Report – Saul Eslake, Economist, 19 August 2024

Independent Review of Tasmania’s State Finances

Since the beginning of European settlement more than two centuries ago, government has always played a major role in the Tasmanian economy and in the lives of Tasmanians. The State Government and its instrumentalities account for a larger share of economic activity and employment in Tasmania than in any other part of Australia (with the exception, in some instances, of the Northern Territory); and a larger proportion of Tasmania’s population than of any other state look to the State Government for services that play a vital role in their lives.

The Tasmanian Government’s capacity to meet the expectations which Tasmanians have of it is crucially dependent on its financial position. That doesn’t mean that it should never resort to borrowing to meet some of its expenditure commitments, or that all of the debt which it has at any particular point in time must be repaid by some stipulated later point in time. However it does mean that its financial position should be sustainable – that is, that it should be able to maintain its spending, tax and other policy settings indefinitely without the need for major remedial policy changes.

Sustainability, in this sense, builds confidence among businesses, community groups and individuals that they won’t be suddenly hit with big tax increases, or reductions in funding or services on which they depend, in turn enabling them to plan and arrange their affairs with greater surety. Fiscal sustainability also helps to promote intergenerational equity, by reducing the likelihood that one generation has to pay for the fiscal mistakes of another. Conversely, a protracted failure to ensure fiscal sustainability almost inevitably leads to a fiscal crisis – which in turn increases the risk of political and social instability, and long-term adverse economic consequences.

Fiscal sustainability is arguably more important for Tasmania, given that its long-term economic performance has been consistently poorer than that of any other state or territory – a reflection of persistently below-average participation in employment (and in particular full-time employment) and below-average productivity. One reason why so little has been done to remedy that sub-par economic performance may be that individual Tasmanians are sheltered from many of its consequences by the operation of the national taxation and social security systems. Similarly, the Tasmanian Government is partially shielded from the same consequences by the long-standing system of ‘horizontal fiscal equalization’, whereby Tasmania receives a much larger share of funding from the Federal Government than would be the case if that funding were distributed among the states and territories on an ‘equal per capita’ basis.

Tasmania’s public sector finances have deteriorated significantly since the latter part of the 2010s – despite a noticeable improvement in Tasmania’s economic fortunes, by many metrics, relative to the rest of Australia between about 2016-17 and 2021-22. That deterioration, best evidenced by the shift in all of the principal measures of the government’s budget ‘bottom line’ from balance or surplus in the mid-2010s to persistent and (for the most part) growing deficits since 2018-19, and the government  shift from net creditor throughout the 2010s to a net debtor from 2020-21 onwards.

These trends were partly attributable to the Covid-19 pandemic, and more recently to the need to provide for compensation payments to survivors of child sexual abuse in State institutions. But they began before the onset of the pandemic, and have continued after it.

Drawing on publicly available information, the Review finds that the deterioration in the financial position of Tasmania’s ‘general government sector’ – that is, state government departments and agencies funded primarily by taxation revenue or grants from the Federal Government – over the past decade is entirely attributable to ‘policy decisions’ by government (to increase ‘operating’ or recurrent expenses, and spending on infrastructure projects, and to a lesser extent to reduce taxes). By contrast, ‘parameter variations’ – the effects of factors beyond the control or influence of any state government (such as unforeseen changes in economic activity or employment, or decisions made by the Federal Government) – have, more often than not, had a favourable impact on the government’s finances.

Information publicly available prior to and during the election campaign unambiguously indicates that the financial position of Tasmania’s general government sector will deteriorate further over the next three years (that is, to 2026-27), and that this will be compounded by a deterioration in the financial position of Tasmania’s non-financial corporations (government business enterprises).

Indeed, based on publicly available information, by some metrics – in particular, the cash balance and net financial liabilities of the state non-financial public sector as a whole, relative to the size of the state’s economy – Tasmania’s financial position will become worse than that of any other state or territory (including Victoria and the Northern Territory) over the next three years.

The Review was astonished to discover that the Tasmanian Treasury does not prepare ten-year projections of the principal indicators of the State’s financial position, other than as part of the five-yearly Financial Stability Reports, the last of which was published in 2021, and the next not due until 2026. In order to fulfil its Terms of Reference, the Review has therefore undertaken these projections itself – with more limited resources and less time than the Treasury has every five years, but with the invaluable assistance of the Australian Parliamentary Budget Office.

