Time to count the cost

Is the State Government making progress towards cutting costs, asks Ruth Forrest, MLC

THE Premier’s first major policy statement in February, the Mid Year Financial Report for 2010-11, followed a review of the flotsam left by the Aird-Bartlett duo.

At that time a few cost-saving decisions had been made, but most were still on the drawing board.

The estimated expenses noted in the Mid Year Report of $4740 million were almost identical to the Preliminary Outcome released in August, suggesting a lot of hot air but no significant overall cost savings in five months.

Within total expenses, “supplies and consumables” that represent about 20 per cent and are the second largest category after employee costs accounting for 50 per cent of outlays, saw a big drop, from $1013 million to $935 million.

In the past, items have been shuffled between “capital” and “repairs” and vice versa, or, to use the Budget vernacular, from “supplies and consumables” to “purchases of non-financial assets”.

Sometimes amounts to be spent are deferred. It isn’t evident at this stage if this has occurred because Forward Estimates have not been updated.

The cash balance in the Preliminary Outcomes has improved to $633 million hopefully not an illusion achieved by deferring rather than cutting expenditure.

The Government’s operating income, measured by the Net Operating Balance (NOB), has also improved now to a deficit of $29 million, compared with the original budgeted figure of a $65 million deficit.

Non-operating amounts have helped the bottom line, including revaluations of the electricity companies and Tas Ports, partially offset by the decline in the value of Forestry Tasmania.

However, the most significant change that occurred was the write-down of the value of the state’s roads of $743 million. Admittedly only a book entry and not a cash outlay, but nevertheless it does affect the state’s overall equity position and subsequent calculations of the NOB, the current measure used to describe Budget sustainability.

The state’s overall equity position worsened by $437 million during 2010-11 compared with an improvement of $1146 million predicted in the original Budget a turnaround of $1583 million.

In its recent Budget, the Government unveiled Fiscal Strategy Mark III, its third strategy in as many years. The cornerstone of the strategy is to achieve a sustainable Budget position as measured by the NOB.

The NOB includes all grants as income, even those that may, in part, be earmarked for capital purposes. Because capital expenditure doesn’t appear in the NOB, capital grants from the Australian Government will boost NOB.

The Budget papers acknowledge this problem by presenting underlying NOB figures, by excluding capital grants such as the recent stimulus payments. But it is the unadjusted NOB figures that form the basis of the Fiscal Strategy Mark III.

A further problem with using NOB as a measure of Budget sustainability occurs with the write-down of assets such as the state’s roads after the formulation of the strategy.

It means depreciation in subsequent years will be less and the NOB consequently more, therefore it is illusory to say the Budget is more sustainable.

Overall, the NOB is a second-rate, easily corrupted measure of Budget sustainability. We need a better measure.

Fiscal Strategy Mark III in the short term, 2011-12, seeks to achieve a NOB of minus $120 million, and the Budget estimates the NOB will be minus $114 million, so we’re on track this year.

In the medium term, the strategy is to achieve a NOB of $50 million, but the forward estimates note the NOB will be only $2 million, putting Fiscal Strategy Mark III in trouble already.

The long-term strategy in 10 years’ time is to achieve a NOB of $200 million. Is this achievable? I hope so, but the best result in my memory was $53 million in 2007-08 and that was the year the Hobart Airport was sold.

I would suggest that this is not really a strategy, rather it’s just the estimated Budget outcome, the figure on the bottom line. A strategy should be a means to achieve stated goals, not estimated Budget outcomes presented as a strategy.

The Government still aims to fully cash-back the unfunded super liability by 2035, but the strategy no longer forms part of Fiscal Strategy Mark III. The net unfunded amount at June 30 is still reported as $3521 million.

This is misleading because there is no cash-backing. The unfunded liability at June 30 is $4968 million. Listing the net unfunded super liability as $3521 million implies a funded amount of $1347 million, the amount that should be in the Superannuation Provision Account (SPA). But it’s a “Clayton’s account” with no cash in it.

At June 30 there was $633 million in the bank. We are yet to be told the exact details of the $2300 million that is supposedly in various deposit and trust accounts, most of which has been appropriated by Parliament through the Budget process.

In other words, there’s only $1 in cash for every $3 appropriated by Parliament allegedly sitting in special deposits and trust accounts, waiting to be spent in areas funded in the Budget. The rest has been “borrowed” by the Government and spent.

The Government talks about restoring cash balances over time. This is unlikely to happen, it’s too late. The horse has bolted from the barn, along with all the hay.

During the term of this Government we will see little change in cash balances. The present plan for restoring cash balances is little more than a wing and a prayer.

We need to severely limit the system of internal borrowings and stick to appropriating what cash is available. Reform is in the pipeline but overdue.

Most of the internal borrowings are from the SPA and Tasmanian Risk Management Account (TRMA). As the state is self-insured, the TRMA is supposed to be available to meet insurance needs as and when they occur. I am not convinced the current cash-backing of the TRMA is enough to meet serious disruptions such as floods that have occurred in other jurisdictions recently.

The current slowdown in revenue may be temporary. However, we should plan for the worst while hoping for the best. There’s little support for increased taxation, so we need to make do with what we’ve got and do more with less.

The Mid Year Financial Report in February acknowledged that the share of outlays attributable to employee costs was unsustainable and that measures needed to be adopted to improve the efficiency and productivity of the public sector. It also costs us more to deliver the same service compared with other states.

A break-up of wages, such as management wages, back office, administration, front-line wages or other relevant categories is not provided, just employee costs.

Staff numbers are difficult to obtain, making it frustrating for a legislator who wishes to scrutinise and contribute to the debate.

We need to be able to help identify not only redundant programs and those that can be downsized, but more importantly what is the break-up of the various wages categories.

Maybe the Public Sector Productivity Strategy will reveal all, though it is unclear how this is proceeding and when we are likely to see the results.

Cutting government spending on resources without cutting the size of the state sector doesn’t work either, because services decline and costs increase as they are shifted to other areas. The perverse priorities and the lack of transparency, despite all claims to the contrary, are concerning.

Thus far the public evidence provided in the Preliminary Outcomes suggests that the Government has had little success cutting total expenditure.

We await the first of the quarterly Budget Saving Strategies progress reports to be released next month. Hopefully this will provide a much better guide as to how the state is tracking but I am not holding my breath.

Ruth Forrest is the independent Member for Murchison. First published in Mercury, HERE