Wednesday, February 16, 1994

1993-94 Budget Backgrounder

Vol. 6, No. 2

INTRODUCTION

The 1993-94 round of government budgets was pivotal to the nation's economic future.  The massive expansion in fiscal policy over the last few years has left the nation bereft of savings and some governments with serious debt problems.  Investment has been the missing link in the economic recovery so far, and if the recovery is to be sustainable, we need an investment boom.  We cannot, however, rely on foreign savings as we have in the past to fund the needed level of investment:  our foreign debt and current account deficit are too high, and international competition is too tough.  The only answer is to generate savings domestically;  that means cutting back on public sector borrowings starting in 1993-94.

This Backgrounder provides a comprehensive and comparative review of Commonwealth, State and Territory finances in 1993-94 and over the medium term.

Section I presents our annual budget awards.  Tasmania wins the 1993-94 Award for Most Responsible Budget.  The Commonwealth wins the Lemon Award for Most Irresponsible Budget.

Section II assesses the fiscal settings of the State, Commonwealth and total public sectors.  The total public sector will, in terms of national savings, generate the worst fiscal outcome in fifty years in 1993-94 -- with the total public sector for the first time since World War II borrowing to fund current outlays -- resulting in the largest level of dissaving in Australia's post-war history.  All governments are planning to reduce their draw on savings over the medium term;  but in aggregate these plans fall far short of what is needed.  The primary culprit is the Commonwealth.  The States are clearly leading the way on fiscal policy.

Section III reviews the budgetary performance of each State and Territory.  Although performance often lags behind rhetoric, the movement is in general in the right direction.

This Backgrounder uses data generated in mid to late 1993 when the various budgets were released.  The economic outlook has improved in the meantime, and will result in a better budgetary position for all governments than initially expected, with the deficit of the total public sector expected to be about $3 billion lower.  Even a cyclical improvement of this magnitude, however, will not affect the basic conclusions of the paper.


PART I:  BUDGET AWARDS

THE 1993-94 AWARD FOR THE MOST RESPONSIBLE BUDGET

Tasmania

The Tasmanian Government produced the most responsible budget in 1993-94.  That budget continued the process of fiscal reform begun under the Field Government in 1990.  Spending was held tightly in check, with current outlays set to grow by only 0.8 per cent in nominal terms, and expenditure on new fixed capital expected to decline by 3.9 per cent.  The Budget introduced no new revenue-raising measures and resulted in total own-source revenue growth of only 1.5 per cent, with no growth in total revenue.  The underlying net financing requirement (NFR -- see footnotes 3, 4 and 5, below) of the consolidated sector is expected to increase, but solely as a result of increased investment in revenue-earning assets in public trading enterprises.  The underlying NFR of the general government sector will decline, as will net debt and the total net liabilities of the Tasmanian public sector.  The policies put in place in 1993-94 are expected to yield a steady reduction in the budget deficit over the next four years, which, if achieved, should result in a well-deserved upgrading of the State's credit rating.

The budgets of the ACT and Victoria deserve honourable mention.  Although both expect large increases in their bottom line and net debt in 1993-94, they did take tough decisions which will help overcome their severe structural problems.

The ACT Government's problem is that it is heavily dependent on the Commonwealth for money;  and as a result it expects a steady reduction in grants (down 12.2 per cent in 1993-94) and total revenue (down 5 per cent in 1993-94).  The ACT responded to the reductions in revenue in 1993-94, by cutting outlays and staff, and by raising revenue through higher taxes, user charges and asset sales.  If accompanied by similar decisions, these should allow the ACT Government to reduce its deficit and to begin to live within its means.

The Victorian Government's problem is the financial legacy of past Victorian governments.  The Kennett Government correctly allocated $2.7 billion in 1993-94 to cut excess staff put in place by its predecessors ($1.3 billion), and to refund moneys "borrowed" from public service super funds by them ($1.4 billion).  These commitments will, however, result in a very large increase in current outlays (expected to rise by 13.3 per cent).  The Kennett Government will also raise substantial amounts of additional revenue in 1993-94.  While, given the size of the prospective deficit and level of net debt, some increase in taxes was probably unavoidable, a greater effort could have been made on the spending side.  Although the Victorian Budget will result in a large increase in the NFR and in net debt, these will be incurred for good reasons:  the strategy should eliminate the State's current account deficit by 1995, and should also help stabilise the level of State debt by 1997.  The 1993-94 Victorian Budget was widely criticised as draconian, but the simple fact is that even under the Kennett-Stockdale regime, interest costs will still be increasing as a proportion of total revenue even as late as 1997, and the much-desired Triple-A rating is still probably a decade away.

