Budget and Economic Development

A New Direction

Details: Created on Thursday, 21 June 2012 10:00; Written by Julian Amos

Recent statements by the Federal Minister for Health to provide special assistance to the State’s Health budget is in a very real sense an admission by a senior Commonwealth Minister that the formula for funding the States is not working.

The GST was introduced as a growth tax to compensate the states for the removal of a range of inefficient and regressive state taxes. For some years, the plan worked, and worked well. GST receipts grew at a rapid rate and so did the returns to State coffers.

In Tasmania, for some years this windfall was managed well. The State was able to get out from under the burden of net debt. It spent again in essential areas that had been neglected, and began to build up reserves, especially in funding the public sector superannuation schemes.

But in more recent times the reform agenda stalled. Slowly but surely, payroll costs escalated beyond the GST returns, not only through an increase in the number of public servants, but also in their remuneration. We soon reached a stage where we had to once again start dipping into the reserves, while at the same time we continued to increase the size of the payroll. We were spending beyond our means!!!

From an economic point of view, we got lazy. We seemed to have enough money to do all the things we wanted to do, as well as all the things we needed to do.

Then, the world went crazy, and GST receipts crashed. At a national level, consumers stopped spending, at least within Australia. The high value of the dollar put pressure on jobs, particularly in the manufacturing sector in this country. In Tasmania, we even encouraged a loss of jobs through the approach taken over forestry, culminating in the loss of over 6000 jobs. The high value of the dollar also meant that overseas travel was cheap and overseas goods were cheaper. Many consumer purchases began to be made overseas, from overseas travel and by purchases over the internet.

Both the Government and the Opposition have now recognized this fact. Both have talked long and hard about the changed circumstances and the reduction in revenues to the State. However both have talked up an improvement in receipts as being the cornerstone of their budget approach. A risky business indeed. Because for this to occur it will require both an increase in GST receipts, and continuance of the formula for the divvying up of the pool between the states. Already there are interstate rumblings that Tasmanian is getting more than its fair share.

Outside of official figures, most pundits are pessimistic of an improvement in GST receipts anytime soon. GST receipts are dependent on consumers buying goods and services within the country. For that to happen, consumers need to be confident that they can afford to spend. That confidence has dissipated. Furthermore, the budgets are relying on the continuing rude health of the Chinese economy to maintain the mining boom. Again, a somewhat risky scenario considering the world economic environment at this time. Europe is in meltdown, and Europe is a market for Chinese exports. Not that the mining boom will end any time soon, because China’s domestic economy will still demand inputs, will but it will come under increasing market pressure.

Having defined the problem, let’s consider some solutions.

From the State perspective, the States and the Commonwealth need to come up with a new formula that ensures growth in returns to the States commensurate with growth in the economy. To not do so will only cause the States to have to continue to contract its service delivery activities (health, education, law and order), with added suffering to the public.

Tasmania is at the cutting edge of this problem, so it is in the box seat to be leading the charge.

At the same time, the States will need to rein in expenditure and ensure they get best value for the dollars spent.

It is a recognised fact that Tasmania economically is in the slow lane. The mining states are booming, all else is lagging behind. The question needs to be asked, and I don’t hear it being asked by anybody really, how can Tasmania benefit from the mining boom? How can we leverage off the good fortune of the mining states? For that to be answered, we need to ask a further question. What is it that we have got that they want, that we could supply that they cannot supply themselves. For example, what can we produce with our surplus labour that they cannot provide because of their shortage of labour?

So, an avenue to explore. Every mining town has a chronic shortage of housing. Considering the nature of mining towns, there is a desperate shortage of mobile kit homes, or prefabricated housing to ship over as panels and erect on-site. We are good at making panels.

They need skilled labour. We are good at training labour. In fact we already have schools of expertise in various forms of metalwork, and properly marketed, they might even end up being funded by the mining companies. It will obviously mean the export for a period of skilled labour, but at least the labour is skilled and employable. Promoting such schools of excellence would also encourage an intake from interstate, and this would to some extent counterbalance the drift. We already promote education as an export industry – here at our back door is a ready-made market.

