Why is budget repair so difficult?

Posted on March 13, 2016 by Gene Tunny

One of my favourite movie scenes is from Jaws, when Roy Scheider’s character Martin Brody, after seeing the shark for the first time, tells the captain “You’re going to need a bigger boat.” That scene came into my mind in December 2008 in my office at the Treasury when, seeing updated cash-at-bank projections for the Commonwealth Government reflecting the latest disappointing tax collections, it was apparent that the Commonwealth would need to start running much bigger bond auctions and substantially raise the debt limit, then only $75 billion. This was the beginning of the slide into a position of permanent deficit and growing debt (e.g. see chart below). While deficits were inevitable and desirable at the time of the financial crisis, there is no justification for the large $37 billion deficit (2.3% of GDP) we currently have in the 2015-16 financial year.

CGS

A good question is why have we failed to repair the budget, particularly when there is widespread agreement that reducing the deficit and limiting the growth of debt is desirable? The answer is possibly the selfishness of current generations, who would rather avoid the necessary austerity measures that would cost them but benefit future generations (through repaying debt and not transferring it on to future generations). An excellent working paper from ANU’s Tax and Transfer Policy Institute published last month presents a computable overlapping generations model illustrating this point (Budget repair measures: Tough choices for Australia’s future). The authors, George Kudrna and Chung Tran, note, regarding three budget repair measures they modeled:

“Even though the long-run benefits of budget repair measures are undeniable, the transitional costs to the economy and welfare are significant and unavoidable. The budget repair measures are indeed tough policy choices for a better future in Australia. Our results consistently suggest that none of the three fiscal austerity measures are politically feasible as they will likely fail to gain the political support of current generations. The conflict of interest between the current and future generations suggests political infeasibility for any structural fiscal reforms.”

So do not expect budget repair any time soon, not solely due to a lack of will from politicians, but partly due to many current voters not really wanting it.

Posted in Budget, Uncategorized | Tagged , , , , , , , , | 5 Comments

Qld private independent schools saving taxpayers $1 billion per annum

Posted on March 11, 2016 by Gene Tunny

ISQ_figures

Independent Schools Queensland yesterday released a report it commissioned from AEC Group on the economic contribution of its 190 member schools (i.e. non-Catholic private schools) to Queensland, revealing a direct contribution of over 14,000 jobs and $1.8 billion in gross state product (0.6% of total GSP). As is usual in economic contribution studies, much is made of the estimated indirect impacts, production and consumption-induced economic activity (see figure above), but as the calculation of these impacts is controversial and the usefulness of the estimates (particularly the consumption-induced impacts) is debatable, I will refrain from getting too excited about them.

In my view, the really interesting aspect of the study is the estimated savings to taxpayers from independent schools. While private schools receive some public funding, largely from the Commonwealth Government, as you would expect, it is much less per student than funding to state schools, implying a saving to taxpayers when students move from state to private schools. The report notes:

Independent schools are estimated to have saved tax payers a total of $1.02 billion in 2013-14, through a combination of savings of $804 million in recurrent education costs and $218 million in capital costs.

This raises in my mind the messy and sub-optimal funding arrangements we currently have for schooling in Australia, involving a mixture of grants for different purposes from State and Federal Governments. Ideally, we would have some sort of means-tested voucher for schooling, so government funding per student is not affected by the choice of school, and to promote greater competition among all schools, with efficiency gains likely flowing from that. This would require substantial Commonwealth-State cooperation to implement and hence is very unlikely to ever occur.

I recall that, last year, at least one courageous public servant from the Queensland Department of Premier and Cabinet tried to get the State Government to consider school funding reform, raising the idea of co-payments for state schools, but alas that effort was not well received by the Government (see Qld Government denies plan for public school fees).

For more on school funding, see my previous posts:

Catholic schools still benefiting from very favourable funding deal from Howard Govt days

Large savings for Qld Govt from shift to private schooling

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

NFPs recognise need to innovate as government funding is now much less reliable

Posted on March 10, 2016 by Gene Tunny

CPA_NFP_photo.png

Over the first part of this week I was in Melbourne and Sydney attending and presenting at the CPA Australia Not-For-Profit Conference, which will be also held in Brisbane next Wednesday and Thursday. If you are involved in an NFP I would strongly recommend you attend, as you will learn important insights into how NFPs can thrive in an environment in which government funding is much less reliable. Key issues covered at the conference, which I will try to cover in more depth in the future included:

  • Shared services models for NFPs to achieve administrative cost savings,
  • Social enterprise business models, which I have previously referred to on this blog (see Impact Academy fostering local social enterprises), and
  • Social benefit (or impact) bonds, which are an innovative new way of financing social programs.

