Image for How to squash an economy

*Pic: The buck stops here ... Peter Gutwein, centre, and Premier Will Hodgman, left, in Parliament ...

The state government is slashing the public service because, it says, Tasmania can’t afford to pay its way and faces a fiscal crisis. But does it? Changes need to be made, argues Martyn Goddard ‒ but not this quickly and not this way.

‘There is an air of quiet optimism in the community,’ treasurer Peter Gutwein told Parliament in October, ‘as retail sales recover, visitor numbers increase, jobs are created and the economy begins growing again for the first time in years.’

At the time Mr Gutwein spoke, announcing that he would get rid of 3.5% of all public servants, the Tasmanian economy had been in slow and uncertain recovery for a year ‒ a process that began in the dying months of the previous government.

But if the sense of optimism was quiet then, it’s a lot quieter now. The economy is growing, but slowly. Gross state product for 2013-14 rose by 1.2% over the previous year, the slowest growth of any state.

Unemployment, still the worst in the nation, improved over the year but by the time Mr Gutwein spoke of quiet confidence, the improvement had stalled. In trend terms, growth in retail turnover almost stopped at about the time of the May election and has been going backward since August. On present indications, low-margin discount stores will have a better Christmas than anyone else.

Tourist numbers? That depends on whose figures you trust. The state government’s survey shows strong growth; the federal government’s survey shows a strong decline. Take your pick.

Other areas ‒ the construction industry and business investment are keeping the economy going. In trend terms, housing finance approvals ‒ driven at least in part by the new government’s first-home owners’ subsidy ‒ have been rising since the election but at about a quarter of the rate seen in 2013, Labor’s last troubled year.

The picture, then, is of a patchy and fragile recovery in danger of stalling altogether.

Two obvious things happened at once: the federal government’s May budget, which sent consumer confidence plunging; and the new Liberal state government was elected with talk of big cuts to the public service. As that talk morphed into concrete plans, anxiety in the community ‒ among public servants, their dependants and the businesses which rely on their custom ‒ increased and turned into real economic damage.

A small mid-year rise in the Westpac Melbourne Institute consumer sentiment index, which plunged after the Joe Hockey’s budget, was quickly wiped out. The critical pre-Christmas December release plunged another 5.7% back to the level of the global financial crisis in 2009.

‘This is a very disturbing result,’ said Westpac chief economist Bill Evans

‘This is a very disturbing result,’ said Westpac chief economist Bill Evans. ‘Respondents are clearly concerned about the outlook for the economy and job security. In addition there is ongoing disillusionment about the May (federal) budget, six months after it was announced.’

In a parallel survey, Evans said, the number of consumers expecting unemployment to rise is back to the level of June 2009.

Many retailers and other businesses are facing a bleak Christmas and a new year that promises to be less than happy.

The Tasmanian economy, like that of all other states, is facing strong headwinds generated from Canberra. Conventional economics dictate that this is not the time for contractionary policies at state level. But the Tasmanian government’s austerity drive is delivering precisely that.

In October the state government announced budget cuts which would eventually total almost a billion dollars, including getting rid of 861 full-time equivalent public servants this financial year. The dangers of taking that amount of money so quickly out of a fragile economy, and of putting so many extra people onto a struggling private sector jobs market, should be obvious.

According to the Australian Bureau of Statistics, this state has 39,200 state government employees ‒ one for every 13 Tasmanians. In NSW, Queensland, WA and the ACT, it’s one in 14. The outliers are Victoria ‒ one in 17, the result of Jeff Kennett’s privatisations ‒ and one in 9 for the Northern Territory, where the population requires increased services.

On that basis there may be room for greater efficiency, but Tasmania’s older, sicker and poorer population needs a higher level of service. So a slightly greater ratio of public employees might be justified. We are certainly not as bad as the government and some business leaders would like us to believe.

Nor are public sector wages blowing out. Between 2012-13 and 2013-14, the total wages bill for the state public service in Tasmania rose by 1%, the equal lowest in the country. The national average was 3.8%.

And the average wage for each state public sector employee rose by 2.1% ‒ less than inflation ‒ compared with 2.4% for all state and territory governments.

