Economy
Tasmania’s economy – out for lunch. Back Soon
Nobody doubts why the Hodgman Government won so convincingly in March – it was viewed as a better economic manager than its predecessor. Its primary mandate could be likened to that of the administrator of a failed company – tasked with keeping the place afloat and making some tough decisions. Like restructuring, cutting staff, increasing efficiencies and removing the dead wood accumulated over the course of 16 years. This Budget goes some way towards achieving that.
Liberal has delivered on its election promises; shown a glimpse that Tasmania’s financial position can be returned to a semblance of sustainability in a few years; acknowledged its sister government in Canberra has treated Tasmania harshly.
The business community will applaud.
It’s also a document without empathy – bereft of ideas, lacking in vision. It’s a Budget drafted by accountants, for accountants. People are just reduced to an inconvenient expense in the profit and loss account. Peter Gutwein’s first Budget is, in essence, what we were all expecting.
And for all the talk in recent months of Tasmania being open for business, Peter Gutwein has just hung the ‘out for lunch’ sign on the door. With the exception of the obligatory handouts to the white-shoe brigade (around $10 million in total to help three illusory tourism developments, all of which have promised but not delivered for a decade) there’s little in direct assistance to the private sector.
We’ll be out for lunch until late next year, when we’ll find out whether the frosty relationship between the State and Federal Treasurers thaws enough to work together on genuine tax reform, or the $2.1 billion already stripped from Tasmania’s revenue was just the start of a Cold War. Two White Papers – one reform of the Federation and one on tax reform – are due late 2015. Things could go badly indeed.
Gutwein isn’t skirting around the problem either. A consistent theme in this year’s Budget is the risk of feral Feds bowing to pressure from the resource-rich states and cutting our GST distributions to unmanageable levels.
There are a lot of risks in this Budget and most are on the downside, with the possible exception of revenue from Tasmania’s traditional tax base – it’s little better than it was a decade ago and in some cases, like the collapse in mining royalties, to just $26 million – much, much worse.
The headline numbers – most prominently a claimed $285 million deficit this financial year – appear reasonable. Except somebody in Treasury’s been throwing the magic faerie dust around, and the real number would be closer to $400 million if it weren’t for a little creative accounting and a friendly deal with the MAIB.
The MAIB, we’re told, are paying a special dividend of $100 million, thanks to better than expected investment returns on their reserve account. So $100 million in equity will be transferred to Treasury, with a grateful government booking the proceeds in the ‘dividends from GBEs’ account. It’s not a dividend of course – just a capital transfer, but I’m told this is all legit under the GBE Act.
We get a new Fiscal Strategy, replacing the last Fiscal Strategy which didn’t work very well, and in any event was written for a Labor Government with different ideals and priorities. The new strategy is more flexible in that is avoids specific fiscal targets and contains sufficient ambiguity to make replacing it with yet another Fiscal Strategy unlikely for a few years.
As promised, Forestry Tasmania has been stripped of the former government’s promised $100 million contingency money, instead being funded to the tune of $6 million annually – $2 million to fight fires, and $4 million to assist with the cost of non-commercial activities. Those cynics who argue most of Forestry Tasmania’s activities are non-commercial may not be comforted by the fact that organization now appears to have been handed their own cheque account, and given the right to overdraw it when needed. Borrowings, which appear inevitable to prevent FT from insolvency – will now be isolated from the State Budget ledger.
The biggest cuts, promised and expected, relate to the $2.4 billion wages bill. With a 12 month pay freeze already broadly opposed, I can only assume union boss Tom Lynch will be most displeased with news future pay rises will be capped at 2% for the life of the forward estimates.
But Gutwein appears to be itching for a fight with the unions, claiming public servants are already paid more than 25% more than workers in the private sector. It’s an irrelevant statistic – there’s no like for like comparisons in its computation – but does provide evidence the government is committed to wage restraint, even at the expense of future votes from working Tasmanians.
Long treated as a source of easy cash for financially constrained Treasurers, our state-owned business enterprises get a special mention this year. There’s a frank admission that their performance is well below what would be expected in the private sector, but despite that, no sale plans have been declared, although changes to the capital structure of energy assets is being considered, and the sale of the RBF could be imminent.
The rest of the GBEs will stay under public ownership for now, but under a new dividend regime will be expected to contribute 90% of their net profits in the form of dividends. As I’ve already mentioned, $100 million is being syphoned from MAIB reserves this year, and higher dividend payments are expected from that source over the forward estimates. That softens the impact of Hydro Tasmania’s diminished value in a post-carbon tax environment, although I suspect the energy generator will be able to contribute more than forecast in coming years.
For how many years? Well I doubt the Treasurer is too concerned. This isn’t a forward-looking Budget, and the requirement for GBEs to pay 90% of profit in dividends is confirmation. The average dividend payout for ASX listed companies is scarcely half that, with the balance of earnings retained internally to help with business expansion. At some stage, Hydro Tasmania, TT Line and the rest will need significant retained earnings not just to expand, but to barely survive. That can’t happen if most of the cash generated is paid to Treasury.
There’s scarcely enough spending on basic infrastructure to maintain the state-owned asset base in serviceable condition despite the media releases spruiking spending on roads, health and education. It’s a complex enough equation to warrant a separate analysis, but let’s just say it reinforces the view this is a Budget waiting for the Big Tax Picture to become clearer, late next year.
Then we have the elephants in the Budget room.
The terms ‘climate change’ only appear a couple of times, and only then in the context of saving some dollars by abolishing the Climate Change Council.
Billions and billions of dollars continue to stress the balance sheet in the form of unfunded superannuation liabilities, but again, addressing that fiscal time bomb isn’t going to happen until 2018 at the earliest.
The biggest threats to the integrity of Gutwein’s Budget may not become apparent for a year or two, and they will emerge in the form of unfunded, unexpected and unwelcome cost blowouts. The entire forward estimates are based on restricting spending to below 2%, and I doubt that is remotely feasible, let alone achievable.
But perhaps it doesn’t really matter. In 18 months, Australia will be grappling with major tax reform, a key element of which must include lifting the rate of GST. Even a 12% consumption tax could improve Tasmania’s budget position by $700 million each year. When that happens, and Gutwein has the funds to actually implement a growth strategy, this Budget, which just puts the economy on hold for a while, starts to make perfect sense.
Next: The infrastructure crisis (or why we’re getting potholes fixed, rather than a new Midland Highway).
*Tom Ellison is general manager of Wills Financial Group and director at Recherche Partners.
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