The presentation by Wendy Haigh from the Benevolent Society on the $10 million Resilient Families social benefit bond trial her organisation undertook in NSW with the support of the NSW Government, Westpac and CBA, was illuminating. As noted on the Benevolent Society’s website:

A Social Impact Bond, also known as Social Benefit Bond, is a form of finance designed to raise capital for programs that address areas of pressing social needs.

Private investors provide capital to a service provider to achieve improved social outcomes. If these outcomes are achieved, the cost savings to governments are then used to repay the upfront investment plus a dividend.

In the case of the Benevolent Society’s Resilient Family program assisting 400 NSW families at risk, the one-off cost of around $25,000 per family for early intervention 24/7 on-call assistance would be paid back many times over if the intervention would prevent a child from having to go into out-of-home (i.e. foster) care which can cost over $60,000 annually per child. The Resilient Family program has achieved some excellent outcomes over the last two years. For example, it has increased the percentage of families in the program experiencing only low levels of distress from 54% to 71% (i.e. it has reduced the percentage of families experiencing medium and high levels of distress) and increased the percentage of children in a normal emotional range from 66% to 86%.

While the money to fund the program ultimately comes from the government, out of future cost savings the theory goes, the involvement of private sector investors means some private sector money is at risk, because if the program does not achieve its outcomes they may not earn a return on their investment. The private sector investors are thus likely to pay close attention to the program and ensure the governance and monitoring and evaluation structures are in place to maximise the program’s chance of success.

The Queensland Government is currently investigating the potential application of social impact bonds in Queensland, which is an exciting development worth watching (See Social benefit bonds pilot program).

Posted in nfps, Uncategorized | Tagged , , , , , , , , | 2 Comments

Regional rescue packages have a poor record

Posted on March 6, 2016 by Gene Tunny

Regional_employment_growth_Jan16

The Sunday Mail reported this morning that Queensland Federal Government MPs are “at odds over federal relief funding for Queensland” in response to the economic downturn in much of the State outside SEQ (e.g. note the large job losses in the Mackay and Queensland outback regions over the last twelve months in the chart above). It appears that Herbert MP Ewen Jones is opposed to a $100 million rescue package being proposed by Dawson MP George Christensen, noting “Queenslanders need to be better than just putting out their hand.’’ Nicely said. I sense that Mr Jones understands that any assistance package would not provide any long-term sustainable benefit to regional Queensland.

Rescue packages, or structural adjustment packages as they are referred to in policy circles, are typically found to be ineffective. Rather than trying to prop up faltering regional economies, it is usually better to allow the playing out of the natural economic adjustment mechanisms, which could include people migrating out of some regions to find employment in regions with more favourable conditions.

It is widely acknowledged that Australia’s record across all levels of government in structural adjustment policy has been poor. Clearly, structural adjustment packages are challenging to design well. Research by the Grattan Institute (see Investing in regions: Making a difference) has found that structural adjustment packages across a range of industries typically (p. 26):

  • “have a high cost per job;
  • do not appear to have significantly affected overall long term employment trends in the region; and
  • did not result in the regions performing any better than other regions that lose a major employer but did not receive any government assistance.”

It appears pointless to devote funds to trying to promote new job opportunities, as ultimately economic fundamentals in the region will determine industrial and employment growth. As noted by the Grattan Institute (in the report cited above on pp. 26-27), regarding substantial amounts of structural adjustment assistance provided to Adelaide following automotive plant closures:

“…unemployment rates in Adelaide persisted above the national average for the last decade despite significant structural adjustment funds. Grants paid out under job attraction schemes introduced following automotive plant closures appear to have only temporarily reduced the region’s unemployment rate. Overall, local unemployment rates seem primarily driven by national economic factors and the lack of economic diversification and vibrancy in the area rather than individual plant closures or specific job attraction and retention programs.”