I have argued in this column for the Commonwealth to spend more of its defence and immigration funds in this state. Tasmania is in fact the poor cousin when it comes to this form of funding. Much better to have real jobs paid for by the government than not have the jobs at all. A marine maintenance facility, supporting and supported by the navy, could be an ideal addition to our Maritime College, CSIRO, fishing and Antarctic activities.

An area that requires a significant overhaul is in the area of microeconomic reform. Our regulatory environment is a nightmare, and although some may argue it is no worse than other States, that does not excuse the appalling disregard for being efficient. If the state is to be “open for business” as some politicians keep muttering, then their priority must be to make it easier to do business here.

My attention has recently been drawn to the details of the Parliament Square development, a matter that has dragged through the Resource Management Appeals Tribunal and the Supreme Court for over 3 years. Three years, and still no permit. Three years to get a decision. It’s farcical.

A simple solution could be to give to the Appeals Tribunal the powers of the Supreme Court, and for it to become a final court of appeal. That way the Tribunal is the final arbiter. If this were the case, it would have saved this project at least 2 years, and still given objectors an opportunity to have their day in court.

Columnist Greg Barns recently wrote of an incident is Bellerive, which has so far cost the property owner, who has wanted to build an extension on his house, over a hundred thousand dollars in costs and still no decision. This is just wrong.

Examples such as these amply demonstrate that Tasmania is not open for business. And fixing these problems would not cost the government one red cent. Making Tasmania an interesting place to invest would change the nature and the mood of the investment community, it would create thousands of jobs, and set us on the growth path we so desperately need.

Where there is a will, there is a way. It’s time for some action.

Budget Woes

Details: Created on Friday, 25 May 2012 10:00; Written by Julian Amos

The budget season has come and gone. Treasurers have made budget speeches, and Oppositions have responded. And yet the question remains – what’s changed?

Governments should provide their constituents with a vision of the future, the place they are going to take us to. The budget is the tool in the tool box that helps get us there. In the absence of any articulated vision of the future, by either side, in either parliament, what is it about the recent budget that shines a light into the souls of government and the alternative government, and gives us an indication as to where they want to take us. What signals can we glean from the latest budget round.

At the Commonwealth level, a new carbon tax is being imposed on “polluters” and being redistributed amongst the community. The tax is being imposed to clean up our act and stop polluting the atmosphere with carbon dioxide. Carbon dioxide is a byproduct of the burning of coal and petroleum products. It is also a natural gas that is respired by all life forms, including you and me.

The call is for Australia to move away from coal as the major source of energy and to move to more expensive renewable energy sources, such as solar and wind power. Yet we export increasing quantities of coal for others to burn. End result, no change in the amount of gas in the air, cheaper power is provided to our trading partners, and as a consequence, manufacturing jobs are moved offshore. Some signal.

At the State level, we have been advised the Tasmanian economy is in the slow lane, with little economic growth and with rising unemployment. The budget papers recognise declining revenues from the GST, a tax that was meant to be a growth tax, and the Treasurer has decided to go into net debt as a consequence.

Like their Federal counterparts, who query the accuracy of the revenue estimates, the State Opposition has raised questions regarding the forward estimates for GST receipts, but this is not and should not be the main game.

Going into net debt last year was considered evil, now it is acceptable. Interesting change of rhetoric. Some taxes have been increased, but I suspect will do nothing to dampen or stimulate the economy. The big ones though, land tax and payroll tax, have not been considered. These are in the greatest need of reform if the economy is to stimulated and politicians cannot keep squibbing it.

At present land tax is not imposed on private dwellings, so the burden of this tax falls mainly on commercial property. The signal is that commercial property is fair game for taxation purposes. Payroll tax is imposed to a greater degree on large employers. Signal. We penalize large businesses. And the rebate for apprentices has not been restored. Signal, no encouragement is given to employ our youth or to advance our skill base.

On the expenditure side, the government has ring-fenced education and health from any further cuts. These two departments make up over 50% of budget expenditures. The government should be ensuring these departments practice proper cost control measures to ensure the taxpayer is getting the best bang for the buck. Cost control does not necessarily mean cost cutting, but it does mean a more effective use of the money. Such a concept seems to have been ignored.

