TOWARDS A PROFESSIONAL PUBLIC SERVICE FOR QUEENSLAND

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Email sent 25/5/09

Mr Andrew Fraser,
The Australian

Queensland's 2009-10 Budget Stress: The Tip of an Iceberg?

In a recent article you outlined the emerging public debate about Queensland's budget predicament

My interpretation of your article: Superannuation payments to Queensland public servants could be reduced to statutory minimum 9% and state's $50bn in assets are 'on the table' in considering Queensland's budget options. Revenue streams from mining royalties and property taxes have collapsed, leaving a projected $1.6bn deficit following original forecasts of $809m surplus. Deficits are forecast over next two years, with unemployment likely to rise 60,0000. WA government has cut 5000 public servant jobs to deal with budget damage. Bligh government wants to maintain jobs and $17bn capital works spending. Opposition Treasury spokesman (Tim Nicholls) said that LNP would adopt similar strategy to WA and that state's entire portfolio of ports, railways and power stations could be sold. Queensland differs from most states in having many GOCs - and both parties are considering asset sales. But LNP was concerned that asset sales now would yield only fire sale prices - and preferred to control public sector spending (Fraser A., 'State super in the budget firing line', The Australian, 25/5/09).

I would like to suggest that the difficult budget position is merely a symptom of much deeper problems facing government in this state. In particular:

• it is unrealistic to try to separate debate about the state budget from questions about the uncertain economic outlook;
• there were reasonable concerns about structural problems in Queensland's public finances before the most recent economic boom and bust;
• those concerns have been compounded by ineffectual management of massive spending on catch-up infrastructure; and
• whether or not serious market failures exist is surely more important in deciding whether to privatise GOCs than the price that might be obtained for them.

These points are explored further below.

Good luck in your efforts to further promote public awareness of the strategic issues involved in Queensland's forthcoming state budget.

John Craig

Details Regarding the Above Dot Points

A: Relationship with the Economic Outlook

Queensland's economic outlook and budget position depends on the world's recovery from the global financial crisis (GFC) - and particularly on the mineral and energy exports expected from future growth in Asia. The federal government is experiencing financial difficulties partly because spending commitments were entered into on the basis of revenues generated during an unsustainable economic boom (see Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government ). Queensland appears to have yielded to the same temptation (see comments on 2005-06 budget).

Thus serious assessment of the prospects for global recovery and future growth in Asia must be central to any debate about Queensland's budget. Yet this does not seem to be being publicly mentioned by anyone.

The present writer's suspicion is that there may be structural problems in the way of easy recovery (see Are East Asian Economic Models Sustainable?). If so, then creating well-paid jobs and maintaining the levels of public spending to which the community has become accustomed requires more than simply waiting for the pre-GFC economic environment to be restored. Options to create an environment in which business would be more able to take the lead in recovering from recession (and, by doing so, to boost employment and tax revenues) are outlined in A Case for Innovative Economic Leadership

B: Pre-existing Budgetary Concerns

Queensland's budget was apparently already headed for trouble before the GFC made economic growth uncertain. There were grounds for suspecting structural difficulties before these were eased by the post-2000 economic boom (eg see Emerging Financial Problems, 2001), and that these were being papered over by dubious capital accounting practices (eg see 'Underlying Pressures for Increased State Taxation').

C: Mismanaging Infrastructure

Those difficulties have been compounded by mismanaged catch-up infrastructure spending in recent years. The problem seems to be that;

• large amounts that have been borrowed for 'catch-up' infrastructure spending have apparently not always been effectively spent (eg consider Structural Incompetence and SE Queensland's Water Crisis; and Brisbane's Transportation Monster) because Queensland's machinery of government has been ineffectual. Public administration has suffered (for example) from: (a) deskilling of public services to ensure unquestioning political compliance; (b) unrealistic centralised strategic planning; and (c) fragmentation of functions in an attempt to make delivery of goods and services more 'business-like' (see The Growing Case for a Professional Public Service and Chronological Summary of Documents);
• large (eg 30%) cost blow-outs seemed to emerge because high rates of public infrastructure spending overlapped a private resource investment boom.

Moreover catch-up infrastructure spending was needed in the first place because of defects in national and state machinery of government (see How Queensland's Infrastructure Management System Deteriorated). For example, infrastructure backlogs emerged in the 1980s and 1990s because: (a) especially since the 1970s, federal-state financial imbalances have seriously reduced the ability of state governments to take real responsibility, or be held democratically accountable, for their functions; and (b) amateurish attempts at administrative 'reform' in the early 1990s further eroded the public sector's ability to produce practical results (see Towards Good Government in Queensland, and Mismanaged Reform). There has, as yet, been no serious attempt to remedy the underlying causes of these problems.

D: Market Failures and GOCs

An aside (added later): Current bipartisan proposals to sell state assets (eg GOCs) to fund Queensland Government spending are not new. In the 1990s GOCs were frequently required to substantially increase their debt levels in order to pay special 'dividends' to Treasury. That often-criticised tactic amounted to partial 'sale' of those GOCs..

The price that might be obtained should not be not the only issue in considering selling major government assets.

In an attempt to to improving the efficiency of public sector functions in the early 1990s, the 'reformist' Goss administration corporatised various major functions (ie it created government owned corporations (GOCs) for ports, railways, electricity. water).

This was unwise as politically accountable organisations (which are subject to interest group pressures as well as to customer demands) can never succeed commercially in a competitive environment (eg see The Limited Economic Effect of 'Commercialization', and Government Business Enterprises). The creation of GOCs was a only a temporary way of avoiding the question of whether affected functions suffer real market failures. Where there is no significant market failure, there is no reason for government ownership / operational control. But functions which do suffer major market failures can't satisfactorily be privatised and should be undertaken by non-commercial public sector entities. The problem with privatising functions subject to market failures was illustrated by the case of Dalrymple Bay Coal loader.

In parallel with corporatisation, the Goss administration introduced arrangements to promote efficiency by 'commercializing' the operations of other service providers The practical result was that the structural separation of 'purchasers' (who had the responsibility) and 'providers' (who had the technical skills and coal-face knowledge) was one factor in the fragmentation of responsibilities that left no one in a position to plan infrastructure. The whole exercise arguably reflected a failure to seriously consider the nature of government (see Governing is not Just Running a Large Business).