These projections – made using assumptions similar to those which Treasury has used in previous Financial Stability Reviews – indicate that, in the absence of corrective policy actions, the financial position of Tasmania’s general government sector will worsen further over the next decade, with

  • cash deficits averaging almost $1.3 billion per annum and totalling $12.7 billion over the ten years to 2034-35,
  • net debt rising to over $16 billion (equivalent to more than 25% of gross state product) by the end of the 2034-35 financial year, and
  • interest payments rising from about $250 million in 2024-25 to $730 million in 2034-35 (or from about 2¼% to 6% of total revenues) over that period.

Such an outcome would almost certainly result in Tasmania’s credit rating being downgraded, probably by more than one ‘notch’, if it were allowed to happen.

This should not come as a surprise. Since 2016, the Department of Treasury and Finance has repeatedly warned (in its Fiscal Sustainability Reports) of the risks to the sustainability of Tasmania’s fiscal position in the absence of corrective action (including reform of Tasmania’s taxation system), of the risks associated with taking such action later rather than sooner, and of the impossibility of relying on economic growth alone to maintain fiscal sustainability. Yet these warnings have gone unheeded, not just by the government of the day, but by all of the major participants in  Tasmania’s political process, including during the campaign for the most recent State election.

Returning Tasmania’s public finances to a sustainable position – and no less importantly, keeping them there – represents a substantial and, the Review readily acknowledges, politically challenging, task. It is one which is unlikely to be achieved during the life of the present Parliament.

It is, therefore, one which should, ideally, command in-principle support across the political spectrum. Among other things this would help to instil confidence that the return to fiscal sustainability will not be derailed by changes of government – even if there will inevitably be (as is to be expected in a democracy) differences of opinion as to how best to achieve that objective.

The Review proposes that the government, and all other political parties, commit to achieving a series of fiscal targets over the next four to ten years – including

  • a return to an ‘underlying’ net operating surplus within four years;
  • achievement and maintenance of an overall fiscal surplus over the following five-ten years;
  • reducing the ratios of net debt and net financial liabilities to gross state product to below the corresponding averages for all states and territories; reducing the ratio of interest payments plus defined superannuation benefit payments to less than 7% of revenues within five years; and
  • increasing the ratio of ‘own-source’ to total revenues to its long-term average of 37% within the next ten years, with a longer-term goal of increasing it to 40%.

Ideally, these objectives should be incorporated into the Charter of Budget Responsibility Act.

The Review believes that it would be both difficult and undesirable for a large proportion of the task of returning Tasmania’s public finances to a sustainable condition to be undertaken through reductions in ‘operating’ expenses.

That’s partly because, based on assessments made by the Commonwealth Grants Commission (as part of its annual determination of GST revenue shares), Tasmania has in recent years been spending about $530 million per annum less than it needs to in order to provide services similar to the average level and efficiency of all states and territories, whilst raising around $170 million less in state taxes and $42 million less in mineral royalties per annum than it would if its tax and mineral royalty regimes were similar to the average of all states and territories.

It also reflects a judgement that cutting ‘operating’ expenses would have a bigger adverse impact on the Tasmanian economy, and on the most needy or vulnerable Tasmanians, than raising revenues by an equivalent amount, bearing in mind that state taxes paid by businesses are deductible against federal company tax, and at least part of any increase in state taxes paid by individuals would be absorbed by lower saving.

The Government should, of course, be evaluating the efficiency and effectiveness of individual spending programs as part of its ongoing management of the budget – and there would appear to be ample opportunities for improving both the efficiency and effectiveness of current spending in areas such as health and education.

But the Review considers that ‘efficiency dividends’ and ‘vacancy control’ are very poor means of achieving meaningful and lasting expenditure savings.

By contrast, the Review considers that there are a number of options which should be considered in order to raise additional revenue, with a view to returning Tasmania’s finances to a sustainable position. Specifically, the Review recommends that the Government consider some or all of the following:

  • broadening the base of payroll tax by lowering the existing tax-free threshold (which is the highest of any state and which the Review considers has done little or nothing to boost employment), with a longer-term aim of lowering the rate of payroll tax (which is the highest of any state);
  • over the longer term, abolishing stamp duty and replacing it with a broadly-based land tax (including owner-occupied residential property) with an appropriate tax-free threshold, provision for asset-rich but income-poor landowners to defer land tax payments as a charge against their estate, and transitional provisions to avoid ‘double taxation’ of recent property purchasers);
  • ahead of a ‘land tax for stamp duty’ switch, imposing a modest surcharge on municipal rates on residential property similar to the existing fire and waste levies;
  • extending the surcharges on stamp duty and land tax payable by foreign investors in residential real estate introduced in recent years to mainland-based investors in established residential real estate (with an exemption for new builds);
  • increasing motor vehicle registration fees, and duty on the purchase of expensive new motor vehicles (with appropriate concessions for pensioners and other low-income earners) to levels more commensurate with other states and territories; and
  • increasing mineral royalties to levels more commensurate with other states and territories.

