Issue Analysis
Tax, Borrow, Spend: How the States Compare
This report evaluates and compares the recent performance of the six Australian states in fiscal management, covering indicators such as debt, other financial liabilities such as unfunded superannuation, government spending, public sector job numbers, and taxation.
Fiscal management isn't everything; it says nothing, for example, about the quality or efficiency of government services or how much taxpayer money is wasted. But sound fiscal management is an essential platform for efficient delivery of quality services and a stable climate conducive to private investment.
The assessment in this report is based on a limited government perspective, which takes the view that lower levels of government spending, taxation and debt are desirable, while not rejecting a manageable level of debt. The assessment is also based on both the latest position of each state (in 2009–10) with respect to the relevant indicators and trends over time (three years to 2009–10)—the latter showing how state governments have managed the impact of the global financial crisis.
Broadly speaking, none of the Australian states is in poor financial condition. They all have the prized triple-A credit rating except Queensland and Tasmania, and even their rating of AA+ would be the envy of many comparable sub-national governments in other countries such as the United States. The overall trend of the last three years, however, has been one of deterioration driven by strong growth in recurrent and capital spending in addition to losses on financial assets inflicted by the global financial crisis. The latter may self-correct over time, but the strong growth in spending will need to be actively curbed if the trend deterioration is not to continue. In the three years to 2009–10, growth in real per capita spending (that is, after allowance for inflation and population growth) averaged 4.2%, which was much faster than real per capita growth in Gross Domestic Product.
With the growth in spending a common factor, the differences in fiscal performance among states are mainly the result of other forces. Surprisingly, Tasmania scores best in terms of trends over the three years. This is because it has had the smallest increases in debt and other financial liability burdens, while not increasing taxes and in some cases lowering them. Looking at where Tasmania's position ended in 2009–10, it remained mediocre, reflecting deep-seated weaknesses that could only be overcome by more years of improvement.
For all the other states, their average trend score was weaker than their average position score. The largest three states—NSW, Victoria and Queensland—earn particularly poor trend scores because of large increases in debt and other liabilities. In addition, NSW and Queensland have been increasing taxes more than reducing them. As a result NSW ended 2009–10 in a mediocre position, having dissipated some of its previous strength, while Queensland slipped to equal lowest with South Australia. This status represents a remarkable turnaround for Queensland, which once boasted of negative net debt and claimed with justification to be the 'low tax state.' Queensland’s taxes are now just about average.
Victoria and Western Australia have become the lowest taxing states. This status, together with relatively low levels of net debt, helps make these two states the equal strongest in overall fiscal position in 2009–10.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
WATCH Robert Carling discuss his new report.
