SANTA came early to Victoria, in the form of Dr Peter Sheehan, former head of the Victorian Treasury. His article (AFR, December 21) had a cheerful Christmas message: that all Victorians need is a little confidence and their economic woes will disappear.
Santa Sheehan reasoned that (a) Over the past six or seven years the Victorian public sector has been made ruthlessly efficient by the present government; (b) a few isolated incidents (Trico, Pyramid) were blown out of all proportion by proponents of "current orthodoxies" to undermine what was otherwise a success story in financial management; and (c) that caused a pervasive pessimism in the State.
Unfortunately, like Santa, Dr Sheehan's arguments belong to the world of make-believe.
Consider the following myths put forward in his article:
1. The 1980s was a very strong period for Victoria.
Sheehan repeats the oft-quoted boast of the present Victorian Government that the economy has out-performed other States during its period on office. Wrong. While Victoria was the lead State in terms of output per head when the Government was elected, growth below the all-State average meant that by 1989-90 it had fallen into second place behind Western Australia, with NSW catching up quickly.
Sheehan pointed to the strong growth in private business investment as evidence of underlying strength. But while total private investment has been strong over the period, this has been concentrated in the construction component, which grew at an average annual rate of 21 per cent. In other words, Victoria has been a leader in the massive speculation boom in commercial property, the relics of which will be dotting Melbourne's skyline for years to come. A claim to leadership indeed; but hardly a proud one.
Meanwhile, the critical area of plant and equipment investment, so important for the health of Victoria's large manufacturing sector, has grown at an average rate of less than 10 per cent since 1982-83, and has fallen by 8 per cent in 1989-90. The outlook for total investment is bleak: once current construction projects are completed there will be a dramatic fall in investment on buildings and structures, with no sign of any upsurge in plant and equipment investment to take its place.
2. This Government transformed the public sector into a lean, efficient organisation by ruthlessly imposing spending restraint.
This claim is based on selective use of statistics. Dr Sheehan supports it by pointing out that growth in total public sector outlays was the lowest of all the States over the period 1983-84 to 1989-90. Given that the Labor Government was elected in March 1982, and introduced its first Budget five months later, it is strange that he uses 1983-84 as a base period for comparison: surely a more apt starting point would be 1981-82, the last year of the previous government.
To return to my earlier point, if we look at expenditure trends in 1982-83 and 1983-94, it is little wonder Dr Sheehan avoided including them in his analysis. In 1982-83, total outlays increased by a massive 17.5 per cent, and by a further 10.6 per cent the following year.
1983-84 thus has the advantage of being an inflated starting point from which to measure spending levels of the Victorian Government.
This statistical sleight-of-hand changes the picture considerably: while real Victorian public sector outlays grew at 2.5 per cent per annum over the six years chosen by Dr Sheehan, it grew by 3.4 per cent over the eight years from 1981-82.
Even ignoring this "massaging" of the data, the claimed "restraint" from 1983-84 onwards is entirely a reflection of the fact that Victoria was the only State in which public sector capital outlays actually fell in nominal terms over the period 1983-84 to 1989-90. Current outlays -- the real test of expenditure restraint -- increased at an average annual rate of around 10 cent per annum, above the all-State average.
It is relevant that from July 1983 to June 1990, State public sector employment in Victoria grew by 12.8 per cent, higher than for any other State. This is hardly consistent with the notion of a public sector being "... squeezed harder by the Victorian Government than by any other Australian Government since the war". But, even if it were true, the fact remains that the Victorian public sector is operating from a higher spending base than other States.
3. Victoria is a low tax State.
The other side of the coin to expenditure is revenue raising. Sheehan firmly rejects the notion that high taxation is another dimension of the Victorian malaise.
However, on the basis of taxation defined by the Commonwealth Grants Commission for the purposes of framing its recommendations on how to allocate general revenue grants to the States, by far the most objective test, Victoria is clearly the highest taxing State. The commission's estimates show that in 1988-89, before the big tax rise of this financial year, Victoria raised 11 per cent more per head than if taxes were imposed at the average rates for the six States.
4. Victoria does not have a debt problem.
This is the most worrying aspect of the Sheehan analysis. He argues that the public debt level is not a problem because "... as a proportion of Gross State Product [it] is almost as low as it has ever been this century". Whatever the truth of this statement, it does not resolve the debt question which, as Moody's pointed out in down-rating Victoria's $A denominated debt, revolves around the burden of servicing debt.
At the start of the 1980s real interest rates turned sharply positive and have remained high ever since. Moreover, an increasing proportion of Victorian borrowing has been used for non-income earning capital expenditure. Accordingly, we now have the situation in Victoria where 20 cents in every dollar raised in revenue goes towards paying interest on borrowings, let alone actually repaying the principal. This is double the average for all other States. In fact, public sector interest payments have nearly doubled on a per capita basis over the period 1982-83 to 1989-90, from $334 to $640. The average for all other States in 1989-90 was $358.
Dr Sheehan is correct in identifying a confidence problem in Victoria. But the correction of that problem requires more than a simple injection of Christmas spirit to convince Victorians that after all their State has been well managed.
The Government needs to demonstrate that it has the political will to overcome Victoria's fiscal problems by bringing recurrent spending under control, by further lifting returns on public capital and by privatising public enterprises as quickly as the capital market will absorb them.
It also needs to create an environment more conducive to productive business investment by reducing both the role of unions and the regulation of business activity by government.
A report commissioned by the Government itself in 1989, but suppressed until recently obtained by the Opposition, says that laws covering labour conditions and unions are the greatest hindrance to the development of industry "with union representatives making unrealistic demands".
Until the Government redresses the imbalance against the private sector, Santa's bundle likely to remain dropped at the bottom of the chimney and the Victorian economy will continue to slip relative to other States.
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