About Queensland's Budgets  (2001+)


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Overview +

Addenda:

This document presents observations about the growth of underlying difficulties in Queensland's state budget.

It builds on a fairly detailed coverage of, and commentary on, the 2001-02 budget that was produced because it seemed to contain weaknesses (eg funding difficulties and non-transparent presentation) that had not attracted much public or political attention. This was then summarized and expanded to include newly emerging issues related to the 2002-03 budget. Debates concerning the 2003-04 budget were then briefly outlined together with indicators of underlying pressure for tax rises.

[[An outline of issues arising from the 2004-05 budget was intended to include information about events in 2003-04 which provided temporary funding benefits - but remains incomplete ]].

Comments related to the 2005-06 budget suggested that a crisis point was probably approaching despite the community's relaxed attitude to the situation, while those related to the 2007-08 budget referred to concerns about infrastructure backlogs, and rapidly increasing capital spending. Comments on the 2009-10 budget were more comprehensive, as it seemed that the 'chickens could be coming home to roost' though the continued lack of transparency in the budget's presentation made it hard to be sure what was going on.

The QCU Forum on Government Spending / Revenue (April 2003) provided some useful additional perspectives on Queensland's financial situation.

In 2012, in the context of public recognition of the extent of Queensland's fiscal difficulties  Recovering from Queensland's Debt Binge drew attention to: (a) the fact that those difficulties had been emerging for many years and were probably much worse than officially acknowledged; and (b) had to be viewed in the context of general weaknesses in Queensland's institutions.

A Commission of Audit established by the incoming Newman Government in 2012 seemed unable to adequately assess the financial position and develop strategies to improve that position, because it failed to recognise these factors (see Auditing the Commission).

2009-10 + ABOUT THE 2009-10 BUDGET

Public Debates

Before it was presented on 16/6/09, debate about Queensland's 2009-10 budget focused on the large revenue losses that seemed likely due to the global financial crisis (GFC), and on proposals to improve the budget position by selling public assets and removing a petrol subsidy.

However many broader issues were raised in public debates both before and after its presentation, such as: 

  • in relation to privatisation of public assets: whether / when this is desirable; how to protect the public interest; whether / how much selling assets will  improve public finances; and the fees involved;
  • the relationship between the budget and Queensland's economic outlook (eg the GFC's impact on business investment / employment; the large increase in fiscal deficits to reduce the economic downturn; Queensland's vulnerable economic structure; economic impact of state taxes; the expectation of a shallow recession and full recovery in 4 years; and the risk if everything does not go according to plan);
  • structural problems affecting Queensland's public finances (eg states' narrow tax bases under the current federal financial system; rapidly increasing population / spending in recent years on services / catch-up infrastructure; loss of AAA credit rating; expectations of ongoing deficits for years; and the pro-cyclical process for distributing GST revenues);
  • the effectiveness of public spending (eg possible wastage of boom-years revenues; political interference in GOCs; defective planning and emergency infrastructure development; and government efforts to rectify some of those problems).

The latter debates are outlined below.

Outline of Pre and Post Budget Public Debate

Privatisation of Public Assets

In advocating privatisation of several assets, the state government noted that: the global recession had seriously eroded its revenues; continued infrastructure investment and restoration of its AAA credit rating were desirable; its investment priorities (schools, hospitals, public transport and roads) were now different to what they had been; sales should yield $15bn (and save a further $12bn investment) while reducing income only $280m;  and various precautions would be taken to protect the public interest following such sales.

Other observers noted: the need to protect the public interest in privatisations; the high cost of fees to advisers in arranging such sales; the likely difficulty in selling assets for good prices under difficult circumstances; industry concerns about details of particular arrangements; and that selling the most profitable assets could be unwise. Unions and many ALP officials opposed the sales on principle - but their concerns were rejected.

Details about financial details of the proposed asset sales appeared sparse and unconvincing.

Details

Queensland's premier introduced proposals for privatisations as follows.

A plan exists to renew Queensland's finances and grow future investment. Global recession has led to $14bn loss in expected revenue over 4 years (1/3 of annual budget), and there has been $2bn decline in GST revenues. Government must continue to build infrastructure for growing population, and wishes to restore AAA credit rating. Government priorities change (eg regional airports were once developed, but now have been sold to private operators). There is a need to consider what government should do in future. Strategic asset sales are proposed to secure various functions without future public funding - to free government for funding of public infrastructure like schools, hospitals, public transport and roads. Renewing Queensland Plan involves sale over next 3-5 years of Queensland Motorways Ltd; Port of Brisbane; Forest Plantations Queensland; QR's coal business; and Abbott Point Coal Terminal. Sales should yield $15 and eliminate the need for $12bn capital spending over next 5 years. Annual revenue of $280m will be foregone, a 2% return. $12bn in avoided capital spending will save $750m pa interest. Government has chosen to run short term deficits as response to global recession. But in the long term tough structural changes are needed to restore a recurrent budget surplus. Queensland does not get value from $500m fuel subsidy scheme - so this will be ended [1]

In presenting its proposals the government further indicated that:

  • the proposed asset sales were expected to yield $15bn and save $12bn in further spending. While $280m pa in revenues would be lost, $750m pa in further interest costs would be avoided and state debt would fall $15bn (Renewing Queensland: Future investment Plan);

  • it was more important for government to improve public transport than provide rail networks for the private sector [1];

  • tolls will be set by law to prevent price gouging after sale of Queensland Motorways [1]

  • community will have continued access to forests despite government plan to sell off its forestry business. At one time it made sense for government to start a forestry industry - but no longer [1]

Other observers elaborated and / or expressed support for, or concern about, the proposals.

  •  government has to sell existing assets to fund an unprecedented infrastructure program. [1];
  • 'Renewing Qld plan' will see sale of $15bn in assets and saving of $12bn in future capital - Queensland motorways, QR's coal and freight arms, Port of Brisbane, Forest Plantations Queensland, Abbott Point Coal terminal.  [1]
  • privatisation for the wrong reasons, or badly managed, can be against the public interest. What assets are appropriate for privatisation? Many businesses are now well run privately when they used to be government owned.  For all its problems Telstra has become a great Australian company. Australia pioneered the privatisation of airports - and this has been successful because of well-constructed legislation. Privatisation lifted the financial, political and administrative burden from government without sacrificing airports' economic / lifestyle contribution. Such sales have improved funding for Queensland's hospitals. The challenge facing government is to make sure that the correct checks and balances are in place to ensure that core services are not sacrificed to the gods of foreign private capital  [1]
  • the GFC has been blamed for the proposed privatization of Queensland assets. However privatising of just the profitable bits of Queensland is foolish as this has long subsidised the unprofitable passenger services, Cross subsidies within infrastructure is the only option for public services to Queensland's dispersed population [1]
  • approx $200m in fees are likely to be paid to advisers who arrange sale of government assets [1];
  • Sale of Forestry Plantations Queensland is expected to yield $500m. [1]
  • higher road tolls, higher prices and the millions to be paid to financial advisers will be ongoing problems [1]
  • there was uncertainty within timber industry about the implications of sale of Queensland Plantations [1];
  • mining industry believes that sale of rail haulage business and Abbott Point Coal Loader is fine in theory - but wants assurance that upgrades of these systems will not be put on the back burner [1]. Mining industry was assured that its interests would be considered in asset sales [1];
  • state government will be selling assets at a bad time - as many infrastructure assets are being sold worldwide and there is a shortage of capital - creating a buyers market [1]
  • selling off state assets is a brave and commendable move - but may come at an unfortunate time in the business cycle so prices may be limited. Other state governments seem to be headed towards similar auctions [1]. In Europe port and rail assets have been offered for sale for months, and in Australia private infrastructure assets have also been for sale. But there is a shortage of buyers [1]
  • government will struggle to get $15bn for assets (QM $3bn, Port of Brisbane $3.5bn; FPQ $500m; QR's coal freight $7bn; Abbott point $1.9bn) because of GFC [1].
  • Queensland's $7bn coal freight network and 2 Brisbane toll-roads are likely to be attractive to investors, but Port of Brisbane, Abbott Point Coal terminal and Forestry Plantations could struggle to find buyers. Gains: Motorways ($3bn + 1bn debt reduction); Port of Brisbane ($3.5bn +$900m); Plantations ($500m + $100m); Coal network $7bn + 7bn); Abbott Point ((1.9+3.5) [1]
  • Brisbane toll roads (whose value is put at $4bn) might be easiest assets to sell because of their business model. There are about $20bn of other infrastructure assets on the market in Australia. QIC, Canadian Pension Plans and industry funds top the list of likely buyers [1]

There was vocal opposition to the proposal, mainly from within the ALP and union movement.

  • ALP rules say that party was established for democratic socialization of industry. ALP 2008 specifically rejected privatisation of public hospitals, schools public enterprises or utilities (especially rail, ports, public hospitals, electricity and water [1] ;
  • ALP president (Andrew Dettmer) suggested that short term solutions would create long term problems (eg giving mining companies complete control of regional economies)  ACTU president (Sharan Burrow) suggested that rail privatisation was never successful. [1];
  • Queensland Council of Unions argued that privatization (eg of Commonwealth Bank and Telstra) had cost community.[1]

Moreover general opposition was expressed by: Rail Train and Bus Union secretary (Owen Doogan) Maritime Union spokesman (Mick Carr)  [1]; QCU secretary (Ron Monoghan) [1]

In response to such criticism, the government reportedly said that the sell-off was a done deal [1]

Information / speculation about the financial status of various assets proposed for sale was available, but neither comprehensive nor convincing.

  • Queensland Motorways profit before tax, depreciation and interest was $110m - so a $3bn valuation would be 30 times earnings. Those prices are based on boom times data - but listed infrastructure assets have fallen 50% since then [1];
  • Forestry Plantations Queensland's 2007-08 annual report revealed: sales $93.8m; $29.6 trading surplus; $13.4m dividend to Treasury; and ; capital investments $25.6m. The operating surplus (including increased value of plantations) $85.5m [1]. An examination of FPQ's annual report revealed very 'interesting' (but apparently standard) accounting practices (p29-30), ie (a) 'income' included assessed revaluation of growing plantations and (b) the results of trading operating (ie sales of timber) were not mentioned as income but simply recorded in a cash flow statement;
  • Queensland Rail's annual report for 2007-08 suggested revenue of $3.5bn and EBITDA of $1.1bn [1];
  • Macquarie Infrastructure sold its M7 stake for 24 times earnings before interest, taxes, depreciation and amortization - which suggests that Queensland's Motorways EBITDA of $27m would result in valuation of only $652m [1]
  • QR's coal assets will yield $7bn and save $7bn in future spending.  However QR Coal returned hundreds of millions to budget [1]
  •  Port of Brisbane (that returned $72m dividend to state government) could be sold for $4.4bn and save $900m further investment over 4 years.  [1]

Other Pre-Budget Expectations

In relation to the budget and Queensland's financial position generally observers noted in the lead up to the budget delivery that:

  • the state's deficits appear structural, rather than merely cyclical. Government spending has been growing much faster than revenues. The public service has grown very rapidly (and was concerned about possible cuts). Borrowing costs will rise because of loss of AAA credit rating;
  • economic growth is well down on expectations. Government would not comply with the desire of rating agencies for large spending cuts and tax rises - because of adverse economic impacts; 
  • business wants: high infrastructure spending to keep unemployment low; a plan for fiscal recovery; payroll-tax relief; reduced red-tape; and investment to be maintained in area where assets were to be sold;
  • ominously there was no 'good news' prior to budget release. Business and the community faced higher costs;
  • government was acting contrary to core ALP principles in selling assets. Asset sales focused on those with business customers. More assets might be sold in future;
  • state is looking to reform of federal financial system to boost revenues.
Details
  • Queenslanders face substantial increases in living costs (ie electricity 36%; rates 18%; gas 40%). Including the effect of eliminating fuel subsidy, families might face increased costs of $1000 pa [1]
  • Queensland's premier defied Labor orthodoxy by proposing the sale of state assets (hoping thereby to recover from the loss of the state's AAA credit rating) in preference to curtailing big-spending public works program (eg for hospitals, passenger rail systems, regional roads and social housing) [1]
  • motorists will face $300 pa increase in fuel costs [1] ;
  • government has focussed on selling assets that service commercial clients - except for Queensland Motorways whose tolls are tightly regulated [1]. Other state assets that could be sold later include: printing, car fleet management and IT businesses [1];
  • these privatisations could be followed by more - including some of six big remaining ports  [1]
  • the numbers in Queensland's public service have grown significantly over the past 5 years - (ie a 20% increase in the proportion of workers in public administration) and rumours are rife about culls in the numbers of temporary / contract positions [1];
  • unions are concerned that up to 25% of public servants in temporary positions could be at risk as government seeks $280m savings [1]
  • Government may trim contributions to public servants' superannuation in another cost cutting measure [1]
  • in lead up to state budget there have been no 'good news' leaks - which is ominous. By 2011-12 total state debt is likely to reach $74bn (less proceeds of possible asset sales) - and a $1bn pa deficit is expected in coming years. There is nothing wrong with deficits incurred in making productive investments - but structural deficits are undesirable. Queensland's spending growth (10% last year) has far outstripped revenue growth (1% last year). Without drastic action on cost side, recurrent expenses will continue to exceed revenues - and this shortfall should not be met by selling assets. Cuts must be made in spending - given that tax increases have been ruled out [1]
  • Queensland treasurer has called for reform of Australia's tax system through Henry tax review because of the inherent weakness of states' narrow tax bases [1];
  • according to treasurer there will be little good news for community in budget and government does not intend doing what rating agencies want (ie massively increase taxes and cut the building programs) because this would be economically disastrous [1]
  • Queensland's economic growth in 2008-09 is 0.5%, well below the 5.1% in 2007-08 and the 4.5% originally forecast for the current year [1]
  • Business doesn't expect handouts from government but wants to see plan to restore AA credit rating, and give priority to economic / job growth so that business can defend markets / workforces. Payroll tax relief is a priority. CCIQ (Beatrice Booth) wants smaller, more flexible, efficient and skilled public service. Compliance costs need to be reduced.  QRC (Michael Roche) is concerned that criteria for asset sales is a reduction in governments infrastructure spending - as there is a need to ensure ongoing focus on upgrading rail lines and ports. Increased changes must also be used to streamline and increase efficiency. Macarthur Coal (Nicole Hollows) is concerned that asset sell of might replicate problems like those at Dalrymple Bay. ANZ (Russel Shields) emphasised the need to fund infrastructure spend and keep unemployment low. BOQ (David Liddy) called for tax-breaks and incentives for SMEs in order to promote economic recovery. Hutchinson Builders (Scott Hutchinson) expressed satisfaction with existing levels of spending [1
  • Queensland faces problems because of loss of AAA credit rating. It will make semi-government borrowing more costly. Returning to that rating will take years. When revenues like those in 2007/08 will resume is unknown. Despite this, a large capital works program will be committed to boost growth. Business concerns that government will delay some projects appear realistic. Premier says downturn has forced state to divest assets it should have sold (as Victoria did) years ago. [1]

Fiscal Issues

In relation to the budget various observers drew attention to: confirmation of asset sales and elimination of petrol subsidy; new grants for first home owners; the temporary boost from federal stimulus spending; the need to reconsider the role of government because of increased demands for government services; high levels of infrastructure spending; increasing debts (mainly due to infrastructure spending because GFC has only limited impact) though totals would remain low by international standards; rapid past turn-around from large surpluses to deficits; expected deficits for 8 years; failure to mention worrying debt / GSP ratio; difficulties in recovering AAA credit rating; very rapid growth in past spending (rather than GFC) as the main cause of credit rating downgrade; continued low GST revenues due to high past revenues; government's search for federal guarantees of its debts; Treasurer's push for changes to federal financial arrangements; constraints on public service pay rises and on overall public spending; doubts that infrastructure cost increases could be blamed on rising construction costs; and the risk that conditions might deteriorate more than expected.

Details
  • budget will be in deficit for 8 years. $18bn will be spent on infrastructure in 2009-10. Current deficit will be $574m rising to $4.1bn in 2011/12. Cuts to petrol subsidy and asset sales proceeded. Public service cuts did not. Grants will be given to first home buyers.  [1];
  • Treasurer emphasises government infrastructure spending. But there has been a need to reconsider the role of government generally (and privatise some functions) in view of increased pressure on government to provide services [1].
  • borrowings will rise from $57.7bn in 2009-10 to $85,5bn by 2012-13. $18bn on capital works will fall to $10bn in 2012-13 because peak spending (water grid and new hospitals) will phase down [1]
  • GFC showed that Queensland's finances were built on loose sand. Ongoing deficits are expected. However the problem is not loss of revenue due to GFC - as 2009-10 revenues will be $37.2 bn (up from $35.9bn last year - with some help from federal stimulus). The problem is increased spending. At start of decade this grew 3% pa - but this increased to 12% pa eventually. General government sector will go into net debt in 2011-2012, while non-financial sector net debt will increase from $14bn in 2008-09 to $51bn in 2012-13. This led to downgrade of state credit rating. [1]
  • Queensland has to rely on success of asset sales to reclaim credit rating lost when large long term budget deficits were announced last year. Standard and Poors indicated that nothing about budget suggested upgrading to AAA. Asset sales could reduce debt levels to 120% of revenue by 2013 - above the 100-110% level needed for rating to be re-assessed. Queensland faces $3.3bn pa fall in mining and property revenues [1]
  • public service pay rises will be limited to 2.5% pa [1]
  • staff expenses are rising much faster than 2.5% nominal wage cap. [1]
  • Treasurer is proposing to cap government spending growth at 4.75% (down from 14.3% two years ago) [1];
  • Budget did not mention debt / GSP ratio. [1]
  • Opposition has criticised increased debt involved in Queensland's budget - though this will be partly offset by asset sales [1]  ;
  • interest on general government borrowing would be 2.38% of general government revenue in 2009-10 rising to 5.69% in 2012-13. Including GOC the figures become 6.48% and 10% respectively [1]
  • in all states net debt will rise from 3% of GDP to 12% by 2012-13 (about 1/3 due to GFC). These levels are low by international standards. Most debts will be covered by increased charges by GTEs [1];
  • over 15 years ago a Treasurer noted that Queensland had no net debt (ie that financial assets exceeded liabilities. Now there is a $17.8bn excess, though this will now change (ie net debt will be $5.9bn in 2012-13). In 2008-09 borrowings are $44bn, but they will reach $85bn - though this should be reduced by asset sell-off and the $12 that won't need to be spent. The interest bill on borrowings next year will be $887m (ie 2.3% of revenue) - though this will be more than offset by income on investments. Even in 2012 interest will be only 5.6% of revenue - which will be very manageable.  Queensland's danger is that conditions might deteriorate more than expected. [1]
  • Queensland goes from $4bn headline surplus to $4bn deficit in 8 years. GST revenue is based on past state revenues - so Queensland will still receive boom time (ie small) allocation though revenues have fallen. Treasurer argues that state's tax base is too narrow. [1]
  • states are going into debts because of heavy infrastructure spending, not (as they claim) because of GFC. Queensland will lose $15bn revenue - only about 1/3 of $41bn increase in net debt to 2012-13. This investment reflects past under-investment and it is mere luck that it corresponded with recession. [1]
  • Queensland will apply for Commonwealth guarantee of its debts. [1]
  • Royalty revenues will fall from $3.4bn in 2009-09 (achieved after a surprise increase in rates) to $1.8bn in 2009-10 - a fall of 47% [1]
  • Queensland's revenues are adversely affected by downturn in coal royalties and property taxes. GST revenue is falling because the total pool is reduced, and Queensland's share is cut because of the past strength of mining and property revenues. Budget expresses concern that processes do not provide Queensland with revenues needed by its rapid population growth [1];
  • RACQ suggests that scrapping of fuel subsidy forces motorists to pay for lack of foresight [1];
  • the position is currently improved by effect of Rudd Government's stimulus program and less-than-expected capital works bill - but this is only temporary.   [1];
  • a quantity surveyor suggested that government's claim that $17bn blow-out in its 20 year infrastructure program could be blamed on rising costs appeared suspect, as costs were actually falling. Increasing the scope of projects was seen as a more likely explanation [1]

Economic Issues

In relation to Queensland's economy observers suggested  that: Queensland has suffered more than other states, and has only its economic structure and financial arrangements to blame; unemployment will rise; mining / property booms have ended; business investment could fall 25%; and business has concerns (eg with higher costs which can't be passed on;  and lack of payroll tax relief / strategy for fiscal recovery). However on a positive note it was suggested that: the budget deficits would result in less economic contraction and unemployment; Queensland's performance (despite setbacks) should still be better than others; and the worst may be over in 4 years with strong growth resuming in 2011-12.

Details
  • Queensland has replaced NSW as state most likely to drag Australia into a long recession. Its budget position is worst and citizens face biggest fall in living standards (and doubling of unemployment). Queensland faced budget turnaround over 4 years of $14bn, while NSW only faced $5bn. Queensland has itself to blame because of economic reliance on mining royalties, an overheated property market and cross-subsidies to keep its budget in the black. Infrastructure spending was committed that could not be stopped. How much Queensland's folly costs Australia depends on how long recession lasts [1];
  • unemployment will peak at 7.25% in 2010-11. Business investment is expected to fall 25%.  Economy is expected to shrink 0.25% over next 12 months, before growing 2.75% in 2010-11 [1];
  • Queensland continues to show rapid population growth (1800 per week of which 1000 are international, 410 (and falling) are from interstate).  Budget papers suggest that worst of global economic crisis will be over in 4 years. Economic growth of 2.75% is expected to resume in 2010-11 and recover fully (4.5% pa) by 2011-12 [1];
  • Queensland's unemployment rate will rise drastically in next few years - especially in construction industry [1];
  • Queensland faces: end of mining / property booms; stalled private investment; more jobless; increased government debt while government tries to cut spending. [1];
  • despite Queensland's budget difficulties, government rejected the notion that Queensland had become economic basket case - as its economic performance still exceeded national average [1]
  • business is not happy with budget (despite positive view of infrastructure spend) because of lack of payroll tax relief. BDO Kendells (Dennis Lin) suggested that budget had no real plan to get books back into black. CCIQ (David Goodwin) suggested that cost of business was rising, but could not be passed on. It was of concern that spending would rise 7.4% in 2009-10 with wages up 9.1%, State deficits will rise to $4.1bn and surpluses are not expected til 2016-17. Grants to new home owners were seen as only a small aid to a sector facing significant difficulties - by Paul Nash (Devine Queensland). NAB (Julian Pearce) saw infrastructure spending as positioning Queensland businesses for recovery [1]
  • business had been advised of budgetary problems and that the alternative to budget deficits was larger scale unemployment and cutting back on infrastructure that was seen to be essential [1]
  • Queensland's economy will contract - but less than most other states despite unwinding of mining boom and consequent sharp fall in business investment (which also reflects vacancy rate and limited funding access affecting property). Soft household consumption will be another constraint. $18bn pa state capital works will offset retreat of private sector capital investment. Exports will fall in 2009-10. Recovery is not forecast until 2010-11. [1]
  • opposition warned of consequences of debt blow-out (from $64bn to 85bn) in terms of increased costs of fuel, food, water and power. AIG (Chris Rodwell) argued that business would face an extra $500m costs. [1]

Government Administration

Various observers suggested that past government administration had been deficient, eg in relation to: ineffective use of (and lack of savings from) massive revenues gained during boom years; political interference in operation of GOCs; lack of planning resulting in emergency infrastructure development; and limited use of PPPs. The Opposition suggested that asset sales were needed because of many years of poor administration. Premier defended sales on the basis that: government could no longer afford to make significant investments in some infrastructure; and rating agencies had a perverse approach which unfairly penalised governments with profitable GOCs.

However its was also suggested that Queensland, whose governments had long under-funded essential infrastructure and which had not focussed on forward planning, had tried to fix its dysfunctional infrastructure - as compared with NSW (for example) which has yet to do so.

Details
  • government faces problems in convincing people that it made the most of revenues it gained over many years. Each year from 2003/04 actual revenues exceeded estimates by $3bn. Over four years to 2007/07 revenues rose 65% (from $19.9bn to $32.6bn). Though there were demands (eg effect of drought and education / health needs) some could have been saved to avoid current problems (according to QRC). [1]
  • former Treasurer (Keith De Lacy) argues that 25 years of meddling by successive governments has undermined the efficiency of GOCs whose corporatisation he started. Political interference prevents effective operation - yet government shareholders can't resist interfering. Ken Wiltshire also argues that GOCs need to operate at arm's length. However ministers and officials have often set policy and creamed off dividends arbitrarily. There has been an enormous difference between the operations of GOCs and listed public companies [1];
  • Opposition criticised $16bn in asset sales and expected rise in debts to $85bn - arguing that sell off of profitable assets will cover 11 years of mismanagement, but yield very low prices. Queensland once had strongest balance sheet in country - but now the worst. [1]
  • Sale of assets will result in many Labor mates losing board positions [1]
  • Paul Clauson (Infrastructure Aust Qld) suggests that lack of planning was a problem - as with emergency development of water infrastructure. Money might have been saved by putting projects such as Gateway duplication up for PPPs  [1]
  • Comparing Queensland and NSW (which is in better financial position) is complex as NSW has dysfunctional infrastructure - but has not attempted to fix it as Queensland has (according to John Quiggin). [1]
  • when Anna Bligh took over from Peter Beattie she believed state was too reactionary, and needed to plan for new challenges. Essential services have always been under-funded in Queensland - Australia's most decentralised state. Government maintained political support by exploiting boom-time revenues. It borrow heavily for infrastructure to meet demands of population growth - rather than end low-tax status or cut public sector. Then recession hit.  [1];
  • Premier defended asset sales on the basis that: government could no longer afford to keep making significant investments in such infrastructure - so this option was best in terms of maintaining those assets and providing for community's needs. Queensland had been penalised because (a) the debts of GOCs had been on its books and (b) rating agencies adopted a perverse approach and penalised governments when their GOCs were making profits [1]

Future Strategy

In relation to forward-looking strategy, it was suggested that: future deficits reflect priority assigned to creating jobs; structural reform of economy might be needed to regain AAA credit rating; budget reflects hope that recession will be shallow and brief; there is little beyond catch up infrastructure spending proposed; there are no contingency plans if situations worsens; more GOCs may need to be sold; while useful steps have been taken there is no certainty about the further reforms that are still needed.

Details
  • Queensland will suffer $13bn in deficits over next 4 years - as budget has given priority to jobs. Total government borrowing is expected to reach $85bn over 4 years with interest 10% of revenue by 2012-13 (ignoring effect of asset sales). Standard and Poors indicated that AAA credit rating might be restored after 2013-14. However structural reform of economy as well as asset sales might be needed  [1]
  • NSW and Queensland budgets involve spending binge based on assumption that recession will be shallow and brief. Depression era economics have been used to justify massive spending rises. Queensland suffered a large revenue meltdown ($15bn) but has realistic projections on return to surplus. Privatisations may not be enough to restore AAA rating.   Too much of Queensland's spending involves catch-up and maintenance instead of productivity-enhancing investment. Other GOCs may need to be sold to keep debt under control. No state has credible plan to repay debt if everything doesn't go as planned. Required savings won't come from chipping away at public service - but will require more privatisation [1]
  • Government hopes unprecedented deficits will save state from economic abyss. $18bn infrastructure spend will result in a decade of deficits. Current year's deficit will be $574m (down from $1.6bn surplus estimated 4 months ago). Restoring Queensland's AAA credit rating will take 5-10 years. Opposition leader said that government was addicted to debt and 'played us for fools' by not revealing problems in March election [1]
  • State revenues will be $37bn with spending of $39bn. Revenue loss over 4 years has been $15bn. Business investment will fall 17%. Treasurer has done the smart thing by spending to counteract economic downturn (as governments worldwide are doing).  [1]
  • Useful steps have been taken to restore fiscal position (ie cutting fuel subsidy and privatising some assets). However there is uncertainty about the commitment to reform - given governments jobs-not-cuts policy agenda. [1]

CPDS' Comments

The present writer's earlier research had also suggested that budget difficulties that came to a head in 2009-10 were largely symptoms of deeper long-developing problems (see Queensland's 2009-10 Budget Stress: The Tip of an Iceberg?, 25/5/09).

