1. Instability Resulted from Failures in Managing 1990s' Economic Change

The social stresses and political instability that have appeared in Queensland have economic causes as suggested in Defects in Economic Tactics, Strategy and Outcomes. 

In brief, this argues that there has been general recognition since the early 1980s of the need to strengthen and diversify Australia's economy into higher productivity activities - because of the slow growth and poor terms of trade of traditional resource-based commodity exports. Neo-liberal ('free-market') policies were generally adopted to facilitate change.

However, at the same time, competitive pressure from newly industrialized countries forced developed economies to switch from industrial-era economic tactics to a "new" / knowledge-based economic style. This raised the goal-posts for Australia's economy.  In particular, because of the need to shift to a 'knowledge' economy, the economic development tactics of an 'industrial' economy were no longer adequate.

Despite this, during the 1990s Queensland continued its traditional policies (low taxes and supporting 'major projects') that had the effect of encouraging the growth of low productivity industries and continued using industrial-era economic tactics in seeking to promote 'development'. The result was poor overall economic performance ⁽³⁾, and that marginal rural, coastal and metropolitan regions, whose traditional industries were under pressure, faced an impossible challenge. Thus under-employment (and high unemployment) became a major problem, leading to social stresses and to the political instability revealed in the One Nation phenomenon ⁽⁴⁾.

In simple terms, 1990s attempts at economic change failed because exposure to competitive pressure was not enough to ensure the ability to compete successfully. Systematic development of stronger practical and economically relevant support  through the market by stimulating informed leadership within industry clusters was a feasible alternative - and would have dramatically improved the performance of the mainstream economy and the plight of marginal regions. 

2. Recent Economic Strategies have not been Not Doing Much Better.

The first Beattie Labor Government, like its predecessor in a 1997 State Economic Development Strategy, officially recognised the vital importance of developing Queensland's economy. In late 1999 a plan, Innovation: Queensland's Future, suggested an ambitious goal of making Queensland into a world leader in innovation.

The goal of a stronger innovation capability was desirable. Innovation is the main way of creating economic value from knowledge, and knowledge is generally seen by economics as the main factor in economic growth (especially in 'new' growth theories). Thus a sound commercial innovation capability in Queensland's regional communities would reduce many current social and political symptoms, because it would enable regions to profit from, rather than be hurt by, globalization and economic change. Such a goal was also consistent with the Smart State theme of the State budget, and seemed to be part of a whole-of-government program being orchestrated by the Department of the Premier and Cabinet to 'reposition' Queensland globally in the knowledge economy.

But, despite the draft plan's good intentions, much of the innovation infrastructure it suggested could (at best) provide costly 'toys' for the political system (ie Ministers and established interest groups) to play with, rather than being commercially relevant ⁽⁵⁾. There were also risks that a politically based push to 're-position' Queensland could unwittingly de-skill its innovation capabilities, just as political efforts to 're-engineer' the Public Service (theoretically to make it business-like) did to the Service's professional skills in the early 1990s (see Section 5 below). The reported ten year $1bn strategic commitment to information technology could have a similar outcome, despite the enthusiastic support it has reportedly gained from benefited interest groups ⁽⁶⁾.

Moreover there is clear evidence that without more successful efforts to develop the economy (ie to upgrade the ability of the economy to initiate and support higher value-added enterprises), the market-relevant demand for high quality human resources or for R&D will remain inadequate. Thus the efforts that various governments are making to increase the supply of higher quality human resources (eg under 'Smart State', 'Knowledge Nation' or 'Backing Australia's Ability' type strategies) must just accelerate the 'brain drain' ⁽⁷⁾. And what is the point of large spending on vocational education and training if the economy is not able to generate enough appropriate jobs ⁽⁸⁾.

The adoption of trendy goals, that can have little useful real-world impact, reflects the limitations of the advice and implementation techniques that have been available to government. The resulting damage to Queensland could be enormous, because:

3. Even More Fundamental Economic Change is Looming

Resource-based industries were a major part of investment in regional Queensland during the 1990s - but resource investors generally achieved very poor returns. The reasons for this may well be structural rather than cyclical (eg firms tried to create competitive advantages using capital intensive strategies when their competitors were mainly in less developed countries, which manufacturing industries had found to be impossible in the 1970s) ⁽⁹⁾. Thus, as current committed projects are completed, the next round of such investments may be much smaller than expected - unless firms finds a way to reinvent their industry clusters to achieve higher productivity (see below).

