Opinion & Commentary
NSW needs more bang for the bucks it spends
It is well known by now that New South Wales state finances are at a crunch point and that the Rees government’s solution is to be unveiled in a mini-budget this week. It is less clear that the forces driving the state’s budget to this point are well understood.
The torpedoing of the Iemma/Costa plan for electricity industry privatization has forced the number crunchers back to the drawing board. Apparently there is to be a watered-down, union-approved version of privatization, and the mini-budget will reveal how the government is to rejig its infrastructure plans to fit the shrunken envelope of privatization proceeds.
But that is secondary to the fundamental and long-running problem of too much spending for too little public benefit. This budget crunch has been festering for years. The facts challenge the conventional wisdom that the Carr government was tight-fisted, let alone its successors. A pattern of high spending goes back to the 1990s. The reputation for restraint that survives from that era is mythology with just a grain of truth.
The starting point is arbitrary, but if we take the year 2000, the ongoing annual running costs of the state government took five years to go from roughly $30 billion to $40 billion. They are now well on their way to $50 billion. The rate of increase has more than kept pace with the growing state economy and exceeded underlying revenue growth. The budget has not just now gone into deficit; it did so four years ago according to the definition that the government favoured then (but dropped when it became inconvenient).
Carr and his Treasurer Egan were lauded at the time by fiscal conservatives but are now taken to task for having worshipped at the temple of the triple A rating, sacrificing decent services and infrastructure in the name of debt elimination. The grain of truth in that account is that they kept a tight lid on capital (nowadays known as ‘infrastructure’) spending, notwithstanding the capital costs of the Sydney Olympics. But operating expenditure, which is ten times larger, grew strongly. Debt was only able to be reduced simultaneously because revenue was galloping ahead. Even so, by the time the Sydney real estate boom drove revenue to peak strength five years ago, the government’s spending had increased so much that the surplus (as then defined) had disappeared, leaving no cushion for the inevitable downturn. It would have been like the Commonwealth government having no surplus at the peak of the boom.
The end of the real estate boom brought an abrupt end to the government’s revenue bonanza. With no cushion remaining, the budgetary cracks were exposed. Recent events were the last straw. While operating expenditure has continued to expand almost as fast as before, capital spending has been released from its shackles, almost doubling in five years. The waves from the global financial crisis have sent stamp duty revenue into a dive in recent months as big commercial real estate transactions have dried up and the residential sector has softened. And now GST revenue prospects are dimming.
The kind of deficit that has now emerged is an excess of current expenditure over revenue; in other words, the state faces the prospect of borrowing to pay wages, not just borrowing to fund the capital program. New South Wales has not been close to this situation since the early 1990s, when the mother of all real estate booms collapsed. Stamp duty revenue fell by 30 per cent in one year – a reminder of what the government could face now.
For all that, the problem is manageable. The state doesn’t have a debt problem; it has the beginnings of one. Having a deficit as such is not the issue; it’s a question of what causes it, how big it is and how long it lasts. The fall in revenue is cyclical; the high level of spending is structural. The remedy is to cut back on recurrent spending, which means sacrificing sacred cows, restraining public sector pay and overcoming the resistance of public sector unions to efficiency-boosting changes in work practices and staffing levels. State services are found wanting not because there is insufficient spending but because the spending lacks bang for the buck. In this situation, there is no excuse for taxes to be increased, or for new taxes to be dreamt up as in the past, or for New South Wales to follow Queensland’s short-sighted coal royalties grab.
There are those who think that the only thing to be sacrificed should be the AAA credit rating. It is easy to poke fun at New York based credit ratings agencies with funny names and tattered reputations, but they still have an influence, if only because there are no alternative sources of the essential financial market information that they provide. Attractive though it may sound, trading in the top credit rating for a bit more infrastructure would be a risky proposition. While many governments around the world (including some Australian ones) have endured downgrades in the past, strategically engineering one would make Rees and Co. look like turkeys dressing themselves for Christmas. Apart from their role in financial markets, credit ratings also influence business confidence and decisions on whether a new investment should take place in this or that state. If New South Wales were to volunteer for a downgrade, you can be sure that the states around it could barely conceal their glee.
Robert Carling is a Senior Fellow at the Centre for Independent Studies.
