Newman’s cuts will pay off

This article was originally published in The Australian by SMART Infrastructure Senior Research Fellow Joe Branigan. See the original here

IF the promises made in the 2014-15 Queensland budget are realised, Tim Nicholls can be proud of the turnaround in the sunshine state’s financial position compared with the big borrowing and spending Beattie-Bligh era.

The Queensland Treasurer’s first three budgets set the state back on the path of fiscal sustainability, which should promote better economic outcomes for Queenslanders.

The budget numbers are not set in stone but the promises are impressive. In the six years from the Newman government’s first budget in 2012-13 to the forecasts for 2017-18, Nicholls plans to reduce real per capita total employee expenses by an average of 5.5 per cent a year, much of that done in his first year. Real annual per capita spending growth on education, health, welfare and housing will be almost half that late in the Beattie-Bligh era. The turnaround in Queensland’s recurrent spending will represent a feat that betters Paul Keating’s ‘‘best-of-the-best’’ fiscal consolidation effort in the late 1980s.

But Nicholls must remain vigilant to backsliding on recurrent spending. As the International Monetary Fund noted in its latest Fiscal Monitor: “Containing the growth of the wage bill in a lasting way would require replacing the across-the-board wage and hiring freezes implemented in several countries since 2009 with deeper, efficiency-enhancing structural reforms.” Here, the recommendations of Queensland’s Commission of Audit in relation to introducing contestability for many public services (such as social housing for example) must be implemented in a lasting way so the growth in employee expenses experienced in the mid to late 2000s does not repeat itself. And Nicholls needs to promote more widely his fiscal strategy to keep spending less than revenue, to bind cabinet and the public to that commitment.

But Queensland’s greatest problem (apart from losing Origin I) is its enormous debt burden relative to the size of its population, which cost it the AAA credit rating and drains about $4 billion in interest payments from the state budget annually.

The proposed asset sales, which should reap $30bn to $35bn, are not only a good idea from an economic policy perspective, they are absolutely necessary from a public finance perspective. Queensland is at its borrowing limit based on credit rating agency metrics, and those who argue that asset sales are a zero-sum game ignore the reality that when a state has maxed its credit card it has no other choice but to reduce debt even if the value of future dividend payments is equal to the sale value of the asset, since not doing so dramatically reduces the state’s options to respond to future economic crises.

The Strong Choices campaign, which showed Queenslanders the unpalatable options if asset sales were taken off the table (such as raising taxes and/or cutting ser­vices), has been worthwhile because it has taken a lot of the emotion out of the debate even in the incredibly tribal maroon state.

The asset sales proposal in the budget should reap $30bn-$35bn, but Nicholls will allocate only $25bn to reduce debt and the rest to recycle assets. This is risky because the Newman government does not yet have in place a proven best-practice method for identifying, prioritising and evaluating infrastructure projects, or a successful strategy to ensure that the projects that are built are able to be funded.

This is particularly true in the transport sector, which is funded by taxes, tolls and fees, with no direct price signal on demand. Nicholls knows he must also rein in the out-of-control infrastructure borrow and spendathon of his Labor predecessors, and has promised to reduce the total annual capital program in real terms from an average of $19,900 per person a year under Beattie-Bligh (2006-07 to 2011-12) to $10,700 under Newman (2012-13 to 2017-18).

Just as important is the need to manage the trimmed-down $7bn version to ensure taxpayers get value for money. To do this his senior ministers must stick to good governance arrangements, to ensure that ridiculously over-specified mega-projects, such as the Cross River Rail — which to his credit Newman has pulled — never see the light of day.

Despite taking three steps forward on the path to fiscal sustainability, Nicholls understands there are many factors outside of his control. One is the federation and the process of horizontal fiscal equalisation. The system is in desperate need of repair, asrecent complaints from premiers about the cuts to their health and education budgets demonstrate.

It is time for the larger states to loosen their link from the commonwealth government and be held fully accountable for their spending and revenue decisions. The proposals in the National Commission of Audit to allocate a proportion of income tax revenue to states and set GST payments on a per capita basis make a lot of sense. At least this way, Nicholls will have two hands to battle the planners and dreamers in cabinet rather than have one hand constantly fighting Canberra for Queensland’s fair share.

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