less constant and the fiscal surplus for 2016-17 actually turned out to be lower than expected (see chart below).

variations

What appears to have happened is the Government has received more money in advance from its government-owned corporations such as Energy Queensland than it was previously expecting. It has again taken advantage of the blurred lines between government agencies and the GOCs I mentioned to Steve Austin on Wednesday morning. The advances received item in the general government balance sheet turned out to be $1.831 billion in 2016-17 compared with the $1.328 billion expected 2-3 weeks earlier at budget time. I expect this increase of $503 million explains a large part of the lower state general government debt amount reported as at 30 June. So it appears the government has engineered this slightly lower debt figure by extracting more money out of its electricity GOCs. This obviously isn’t sustainable, and it means less can be extracted in future years, so I still expect government debt to remain on its previous upward trajectory to $41 billion for the general government and $81 billion in total by 2020-21.

The Report on State Finances also confirmed the large revenue surprise and high expenses growth in 2016-17. My old friend and former Treasury colleague Joe Branigan, now a Senior Research Fellow at SMART and an economic consultant, texted me the following insightful commentary on the Report:

Employee expenses growth is running at 6%, which is plainly not sustainable. The general government books look good thanks to a massive $5.4 billion increase in revenue, due to above-average growth in Commonwealth Grants and royalties, and that’s not sustainable either. Eventually, governments run out of accounting tricks or luck or both…The non-financial public sector debt is plainly too high to withstand a sustained economic downturn.

Joe’s last point is consistent with my comments in the Courier-Mail on Tuesday. Let’s hope the budget and debt debate continues into week 2!

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Comments on Qld state debt to the Courier-Mail

I am quoted in today’s Courier-Mail in an article on Queensland state debt, which for the whole Queensland Government (incl. government-owned businesses) is on its way to over $80 billion (see chart below). The paper reports on the Premier’s failure to answer a tricky question regarding how much dividends from government-owned corporations have contributed to debt reduction:

Qld election 2017: Palaszczuk draws a blank on state debt

The Courier-Mail reported my comments as follows:

Economist Gene Tunny, principal of Adept Economics, said the state was at risk during future downturns and could face a fiscal crisis if government failed to adopt a disciplined approach to debt reduction. Debt was approaching $80 billion and needed to be below $50 billion to win back a AAA credit rating, he said.

“That’s a direct saving in interest costs and that could be used to pay for education or health services or it could be used to further reduce debt.”

He said there had been a loss of financial discipline since the mid-2000s that had allowed debt to balloon.

The point I was trying to make was that if we do not get our debt under control, then it will keep creeping up and will compromise our ability to respond to future economic downturns and crises. As a former Australian Treasury official, I will always remember the financial crisis in 2008-09, during which the Australian Treasury had to temporarily provide a guarantee of state borrowings, largely to support the huge financing task faced by a nervous Queensland Treasury. I would like the Queensland Government to get its budget and debt under control so the state does not end up in that unfortunate situation again.

If the Queensland Government could reduce total borrowings to $50 billion or less, the aspiration I suggested to the Courier-Mail, then the state would certainly get its AAA credit rating back. I should have been clearer in my comments to the Courier-Mail and noted we may even be able to get a AAA rating back if we can reduce debt to around $60-65 billion. The critical ratio the ratings agencies (e.g. S&P, Moody’s) appear to look at is the debt-to-revenue ratio, and they get worried when it is over 100 percent. Currently, total revenue for the state non-financial public sector is around $63 billion. So if we could reduce total borrowings to $50 billion or less, we would definitely get back the AAA rating and provide a buffer that could help us absorb future shocks.

borrowings

Finally, I should mention the Courier-Mail got in touch with me after it noticed I was a co-signatory to a letter organised by Graham Young at the Australian Institute for Progress regarding critical issues for the Queensland election, one of which obviously was state debt:

Queensland election issues: open letter from 7 public policy professionals

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Senator Canavan’s ambitious plan for a State of North Queensland

Senator Matt Canavan, a friend of mine from my Canberra days, is not wasting any time while he is temporarily out of the Cabinet. He is making plans for a new State of North Queensland. With his background as a Productivity Commission economist and as the former Minister for Northern Australia, Senator Canavan has the expertise and experience to come up with a credible and convincing plan for a new State of NQ. The Senator made some very interesting observations to the Townsville Bulletin last Friday:

“I’ve often said we’re big enough and strong enough and wealthy enough to represent ourselves,” he said.

“I reckon we’d get more things going if we didn’t have the handbrakes put on us by Brisbane and Canberra.”

Senator Canavan said Tasmania had 12 senators with 500,000 people but “North Queensland has only two and we have more than one million people”.

“I utterly reject any notion that we couldn’t stand on our own two feet,” he said. “Our average per-person economic output in North Queensland is 30 per cent higher than in southern Queensland. All the money seems to get spent in Brisbane.”

Senator Canavan is absolutely right about NQ’s higher economic output per capita (see chart below based on the most recent official estimates from Qld Treasury), although this is a result of the disproportionate contribution of mining to NQ’s economy. A lot of the income generated in NQ is earned by mining companies, and the bulk of it ends up leaving NQ, with a good proportion of it going overseas. The average NQ resident does not earn a higher income than the average SEQ resident. That said, the large economic contribution of mining (e.g. around two-thirds of North West Qld’s economy, half of Mackay’s, and one-third of Fitzroy’s) means that a new State of NQ would earn healthy royalty revenues. Of course, as currently happens with Queensland, this healthy royalty revenue would count against NQ in the distribution of GST revenue.

While I concur with the Senator that a State of NQ would be economically viable, I’d be careful about rushing into it. The set up costs would be large, and there may be trouble filling senior public service positions, given the vast majority of current Queensland public service SES positions are in Brisbane. Also, as I’ve posted on previously, I’m unsure NQ gets such a raw deal from Brisbane (see my post Is NQ under-funded relative to SEQ?). That said, I am very open to a debate about a new State of NQ, and I look forward to further contributions from Senator Canavan in advancing this interesting proposition.

Canavan_NQ

*NB Senator Canavan is including Rockhampton, where his office is based, and the Fitzroy region in NQ.

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