As well as competitive challenges, some important industries face other constraints eg (a) on land access due to native title - noting that, despite high oil prices and contrary to expectations, oil exploration expenditure in Australia has not increased - apparently because of complex environmental and native title requirements ⁽¹⁰⁾ (b) from land degradation in some regions ⁽¹¹⁾; and (c) on energy intensive production and land clearing from greenhouse emission controls ⁽¹²⁾. While the impact of the latter is uncertain, some analysts estimate very large adverse effects ⁽¹³⁾.

The widespread expectation that resource strengths might now attract investment in 'value-adding' to food and mineral production has often been ill-informed. The 'production focussed' (as compared with value creation) attitudes, which have dominated mining firms ⁽¹⁴⁾ and contributed to their poor returns, appear to have applied equally in efforts to promote mineral value-adding. In Queensland (for example) value-adding to mineral production has been defined as downstream processing ⁽¹⁵⁾. However downstream processing only adds economic value if the increased price of the processed commodity exceeds the cost of the processing. This is not assured, and depends entirely on the competitive environment, where again industrial-era (ie primarily capital intensive) strategies are now unlikely to be effective.

Such sectors might be reinvigorated by more effective institutions for stimulating overall development of clusters of production, processing, and supporting activities. They would need to be able to give business-like attention to capabilities that would enhance competitive advantages available to firms, rather than focusing on simple production / processing issues.

Clearly unless economic changes are faster and smoother than during the 1990s, the level of social stress and political instability must rise further. The fact that many seem to believe that change can be avoided shows how hard this challenge is ⁽¹⁶⁾.

This situation is further complicated by the new economic paradigms which are being applied by important trading partners in East Asia, which differ markedly from the consumer-oriented democratic capitalism with which Australians are familiar ⁽¹⁷⁾.

4. Queensland's Parliament has not been a Serious Institution

In this environment Queensland's system of government has been failing.

Observers have periodically made uncomplimentary remarks about the standards and behaviour in Queensland's Parliament ⁽¹⁸⁾. The antics of some members and ministers have suggested that they did not believe Parliament was a serious institution or very relevant to community welfare.

There are two reasons that Members could have seen Parliament as having limited relevance. The first was the dominant role the Executive (eg ministers and government agencies) had always had in governing Queensland. Thus the Legislature (Parliament) was comparatively unimportant. The second reason was the limited number of independent institutions which Queensland has had to put forward policy 'raw material', which Members could use to develop realistic proposals for better government ⁽¹⁹⁾.

Both the above characteristic arguably resulted from Queensland's economic reliance on natural resource strengths, and the secondary importance of the community's economic contribution ⁽²⁰⁾. As 'success' has been seen to be easiest when autocratic Governments 'followed orders' from outside investors, independent economic and public policy institutions were not prized - even though the latter might: allow economically valuable competitive advantages to emerge in the community; and provide 'raw material' to Members of the Legislative Assembly (and others) for realistic policy debate.

Where the government Executive was the best available (but still a very weak⁽¹⁹⁾) source of information, then Parliament could do virtually nothing to guide Executive government's activities. So if Members engaged in 'childish' antics .... who cared?

To date this situation has led to farcical politics and to some disrespect for Queenslanders ⁽²¹⁾. However it has increasingly become (a) an opportunity for undesirable influences to gain power ⁽²²⁾ (b) an obstacle to diversification into higher value-added economic activities as the latter requires knowledge (not capital) intensive production and (c) an increasingly obvious source of political instability ⁽²³⁾ - due to the economic origin of many of the stresses facing the community.

The absence of institutions to identify constructive new alternatives also threatens to make the 'banana republic' a reality, because  it leaves the responsible community floundering when desirable policy directions are not obvious, and thus clears the path for political populism - which is a milestone on the road to 'banana republicanism' ⁽²⁴⁾.

This situation has been compounded by a general disillusion with the political process, and a loss of popular participation which may have made electoral rorting a profitable option ⁽²⁵⁾. 

5. Queensland's Public Administration was Seriously Damaged

Numerous recent public allegations imply that a grubby, self-serving manipulative culture has permeated a dominant faction within the Australian Labor party, ie the AWU, and affected the filling of some important political positions⁽²²⁾. While the claims to the Shepherdson inquiry have been only partially tested and while legal obstacles appear to prevent many prosecutions ⁽²⁶⁾, concern about 'thuggish' practices for gaining and maintaining power within the AWU itself were raised in an inquiry a few years ago ⁽²⁷⁾.