The NSW Government brought down a holding budget in 1993-94, with few policy changes, good or bad.  Although the 1993-94 Budget should allow the NSW Government to maintain its Triple-A credit rating over the next few years, the Olympic Games and other fiscal shocks could change things for the worse.

The Queensland Government this year continued its expert utilisation of its fiscal inheritance.  The 1993-94 Queensland Budget implemented, for the fourth consecutive year, large increases in spending, with consumption spending set to increase by 6.8 per cent and new fixed capital expenditure set to increase by 21.5 per cent.  Notwithstanding the increase in spending, Queensland will again produce the best bottom line of any Australian government in 1993-94, and that by a Queensland country mile.  It will be the only government to achieve a surplus;  and it will achieve a surplus (a negative NFR) in the general government, public trading enterprise and consolidated sectors.  These surpluses will, importantly, be achieved with very low levels of revenue growth (with total revenue expected to grow by 1.3 per cent in 1993-94) and full funding of superannuation liabilities.  Most importantly, the Queensland Government has not squandered its inheritance.  It is expected to continue to produce surpluses over the medium term, and as a result is expected to have no net debt by 1996.  Queensland is, in fiscal terms, in a league of its own.


THE LEMON AWARD FOR THE MOST IRRESPONSIBLE BUDGET OF 1993-94

The Commonwealth

The Commonwealth Government Budget for 1993-94 was on all counts the worst budget in at least 50 years, and easily the worst in 1993-94.  Not only was the budget unfair and dishonest, it was in fiscal and economic terms irresponsible.  Despite the known fact that the public sector was already in 1992-93 more than consuming the totality of national savings and thereby crowding out investment, the Commonwealth significantly increased borrowing for purely consumption purposes in 1993-94, with its current account deficit expected to reach an all-time high of $15.1 billion in the general government sector.

The Commonwealth Government's justification for its spending spree does not hold up.  There was no need to pump-prime the economy again in 1993-94, and the so-called "medium-term fiscal strategy" is little more than a tax-raising exercise.

The Northern Territory and the South Australian Budgets were the least responsible of the State budgets.  The NT Government took its cue from big brother -- the Commonwealth -- and used the slow recovery as an excuse to put reforms aside and spend big.  At least the NT's spending spree is better targeted than that of the Commonwealth, with the additional spending concentrated on capital goods.  The NT also held tax receipts tightly in check.  The problem is that the NT economy neither needed nor can afford this spending spree.

The South Australian Budget was a masterpiece of double-speak.  It promised spending restraint and yet delivered a 10.8 per cent increase in current spending.  It promised to restrain the growth in taxes and other charges, but own-source revenue is set to grow by 14 per cent in 1993-94.  It committed $210 million to reducing the public service by 3,000 positions, but at the same time created 1,200 new positions.  The Budget will result in a lower budget deficit and a lower level of net debt, but this will be achieved primarily by flogging assets and as such will be temporary.

The Western Australian Budget was a mistake and a chance lost.  The Court Government was elected in early 1993 on a platform of reducing the level of government spending and the size of the public sector workforce, of cutting debt, and of lower taxes.  Its 1993-94 Budget will do the opposite:  spending will increase, and WA will be the only government in the State and Commonwealth sectors which expects to increase its budget sector workforce in 1993-94.  Net debt is set to grow by 12.5 per cent in the general government sector;  and tax receipts are expected to grow by 7.5 per cent, the second-highest increase in the 1993-94 round of budgets.  How did this happen?  It appears that the new Court Government, preoccupied with other issues, failed to take control over budgetary policy, and somehow delivered its predecessors' budget.  This mistaken budget will make Mr Court's commitments to achieve a Triple-A rating and lower taxes by the end of his first term more difficult, though not impossible.


PART II:  PUBLIC SECTOR FINANCES 1993-94:
STATE, COMMONWEALTH AND TOTAL PUBLIC

BACKGROUND

The 1993-94 round of government budgets had the hallmarks of a B-grade movie.  It had intrigue and suspense;  passion and heroism aplenty.  It had bad guys and good guys and even a few white knights.  It dealt with money, power and sin (or sin taxes) and had more hype and media coverage than Madonna.

The budget round also had its serious side, though this was obscured by the hurly-burly of politics.  The public sector needed to get serious about the nation's savings and investment crisis.  Otherwise the recovery, though perhaps rapid at first, will prove to be short-lived, and high unemployment will become even further entrenched as a feature of Australian society.