Generally, the view from many authorities, including the Productivity Commission, the Grattan Institute and CSIRO, is that government policy should not try to prevent the natural adjustment of regions to economic shocks from occurring, and should indeed facilitate that adjustment occurring, while managing any adverse consequences using other means. Hence so-called exceptional circumstances assistance would be undesirable. Instead, a range of policies designed to expedite adjustment, such as re-establishment grants or loans and assistance to obtain professional business advice, may be desirable.

Clearly, a significant part of regional adjustment is expected to occur through migration flows. A 2001 study by Paul McGuire, then at the Queensland Department of Employment and Training, found that a large part of a region’s adjustment to declining employment opportunities occurs via migration flows. Governments should accept that this is natural and desirable and not waste money on regional assistance schemes. As John Daley from the Grattan Institute has wisely observed:

“…governments should put development funds where people and jobs want to go.”

Posted in Labour market, Mackay, Macroeconomy, Queensland Government, Townsville, Uncategorized | Tagged , , , , , , | 5 Comments

What economic indicators should board directors monitor?

Posted on March 5, 2016 by Gene Tunny

I have recently published an article on the website of the corporate governance consultancy firm Effective Governance, at which I am a specialist adviser, regarding:

What Economic Indicators Should Board Directors Monitor?

The article was inspired by a recent Harvard Business Review article, The Political Issues Board Directors Care Most About, which identified the economy as the number one issue for board directors globally. In the article, I discuss the major economic indicators of GDP, the unemployment rate, employment growth, and the inflation rate. And I encourage board directors to consider leading indicators such as business confidence and building approvals, as well as any indicators relevant to their specific industries.

Practically every company or organisation will be affected by the economy in some way, so it is important for board directors to be familiar with the current state of the economy and the economic outlook. One example I briefly mention in the article was based on a Brisbane private school board that monitored the sharemarket (see chart below) and consumer confidence during the financial crisis, as they considered those indicators would be relevant to the capacity and willingness of parents to pay school fees. With these indicators suggesting there would be an increase in unpaid school fees, strategies were put in place to manage the problem (e.g. early engagement with parents on late payments to work out whether the fees could be paid according to a payment plan in a reasonable time, or whether the student would have to be withdrawn). Forewarned is forearmed.

S&PASX200

N.B. The chart above is based on end-of-month values of the S&P/ASX 200 share price index. As at the close of trading yesterday (Friday 4 March) the index was at 5,090, around 4% higher than its value at the end of last month.

Posted in Macroeconomy, Uncategorized | Tagged , , , , , , , , , , , | 1 Comment

International visitors take advantage of lower Aussie dollar

Posted on March 3, 2016 by Gene Tunny

Expenditure by international visitors to Queensland increased to over $4.9 billion in 2015 from $4.2 billion in 2014, a 19% increase, according to new International Visitor Survey data released by Tourism Research Australia (see chart below). This was less than the 30% increase Victoria experienced, but around the same as the 19% increase in NSW.

International_visitors_2015

Actual international visitor numbers increased by nearly 9% to 2.34 million in 2015 in Queensland. So the lower Australian dollar (see chart below) has brought an increase in both visitor numbers and average spending while in Australia (up 9%) by visitors who are taking advantage of the greater purchasing power of their own currencies in Australia. Visitors are staying one night longer on average, and they may be staying in better hotels and eating more expensive restaurant meals, for example.

Exchange_rate_Mar16

Tourism is clearly helping Queensland endure the end of the mining boom. Also, as discussed in my previous post on the latest National Accounts figures, the Queensland economy benefited from a timely increase in State and Local Government capital expenditure in the December quarter (see chart below). This would have been partly due to Commonwealth Games-related construction activity on the Gold Coast, as well as partly due to local council public works spending in the lead up to council elections this month. Without this boost in public sector capital spending, state final demand would have recorded a fall in December quarter (and Queensland would have been totally reliant on increased exports to have grown the economy in the quarter, noting that state final demand does not include exports). It remains to be seen just how far State and local government capital spending can continue to increase and add to economic growth, given the budgetary challenges faced by the State Government in particular.