The latter argued that:
  • it was unrealistic to try to debate the state budget without considering uncertainties in the economic outlook;
  • there had been reasonable grounds for concern about structural problems in Queensland's public finances before the most recent economic boom and bust;
  • those concerns had been compounded by ineffectual management of large-scale spending on catch-up infrastructure; and
  • assessing whether serious market failures exist should be the most important consideration in deciding whether to privatise government owned corporations (GOCs).

Further conclusions have emerged from considering the 2009-10 budget and debates.

Firstly there is a need for more transparency in presentation of data about Queensland financial position. Current practices (though they may nominally comply with current standards) make understanding of what is going on virtually impossible.

For example:
  • as noted below it has seemed for years that 'balancing' Queensland's recent budgets required a good deal of 'creative accounting' (see Enron-itis; About the 2003-04 Budget; and assertions by Commerce Queensland [1]). Though Queensland's reported operating result has deteriorated over the years, the modest extent of this does not 'feel right' to the present writer, given the huge increases in public capital spending that have occurred;
  • the budget is presented on an accrual accounting basis. This is suitable for a business, but not for a government. For example:
    • it presents a 'balance sheet' which includes rapidly rising values assigned to assets which have no real market (eg revaluation of roads allowed its claimed 'net worth' to rise from $128.6bn to 149.8bn [1] over the course of 2008-09 during which the government's credit rating was downgraded); and
    • assets are presented only in terms of their financial worth (though such considerations are only part of the reasons for government involvement in functions that typically reflect market failures);
  • the core section of the budget [Section 3: Budget Performance and Outlook] is presented in highly aggregated terms only for the 'Central Government Sector' (which, as noted below) does not represent the government's overall fiscal position because of the effect of its Financial and Non-Financial Corporations;
  • information about the latter is elusive;
    • aggregated data is available separately and retrospectively for both Financial and for Non-financial Corporations - and, though the latter categories are defined, the organisations included are not listed [1];
    • some information about Non-financial Corporations (ie excluding the Queensland Investment Corporation) is provided in Section 5 of Budget Strategy and Outlook including: (a) what type of businesses they are involved in; (b) their combined contributions to state revenue (through dividends and tax-equivalent payments) of $1.1bn pa - which reflects a 4.7% return (thus implying that they have a total equity value to the state of $20-25bn); and (c) lists of various projects that might be undertaken. However no balance sheet data is provided;
    • an aggregated balance sheet for Non-financial Corporations is provided in Section 10 of Budget Strategy and Outlook, together with an consolidated balance sheet for the Non-financial Public Sector (ie excluding the Queensland Investment Corporation). There is no explanation of this data, even though (for example) the consolidated balance sheet showed a negative value for total equity investments;
    • GOC details might be obtained by examining large numbers of separate reports - but somewhat peculiar accounting practices seem to prevent easy understanding. For example, in the case of Forestry Plantations Queensland (FPQ - which the government proposes to sell), estimated increases in the value of growing forests are included as income while timber sales are not - the latter (together with cost of sales) being recorded only in cash flow statements. There is no clear picture of what debt FPQ is carrying. [One observer suggested that the debts of GOCs are all held by the Queensland Treasury Corporation and not by individual entities];
  • the reasons for Queensland's loss of its AAA credit rating are not clearly stated. For example:
    • there was a fall in Queensland's net financial wealth of $13.1bn during the course of 2008-09  [1] which appeared to be attributable to a fall in the value of assets (investments $1.9bn, equity $5.6bn) and an increase in liabilities (staff super $2.3, borrowings 2.7).  This raises (but doesn't answer) questions about the extent to which the financial stress that arose during that year was the result of losses on investments rather than simply the result of declining revenues;
    • one observer publicised the view that Queensland's financial assets (investments and cash at hand) exceeded the state's borrowings by $17.8 bn [1]. This was correct (for the general government sector only) according the budget papers [1] which shows net financial assets only becoming negative in 2011-2012. However Queensland lost its AAA credit rating apparently because rating agencies concluded that its net financial liabilities exceeded its annual revenue [1]. General government revenue is about $37bn [1] and GOCs appeared to add a net $8bn (approx) to consolidated revenues in 2007-08 [1]. This implies a $45bn or so net deficit in Queensland's financial position. This is compatible with the net financial liabilities of Queensland's general government and non-financial corporations as recorded in  Section 10 of Budget Strategy and Outlook (apparently reflecting $13.8bn net debt + $23.9bn superannuation liabilities + $11.6bn other current liabilities + $3.7 bn negative equity - $3.7bn various receivables). But what is going on is not clearly stated anywhere.
    • asset sales are proposed apparently to keep net financial liabilities down at about 130% of revenue [1]. However it is very difficult to work out the financial implications of proposed asset sales. $15bn is apparently expected to be realized from selling five assets, as well as savings of further investment of $12bn over the next 4 years. The net revenue loss from doing this is said to be $280m pa - which is about 2% of the sale price. As any private purchaser would expect to get a return of about (say) 9%, this implies that total revenues from those assets need would be something like $1.35bn pa - and thus that those entities currently pay about $1.1bn pa in interest (which in turn implies that they carry debts of about $20bn at the (about) 5% rate that has been applicable to government bonds). However this information does not appear to be readily available anywhere. The fact that purchasers would apparently find themselves confronting a further $12bn in further capital spending almost immediately (for which they would need to get a return by (say) increasing charges by $1.1bn pa or discounting the purchase price by $12bn) again suggests that there is something odd about the expectation that $15bn might be obtained from the proposed sales. While the writer hasn't studied the reports of all the proposed asset sales, the obscurantism of the FPQ report and the state budget generally does not encourage the view that enlightenment would be easily found;

As noted in the above examples there seems to be a particular need to clarify:

  • the capital accounts - especially those of GOCs;
  • whether tactics such as those reportedly used by Greece (with connivance by financial engineers) to conceal public debts [1] may have been used; 
  • why Queensland lost its AAA credit rating (as there was a $13.1bn fall in net financial wealth during 2008-09 which can't be explained by declining revenues due to the GFC, and hasn't even been mentioned); and
  • how much Queensland's net financial position can be improved by privatising assets.

Second there appear to be grounds for concern about conflicts of interest in relation to current privatisation proposals.

Reasons for concern include:
  • general problems in Queensland's system of government (see Reform of Queensland Institutions - or a Rising Tide of Public Hypocrisy?);
  • the possible conflicts of interest involving: political lobbyists; private infrastructure promoters; and the QIC that were suggested by the Airport Link Project;
  • the presentation to the state government of information about its dire financial position by private financial entities who might profit from particular types of solutions [1];
  • the (about) $200m fees that could be paid to those who package the assets for sale [1];
  • the lack of clarity about the financial position of the various assets which the government proposes to sell. The way in which valuations have been reached, and the existing associated government debts are unclear;
  • the lack of clarity about the commercial value of such assets; 
  • the possibility that QIC (holding public service superannuation funds) might be a significant  customer for some assets which government sold [1] - which could result in funds that are supposed to be invested for the benefit of state superannuants might be mis-used to underwrite the government's financial predicament.

For both the above reasons, the establishment of an independent capacity to evaluate Queensland's financial position seems to be long overdue.

Third, the risk of significant market failures associated with the proposed privatisations needs to be considered. This question, which can't be addressed purely in fiscal terms, does not seem to have been considered worthy of analysis.

This needs attention because there are examples of privatisations which have not been in the public interest (eg consider Dalrymple Bay Coal loader; difficulties in developing telecommunications given monopoly infrastructure retained by Telstra when it was privatised; disputes in relationship between privately controlled Sydney Airport and airport users; large increases in electricity prices associated with privatisation of Queensland's electricity assets). Moreover there were environmental goals originally associated with government involvement in forestry development that can't be dealt with by treating Forestry Plantations Queensland simply as a 'business'.

Fourth, the expectation that large budget deficits should be incurred to reduce the intensity of a presumably shallow and short term economic contraction appears unwise. Though the issues involved in the GFC are extremely complex (and thus can't be comprehensively dealt with here), it seems unlikely that the economic downturn will be of short duration or ended by resumption of traditional patterns of growth.

The current economic strategy in the face of the GFC seems to be: spend and hope.

However the GFC is unlikely to end quickly or painlessly because of the poorly-understood relationship between the financial crisis and the global financial imbalances which have emerged in recent years.

In simple term those imbalances (reflected in current account deficits in the US (mainly), and the accumulation of large foreign exchange reserves by Japan,  Germany, and various emerging economies, most notably China) have arisen  from the way in which US monetary policy was used to counter-balance the demand-deficits which have been a by-product of export-driven economic strategies (see Understanding East Asian Economic Models).

In many cases the growth prospects of emerging economies (including China which has been important to Queensland's economic future) and also Japan  depend on ongoing export driven growth. If their growth were to be driven by domestic demand, currency crises must emerge under Western-style financial regimes which expect capital to be used profitably. This issue was raised obliquely by André Lara Resende (a prominent Brazilian economist and former central banker).

However neither the US nor anyone else is positioned to provide the demand for exports which emerging economies need to continue growing once their accumulated foreign exchange reserves are depleted (in say 2-3 years) if their growth has to be driven by domestic demand.

It appears that the US has not written off a great deal of the bad debts in its banking system, as doing so would have led to a near-depression. As toxic assets have remained on the books, the US's economy will be stagnant for many years (as Japan's was in the 1990s) while new income is used to settle old debts. Europe's predicament seems similar to the US in terms of unresolved bad debts.

Thus, while deficit spending to reduce the impact of the economic downturn gives the appearance of solving the economic problem in the short-term, it is unlikely to be enough in the medium to longer term.

The risk of an economic shock to Queensland is further compounded by the dependence which economic growth has acquired on rapid population increase. If high unemployment, high costs and high taxes adversely affect immigration flows, this could further weaken economic demand.

Serious efforts to boost the supply side of Queensland's economy are needed (to grow out of recession), rather than accumulation of huge debts (and hoping that these will be dealt with by resumption of growth similar to that in the past) as such debts will simply constrain future growth and enforce ongoing sale of public assets. Methods whereby the supply side might be strengthened are suggested in A Case for Innovative Economic Leadership - with an initial focus on capabilities relevant (for example) to: (a) agribusiness; (b) minerals and energy; (c) growth oriented SMEs; and (d) larger regional economies.

An expert / practitioner panel to provide advice to business and community leaders about the economic outlook and enterprising options for enhancing economic systems (as well as raw material for political debate) appears highly desirable.

Fifth there is undoubtedly a need for reform of Australia's tax system so that states are not left with a narrow vulnerable tax base (see Vertical Fiscal Imbalance). However there is also a need for this so that state political leaders are given financial incentives to take economic development more seriously (see Economic Development Incentives).

Finally there is a desperate need for better support to the community's elected representative from a professional Public Service. Professionals are more likely to generate practical action to address infrastructure needs than are the  cronies and 'yes men' whose dominance has been promoted since the early 1990s to ensure unquestioning political compliance. Proposals for reform were referred to in Queensland's 2009-10 Budget Stress: The Tip of an Iceberg?.

Given a truly professional Public Service the size, cost and complexity of the public sector could probably be reduced (eg by boosting demand and creating a market framework for private initiative in cases where market gaps are perceived which would currently be filled by growth of government services; and by development of independent institutions for dealing with emerging social, economic and environmental demands in ways that inhibit the emergence of 'red tape').

The corporatisation model (instituted by the Goss Government for 'semi' government' functions) was always an unworkable compromise (op cit) - as also is the public private partnership concept in many cases. The public and private sectors need to be distinct - in order to reduce the growth of crony capitalism as much as anything else.  The latter is a serious risk for Queensland because of its 'state corporatist' / 'agrarian socialist' history (under which a supposedly 'private' sector seeks to be seen as an agent / extension of the state).

2007-08 ABOUT THE 2007-08 BUDGET

Attention in relation to the 2007-08 budget focussed on the very large commitment to infrastructure spending to overcome backlogs, and to deal with the challenge of rapid population increase through interstate migrations.

The present author's email to a journalist noted that infrastructure neglect in Queensland is not solely due to Beattie Government, and responded to other comments about 2007-08 state budget (see 'Neglect catches up with Beattie' - 'Sunshine dims as borrowing goes up')

2005-06

About the 2005-06 Budget

Significant published assessments of Queensland's 2005-06 budget are outlined in Public Finance notes from June 2005.

The budget was generally well received by business [1], and viewed favourably  by commentators (though with reservations).

The latter suggested, for example, that:

  • Queensland's budget - recently in deficit - is now very strong because of economic good luck. Gradual economic diversification will reduce future revenue difficulties - though an economic shock in China could be a problem. Growth at well above the national average will continue [1];
  • this budget may be as good as it gets. Economic growth is based on a boom in China and India. Changes by the Grants Commission could take Queensland's hand away from the 'national cookie jar', while high levels of infrastructure spending will make financial situation tighter [1];
  • budget is economically responsible and fiscally generous. Social spending showed a government with heart, while impact of population boom was coped with. Funding for Smart State was based on desire to increase contribution to economic growth from labour productivity. The budget indicated that revenue will be tighter in future [1]
  • budget is one of Queensland's best. Business will be happy with high economic growth and surplus. Large infrastructure spending reveals long term thinking and 'pump priming'. Regional spending is high. Support for R&D and teachers will convince those sceptical of Smart State. A change to Grant's Commission's formula - because of Queensland's rapid growth - could end the financial party [1].

The budget was criticized by the Opposition only on the basis of tax rates and reliance on Commonwealth funding [1, 2, 3]. Commerce Queensland criticized the budget for: having a surplus rather than spending more; not spending on particular projects; and failure to further reform / reduce business taxes [1].

Despite its generally favourable reception Queensland's 2005-06 budget seems irresponsible, because:

  • a very high level of capital expenditure is proposed in the face of a resource driven construction boom, which is already facing escalating costs because of capacity constraints;
  • a level of recurrent spending is being established as normal on the basis of revenues gained at what must be the peak of an economic boom; and
  • Queensland does not seem to have a reliable administrative capability to use effectively the resources the budget provides.

Capital spending

The budget's high level of capital spending was presented as a counterbalance to a projected economic slowdown [1]. None-the-less the proposed rate of capital works spending seems irresponsible. The 2005-06  budget involved $8bn in state capital spending (a 30% increase, following a 20% increase the year before) [1]. There are already construction cost blowouts because of construction capacity constraints [1], and the premier indicated  that a skills shortage was likely to lead to overheating [1],

Moreover spending proposals may not have been well considered. For example, proposals to upgrade specific infrastructure to meet future demands for coal transport were described as 'irrational exuberance' and likely to be sub-optimal by a major mining company [1].

Sustainability

Queensland's budget proposes recurrent spending of $25.7bn, a 6.8% increase roughly in line with the 6.2% revenue growth in the previous year - though overall revenue growth is projected to stall in 2005-06 [1

Furthermore the budget also involved the start of a major borrowing program to fund infrastructure [1]. Government trading enterprises face a projected $10bn deficit over the next 4 years [1], and the government is 10% in deficit overall in 2005-06 according to Standard and Poors [1]. Wage cost pressures are likely due to low unemployment [1]. The overall budget outcome, moreover, is forecast to fall $2bn pa over the next 4 years [1] - mainly because of infrastructure spending and tax cuts. One observer suggested that it may become necessary to borrow for ordinary operations [1]. The premier pointed out that the future budget position will be much more difficult due to the large infrastructure program [1].

When the Health System's Review produced concluded that there seemed to be very large funding shortfalls affecting Queensland's health system (eg a failure of funding to match population growth and a deficiency of 2000 doctors), the premier indicated that future budget surpluses would be devoted to this [1]. 

Queensland has long faced underlying difficulties in its public finances as outlined below.

Reasons for this include: above-average population growth which counterbalances above-average economic growth; infrastructure backlogs; past reliance on asset stripping and creative accounting to balance the budget; uncertain return on financial assets in a financial market reversal; an economic structure which assumes low taxes - and presses for further tax cuts [1]; cost pressures; under-funding of apparent spending obligations; and interstate pressure to treat Queensland less generously in distributing federal funds.

These pressures have been offset recently (to an un-quantified extent) by large revenue gains associated with property and commodity booms [1, 2, 3]. However those gains are likely to be temporary and the high levels of recurrent spending that are being committed will be difficult to unwind. Financial difficulties are likely when the booms end [1, 2].  Queensland spent revenue as it became available rather than building up a surplus during the boom [1]. 

Some reasons to suspect that the current economic booms (and the revenue gains they generated) could be transitory are:

  • for more than a decade demand in the global economy has been highly dependent on a credit boom - for reasons outlined in Structural Incompatibility puts Global Growth at Risk. In essence, a rapid rate of credit growth has been both caused (and self-justified) by:
    • asset price increases (initially in equities and later in real estate) as the foundation for (a) consumer spending in the US (and also in Australia) that considerably exceeds income, and (b) export driven growth in Asia;
    • a huge expansion of unprofitable investments in production capacity / infrastructure in East Asia - which translates into losses in banking systems that can only be protected so long as there is a large current account surplus.
  • this situation reflects a self-generating 'bubble' - though when (if?) the associated financial imbalances that concern central bankers [1, 2] will cause it to deflate / explode  is uncertain. Ultimately the 'bubble' depends on the US's ability to borrow, which must be approaching a limit [1];
  • Australia's commodity boom depends heavily on demand from China, one of the principals in this 'bubble'. Moreover:
    • China also faces various other unexamined sources of potential economic dislocation - such as domestic discontent and environmental stresses (see China's Development: Assessing the Implications); 
    • there are signs of overcapacity due to over-investment. For example, massive overcapacity, and a collapse in profits, have emerged in vehicle production by investment on the assumption of continued 70% pa growth in domestic demand which has not eventuated [1]. Capacity utilization in many industries, which have been developed with little regard for market demand, seems to have fallen (eg to around 60%).
  • the commodity boom is likely to end in 2 years - as other producers come on stream. Australia has not chandelled the boom well because it has over invested at the peak [1]
  • there seem likely to be limits to what can be achieved by simply continuing the economic reform process which has aided past growth [1] - see also Australia's Strategic Positioning: The Challenge to Leaders. Queensland in particular faces serious unmet economic challenges (see Queensland's Economic Strategy), while efforts to diversify the economy through Smart State seem to be merely a pretence to gain ill-informed political applause (see Commentary on Smart State).

The suggestion by Queensland's Treasurer that conservative Treasury estimates exaggerated the projected decline in Queensland's budget surplus over the next few years [1] could be well wide of the mark. Australia's Reserve Bank has however suggested that the potential risks to global growth suggested above could be managed [1].

The claimed budget outcomes are uncertain, noting the inclusion of earnings by the Queensland Investment Corporation in the budget bottom line though this can't be used in consolidated revenue. Other examples of apparent creative accounting in Queensland's recent history (see below) also cast doubt on the budget figures.

Sustainability is also at risk because of dubious Grants Commission arrangements for horizontal equalization which (in effect) provide a subsidy to Queensland at the expense of other major states because Queensland's economy is geared to activities that maximize state taxes but are relatively unproductive (and thus weak in generating income taxes and GST relative to the state's population and share of public spending). Pressure for review of this arrangement continues [1]. The Treasurer's argument that Queensland only gets its population share of payments [1] is not the point, because the problem is Queensland's limited contribution to national tax receipts.

It has been suggested that Queensland needs a broader tax base to provide the base for lower tax rates [1].

Administrative Capability

The effectiveness with which resources are used is as important as the quantity of resources which are made available - and recent administrative disasters in Queensland (electricity network development, health system, child protection) combined with indications that similar difficulties are pervasive do not lead to certainty that money will be well spent [1, 2].

For example, social spending has reportedly risen 80% since 1998 [1] - yet Queensland still had a fiasco in its health system (see Intended Submission to Health System Royal Commission).

There are indications that Queensland has serious social problems - see Commentary on Is the Smart State a Just State.  The latter document also suggests that those problems can not be solved by just throwing money at them - as this is likely to result in nothing but an increase in publicly funded welfare services which increase dependency. However the budget seems to have done just that [1].

Underlying pressures

UNDERLYING Pressure for Increased State Taxation

Despite the rapid increases in public spending that has occurred, there are indications that the pressure for significant tax increases and new taxes are likely to become irresistible.

General indicators are:

  • Queensland's rapid 'sunstate' growth (which seemed to be triggered initially by low taxes and costs, and then became self-sustaining) has generated demands for high levels of public spending - which have temporarily been supported by a property boom [1].
  • Queensland's interstate migration (of 700 per week) has both benefits and costs. Difficulties have arisen as a result in electricity, health and water. [1]
  • Queensland's revenue and spending effort, which had been 80% of the national average in the 1980s, was increased in the 1990s to well over 90% of the national average expenditure without yet any corresponding increase on the revenue side (see QCU 2003-04 Budget Submission);
  • 'balancing' Queensland's recent budgets appeared to require a good deal of 'creative accounting' (see Enron-itis; About the 2003-04 Budget; and assertions by Commerce Queensland [1]);
  • cost pressure due to accelerating wage increases are expected Australia wide [1, 2, 3]. These will affect all state governments [1]. Moreover:
    •  A skills shortage [1, 2], the effect of slowdown in gains from property price rises [1] and international competition for skilled staff [1] seems also likely to force up wage costs;
    • large pay rises had to be provided to VMOs to prevent a mass resignation from Queensland hospitals [1]
  • subsidies will need to be provided for rural electricity consumers if  the monopolies that Energex and Ergon have on electricity supply are eliminated [1]
  • QRail's ability to cope with competition in its bulk coal haulage business (which provides most of the profits that are provided to government as dividends) is seen to be in doubt - along with the state's corporatised governance model for GOCs [1].
  • Queensland's government owned electricity industry had been treated as a 'cash cow' [1, 2] and future reform could be associated with reduced dividends as well as a need to inject new capital and pay what have been hidden subsidies directly. In particular:
    • former directors of government electricity companies (Ergon and Energex) have alleged that government forced them to invent false profits to pay dividends to support the government's budget as this was under heavy pressure [1]
    • an independent panel found that a massive program of rebuilding the electricity distribution system is needed - because, in focusing on improving financial results, there has been little attention to developing the network for years [1];
  • community-service-obligation payments would be required from Treasury to rural consumers to maintain uniform tariffs if full retail competition is introduced [1] and consumers in SE Queensland can thus no longer forced to pay a hidden subsidy (see Queensland's Rejection of Retail Electricity Competition);
  • Queensland's capital expenditure seems like a 'magic pudding' eg:
    • spending was returned to above $5bn pa in 2003-04 [1] similar to the historically very high levels achieved in the late 1990s which was (a) seen to account for 1/3 of capital expenditure by all states [1] and (b) apparently funded by stripping the assets of GOCs - a practice which now seems much less feasible. The Government had previously described $5bn pa capital spending as unsustainable without tax rises [1], and in 2002-03 capital spending had reverted to $3bn pa.
    • there are suggestions that even higher levels of infrastructure investment are needed [1, 2];  However:
    • the option favoured by the state government to increase infrastructure investment, ie Public Private Partnerships, can not actually allow this to be achieved [D]. The premier suggested that it was extremely important for the private sector to become more involved in funding transport infrastructure [1]. In this he did not specifying whether this investment would be re-couped from users or from taxpayers - which is a critical question as, if taxpayers remain the ultimate purchaser, private borrowing to finance transport infrastructure can not increase the total feasible investment (and might actually reduce it due to their higher borrowing costs);
    • the Queensland Treasury Corporation is likely to borrow $6.7bn in 2005-06 (of which $2.5bn would be for new capital investment) in addition to investments associated with the SEQ regional plan [1]
    • proposals for $8bn in state capital spending (a 30% increase) emerged in 2005-06 budget [1]. This high level of spending is  mainly about overcoming past problems (eg those in electricity supply) rather than addressing emerging problems (eg those in water supply) [1]
    • the future budget position will be much tighter due to large infrastructure program [1]
    • in 2004 substantial cost increases due to a building boom required the whole capital works program to be rescheduled [1].  In 2005 large investments linked to a resources boom were already forcing a 30% increase in project costs [1]. The premier argued that a skills shortage associated with large infrastructure investments could led to overheating [1]; and also to a cost blow-out that would require government to seek skills overseas. [1] In 2006 the cost of state government's infrastructure plan for SEQ increased $11bn apparently due to rapidly rising construction costs. [1]
    • there is no reason to expect that Queensland would avoid problems (eg rising costs, lengthening delays) which are suspected in Victoria because of difficulties in managing record infrastructure programs in the face of loss of specialist skills, political priorities and interstate competition for skills [1]
    • expenditures of over $1bn pa have been seen as required to address backlogs in infrastructure investment that emerged in the decade to 1994, and to meet standards to larger Australian states and international comparisons [1]
    • very substantial deficiencies exist in Queensland infrastructure - according to IEAust's Queensland Infrastructure Report Card [1]
    • the cost of upgrading dams to meet safety standards has led to delays [1]
    • water shortages are looming in many centers without significant spending [1]
    • Australia invests considerably less in water infrastructure than other OECD countries [1] - despite the fact that it arguably the driest inhabited continent;
  • questions have also been raised about the adequacy of spending on state services [1], and an apparent backlog in school maintenance [1, 2]. Secrecy about the state of school repairs implies that there could be a problem [1]
  • the Government agreed to reduce class sizes and increase teachers' salaries [1, 2] which had previously been resisted on financial grounds . Many equally-resisted similar claims (eg from nurses - see Enterprise bargaining) will presumably also be conceded;
  • the appears to be a massive growth in demand for social support services which is overwhelming current systems (see outline of 2003 conference on Is the Smart State a Just State?). QCOSS has argued that very large increases in funding are required to sustain disability support and homelessness services [1]
  • the cost of upgrading Queensland's child protection services has been seen to be substantial [1], and various interest groups have questioned the government's willingness / ability to meet those costs [1, 2]. [The Treasurer however suggested that funding would be no problem as Queensland's budget position was sound [1]]. By late 2005, after large increases in funding reports of abuses had escalated, many were not being properly investigated and the system was seen to be on the verge of being under-funded again. [1];
  • a government report suggested that funding rapid growth in SE Queensland was impossible without user pays or tax increases [1];
  • Queensland's hospitals were seen a few years ago to be facing an 'unsalvageable funding crisis' [1]. Health costs are growing rapidly and placing pressure on state budgets [1]. Moreover all states are claiming that the 5 year Commonwealth / state agreements for future funding of hospitals is likely to increase pressure [1, 2], while doctors and others claim chronic under-funding  [1, 2]. The government was alleged to have used misleading statements about the gains from GST revenue to avoid increasing health funding [1], and to have made a large populist pre-election funding commitment for elective surgery though there are many higher priority needs [1]. Queensland Health is seen to have become overcommitted and to have to cut back services [1]. A large number of other allegations of under-funding are detailed under the 'Health' topic on Queensland's Ongoing Challenges. While state spending on health has been rising, health costs have risen much faster [1]
  • a Review of Queensland's health systems found: evidence of inadequate staff training in hospitals because of a lack of time [1]; overall funding has not kept pace with population growth [1]; funding and staffing levels were well below interstate relativities (with a need for 2000 additional doctors) [1]; and staff pay levels were below interstate relativities [This all suggests that fixing these problems could be costly. The premier indicated that future budget surpluses would be devoted to this [1] ]. The final report of that Review suggested a need for $1.5bn pa in increased spending [1], which Premier reportedly hoped might be funded by increased revenues from mining (and other sources) without the need to increase taxes. [1] [However optimistic projections of revenues from mining may be unreliable - see comments on [1]; while those proposed on interstate relocations [1] would arguably be unconstitutional]
  • an analyst suggested that health costs were likely to triple by 2020 [1];
  • local authorities reportedly see themselves as facing a financing crisis because of cost shifting by commonwealth and state governments [1, 2]. The Australian Local Government Association demanded an increased share of federal revenues - because Councils' ability to fund infrastructure (roads / sewers) was at breaking point. [1]
  • the Federal Government is increasing pressure on the states to:
    • pay more of the cost of roads [1]. Transferring responsibility for substantial road costs to the states is seen as one effect of the Auslink program [1];
    • meet part of the shortfall in funding for tertiary education [1];
    • pay more of the cost of essential services generally [1];
  • the Federal Opposition wishes to pass full responsibility for funding Roads of National Interest to the states [1];   
  • the development of a strategy to finance transport infrastructure is very difficult - eg an analysis showed a $5bn black hole in road maintenance funding and a $1bn pa shortfall in funding for transport in SE Queensland [1];
  • electricity distribution systems in SE Queensland are overloaded and old [1]. The government was forced to reverse a decision to draw large 'special dividends' from  electricity companies because of their problems with failing infrastructure [1];
  • the effect on the budget bottom line of Queensland's net financial assets is uncertain, and the government warned that this might increase pressure for tax rises [1] - though in 2003 assets have again been improving the budget bottom line [1];
  • new taxes have reportedly been under consideration [1, 2, 3, 4] - and the Opposition claims that large numbers of new taxes and tax increases above inflation have already been introduced [1]
  • funding difficulties have been reported as due to:
    • over-commitment in 2004 election; building cost increases; higher than expected cost of implementing child safety reform [1]
  • the State government proposes extending its hard-line policies on hospital patients (restricting services to poorest and making others pay) into areas of public housing [1]. This reflects a fundamental shift away from welfare state concepts.