So the notion that the Tasmanian economy is somehow being held to ransom by lazy and greedy bureaucrats simply doesn’t hold up. It’s true that our public sector comprises a greater share of the economy than in other states ‒ but that’s because the Tasmanian private sector is small, rather than because the public sector is so big.

An indicator of that is that only about one-third of the state government’s income is derived from the local economy. The rest all comes from our high share of GST and from specific-purpose payments from Canberra.

There is a hopeful theory among many free-market economists that, to boost the private sector, all you have to do is cut back the public sector. That, the theory goes, will allow private business to move into the vacated space, produce tax cuts for people to spend and allow entrepreneurs to flourish.

Sometimes, in a large and strong economy, this can work ‒ up to a point, anyway. But our economy is small, we import many of our needs and our state government is funded largely by cash from the mainland. Cutting back the public sector, particularly right now, is far more likely to send the fragile private sector crashing rather than prospering ‒ particularly the small and medium businesses that rely on local sales. But that’s what is happening.

‘Private sector investment today depends on investment by the public sector,’ US economist Jeffrey Sachs wrote recently. Professor Sachs, from Columbia University, is also a special adviser to the UN secretary-general.

‘Our age is defined by this complementarity. Unless the public sector invests, and invests wisely, the private sector will continue to hoard its funds or return them to shareholders in the forms of dividends or buybacks.

They are cutting back ...

‘In most countries, governments are not leading, guiding or even sharing in the investment process. They are cutting back. Free-market ideologues claim that governments are incapable of productive investment. Nor do Keynesians think through the kinds of public investments that are needed; for them, spending is spending. The result is a public-sector vacuum and a dearth of public investments, which in turn holds back necessary private-sector investment.’

The Tasmanian government is following the well-trodden and disastrous path to austerity. The whole policy rests on the notion that the state’s government debt is too big for us to service or pay off and must be reduced at once.

‘The previous government delivered deficit after deficit, put the budget into an unsustainable position and put the state on track for cumulative deficits of more than $1.1 billion,’ Peter Gutwein said.

‘We simply cannot allow the budget position to get worse. If we don’t start to fix the problems now, the actions that will need to be taken in future years will be even more severe.’

This approach has dominated the government’s entire program. Everything else is subordinate to this.

But the management of government finances is not this simple. Even conservative fiscal management calls for a balanced budget over the economic cycle, borrowing and spending when the economy is weak and paying it off when the good times return, as they always do.

It’s a predictable cycle of events. There is usually a space of 12 to 15 years between each peak and between each trough. But both sides of politics prefer to ignore that cycle. In the good times, they behave as if the salad days will last forever. And when the economy turns, as it always does, they then behave as if the bad times will last forever.

Politicians spend a lot of time telling us how awful budget deficits are. But their behaviour shows they hate surpluses even more. When they get some money in the kitty, they can’t wait to get rid of it ‒ often in the most unproductive, vote-catching, fistful-of-dollars tax cuts, subsidies and giveaways.

The government’s claim that state debt is vast and borrowings are unsustainable is not supported by the data. On 30 June this year, general government borrowings ‒ that is, not including government-owned businesses ‒ were $1.149 billion. But that includes $920 million of overnight borrowings on that particular night, the end of the financial year. The valid figure, then, is $229 million.

Government owned businesses, like most large companies, run their balance sheets with a healthy quota of debt, which is serviced or paid off from their own operations. The use that debt to fund the development of their businesses, to become more productive and more profitable than they could otherwise be. The only other way to fund new investment is to get more money from shareholders ‒ either as new equity or in withholding money that would otherwise be paid as dividends. Companies, including those owned by governments, which fail to borrow can expect to be punished by their shareholders.

It’s therefore not valid to lump the borrowings of government-owned companies in with those of central government. They are different things and should be treated differently.

Nor are we being crippled by interest payments ...

The state government’s net debt in 2013-14 was $208 million. In the current financial year, Treasury expects it to increase to $220 million.

