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)

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 would inhibit the distortions of the capital account that an accrual accounting system has allowed 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.

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

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'?)

• a senior public servant suggested in the late 1990s (in a personal communication) that some years earlier, a minister (who had by then become very influential) had made unauthorised use of capital funds  for a department’s recurrent spending (a practice that some have described as the 'Worldcom' syndrome');
• a state Treasurer resigned in 2000 after concerns were reportedly expressed by his office about problems in Queensland’s budget;
• the risk of future fiscal difficulties was becoming obvious in 2001 (eg see About Queensland’s Budget’s, 2001, and Emerging Financial Problems: A Speculation in Queensland's Challenge, 2001).

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: 

• ensuring that states gain financial benefits from doing so by changes to Australia's taxation regimes (eg see Economic development incentives);
• endorsing protocols under which market oriented leadership of accelerated development within whole industry clusters becomes possible (eg see A Case for Innovative Economic Leadership and Reinventing the Regions); and
• considering the effect of migration on economic growth and demand for both labour and infrastructure investment (see Speculations about Queensland's Economic Predicament). Rapid population growth associated with high rates of migration seems to generate both: (a) labour shortages due to the labour requirements of 'migration industries' (see Developing Australia's Economy - The Role of Migration); and (b) a need for massive capital investments.

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).

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

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.

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

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

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.

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

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

Accounting Tricks Make it Impossible to Know Queensland's Real Financial Position - email sent 12/7/15

Gene Tunny,
Qld Economy Watch

Re: Accounting trick wouldn’t improve Qld Government’s real financial position, Qld Economy Watch, 10/7/14

Your article realistically pointed out, in relation to Steven Wardill’s article (‘Pitt’s Debt Trick’, Courier Mail, 10/7/15), that an ‘accounting trick’ (ie transferring $4.1bn of Queensland’s general government debt to government owned corporations - GOCs) does not improve Queensland’s real financial position.

However the issue is far more complex than this. Various different forms of ‘creative capital accounting’ have apparently been used in Queensland (presumably on Treasury advice) for almost 20 years (eg see Enronitis, 2002+). Requiring GOCs to borrow to fund general government spending was a very early example of this, and one that was relatively simple and transparent (see Emerging Financial Problems, 2001). However there have been many less transparent examples, and these (and the lack of any consolidating explanations and information) have made it essentially impossible to gain an understanding of the real status of Queensland’s capital accounts (see A Debt Binge, 2012).

The previous Queensland Government established a Commission of Audit in 2012 to review the state’s financial position. However the Commission took Treasury figures in relation to Queensland’s capital accounts at face value – and this was arguably naive as there were many reasons to doubt their reliability (see Auditing the Commission, 2012 and A Forensic Audit is Needed, 2012).

While it is desirable to challenge new ‘creative accounting’, it would be extremely unwise to ignore the fact that this seems to have been going on since the mid-late 1990s. And, in considering that risk, it would also seem desirable to recognise that:

• State Corporatism is a (widely-criticised) system of political economy under which the 'private' sector is viewed as an extension of the state. It is viewed as an alternative to both democratic capitalism and socialism. Corporatist practices have long had a place in Queensland’s political economy (eg as agrarian socialism) and similar thinking apparently emerged in the 1980s (eg in efforts to create a coordinated Queensland Inc under Treasury-supported state financial institutions) as alternatives to proposals (by the present writer and others) for the development of an effective market economy (see Dependence Characterises the Queensland Economy, 1994);
• politicisation in the early 1990s significantly reduced the effectiveness of Queensland’s public services (see Towards Good Government in Queensland, 1995 and Decay of Australian Public Administration, 2002); and
• the subsequent expansion of ‘corporatist’ arrangements gave private interests a significant stake and role in Queensland’s GOCs and state financial dealings – and these have potentially given rise to conflicts of interest (eg see apparent examples in Reform of Queensland Institutions: or a Rising Tide of Public Hypocrisy?, 2004+).

John Craig

Queensland's budget problems started MUCH earlier - email sent 20/6/16

Michael McKenna
The Australian

Re: Queensland ‘eight times more in the red’ since Bjelke, The Australian, 20/6/16

Your article pointed out that Queensland’s budget position has deteriorated over recent decades. However official budget figures do not provide a reliable picture of what has happened – especially in relation to the capital accounts and the consolidated position of the general government sector and government-owned corporations (GOCs). The following extract from your article is thus misleading.

“Budget figures show debt levels began to soar in the last few years of the Beattie Labor government, and then through the Bligh Labor government as it moved to meet infrastructure shortfalls and pay for services in the face of falling revenues.”

The reality is that Queensland had been on a path to budget problems from the mid-1990s when government spending started escalating (see Emerging Financial Problems, 2001 and Comments on 2001 Budget, 2002). In the 1990s Queensland had, for example, increased its capital spending to about 1/3 of the total for all states and committed large amounts to favoured programs that had never been seen to be available before.

However nothing showed up in official budget figures because spending was funded by raiding the balance sheets of GOCs and Enron-like methods of creative accounting were apparently in place (eg see Enron-itis, 2002; Queensland’s Debt Binge, 2012; and Accounting Tricks Make It Impossible to Know Queensland’s Real Financial Position, 2015).

There has recently been concern about Queensland Government efforts to deal with problems in its recurrent budget by extracting assets from, or transferring debts to, GOCs (eg see Remeikis A., Queensland may raid Defined Benefit Scheme surplus, Brisbane Times, 24/5/16). However, it needs to be recognised that such practices have a VERY long history. A more serious approach to strengthening Queensland’s economy (and thus the federal / state tax base) is arguably required to overcome these problems (eg see Queensland's Preference for Economic Futility, 2016).

John Craig