On the other hand a reputable consultant's analysis has suggested (on an unknown basis) that states are in a position where they could eliminate some inefficient taxes (which would give a boost to growth) [1]

Offsetting these pressures will be temporary increases in stamp duties' revenue (for as long as a property boom / bubble lasts). 

The property boom (and profits on equities held by state superannuation funds whose inclusion in the government's operating result is problematical) provided the basis for bringing Queensland's 2002-03 budget into surplus [1] - and in turn the launching of a proposal for $1.4bn additional borrowing for infrastructure as one basis of a 2004 state election campaign [1]. However the dependence of this which has grown will make its ending painful [1], and a very substantial fall in state receipts from stamp duties is expected in 2004-05 [1]

However neither the tax windfall nor the $1bn infrastructure package will reduce the pressure for substantial tax rises in Queensland in future. 

However it might prove impossible to overcome looming problems in state financing no matter what is done to try to increase state revenue.

Why?

There are constraints (see below) on Queensland's ability to increase revenue by raising taxes related to:

  • the weakness of Queensland's tax base;
  • the dependence of the industrial structure on low taxes (and rapid population growth);
  • the limited control states have over most of their revenues (which amongst other things severely limits the amount that can be borrowed for infrastructure without a significant rise in state tax rates); and
  • the need for nationally and internationally competitive tax rates.

Moreover, there is pressure to reduce / eliminate existing taxes eg:

  • there is an expectation that financially significant existing state taxes would be removed as a result of the introduction of GST [1] - especially stamp duties [1] and payroll tax [1];
  • the federal government presses states to cut taxes because they receive GST revenues [1].
  • the federal Opposition has expressed concern about the social impacts of state reliance on gambling revenues [1];
  • taxes on families have been decreasing in most OECD countries - but increasing in Australia [1]; and
  • it has been argued that Queensland is overcharging electricity consumers (by not introducing retail competition) in order to be able to extract special dividends from government-owned electricity utilities and to reduce the need for borrowing [1].

And, tax rises may encounter political resistance unless there is a perception that the money would be productively spent - and favourable perceptions may not exist given the emergence of complaints from many interest groups about performance.

Given that most state revenues are raised by Commonwealth taxes, one logical place to look for an increase in state revenues is at Commonwealth taxation and expenditures. However, even ignoring political constraints, this may be no panacea - because:

  • despite a surprise 2002-03 surplus [1] there are constraints and increasing demands on federal revenues (see Federal - state fiscal imbalances). Facing large demands for health, education, aged care, child care, the Federal government had a budget surplus of few billion dollars - which is drop in the bucket given the estimated $1bn pa deficit in infrastructure investment in SE Queensland (alone) in transport (alone) [1];
  • the federal government has adopted a highly centralist stance - which involves an apparent desire to reduce state roles (op cit);
  • likely changes in the pattern of economic growth would slow the rapid growth of GST revenues which the federal government collects for the states [1];
  • other major states are seeking a reduction in the large subsidies their taxpayers have provided to Queensland due to its weak tax base (under the horizontal equalization principles the Grants Commission applies to Commonwealth payments to states). The Prime Minister seemed informed about their case [1], and the Grants Commission itself apparently believes that its formulas need to be rethought [1]. Also it seems to be in Queensland's long term interests to phase out this subsidy. In early 2006, changes were made to Grants Commission formulas which reduced the funding available to Queensland (and WA) [1, 2];
  • factors which improve the state's own taxing capabilities (eg mineral boom which increases royalties) are taken into account by Grant's Commission and result in reduced shares of GST revenues [1]

In the medium term one way to provide states with revenue more in accordance with their responsibilities and to provide an incentive for serious economic strategies might involve restoring personal income taxing powers to the states [see 1]. 

Another alternative which might be considered to restore the balance between state revenues and expenditures might involve the imposition of death duties which would (a) increase state revenue and (b) reduce interstate migration and the pressure which this imposes on state finances.

In the short-medium term a significant future deterioration in economic conditions is possible which would seriously erode existing revenues (including those collected on states' behalf by the Commonwealth), so even with tax rises increased revenue is not assured -see The Potential for Economic Instability.

In the medium term, there are emerging signs of a need for further very difficult structural changes in Queensland's / Australia's economy if strong growth is to be achieved.

[2004-05 Budget]

About the 2004-05 Budget [NOT COMPLETE OR meaningful]

Significant published assessments of Queensland's 2004-05 budget are outlined in Public Finance notes from June 2004.

Key points include:

  • the budget position in 2003-04 was substantially improved by turn-around in earnings on invested assets (which contributed $1bn after 2 years of losses), and large stamp duty payments (up $500m to $1.8bn) associated with a property boom [1], as well as by increased GST revenues (up $600m) [1]. Much of the increased investment income will not be retained. Stamp duty payments are forecast to fall $400m in 2004/05 (to $1.4bn) [1].

    Thus increased spending in 2004-05 is likely to be financed by borrowing and GST. Underlying pressure for tax increases are still there.

  • 2003-04 surplus is not as good as it seems because Queensland fully funds its superannuation commitments so that gains and losses in QIC's investment portfolio show up in the budget operating result [though they do not provide a cash source which government can draw upon]. Past deficits were influenced by poor investment returns [1]. Because of the distorting effect of returns on super funds these are likely to be excluded in future [1].
  • government appears to intend to borrow for industrial development projects [1] which is probably inappropriate - quite apart from poor policy basis for those programs;
  • Queensland's population boom (principally in SEQ) both increases revenues - and creates large increases in spending demands [1]. How this will balance out is anything but clear.

there is nothing outstanding as major contributions to improving arterial roads - money is being spent but it has to cover a lot of territory

  • Smart State Development Fund was announced in October 2003 - involving borrowing of $1.4bn for infrastructure - $400m for City Train and the balance for education, health and transport facilities [1]. A need to define what it would be used for has been suggested [1]
  • rapid economic growth, which has been achieved from domestic consumption and housing construction due to population inflow, is assumed to now have to be maintained through exports [1] - an assumption that seems most problematical (see Difficult Trading Environment)
  • What effect will capital spending have on budget when boom over - it will stimulate economy which will generate revenues.

    What is the actual need relative to booming population gains. Note classic naive local authority

    The additional infrastructure spending will simply accelerate existing capital works programs - and does not involve any additional initiatives to deal with apparent infrastructure backlog in SEQ. It would merely prevent the backlog from further increasing [1]

Building program prior to 2004 election was based on property tax windfall [1]

2003-04 Budget

About the 2003-04 Budget

Significant published assessments of Queensland's 2003-04 budget are outlined in Public Finance notes from June 2003.

Key points include:

  • Queensland's 2002-03 budget was in deficit ($350m) for the third successive year [1]

[CPDS Comment: It is possible that federal governments could expect states to assume large additional funding responsibilities. For example, difficulties that the federal government is experiencing in funding tertiary education are being seen as requiring top-up funding by the states which they can 'afford' because of the GST [1]]

  • Queensland's budget outcome has been adversely affected by global financial markets [1, 2], because of the way gains in superannuation funds directly affect the bottom line [1]

    [CPDS Comment: in earlier years gains from the financial market boom were relied up to support large increases in spending]

  • the budget position has been improved by a property boom, and federal grants [1, 2]
  • revaluation of assets has been used to improve the budget bottom line [1, 2];

    [CPDS Comment: many of those assets have no realizable cash value]

  • special dividend payments were sought from GOCs on the basis of their revaluation reserves - a practice whose legality the Auditor General has sought legal advice about [1];
  • a total of over $1bn has been obtained from GOCs as special dividends over the past 4 years [1]

    [CPDS Comment: Much greater amounts appeared to have been taken over the preceding four years - see Note 53]

  • cash is being drawn from GOCs to support the state budget using accounting tricks - and this undermines the purpose of corporatisation whose goal was to shield government enterprises from such manipulation [1].  Such asset stripping was seen by the Treasurer as a way of preventing the money from being mis-spent [1] and improving accountability - though this practice will reduce future income and can not continue indefinitely [1, 2]

    [CPDS Comment: Entities that are subject to both user-pays competition and political directives are very likely eventually to present large financial losses to taxpayers (see Note 76)]

  • Queensland benefits from transfers at the expense of taxpayers in other states because that is the way the Commonwealth Grants Commission works

    [CPDS Comment: Queensland benefits from horizontal equalization payments from the Commonwealth because it has a weak tax base as a result of economic strategies that have encouraged the growth of low productivity industries]

  • Queensland's balance sheet is the strongest in Australia [1]

    [CPDS Comment: Queensland's balance sheet is not the soundest in Australia when account is taken of relatively low non-financial assets - which also suggests chronic under-investment in such assets - see QCU Forum on Government Spending / Revenue

    Furthermore a strong financial balance sheet is only really able to be translated (by borrowing) into increased public capital spending (assuming that it is not good practice to borrow for re-current spending) - and there are serious constraints on re-current spending which might be further adversely affected by the ongoing cost of supporting additional capital assets].

  • Queensland's financial position appears to be excellent - though there are economic risks [1]
  • It is not possible to seriously criticize Queensland's overall financial position [1]

    [CPDS Comment: There appear to be flaws in each of the reasons given for this view [1]]

  • new taxes are being considered [1, 2, 3]

    [CPDS Comment: there is limited scope for increasing state revenue through increased state taxation]

  • Queensland's forecast future surplus depends on a 7.5% return on equity assets - which seems optimistic [1, 2]
  • Industry groups generally praised the budget, because (a) financial assets remained sound despite recent deficits (b) Smart State strategy is enhancing the business environment and (c) Queensland's low tax status is valued [1].

    [CPDS Comments: Queensland suffers a major problem in that there are few independent institutions able to provide competent economic or public policy inputs to political debates (see Queensland's Weak Parliament).

    Smart State is purely for political appearances - as the main constraint on the growth of innovative enterprises is the lack of commercial capabilities, and this is not aided by public funding of education / training / R&D (see Comment on Smart State] or by government 'assistance' services to firms. There are some indications that it is finally being recognized internally that Smart State is merely a political slogan, rather than a serious policy [1, 2].

    Queensland's low tax status has been a significant factor in encouraging the development of low productivity industries (see Queensland's Economic Strategy), which has in turn created the weak tax base which requires Queensland to dip into the pockets of taxpayers in other states to fund services.  It seems most unlikely to be sustainable - see QCU Forum on Government Spending / Revenue]

2002-03 Budget

About the 2002-03 Budget

In brief published assessments of the Queensland's 2002 budget might be summarised as follows:

  • the 2002 budget is socially responsible under difficult circumstances - though it lacks initiatives relevant to business. In particular greater infrastructure spending seems to be expected;
  • regarding Queensland's $486m operating deficit in 2001-02 it is variously suggested that:
    • the real deficit is even greater, because losses by Government Owned Corporations have not been included in the consolidated government account;
    • Queensland's operating deficits are not significant because of the state's relatively sound net asset position. In fact the deficit is largely the result of losses on financial assets;
    • government should be far more willing to borrow to fund investment - and there are many areas where increased spending is needed;
  • budgeted revenue depends on projected economic growth - and observers are unsure whether the growth estimate is over- or under-stated;
  • large staff wage rises could undermine the budget.

Unfortunately published assessments of Queensland's 2002 budget appear to be superficial, and to have overlooked related issues that suggest real difficulties. In particular:

A. There are indications that Queensland's public accounts may have been infected with a touch of 'Enron-itis' (ie misrepresentation of assets and liabilities in the capital account). For example:

  • the present state government has had a miraculous ability (which its predecessors lacked) to find tens or hundreds of millions of dollars to devote to each of numerous favoured projects with much less apparent impact on the budget than might have been expected;
  • current accounting standards (especially GFS practices) have been claimed to allow governments to do the sorts of things that Enron had to break the rules to achieve [1]
  • the assets of Government Owned Corporations were stripped - without it being clear what was actually happening - noting that in recent years a poorly-explained $2bn pa item called 'equity return' has appeared (and disappeared) in the budget;
  • government borrowing has been removed from the budget - by making this part of the consolidated capital position of individual departments. Under an accrual accounting system there is scope for manipulating the value of assets (to offset liabilities) - especially where assets are valued at estimated depreciated replacement cost;
  • losses incurred by GOCs have apparently been ignored in calculating the operating deficit in the 2002 state budget - according to Opposition statements. [Moreover there is a huge risk in the longer term of large losses by GOCs and other commercialized entities that are subject to both political direction and to user-pays competition];
  • $220m was 'raided' from a fund set up to protect property consumers [1];
  • Earnings by Queensland's superannuation funds have been consolidated with general public finance so as to make the operating result look a lot better than it actually was during periods of rapid share market growth, and now making the operating result look worse (Madigan M 'Budget in confusion after super funds used as prop',  CM,  2/11/02)
  • the Auditor General is reportedly concerned [1] about the need for more details of arrangements made with the private sector. Note also:
    • Queensland has a growing propensity for 'buying' industry, and some arrangements could be creating future liabilities that (under an accrual budgeting system) should be included in the annual operating accounts;
    • a preliminary undertaking appeared to be given inadvertently to provide a very large (say $2bn) subsidy for establishing a PNG gas pipeline;
  • the Auditor general has also expressed the view that some departmental reporting to Parliament is inaccurate and misleading [1];
  • the Auditor General has requested advice about Government proposals to draw special dividend payments to itself from the asset revaluation reserves of it electricity GOCs [1]. Such 'reserves' are purely a book entry and have a most uncertain cash value;
  • State governments, who provide insurance over state hospitals, might face huge liabilities from the large medical damages awards that have bankrupted medical insurers;
  • the actual cost of the re-development of Suncorp Stadium (estimated at $280m) was claimed (by a respected political analyst) to be open-ended and hidden in a 'web of financial fictions' (Fitzgerald R 'Political football now has a home ground',  Courier Mail,  30/4/02)

  • politicisation of the bureaucracy (which has easiest access to information about any irregularities) has neutralized its ability to act independently in the public interest;
  • previous misuse of capital funds for re-current spending (which was later referred to by some observers as the 'Worldcom' syndrome, though it also seems to characterise East Asian systems of socio-political-economy) was alleged in relation one member of Queensland's Government (personal communication from a senior public service source);
  • the previous Treasurer unexpectedly retired from politics following internal reports from his office of serious concerns about Queensland's budgetary position

B.  Published assessments of the 2002 budget have assessed it mechanically in terms of the quantity of spending, while ignoring the quality of that spending (ie whether it is likely to achieve desired and constructive outcomes).

C. Queensland faces growing financial difficulties and concerns about ineffectual economic strategies and public administration (see 2001 Comments). In particular ......

D. It is proving difficult to meet expectations related to infrastructure funding

In brief: Until a few years ago the Queensland Government had been spending about $3bn pa on infrastructure. The present Government increased this to $5bn pa - apparently mainly using money stripped from the assets of Government Owned Corporations (by forcing them to increase their debts in order to make an equity return to government - see Note 53). 

In 2002-03 state infrastructure spending has been reduced to about $3bn pa (presumably because asset stripping has become harder and the budget position is very tight).

To compensate funding infrastructure through Private Public Partnerships (PPPs) has been proposed - with reference to projects worth $2bn.

However PPPs appear to be of only marginal relevance (see About Public Private Partnerships). The basic point is that:

  • the public sector remains the ultimate purchaser for most infrastructure on behalf of the public no matter who initially finances the project;
  • increased infrastructure investment through user-charges could be employed without using PPPs;
  • anticipated cost savings through efficiency seem likely to be lost in the complexity of contact management - because of the character of public goods and services.

Thus Queensland could be thrown back onto looking for some other means for financing a large quantum of spending on additional infrastructure services.  

It should also be noted that business observers (and some others) have claimed that Queensland's annual infrastructure capital spending really needs to be much more than $3bn (eg perhaps as much as $7bn PER ANNUM) to catch up with backlogs created in the 1980s and 1990s and with the effect of population growth - and to create an attractive business environment. Queensland's large geographical area and decentralized character also pose infrastructure challenges, as it is hard to adequately fund both regional Queensland and the rapid population growth in SE Queensland. 

In the event that a significant increase in infrastructure investment was seen to be needed, then existing weaknesses in Queensland's machinery for planning and delivery of infrastructure would become an even more serious problem.

E. There is very limited scope to overcome growing financial pressures merely by increasing tax rates (as has now reportedly been suggested):

  • Queensland has a relatively weak tax base because of the under-development of its economy (see About Review of Grants Commission Arrangements);
  • only a very small fraction of state revenues are determined by state policy (see Note 81). Thus quite large changes in state-determined taxes might be needed to achieve a modest increase in overall income. [An aside: The main growth tax that the states (indirectly) have access to is the GST, and proposals for an increase in the GST even before it is fully bedded down might not be well received by the public];
  • Queensland's tax rates are not all that low relative to other states, with Tasmania's rates reportedly lower overall and Victoria adopting a highly competitive tax regime. Furthermore some other services costs are relatively high;
  • periodic warnings (of unknown validity) have been given about the risk of capital flight from Australia if business taxes are raised; and
  • Queensland's industrial structure has been built on the basis of economic strategies in which 'low taxes' were one (though not the only) critical feature. The state statistician showed the importance of interstate migration to Queensland's economy [1]. Low taxes are a factor in the industrial structure not only because of the direct impact of business taxes, but also indirectly because rapid interstate migration (which seemed to be triggered by removal of death duties and has since been influenced by living costs lower than in Sydney and Melbourne) has caused the demand for construction of housing and related facilities to be a major driver of economic growth (and thus of the current industrial structure) especially in SE Queensland.  However it can be noted that (a) Victoria reversed its population outflow, and was seen to be enjoying the same sort of economic stimulus from population inflow that Queensland has (see James C. 'Victoria growing in stature',  Financial Review,  17/7/02) and (b) rising housing prices in Queensland have slowed interstate migration [1]. Thus the economic consequences of increasing taxes may not be trivial.

The implications of Queensland's very narrow and weak tax base can be illustrated by considering the state's limited capacity to borrow to fund infrastructure (despite its positive net assets). A rough calculation suggested that if only a 10% increase in state-determined taxes was considered politically tolerable, then the TOTAL amount which the state might be able to increase its borrowings might be $7.5bn - which will not go far if Queensland's capital infrastructure spending needs to increase by several $bn PER ANNUM as some analysts have suggested.  

A further once-off pool of investment funds might be available if it is feasible to redirect revenue that is now invested in capital works towards debt repayment (eg a TOTAL amount of some $25bn might be invested if about $1.5bn pa of revenue were to be redirected).  However, given the pressure on revenue, this option may no longer exist.

This amount available for investment could be increased to some extent by application of direct user charges - which would take the pressure off taxes.

Furthermore well designed investment could itself lead to an increase in state taxes through expanding the state's tax base by:

  • increasing economic output - both directly and through a multiplier effect of investment on community income;
  • increasing economic productivity though allowing the economy to develop (ie undergo market-relevant qualitative changes) by providing economic, social and environmental goods and services which can not be provided through private investment.  For example, economic productivity is critically dependent on flexible change and there are always new forms of economic infrastructure subject to market failures which are needed to support new economic opportunities.  Public investments in social support to the disadvantaged can also raise productivity by overcoming political resistance to economic change. Similar effects can be achieved through appropriate environmental investments in an era where those constraints are increasingly important.

Strengthening Queensland's tax base by becoming serious about developing the state's economy might also significantly increase government revenue potential overall (see comments in About Public Private Partnerships).

However because of Australia's unbalanced federal financial system and the Commonwealth Grant's Commission's horizontal equalization principles, most of the gains from a stronger tax base in Queensland would be enjoyed by other states (see About Review of Grants Commission Arrangements). Moreover  .....

F. Queensland's economic position is not trouble free, eg:

  • Queensland's already-low average community incomes declined further against national benchmarks in 2001-02 - despite the Smart State push supposedly to develop higher value-added industries. This is shown by the decline of Queensland's economic growth to the national average while the state's population growth rate remained much higher (see O'Dwyer and Mathewson below), which means that Queensland's per capita economic growth was below the national average.
  • while a private investment surge is expected to boost Queensland's economy:
    • this 'investment surge' now increasingly features projects that have been significantly subsidized by governments (see Buying Industry);
    • some major investments are energy-intensive with very large greenhouse gas implications, and there are indications that climatic change is an issue which is going to have to be taken seriously (eg see article dated 27-3-02);
    • mis-handling of the PNG gas pipeline may have created a basis for investor concerns about sovereign risk
  • there appears to be growing competitive challenges to Queensland's economy - perhaps requiring difficult structural changes.

G. Moreover other major states are apparently increasingly determined to prevent their taxpayers having to subsidize Queensland - a subsidy which occurs through interstate transfers of up to $2bn pa in Commonwealth revenues under the Commonwealth Grants Commission 'horizontal fiscal equalization' principles because Queensland's Economic Strategies have created a poorly developed economy and a weak tax base.

June 2002

Published Assessments 2002-03 - General

Government used windfall gain from stamp duties to fund new priority infrastructure and prop up the bottom line for current budget. A $1bn loss on QIC investments has been blamed for the $486m operating deficit (with a $382m cash surplus). State's economic growth in 2001-02 fell to national average of 3.75% for first time in a decade. Overall infrastructure spending is to fall. Significantly increased funding is to be provided to child welfare. There are no new taxes. Remedial action had been taken mid-year to prevent large deficit when the share-market turned down. Property industry complains of being used as cash cow. Queensland Commerce suggests that there is little in the budget for business - and complains about reduced infrastructure spending. Opposition pointed out that government had omitted losses by GOCs from budget bottom line - and that the real operating deficit was $883m. (Strutt S. 'Beattie's back to basics budget', Financial Review, 19/5/02)

Government has taken a $1bn hit - but can still expand services and cut business taxes because of the state's wealth inherited from the Bjelke Peterson era. Financial sustainability is not an issue for Queensland. The state will also benefit from an investment boom over the next year. Recovery in US and Asia should see 4.5% growth. However there are clouds on the horizon. The budget will barely be back in surplus this year - and Queensland is close to being in net debt. (Mitchell A. 'Beattie is cruising along', Financial Review, 19/6/02)

Standard and Poors gives Queensland a AAA rating despite its second deficit in a row, because of its strong balance sheet and forecasts of an improved position. Business criticised the budget for increasing social spending while infrastructure drops (Strutt S. 'Queensland is still in the black with agency', Financial Review, 20/6/02)

Pay rises for government workers could blow the budget - with only 3% increase being allowed, and nurses demanding 9% (McKinnon M. 'Pay hurdle the dark horse', CM, 19/6/02)

Opposition stated that Government had concealed large losses in GOCs in budget. If these were included, deficit was $883m and cash deficit was $200m. Net per-capita worth of Queenslanders has been reduced 4.8% over the past 5 years. The government is delivering rhetoric, not jobs. It spent too heavily on public service over first 3 years, and now lacks the ability to do more than keep up with population growth. Financial discipline, and decreases in numbers of public servants is needed. (Jones C. '$200m deficit buried by Labor', CM, 19/6/02)

The budget failed to deliver jobs or funding needed for hospitals and police - according to the opposition. Financial mismanagement had left government with little money for needed services. The deficit was much larger than claimed, as GOC losses were being hidden. There are no new job creating initiative, reduced capital works funding. The health system threatens to give way under the pressure of so many patients. The $148m program for child protection has come too late, and will not achieve full benefits for 4 years (Odgers R. 'Horan tips bucket on Budget of deceit',  CM,  21/6/02)

State government has done a good job in difficult circumstances this year. A $486m deficit would disappoint a government whose conservative financial strategies require operating surpluses, restricted borrowings and low debt. The deficit was not the result of abandoning fiscal rectitude - but of zero return on superannuation portfolio managed by QIC. Where some might say government has failed is in terms of capital spending - with a bias towards services to families, health etc. But infrastructure spending is down - despite rapid immigration and consequent need for more services - because government is too shy about borrowing. The budget resorts to relying on one-off increase in stamp duty revenue and emphasis on PPPs - which have problems in leaving risks with government if all does not go well. The reason for avoiding borrowing is hard to fathom - as households and businesses do so. Spending should increase on health, education, urban traffic congestion, and high unemployment. (Stanford J. 'Step outside comfort zone', CM, 19/6/02)

Queensland's budget has been described as solid but with heart. However its assumptions about future revenue growth are brave - and the more brave those assumptions are the less solid the budget looks. Government expects 4.25% growth - partly due to recovery by Japan - which most other analysts are not convinced about and that $A will stay below US 60c. Queensland's problem is where the revenue will come from. Its deficit was $486 m. The days of raiding the profits of electricity generators are over - as the dividend revenue source has been slashed. And costs are continuing to rise. ('Budget's balancing act', CM, editorial, 19/6/02)

A $148m four-year increase will bring Queensland's spending on child protection up to the national average - as the center-piece of the 2002 budget. Spending on health, education and police also increased - while the state's financial position declined due to global economic slump. Welfare groups welcomed the budget, while business groups doubted its growth forecasts. The opposition suggested that the books were cooked by concealing major losses by GOCs (including power companies). Capital spending was cut from $5.1bn to $4.8bn (Franklin M. '$148m to save kids', CM, 19/6/02)

$400m windfall from stamp duty and $150m from extra dividends did not stop second annual deficit - due to collapse in QIC earnings. Deficit could have been $1.1bn. Government rejected claims of prior QIC chairman of interference - and rejected suggestion about privatizing QIC. (Emerson S. 'Treasurer defends red result', A, 19/6/02)

Queensland has fully funded its superannuation liabilities (about $11bn) and even long service leave - and has about $13bn in financial assets as well. In fact the deficit is mainly due to the effect of market downturn on its financial assets. Thus the budget deficit which is projected to continue to 2005-06 (which would be bad news elsewhere) is not significant (Wood A. 'On balance, deficits no cause for gloom in the sunshine state', A, 19/6/02)

