Tasmanian Times

The individual has always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, and sometimes frightened. No price is too high for the privilege of owning yourself. ~ Friedrich Nietzsche

The individual has always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, and sometimes frightened. No price is too high for the privilege of owning yourself. ~ Friedrich Nietzsche

Alex Wadsley

The State Budget Update: Panic or Celebrate?

Alex Wadsley
If the balance sheet is to be believed the government is not worse off than it was at the budget time. It is making the same amount of money, it is spending more, its liabilities have increased, but the value of its assets has increased much more than the liabilities. This means that the government is actually in a good position to spend its way through the recession, assuming it has a way to balance the assets and liabilities and access cash flow. The simple solution would be some form of asset sale to release part of the increased value associated with the state’s assets. The sale of TOTE could be seen as part of such a strategy. However given the state of the financial markets the government is unlikely to get the best price for many of its assets. A better solution would be to restructure the state superannuation liability so this monkey doesn’t keep weighing down the financial results. Currently the state government is operating like James Hardie facing a massive asbestos legal case: you can’t track their financial performance because changes in the asbestos liability keep shifting the baseline.

THE Mid-Year Financial Report was released on the 30th January. The headline was deterioration in the Net Operating Balance, a profit style measure taking revenues less expenses, from a$105 million surplus $91.7 million deficit for 2008-09.

In an unfolding global economic crisis this would be a scary development, but examination of the accounts in more detail shows that the shift has little to do with the crisis. Forecast revenues for 2008-09 are virtually unchanged from the budget, from $4.13 billion to $4.12 billion.

That’s right, the governments forecast revenues are only $7 million less than budgeted. So why panic?

The problem is that government expenditures are $190 million more than budgeted. Parliament was told the government would spend $4.025 billion in 2008-09, but the government is now spending $4.215 billion. It seems hard to blame this problem on the financial crisis.

The division of cost increases is spread fairly evenly across the components, employee expenses have increased by $38.9 million, but this is only 2% higher than forecast. Superannuation on the other hand has increased by 24.6% or $42 million and supplies and consumables by $48 million or 5%. So while it might be convenient to blame the ‘unaffordable’ recent public pay rises, this wouldn’t tell the whole story.

The rapid rise in superannuation, both as an employee expense and the nominal interest on the superannuation liability suggests this massive liability is still not under control. The increase in supplies and consumables is explained in the Preliminary Mid-Year Report as due to increases in health expenditures, including expenses relating to the Mersey. This is very convenient for the government as few would criticise spending more money on hospital operations.

The components of income have also changed, duty is down, GST revenue is down, but tied grants from the Feds are up. Thus, while the state government has virtually the same money that it budgeted, its freedom over how to spend the money has fallen… hence the budget woes.

Looking at other economic flows and the superannuation elephant once again rears its head, with a $478 million upward revision in the unfunded superannuation liability. The States’ net value was originally forecast to improve by $487 million over the financial year; it is now forecast to decline by $166.7 million.

This number is called the ‘comprehensive result’ in the papers, though in this case it isn’t comprehensive, because the balance sheet reported in the papers actually show an improvement in Net Worth, that is assets minus liabilities, for 2009, from $10.8 billion to $11.2 billion. Rather than falling in value, the net value of the State Government is projected to be $400 million higher than forecast!

There appears to be some reporting error in the budget papers, with a valuation increase of non-financial assets on the balance sheet of $860 million, $550 million more than the original budget, that is not being captured in the ‘comprehensive result’. I’ll leave this to the accountants to sort out, but what are the economic implications?

If the balance sheet is to be believed the government is not worse off than it was at the budget time. It is making the same amount of money, it is spending more, its liabilities have increased, but the value of its assets has increased much more than the liabilities. This means that the government is actually in a good position to spend its way through the recession, assuming it has a way to balance the assets and liabilities and access cash flow.

The simple solution would be some form of asset sale to release part of the increased value associated with the state’s assets. The sale of TOTE could be seen as part of such a strategy. However given the state of the financial markets the government is unlikely to get the best price for many of its assets.

A better solution would be to restructure the state superannuation liability so this monkey doesn’t keep weighing down the financial results. Currently the state government is operating like James Hardie facing a massive asbestos legal case: you can’t track their financial performance because changes in the asbestos liability keep shifting the baseline.

One way would be to transfer the superannuation liability into a state financial corporation, guaranteed by the state government, along with enough assets to cover the liability. There would need to be a balance of assets, some liquid, such as cash, and some illiquid, such as equity in state businesses like Aurora, Forestry Tasmania, the Hydro and TasPorts. The return on these assets then pays out the superannuation liability as it becomes due, without impacting on the states operating result.

Such a fund could be managed by the RBF, or have its own board, similar to the Federal Government’s Future Fund. With the state’s GBEs majority owned by a superannuation investor it is more likely that investment decisions will be made towards long-term profitability, rather than political expedience, and in some cases this may mean recommending asset sales. Instead of attempting to pay-down the unfunded superannuation liability, firstly by 2018 (prior to the 2006 state election), and then 2033 and now 2035, it would be paid off in one hit.

The Treasurer is then clear to use all available funds to support further investment in the State’s economy and infrastructure. An indicator of the difference can be seen by comparing the State fiscal balance and the State net cash flow. While the fiscal balance shows a deficit of $148.1 million, the government is still projected to raise $24.5 million more in cash then it intends to spend. This is not the time to save. If we’re no-longer building a new Royal or paying off super then this money should be spent supporting the economy.

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3 Comments

3 Comments

  1. Mike Adams

    February 5, 2009 at 1:51 am

    From my limited knowledge of economics I would anticipate that we’re in for a period of inflation. Money poured into consumer spending whether directly or through infrastructure projects or through very low interest rates will simply bump up prices as importers/ wholesalers and retailers take advantage and cushion themeselves against the colder winds to follow. And our balance of payments will blow out as those who don’t gamble the gift horse in Federal Hotels and other establishments to separate the punter from his money will spend up big on Jap or other imports.
    I agree, which is rare, with Turnbull. I think this is a depression we have to have and with luck emerge from the other end with sane and much greener policies.
    It could be, for those with existentialist leanings, a last chance given us by Gaia to curb our exploiting nature.

  2. Alex Wadsley

    February 4, 2009 at 12:19 pm

    The problem is that most of our politicians and bureaucrats don’t understand what is happening.

    They were led to believe that deregulated financial markets would cure the world’s ills and make everybody rich. Now they’re being told they need to simultaneously bail out the financial sector and stimulate the real economy or we’re in for a depression, while some jesters on the sidelines are still calling for budget surpluses and public service job cuts.

    Given that 20 years of neo-liberal economic dogma have been shown to be false, Rudd and Glenn Stevens are playing it pretty well.

  3. Bemused

    February 3, 2009 at 1:33 pm

    Good advice Alex but should I panic?

    Everytime I listen to this governments ‘explanations’ I feel like panicking! It’s got so that just seeing their faces on TV gets me shrinking back in anticipation.

    They are masters of the let down, never failing to disappoint despite my collapsing expectations.

    Every blunder, every new line of spin, every hollow promise, every falsely sincere expression of concern – they all contribute to a picture of adults somehow trapped in a kindergarten and contribute to my personal sensations of sinking into quicksand.

    I vote for panic every time.

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