There has been some movement to rein in the cost of living, and action has been taken to bring efficiencies into the power distribution system. A good start, but more can be done to control expenditures. At the same time, government should have in place a Plan B in case Aurora cannot be sold. I suspect it would not be seen as a preferred asset by potential buyers.

The government’s continuing austerity measures are to be balanced, or so it is hoped, by an increase in investment activity by the private sector. The Treasurer has gone to some pains in recent times to make the call for the sector to front up to the plate. And this is a good call. It is what we expect of the sector.

But there is a quid to the quo. In order for industry to invest there needs to be a signal from the government that such investment would be encouraged. There is so much that can be done in the area of microeconomic reform to provide that opportunity, but again it has not been addressed.

There are presently 34 separate planning schemes in the State. The regulatory environment is harsh and inflexible. Steering a way through them is extremely onerous, time consuming, and exhausting. With an appeals process weighted against any investor. And yet no mention of any reform in either the budget or the budget reply speeches. Signal – investment is not wanted, and investors go elsewhere.

The continuing and ongoing demands by the conservation movement to move land out of productive purposes is alarming, and continues unabated. Whether the topic is forestry, mining, aquaculture, agriculture, even tourism in our natural places, the argument against them is continual: more ground needs to be preserved from economic activity.

Would you invest in these industries, knowing that at any time you may be at the butt end of a claim to close you down? Because that is what is happening right now. With unemployment high and climbing, and with our rural communities bleeding, the demand from the preservationists is to lose more jobs. Quite frankly, it is obscene.

The budget provides no clue whatsoever as to which direction the government wants to take us on these critical issues.

Some argue that the economy in transition. It is a reasonable argument, and an obvious one, because economies are always in transition. The issue is whether we should actively close down existing industry in the hope that something new will come along, or to maintain our existing base whilst encouraging new activity. No signals in the budget for the latter proposition.

The current European maelstrom will lead to a flight of capital and people from the area, both looking for safe haven. We could be a beneficiary, properly targeted. But there seems to be little focus on such benefits.

Many say our future lies in Asia. As Paul Keating once said, we need to be a part of Asia, not apart from it. I agree with this view, but what are we doing as a state to ensure our future? Whether it is Asian languages in our schools, an active student exchange program or trade offices in China and India, it would appear neither party has given any consideration as to how to engage with the region. A trade mission once a year is a token gesture at best. Without a concerted effort, the rest is platitude.

So the out-take from the present budget round is that our political leaders are more concerned with managing the present, and scoring cheap political points off each other, than providing us with a direction for the future, and the means to achieve it. We deserve better.

The State’s Budget Woes – Is There Another Way?

Details: Created on Friday, 18 November 2011 11:00; Written by Julian Amos

Pressure is mounting on the government. Demands to maintain expenditures are strident, even though revenues have fallen significantly over recent times, and the attacks have been relentless whenever reductions in expenditure are announced.

Over the last few years expenditures have increased in line with increasing revenues, setting up additional public service functions and staff. However, the downturn in the economy has changed the picture.

The main culprit is declining revenues from the GST. Consumer confidence is down, and consumers are spending less, or buying goods offshore. Such goods do not attract GST.

Furthermore, the formula on which GST reimbursements to the States are based is under review, with the threat being that such a review will not go in Tasmania’s favour.

The Government has responded by cutting hard into its expenditures, saying the budget must remain in surplus and that it will not contemplate going into net debt. Net debt is a situation where it needs to borrow to pay its bills.

Cuts in education and health have elicited visceral attacks on the government, an uproar from a range of affected interests, and howls of protest from its own employees.

Protest meetings and street marches have become the order of the day – Ministers are lampooned and Cabinet is fractured, with the Green Ministers claiming that the budget decisions were not their responsibility. Not an edifying sight on their part.

So much pain all round. - Has it all been worth it? And is it necessary?

First up, going into net debt means borrowing money to pay the bills. Many have argued that this is not a good policy and have called on the example of the household budget to explain their position. We cut the cloth to suit the circumstance.

However, the question “Should we go into debt at all?” is one that needs to be asked, and analysed.

If no action is taken to rein in expenditure, then maintaining the status quo is not a clever option. Expenditure outstrips receipts. Borrowing money to pay employees and to spend on other recurrent expenditures will lead to the nightmare scenario of borrowing money to pay the interest on moneys already borrowed. A bad situation simply gets worse.