Govt_capex_Dec15

Posted in Macroeconomy, Tourism, Uncategorized | Tagged , , , , , , , , | 4 Comments

Qld economy supported by State & local Gov’t CAPEX in December quarter

Posted on March 2, 2016 by Gene Tunny

The latest National Accounts released by the ABS were better than expected, with the national economy growing at 0.6% in December quarter 2015 and 3% through-the-year. Regarding Queensland, state final demand barely moved with a 0.1% increase, but that does not include net exports which likely would have added to economic growth that quarter. It was good to see that the slide in State and Local Government capital expenditure has been reversed, and it is now helping the Queensland economy endure the end of the mining boom and the big reduction in private sector capital expenditure associated with it (see chart below). As the ABS noted regarding the Queensland estimates:

Public gross fixed capital formation increased 9.3% largely due to a rise of 12.3% from State and local General government.

In summary, the data were more positive than I expected but I remain concerned about the sustainability of Queensland State and local government capital expenditure given budgetary pressures.

Decomposition_Dec15

Posted in Macroeconomy, Uncategorized | Tagged , , , , | 2 Comments

Beattie right to recommend asset leases, but his advice has come too late

Posted on March 1, 2016 by Gene Tunny

Former Queensland Premier Peter Beattie is right to recommend the leasing out of State-owned assets, as reported in the Australian today (see Beattie sees the light on leases, which is behind the paywall). But unfortunately he is over a year late in offering this advice, as the current Government was elected on a platform of total opposition to privatisation. It would have been good if the former Premier could have persuaded the then Opposition to have been less ideological on the issue in the lead up to the 2015 election.

For several years on this blog, I have argued that privatisation of state-owned assets would benefit Queenslanders through the more efficient operation of the assets by the private sector (e.g. see my Productivity and Privatisation speech from 2014). I have also discussed the desirability of regaining our AAA credit rating through paying off a large chunk of our $80 billion of borrowings with privatisation proceeds. And I have noted that, without the proceeds the previous Government would have had from asset leases, the current Government has insufficient money in the forward estimates to fund the level of infrastructure spending that is likely desirable (e.g. see New Qld Government faces big fiscal challenges). Beattie is absolutely correct, but, alas, his words have come too late to make a difference I suspect.

Peter_Beattie,_BYCC,_August_2013_(cropped)

Former Qld Premier Peter Beattie

Posted in Uncategorized | 3 Comments

Qld economy patchy – SEQ appears fine, but much of rest of Qld struggling

Posted on February 27, 2016 by Gene Tunny

I had a nice chat with Ben Davis on his 4BC Live program yesterday afternoon about the state of Queensland’s economy, a discussion which was inspired by the flurry of press releases that came from the State Government in the morning regarding jobs growth in different regions. I explained to Ben that economic conditions are different across the State, and while South-East Queensland might be fine, partly due to the apartment construction boom in Brisbane and Commonwealth Games’ preparations on the Gold Coast, the rest of the State is struggling in many parts due to the mining downturn and the drought (see the chart below, illustrating the stark difference in conditions in SEQ and the rest of Queensland).

SEQ vs non-SEQ_Jan16

I mentioned to Ben that economic conditions vary by industry and by region. Tourism is a well-known bright spot, due to the lower value of the Australian dollar, and that has helped improve conditions in Cairns, for example. But the Mackay, Rockhampton and Townsville regions, for example, have suffered as a result of the mining downturn (on Townsville and Cairns, see Pete Faulkner’s latest post).

To further make the point about the variability of conditions, I mentioned that health, aged care and child care workers appear to be in demand across Queensland, and there are shortages of some health professionals in regional areas, according to the Commonwealth Department of Employment’s Skill Shortage List. Also, the National Disability Insurance Scheme (NDIS) will boost demands for disability care workers as it is rolled out over the next few years.

The flurry of press releases from the State Government I referred to earlier was very likely prompted by two columns in Friday’s Courier-Mail questioning the strength of the Queensland economy, both of which included quotes from my recent posts. One of the columns also included an unfortunate off-the-cuff remark I made to one of the journalists while chatting on the phone (see image below).

IMG_0157

Posted in Labour market, Macroeconomy, Uncategorized | Tagged , , , , , , , , , , , | 10 Comments

Is banning plastic bags the best option to tackle litter and reduce waste?