Nor are we being crippled by interest payments. In 2013-14, borrowing costs relating to general government debt amounted to just $12 million. And the Treasury made some money from its own lending. Receipts from interest payments were $13 million.

At the time the government came to power, the state’s bottom line was improving. The deficit ‒ the net operating balance measure used by the Bureau of Statistics and other states ‒ fell from $316 million in 2012-13 to $165 million in 2013-14. Net debt fell over the same period from $220 million to $208 million.

The Premier, the Treasurer and other ministers have repeatedly claimed the government’s debt is unsustainable. By any meaningful measure, they are wrong.

Figures from the Commonwealth Grants Commission show that compared with other states, Tasmania’s per-capita net borrowing in 2012-13 was the second-lowest in the country: $440 for every Tasmanian, compared to $817 for the average of all states and territories.

In America and especially in Europe, where some countries have debt that is actually is unsustainable, leading economists have tried to calculate the point at which government debt becomes unsustainable ‒ that is, too big to service, leading to default. One Swiss group, at the University of Berne, calculated the maximum sustainable debt ‒ the level of debt that could still be paid for and that markets would still be likely to fund ‒ for 23 developed national economies.

On those figures, Korea could theoretically borrow the most: up to 292% of gross domestic product. Greece was the most fragile, with only 89%. Australia’s maximum sustainable debt was 142% of GDP. (In fact, the Australian government’s debt is around 20% of GDP, the second lowest of OECD nations.)

It’s not possible to compare directly a state’s fiscal policy with those of nations. And Tasmania’s sustainable debt level has not been calculated. But, for the sake of argument, let’s see how we compare.
In 2013-14, gross state product ‒ a basic measure of the value of goods and services produced in Tasmania in that year ‒ stood at $24.913 billion. State government debt was $208 million. That’s a debt ratio of 0.8% of GSP.

But even that may be an overstatement. As we’ve seen, only one-third of the state government’s income comes from the Tasmanian economy through its own taxes and charges. The rest comes in the form of GST and payments from Canberra. So the government’s capacity to service and sustain its debt is three times the level indicated by the ratio of debt to GSP.

Tasmania is one of three jurisdictions running a deficit in 2013-14, along with South Australia and the ACT. The Tasmanian Treasury uses a measure ‒ underlying net operating balance ‒ which ignores one-off but nevertheless real Commonwealth payments. It put the state’s deficit for last financial year at $406 million. But most other states, and the Australian Bureau of Statistics use another measure, net operating balance. So, to compare ourselves with others, we need to use the ABS figures. On a per-capita basis, it works out like this:

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We’re certainly not the best but not the worst either. Deficits, unsurprisingly, are found in jurisdictions suffering most from painful economic adjustment and therefore most in need of an accommodative fiscal policy from their governments. And as Liberals are likely to point out, they also have Labor governments.

Every state and territory has seen its income affected by the global downturn, sharply falling commodity prices and a fall in GST receipts as a result of a sustained decline in consumption. That will change, as it always does. Tasmania also has serious underlying problems ‒ principally our relative isolation from trade routes and our demographics ‒ but there is no crisis. We need to make strategic and considered changes but these will not be delivered by the quick, knee-jerk austerity measures upon which the government has embarked.

Sacking 861 full-time equivalent public servants this year ... carries costs and risks ...

Sacking 861 full-time equivalent public servants this year ‒ and thereby threatening the finances and the futures of many more Tasmanian households because not everyone is employed full-time ‒ carries costs and risks. Unless we believe that a large number of public servants are performing no necessary work, or can easily be reorganised out of existence, services will suffer. The government, like most governments, has promised to cut regulation but until ‒ and unless ‒ it eventually achieves substantial deregulation, the regulations that exist will still need to be enforced and administered.

‘Back-office’ operations are, despite the popular belief, not an optional extra to government. Imagine what would happen if there were not enough people to process payrolls, or the effect on small and medium businesses if government departments paid their bills a week later than usual because there weren’t enough accounts-payable clerks.

