Image for State Governments can’t control the economy. There, I’ve said it ...

*Pic: Peter Gutwein in Parliament, flanked by Premier Hodgman and Rene Hidding ... ABC pic

At the Federal level, there’s scope for influencing consumer demand and business investment through application of monetary policy, and the labour market through regulation.  As we’ve seen in recent years, a mirage of economic prosperity can also be created through Keynesian stimulus.  But it’s only an illusion, and when the school halls are built and the Family Tax Benefit bonuses spent, the real economic forces at play come back to haunt us.

Even less sustainable is the wasteful yet endemic practice of giving the private sector money, hoping business will respond gratefully by providing a mountain of tax revenue and a jobs bonanza.  There are countless examples of governments, State and Federal both, throwing cash at businesses without any real analysis of likely outcomes, then walking away after the obligatory media conference and photo shoot.  Nobody really knows what happens after the cheque clears.

At the Federal level, there’s often some tangible benefit to the economy as a whole.  When Ford, Holden, BHP Billiton or whomever are given a few hundred million dollars, jobs may be retained, workers may continue to contribute to the income tax and GST pools and some company tax is likely to be levied.  Drill down to a smaller economy, like that of Tasmania, and a different picture emerges.

Virtually none of the multitude of handouts, subsidies, grants, benefits, or waived revenues has made a positive impact to Tasmania’s finances in recent years (as far as we can tell, because in most cases, regardless of the dollar value, there has been no analysis or evaluation of the benefits).  And we’re talking billions of dollars here.

Looking at the long and sordid history of corporate welfare in Tasmania isn’t a happy exercise.  It’s the sort of capitalism a committee might dream up – acknowledging the ability of the private sector to create positive community outcomes, then distort the same system by favouring some participants over others or throwing cash around at random.  A level playing field on a 60-degree slope.  Or Robin Hood on acid.

So the Treasurer hands down his first Budget next week, don’t expect to see any form of stimulus for the business sector.  Peter Gutwein knows that won’t work.  Not that there’s any money to pay for another round of handouts anyway.

Since Lara announced the absence of hay in the barn (even though she stood and watched Aird, Lennon and others pilfer it), the position has got worse.  Much, much worse.  Of course there are many explanations for that.  One could suggest the size and cost of the public service is to blame.  It is indeed a factor.  As is the massive duplication of services in a small regional economy.  A health system that favours treatment over prevention.  And parochial demands to have a school in every hamlet.

All of that needs addressing at some point, although it wouldn’t be fair to blame Tasmania’s financial predicament on any of them.

It’s really social factors that have caused the problem:  Lifestyles vastly different from those many Tasmanian businesses and service providers are accustomed to dealing with.  Changing demographics in our society.  Terrorism.  An emerging middle class in Asia.  Awareness of ethical and conservation issues.  None can be easily dismissed as passing trends; nor can they be changed by fiddling with Budget parameters.  These paradigm shifts are real, ongoing, and our business and government sectors haven’t adapted to them well.  Tasmania is now a tiny, insignificant fragment of a shape-shifting world economy.

A small, but compelling piece of evidence supporting this might be the fact Tasmania’s most sought-after export is not woodchips, zinc or abalone, but a $90 nylon bear stuffed with lavender.

Whilst not suggesting Peter Gutwein will be considering putting a levy on export of purple bears, he needs to do something to prop up Tasmania’s revenue sources.  Less than 40% of the Budget is sourced internally.  The rest comes in the form of Federal handouts. 

The biggest cash cow for Tasmania is payroll tax.  Arguably the ultimate job destroying impost, payroll tax puts $300 million each year into State coffers, and there’s little scope to increase that.  Tasmania, Victoria and NSW all have similar payroll tax regimes, and are embroiled in a race to the bottom in encouraging bigger employers to relocate to their relevant precincts.  Ultimately, it’s a zero sum game, with incentives from one State resulting in lost revenue from another.  Payroll tax can’t be increased – and if another State cuts or abolishes it, then we’re in serious strife.

The much-heralded resource industries - forestry, mining and agriculture aren’t significant in a revenue sense.  Mining royalties contribute just $50 million each year – enough to run the health system for 9 days.  Running the new, revamped forestry industry looks likely to come at a cost of around $100 million each year for eternity.  Our farmers grow nice stuff, but the cost of providing some of them with irrigation in recent years is vastly higher than their financial input in terms of taxation.

The financial year just ended saw a deficit of around $400 million.  Even modest adjustments for inflation would see a 2014/15 figure of more than $650 million if the parameters aren’t adjusted.  A big challenge for a new treasurer, particularly in the face of a fiscally hostile Federal Government.  If some of Gutwein’s mainland counterparts had their way, and GST distributions were recalculated, the situation would be much worse.  Like a $1.3 billion deficit.

Sadly, ‘open for business’ slogans won’t make a dent in that sort of problem.  To return the Budget position to anything approaching sustainability just three options exist – massive cuts to the public sector an obvious and already dismissed solution, at least this year.  Lifting revenue is where governments have gone in the past – hiking taxes on cigarettes, badgering property owners for a higher contribution, possibly even suggesting those exporting Tasmania’s sovereign assets like timber or minerals pay a commercial rate.  That won’t happen.

All that’s left is the disposal of assets.  An emergency garage sale if you like.  And there’s plenty to flog off.

Hydro Tasmania would be worth twice as much under a regime where renewable energy were valued, which isn’t currently the case.  But there’s a big carrot in the form of a 15% subsidy from the Federal Government should Tasmania’s generation assets be privatized.  Not this year, but it will happen.

Tasmania’s ports, the MAIB, various Forestry Tasmania assets and some of the irrigation schemes all have value.  Thinking tangentially, there’s no real reason why significant parts of the public service shouldn’t be progressively opened up to private operators.  A toll on the Tasman Bridge is inevitable in the coming decade.  TT Line is arguably irrelevant, and although there’s no chance a private operator would be interested in running a Bass Strait service, at least the Spirits have some residual value if sold.

There’s also the RBF.  The Government has possession of a review into that organisation’s operations, which values the saleable component at zero.  I don’t agree.  If the accumulation fund were offered on the open market, I’d expect offers between $80 million and $120 million, going some way towards filling the 2014/15 black hole.

If pushed, I would predict Gutwein will be aiming for a deficit of around $250 million, improving to a surplus within four years.  The second target is impossible without asset sales.  Putting the Budget back in black in that timeframe can’t happen unless we suddenly see the Federal Government become a benign, rather than hostile provider of funds.  Neither a modest deficit this year, or a surplus in future years are likely without unpopular cuts to the public sector, together with massive reform to delivery of services.

The State Government is still enjoying a honeymoon of sorts, appearing far more rational and reasonable than their Canberra cousins.  That might all change next Thursday.

Tom Ellison is an analyst specializing in the Tasmanian financial sector.  His review of the State Budget will be released at 5pm on the 28 August.

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