If money is borrowed to assist in a transition which leads to less future expenditure then this is not a bad option at all, because of future savings that can be made. However the Government does not appear to have considered this alternative, which means less pain for those affected and buys time to bring in appropriate transitional arrangements.

In fact, this is a much more sensible option because it would enable the government to be more strategic in determining where to make the cuts, rather than the “across-the-board slash-and-burn” approach presently being employed.

In previous articles I have mentioned that a review of departmental management is long overdue, and that the focus of government programs should be on outcomes, rather than processes. Whether it involves planning issues, the management of our hospitals, or running our power utilities, taxpayers should be concerned to ensure their dollars are being used effectively.

However, the present arrangements bypass this step. Government says to its Heads of Department – expenditure needs to be cut. The manager elects to cut services. Cutting services is the easy option for a manager to take. The odium falls on the government for forcing reductions in expenditure. But the real issue remains: it is not the services being cut, but whether the management of those services is being done effectively. In other words, is management doing its job properly? I don’t see this question being asked at all.

Furthermore, money that is spent on capital works, and in particular on works that assist the economy to generate wealth, should not be considered inappropriate expenditures, as the revenues raised from the increased economic activity will cover the expenditures outlaid. In fact not making that investment now will lead to a lesser economy later.

And spending money on timely maintenance of existing infrastructure such as roads will ensure that greater amounts of money are not required later to fix even bigger problems of dilapidated assets.

So, in summary, going into debt is not necessarily a bad thing, as long as it can be shown that there is a return on that investment.

Given this situation, it is interesting to note that every other State in the Commonwealth has brought down budgets that have moved them, or have expectations of moving them, into a position of net debt. A recent report from the ANZ, entitled “Australian Public Sector Chartbook” provides a snapshot of each State’s circumstance. Essentially, net debt in every State except Tasmania is forecast to be in the vicinity of 3 to 5% of GSP. Victoria in fact is forecast to be above 6%. Tasmania stands alone in following an ideological commitment to “no net debt”.

And yet expenditure patterns are not that divergent. Employee-related expenditure in all States is around 45% of all expenditures, and what is called “Other Operational Expenditure” is around 25%. Tasmania’s pattern of spending is similar to other States.

However, as Ruth Forrest MP has pointed out (Mercury 16 November), we have dipped our fingers in the cookie jar, and there is very little in the way of cash reserves left to play with. The wild swings in the GST revenues make it imperative for a small economy like Tasmania to cut a new deal with the Commonwealth, to even out these swings and roundabouts. Suggested cuts in the GST revenue should be balanced out by such an arrangement. Such a deal is an imperative and the State should waste no time in putting its case together.

And that case should include a commitment to reform in the public sector. It is essential, no question. However, maybe it’s time the government revisited its approach to keeping the budget in surplus. Surpluses of themselves should not be the goal. Effective management should be. With street marches, stopwork meetings and the general collapse of morale in the public service, and legitimate concerns being expressed within the broader community, government could do itself a real favour by loosening the purse strings a little and buying itself time to become more strategic in its reform agenda.

Confidence, like respect, doesn’t just happen – it must be earnt

Details: Created on Wednesday, 30 November 2011 11:00; Written by Julian Amos

The Tasmanian economy is flatlining. Statistics released by the ABS last week for the 2010-11 financial year show a rate of growth for Gross State Product for Tasmania of 0.8%, compared to the national growth in GDP of 2.1%.

As a state, we are continuing to fall behind the rest of the country. This situation was recognised back in August*, when it was said that Tasmania was at real risk of becoming an aged care facility in a national park. Unfortunately, nothing seems to have changed.

No matter what the field of economic endeavour, the typical experience is of extraordinary delays in gaining approvals to move projects forward. Whether it be a rural subdivision, a mining exploration licence, or building a commercial building, all suffer from being bogged down in a slow and cumbersome bureaucratic process.

This has - inevitably - led to Tasmania getting a reputation that it is too hard to do business here, and so projects that could occur do not attract the capital necessary to make it work.