Because of this it is essential to recall that under the Goss Government staffing of the ministerial offices was AWU (ie Premier's office) controlled, and that Public Service 'reform' (which was directed by those ministerial offices) had a similar flavour to recent public allegations about practices within the ALP ⁽²⁸⁾. It beggars belief that a virtuous distinction would have been drawn between a whatever-it-takes approach to gaining key political positions and due respect for professionalism in filling Public Service positions. And, in fact, some have claimed that no such distinction was made ⁽²⁹⁾.

The (so-called) reform of the Public Service in the early 1990s largely eroded the relevant knowledge, skills and experiences of that body (see Towards Good Government in Queensland ⁽³⁰⁾). Attachment A to the latter paper noted similar conclusions by other observers.

Towards Good Government in Queensland took the view that most of the problem arose from the relative inexperience and ignorance of those charged with managing 'reform'. However practices such as have now been alleged to have been used politically inside the ALP did seem to be being used by Ministerial offices against the professional Public Service - presumably in order to secure the power base of the inexperienced. Unfortunately the process of (alleged) reform of the Public Service was neither 'straight' nor effective ⁽³¹⁾. Furthermore the damage thus done is very hard to reverse ⁽³²⁾.

The resulting lack of realistic advice and effective policy implementation (invisibly) led to the 1995 downfall of the Goss administration - and to the poor responses to strategic challenges whose symptoms have been social stresses and political instability. The problem was not solved either (a) by the Borbidge Government - which tried to restore practical competence, but did not adequately deal with the strategic challenges or the erosion of senior-level knowledge and skills or (b) by the first Beattie Government - which installed a virtual reincarnation of Queensland's 1995 administration.

These historical issues continue to prevent progress as the lack of any real requirement to consider merit in Public Service staffing has not been resolved ⁽³⁹⁾.

6. Administrative Disorder

There are many indicators that Queensland's Public Service, and thus Queensland's system of public administration generally, have been in serious difficulties. For example:

• administrative machinery has been constipated (ie restrictively complex in areas such as Cabinet and budget processes, and in methods used to authorize investment) ⁽³³⁾;
• there has been no effective way of planning infrastructure ⁽³⁴⁾. This has been a critical defect given high capital works spending and the effect on public finance of the balance sheets of trading enterprises competing in infrastructure markets (see below);
• Public Service politicisation has had bipartisan political support ⁽³⁵⁾, though there are technical reasons to expect politicisation to often lead to de-skilling from the top down ⁽³⁶⁾ and to a massive loss of intangible public assets ⁽³⁷⁾. However concerns about the effect of politicisation have started to be recognised ⁽³⁸⁾;
• for a decade there has been no real requirement to base Public Service appointments on merit ⁽³⁹⁾, and thus no way to establish the professional credibility of the Service;
• the Ombudsman's growing workload suggested systemic defects in Queensland's system of administration to an academic reviewer ⁽⁴⁰⁾;
• a Criminal Justice Commission survey of public perceptions of the Public Service was seen by another academic observer as reflecting widespread disenchantment ⁽⁴¹⁾;
• the granting of an Internet casino licence to GOCORP showed that extremely foolish recommendations could emerge without any obvious procedural failure ⁽⁴²⁾; and
• many anecdotes from experienced observers suggested an emerging shambles ⁽⁴³⁾.

Furthermore the corporatisation / commercialisation model adopted for much of the public sector in the 1990s must lead to a constant worsening of the now-emerging public financing problems (see below). Also the government-as-a-business model has eroded the ability of the Public Service to advise on, or contribute to, effective governance.

A suggested approach to Renewal of Queensland's Public Service on a professional basis is available ⁽⁴⁴⁾.

7. Emerging Financial Problems: A Speculation ⁽⁴⁵⁾

Queensland has had a reputation for sound financial management, and strong public finance ⁽⁴⁶⁾. For government as a whole ⁽⁴⁷⁾ 1998-99 revenues and expenditure were $21.5bn and $20.7bn respectively, and net state assets were assessed as $57.7bn at 30/6/99 (the difference between $96.6bn in assets and $38.9bn in liabilities) ⁽⁴⁸⁾.

