Opinion & Commentary
Standard and Poor’s has given NSW the benefit of some major doubts
The NSW government, in its 2009–10 budget announced last week, claims to have charted a course back to a budget surplus by 2011–12.
The budget has won approval from Standard & Poor’s, the credit rating agency, which promptly removed the guillotine it had placed above the state’s AAA rating late last year. In doing so, Standard & Poor’s must have given NSW the benefit of some major doubts.
Post-budget commentary has focused on the forward estimates of expenditure, which assume a degree of restraint that has been lacking in the past. But there is also a credibility gap in the revenue estimates. Transfer duty revenue (aka stamp duty on conveyances) is estimated to jump by an eye-popping 44% in 2010–11. This alone contributes $1,200 million to deficit reduction.
It is true that transfer duty revenue is extremely volatile and that a rebound is likely from current depressed levels, but a 44% increase in one year would be at the extreme end of the range of possible outcomes. For it to happen in 2010–11, a boom in the Sydney property market would need to be under way this time next year. Anything is possible, but revenue estimates should be based on the most likely scenario, not the best possible one. The NSW budget estimate for transfer duty revenue must be among the most heroic ever used in an Australian budget.
The expenditure estimates are also bold. The budget assumes that total expenditure, having galloped ahead at an average 6.6% increase a year in the ten years to 2009–10, will suddenly drop back to a 2.9% average in the following three years. This is based on the standard no-new-policies assumption, but it also assumes efficiencies of 1–1.5% a year, to be achieved through a line-by-line review of existing program costs.
There is no doubt that the growth of expenditure should slow and that efficiencies can be found. But this is not the first time the forward estimates of expenditure have been built on such hopes. The track record justifies doubts as to whether the outcome will be any different this time.
Vague promises of efficiency savings far into the future are one thing. A surer way to curb the growth of spending would have been to cut out some existing programs. But this is much more confronting to the electorate and not something the state government shows any appetite for. Efficiency savings are behind the scenes, remote from voters and easier to present as harmless to so-called ‘front line’ services.
Leaving aside doubts about the budget estimates, there is an important sense in which the budget will not return to surplus as claimed. After all, how can a state pull this off three years ahead of the Commonwealth, when they both face the same economic headwinds? Part of the answer is that NSW (along with the other states) defines its budget bottom line in a way that makes it easier to report a surplus. It used not to do that, but shifted the goalposts in 2004 to avoid embarrassment when the stricter definition went into deficit after a run of surpluses.
If NSW presented its 2009–10 budget in the way that it did until 2004 and in the same way as the Commonwealth still does now it would have projected a deficit of $4,695 million next year (not the headlined $990 million) and deficits (albeit diminishing) in each of the next three years. There would be no return to surplus to boast about.
The states define their budget bottom lines as the ‘net operating result’ whereas the Commonwealth defines it as the ‘underlying cash result’. The state measure isn’t wrong; it just doesn’t tell the full story. It counts annual depreciation of physical capital as an expense but excludes capital outlays (or what they now call ‘infrastructure’) from expenses. This is convenient when outlays on new physical capital far exceed depreciation of existing capital, as is the case now.
Standard & Poor’s understands the difference between an operating surplus and a cash surplus and would not have been swayed by government rhetoric, but the public also deserves to be told the full story. Most people would think that if the government is continuing to increase its borrowings – as it is over the full four years of the forward estimates – then it must be in deficit for those four years, as indeed it is on the cash measure.
Being in deficit for the next four years is not necessarily wrong. The timing of NSW’s return to budget balance or surplus is a matter for debate, but that debate needs to be fully informed by the facts.
Robert Carling is a Senior Fellow at CIS and a former state and federal treasury official.