Economy

Queensland has had a population growth of 8.5% over the past 4 years - the largest growth in Australia, compared with a national 6% rise - but tough times have reduced 2001-02 economic growth to the national average of 3.75% (O'Dwyer E. and Mathewson C. 'Queensland the boom state', CM, 18/6/02)

Queensland's economy will grow 4.25% according to state government estimates - providing $A does not appreciate too much - as this could affect mineral and tourism exports. Commerce Queensland expects growth to be lower - because of lack of incentives for business but ABN Amro Morgan states that consensus growth forecast is 4.7%. Government expects that major growth risks are $A strength, strength of trading partners, timing of investments, inflation and possible drought (McKinnon M. and Anderson F. 'Growth reliant on dollar value', CM, 19/6/02)

The budget assumes that $13bn investment will boost Queensland's economy (including Comalco Aluminium and AMC Magnesium Plants). Exports and tourism are also expected to pick up. Employment should rise 2.5% and unemployment fall to 7.5% (Strutt S. 'Mackenroth banks on $13bn investment surge', Financial Review, 19/6/02)

Economic growth is forecast at 4.25%. Strong investment growth and export recovery are expected to underpin this (Strutt S. 'Qld to outstrip nation's growth', Financial Review, 18/6/02)

Business has endorsed the State Government's robust economic forecasts - but warned about the effect of volatility in global markets. Queensland Commerce suggested that the budget was light on new initiatives to stimulate investment. AIG suggested that budget balanced social responsibility with maintaining financial strength. (Anderson F and Sommerfield J. 'Business key to bullish growth', CM, 19/6/02)

Spending

Queensland will reach national spending levels on child protection in four years (Wenham M. 'Child protection counts on honouring inquiry pledges', CM, 19/6/02)

300 increase in police numbers and capital works are the center of fight against crime (Odgers R. 'Cash puts more on the beat', CM, 19/6/02)

Government is to provide $4.2m for central coordination task-force for PPPs in Department of State Development (Odgers R. and Anderson F. '$4.2m breath of life for infrastructure policy', CM, 19/6/02)

After spending less on social services for many years, Queensland has now achieved parity (Fraser A. 'Servicing social commitments', A, 19/6/02)


About the 2001 Budget

Overview PUBLISHED ASSESSMENTS
  • General: The budget contains weaknesses, but these seem to attract little public interest
  • Assets: Net assets are still positive - but it is hard to balance Queensland's budget
  • Deficit: There is uncertainty about Queensland's budget outcome. Observers do not appear to take the claimed figures at face value - but disagree amongst themselves as to what the 'real' position is.
  • Economic outcomes: Few seem impressed about the economic and employment position
  • Taxes: have given rise to complaints

CPDS COMMENTS

There is a lack of realism about the budget's ability to deliver on its populist rhetoric. In particular:

  • financial difficulties appear to be further increasing;
  • efforts to manage and diversify the state's economy are amateurish;
  • the Managing for Outcomes framework within which the budget was prepared seems to have weaknesses in dealing with core government functions because:
    • such functions may have no outputs;
    • intrinsic problems arise in defining and measuring some services;
    • leadership can be more important than defining outputs;
    • non-financial performance indicators (which can be more important) are not addressed; and
    • the complications of competitive service delivery have not been resolved.
  • poor policy advice and implementation support from a Public Service subjected to intense 'political' manipulation means that what may seem like good ideas on paper are unlikely to be effective.
Published Views

PUBLISHED ASSESSMENTS 2001-02

General

"Few Treasurers would have been able to brush aside the figures revealing that Queensland had a huge operating deficit. Lesser political performers would certainly have been in deep water with the news that the state's unacceptably high unemployment was forecast to stay at 8 percent despite another bumper capital works program. But Mr Mackenroth's budget is being called everything from socially responsible to boring" (Strutt S. 'Boiler-plated Mr Fixit does Beattie's biz', Financial Review, 22/6/01)

The budget shows few signs of fiscal discipline (according to a UBS Warburg analyst). In 2000-01 there was a 16% ($1.8bn) increase in expenses over the previous year. The budget has inappropriately emphasised services delivery at the expense of infrastructure, according to another analyst. Positive features seen in the budget include: focus on reducing unemployment and up-skilling the workforce; public spending to upgrade IT (which appealed to IT suppliers though they were concerned that there might not be much spending with existing firms) and the $100m fund to support technology and innovation (Anderson F and Brannelly L, 'Payroll tax change bolsters government coffers', Courier Mail, 20/6/01)

Net Assets remain positive - but Queensland has trouble balancing its budget

Queensland had a $474m cash surplus in 2000-01 but a $820 operating deficit. Standard and Poor said that AAA rated governments (like Queensland) were expected to produce operating surpluses. Queensland seems to be getting to a position where it is struggling to balance its budget. But, as the only state with net financial assets, it can afford to do this for a while, and run down those assets. Comparing NSW, Victoria and Queensland on ABS's GFS basis shows that Queensland's budget position is the weakest at present. On a GFS fiscal basis Queensland will have a $1.7bn deficit in 2000-01, reduced to $499 in 2001-02 and turning positive in 2003-04. On a GFS cash basis Queensland will reduce a $474m surplus to $253m in 2001-02 (Field N. 'Qld budget sins forgiven for a while', Financial Review, 23-4/6/01)

Standard and Poor has warned by that Queensland's budget position is weakening - noting its $820 operating deficit in 2000-01. However Queensland's accounts were still the best in Australia. S&P noted that Queensland was budgeting on a return to surpluses in 2002 following several large recent projects (Franklin M. and Parnell S. 'State still tops in the eyes of the world', Courier Mail, 21/6/01)

The Budget papers make Queensland's strong financial position clear - and that this advantage is being frittered away. The $820m operating deficit in 2000-01 is Queensland's first in a long time. Government said that this was due to the HIH collapse - and a $400m reduction in income. But government also had $481m in other revenues, and spent $590m which were not in the budget. The 2000-01 budget placed the accrual- based fiscal deficit for that year and the next 3 years at $2.5+bn. Those projected deficits are now expected to exceed $5bn. If the $3bn deficit in 2000-01 is ignored, then in the 3 years from 2001-02 the government intends to increase the fiscal deficit by $1.3bn to $2.2bn. Even Queensland can't afford this without endangering its low taxes (Harris T. 'Fiscal discipline is being frittered away', Financial Review, 20/6/01)

Deficits?

If the operating loss in 2000-01 of $820m is added to losses in capital accounts than the real loss becomes $1.7bn - according to state Opposition estimates. The Opposition also claimed that the budget was deficient because payroll taxes have been increased (which are a tax on jobs) at the same time that capital works spending has declined (and spending was increasing on short run 'feel good' schemes). Queensland's unemployment rate had increased by 2% over 2 years, while NSW and Victoria had cut unemployment by 1.6% (Parnell S. and Yallamas L., 'Budget is covering up losses', Courier Mail, 22/6/01)

The budget is not fiscally responsible. The latter requires that the budget be balanced - on average over the full economic cycle. It is not balanced despite a claimed $24m surplus because this figure is padded out by asset sales - and, even if it were correct, it would not be enough at a time in the economic cycle when the economy is strong. The surplus figure includes only government departments and not public enterprises. On a consolidated basis the operating deficit would be $225m. The transfer of funds occurs when government gains special dividend payments related to the sale of the Brisbane Market Corporation and the lease of Dalrymple Bay Coal terminal. These are treated just like ordinary revenue.(Robinson M. 'Essential to provide for bad times', Courier Mail, 20/6/01)

Government is forced to rely on the sale of assets to prop up its predicted $24m operating surplus (Strutt S. 'Hefty deficit, but strong economy', Financial Review, 20/6/01)


Economic impact

The state budget will promise a 4% growth rate (0.75% faster than the national average). But jobs growth will only be 2% not enough to make much impact on the state's 9% unemployment. The budget will show that business investment has fallen 14.5% (Franklin M. and Jones C., 'State aims to regain the lead', Courier Mail, 19/6/01)

Business saw the budget as disappointing, and lacking financial leadership. The Queensland Commerce view was that business was thrown a few short term sweetners on the basis of the recent economic downturn. Government's strategy is to rely on the next upswing, rather than to introduce fundamental reforms of industrial relations and state taxes. An economist suggested that capital spending is 6% less in real terms than last year, and that $7.6bn in infrastructure spending is needed. In the 1990s, the trend was to increase services at the expense of infrastructure - which didn't make Queensland a competitive place to do business. Property Council criticized low capital works spending, and the concentration of 58% of this outside SE Queensland. More infrastructure might be funded by selling government office buildings (MacDermott K., 'Thumbs down from business', Financial Review, 20/6/01)

Smart State crusade was continued in Queensland's 2001 budget. But the mining and agricultural industries pointed out Queensland's dependence on them. The Mining Council said that there was a danger of forgetting that the mining industry faces competition from Indonesia and China. It was being seen as a milking-cow with nothing being put back. Queensland now has fewer incentives to attract mining exploration than other states, and has a 1700 backlog in dealing with mining permits. Agforce identified a need for investment to support beef (MacDermott K. 'Small change, say the producers', Financial Review, 20/6/01)

If Queensland is the Smart State why has it the highest unemployment rate in Australia? The Premier claims this is due to rapid interstate migration - but this is unlikely to be the whole problem. Queensland's rigid industrial relations system is quite 'unsmart' (Wood A. 'Smart state doesn't have know-how to cut jobless', Australian, 20/6/01)

A principle objective of any government is to create an economic environment that helps people keep their jobs. This was reinforced when the Beattie Government chose jobs as the first of its seven policy priorities (because this is the most important source of people's income and their participation in community life). The budget forecast the creation of 33,000 jobs and a $24m surplus (which is small considering the stage in the economic cycle). Why was the Treasurer satisfied with a result (ie an 8% unemployment average over next year) so far from the 5% unemployment rate that was targeted on gaining office? The government has suggested that high unemployment is a negative effect of high population growth. The Government needs to consider the job creation potential of a less restrictive industrial relations climate. However there are positive elements in the budget eg (a) $100m funding for infrastructure for industries like biotechnology and light metals - though this is of little use unless such firms locate here and (b) social services - though these are still well behind other states ('Budget fails grade on job creation', editorial, Courier Mail, 20/6/01).

The problem with the budget was its forecast 8% unemployment rate when the government had promised 5%. At a press conference, journalists mainly wanted to ask the Treasurer about the Government's jobs' performance - as everyone but the Treasurer saw this to be poor. When the Premier appeared, all he wanted to talk about was Smart State (Johnstone C. 'Jobless prove to be hard work', Courier Mail, 20/6/01).

The Opposition criticised the budget for not creating a framework for long term job creation. There was (it was said): a lack of regional projects; an emphasis on short term schemes; and a $170m cut in capital spending. Commerce Queensland suggested that the budget did not provide fiscal leadership in reforms that might stimulate investment and jobs (Parnell S. 'Horan hits blueprint of gloom', Courier Mail, 20/6/01)

The budget is constructive in trying to diversify the state's economy - yet there has been no attempt to achieve industrial reform, which is essential given the high unemployment rate. Funding was only provided for marginal issues such as making workplaces family friendly, establishing a youth advocate, and setting up a bullying task force (McCarthy J., 'Mediocre measures ignore core state issues', Courier Mail, 20/6/01)


Tax rates

Commerce Queensland criticised the budget for increasing the numbers of firms required to pay payroll tax (though the rate had reduced). (Anderson F and Brannelly L, 'Payroll tax change bolsters government coffers', Courier Mail, 20/6/01)

The state government has paved the way for increasing revenue from the state's coal industry - taking advantage of the first profitable period in seven years - to which the Queensland Mining Council has strongly objected. Mining royalties of $696m are expected ($500m from coal mining alone) in 2001-02 - with an extra $500m from leasing of Dalrymple Bay coal loader. The QMC suggested that the industry was being seen as a milking cow. The moment tourism is in trouble it gets major concessions - yet none have been made for mining (McCarthy J. 'Govt eyes coal revenue till', Courier Mail, 20/6/01)

Queensland continues to claim that it has the lowest tax rates in Australia - yet Tasmania's tax rates have become lower since 1998/99 (Emerson S., 'Time to get over economic fairytales', Australian, 20/6/01)

Business is unimpressed with Queensland's 2001 budget - with the mining industry particularly outraged by increases in taxes and charges (Fraser A. 'Treasury digs deep to tap into miners' profits', Australian, 20/6/01)

COMMENTS

CPDS Comments on 2001 Budget

On paper many of the ideas behind the budget strategy sound very good. However there are difficulties in (a) the financial position (b) the related economic strategy (c) the methods being used to develop the budget strategy and (d) the abilities of a politically-manipulated Public Service.

Firstly the financial position is deteriorating (eg see published assessments above), and note that

  • in 2000-01 Queensland appeared to be facing significant financial challenges (see Section 7 of Queensland's Challenge). Particular points to note include:
    • the state's narrow tax base ( Note 49 on Queensland's Challenge );
    • past increases in public spending that for years were much larger than the rate of growth of the state economy ( Notes 50 to 52);
    • a weak tax base related to the low productivity of the industries that have been encouraged by low taxes (Note 69 ). Moreover Queensland is somewhat 'locked into' low tax revenues because of:
      • this established poor industrial structure; and
      • the adverse effect on economic growth which raising taxes rates would have due to the dependence of growth (and some industrial production) on rapid net interstate migration which is in turn partly dependent on low costs (see Section 7.2 of SEQ 2001: A Plan for an Under-developed Economy );
    • the progressive erosion of Queensland's claimant status under Commonwealth Grant's Commission arrangements ( Note 63 );
    • the recent reliance on capital funding derived from raiding the limited balance sheets of government enterprises ( Note 53 );
    • the proposed adoption of new accounting standards which will inhibit the distortions of the capital account that an accrual accounting system allows through the values assigned to government assets ( Note 61 );
    • the financial risks inherent in Queensland's corporatisation model for government business enterprises in any truly competitive environment ( Note 76 );
    • the potential need to find substantial funds to re-capitalise various government business operations if the market values of their assets fall in the face of competition ( Note 75 ); and
    • the practical limits on Queensland's capacity to borrow ( Note 81 ).

  • there is concern by several other states that Queensland receives far more funds from the Commonwealth than the latter collects in revenue in Queensland (and an investigation into Commonwealth Grants Commission procedures has been launched as a result). The phenomenon reflects the weak tax base in Queensland that defective economic strategies have created (see Comment on Proposed Review of the Grants Commission Arrangements)
  • there is little credibility in the forecast of future budget surpluses. For example:
    • government revenue in 2001-02 is being supported by assets sales (which are depressing operating results of Public Trading Enterprise) (Budget Paper #2. p21 and p27). There now appears to be little left to sell except for the electricity industry;
    • gross fixed capital formation is forecast to decline significantly in coming years (Budget Paper #2, p21 and p27) despite business expectations that infrastructure spending should actually rise (eg see article by MacDermott above).

      On reducing capital demands: The Queensland Government has indicated (in early 2002) that it can't maintain its record ($5bn pa) capital works spending without raising taxes - which it doesn't want to do. Private sector help in providing infrastructure is sought - and a Public Private Partnership arrangement has been developed to allow this (Strutt S. 'Beattie calls for private sector help on capital works', Financial Review, 6/2/02) [[CPDS Comments: (a) the relatively small amount that could be borrowed without significantly increasing taxation can be noted (see Note 81); as can (b) the inadequacies of arrangements for private public partnerships - See Comments on Infrastructure Partnerships]]

    • earnings from financial assets (on which projected forward budget surpluses depend) are forecast to increase strongly (Budget Paper #2, p32-33) despite the fact that financial market analysts generally expect earnings over the next decade to be well below those of the 1990s.
  • There is a 'feel' in studying the budget documents that details are being glossed over, in areas where 'fiddles' might be possible. For example:
    • capital transactions have now been removed from the budget - and have become the responsibility of individual agencies (Budget Paper #2, p63), eg
      • Queensland Police have had to borrow ($22m) for the first time ever to replace run-down and overcrowded police stations (Greber J. 'Police run up $22m debt over antiquated stations', Courier Mail, 9/7/01).

      Removing agency capital transactions from the budget provides scope for 'fiddles' - and is an intriguing action by a government that seems to be able to find tens to hundreds of millions of dollars to generously support favoured projects that none of its predecessors seemed to be able to find.

      Note also: The adoption of Public-Private Partnership arrangements will shift some public liabilities off-balance-sheet. The requirements to incur debts which have to be repaid will be replaced by a contractual obligation which presumably (and somewhat deceptively) does not appear on the balance sheet (Gray J. 'Going private a $20bn shake up', Australian, 11/2/02). Similar effects have been achieved in the past through leasing, rather than purchasing, plant and equipment.

    • 'fiddles' are also possible in the assessment of net state assets under an accrual accounting system - through the valuations assigned to assets which may have limited financial value, but which offset (now undisclosed) borrowings.
      • Queensland's net state assets are rising as a result of asset revaluations (despite the poor 2000-01 operating result). But ...
      • Recorded net financial assets are however falling slightly - a fact which was not explicitly acknowledged (see Budget Paper #2, Section 2);

      As noted above, changes to rules related to valuing assets should soon reduce the potential for distortions in this area.

    • gross revenue includes around $2bn in 'equity return' which is not well explained (see Budget Paper #3, p45). In 1999-2000 and 2000-01 Public Trading Enterprises were required to borrow something like $2bn pa to increase their debt levels, and it appeared that this was then paid to the state as a return of equity as its did not appear elsewhere in the budget - and (presumably though not provably) used to finance capital expenditure. However Robinson suggests that the proceeds of government asset sales in 2001-02 are being paid to state revenue as special dividends (a practice which itself concerned him). However, if this is so, than it is unclear what 'equity return' means.
      • perhaps it is purely a meaningless payment of a return ON equity - ie government says to an agency: you have $x bn in non-financial assets on which we expect a return of $y m, and your budget includes $y m to allow you to pay this back to us. However:
      • it might also be taken to mean a return OF equity. Is it possible that undisclosed and unwarranted borrowings are being used to contribute to gross revenue - which then are involved in an inter-agency transfer and appear in GFS revenue in another form?

There has been concern about financial analysts who have given investors un-ethically favourable assessments of shares to make profits for another division in the analyst's business from dealings with the company. When the assessments of Queensland's financial status that are offered by some analysts are compared with the above indicators, one can not help but wonder whether there are hidden relationships that may compromise the analyst's independence and turn them into mere 'hired guns'.

Secondly, while the Government's economic strategy emphasises highly desirable and long overdue diversification of the economy, the way in which this is being done seems quite amateurish.

Thirdly there appear to be technical weaknesses in the Managing for Outcomes arrangements which underpin Queensland's procedures for strategic planning and budgeting.

Finally the general problem facing Queensland's overall system of public administration is that trendy ideas, that may sound fantastic in theory, are often not practical or able to be capably implemented.

This problem arises because the Public Service has for some time operated under a mainly political, rather than a professional, mandate. In other words it is obliged to be more concerned with how policy appears to influential interest groups, than whether it works in practice.

See: The Growing Case for a Professional Public Service; Towards a Professional Public Service for Queensland; Section 5 and Section 6 of Queensland's Challenge; and its Continuation. A tentative proposal for Public Service Renewal on a Professional Basis has been drafted, a process which (whenever / if it is started) will necessarily take many years.

The result is that the Public Service has difficulty providing practical advice about policy and effective support with policy implementation - which translate into a potential to spend ever increasing amounts of money for ever declining benefits.

Moreover a mainly political focus constrains the Public Service's ability to protect the public interest by acting as a counter-balance to elected government (eg by ensuring that problem areas in the budget and elsewhere are not just 'swept under the carpet'). And whether financial data is really meaningful depends a great deal on the motivations of those who prepare it (as the Enron debacle has graphically illustrated).

Queensland's community, whose representatives have long tolerated an inept and unjust system of public administration, may now be about to pay a high price for their apathy.

The above comments are based on only a cursory examination of the 2001-02 budget.

January 2002

Budget Documents

2001 Budget Documents

Queensland. State Budget 2001: Budget Speech (Budget Paper No 1)

  • A Charter of Social and Fiscal responsibility has been accepted
  • Net operating surplus in 2001-02 will be $24m in GFS (Government Finance Statistics) terms - with a $253 cash surplus.
  • Total net state assets will grow to $59.3bn by 30/6/02. Financial assets cover all accruing and future liabilities - which contrasts with the situation in the Commonwealth and all other states.
  • Aggregate expenditure will rise 6% in the 2001/02 budget.
  • An enhanced agency strategic planning process is to be implemented (to align services and priorities).
  • Economic challenges have included: the introduction of the GST; declining business investment; and US / Japan slowdowns. Yet Queensland still grew 3.5% in 2000-01. Forecast growth for 2001-02 is 4% - mainly due to household consumption; more housing construction and from exports.
  • Jobs will grow 2% yet unemployment will still be 8% which is too high because of growing labour market participation and labour market growth. Jobs' growth under present government has been 111,000.
  • Queenslanders pay 26% less tax per capita than other states. Payroll taxes are to be reduced, and some stamp duties are to be cut and rationalised. The coal royalty arrangement will be refined
  • job creation (and breaking the unemployment cycle) remain major priorities.
  • the Smart State program involves positioning Queensland for innovation and for the information economy (for which Department of Innovation and Information Economy has been created). Investments in education and research will seek this goal.
  • Queensland is highly decentralised, and substantial investments will continue in the regions;
  • emphasis will also be given to:
    • stronger police service, secure prisons and getting smarter about crime prevention
    • access to high standards of education, health, housing and family services as a basis for a better quality of life
    • protecting the environment and its biodiversity
    • articulating a vision, listening to the community, seeking productivity and being accountable
    • delivering on commitments

Queensland. State Budget 2001-02: Budget Statement (Budget Paper No 2)

  • 1. Budget Strategies and Priorities
    • Highlights (p1)
      • 2001-02 budget provides an operating surplus of $240m and cash surplus of $253m in General Government on a GFS (Government Finance statistics) basis
      • General Government forward estimates are for a sustained and improving surplus in the out years - as required by the Charter of Social and Fiscal responsibility
      • General Government revenue will increase 5.5% over 2000-01 to $19.261bn
      • General Government expenses will increase by 3.1% to $19.237bn - after allowing for the effect of HIH insurance collapse and the transfer of a water supply board to local government
      • Total capital outlays will rise 2.2% to $5.115bn
      • Net state assets will rise to $59.259bn by 30/6/02
      • GSP (gross state product) will grow 4% in 2001-02 - up from 3.5% in 2000-01
      • employment will grow by 33000 jobs
    • capital programs are being reduced to more sustainable levels (p2)
    • Government has accepted a Charter of Social and Fiscal Responsibility (p4) and has defined its policy priorities and objectives (p5)
  • 2. Background and Outlook
    • Key points (p17) - in 2000-01 General Government will have a $474 cash surplus and an operating deficit of $820m - due to collapse of HIH insurance, transfer of assets of a water supply board and $300m lower than expected investment returns on state's financial assets
    • Key financial aggregates (p21) include:
      • Gross fixed capital formation gross fixed capital formation will decrease in 2001-02 - as projects are finished and remain stable at a sustainable level
        1999-2000 2001-02 2004-04 (forward estimates p 27)
        General Government $2.6bn $2.0bn $1.6bn
        Public Trading Enterprises $2.6bn $2.0bn $1.3bn
      • net operating balance of Public Trading Enterprises - which is declining
        $99m ($249m)
    • Poor net operating result by PTE sector is due to once-off special dividend from sale of Brisbane Market Corp and long term lease of Dalrymple Bay Coal Loader (p21)
    • Net worth of state
      1999-00 2000-01 2001-02
      $57.293bn $58.473bn $59.259bn
      Including equity in PTEs $11.725bn $12.608bn $12.552bn
      and equity in PFEs $916m $682m $682m
    • Despite poor operating result in 2000-01, the net worth of state will increase in 2000-01 by $1.18bn due to revaluation in education, main roads, natural resources and mines and by Ergon Energy and Energex (p24)
    • Net financial assets are a measure of financial strength (= financial assets - liabilities). Net financial assets in General Government will grow by $1.131bn to $32bn as at 30/6/01 - while liabilities will increase by $1.5bn to $17.036. Thus assets are more than adequate for liabilities.
    • State net worth will increase by $786m to 30/6/02 - due to revaluations, gains from assets sales, net additions to stock, and net operating profits.
  • 3. Operating Statement
    • Cost of HIH collapse was $354m (discounted) and transfer of water supply board cost $180
    • See summary operating result p31
    • Interest income in 2000-01 is to be lower than in 1999-00 due to lower rates of return in international equity markets. Future interest income is forecast to increase from $981m (2000-01) to $1260m (2001-02) and $1653m (2004-05) [p32-33]
    • Other Income - which includes dividends, royalties, property, fines, donations and sundry sources. Expected to increase 3.2% in 2001-02 due to greater royalties and general revenue growth across departments. Dividends will increase slightly in 2001-02 (from Ports and QRail - offset by smaller electricity supply dividends - the latter being counterbalanced by smaller government electricity subsidies) (p37)
    • PTEs will pay $1392m to revenue in 2001-02 and receive $807m in GOCs.
  • 4. Statement of Financial Position
    • Financial assets will exceed liabilities by $15.013bn at 30/6/02
    • From 30/0/01 departments will shift from valuing assets on the basis of deprival (replacement) value to either cost or fair (market) value. Those changes are of only a technical accounting nature (p46)
    • Public Trading Enterprises situation (p52)
      • financial position of PTEs ($bn)
        • 1999-00 2005-05
        • Assets 26.2 27.9 29.0 29.6 30.0 30.4
        • Liabilities14.5 15.4 16.5 16.7 16.8 16.6
        • Net11.7 13.8
      • Net worth of PTE's at 30/6/02 estimated at $12.552bn increasing to $13.802bn by 30/6/04. Ratio of total PTE borrowings to equity plus borrowings = 49.9% (at 30/6/02);
      • Government's equity to total assets at 30/6/02 = 43.2% - which is similar to various major companies
      • Debt levels are comparable to private counterparts with 80% (ie $10.849bn) being owed to QTC, and $953 being balance of deferred tax equivalent liability of GOCs owed to government
  • 5. Statement of Cash Flows
    • Government will record $2.276bn surplus from operating activities more than sufficient to fund $2.024bn in new financial assets (p55)
  • 6. Capital Program
    • Key points (p63)
      • 2001-02 - capital program will have significant employment impact - and support 46300 full time jobs
      • 58% of capital expenditure will be outside Brisbane
      • under Queensland accrual accounting budget model, Managing for Outcomes, there is no specific appropriation for capital. Instead responsibility for capital management devolves to agencies which develop capital investment plans that include sources of funding for assets. Funding sources can include: equity injection from government; output funding to cover cost of capital consumption such as depreciation / amortisation; asset sales; borrowings; retained earnings and own sourced revenue.
      • Sources of funding for Property, Plant and Equipment and Other Capital in 2000-02 will be: Depreciation and amortisation ($2660m); Equity injections, borrowings and other sources ($2022m); and capital contingency reserve (negative $110m) = $4571m (p67)
  • 7. Long Term Fiscal Trends and Risks
    • Key points (p73)
      • Queensland maintains a strong balance sheet
      • expenditure effort has moved above average
      • Queensland has maintained a competitive tax regime - but has seen the erosion of its tax base and reduced fiscal flexibility due to tax reform
    • Long term challenges include: aging population; general demographics; indigenous demographics; and the environment.
    • Funding capital expenditure (p79)
      • agencies are provided funding for depreciation to maintain existing levels of capital stock. Increases in capital stock are funded from operating surplus and by balance sheet means such as borrowing, asset sales, or converting financial assets to physical assets
      • fiscal principles in Charter of Social and Fiscal Responsibility are:
        • government will ensure sustainable services by maintaining overall surplus;
        • borrow only for capital purposes - where this can be serviced within the surplus;
        • financial assets will cover future liabilities;
        • maintain (and try to increase) total state net worth
      • funding new assets by sale of old assets reflects strategic decisions. Where do not want to sell old assets, there are limits to the capital program set by operating surplus and depreciation provisions (p80)
      • as the capital base increases, depreciation provisions increase;
      • Queensland agencies have taken a more cautious approach than some others - with higher depreciation rates. This lowers surplus and results in more frequent upgrade of assets.
    • Interest revenue was up in 1999-00 (giving a better surplus) and down in 2000-01 (contributing to the deficit) - p85
    • Other revenue includes contributions by PTEs - which are subject to risks (p85)

