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

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.