Despite this, indications of public finance problems have emerged. For example:

• the Commission of Audit forecast in 1996 that Queensland's financial position would deteriorate due its weak tax base and fast growing demands for services ⁽⁴⁹⁾
• spending increased VERY fast in the four state budgets to 1998-99, concerning which the new Labor Government stated that it (ie the Coalition's final budget) had been unsustainable ⁽⁵⁰⁾.
• the Beattie Government then further increased, rather than reducing, spending ⁽⁵¹⁾, and entered into unusually large commitments to achieve 'strategic' economic goals ⁽⁵²⁾;
• budget capital spending now appears to be dependent on stripping about $2bn in assets from Government Owned Corporations (GOCs) each year ⁽⁵³⁾ - a process which can not continue much (any?) longer despite a misleading implication in the 2000-01 budget papers that equity return is now a normal revenue source ⁽⁵⁴⁾. In particular:
  • the deficits of GOCs have reportedly increased significantly between 1998 and 2000 ⁽⁵⁵⁾ - apparently due to declining earnings ⁽⁵⁶⁾ and increased borrowings to supplement the general state capital budget as well as funding capital works;
  • the net value of equity in government's trading enterprises (GTEs) has fallen from $17.1bn in 1995⁽⁴⁹⁾ to $11.8bn in 2000 ⁽⁵⁷⁾. This shows (a) the effect of 'stripping' GTE assets ⁽⁵⁸⁾, (b) the adverse effect of a new accounting standard when used to value some water assets ⁽⁵⁹⁾ and (c) how small the base for asset 'stripping' is ⁽⁶⁰⁾.
• claims about the state's balance sheet (ie net assets after deducing liabilities) and continued growth in net assets have been based on an old practice for valuing assets (ie one based on their cost rather than what they produce) which gives a misleading impression from a financial viewpoint. A soon-to-be-adopted new standard could allow government's asset position to be more realistically (and less favourably) assessed ⁽⁶¹⁾;
• the 1999-2000 state budget started in a cash deficit for the first time in 20 years, and an underlying $1.6bn cash deficit was suggested to exist in 2000-01 ⁽⁶²⁾;
• Queensland seemed set to lose its status as a net beneficiary of interstate financial transfers through Commonwealth payments to the states ⁽⁶³⁾. This is likely to offset the financial 'sunshine' which some had expected the state to enjoy as a result of the introduction of a Goods and Services Tax ⁽⁶⁴⁾;
• resources available to the health system appeared unable to meet current demands ⁽⁶⁵⁾;
• the Auditor General has expressed reservations about the viability of numerous small entities as going concerns ⁽⁶⁶⁾;
• anecdotal evidence suggested that all departments were constantly pressed to find savings - resulting at times in the deferral of essential maintenance spending; and
• the Treasurer appeared to have been unhappy about the 2000 budget outlook ⁽⁶⁷⁾, and then unexpected announced his intention to resign ⁽⁶⁸⁾. Both he and the Premier stressed that Queensland could not afford new initiatives as part of the 2001 election campaign - a fact which was blamed on unforseen pay rises granted to teachers.

A number of reasons can be suggested for Queensland having financial difficulty.

First, for historical reasons, Queensland does not have a strong tax base relative to the demands now likely on the public sector. This arose partly from rapid growth and partly from Commonwealth / State financial arrangements whereby the Commonwealth had access to the major growth taxes (especially income taxes), and states were financially dependant and had to rely on a narrow tax base. Because of this, and for other reasons, Queensland developed an economic structure dependant on low taxes ⁽⁶⁹⁾, and also has, what some see as, a backlog in public capital that now requires catch-up spending ⁽⁷⁰⁾.

Queensland's regional predicament further adds to the revenue / spending imbalance. The state's large geographic spread and social / economic problems in many marginal regional economies, led to capital spending concentrated in remoter regions - though this may make it impossible to fully meet economically significant demands in SE Queensland as well ⁽⁷¹⁾.

Second, Queensland governments greatly increased their spending in the four budgets to 1997-98⁽⁵⁰⁾ - perhaps because accrual accounting ⁽⁷²⁾ led to the view that large under-utilised resources were available in GTE's assets ⁽⁷³⁾. High spending also gained popular acclaim ⁽⁷⁴⁾. Ultimately large amounts of GTE assets were 'burned' in the two budgets to 1999-2000 to maintain that spending, and this process can not continue much (any?) longer.

Third, accounting standards (which are too generous in the way economically unproductive assets are valued) have continued to be applied and have given a misleading impression of the state's balance sheet from a financial viewpoint. A new soon-to-be-introduced valuation standard seems likely to present a more financially realistic, and less comfortable, picture⁽⁶¹⁾

Finally, corporatisation and commercialisation were introduced as ways to manage government's 'businesses' with a view to increasing revenue. Predictably competition has been causing prices (and revenue) to decline. In future this problem must get worse because:

• falling prices (which would normally eventually restore revenue by rapidly increasing market demand) can presumably not be allowed to do so for key electricity GTEs due to greenhouse constraints⁽¹²⁾;
• some GTEs may require a large injection of capital from the state budget to meet the challenges of commercial competition (eg to finance diversification, and ensure a prudent balance between debts and asset values as revenues are eroded by competition) ⁽⁷⁵⁾;
• 'nationalised industries' (ie all Queensland's government businesses operating under competition) must be expected to incur serious financial losses in the longer term ⁽⁷⁶⁾.