Queensland State Budget 2001-02: Economic and Revenue Outlook (Budget paper #3)

  • 1. Economic Strategies
    • Highlights (p1)
      • pursuing strategies aimed at lifting Queensland's economic growth to increase living standards and employment. This requires responsible fiscal strategy, a supportive business environment, employment initiatives, balanced structural adjustment and infrastructure investment
      • accompanied by targeted action in key areas of education and training, regional growth, industry growth and innovation
    • quotes OECD Growth Strategy (2001) for desirable policy to increase growth.
    • outlines key issues in strategy (p3-11)
    • growth strategies
      • Education and Training Initiatives (note policy in Queensland State Education 2010 )
      • Regional Growth including (a) infrastructure (b) regional trade action plans (c) major regional tourism initiatives (d) regional business development
      • Industry Growth and Innovation including (a) $100m Smart State Research Facilities Fund (b) Queensland Innovation Strategy to provide grants for infrastructure / skills (C) Queensland Industry Development Scheme - government funding for new projects and (d) Governments Biotechnology Industry Strategy
      • Market reform - involving competitive markets in rail, water, energy
  • 2. Economic Performance and Outlook (p15)
    • employment will grow 2%
    • unemployment will fall - but remain at 8%
  • 3. Revenue Outlook
    • Some changes in tax rates (p35)
    • Total General Government Revenue (gross) 2001-02 (p36)
      • Taxes Levies, fees and fines$5137m
      • Commonwealth payments $9388m
      • Revenue from Financial Assets $2903m [see detail below]
      • User charges $2515m
      • Royalties $696m
      • Grants and contributions $714m
      • Gains, Revaluation and other $2302m [see detail below]
      • Total $23657m
    • Revenue from Financial Assets 2001-02 (p41)
      • Investment Earnings $1269m
      • Dividends $1164m
      • Tax equivalent payments $369m
      • Guarantee fees $79m
      • other $22m
      • Total $2903m
    • Gains, Revaluations and other Revenue (p45)
      • Equity return $2027m [$1870m (1999-00); $1995m (2000-01]
      • Gains and revaluations $11m
      • Other $264m
      • Total $2302m
    • "Equity return is a periodic payment made by agencies reflecting the opportunity cost to the government of the assets held by agencies - and is calculated on the value of the agencies total assets. In 1999-2000 agencies were fully funded for equity return and this has been built into ongoing funding. In 2001-02 the equity return is expected to grow by 1.6% in line with general growth in departmental equity" (p45)
    • Reconciliation with Consolidated General Government Revenue Data (p51)
      • Gross Intra-sector transactions Net revenue
      • Taxes Levies, fees and fines $5137m $297 $4840m
      • Commonwealth payments $9388m $9388m
      • Revenue from Financial Assets $2903m $315m $2588m
      • User charges $2515m $1264m $1251m
      • Royalties $696m $696m
      • Grants and contributions $714m $527m $187m
      • Gains, Revaluation and other $2302m $2084m $218m
      • Total $23657m $19170
    • "The main difference between revenue estimates here and in GFS is that GFS is net estimate excluding intra-sector transactions and also excluding gains and losses on asset sales and other asset revaluation adjustments"
  • 4. Federal Financial Relations
    • Queensland has been disadvantaged by national tax reform because of its prior competitive tax environment
    • Queensland receives funds for reduction in state taxes that average $213 per capita as compared with national average of $819
    • Queensland receives only 1.7% of budget balancing assistance
    • Queensland's share of former Financial Assistance Grants has been falling due to changes in Commonwealth grants Commission's assessment of states
    • considering all Commonwealth payments to states in 2001-02, Queensland will receive $270m less than its per capita share

Queensland the Smart State - Investing in People and Communities

Smart State is a plan for the future. It sees Queensland with broader and more technologically based industries and more skilled and adaptable workforce. People will live in safer, cleaner and more secure environments. Communities will be stronger. Government services will be more flexible and better targeted. Economic strategies will be driven to new knowledge industries - with thousands of IT and biotechnology jobs and a vibrant cohesive society looking outwards to the world. Development will balance the competitive and productive needs of business with quality of life for citizens and public service delivery. Investing in People and Communities recognises that people are our top priority. All efforts are to improve lives of Queenslanders via job creation strategy, major jobs projects, schools, health services, etc. Government will continue to improve its relationship with the community. Government will support people at critical times in their lives eg early childhood, in school to work transition and in retirement.

  • Securing Economic Prosperity:
    • Equipping traditional industries for new challenges, and investing in and attracting new industries
    • $55bn in projects are planned or committed (according to Access Economics Investment Monitor - March quarter 2001)
    • $5.115bn capital spending - more per capita than other states - 58% outside Brisbane
    • Private sector partnerships eg: CS Energy's Callide Power Station; Gold Coast Convention and Exhibition Centre; Intergen's plan for power station at Millmerran; Airtrain Consortium for Brisbane Airport Rail link
    • Local infrastructure and services - assisting via subsidies
    • Trade - $23bn exports - 22% of GSP - up 5.7% pa (cf 4.7% pa growth pf GSP) = 20% of national exports
    • Jobs - 30% of Australia's job creation since 1990-2000 - growth 2.5% pa cf 1.2% pa nationally. More for Breaking the Unemployment Cycle; strategic interventions intended for youth and aged
    • Smart State Research Facilities Fund - $100m to invest in world class research facilities - administered by new Department of Innovation and Information Economy.
    • Strategic industry development - emphasising aviation
    • Learning excellence - centres of excellence in Pharmacy and in Technology / Maths and Science in secondary schools.
  • Farming for the Future
    • Understanding the environment (eg salinity and water quality)
    • Sustainable Land and Water management practices
    • Creating innovative technologies (applying advances in biotechnology and food and fibre science and innovation)
    • Adapting to change (eg farm business improvement, climatic information, market access and product)
  • Protecting Natural Assets
    • Diversity
    • Enhanced protected Area Management
    • Great Walks
    • Protecting the Great Barrier Reef
  • Putting Families First
    • Child health care
    • Nurturing families
    • Safe communities
    • Community and infrastructure support
  • New Deal for YoungQueenslanders
    • Education
    • Skilling for jobs - big increase in apprenticeships
    • Participating in Queensland life
  • Tackling Drugs
    • Prevention
    • Treatments
    • Law enforcement
  • Senior Queenslanders
    • Quality of life
    • Safety
    • Working
    • Dental care
    • Volunteers
  • Safety and Justice
    • Police service
    • Secure prisons
    • Community renewal
    • Responding to disasters
    • Access to justice
  • Community Engagement
    • Office for women
    • Regional communities program
    • Multicultural affairs
    • Cape York partnership
    • Crime prevention
    • E-democracy trial over 3 years
    • Community cabinets
    • Qld events
    • Queensland's greats
    • Access Qld - a program to improve whole-of-government service delivery
Addendum A: Recovering from Queensland's Debt Binge +

 

Recovering from Queensland's Debt Binge - email sent 22/3/12

Dr Mark McGovern, 
Queensland University of Technology

Re: Our economic binge is over, it's time for Uncle Debt to sober up quick, Courier Mail, 9/3/12 and Standing in the shadow of debt in the Sunshine State, The Conversation, 19/3/12

Your recent articles (which are outlined on my web-site) have been useful in highlighting the need to manage, rather than continuing to increase, Queensland’s debt exposure. In brief I interpreted your articles taken together as suggesting that:

  • Queensland’s overall expenditure has exceeded gross state product for a quarter of a century. Investments have not generated sufficient returns;
  • The state government’s debt position is much worse than other states. State debt has been increasing rapidly, and continues to do so despite asset sales;
  • The political system is not coming to grips with the problem;
  • Queensland’s development is uneven – with unmet needs in many regions. Moreover Australia’s dependence on a mining boom creates a need for matching infrastructure investment. This is being met by government in Queensland and the private sector in WA. Queensland’s debt constraints are a national issue;
  • Reliance on funding by issuing bonds has failed;
  • Selling assets or slashing the public sector won’t solve the debt problem. Queensland’s problem is not as bad as that in Greece;
  • A moratorium on infrastructure spending is needed until the problem is solved;
  • Solutions required involve: disclosing the problem; sticking to core business; expert review of the issues; good project evaluation; tight budget controls; and (perhaps) establishing a Queensland Development Bank

Your suggestion that Queensland’s fiscal predicament is not as bad as that in Greece is presumably correct. At its peak Greece’s sovereign debts were some 140% of GDP, whereas my guess-timate is that in Queensland the combination of Queenslanders' share of Commonwealth debts as well as those of state and local governments is only (something like) 60% of gross state product. However as in Greece, there are many other difficulties that: (a) have contributed to the emergence of the debt problem; and (b) need to be addressed at the same time. Debt can’t be treated as the only problem.

It is submitted for your consideration that:

  • Queensland’s potential for a serious fiscal problem has been obvious for many years, and the situation is probably worse than official data indicates, because: (a) there have been many reports suggesting creative accounting; and (b) the position is not transparent (especially in relation to government owned corporations);
  • Complications which contributed to the growth of the fiscal problem or constrain solutions include: dysfunctional and crisis prone machinery of government; weak civil institutions; economic strategies that are ineffective in building the tax base; and Queensland’s ‘corporatisation’ approach to GOCs;
  • Something like your suggestions about a moratorium on infrastructure investment and the creation of a Development Bank may well be needed, though those options go beyond the measures that the presumably-soon-to-be-elected LNP administration has proposed to resolve Queensland’s fiscal problems. However better financial management cannot be effective in isolation. Simultaneous and complementary attention needs to be given to: (a) rebuilding an effective system of government – as without this nothing that the public sector is asked to do is likely to be reliably achieved; and (b) more effective economic strategy;
  • Success will require effective support from the public sector in managing these complex issues, and the relationships between them.

The above comments are developed further on my web-site.

I would be interested in your response to my speculations.

John Craig


Detailed Comments [Working Draft including some changes after 22/3/12]

An interpretation of articles:

Everyone loves presents, but it is better to buy / build what you can afford. Queensland’s debt is over $85bn, much greater than any other state. Supposed returns from $15bn in asset sales have made no difference to relentless rise in debt. This is being ignore in state election context. QTC reports that gross debt outstanding was $84.7 bn (up $11.7 bn / 16% in six months). Since 2004 debt has quadrupled from $21bn to $85bn – after being reasonably stable ($17bn to $22bn) between 1992 and 2004. No political policies yet recognise the scale of the problem – and a new commitment to restoring Queensland’s financial health is needed. At present Queensland has more debt than NSW and Victoria combined, with less than one third the income stream. A solution requires: disclosure; expert involvement; better government business practices; and sustainable financial arrangements. There is a need for: (a) clear and continuous disclosure to citizens of ‘how we are doing financially’; (b) sticking to core state businesses; . (c) expert reviews of state finances, federal-state funding limitations, state budgeting processes, public sector decision processes and outsourcing. Government activities could be improved by: (a) costing initiatives before announcement; (b) targeting prudent decision making; (c) active / ongoing project evaluation; (d) tighter budget controls; (e) more open / responsible procedures; and (f) establishing sustainable financial arrangements with industries / banks (eg by creating Queensland Development Bank). Debt is not bad, but has been over-indulged. (McGovern M., Our economic binge is over, it's time for Uncle Debt to sober up quick, Courier Mail, 9/3/12

In 2012 election campaign, politicians are making promises, but few seem willing to face the spectacular rise in state debt. Public debt quadrupled from $21bn in 2004 to $85bn in December 2011, is about $90bn now and likely to be $92.5bn in July The recent $15bn in asset sales made no difference to debt growth. All parties are promising more infrastructure spending. Queensland’s debt is more than NSW and Victoria combined, yet has less than 1/3 of their income to service it This will be a national problem, yet not a voice is raised. Locals are concerned about rising costs. Development in Queensland is uneven. If Australia is reliant on the mining boom to rectify external imbalances, public bets on this are being paced in Queensland. In WA, reliance has been placed on private infrastructure investment. Queensland has more populated regions / public infrastructure systems / contested ecosystems. Whole road systems need refurbishment, and under-resourced communities struggle. Queensland has relied on debt funding (bonds) to meet needs / obligations – and escalating debts show this strategy has failed. Much of the needed technical analysis has been done. Incoming government will be tempted to ignore the problem, or to sell assets. But there is now too little to sell to make much difference. Slashing the public sector is also considered, but services are already struggling. Reduction, refocusing and re-skilling are more sensible than Austerity option. A moratorium on infrastructure may be needed until the problem is resolved. Debt funding of infrastructure is no longer possible – irrespective of hopes for public-private partnerships. Sensible ways of funding public functions need to be found – as applies in many developing nations. Vertical fiscal imbalances are only part of the problem. Expenditure in Queensland has exceeded GSP for a quarter of a century. Expenditures have not increased returns from production sufficiently. The real problem is inadequate returns from investment. (McGovern M., Standing in the shadow of debt in the Sunshine State, The Conversation, 19/3/12)

A Debt Binge?

The present writer has no clear picture of the overall debt level of Queensland's Government. The latter includes a general government sector as well as both financial and non-financial corporations - each of which has financial and non-financial assets as well as liabilities (and also ongoing contractual rights and obligations that might or might not be included as assets and liabilities). And one sector's recorded assets can include another sector's liabilities. 'Official data (eg in Queensland. Treasury, Mid Year Fiscal and Economic Review 2011-12) does not present a consolidated view, or provide any means to produce a consolidated statement (eg because of the varied and non-transparent way in which data are presented).

Many different claims (many of which are 'true' if one looks at the situation in a particular way) are thus able to be made about Queensland's debt levels.

For example:

Queensland's budget position is seen as unsustainable, and a further credit downgrade is possible. Debt is expected to rise from $62bn to $85bn. S&P will watch how spending is cut to restore a surplus (Ludlow M. 'Queensland could face another credit downgrade, Financial Review, 31/3-1/4/12)

Queensland has no net debt in 2011-12. Weakening property market is undermining states' stamp duty revenues and raising the need for smarter ways to prop up budgets. Stamp duties are now so high that they discourage people from moving - and thus reduce revenue. Current state taxes are not only inadequate, but are poisoning state economies (Murphy J. 'As house prices go, so do state budgets', Financial Review, 31/3-1/4/12)

In 2011, it was indicated that sale of $15bn in assets would reduce Queensland's debt from $70.3bn to $52.8bn - and this was expected to rise to $84.9bn by 2014/15 resulting in $5.1bn interest payments pa. The Treasurer described the state's position as equivalent to a household with an $85,000 mortgage, $45,000 invested in the sharemarket and $313,000 in assets (Moore T and Hurst D ''We need to start living within our means', Brisbane Times, 14/6/11)

And quite different perceptions of Queensland's fiscal position were indicated in a March 2012 article that is outlined below.

There have however been signs that something has been going wrong with Queensland's public finances for many years because:

  • in the mid 1990s public spending grew much faster than the state’s economy, and capital spending amounted to 1/3 of the national total;
  • the assets of government owned corporations (GOCs) were drawn down to fund increased public spending (a practice that was started under the Borbidge Government), and this seemed to be extended under the Beattie administration into dubious arrangements (eg requiring GOCs to take on new debt in order to make large (eg many hundreds of $m) special dividend payments to the state government); 
  • there were many other indications of creative (or perhaps fraudulent) accounting practices in later years that suggested the need for a forensic audit of Queensland's public finances;

Causes for concern included:

  • accounting standards that allowed governments to do the sort of things that Enron had to break the law to achieve; removing government borrowing from the budget by dealing with the consolidated capital position of departments, whose unmarketable assets could be valued somewhat arbitrarily; ignoring GOC losses in the budget; raiding a fund set up to protect consumers; consolidating superannuation funds with general public finance which made the government's position appear more favourable during periods of rapid share market growth; allegedly hiding the cost of redeveloping Suncorp Stadium in a web of financial fictions (see Enronitis above);
  • published claims in 2003 that cash was being drawn from GOCs to support the budget using accounting tricks (see About 2003-04 Budget above);
  • claims in 2004 by Commerce Queensland that budget figures were 'fudged' [1];
  • dubious dealings that were reported in relation to financial corporations associated with the Queensland Treasury. For example:
    • the ALP's Labor Holdings reportedly made substantial profits as a major shareholder in Metway Bank as the latter was merged with the previously state-owned Suncorp when the latter was privatised following the Beattie Government's first (ie 1998/99) budget (see reference in Reform of Queensland Institutions or a Rising Tide of Public Hypocrisy?).
    • QIC's chairman was apparently forced to resign in 2009 in the face of concerns about conflicts of interest in relationships with business associates (op cit) . For example:
    • QIC invested heavily in 2009 in rescue operations for the troubled Brisconnections group that was developing the Airport Link tunnel project when both the QIC and Brisconnections had the same chairman. The Airport Link project had initially been financed through arrangements that involved toll charges that would cover only a fraction of the capital cost, apparently in expectation that ongoing borrowings for several decades would fund initial capital costs until traffic volumes / affordable tolls increased. However this common tactic proved disastrous for initial investors, given: the restricted access to credit resulting from the GFC; the declining (rather than increasing) overall traffic in SE Queensland (in terms of vehicle kilometres travelled) that seemed to be resulting from higher oil prices; and community resistance to paying tolls. Subsequently estimates of traffic through the Airport Link tunnel were endorsed by project promoters that defied credibility - but perhaps had the effect of making it unnecessary for investors in the project to admit that the value of their investments needed to be substantially written down (see Airport Link: An Example of the 'Monster'?)

About Queensland’s Budget’s, 2001 referred to:

  • financial challenges (eg a narrow / weak tax base; past rapid spending growth; erosion of Queensland claimant status for Commonwealth grants; reliance on raiding GOCs' balance sheets; eliminating the distortions that accrual accounting permits; financial risks associated with corporatisation; and Queensland's limited ability to borrow (because so little of its revenue can be increased by the state government own decisions);
  • pressure from other states to reduce Queensland's Grants Commission share;
  • the lack of credibility of forecast future budget surpluses, given past reliance on raiding GOC's balance sheets (which has limited future prospects); and the divergence between business expectations of large increases in future capital spending, and budget documents that suggest that capital spending would need to decline;
  • apparent budgetary 'fiddles' (eg removing capital transactions from the budget; potentially also achieving this through Public Private Partnerships; assigning unrealistic values to assets; and the lack of clarity about 'equity return' from GOCs). 

Emerging Financial Problems: A Speculation referred to:

  • indicators such as: conclusions by a 1996 Commission of Audit that funding Queensland's needs would be difficult; unusually large commitments to achieve 'strategic goals'; increasing deficits facing GOCs and their reduced net assets; dubious practices for valuing assets; and the emergence of a cash deficit for the first time in 20 years;
  • likely causes such as: Queensland's reduced share of Commonwealth grants; the state's weak tax base; the way assets for which there was no market could be valued in producing pseudo-commercial balance sheets under accrual accounting methods; overvaluing assets; and the introduction of corporatisation and commercialization practices which seemed to: (a) reduce GOC revenues; (b) potentially require large future injections of capital; and (c) suggest that losses would be incurred in future.
  • Queensland’s capital spending continued to escalate apparently with strong business encouragement (ie up to about $18bn pa in 2009-10) wildly beyond the $5bn level that the then government itself had described in 2002 as unaffordable without significant tax increases. For example, a 30% increase to $8bn in 2005 followed a 20% increase the previous year;
  • Auditor Generals expressed some concerns. For example, in 2002 an Auditor General argued that more information needed to be given about business transactions with the private sector [1], and that financial reporting procedures to parliament by the government were incomplete and misleading [1]. Then in 2003 he questioned the legality of requiring GOCs to pay special dividends on the basis of ‘reserves’ created by simply revaluing their assets. These and other issues apparently led to government efforts to reduce the independence of the Auditor General [1, 2]. In 2008 an Auditor General found that government spending was inadequately explained or documented (Odger R and Wardill S., 'Auditor blasts shoddy work', Courier Mail, 18/4/08);
  • after the 2009 state election Queensland's premier (Anna Bligh, who had been Treasurer from July 2005 until she took over as premier in September 2007) unexpectedly announced proposals for selling assets valued at $15bn in order to reduce Queensland’s public debt levels after the state’s AAA credit rating had been lost. However it was anything but clear: (a) why assets that appeared to contribute very little to state revenues and required large further capital injections could be sold for $15bn; and (b) what effect the sale would have on Queensland's overall fiscal position (see Privatisation of Public Assets above);
  • more concerns about Queensland's debt levels were expressed publicly.
Queensland's $65bn borrowings are of concern. This represents 2.5 times the average borrowings of other states. Debt in 2011/12 is likely to be $15,000 per person, while Western Australia has the next highest level ($8,620 per person). It took the Howard government 10 years to pay off the Keating Government's $91bn debts - with a much stronger revenue base. (Queensland Government borrowings, Revenue Review 2009),

Queensland has $74bn debts which cost $5.2bn pa in interest at 7% - yet has only about $30bn income. The Opposition is looking for $1bn in savings, which is a fraction of the debt service cost (Smith M. 'State Debt, 3/3/2009)

  • potentially serious capital account deficiencies were apparent in  the 2009-10 state budget (see About the 2009-10 Budget and Queensland's 2009-10 Budget Stress: The Tip of an Iceberg?). These referred to: a lack of transparency that makes it very difficult to understand the true financial position; potential conflicts of interest in privatising assets; tests that need to be applied in deciding whether to privatise assets; the relationship between budget strategy and uncertain economic conditions; reforming federal financial arrangements; and the need for professional support to government;
  • concerns have been expressed that the debt levels of Queensland's local governments are increasing significantly, partly because the state government can no longer provide help.
Local council debt levels are expected to rise (to $22bn from $16bn over the next 20 years) because their support from state is being reduced - by eliminating water and sewage subsidies; capping dividends from council owned water authorities and capping infrastructure charges {Agius K 'Queensland's council's debt levels soar', Brisbane Times, 3/10/11)
  • some assertions about Queensland's financial position are difficult to understand unless  extremely large payments (several $bn pa) were received from the Commonwealth for infrastructure investment; or (say) the superannuation assets of government employees that are held by QIC on behalf of Q-Super are being treated as government assets. For example:
    • how can an ongoing (about) $15bn capital works program (most of which is presumably not funded by current state-sourced revenues) and a (hopefully peak) $4bn operating deficit in the general government sector (see Queensland's State Budget 2011-12 At a Glance) be reconciled with multi-year estimates of increases in Queensland's debts of only (say) $8bn pa [1, 2]?
    • why did the state government's claimed net worth fall by $13.1bn 2008-09 without explanation (see above)?
  • the NSW Treasurer reportedly warned in 2012 that the Queensland opposition might be shocked by the state of Queensland's finances if it won the 2012 election (see below)

A Dysfunctional and Difficult Environment

The difficulties that have become increasingly apparent over the years in Queensland's fiscal position did not arise in a vacuum.

Queensland's machinery of government has long been weak - partly due to: (a) the lack of high level and up-to-date understanding by the civil institution (that have a major influence on the policies adopted by political parties) about the nature and functions of government; and (b) federal fiscal imbalances that have made it almost impossible for states to take real responsibility, or be democratically accountable, for their nominal functions.

This limitation was compounded by inexperienced 'reformers' under the Goss Government in the early 1990s (see brief outline in Queensland's Next Unsuccessful Premier),  The administrative machinery established was politicised (ie dominated by 'yes men') and complex, and this ensured that: (a) later administrations were dysfunctional and crisis prone because of the lack of any professional reality check on perhaps overly simplistic political agendas (see Evidence of Dysfunctions); and (b) machinery for planning and development of infrastructure was ineffective. Also the 'corporatisation' model adopted for GOCs seemed: (a) incompatible with a National Competition Policy environment; and (b) to put state government finances at risk.

Very large (eg 30%) cost blow-outs plagued infrastructure spending at times, presumably as a consequence of ineffectual machinery, and the overlap of public infrastructure and mining investment booms. And some infrastructure fiascos became apparent (eg see Failure of Queensland's Electricity Distribution Network, 2004; Privatisation of Monopolies Leading to Regulatory Failure (in relation to Dalrymple Bay Coal Loader), 2004; Structural Incompetence and SE Queensland's Water Crisis, 2007+; and Brisbane's Transport Monster, 2008).

It was suggested above that investment in Queensland has for decades generated poor returns and limited increases in gross state product. One factor in this is arguably that economic strategies, though improved, have been inadequate - and those strategies influence the character of investment.

In 1991 Queensland's GSP per capita was about 87% of the national average. Though this had risen to 94% by 2011, it remained below the national average (see ABS, 5220.0 - Australian National Accounts: State Accounts, 2010-11) and ABS Australian Demographic Statstics).  And Australia's perceived productivity gains in the 1990s have subsequently stalled - a history that might be due to changes in exchange rates as much as to anything else (see Analytical Complexities)

Economic strategy in recent decades can (simplistically) be seen to have involved either exploiting natural wealth or diversifying through the development of knowledge based functions (ie the 'Smart State' agenda). The former however: is subject to boom / bust cycles; tends to be relatively unproductive except during booms (as booms encourage over-investment that causes prices to collapse when demand moderates); and creates moral hazards for political and business elites (eg see Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?). And the 'Smart State' has been sought mainly by publicly funding of often very costly 'smart' inputs to economic systems that are not well enough developed to use them productively (and also by providing government 'assistance' that obstructs real economic development). The alternative would be to start at the market / commercial competencies end and thereby create a real demand to give urgency and direction to 'smart' inputs (see Queensland's Economic Strategy, 2002 and Commentary on Smart State, 2003). 

A more market-focused approach might have considerably strengthened Queensland's tax base, and government revenues. 

And since about 2008 there have been perceived needs for large scale often-deficit-funded public spending to counter the economic and social effects of: economically-disruptive international financial crises; natural disasters; and a significant decline in interstate migration (and thus in the prospects of what can best be described as the 'migration industries' that have been critical to SE Queensland's economy).

Queensland's growing fiscal problems have been paralleled by those of the Commonwealth Government which provides about half of the revenues for state spending. For example very large increases in federal revenues in the middle of the last decade were achieved on the basis of an economic boom (which generated strong growth in asset values and thus in capital gains taxation) and then fully committed on an ongoing basis (mainly by cutting tax rates and increasing welfare programs). This created what some observers saw as a structural budget deficit for the Commonwealth (see The Long Term Impact of the Global Financial Crisis) - noting that rapidly rising asset values were dependent on a long boom supported by the excessively easy credit (in the US and Japan primarily) that: (a) affected Australia through 'carry trades' and (b) also fed the asset bubbles in the US that led to the GFC. And the federal government's fiscal position deteriorated further because of: (a) measures taken to minimize the initial impact of the GFC, and (b) the economic changes resulting from the GFC. The Treasurer confirmed the structural factors affecting the federal government's tight fiscal position in March 2012. And few observers seemed to accept the optimistic assumptions underpinning the government's claim of a 2012-13 budget surplus (see Australia's Federal Budget Surplus?). Another unfunded stimulus package seemed a more accurate description.

Solutions

It is difficult to propose solutions to Queensland's apparently serious deficit / debt position in the absence of a consolidated picture of what the deficit / debt position actually is. 

