Shortly after taking office as Premier and Treasurer, Lara Giddings revealed that the Tasmanian Government’s financial position had deteriorated significantly since last year’s Budget, largely as a result of a further shortfall in GST revenues.

Without corrective policy actions, Tasmania’s budget ‘bottom line’ will be almost $190mn worse off over the remainder of the current fiscal year, and the following three years, than envisaged last June; and the ‘general government’ sector (that is, excluding government business enterprises such as Hydro Tasmania and Aurora) is set to become a net debtor again during the 2012-13 financial year, for the first time since 2003-04. And Treasury projections indicate that, in the absence of corrective action, by 2014-15 this net debt would exceed $1.5bn, a higher figure than when Labor took office in 1998.

If this debt were being incurred to fund much needed economic or social infrastructure, it might not be unduly worrying. But the Government is in fact cutting back its provision for infrastructure spending over the four years to 2013-14 by $90mn. The prospective swing back into net debt is entirely because the Government’s ‘operating’ expenses will exceed its revenues. For a State Government, that is simply not sustainable.

Tasmania’s medium-term budgetary position is at risk of being made even worse by the Gillard Government’s accession to pressure from Western Australia to amend the principles under which the Commonwealth Grants Commission divides up the revenue from the GST among the States and Territories – principles which worked in Western Australia’s favour for most of the 78 years since the Grants Commission was established following WA’s vote to secede from the Commonwealth in 1933, but which the Western Australian Government wants to change, now that the rapid industrialization and urbanization of China and other developing economies has pushed the prices for the resources with which Western Australia just so happens to be richly endowed to record high levels, making that State the richest in the Commonwealth.

Western Australia’s attitude is a bit like that of a pensioner who has won the lottery, and then complains about losing the pension and having to pay some tax on his winnings. But there are a lot more votes in Western Australia than in Tasmania, and even more in New South Wales and Victoria, two of whose former Premiers make up the majority of the review panel which the Prime Minister has established to review the distribution of GST revenues from 2013-14 onwards.

All of this underscores the importance of the Tasmanian Government taking effective action to bring its ‘operating’ expenditures into line with its revenues. As I have written here previously, the fundamental problem is that Tasmania spends more per head of population, or as a proportion of the State’s income, providing government services than can be explained by our relatively small and dispersed population, or the relatively high proportion of our population who are for various reasons in need of such services.

Unfortunately, crude measures such as ‘vacancy control’, across-the-board ‘efficiency dividends’ and voluntary redundancies won’t solve that problem. Voluntary redundancies, for example, mean that the employees most likely to leave are the ones who are most confident of finding employment elsewhere, who more often than not are the ones the Government would most like to keep. Cutting spending across the board by arbitrarily-chosen percentages, or simply not filling vacancies caused by retirements and resignations, means that no thought is given to how most effectively to achieve savings whilst minimizing the impact on the quality of service delivery.

What the Government ought to be doing, and what those who aspire to be in government should be urging, is a thorough-going investigation of where and why the unit costs of service provision are higher in Tasmania than elsewhere in Australia, the results of which should inform the decisions as to what cuts are made, where.

First published in The Examiner, Tuesday 12th April 2011.

Former ANZ Bank Chief Economist Saul Eslake is now Director, Productivity Growth program, The Grattan Institute