The Review recommends that the Government explore options for moving the now relatively small number of public sector employees who are members of defined benefit superannuation schemes which were closed in the late 1990s to defined contribution schemes of which the vast majority of current public and private sector employees are members.

The Review notes that, based on currently available Forward Estimates, Tasmania will over the next three years (and probably beyond) be running the largest public sector infrastructure program, relative to the size of its economy, of any state or territory – and questions whether Tasmania can afford to do this.

The Review instead recommends that the Government should as part of the annual Budget process, determine, based on Treasury advice, how much it can afford to spend on infrastructure having regard to both the requirements of fiscal sustainability and the capacity of the Tasmanian construction industry, both over the following ten years and in each of those years.  After having done so, it should then determine which projects are to be financed by ranking them according to robust estimates of their social and economic benefits relative to their costs – rather than, as appears to have been the case, arriving at an infrastructure spending program via a ‘bottom-up’ process.

The fact that Tasmania has found itself in an unsustainable fiscal position for the third time in less than four decades (following the previous episodes in the early 1990s and early 2010s) suggests that Tasmania needs stronger institutions and more robust rules around the management of its public sector finances.

In particular, the challenge of returning Tasmania’s public finances to a sustainable condition over the next five-ten years will require Treasury to be better resourced than it has been over the past decade, and a greater willingness on the part of the Government to seek, and pay heed to, its advice than appears to have been evident over this period.

While there are some respects in which Tasmania’s annual Budget Papers offer more comprehensive information than those of other states and territories (or indeed those of the Federal Government), there are others in which there is scope for improvement, which would assist in promoting greater public awareness and understanding of Tasmania’s public finances and hence in restoring and maintaining fiscal sustainability. In particular, the Budget Papers and the mid-year Revised Estimates Report should include:

  • more comprehensive and detailed analysis of recent developments in and the outlook for the Tasmanian economy;
  • ten-year projections of key fiscal aggregates;
  • more long-term historical fiscal data;
  • tables and data underpinning charts in excel spreadsheet form; and
  • a more detailed and quantified Statement of Risks

The Review recommends that the Revised Estimates Report should be brought forward from February to December, in line with other states and territories and the Federal Mid-Year Economic and Fiscal Outlook.

The Review considers that the Charter of Budget Responsibility Act should be amended to remove the requirement that political parties present “fiscal objectives and targets for the budget year and the following three financial years” during election campaigns, and to require instead that political parties indicate how they propose to pay for their expenditure or revenue commitments, or (alternatively) to state explicitly that they will pay for those commitments by running smaller budget surpluses or larger deficits.

It also recommends that political parties be required to publish their election costing statements at least nine days before polling day, rather than on the Friday afternoon before polling day (long after a growing proportion of voters have cast their ballots) as has become the ‘norm’ at recent elections.

In order to enhance the capacity of the Parliament to comprehend and discuss fiscal issues, and to formulate policies which will have an impact on the Budget, the Review recommends that Tasmania follow the Federal Parliament, and the Parliaments of New South Wales and Victoria, in establishing a Parliamentary Budget Office.

Finally, the Review notes that other states and territories have in recent years implemented measures to enhance the independence of their Audit Offices, and recommends that the Parliamentary Public Accounts Committee investigate and report on how to enhance the independence of the Tasmanian Audit Office in order to bring it into line with ‘best practice’ in other jurisdictions.

In total, the Review has made 26 recommendations, which are set out at the end of Chapter 6 (pages 104-106) and Chapter 7 (pages 119-120).

Read the full report here: Saul Eslake | Economist

Media release – Jacqui Lambie Network, 19 August 2024

INDEPENDENT REPORT CONFIRMS BUDGET EMERGENCY

An independent report commissioned by the Jacqui Lambie Network state MPs has revealed significant concerns regarding the current state of Tasmania’s finances.

The report, compiled by respected economist Saul Eslake, provides an in-depth analysis of the state’s fiscal health and outlines the challenges facing the government in managing its budget.

“The current budget trajectory has Tasmania heading off a cliff,” Bass JLN MP Rebekah Pentland said.

“Debt and deficit are getting out of control. We’re going to leave the next generation with a terrible burden.”