One of the lessons from the previous government’s botched program of redundancies and sackings in 2011 was that unless the workload is reduced, getting rid of staff can lead to sharp increases in costs. In two years, the Giddings government got rid of 21% of FTE doctors in public hospitals and 6% of nurses. But the costs of employing each remaining doctor rose by 32% and of each remaining nurse by 12%. The staff had been reduced but the workload had not: patients kept coming through the doors. Expensive locums and agency nurses had to be employed. Nurses worked long hours of overtime, with hundreds of double shifts every month. Staff doctors were replaced by locums on $2,000 a day. Some doctors who remained demanded special contracts which earned them, reportedly, up to $1 million a year.

Redundancies for sacked workers are not cheap. The government has two main schemes ‒ voluntary redundancy (VR) for those who come forward, and a more expensive ‘targeted and negotiated voluntary redundancy (TNVR) for those who don’t. It could also sack people by abolishing their jobs but they would then go onto the unattached list and would have to be paid for six months for doing nothing. And the government has repeatedly promised that there would be ‘no forced redundancies’.

Assuming average lengths of service, a full-time public servant on the lowest pay scale would be paid $137,225 for a VR termination and $163,363 for TNVR. At the other end of the scale, the highest-level employee below the senior executive service would cost $597,557 for VR and $711,377 for TNVR.

Assuming the pattern of redundancies reflected the general patterns of seniority and length of service, getting rid of 861 FTE employees would cost the government over $32 million.

The government has not admitted either to the cost of its redundancy program nor to the unforeseen risks that will follow. These costs and risks will bite into the savings the government has announced and factored into its budget forecasts.

But none of that money will go anywhere near health ...

There are ample reasons to reform the Tasmanian public service and to bring services more into line with the needs of the population ‒ and perhaps to reduce its size in the process. The public sector has grown for the past 211 years, often more in response to sectional pressure and bureaucratic empire-building than to real community need. Reform has never kept pace with the need for reform. But reform needs to be undertaken not only for the short-term goals of government downsizing but for the more productive and lasting end of public benefit.

One place to start is with the Commonwealth Grants Commission’s analysis of the specific needs of the Tasmanian population. It looks in detail at the demographics of each state and doles out money from the GST pool accordingly. Tasmania’s needs are considerable but the GST carve-up boosts our budget to the level at which we could, if we showed greater competence, provide services equal to any in the nation.

In health this year, we will get an extra $169 million of other states’ money to spend on hospitals, disease prevention and community clinics. But none of that money will go anywhere near health. Instead, it will be siphoned off into other things that the Commission’s careful analysis shows we need less.

Welfare and housing does well, too. We are given an extra $119 million, or $230 per Tasmanian more than the other states get, to bring our standards up to those of the rest of the nation.
We are sacking teachers but this year we are being given $99 million for schools. We’re cutting back on legal aid but we are given $43 million more for justice.

That’s all on top of a huge general top-up to the state’s coffers which brings the capacity of our government to fund the services up to the level of the rest of the country, because the Commission recognises that the local Tasmanian economy cannot do the job alone. The specific amounts on top of that ‒ for health, education and so on ‒ are in recognition of the particular needs of our population.

There is no excuse for our government services to be so much worse than those in other states. No reason why our hospitals and health services should leave so many people untreated or under-treated. No reason why our education outcomes should be so poor. No reason why our homelessness problem should be as bad.

We need reform. Badly. But sacking public servants simply because the government is ideologically determined to cut spending when the economy needs the opposite is not reform at all.

*Martyn Goddard was a journalist and documentary producer, mainly at the ABC in Sydney and Melbourne. He has also worked as a publicist for the Adelaide Festival and publicity manager for the South Australian Theatre Company, and set up ABC-TV’s first national arts current affairs program. His current primary focus is as an independent health policy analyst based in Hobart. He has been a member of several key Commonwealth committees, including the peak ministerial advisory group on AIDS and hepatitis, and was the first consumer member of the Pharmaceutical Benefits Advisory Committee, which evaluates drugs for listing on the PBS. He has conducted many policy reviews and submissions for Commonwealth and other organisations, and is a former health policy spokesman for the Australian Consumers’ Association.

Martyn Goddard’s extensive analyses of Tasmania’s health system - and many other articles - are available HERE

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