Posted on February 26, 2016 by Gene Tunny

Guest post by Rod Bogaards

It looks like a push is on to ban single-use plastic bags nationally according to the Courier-Mail. A ban has already been implemented in some of the smaller states and territories but not elsewhere. Perhaps there is good reason to be cautious.

In 2005, the Council of Australian Governments (COAG) agreed to phase out single-use plastic bags by 2008 because of the alleged problems that plastic bags pose for the litter stream and marine wildlife. Plastic bag litter is seen as a particularly undesirable because it:

  • can be highly visible and long lasting, since plastic bags easily become airborne, are moisture resistant and take many years to decompose, and
  • has the potential to injure or kill wildlife, particularly in the marine environment through ingestion or entanglement.

But the 2006 Productivity Commission (PC) inquiry into waste management found a wholesale ban on plastic bags was unlikely to address the problems identified, or solve the litter problem more generally. This is because a ban would penalise most uses of plastic bags, whereas the potential environmental benefit would only come from the less than 1% of bags that are littered.

The PC found that:

  • Only a small proportion (0.8%) of plastic bags become litter (although available estimates suggest that in absolute terms, plastic bag litter is significant).
  • Although the impact of plastic bag litter on marine life is uncertain, the available evidence suggests fishing-related debris, rather than land-based sources, is the principal source of litter hazardous to marine wildlife.
  • Despite successful initiatives to reduce the use of plastic bags, particularly from supermarkets (the number of retail carry bags fell by 34% from 2002 to 2005), the decline did not appear to translate into a fall in plastic bag litter. The likelihood of a supermarket bag being littered is low as people use them to carry goods to their homes. Bags supplied for away-from-home uses – such as to carry takeaway food – are much more likely to be littered.
  • A cost-benefit analysis, commissioned by the Environment Protection and Heritage Council (EPHC), considered eleven regulatory options (ranging from a ban or levy through to a new code of practice for retailers) and found that all of them would impose a net cost on the community.

The PC recommended an assessment of alternative approaches that specifically targeted litter, rather than all plastic bag uses and to focus on away from-home sources of litter entering marine environments. The subsequent EPHC Regulatory Impact Statement (RIS) acknowledged that targeting litter may be a more cost-effective solution to the plastic bag problem, but rejected the option because it was inconsistent with the commitment to phase out plastic bags. In April 2008, the EPHC decided not to endorse uniform regulatory action to ban or place a charge on plastic bags. However, four jurisdictions have implemented their own bans.

The reviews of plastic bag bans in SA, ACT and the NT show that there can be some perverse consequences when consumers modify their behaviour in response to a ban.

The SA Review found that previously many households used single-use plastic shopping bags to line their bins and, as a result of the ban, significantly more consumers have turned to purchasing bin liners:

… the purchase of bin liners by households has increased from 15% to 80%, raising some scepticism about the broader environmental benefit of the ban.

The ACT Review showed that an increase in reusable plastic shopping bags partially offset the decline in single-use plastic bags (by weight) following the ban:

… this review estimates that around 114 tonnes of boutique bags were sent to landfill in the period 1 May 2013 to 31 October 2013, compared to an estimated 182 tonnes of single-use plastic bags in the period 1 May 2011 to 31 October 2011.

The ACT Review did show a reduction in plastic bag litter following the ban but there are still too few data points to be confident in the results.

Finally, the NT Review indicated that both reusable plastic shopping bags and bin liner numbers increased significantly post ban (see table below of bag and bin liner numbers per year in the NT).

Pre-Ban

Post Ban
Banned Single-Use Plastic Bags

31 502 000

0
Reusable Shopping Bags

256 000

7 298 000
Bin Liners and Kitchen Tidy Bags

8 000 000

22 150 000
TOTAL

39 758 000

29 448 000

The review concluded, that despite a reduction of 10.3 million bags per year, given the diversity of bag types of varying thickness that were available, it was uncertain whether there was a reduction in overall plastic usage in the NT.

Overall, it remains unclear whether the benefits to the environment from plastic bag bans have been as large as anticipated, and worth the inconvenience and direct financial cost to consumers of purchasing alternative bags. It will be interesting to see what new evidence is put forward to Environment Ministers who are considering this issue at their next meeting in Sydney on Monday.

Rod Bogaards is an economist and former Director of the Productivity Commission.

Posted in Environment, Uncategorized | Tagged , , , , , , , | 8 Comments