Lyons JLN MP Andrew Jenner says Saul Eslake’s report exposes the reckless election spending of the old political parties.

“Every election campaign we see a spend-a-thon from the major parties and it’s put Tasmania in a perilous position,” Mr Jenner said.

“The vote-buying has to stop. Reckless election promises are undermining Tasmania’s ability to pay for essential services.”

“Unlike every other party, the JLN made no spending promises during the last election campaign because we knew the budget couldn’t afford new expenditure.”

“Despite knowing the state of the budget, the major parties went on a spending spree.”

Braddon JLN MP Miriam Beswick said Saul Eslake’s report should herald the state of a new chapter when it comes to budget responsibility.

“The JLN is proud to have demanded this report on coming to government” Mrs Beswick said.

“We thank Saul Eslake for his hard work and honest assessment, but it shouldn’t have taken the JLN to call for a report like this to be done.”

“We’re pleased that Saul Eslake hasn’t recommended cutting spending on services to repair the budget.”

“The JLN is committed to properly funding Tasmania’s essential services like our hospitals, schools and police service.”

“The ideas Saul Eslake has put forward to raise revenue are all worthy of consideration and the JLN will take the time to consult on each and every one of them.”

“All sides of politics have a responsibility to take this report seriously. We can’t afford to leave future generations to pay for our mistakes.”

The link to the report; https://www.sauleslake.info/independent-review-of-tasmanias-state-finances/.

Media release – Michael Ferguson, Treasurer, 19 August 2024

Response to Eslake Report

The Tasmanian Government thanks Mr Eslake for his comprehensive review of the State’s finances.

The Review was a key principle of the JLN Agreement, and we acknowledge the JLN’s commitment to productive public discourse with this review.

The Tasmanian Government will consider the contents of the Review and the recommendations and will provide a response in the Budget on 12 September.

There will be no new or increased taxes under the Tasmanian Liberal Government, as committed to at the 2024 election.

The Tasmanian Government is committed to providing cost-of-living relief while delivering the services Tasmanians deserve as part of our 2030 Strong Plan for Tasmania’s Future.

Media release – Nic Street, Minister for Finance, 19 August 2024

The Tasmanian Labor Opposition supports new taxes

The Labor Opposition promised $4 billion in new spending at the 2024 election and pledged $2 billion in cuts to essential services and important infrastructure projects. This included nearly $200 million to be cut from health services.

The question at the time was where the other $2 billion was coming from.

Today, the Opposition Treasury spokesperson was conspicuously quiet about Labor’s plans to increase taxes on hard-working Tasmanians and small business owners.

Make no mistake, the Tasmanian Labor Opposition would follow their Victorian counterparts and raise taxes to the detriment of everyday Tasmanians.

It seems Tasmanian Labor plans to rip $500 million per year from the pockets of Tasmanians and small businesses.

Tasmanians cannot afford the Labor opposition’s cruel tax grab.

Only the Tasmanian Liberal Government, with its 2030 Strong Plan for Tasmania’s Future, is providing real cost of living relief while delivering the services Tasmanians deserve.

Media release – Vica Bayley MP, Greens Treasury spokesperson, 19 August 2024

Eslake Report calls out poor policy and paints a dire budgetary picture

Independent economist Saul Eslake’s report into Tasmania’s finances demonstrates why we need to make big corporations pay their fair share and scrap the Liberals’ billion-dollar stadium.

Liberal politicians like to trumpet their credentials as ‘responsible economic managers’, but this report shows their policy and spending approach to the budget has been flawed and is plunging the state into a difficult position. In a vain effort to paper over the problem, the government has starved essential services like hospitals and schools of hundreds of millions of dollars a year. Now they’re making further cuts as they stubbornly pursue an expensive stadium Tasmanians don’t need or want, and clearly can’t afford.

The shocking state of our finances is a direct result of politicians prioritising the profits of big corporations and special interests over the needs of everyday Tasmanians. A good example is how the Liberals’ have repeatedly dismissed our calls for mining royalties to increase to match mainland levels. Their refusal to do this has cost the state budget dearly.

In the face of major budget challenges, we can’t afford to keep letting big corporations have such an easy ride. And we simply can’t afford a billion-dollar stadium.

The Greens have long argued that to properly fund areas like health, housing, and education the state needs to bring in more revenue. But we believe it shouldn’t be everyday Tasmanians footing the bill – it should be corporations like property developers, mining companies, and the gambling industry.

It’s well past time for the Rockliff government to get their priorities straight and put the needs of Tasmanians first. That means making big corporations paying their fair share, scrapping the billion-dollar stadium, and investing in essential services.