However, if (as suggested above) Queensland's debts have been escalating at something like $8-10bn pa (eg if debt increased from $21bn in 2004 to $85bn in 2011), then there may be a need to dramatically reduce capital spending. This would clearly have economic consequences - both in terms of employment and the availably of economically important infrastructure. And if, as seems possible (see above), deficit spending has been much greater than this (eg $15-20bn pa) and partly funded and thus obscured by creative accounting (eg reliance on hoped-for gains in the value of employees' superannuation assets), then the situation could be even more difficult.

Invisible Financial Obligations - A Scenario: In recent years Queensland's state government (including both general government and GOCs) seems recently to have had a capital works program (and thus presumably spending that is not covered by current revenues) of something over $15bn pa, yet only something like $8bn pa has apparently been financed by identifiable increases in state debts. Another way to express the discrepancy is that: from 2002 until 2012 something over $120bn has been budgeted for state capital works; at the start of this period Queensland's net financial assets were apparently some $10+bn; and at the end of the period debts were $60-80bn.

Unless huge Commonwealth grants for infrastructure have been provided, financial 'magic' seems to have been been involved in making several tens of $bns of financial obligations invisible, as the present writer defies anyone to explain what has been going on from an examination of the non-transparent data that is publicly available about Queensland's capital accounts.

A scenario that could be considered is that there has been intense business pressure on Queensland's Government since the mid 1990s to spend (on infrastructure) and a political desire to spend $bns on pet programs such as Smart State. Initially this could be funded by stripping the assets of GOCs – but this ceased to be possible quite quickly. Then GOCs were obliged to borrow to pay special dividends (though borrowing for recurrent spending is not a smart tactic). Around 2000 / 2001 there was still intense pressure to increase deficit spending – but moderate techniques of creative accounting had been exhausted.  It was stated in budget documents at that time that the state government's overall capital outlays would have to decline from $5bn pa to an affordable $3bn pa. Then less moderate methods of creative accounting were perhaps considered to generate up to something like $10bn pa extra for deficit spending above what was being borrowed (noting that capital spending went up to $18bn pa at one stage).

Part of this might involve (say) quietly treating some Q-Super assets (eg money held by QIC on behalf of public servants) as government assets. Gains on these in excess of actuarial estimates of future defined-benefit pension obligations would give government profits (and increased net worth which could perhaps be the basis of loans to other GOCs without altering the government's overall debt position). This would only work if asset values were rising strongly - as share and property values were prior to the GFC. It would also create long term risks, and might not be legal. Such tactics could be similar to the risky way in which social elites in East Asia co-opt national savings to invest in their idea of national interest projects on the assumption that, if industrial capacity / property / infrastructure is built, a way will be found for the community to pay for it. However such tactics would get government into trouble in the post-GFC environment – when asset values started falling rather than rising , and deficits on normal operations compounded the problem.

If Queensland’s Government now needs to acknowledge previously undisclosed financial obligations (eg a deficiency in the funds needed to pay future defined benefit superannuation pensions): its credit rating could be further downgraded;  obtaining capital could be more difficult; borrowing costs would rise; and umpteen $bn might need to be slashed from annual capital spending.

Moreover any solution can't be confined to adjusting the Queensland Government's budget. There would simultaneously be a need to create more reliable machinery of government, because:

  • the most sophisticated methods for evaluating investment options can not compensate if the problem is the lack of strategic awareness or expertise by those who are required to use those methods. For example, it is widely presumed that Queensland's economic prospects are bright because a mining boom will continue to be driven by rapid growth in China and other emerging economies. However this may not be correct (eg see Heading for a Crash? and Who's got Superman?);
  • there is arguably a pressing need for reform of Australia's federal system because, at present: (a) fiscal imbalances render effective state administration virtually impossible, as well as generating duplication, buck passing and waste; and (b) narrow state tax bases discourage states from serious efforts to develop productive modern economies - and thus weaken governments' tax base generally. Reform options are suggested in Fixing Australia's Federation;
  • some arrangements for undertaking public functions seem to create complexities that have not been adequately considered (eg corporatisation of GOCs and public private partnerships);
  • techniques have been identified (eg by the IMF) that permit government debts to be mis-represented 'legally', and this (together with indications of creative accounting in Queensland over the last 15 years) presumably requires both tightening up accounting practices and a forensic review of past activity (which would tend to disrupt ongoing government activities).

Complex financial engineering techniques allowed Greece to borrow heavily without having to account for debts. The rights to future income streams were foregone in exchange for immediate cash advances, and this was classified as a trading arrangement rather than a loan [1]

IMF published Accounting Devices and Fiscal Illusions in 2012 which details techniques for misrepresenting public finances. This refers to: (a) deferring spending; (b) shifting government investments / debts off balance sheet; (c) selling assets and crediting the proceeds as revenue without allowing for the loss of future revenue streams; (d) selling buildings to generate 'revenue' without accounting for the ongoing cost of then paying rent; and (e) failing to make necessary investments, and thus deferring costs. (Martin P. 'Swan needs more than a bag of tricks', Brisbane Times, 3/4/12)

At the same time a more serious approach to development of the economy is long overdue, and this might be achieved by: 

Good Luck with That! 

The presumably-soon-to-be-elected LNP administration has a plan for its first 100 days that starts with setting a 4% unemployment target and asking Treasury to put in place measures that will reduce costs facing the public [1]. These ambitions are unlikely to be practical given the fiscal can of worms that is soon likely to be opened. Moreover they seem incompatible with simultaneous LNP warnings about the possible need to raise taxes to cope with Queensland's debt.

LNP Deputy leader and shadow treasurer (Tim Nicholls) says tax rises may be needed (eg changes to coal royalties). He was wary of what might be found about state finances. Queensland projected debt ($85bn by 2014-15) can't be turned around quickly. LNP is committed to a surplus in 2014-45 following the $4bn deficit this year. NSW Treasurer (Mike Baird) recently warned Mr Nicholls that he might be shocked by Queensland's finances. Nicholls is not confident, but has to rely on official Treasury data. LNP plans a commission to audit to take a new look at the state's finances [1]

Proposals also apparently exist (see CCIQ's Election Commitment Summary) for:

  • costing election commitments;
  • fiscal discipline (eg seeking a surplus in 2014-15; expenses growth below revenue growth; undertaking cost-benefit analyses; planning to regain Queensland's AAA credit rating; and fully funding long term liabilities);
  • a 'war on waste' by ensuring that spending is measured against outcomes;
  • establishing a Commission of Audit to find ways to bring Queensland's liabilities under control; and
  • seeking a mandate before privatising assets. 

While such initiatives may seem appropriate, they must be inadequate because their scope is too narrow. Without simultaneous / complementary action to enhance machinery of government and economic strategy they would be undermined by unresolved weaknesses elsewhere (eg consider a parallel with the apparent inadequacy of the recent Queensland Floods Commission of Inquiry).

Other issues: It can be noted also that conventional ideas about good financial practices are not necessarily adequate. For example outcome-oriented budgeting is subject to many difficulties (see Evaluation of Managing for Outcomes, 1997). And merely calculating benefit-cost ratios (rather than using methods which increase them, such as those suggested above) is arguably no longer sufficient. More generally, while financial calculations and outcomes are important, there is a need to recognise the limitations of these in ensuring both effective government and the development of a productive modern economy (see The Advantages and Limitations of Financial Criteria).

And even more fundamentally, while suggestions about sticking to 'core business' are sensible, it needs to be recognised that the provision of public goods and services to which financial management techniques can be applied is not the 'core business' of governments, and success with the latter (ie success in 'governing') is primarily dependent on knowledge, experience and wisdom rather than on optimal efficiency in the use of the quite limted resources that would be involved (see Governing is not just Running a Large Business).

The public sector potentially provides a source of experience and advice about, and a means to manage the inter-relationships amongst, these diverse complex challenges. However it can only do this if it is developed primarily as a source of support to elected governments rather than being treated as a source of obstruction and cost as has been the case for the past two decades.

And even if the goal were simply to reduce the cost of providing public goods and services, a direct / meat-axe approach is likely to be ineffective. A political focus on cost cutting will tend to put into the most senior positions public servants whose sense of mission and skills involve 'doing things' (ie providing services / undertaking projects) at minimal costs. This would be likely to displace those with the knowledge and orientation required for 'governing' (ie creating an environment in which others can 'do things', an approach that can potentially reduce government's direct and costly operational roles) - see also Eliminating Waste Inefficiently (2005) and An 'efficiency dividend' seems an inefficient way of improving the federal government's financial position (2011).

 

Addendum B: Winning Political Wars is Not Enough

Winning Political Wars is Not Enough - email sent 24/4/12

Tony Walker
c/- Editor, Australian Financial Review

Re: ‘Newman won the war, now he must administer the peace’, Financial Review, 31/3-1/4/12

I should like to suggest for your consideration a couple of reasons to suspect that winning the political ‘war’ may be insufficient to ensure competent administration in Queensland over the next few years.

My interpretation of major points made in your article: Campbell Newman has: moved early to get rid of Labor era political appointees; given notice of intent to scale back ambitious environmental programs; and put prime agricultural land off limits to mining. Cabinet involves a reasonable balance. A Commission of Audit has been set up to see where waste can be eliminated. Planning and other procedures are likely to be loosened.

As your article noted almost the first thing that the new administration did was to continue the politicisation of ‘senior’ public service appointments that has played a significant role in making Australia’s governments ever-more ineffectual and crisis prone over the past two decades. My reasons for suspecting that the Newman Government is unlikely to avoid a similar fate are in Can the Commander Do?

Also there seems to be a need for much more than a review of Queensland’s budget (that your article referred to) to see where waste can be eliminated.

There are many published indicators of a history of potentially creative / fraudulent accounting practices (see Recovering from Queensland's Debt Binge). Thus establishing Queensland’s true current financial position arguably requires a forensic review of the accounts and ‘commercial’ dealings of both the general government sector and particularly of the financial and non-financial corporations that the government controls. However, while it is possible that such a forensic review will be undertaken by the Commission of Audit, there is nothing in its terms of reference that requires it to look closely at whether officially stated figures are a true reflection of the state’s financial position. Moreover it is not clear that sufficient qualified resources (and time) are available to undertake a forensic audit.

If official data on Queensland’s position are correct, the Newman Government faces a very difficult fiscal challenge (and one that excuses not proceeding with many pre-election promises). However, if creative / fraudulent accounting practices have been relied on to sustain (and obscure) Queensland’s apparently extraordinarily high levels of deficit spending over the past 10-15 years, then Queensland’s fiscal problems could potentially trigger a national crisis.

John Craig

Addendum C: Other Suggestions about Fixing Queensland's Budget Problems Other Suggestions about Fixing Queensland's Budget Problems
Queensland's new government must clean up the legacy of 14 years of Labor rule, improve infrastructure and deliver on its election promises. The resources boom should be used for reforms, rather than pork-barrelling. A sustained rise in borrowing has been ALP's legacy. In 2006-07 revenues exceeded current expenses by $1.8bn and with $2bn public investment, the state was a net borrower of $200m. By 2010-11 current expenses were up 40% and exceeded revenues by $1.5bn. Public investment had trebled to $5.6bn and net borrowings blew out to $7bn. LNP intends to reduce borrowings faster than ALP (with smaller  deficit in 2013-14 and larger surplus in 2014-15. A $1.1bn GST windfall will be used for reducing debt - and public sector wage bill be grow by no more than 3%. Spending restraint will be hard given Queensland's rising population. Population growth is 1/3 more than nation as a whole - and growth in Brisbane is even faster. Population doubled since 1981 requiring road / power spending. Queensland's per capita education / health spending now exceed national average (having been lower before). With record infrastructure spending, problems in power systems have been overcome. There is scope for rationalising services (eg hospitals) in regional centres. Similar issues affect transport, and LNP promises to 50% of resource royalties into rural areas could result in wastage. Arrangements like Infrastructure NSW are needed to ensure that investment decisions are based on sound analysis. Transport problems exist in Brisbane also (eg rail and bus system utilization is only 50% and revenues cover only 40% of costs). ALP was increasing costs 15% pa to improve cost recovery - but LNP proposes only 15%. GOCs also require higher cost control, which account for 50% of capital spending, yet earn only 4% on capital (below the cost of capital). There is a need for better evaluation of environmental policies and for enhancing eficiency of the state's revenue base - and generates only 25% of its revenues - compared with 30% average for all states. Reducing unemployment to 15% will be hard - given a relatively inflexible labour market and large differences in unemployment between regions. The Fair Work Act and the carbon tax make the situation worse. But Queensland's restrictions on trading hours have similar adverse effects. Expanding Queensland Competition Authority's role to include efficiency reviews is useful, but requires: (a) change to the QCA and (b) clearer fiscal rules.  There is an opportunity for useful reform, but also a risk of populist temptations. New premier must show he has the insight Queensland's future needs, rather than repeat past errors.  (Ergas H., 'Campbell must clean up state finances', The Australian, 26/3/12)
Addendum D: Auditing the Commission

Other Reactions to Commission of Audit

Auditing the Commission

In June 2012 the Queensland Commission of Audit produced an Interim Report into the Queensland Government's financial position and strategies to improve that position.

Outline of Executive Summary:

Deterioration of the State's Financial Position: Queensland's Government has had an unstainable level of spending in recent years, which puts the state's financial position at risk. From strength six years ago, its position is now weak - with a worse performance than other states since then. Treasury's May 2012 forward estimates indicate an operating deficit of $4.9bn in 2012-13. Though small operating surpluses are likely from 2014-15, this won't fund capital spending - so fiscal deficits will continue. The Commission believes Treasury forward estimates are too optimistic. Those estimates have none-the-less been used by the Commission, though major corrections will be needed to achieve its projections. There has been a lack of fiscal discipline since 2006, as expenditures rose strongly while revenues moderated.

Unsustainable Debt Position: The debt position is unsustainable (with gross debt of $64bn in 2011-12 probably rising to $92bn in 2015-16). Gross debt in the general government sector rose tenfold over the past 5 years - and this precipitated a loss of Queensland's AAA credit rating. Queensland's ratio of total debt to revenue has risen from 20% in 2005-06 and is expected to peak at 132% in 2013-14 (well above the 100-110% trigger range for a AAA rating loss). Interest costs are $3.5bn pa for total government (and $1.7bn in the general government sector), and have been the fastest growing government expense over the past decade.

Lack of Effective Expenditure Restraint: Between 2006-07 and 2010-11 annual expense growth averaged 10.5%, while revenue only grew 6.9% pa. Queensland, traditionally a low tax state, has a revenue effort 10% below the Australian average, but since 2007-08 its level of services spending has been 6% above average. From 2000-01 to 2007-08 Queensland experienced a revenue surge from strong economic growth - and commitments were locked in to high levels of ongoing spending. This created vulnerabilities when GFC and natural disasters hit in 2008 and 2011, as government then had to borrow heavily. Employee expenses (both in terms of staff numbers and wages) have been a major factor in expenditure growth. Most of this was due to the cost of achieving new policy objectives (in health, transport, disability services, education). The Queensland public sector has expanded both absolutely and relatively from 146,000 in 2000 (4.1% of state population) to 207,000 in 2011 (4.5% of population) with over half of the increase in health (mostly in front-line services) and many also in education. Wage growth in Queensland outstripped that in other states, while public service became increasingly top-heavy. Capital spending in general government sector declined from just over 1.5% of GSP in 2000-2001 for several years, before rising to 3.5% of GSP in 2009-10 (while that in other states has mainly been around 1% of GSP). Queensland, being relatively decentralised, may require higher capital spending levels than other states. Major spending has occurred in relation to: SE  Queensland infrastructure; electricity network upgrades; water infrastructure; and hospital beds.

Consequences of Ill-discipline: Queensland now faces a major financial challenge. Expenditure commitments have been locked in, and unrealistic budget assumptions have masked the underlying structural problems. Queensland can't have both low taxes and high spending. Options to boost revenue are limited, given the state's narrow tax base and heavy reliance on Australian Government payments. Thus most adjustment must be on expenditure side.  Thus the Commission believes that there is a need to: review existing services; rationalise core services; and seek better ways of delivering services. There is perhaps also a need to better manage risks associated with government assets and liabilities (including risks that others might manage better), and for better Parliamentary and budget management processes. Queensland's position is unsustainable, and a major process of fiscal repair is needed.

Other Risks and Contingent Liabilities: Queensland faces risks in terms of funding pressures (eg in possible departmental overruns, the carbon tax, and the Commonwealth Games) and contingent liabilities (eg commercial risks and capital funding needs of GOCs).

The Proper Measure of the Budget Position: The fiscal balance (which includes both recurrent and capital spending) is the most useful measure - as it most closely equates with borrowing requirements and with the underlying cash balance. Queensland's fiscal deficit is much worse in 2012-13 than in 2011-12 because of prepayments by the federal government. .

Restoring Queensland to Financial Strength: It will take many years to restore Queensland financial strength. Two stages are suggested. Firstly stabilizing growth in debt and returning to fiscal surplus in 2014-15, and secondly reducing accumulated debt. A $3bn reduction in the bottom line (against current estimates) will stabilize (but not start to reduce) debt. A $6.5bn reduction in debt would then bring the total debt to revenue ration to 105% - and perhaps allow a credit upgrade. It would however still leave the state vulnerable to instabilities. Thus a total debt to revenue ratio of 60% (as in 2007-08) would be a better target.

Recommendations: Fiscal surplus be sought by 2014-15 through a $3bn process of fiscal repair. Total government debt then be reduced by $25-30bn. Then government set zero fiscal balance goal in the general government sector. To achieve the fiscal targets: government should retain the 3% cap on employee expenses. Revenue options (eg by broadening tax bases and increased taxpayer compliance) should be sought. All expenditures should be reviewed, and capital expenditures be appropriately prioritised. Returns from existing government assets should be maximised. The government should examine exiting functions better undertaken by other levels of government, and seek to manage demand for government services. Asset sales should be considered to achieve the objectives of the second stage of the strategy.

Overview of Progress and Limitations

The present writer has attempted to understand Queensland's non-transparent and increasingly exposed financial position since 2001 (see About Queensland's Budgets, 2001+).

From that point of view the Commission's Interim Report is a useful account of the deterioration of the  financial position, and aids understanding in several ways. In particular, it:

  • partially clarified Treasury figures on changes in Queensland's revenue and debt situation over time;
  • highlighted the over-optimistic assumptions needed for the previous government's claims of a quick return to surplus;
  • identified the risk factors being considered (eg funding pressures and contingent liabilities);
  • defined various different concepts of debt, which helps in relating claims based on different assumptions;
  • identified actual (as compared with budgeted) government capital spending  (Section 8), which clearly played the major role in Queensland's escalating debts;
  • outlined some aspects of the financial status of important non-financial GOCs (Section 10);

However in many respects the report seems inadequate because its focus is too narrow. The following is thus an interim 'audit' of the Commission's contribution. In brief it is suggested that:

  • Queensland's financial difficulties apparently started much earlier than indicated by the Commission of Audit, though they were initially concealed by 'creative accounting';
  • there thus remains a need for a forensic audit, rather than continuing to assume that official financial statements present a reliable picture;
  • there is a lack of transparency about the financial position of GOCs and Treasury-linked financial institutions in particular. The latter appear to have contributed to government's claimed revenues and later GFC losses (and thus to the states debt levels) without what is going on being transparently disclosed;
  • the Commission's claim that fiscal repair should focus on recurrent expenditures because this was where the problem mainly arose seems wrong;
  • the methods suggested by the Commission to deal with the state's financial predicament (ie financial manipulations focused on cost cutting and asset sales) are ineffective ways of improving financial or service outcomes - and involve great risks. A primary emphasis on government's core business (ie governing effectively) would be preferable as it would allow: immediate financial pressures to be relieved while building up, rather than dislocating, the competencies needed to deal with the Government's other priorities; better policies to be devised and implemented; distortions in government machinery to be reduced; future challenges to be met with reduced need for public spending and red tape; revenues to be increased; and the potential for abuses of power to be reduced.

Growing Financial Problems have been Apparent for 15 Years

Queensland's financial problems clearly started much earlier than the Commission's report implied. The interim report suggested (p4) that the escalation of Queensland's debt started in 2006-07 when capital spending began to be funded increasingly from debt rather than from recurrent revenue (ie rising from 31% funded from borrowings in 2005-06 to 96% in 2010-11).

However there were fairly clear indications well before 2006-07 that:

  • recurrent revenue had been misrepresented to some extent by creative accounting to allow an escalation of 'revenue funded' capital spending (eg requiring government owned corporations (GOCs) to take on large additional debts to pay special dividends to boost government revenue - see Note 53 on Queensland's Challenge, 2001); and
  • financial problems had been emerging (eg consider the circumstances of a Treasurer's resignation in 2000; government warnings in 2002 about the unsustainability of Queensland's then comparatively modest levels of capital spending; and the present writer's attempt in 2003 to outline the growing pressures for significant tax increases).

Links: to sources on the above and many other indicators are in A Debt Binge?, which drew upon diverse sources mentioned in About Queensland's Budgets, (2001+).

Loading $bns of extra debts onto (say) electricity GOCs in order to conceal general government borrowing contributed to the subsequent need for rapid increases in electricity prices which have caused some community disquiet.

However general public recognition of Queensland's worsening financial position has been almost unbelievably slow to emerge, and there may be structural reasons for this (eg marginalising Auditor Generals; buying the support of interest groups who might otherwise have paid attention to what was going on; or concluding that investment would raise productivity and thus sufficiently increase public revenues).

For example:

  • Auditor Generals, who report to Parliament about Executive finances, have been marginalised perhaps because Parliament has long been dominated by the Executive (see The Upper House Solution: A Commentary which ascribes Parliament's weakness to civil institutions' inability provide reliable / up-to-date information for public debate about Queensland’s government and its functions) ;
  • politicisation of the public service (ie its dominance by ‘yes men’) has had bi-partisan support - see the Decay of Australian Public Administration);
  • potentially influential interest groups may have failed to consider the state's increasingly obvious fiscal problem because their support was being 'bought' (eg unions gained wage rises for members; universities gained 'Smart' State funding; and business associations' demands for large rises in capital spending were met); and
  • governments (initially the Beattie Government) may have concluded that much increased public spending on such 'desirable' activities would generate a sufficient improvement in government revenues to make this sustainable. This assumption was given credibility for a few years after 2000 by useful increases in government revenues, though these may have been mainly driven by the long global boom linked to the asset inflation that later gave rise to the GFC.

It is also noteworthy that in July 2005 (ie after the 2005-6 budget was delivered) Anna Bligh took over as Queensland Treasurer and then as Premier in 2007). The obvious intent of the Bligh Government was to overcome the problems associated with the crisis-prone Beattie Government (see Queensland's Next Successful Premier, 2007). This may have included reducing the emphasis on creative accounting and funding capital spending more transparently by direct borrowing, though it clearly did not involve either: (a) considering the effect that massive increases in capital spending then being planned would have on the state's credit rating; or (b) initiating the institutional changes apparently needed for competent administration (op cit).

A Forensic Audit is Needed

There has been  a need for a forensic review of the accounts and ‘commercial’ dealings of both the general government sector and particularly of the financial and non-financial corporations that the government controls to check into apparent creative accounting to misrepresent Queensland's financial position for over a decade. Moreover:

  • techniques governments are using to 'legally' (though perhaps only temporarily) misrepresent their debts have been identified by the IMF, and it appears that some may have been used in Queensland. [It can also be noted in passing that claims have emerged that the true cost of water infrastructure in Melbourne has been disguised, by the way commercial deals were structured [1]];
  • Australia's GFS (Government Financial Standards) have been suggested to allow distortions like those Enron (a US company that failed after it was discovered that its financial obligations had been shifted off balance sheet) had to break the law to achieve;
  • two Auditor Generals expressed concern about Queensland's accounting practices (see above);
  • indicators of conflicts of interest (ie seeking private profits at public expense) have become apparent in relation to public financing due to growing private involvement in / control over public functions.

However, to date, the Commission of Audit has simply relied on possibly-distorted Treasury figures. As noted below (for example), it is impossible from Section 8 to unscramble the diverse contributions to Queensland's 'gross debt' and 'debt' positions to deduce exactly why capital spending was significantly greater than increases in recorded debt / gross debt figures.

While the conclusions reached from reliance on Treasury figures are bad, they may not reveal the full extent of the problem and thus risk leaving in place arrangements that will generate future problems. A more probing approach to the Commission's task seems to be required.

A Lack of Transparency about Government Financial Operations

The Commission's Interim Report suffers a lack of transparency related to the use of highly aggregated Treasury figures, similar to that which has limited proper understanding of what is going on from annual budgets - a deficiency that particularly affects Government Owned Corporations (GOCs) - see above.

For example, the Commission's report shows a rapid increase in government's debt / revenue ratio after 2006-07 (Chart 1.5, p5). It is implied that this is due to increasing staff numbers, wages and capital spending, combined with the effect of the GFC and natural disasters.

While these (particularly the escalation in capital spending) were real factors, the Commission did not mention the effect of apparently significant losses incurred in about 2008 of funds held by the Queensland Investment Corporation (QIC) on behalf of the Government and potential state superannuants as a result of the GFC, even though:

  • QIC's 2011 annual report showed that it was then managing about $60bn in assets (including superannuation funds held on behalf of public sector employees);
  • QIC had perhaps enabled state revenues to be boosted prior to the GFC by transferring the until-then rapid escalation in asset values to the state government. It is noted that a (roughly) $2bn pa 'equity return' appeared in state budgets to boost government revenues around 2000 with no explanation (see Note 53 on Queensland's Challenge, 2001);
  • QIC's 2011 report also showed that total funds under management had declined from $83bn in 2008 to $52bn in 2010, and it may reasonably be assumed that a similar reduction had affected funds held on behalf of the Queensland Government and superannuants; and
  • Queensland's 2008-09 budget papers recorded a $13.1bn fall in asset values without explanation. 

In fact there is almost no information at all in the Commission's interim report concerning QIC. This is of concern also because of potential conflicts of interest that appear to have existed in relation to the financial dealings by the QICs and other Treasury-linked entities (see above)

Inadequate Goals

The Interim Report suggested (p190) that little can be done to boost revenues, so adjustments to cope with the state's financial difficulties must mainly come from reduced spending - particularly recurrent spending on the grounds that this was the main source of the problem. 

However this seems overly simplistic, because:

  • the escalation in not-always-well-directed capital spending fully (perhaps more than fully) accounts for the officially-recorded deterioration in Queensland's fiscal position. In 2002 the then premier noted that the states' $5bn pa budgeted capital spending was unsustainable. None-the-less capital spending then rose to a budgeted maximum of $18bn in 2009-10 (an actual about $15bn according to the Commission's Chart 8.3). Moreover the Commission's interim report does not make it clear whether ongoing creative accounting might have been involved in minimizing the states' perceived debts. or whether real revenue contributed to capital spending. It is noted that:
    • over the 11 years to 2010-11 total capital spending was about $97bn (Chart 8.3). That total was apparently some $20-30bn in excess of the the present writer's estimate of the increase in Queensland gross debt (an official figure not being apparent from the Commission of Audit's report, or obvious from any other source);
    • over the 4 years to 2009-10 total state capital spending was about $53bn (Chart 8.3), some $17bn in excess of the $36bn increase in the state's 'gross debt' over that period - based on Chart 2.2 (and $22bn in excess of the $31bn increase in the state's 'debt' based on Chart 2.6).  'Debt' (arguably the most important measure) differs from 'gross debt' because of adjustments detailed in Section 2.1 of the Commission's report;
  • a more serious approach to economic development could probably generate a much stronger tax base for federal, state and local government revenues (see Lifting Productivity: Considering the Bigger Picture View, 2010+);
  • reforms to Australia's federal system could be sought that provide states with revenue sources appropriate to their responsibilities, and thereby (a) eliminate the massive costs and distortions associated with extreme federal fiscal imbalances; and (b) give states the financial incentive to take economic development more seriously (see Fixing Australia's Federation and Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government). All states are experiencing serious financial constraints - indicating that their share of overall revenues is too low. With a broader set of revenue sources states would be able to increase their tax rates and revenues;
  • better understanding of Queensland's strategic environment can increase the economically and financially beneficial prospects of avoiding risks and taking advantage of opportunities that arise in that environment (eg the ongoing GFC and the possible 'Asian Century').