Some may argue that this is a good thing. There are those who want Tasmania to stay as it is. However, times do change, and so doing nothing actually means going backwards. Time is a critical element in determining where money is going to be spent, and if it is too hard to do it here, then it will be spent somewhere else.

And this then reflects on investment levels, employment levels and participation rates. Opportunities pass us by, our employable youth leave to find work elsewhere, and we slide into a most unenviable position of despair and social disintegration.

The Pennicott experience at Bruny Island is a classic case in point. A successful and award-winning business entrepreneur, the benefits of his enterprise (Bruny Island Cruises) flow on to other businesses in the area, and to the good name of the State as an eco-tourism destination. He is endeavouring to expand his business, and readily acknowledges he is putting a strain on existing infrastructure. However, opponents of his expansion have taken their opposition to the Appeals Tribunal, and to date Pennicott has spent over $200,000 responding to this opposition. What a waste of time and money, which could have been much better spent in expanding his business and the infrastructure necessary to sustain it.

The Clarence reuse water development supplies grey water from treatment plants at Rosny and Rokeby to the Coal River for use as irrigation water. It is a sound project. However, the infrastructure at Rosny is such that saltwater from the river floods in at high tide making that water unusable. And at Rokeby, a disagreement between Southern Water and the EPA (the EPA insisting on unrealistic outcomes regarding supply levels and monitoring) has meant no water is being accessed. The water still has to be treated, but goes into the Derwent instead. The remaining infrastructure is underutilized, the aboriginal assessment issues over the holding dam are still not resolved three years after investigations commenced and water supply to the Coal River is unreliable. The result: a large number of irrigation projects remain in the planning stage, pricing issues still need clarification and investment still needs to occur so that wealth and new jobs can be created. The State desperately needs both.

The $100m building development project at Parliament Square remains unresolved due to long-running planning appeals delays, despite it being selected as the preferred option by the public, being approved twice by the Heritage Council and the Sullivans Cove Waterfront Authority and by the independent umpire RMPAT. Tourism projects such as Crescent Bay remain unresolved. As detailed in these pages many times less patient developers have simply walked away altogether rather than bear the ongoing cost of this sort of delay.

These three examples show that decisions by government are critical to making things happen, and it is not just about money.

The approach of the government has been to talk of trimming the budget, but only that. It is though the budget has become the sole focus of the government. The approach by the government to become a “budget cuts” only government is taking its toll on the economic fabric of this state, and on its own electoral prospects.

The budget is only one of a number of tools in the government’s toolbox, a tool available to the government to parade what it stands for, what its priorities are and where it is leading us. Which begs the question – what does it stand for?

It stands to reason that we must cut the cloth to suit the circumstance, but the circumstance should not be haunted by bureaucratic ineptitude, a hidebound ideology of “delivering a surplus” at any cost and regulatory complications. At such a time, it is essential that these constraints be removed and that people who wish to invest be encouraged to do so.

The government must start talking up the economy, it must present a vision of growth, and an enthusiasm for investment. Yet we hear nothing about vision, or of purpose, or of future directions, emanating from government spokespeople. In fact just the opposite is true.

There are opportunities for the State to engage with the Commonwealth to get a better financial deal. It requires a negotiation, hard-nosed, as distinct from the price-taker mentality that has recently been displayed, such as with the GST receipts, health payments or forestry arrangements.

And such discussions should occur now, before a fall in Federal receipts becomes an issue. The Federal Government has made two significant policy commitments, with far-reaching ramifications to their own bottom line.

Receipts from the MMRT (the mining tax) are dependent on continuing high commodity prices for iron ore and coal. But these prices are not assured longterm. Yet longterm spending commitments are being made in areas such as tax reform and superannuation payments. A significant exposure.

And the carbon tax, which is enabling tax breaks across the board is also dependent on a viable carbon market. Yet such a market has collapsed in Europe, and shows no signs of getting up in the US. As Bob Cotgrove exposed in the Mercury last Saturday, the tax will have absolutely no effect on climate. However, the move to more expensive energy options will have a significant longterm detrimental effect on our manufacturing capability and our future prosperity.

A weaker economy overall, a challenge indeed for Tasmania.

It is imperative that the government changes its narrative immediately, from cutting expenditure to opening up opportunities. The future of our State depends upon it.

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