Josh Willie MP, Shadow Treasurer, 19 August 2024

It’s official: the Liberals have wrecked the budget

Saul Eslake’s Independent Review of Tasmania’s State Finances has delivered a shocking and sobering verdict: the Liberals have driven Tasmania to the brink of financial disaster.

When Labor left office in 2014, Tasmania had zero net debt. After 10 years of the Liberals, the state’s finances are now on track to become “worse than that of any other state or territory over the next three years”.

Mr Eslake’s report has found the deterioration of Tasmania’s economy is “entirely attributable” to state government policy. He couldn’t be clearer that the Liberals​ have put Tasmania in this terrible position.

The impacts of the Liberals’ economic mismanagement will be felt for years to come. Mr Eslake has found that interest payments on $16 billion of Liberal debt will exceed more than $700 million per year—enough to pay for a brand new major hospital every 12 months—and the state’s credit rating potentially faces being downgraded.

Treasurer Ferguson—once again at the centre of the worst failings of this government—has already started slashing public services Tasmanians rely on. The report condemned his vacancy control policy and efficiency dividends as a very poor means of achieving expenditure savings that will have an adverse impact on the most vulnerable Tasmanians.

Tasmanians will be rightly wondering why they have nothing to show for the Liberals’ budget mismanagement. The economy is flatlining, public services are at breaking point and planeloads of working age Tasmanians leaving the state for better opportunities elsewhere.

Above all, this shocking new report exposes that the Liberal Party cannot be trusted to manage Tasmania’s finances – and particularly so with Michael Ferguson in charge.

Media release – Shane Broad MP, Leader of Opposition Business in the House of Assembly, 17 August 2024

“Untenable”: Jacqui Lambie Network MP calls for Ferguson to go

Jacqui Lambie Network MP Andrew Jenner​ has sensationally and repeatedly called Deputy Premier Michael Ferguson’s position “untenable”.

Mr Jenner said it is “fairly obvious” that Mr Ferguson needs to go—rightly pointing out that Mr Ferguson is responsible for the biggest infrastructure stuff up in Tasmanian history—and said, “the buck has to stop somewhere”.

By backing Senator Lambie’s calls for Michael Ferguson to resign, Mr Jenner has not only split from the Liberals but also from his state colleagues Rebekah Pentland and Miriam Beswick. The two Jacqui Lambie Network MPs, who stood for election on a platform of transparency and accountability, are standing by Michael Ferguson’s handling of the Spirits scandal. It’s little wonder no one knows what the Jacqui Lambie Network stands for.

The fact is the new Spirits project is five years late, $500 million over budget, and every year of delays is now costing Tasmanian tourism businesses half a billion dollars in lost revenue. It’s the biggest, but unfortunately just the latest example of the Liberals’ inability to get anything done.

With a political crisis now engulfing the government because of Mr Jenner’s comments, the Liberals’ inability to get anything done is only set to get worse.

Media release – Tasmanian Small Business Council, 19 August 2024

Small Business slams Eslake tax proposal

The Tasmanian Small Business Council has slammed the proposal by Saul Eslake to tax small business more, by reducing the tax-free threshold for payroll tax.

“Mr Eslake seems to be obsessed with wanting to tax Tasmania’s 41,000 small business more,” TSBC CEO Robert Mallett said.

“Small business in under significant pressure from things like energy prices, inflation and rising costs, increasing mainland and online competition and ever-rising wage bills – all this and more, in a sluggish economy.

“It beggars belief that Mr Eslake thinks that whacking small business with yet another tax is going to do anything other than drive small businesses to the wall, and how that assists the Tasmanian economy is a mystery.

“Any politician or political party who support reducing the tax-free threshold for payroll tax is hopelessly out of touch and need their heads read,” Mr Mallett concluded.

“Tasmania needs to be a small business magnet, not a small business deterrent.

Media release – Senator Jacqui Lambie, Jacqui Lambie Network, 19 August 2024

Michael Ferguson’s position is untenable

“Some sections of the media have been suggesting that a JLN State Member calling for Mr Ferguson to resign breaks the State JLN Agreement with the Rockliff Government – but that’s rubbish.

If the Premier does the right thing and sends Mr Ferguson to the backbench so a competent minister can take the reins, then the Agreement stands.

I congratulate Andrew Jenner (MP for Lyons) for calling out Mr Ferguson and I agree with him that Mr Ferguson’s position is untenable. I hope the Premier sees sense and puts someone in charge that can do the job.”