Inadequate Methods

There is no doubt that dealing with Queensland's bad financial position is urgent. However the methods the Commission proposed to achieve this (eg reducing expenditure in Stage 1 and possible further asset sales in Stage 2 - see p 91) are inadequate and potentially dangerous.

Priority should be given to maintaining and building effective public and civil institutions - partly through requiring and encouraging them to meet the financial challenge.  

Unfortunately the reasons for suggesting this are complicated.

The financial manipulations that the Commission envisages as the strategic focus will do nothing to rectify the across the board weakness / ineptitude in Queensland's institutions that have been a significant factor giving rise to fiscal problems (see How did it get to be so bad?).

The more fundamental problems that need attention are suggested in A Dysfunctional and Difficult Environment, and include:

  • inadequate understanding by civil institutions (because of Queensland character and history) of the nature and functions of government, which at times lead to advocacy and political adoption of amateurish policies;
  • the difficulties and distortions created by federal fiscal imbalances;
  • seriously weakened and dysfunctional machinery of government, which amongst other things deprives elected governments of adequate 'reality' checks on their policies;
  • a weak tax base due to poor economic strategy; and
  • external difficulties such as: (a) a need for high levels of spending to counter the effects of financial crises and natural disasters; and (b) the federal government's structural budget difficulties that have now also become apparent and must affect the funds available for payments to the states which constitute the majority of the states' revenues.

Most of these factors are not mentioned in the section of the Commission's report (eg Section 1.5) related to risks and contingent liabilities, though they are of critical importance.

For example, the Commission's Interim report points to the large increases in spending in recent years and in particular to large increases in employee expenses (p4). However this arguably arose because the Beattie Government: (a) attempted to achieve more ambitious goals than its predecessors while hampered by the ineffectual machinery of government it inherited; (b) encountered many crises; and (c) sought to solve problems mainly by throwing money at them (see A Simplistic View of Past Queensland Administrations). 

The apparent wastage of some funds directed to water infrastructure and transport systems in SE Queensland illustrates the problem (see Brisbane's Transport Monster and Structural Incompetence of SE Queensland's Water Crisis).

The crisis that emerged in Queensland Health also illustrates this. Problems seem to have arisen primarily because of the centralised and politicised environment in which Queensland Health operated, yet inquiries into the medical competency problems at Bundaberg Hospital focused only on factors internal to Queensland Health (see Intended Submission to Health System Inquiry, 2005). Thus little real improvement in the way resources are used has been possible despite massive increases in health-related employee expenses.

Simply focusing on financial goals (rather than addressing them in the context of broader efforts to strengthen Queensland's public and civil institutions) will at best give rise to ongoing crises by impeding progress in:

  • meeting the numerous other challenges that government faces by destabilizing the organisations that are expected to help government achieve goals in areas such as transport, health, education and the economy;  
  • overcoming institutional weaknesses.

At worst the suggested narrow focus on dealing with Queensland's financial difficulties in isolation could lead to a breakdown of effective government, greatly increased risk of abuses of power and rising instability and insecurity in the community.

Moreover, a primary focus on financial outcomes is a very poor way of improving government's financial position (eg see Improving Public Sector Performance in Queensland , 2005 and An Efficiency Dividend is an Inefficient Way of Improving Efficiency, 2011). Doing so will tend to result in an administration dominated by those concerned with financial arrangements or providing goods and service efficiently (and the latter is only governments' secondary function for reasons suggested in Governing is Not Just Running a Large Business). This will reduce, or at worst destroy, government's ability to undertake its core business effectively (ie 'governing', which involves creating a non-centralised framework in which others can 'do things'), because the knowledge and skills required for 'governing' are quite different and much broader (eg concerned with how the society and economy as a whole works).

A Complicated Aside: Desirable outcomes (eg improved finances) are best regarded as the result of the activities of effective organisations, rather than as the 'button' to push in order to make organisations effective, especially in the public sector.

This can be illustrated by the example of improved accountability, which was the primary outcome sought by Queensland's Goss Government in the early 1990s. Effective organisations are likely to reduce both the motivation and scope for abuses of power and corrupt dealings (eg because employees will be motivated by the organisation's goals, and under the scrutiny of competent fellow workers). However the Goss Government's narrow focus on increasing accountability (eg by across the board restructuring and restaffing to match the perceptions of political insiders) resulted in the loss of hard-won competencies needed to achieve practical outcomes and the creation of almost unworkable machinery of government (see Queensland's Worst Government, 2005).  It also created an environment that facilitated abuses of power (see Reform of Queensland Institutions or a Rising Tide of Public)

While the issue is too complex to pursue in depth here some suggestions about the reason for suggesting an emphasis on effective machinery of government as a way to improve financial performance (rather than pursuing financial goals in the hope that this will result in effective institutions) are in:

  • Evaluation of Managing for Outcomes' (1997) - which examined limitations on efforts to control government activities on the basis of financial criteria. Many of the institutional problems that Queensland has suffered over the past two decades seem to relate to this (ie to centralised budget-linked control). For example, a crisis emerged linked to the failure to develop electricity distribution infrastructure, apparently because those who knew that this was needed were excluded from the decision making process;
  •  The Advantages and Limitations of Financial Criteria - which considered the role of financial criteria in coordinating economic activities generally. Such criteria can be useful if they simplify the decision process facing individuals, but hazardous if financial considerations become complex;
  • Governing is not Just Running a Large Business - which suggests why the financial criteria that are useful in managing a business are less relevant in managing government's mainly-non-business-like activities; and
  • Neglected Side Effects - which highlights the way in which the application of competition principles (that can at times be seen as needed for financial criteria to be an effective basis for decision making) can have the unforeseen consequence of making government less effective in 'governing' (eg because it impedes the collegiality that is required to rationalize the relationships amongst diverse complex policy issues).

If a government focuses on its core business (ie 'governing' effectively), rather than on narrowly on financial schemes and being efficient in 'doing things' (ie providing goods and services):

  • the core competencies required for ongoing success will be retained, mobilized and strengthened, because they are being used to deal with financial difficulties and other government priorities (rather than being marginalised and weakened);

  • scope for abuses of power will be reduced;

  • institutional constraints like those mentioned above are more likely to be resolved and thus (for example): enable better policies to be generated; reduce administrative distortions and inefficiencies; and create a stronger tax base, thereby increasing revenues.
  • solutions found to future challenges facing government will tend to involve much reduced demands for public spending and new 'red tape'. Past attempts to reduce 'red tape' illustrate what happens when primary focus is given to streamlining existing regulations, rather than to the machinery through which regulation is developed (ie slight reductions in existing 'red tape' have been swamped by additional demands for regulation to achieve new goals).

Finally asset sales are anything but a certain way of improving government's financial position or the delivery of truly 'public' goods and services (see Infrastructure's New Road). The uncertain financial benefits and potential conflicts of interest related to the earlier sale of Queensland Government assets are outlined above (ie why assets producing little revenue and requiring large future capital injections would attract large sale prices was unclear and insiders appeared to have the potential for private gains at public expense).

This illustrates the complexities and risks that asset sales potentially generate and thus the importance of considering such options transparently within a framework of effective public administration generally.

Other Reactions to the Audit included:

Former ALP government's capital expenditure in 2011-12 was paid almost entirely from debt - according the Commission of Audit. This had risen from 34% debt funding in 2005-06. From 2005-07 spending increased by 10.5% pa while government revenue increased by 6.9% pa. Treasurer says that state had been living beyond its means before GFC and 2011 natural disasters. In ALP's mid-year review capital purchases of $25 (and debt increases of $25bn) were shown over 3 years - which was seen as needed to maintain jobs in financial crisis. ALP also forecast $60m surplus in 2014-15 - based on various savings proposals (eg deferring new police academy and facilitating voluntary separations). Treasurer detailed a further $185 in savings yesterday.  (Moore T. 'Debt paid Labor's bills: audit', Brisbane Times, 15/6/12)

Queensland won't regain AAA credit rating til 2017/18 credit rating and would need to find $30bn savings to achieve this - and to have fiscal capacity to absorb shocks according to treasurer. Commission chairman warned that further downgrades are possible without changes. Queensland has to pay $100m more now than when it had a AA rating. Gross debt is now $64bn and could reach $92bn by 2015/16, Commission of Audit recommends two stage program (a) returning budget to modest surplus by 2014-15; and find large savings by 2019/20. First step (cutting $3bn pa in annual spending will slow economy by 0.75%. Stage 1 cuts involve cutting public sector expense costs to 3%; increasing mining royalties; broadening land tax; and increasing gambling taxes. There is considerable pressure to cut permanent public sector jobs. Asset sales are being considered after 2015/16 election - with possible sales of Q-Fleet, Q-Build, Go-Print and CIREC earlier. $25-30bn in asset sales are needed according to Audit - though government has not yet decided on this. Treasurer said that previous budget was based on heroic assumptions, and was unrealistic. Opposition treasury spokesman (Curtis Pitt) said the report was politically tainted, and would be used to justify job cuts. Its forecasts assumed repeats of the GFC, floods, cyclones. Public sector union, Together, said that government needs to keep its promise about no forced redundancies. Industry groups disagree about whether asset sales are needed, but agree about the need for public sector job cuts. AIG sai that sale of Powerlink, CS Energy and Stanwell would generate $10, but CCIQ said that this would only be a temporary solution. (Moore T., State's AAA rating five years away: report', Brisbane Times, 16/6/12)

Commission of Audit is right in saying that treasury forecasts of budget turnaround are optimistic - a problem that is nationwide. Queensland's position is worst because of large infrastructure spending, and lack of disciple in last 6 years. Commission suggests that general government sector should fund capital spending from revenue, and that GOCs should only make financially viable investments. Asset sales seem to be needed. Suggested revenue measure could adversely affect property market, Commission suggests government should review programs, but a tougher approach is needed (ie to be hard nosed about things that are nice to have but not vital (Uren D. 'Forget niceties and make real cuts', Australian, 16-16/6/12)

Newman Government is considering increased gambling taxes / mining royalties and selling state-owed printing / vehicle and building businesses - as first stage of two term plan to return budget to surplus. Sackings are possible. Options suggested by Commission of Audit include ending first home owners grant, increasing gambling taxes / mining royalties / property transfer duty, and then in second stage selling $25-30 in assets. GOCs will need massive capital injections, competing with health / education and social services for funding. Public service pay cap of 3% has been set. Report said that debt-revenue ratio is much greater than AAA credit rating limit. Peter Costello blamed former government, not Treasury, for overly optimistic forward estimates. Opposition finance spokesman (Curtis Pitt) criticised talking down the economy, and rejected blame for state of the books. He said that debt and deficit assumptions used in Costello audit assume repeat of GFC and natural disasters  (McKenna M and Barrett R 'Job cuts, tax hikes, asset sales on menu', Australian, 16/6/12}

Business (eg AIG's Matthew Martyn-Jones) insists that government sell electricity assets to boost financial position and bring it into line with other states. Commission chairman said that the problem was too big to be solved by spending cuts alone - asset sales will be needed (Barrett R. Business push for power sell-off, Australian, 16/6/12)

State budgets are in a worsening mess - not because of reckless spending but because revenues are flat-lining. The problem is becoming obvious because Rudd Government's stimulus spending that was channelled through states is ending. Reduced GST is now impacting on state budgets - because people are spending less overall and more on services that are GST exempt (eg health, education and offshore spending). Also housing finance has slumped. Property values have declined, and sales have slowed thus duties on property market transfers have fallen. The mining boom is part of the problem because it has driven up $A and worsened prospects of other sectors. Queensland is not benefiting as WA is from this, because coal is not booming in the way iron ore is. Queensland's royalty revenues fell $1.5bn pa . Revenue constraints are affecting the federal government as well. ACT has reformed its tax system in ways that should improve its revenues and sustainability (Hayward D. 'Boom and bust: the parlous health of our state finances', The Conversation, 25/6/12)

Queensland is pushing ahead with significant public service cuts. On election the Newman Government commissioned an audit of the state's finances. This shows Queensland in a sea of red - because of Beattie / Bligh governments heavy infrastructure spending. The problem is flat revenues, while costs rise inexorably. States have narrow tax bases, highly reliant on GST and stamp duty - and GST is no longer rising rapidly. Stamp duties are weak because of problems in real estate. On expenses side, health and education costs are rising rapidly (as wage rises in other industries spill over). Also government now increasingly employs better educated / skilled individuals. States have responded to problems with bouts of austerity. Queensland and NSW have gross debts of $71bn and $54bn respectively, and in Queensland this is only 20% of GSP (ie nothing like the problem facing Greece). Previous governments arguably did the right thing in increasing infrastructure spending, while NSW failed by not doing so. Whether there is a problem depends on whether you think deficits are intrinsically bad. Queensland Commission of Audit provides alot of information to alarm those who think deficits are bad. The real problem is states' narrow tax base and poor revenue growth. Problems will continue until vertical fiscal imbalance issue is resolved. (Eltham B. 'Newman swimming in a budget that’s a sea of red', Crikey, 25/6/12)

CPDS Comments:

 

Addendum E: Handling Queensland's Next Crisis

Handling Queensland's Next Crisis - email sent 3/7/12

Possum Comitatus
Crikey

RE: Introducing the Qld Treasurer, Crikey, 2/7/12

I was interested in your ‘insider’ view of the issues affecting Queensland’s new government.

My interpretation of your article: New governments take time to realize that they are in government – and the Newman Government has been trying to do so for 100 days. Some ministers have succeeded, but the Treasurer has not. This is illustrated by claims that the Queensland public service was cruelly strung along by the previous government, and that (though the government wants to preserve jobs) Labor’s debt makes this impossible. Wage offers are being made that assume very low (1.6%) inflation – and amount to wage cuts. Queensland’s coffers are said to be empty with debt headed for $100bn – so that when unions demand more money for members, this is claimed to be at the expense of reductions elsewhere. Growth in public service numbers occurred in health, police and community functions. This resulted from Queensland’s health crisis and problems in child safety / protection. If public service numbers had only grown at the same rate as Queensland’s population, there would be 18,000 fewer public servants, but problems in those areas would not have been resolved. The Treasurer aims to cut non-front-line staff (which raises questions about who handles hospital logistics) but also needs to cut 7000 front line staff. Employee expenses as a percentage of total government revenue have not changed much. Queensland public sector wages grew faster than average, but had been well behind (and remain somewhat behind) average national levels. Queensland (particularly in the private sector) was a low wage, low skill economy for much of its existence and has only recently started to catch up. Queensland’s public sector already had a higher level of education and training relative to the private sector. Over the past decade Queensland private sector wages grew faster than those in public sector. When GFC hit the private sector, it reduced output because of collapsing demand – but demand did not fall for public services. Many ministers are like the Treasurer in acting as if they are still in opposition – and producing inaccurate / superficial policy. Governments have to base their actions on reality. The Newman Government will be in real trouble when the inevitable policy crisis lands in their laps.

There seems no doubt about your final conclusion – ie that the Newman Government will be in trouble when it is confronted by Queensland’s next (and presumably inevitable) crisis.

My reasons for suggesting this are outlined in Beyond Populist Rhetoric (2011); Curing Queensland's Myopia (2011); Queensland’s Next Unsuccessful Premier? (2012); and Can the Commander Do? (2012). The latter points to the fact that successful government requires mobilizing the knowledge and skills available through the public sector, and that alienating / eliminating those with key knowledge and skills (as the Newman Government also seems determined to do) is a formula for ineffective performance and for ongoing crises like those that have been inflicted on Queensland over the past two decades as a consequence of the autocratic naivety of the Goss administration (see Queensland's Worst Government?, 2005).

In relation to Queensland’s financial position and the affordability of the public service’s wage bill, I suspect that the Treasurer is: (a) correct in suggesting that the situation is dire; but (b) ill-advised in claiming that employing too many public servants is the primary source of the state’s financial mess. My reasons for suggesting this are outlined in Auditing the Commission (2012)

John Craig

Addendum F: More creative accounting in Queensland?

More creative accounting in Queensland? - email sent 31/8/12

Bridget Carter,
The Australian

Re: QIC in talks to buy city offices, The Australian, 30/8/12

Your article noted that the Queensland Government is considering selling (then leasing back) various buildings in Brisbane.

My interpretation of your article: QIC is considering buying about 15 Queensland government buildings for $2bn. These may be lower quality offices that require substantial spending on improvements at a time when the government is seeking to cut spending. Selling to QIC would dampen claims that the government was privatizing those assets. There has been discussion about the length of lease of these buildings by government. Other options are also being considered, eg selling properties individually, or setting up a trust (in which the government would have units) to hold the properties

It is worth recognizing that this tactic (ie selling assets so as to reduce debt and then not counting the necessary stream of future payments for the ongoing use of those assets as equivalent to a debt) is one of the ways that the IMF has identified that governments now misrepresent their true financial positions.

The use of this tactic to reduce Queensland’s apparent financial obligations seems to be just more-of-the same creative accounting that has apparently been used to understate Queensland’s debt position over the past 15 years (see A Forensic Audit is Needed). As the latter noted, Queensland’s recent Commission of Audit seemed to pay no attention to the fairly obvious use of such devises – perhaps because Queensland’s debt position was considered to be bad even without looking deeply at what had been going on (and what your report suggests may still be going on).

John Craig

Addendum G:  Reforming State Governments: Does Queensland's Commission of Audit Have the Answer? +

Reforming State Governments: Does Queensland's Commission of Audit Have the Answer? - email 12/3/13

Mark Ludlow
Australian Financial Review

Re: ‘Costello pushes national plan for state reform’, Australian Financial Review, 2-3/3/13

Your article referred to proposals by Queensland’s latest Commission of Audit (involving a former Australian treasurer and others) for improving Queensland’s financial position, public sector performance and economy. I should like to suggest for your consideration that, while the Commission raised important issues, better options are available.

Key themes in the Commission of Audit’s report (which is outlined on my website) were: the need for change to overcome Queensland’s fiscal problems; a parallel need to improve Queensland’s economic productivity; the relatively greater size of state government in Queensland and the difficulty of funding this; problems in the traditional role of Queensland Governments; improving financial management; achieving better value for money in front-line service delivery; and excellence in public administration.

The Commission of Audit’s proposals primarily involve introducing market-like disciplines within government - like those applied under National Competition Policy in the 1980s and 1990s [1], and which were also advocated by an earlier Queensland Commission of Audit in 1996. The latest version also seems to parallel ideas developed in a report that Commerce Queensland commissioned in 2006. The latter (by Des Moore) pointed to real problems in the role of government in Queensland and suggested that increasing the private sector’s role in the economy and in the delivery of public services was the solution. However, as the present writer suggested at that time, that proposed ‘solution’ was inadequate in itself (see Comments on The Role of Government in Queensland).

The same limitation unfortunately applies to the 2013 Commission of Audit proposals, for reasons outlined in A Broader Approach to Reforming State Administrations is Needed. In brief it is suggested (for example) that:

  • The Commission of Audit’s interim report in 2012 seemed to be based on a very narrow appreciation of Queensland’s fiscal problems and options;
  • The Commission’s report is based on conventional economic analysis in an environment in which such ideas are being challenged and leading economists say that they are no longer sure what to teach. While the effective use of the financial resources that the Commission focused on are important, better use of information is likely to contribute even more to economic performance and effective government;
  • The application of contestability and ‘business-like’ methods that the Commission advocates tends to:
    • be difficult to apply to governments’ service delivery, as the latter typically involve functions affected by real market failures;
    • have the unintended consequence of eroding governments’ ability to carry out its primary function (ie ‘governing’) and can thus generate expensive policy blunders that are anything but a contribution to economic productivity;
  • A primary emphasis on ‘governing’ (ie on creating an environment in which others can ‘do things’) is more likely to constrain the role and cost of government than the primary emphasis on core service delivery that the Commission of Audit suggested;
  • Treasury efforts to strategically control financial outcomes (rather than creating an environment in which agencies can ‘do things’) have apparently been one cause of the poor and deteriorating performance of Queensland agencies, and would seem likely to be reinforced by some of the Commission of Audit’s proposals for new financial controls;
  • Private sector involvement in the delivery of public goods and services (eg on contract) can be highly beneficial, but private ownership and control of functions subject to market failures creates problems;
  • Government should not be the major focus of efforts to boost economic productivity (as it is much smaller than the private market economy and is subject to many more constraints). Much better options for increasing economic productivity are available through accelerating development within the market economy itself by stimulating initiative-oriented investigations of collaborative opportunities;
  • A public service must be ‘responsive’ to many different / incompatible pressures (eg clients, governments, best practices, practical factors, emerging trends) – and these can’t be balanced in the current highly politicised environment. Likewise a ‘reform oriented’ public service is often likely to explore options that are not yet (and may never become) politically acceptable – and this again is incompatible with politicisation.

While the issues the Commission of Audit addressed (ie government’s fiscal problems, cost effective government services, strengthening the economy and public service reform) are important, progress would best be achieved by treating them as ‘areas of critical concern’ within an ongoing process of dealing with all government functions (eg by the use of methods like those Queensland used with reasonable success for other ‘areas of critical concern’ in the 1970s). Implementing the Commission of Audit’s proposals (eg providing core services in a pseudo-business-like manner and increasing centralised control of financial performance) would either: (a) dislocate other government functions and thereby generate future problems; or (b) achieve very little because irresolvable incompatibilities would be discovered with other policy priorities. Thus there is arguably a need to:

  • Mobilize information and support from across the whole public sector in developing and implementing solutions; and
  • Give attention to: (a) much more that the public financial criteria that the Commission of Audit was asked to address; and (b) matters that the Commission’s report did not mention.

In the context of efforts within the ALP to try to end the repeated crises that had plagued the Beattie administration, brief suggestions about the more broadly based ‘institution building’ efforts that seemed to be needed to enable Queensland’s Government to avoid ongoing problems were outlined in Queensland's Next Successful Premier (2007). However neither the subsequent ALP administration nor the current Coalition Government seems to have recognised the complexity of their challenges. In fact the Newman Government arguably risked amplifying Queensland’s chronic problems on day one (see Can the Commander Do? 2012).

Thus Queensland remains in trouble. It fiscal problems are real. Many of the options to deal with this have not been (and could not be) considered because the question has been addressed narrowly through a Commission of Audit. And, though the Commission has touched on real ‘areas of critical concern’, its proposed way of dealing with these would probably create more problems than they solve.

John Craig


In March 2013 the Commission of Audit produced a final report, of which a brief outline follows together with some published comment.

Outline of Queensland Commission of Audit Final Report - February 2013: Executive Summary

Fiscal repair Strategy: interim report suggested stabilizing position (which 20012-13 budget achieved) and then paying down debt. Debt reduction can't be achieved by changes to operating statement (as 50 years would be needed for 1% of revenue to reduce debt by $25bn). State must decide whether to tie up large sums in current businesses or seek better uses for that capital (eg reducing debt / debt service costs and new investment). Without rapid debt reduction Queensland won't retrieve its AAA credit rating. Commission recommends selling assets - especially in the energy sector as these are primarily commercial / provided privately in other states / create commercial risks for government. Commission also recommends seeking higher productivity mechanisms for service delivery (eg by greater reliance on private sector service delivery) in the face of a growing / aging population.

The Economic and Fiscal Challenge: Queensland must lift productivity to sustain economic growth. Economy has been driven for 25 years by population growth, increased workforce participation and mining development. These are not sufficient over the next 25. Productivity has been falling. Projections should much slower growth over the next 40 years - which is a major problem for aging population. Productivity performance must be improved. Business-as-usual projections suggest ever rising state debt / GSP ratios. Productivity gains of 0.8-1% pa are needed for stable fiscal position (ie a one third unit cost of service delivery by 2050-51). This is equivalent to 0.5% pa rise in GSP.

The Size of Government: Government is Queensland's largest employer / purchaser, and thus has significant economic impact. It has been larger than elsewhere partly because of decentralisation. State expenditure has risen since 2003-04 relative to other states. States are under constant pressure to undertake new functions / services, though their tax bases are narrow. Increased revenue requires that the federal government increase taxes and redistribute this - which seems unlikely.

The Role of Government: Queensland Government is involved in commercial activities that are efficiently delivered commercially elsewhere - and this creates commercial risks and diverts resources from core health / education / social services functions. There is no universal rule on public / private functions.  Governments at times started functions (with large start-up risks) that were later privately provided - when appropriate regulatory structures were created. GOCs are at risk in commercial environment because of limited flexibility / entrepreneurship. Governments need to create an environment for services to be provided efficiently / at low cost / with low risk. Privatised government enterprises can be more cost effective if they operate with government interference. Government responsibility for services does not mean that government delivery is required. There can be a continuum from pure public to pure private delivery. Elements of traditional public services are increasingly provided privately. Key principles in managing and delivering services involve: focus on core services; contestability; demand management; workforce flexibility; capacity building (eg in contract management); reducing overhead costs; stronger financial management; and public / private productive capacity. Government should: provide core / public good services; work with non-government providers for other social services; and ensure services with a strong commercial component are privately provided. Keeping taxes low is encouraged. As revenue is constrained, spending should also be limited. The report addresses: orderly exit from functions government should no longer be involved in; achieving better value for money in front line services; and structural / organisational / management options to make the public service more flexible, responsive and cost effective.

Government Commercial Enterprises: Government must make better use of its balance sheet by releasing capital to pay down debt and free up funds for new investment. Commercial test are suggested for ongoing government involvement (in reasonably contestable markets, monopoly undertakings, and others). This suggests disposing of commercial energy / ports operations, and funds management (ie the QIC). Electricity assets should attract private buyers - and generate a significant return of capital to government. Without asset sales further essential infrastructure investment will be constrained. And without sales, capital to pay down debt could be derived from these businesses by long term leases, securitisation of income streams, joint ventures, partial sales and contacting out of some operations. The combined book value of Queensland Government's energy companies is about $25bn. Subsidies for road and rail transport services are increasingly costly. These should thus be delivered through contestable contracts under franchise and lease arrangements. Irrespective of whether they are to be divested, GOCs should be reformed in terms of removing restrictive workplace agreements / unnecessary policy restrictions on commercial operations  - and making cost of policy requirements transparent and paid separately from commercial operations. The GOC legislation was introduced in the early 1990s and not fundamentally reviewed since. The GOC model has been compromised by adding policy requirements that add dead-weight costs that interfere with commercial operations - and reduce returns to government. These costs should be transparent. Policy requirements have destroyed business value and increased the need for government equity injections. The GOC governance model needs to be modernised - with greater separation between government's role as owner, regulator and policy maker. GOCs should have a single shareholding minister.

Financial Management: High standards of financial management are needed. There has been a loss of financial discipline and lower financial management standards. Charter of Fiscal Responsibility standards were not met, and major infrastructure investments were not disciplined. This led to cost escalation. High standards of financial and project management are needed. Government decisions have long term consequences, yet have been made on the basis of short term considerations. An intergeneration report with a 40 year time horizon should be a starting point - and be supported by a 10 year state infrastructure plan. Given constraints on public funds more use will need to be made of the private sector in funding public infrastructure. The Value for Money Framework needs to be revised to recognise the potential for greater innovation / cost effectiveness and better project management. Maintenance needs more emphasis - as it has been neglected relative to new investment. Significant maintenance backlogs exist in Health, Education, Transport and Main Roads. Agencies should produce fully integrated total asset management plans (involving new / replacement assets, maintenance and whole-of-life costs as well as rationalisation / disposal plans) as inputs to the proposed State Infrastructure Plan. In the past this has been done in a piecemeal fashion. A revised Charter of Budget Accountability is needed. Improved financial management will give government better value for money. There is a need to go further than Office of Best Practice Regulation and Queensland Competition Authority in reducing regulatory burden on business. Time-frames fro approvals should be reduced. a Queensland Productivity Commission should be established to provide advice on productivity improvement in the public sector and general economy. It would periodically review departmental budgets to streamline existing operations. Reforms to federal financial relations will be needed to strengthen Queensland's economy (which is outside the scope of the report). However attention needs to be given to which level of government should perform functions and how confusion / overlap can be avoided.