Furthermore these arrangements create conflicts of interest for ministers. For example: (a) information ministers gain as 'shareholders' about GTE's financial predicaments may have adverse serious implications for public finances⁽⁷⁵⁾ and yet be too commercially sensitive to make public; and (b) GTE's commercial goals may conflict with economic (and other) objectives ⁽⁷⁷⁾.

The difficulties speculated above have no easy solution. The current level of overall state spending is simply too high relative to the existing tax regime (by say $2bn pa⁽⁵³⁾) and, in addition, some GTEs may soon require a large (multi $bn) injection of public capital⁽⁷⁵⁾.

Obvious options to improve the situation are: raising efficiency (eg as suggested in 1996 by the Commission of Audit⁽⁴⁹⁾); reduced spending; increased taxes; expanding the tax base; borrowing for capital works; or privatising soon-to-be-costly enterprises ⁽⁷⁸⁾.

However, those options are constrained:

• efficiency gains are unlikely given disorder in public administration - see Section 6 above;
• reduced spending does not seems to be a politically popular option⁽⁷¹⁾. And optimists have called for even higher capital spending as the best way to strengthen the economy ⁽⁷⁹⁾;
• higher taxes could cut growth and jobs because past Governments fostered an industrial structure with low value-added activities dependant on low taxes. Also Australia's tax rates are already high by international standards, and the Bush presidency in the USA is likely to create a global ⁽⁸⁰⁾ expectation of lower taxes; and
• expanding the tax base would be least painful through developing a more productive economy. However, as suggested in Section 2, this has not been being achieved.

And borrowing on the general government account may not be simple either, because taxes that Queensland can influence would have to rise to service new debt. A 10% tax rise might be the maximum acceptable, and only allow a few $bn to be borrowed ⁽⁸¹⁾. Commercialisation of (about 1/3 of) the public sector has also cut the total debt that the Public Sector as a whole can sustain - because associated revenue streams are now less certain due to the effect of competition and market cycles ⁽⁸²⁾. However the latter is not a significant constraint.

Finally the option of privatisation, to avoid asking taxpayers to inject the new capital GTEs will need for commercial competition, is increasingly problematical. Some years ago the market value of electricity assets was reportedly greater than their book value (ie than depreciated replacement cost)⁽⁴⁹⁾. However those market values are now unattainable - due to the growing intensity of competition and the losses experienced by investors in such assets elsewhere ⁽⁸³⁾.

8. The Lack of Realistic Political Proposals

The difficult issues outlined above (and others which can be identified ⁽⁸⁴⁾) require a strategic response from Queensland before there is any credible prospect of success in meeting the community's very practical 'bread and butter' expectations ⁽⁸⁵⁾. Yet they have not been on the agenda of the main political parties ⁽⁸⁶⁾ - and thus the policy proposals advanced in the 2001 state election campaign had little realism. In particular:

• the ALP (and many community leaders) gave the naive impression that they were generally content with the way Queensland has been going ⁽⁸⁷⁾; and
• the Coalition also seemed unwilling to 'rock the boat'. It seemed to intend, if it had gained government, to do more-or-less what it did after the Goss Government fell ⁽⁸⁸⁾. This proved insufficient ⁽⁸⁹⁾ and social stresses and political instability increased. Such an approach would have been even less successful in 2001 as underlying difficulties are more serious ⁽⁹⁰⁾.

Following the Coalition's electoral defeat, its leader (in resigning) reversed the general thrust of its election policies by stating bluntly that the real problem was that economic change has been very badly managed in Queensland ⁽⁹¹⁾.

Unless Queensland's community now seeks, and finds, practical solutions to the underlying causes of political instability, the latter is likely to grow rapidly. Though the extent and nature of these problems would be obscured by a lack of reliable publicly-available information, and the current weakness of organised political opposition, the long-suffering public seems unlikely to tolerate mere good-intentions forever ⁽⁹²⁾.

A lack of practical solutions would be an open invitation to a desperate electorate to provide even greater support to those with crackpot or extremist proposals.

To overcome this risk probably mainly requires realisation that political popularity alone is not enough to ensure that a government is competent to achieve real results⁽³⁶⁾.