Front-line Service Delivery: Better value for money is vital. Government's primary responsibility is to ensure that services are delivered, not that government itself does the delivery. Queensland has become a high-cost provider of services in recent years. This has not been matched by increased output. This must be reversed by greater efficiency or partnering with private / non-government providers. There are also increasing demands for services. Thus all service areas need constant scrutiny. The Commission has closely studied: which services government should provide; current efficiency / effectiveness in service delivery; and options for improvement. There are deficiencies in many areas. Data problems make it hard to assess this fully - though available indicators suggest poor hospital efficiency. Greater use of case-mix funding is recommended to improve this - and meet the National Efficiency Price (which is needed by 2014-15 to reduce Queensland's cost burden under new health funding arrangements).  Contestability should be introduced in the delivery of services - in order to find innovative / lower cost solutions. There is a need (especially in health) to clarify which functions the federal and state governments are responsible for. In education most attention needs to be given to improving student performance outcomes, and narrowing performance gaps - and this requires autonomy and accountability by individual schools. Current efforts to increase competition in the VET sector should continue. An independent industry-led skills authority should drive this process. Queensland should focus on certificate level training to reduce overlaps with federal government. Ownership of TAFE assets should be separated into a commercial entity. Given increasing demand for emergency services, better methods of resource allocation are needed.

Public Sector: Goal should be high standard of excellence and becoming best administered state. Public service is out of date in terms of structure, organisation and management. It has changed little for 20 years. Current arrangements emerged from PSMC in the early 1990s. Commercialization / corporatisation reforms of mid-late 1990s have stalled. This public service needs to be streamlined / modernised. A highly skilled and professional workforce is needed, Reforms to boost flecibility, capacity and mobility include: rationalizing employment legislation; consolidating awards; establishing a new broad band classification system; appointments to band in public service rather than in agencies; flatter organisation structures; and more effective performance management. Public Service Commission needs to refocus on setting / coordinating service-wide strategies for human resources and industrial relations. The overhead costs of supporting front-line service delivery needs to be reduced. Many internal services are provided to captive clients by government mandated monopolies. These are theoretically (but not actually) subject to competition. More use should be made of corporate services, ICT and back-office administrative support from contestable markets.

Conclusion: Many recommendations have been made. A small task force from key public sector agencies should be established to handle implementation in accordance with government decisions. Recommendations will save rather than cost money. They are directed towards improving the performance / productivity of the public sector and Queensland's growing prosperity. 

Some Published Comment

Former federal treasurer (Peter Costello) told Queensland Government to sell energy companies, allow private sector to provide more government services and introduce tougher budget safeguards. Power sale would complete national Electricity Market and boost productivity - which has stalled in recent years. Summary of Audit Commission's report is available - and has the potential for nation wide influence. A major theme is overhaul of public service - so as to achieve a return to reforming government. Audit report also involved Doug McTaggart and Sandra Harding. It called for privatising energy and port assets - as an alternative to further cuts in government spending and tax rises. Sale of $25bn in assets would restore Queensland's AAA credit rating. While government owns these businesses it is exposed to commercial risk. Electricity assets should not however be sold in present environment. Report also called for public transport services (eg Brisbane Rail) to be offered for sale under franchise / lease-back agreements. The report suggests that business as usual is not sustainable. Recommendations include creating a Queensland Productivity Commission; a 10 years state infrastructure plan; an intergenerational report on population aging and a new charter of budget accountability  (Ludlow M., 'Costello pushes national plan for state reform', Financial Review, 2-3/3/13)

Mining companies are concerned about possible privatisation of Gladstone port after privatisation of Dalrymple Bay coal loader led to long delays in upgrading infrastructure  (Ludlow M and Cranston M., 'Miners wary of another port sale', Financial Review, 5/3/13)

Queensland Commission of Audit proposes biggest shake-up of public sector since Goss Government in 1989. Commission was established by Newman Government in 2012 with broad terms of reference: improving state's financial position / service delivery / GOCs. Its interim report recommended a 2 stage fiscal repair to reduce state debt and restore AAA credit rating. The first stage led to cuts of $5.5bn and 14,000 jobs in Newman Governments 2012/13 budget. Commission now recommends reducing government debt by $25-30bn. This will be hard in a community accustomed to low taxes, and counter-cyclical government spending. Queensland has long been a public sector economy (as government is largest employer and purchaser of goods and services). In part this is a result of decentralization - and their could be opposition to privatization and loss of regional employment / access to services. There is nothing new about driving productivity through marketisation and contestability; exposing public services to competition; and sale of GOCs. These were the core of 1980s and 1990s microeconomic reforms - that are broadly agreed to have underpinned Australia's recent economic prosperity and resilience. Similar proposals were canvassed by 1996 Commission of Audit under Borbidge Government and a national Commission in which Peter Costello was involved under Howard Government. But Queensland politics, the realities of minority government, the One Nation challenge caused reform to be tempered. And after deep cuts in Costello early budgets, the proceeds of mining boom were used for a decade of fiscal expansion. Now governments are fiscally constrained, at the same time as there is concern about unemployment and regional services. Large scale debt reduction needs creative thinking. Asset sales have been discussed by media. The report also suggested the need for fundamental public service reform to allow it to be flexible, responsive and cost effective in supporting front-line service delivery. Commission proposes a more flexible broad-banded classification system for public servants - to encourage flexibility, capacity and mobility and challange siloed culture. This raises questions about specialist vs generalist skills. Building skills / capacities is a major focus of Commission. Report also seeks systemic reforms to Commonwealth-State financial relations (an area that attracts increasingly broad endorsement). Peter Costello suggested that the proposed reforms could be a blueprint for national reforms. It is difficult to maintain political interest in public sector reform, and Queensland's public service has confounded successive governments' reform efforts  (Tiernan A., 'Pain or promise looms under Costello's Queensland plan', The Conversation, 7/3/13)

A claim has been made that head of the Commission of Audit (Peter Costello) has a conflict of interest because of his involvement in a company that would profit from asset sales (Hawthorne M., 'Costello conflict claim', The Age, 7/3/13)

A phone poll suggested that there was 80% opposition to sale of government assets - though accusations were made that this had been rigged by union ('Qld privatisation opposed by 85%: poll', BusinessSpectator, 10/3/13)


A Broader Approach to Reforming State Administrations is Needed

Reasons for the suggestions in the above email are outlined below.

Commission of Audit Limitations

  • The Commission of Audit’s interim report in 2012 was plagued by serious inadequacies– and was not a foundation for adequate reform proposals (see Auditing the Commission). The latter drew attention to:
    • Queensland's financial difficulties starting much earlier than indicated by the Commission of Audit's interim report, and problems apparently being concealed by 'creative accounting' and a lack of transparency;
    • The resulting need for a forensic audit, rather than continuing to assume that official financial statements present a reliable picture – especially given a lack of transparency about the financial position of government owned corporations and Treasury-linked financial institutions in particular;
    • the Commission's claim that fiscal repair should focus on recurrent expenditures because this was where the problem mainly arose seemed wrong - because significantly increasing state capital spending (which had been about $3-5bn pa) had been officially said to be unaffordable in 2002, before it escalated to a maximum of around $18bn pa - a change which suggests where a lot of Queensland's debts have come from;
    • the methods suggested by the Commission to deal with the state's financial predicament (ie financial manipulations focused on cost cutting and asset sales) are ineffective ways of improving financial or service outcomes - and involve significant risks;
    • an alternative suggested approach that should allow: immediate financial pressures to be relieved while building up, rather than dislocating, the competencies needed to deal with the Government's other priorities; better policies to be devised and implemented; distortions in government machinery to be reduced; future challenges to be met with reduced need for public spending and red tape; revenues to be increased; and the potential for abuses of power to be reduced;
  • While the financial criteria that the Commission of Audit was asked to examine are important, there are limitations on what can be achieved through maximizing financial performance. The probable emergence of a paradigm shift in conventional economic assumptions is indicated by: (a) the economic success (so far) that East Asian societies have achieved by unconventional practices [1, 2]; (b) the emergence of a global financial crisis to which quantitative easing is (so far) seen to provide the path to recovery; (c) leading economists who say that they are no longer sure what to teach [1, 2]; and (d) uncertainty at a major university about whether conventional economics should be taught at all [1]. Suggestions about what this all might imply are in  The Advantages and Limitations of Financial Criteria, 2010 and Fixing Economics, 2012. Financial criteria are a way of managing certain types of human activities - because they are a form of 'information' which allows decentralised decision making which overcomes the limits that complexity imposes on centralised control. However for reasons suggested below, taking steps to more effectively manage all types of information offers greater gains than merely managing financial 'information' in terms of improving both Queensland's economy (by accelerating development of economic systems) and public sector (by facilitating better decisions [eg see 1, 2]);
  • The Commission also dealt almost exclusively with governments' secondary function (ie the provision of public goods and services) and virtually ignored its primary function (ie governing). Though the former are significant, the latter offers far greater prospects for dealing with the challenges that the Commission investigated (for reasons suggested below - 1, 2).

Boosting Economic Productivity

  • market liberalization (eg financial deregulation and tariff reform) raised Australia's economic productivity and resilience from the 1980s. However attempts to boost efficiency / productivity in the provision of public goods and services by: (a) the pseudo-businesslike approach to management ('managerialism'); and (b) applying market pressures / contestability under the National Competition Policy from the 1990s had seriously adverse side-effects on governments because necessary knowledge, skills and collegiality were displaced (see Decay of Australian Public Administration and Neglected Side Effects of NCP). This contributed to poor decisions about public functions and cost blow-outs that were anything but useful contributions to economic productivity. In Queensland this seemed to lead to failures and unnecessary costs in many functions (see Evidence of Dysfunctions) though electricity, water supply and hospitals were most notably affected (eg see Structural Incompetence and SE Queensland Water Supply Crisis);
  • there is no doubt (as the Commission suggested) about the need to boost Queensland's economic productivity. This is needed not only because of weak productivity performance and an aging population, but also because of the real risks of further global financial and economic problems (eg see Debt Denial: Stage 3 of the GFC?).  Thus if the present environment is not a good time to privatise electricity assets (as was reportedly suggested), the prospects that future environment will be worse should not be neglected. However governments can do far more to boost economic productivity by ‘governing’ (ie creating frameworks within which others can 'do things') than they can by merely concerning themselves with their own operations (see Lifting Productivity: Considering the Bigger Picture). Though (as the Audit Commission noted) government is a significant component of Queensland's economy, non-governmental areas are more than twice as large. Boosting economic productivity through empowering non-political leadership of economic learning within the market economy should have significant benefits in terms of boosting economic / employment growth as well as governments’ tax base. A new Queensland Productivity Commission (to provide policy advice as the Commission suggested - p 19) would be much less useful. While studying productivity issues is necessary, stimulating initiatives to improve it would generate immediate practical gains. A more serious approach to overall economic development by states would be more likely if their tax bases were attuned to value added, rather than to economic turnover as at present (see Economic development incentives, 2009). The use of similar methods can arguably address social needs within the community or create solutions to environmental challenges with less need for costly public programs (see Reducing the Need for Entitlements in a Competitive Economic Environment) - and thus indirectly generate economic benefits by helping to reduce tax rates;

Making Government Effective

Role of Government

  • The Commission of Audit made useful references to problems in the role of government in Queensland (eg in terms of comprising a larger-than usual component of the economy, and the commercial risks facing inflexible government-owned corporations in a competitive environment). There is no doubt about the latter risk (see also 2001 comments on Queensland's 'corporatisation' alternative to privatisation in Government Business Enterprises). However this is only part of issues related to:
    • the high level of dependence of the Queensland community on external institutions (ie foreign investors and government); and
    • a traditional state-corporatist system of political economy that  viewed the 'private' sector as an extension of the state (see Dependence Characterises the Queensland Economy, 1994), That style of political economy, which in Europe has at-times been associated with authoritarian / fascist regimes:
      • was historically present in Queensland through so-called ' agrarian socialism' and through efforts to create a Queensland Inc (ie financial institutions under the state Treasury) in the 1980s;
      • was expanded to some degree in the 1990s by: (a) involvement by business groups in ownership and control of 'public' goods and services; and (b) increased reliance on business to re-write regulations that affect their commercial operations; and
      • seems to be reflected in the Commission of Audit's proposals for widespread more-than-contractual private sector involvement in the performance of public functions;
  • Thus Queensland seems to be flirting with problems like those that existed in the UK in the 19th century, where private involvement in public goods and services led to problems and abuses of power and (via the Northcote-Trevelyan Report) to the development of a professional permanent public service to abate those risks. Creating a professional public service in Queensland (which has not been valued recently) would take many (eg 10) years - see further below;
  • Government’s primary business is ‘governing (ie creating a framework in which others can do things - for example, but not only, by creating a legal system) and its secondary task (ie providing public goods and services) usually involves functions that are subject to market failures (see Governing Is not just running a large business). The latter is part of a document that refers to the breakdown in effective government that resulted from late-1980s-early-1990s efforts to make the public sector more responsive and business-like on the basis of advice from academics and business interests with little or no understanding / experience of the functions of government, or what was needed for governments to be effective;
  • Just as governments' core role is 'governing', so the core role of central agencies primarily involves creating a framework within which operational agencies can 'do things' (eg a framework related to overall policies and machinery for coordination / financing). Centralised 'strategic planning' can not work (see Strategy Development in Business and Government, 1997), and attempts to impose such planning through Queensland's Treasury seems to have been a significant factor in poor and deteriorating performance of state agencies over the past 2 decades (eg see Systemic Defects in Public Administration in relation to problems in Queensland's Health). The Commission of Audit's proposals for new financial procedures (eg for asset management - p18) and identifying innovation options (p19) touch on desirable reforms - but these need to be actioned through operational agencies rather than through centralised bodies (eg a new Queensland Productivity Commission) that seek to second-guess agencies' options. Likewise the Commission's efforts to identify: which functions government should provide; current efficiency and effectiveness and service delivery; and options for improvement (p20) can not be regarded as any more reliable than centralised economic planning has proven to be - because they are necessarily only based on part of the required information ;
  • governments can reduce the cost of service delivery by an emphasis on 'governing' (ie seeking first to find ways to meet needs without direct government involvement) - because the set of skills and approaches that would come to dominate in the public sector would be different to those that dominate under a 'service / project delivery' (ie what can government itself do) emphasis. When an emphasis on 'doing things' (eg efficient service delivery / projects) dominates, governments will be advised / assisted to set up new programs  to meet emerging needs. When an emphasis on 'governing' dominates, governments will be advised / assisted to find solutions that primarily involve others 'doing things'. This is not to say that efficient service / project delivery are not required in government, merely that these should be sought through operational, rather than central, agencies;
  • States have no prospect of being effective until Australia’s federal system is reformed – and this primarily requires that the federal government also focuses on ‘governing’ (ie making it possible for others, especially other levels of government, to 'do things') rather than trying to do and control everything (see Fixing Australia's Federation, 2010). Current arrangements not only generate complexity, duplication and buck passing, they also make effective planning and delivery of state functions virtually impossible (eg by forcing states to focus on lobbying for funding rather than on their functions and by centralising control within states especially in the hands of Treasuries / Intergovernmental-relations staffs - and this separates decisions from those with the information needed to make them)  - see Federal Financial Imbalances in Australia's Government Crisis. While the Commission of Audit referred (p19) to the need for reform, its proposals for tight future financial control would both depend on, and reinforce, the adverse effects of federal financial imbalances. For example, the Commission of Audit referred (p23) to the need to comply with complex measures of hospital efficiency in order to gain funds under new health funding arrangements while simultaneous pointing to the lack of information on which such judgments may be made. The fact that the complexity of public functions renders efforts to provide funding on the basis of simple performance measures almost useless (see Evaluation of Managing for Outcomes, 1997) again suggests that a Commonwealth Government emphasis on 'governing' rather than on micro-managing outcomes will be critical to actually improving public sector performance;

Private Involvement in Service Delivery

  • While there can be great benefits in the private provision of goods and services on behalf of governments (as the Commissions report noted), private ownership and control of assets / services subject to significant market failures can have adverse effects. The latter include: the need for complex and costly involvement by government which offsets potential production efficiency gains; loss of public sector knowledge and skills needed to act in the real public interest; and distorting / corrupting government (see Intrinsic Problems with Public-Private Partnerships). Thus the Audit Commission's suggestion (p7) about a 'continuum' between pure public and pure private service provision is suspect (eg it can be a formula for creating problems like those associated with the US's so-called' 'military-industrial complex'). It is also worth recognising that problems in upgrading facilities at the Dalrymple Bay Coal Loader appeared to arise because: (a) private ownership of natural monopolies requires strict regulation to prevent owners exploiting users; and (b) it was simply impossible for regulators to create an appropriate pricing regime - ie one which involved pricing that was both fixed and variable (see Regulatory Failure through Privatisation of Monopolies). The mining industries' reported nervousness about privatisation of Gladstone port facilities appears well advised;
  • The Commission's suggestion that Queensland's debt problems have to be resolved by selling assets is overly simplistic, because:
    • part of the fiscal problem is arguable states' chronically inadequate share of revenue under Australia's federal financial system;
    • options exist to boost the tax-base and / or find alternatives to public sector spending; and
    • fiscal considerations can't be considered in isolation in dealing with functions that are subject to significant market failures (see below);
  • the Commission apparently assumed that 'commercialized' public assets could be sold without explicitly considering whether market failures in those functions could lead to significant problems. Very large price increases accompanied the 'commercialization' of electricity functions - which was hardly encouraging;
  • the Commission suggested (p15) that the government should compensate 'commercialized' GOCs for the cost of regulatory requirements imposed on them (requirements that may arise because their function involves significant market failures) - even though government routinely applies hopefully-public-interest regulations to the general community and other businesses without such compensation;

Public Administration

  • Great care is needed in public sector change. Government deals with thousands of functions, and success requires integrating new priorities with what already works. Emphasis on a few currently politically-important goals without allowing integration to occur can be damaging and costly. Queensland achieved fairly successful change in the 1970s by identifying 'areas of critical concern' (ie regional / environmental goals) and stimulating / enabling existing organisations to propose solutions. This allowed those goals to be addressed, existing competencies to be reinforced and a more cohesive and purposeful public sector to emerge - until the process was disrupted in the 1980s by requiring that priority be given to supporting 'major projects' at the expense of other requirements. The Goss Government was the last to attempt significant public service 'reform'. However, by adopting  a 'tear it all apart and start again' approach to achieve its very limited range of goals, it created a situation even worse than the one it inherited, and laid the foundations of the dysfunctions, crises and wastage that have characterised Queensland administrations ever since (see Queensland's Worst Government, 2005);
  • The Commission of Audit suggested the use of 'contestability' in relation to the provision of public services (p 22). However for many public functions policy considerations can't be successfully separated from service delivery, so 'contestability' in service delivery also translates into policy fragmentation (ie into an inability to mobilize cooperation in integrating complex policy issues);
  • The Commission of Audit suggested that a ‘responsive’ public sector is wanted. But there was no clarity about what it needs to be responsive to – and there is usually a world of difference between the expectations of clients (eg those to whom government agencies provide goods and services) and political expectations that reflect interest group pressure (see Why are Bureaucrats bureaucratic? 1993). In the days of professional public services (ie when careers were not destroyed when public servants offered a reality check on political ideologies) this gap could be bridged. Making public service unquestioningly compliant with political perceptions (ie by boosting the role of cronies and 'yes men') eliminates critical knowledge and experience - and generates 'structural incompetence';
  • the system of government that Queensland inherited from the UK can not work reliably without a professional public service (eg because of the importance of institutional competence suggested in Another Strategic Option: Boosting Accountability through Enhancing Competence?). Bipartisan politicisation over two decades has eliminated this. Competent government might be able to be created without public service professionalism, but this would require significant and time consuming changes to the overall machinery of government (eg changes to: (a) ensure that civil institutions become able to provide a 'reality check' on populist political ideologies; and (b) contain the distortions that commercial conflicts of interest create);
  • governments deal with immense and rapidly-increasing complexity - and (though this is not all that is required) effective bureaucracies can help governments cope with complexity by potentially mobilizing and coordinating up-to-date practical information about diverse inter-related functions. This is particularly important given the challenges posed by East Asian societies that (in some respects) function as 'whole of society' bureaucracies and in which power (and the Art of War ability to persuade others to weaken their positions) depends on having access to strategic information (see East Asia in Competing Civilizations);
  • Infrastructure requires far more than a 10 year plan - eg it needs competent institutions that have the mandate and the financial resources to address the issue (see Defects in Infrastructure Planning and Delivery in Queensland, 2002). The lack of financial resources is not a viable justification for private provision of infrastructure - because private investment is only viable on a user-pays basis, and government could equally increase its investment capacity by this means;

 Issues that Were Not Addressed

  • The lack of transparency about Queensland's financial predicament that has existed for a decade was not addressed by the Commission of Audit. Moreover the Commission proposed (p14) various methods to free up capital without outright sale public assets - and it is anything but clear that these would not result in misrepresenting the state's financial positions (as, for example, sale and leaseback arrangements can potentially do - see More creative accounting in Queensland?);
  • Queensland financial challenges can't be viewed in isolation, because: Queensland has limited tax sources (as the Audit Commission noted); so much of its revenue is currently derived from the Commonwealth; and the latter faces structural budget deficits that started several years ago and have only recently been acknowledged (see Global financial crisis). The latter points to: (a) committing revenues that were generated by an economic boom / bubble to social programs that that are difficult to unwind; and (b) the importance of those transfer to maintaining a reasonable degree of equity in the more competitive environment that was needed to boost economic adjustment and productivity. Those structural problems are likely to be compounded by populating aging (an issue that the Commission of Audit wisely recommended attention to) because: (a) aging increases health and welfare costs while reducing economic growth and available public revenues; and (b) population aging has international implications that are now starting to become apparent in Japan and Europe.

 

Addendum H: Comment on: Qld Government should sell assets – further spending cuts would weaken economy further

Comment on: Qld Government should sell assets – further spending cuts would weaken economy further - email sent 19/4/13

Gene Tunny
Queensland Economy Watch

While the Queensland Government is undoubtedly facing a financial crisis, the problems that this reflects are far broader than the budget.

The Commission of Audit’s analysis and solutions (which were limited to considering financial criteria) are a quite inadequate basis for solving the problem. The financial problems need to be dealt with, but in a much broader context (see Reforming State Governments: Does Queensland's Commission of Audit Have the Answer?)

There is little prospect that asset sales would improve the state government’s financial position if, as seems likely, the world now suffers a financial crisis that puts 2008 in the shade (eg consider: the apparently unsustainable global financial regime [1]; Europe’s unresolved sovereign debt problems [1]; Japan’s emerging crisis [1]; growing concerns about China’s debt problems [1, 2]; the unexpected crash in gold prices [1] which appears to mainly reflect a loss of confidence in ‘paper gold’ [1] that might affect financial systems in the same way as the 2008 sub-prime crisis; and uncertainty by reserve banks about whether the quantitative easing (that has kept the global economy afloat by providing cheap credit to governments / banks) should be ended because of its unforeseen consequences [1] – noting that one likely consequence of ending QE will be an escalation of interest rates that would drive many heavily indebted governments to default)

John Craig

Addendum I: More Important Choices for Queensland

More Important Choices for Queensland - email sent 16/4/14

Gene Tunny
Queensland Economy Watch

Re: Strong Choices poorly received by public – Treasury needs to do a lot more work, Queensland Economy Watch, 16/4/14

The concerns that your article expresses about the State Government’s ‘Strong Choices’ approach to resolving Queensland’s budget problems are appropriate. However the lack of available facts and logic implicit in the ‘Strong Choices’ process is merely a continuation of the non-transparent approach to budgeting that got Queensland into trouble. Moreover, while more work is needed to develop viable solutions, it would seem unwise to leave this to Treasury.

Your article suggested that the goal should just be to more effectively make a case for asset sales. However there is arguably a more pressing need to:

  • Develop principles for determining whether functions that are subjected to market failure should best be publicly owned or privately owned. Private ownership of public goods can require prescriptive regulation and is not necessarily the best option – quite apart from the risks you mentioned such as the public getting ripped off while ‘cronies’ make large profits. The complexities involved have been generally neglected in efforts over the past decade or so to encourage private ownership of ‘public’ goods (eg see Public-Private Partnerships for Infrastructure , 2002+). Government debt may be vital for the provision of some public functions (ie those subjected to real market failures) – and this needs to be evaluated rather than presuming that private provision is always an effective alternative;
  • boost the budgetary position of all governments by strengthening the economy so as to create stronger tax bases – eg using methods suggested in A Case for Innovative Economic Leadership (2009) and Reinventing the Regions (2010). Similar methods were developed by Queensland’s public service in the 1980s and were starting to be used with beneficial effects – but were disrupted by politicisation of public services from the early 1990s;
  • encourage reform of Australia’s taxation systems to: (a) reduce the complexities and costs associated with federal fiscal imbalances; and (b) provide states (who have most responsibility for encouraging economic development) with a financial incentive to take their responsibilities seriously – and thus to further strengthen tax bases overall (see Australia’s Future Tax System: The Opportunity to Fix Governments, 2009);
  • create more effective and efficient machinery of ‘government’. A great deal of Queensland’s debt constraints arose because governments sought to undertake their functions (eg a massive expansion of infrastructure spending) with machinery that had been rendered ineffectual (see A Dysfunctional and Difficult Environment). Key components of the systemic weaknesses that led to large cost the blow-outs and wastage that left Queensland with such high debts arguably included: (a) public service politicisation which led to an ongoing loss of the experience need for effective government and for the provision of a ‘reality check’ on wilder populist ideas (see Decay of Australian Public Administration, 2002); and (b) attempts to use business-like methods to undertake governments’ primarily non-business-like functions (see Governing is Not a Business). Poorly considered attempts to improve the efficiency of governments in the production of goods and services seriously reduced their ability to ‘govern’ – and thus at times contributed to expensive policy blunders (eg see Neglected Side Effects).

Dealing with Queensland’s debt constraints is not merely, or even primarily, a ‘budgetary’ problem. It thus can’t be resolved by those concerned with finance (eg by a Commission of Audit and / or Treasury). A much broader approach is essential (see also Reforming State Governments: Does Queensland's Commission of Audit Have the Answer?, 2013).

In particular Treasury should arguably not take the lead in dealing with Queensland’s debt problems because:

  • many of the initiatives that are probably needed to correct the problem are outside its jurisdiction;
  • the lack of transparency in ‘Strong Choices’ about Queensland’s debt problem and options is entirely consistent with the lack of transparency that has characterised Queensland’s budgeting for many years – especially in relation to the state’s capital accounts which include dealings with the assets that might now be sold (eg see The Need for Transparency, 2010). Present debt problems would have been nowhere near as severe if there had been more transparency in relation to Queensland’s capital accounts in the past (eg consider the mid-1990s practice of requiring GOC’s to borrow to pay large dividends to support Consolidated Revenue);
  • there are questions about Queensland’s past financial dealings that the Commission of Audit did not ask (eg see A Debt Binge? (2012) and Auditing the Commission (2012)). As your article suggested there are potential risks of corruption and patronage associated with the sale of public assets. And there are indications of conflicts of interest in relation to past privatisation proposals in Queensland that have not yet received public scrutiny.

I would be interested in your response to my speculations.

John Craig