Dr FitzGerald in his June 1993 Report, National Savings, (1) outlined in detail to all Treasurers the extent and causes of Australia's saving crisis, and offered solutions to the crisis.  Aggregate national saving was, at the end of 1992-93, at its lowest level since the present national account series began in the late 1950s -- both as a proportion of GDP and in terms of dollars of the day.  Indeed, according to data published by the ANZ Bank, national saving was not simply at an all-time low but was actually negative in 1991-92 and 1992-93, with borrowing by the public sector for consumption purposes exceeding the total savings generated by the business and household sectors for both of those years. (2)

The serious shortfall in domestic savings is forcing the private sector to rely almost totally on the savings of foreigners to fund investment at a time when the competition for the world's savings, particularly from our near neighbours in Asia, has seldom been as tough.  Although there are signs that Australia has become more internationally competitive in some areas, it is also clear that there is a long way to go in many other, if not most, areas.  The total reliance on foreign savings also means that Australia's already excessive stock of foreign liabilities will get even bigger, and with it will increase both the cost of funds and the nation's exposure to adverse shocks.

The lack of domestic savings is made even more critical by the low level of investment.  Business investment measured as a percentage of GDP currently stands at the lowest level in forty years;  even investment in plant and equipment is at its post-war nadir.  This low level of investment means that Australia needs a veritable avalanche of investment in productive assets -- similar to the one promised by Mr Keating during the last election -- in order to achieve sustained recovery and to create real jobs.  Such an avalanche is not in sight and, unless the public sector makes room for the private sector to invest, is not likely to eventuate.

The public sector has also contributed directly to the decline in investment.  As shown in Figure 1, public sector investment has declined precipitously over the last decade and currently stands at its lowest level in forty years.  More importantly, there has been a deterioration in the quality of public investment.  The trading enterprises, which provide much of the basic infrastructure required by the private sector, have borne the lion's share of the cuts to public sector investment.  The result has been a shift in the public sector from revenue-earning productive investments to tax-dependent "social capital".  A large part of the decline in investment in public trading enterprises can been justified insofar as many of these industries were, a decade ago, grossly over-capitalised.  There is, however, evidence that some worthwhile and productive public sector investments have been crowded out by public sector consumption.

Figure 1:  Deviations from Ten-Year Average

Source:  ABS Cat. No. 5206.0, National Accounts


Figure 1 illustrates clearly the principal cause of the nation's low savings, and what should have been the principal fiscal target for 1993-94 -- public sector consumption.  Public sector consumption spending grew at an unprecedented rate over the four years to 1992-93.  Indeed, in 1991-92 and 1992-93, the public sector for the first time in at least fifty years chalked up deficits on its general government sector operating or current account.  Put more simply, Australian governments borrowed more than $15 billion over the last two years just to cover the running costs of their non-commercial operations.  This fact, more than all the others, should have induced governments to cut back on consumption spending, starting immediately in 1993-94.

Governments were, to varying degrees, under pressure to spend big so as to pay off their "true believers", to buy electoral support, and to be seen to be doing something about high unemployment and the slow rate of recovery.  The truth is that the time for orthodox pump-priming was well past, and that sort of stimulation would have had little positive effect even in the short term.  Since 1989, the Australian public sector had eased fiscal policy significantly each year, going from a surplus of $5.4 billion in 1988-89 to a deficit of $18.3 billion in 1992-93.  The $24 billion expansion, which was one of the largest in the OECD during this period, had limited effect on the pace of the recovery or employment levels.

The slow recovery has been caused not so much by a low level of domestic consumption but by low world demand and declining private investment.  Fiscal expansion -- by consuming savings, and by putting upward pressure on exchange rates and higher real interest rates -- has in fact worked directly against recovery in private investment, and will continue to do so this year.  By now, the economic and political cycle should have lessened the pressure to buy votes with destructive short-term palliatives;  the leadership tussles and elections which have plagued fiscal policy over the last few years have been settled;  and the economy is in its third year of recovery, albeit sluggish to date.


APPROPRIATE FISCAL OBJECTIVES

The budgetary objective for all governments for the short term -- 1993-94 -- should clearly have been to begin the process of fiscal consolidation:  that is, to reduce their deficits.  This should have been achieved primarily through a reduction in the underlying growth of consumption spending rather than through higher taxes or cuts to investment.

The budgets in aggregate should also have started to pursue the medium-term policies outlined in the FitzGerald Report, namely:  that the Commonwealth move to a surplus position in its budget or general government sector (that is, for it to phase out borrowing for all budget sector expenditures, current and capital);  and that the States steadily and continuously reduce their deficits as a share of GDP, and thereby move toward the achievement of Triple-A credit ratings where they do not already have them.


BUDGET OUTLOOK, 1993-94

Total Public Sector

The 1993-94 round of budgets is set to produce the worst fiscal outcome in the nation's post-war history.

The underlying (3) deficit, or net financing requirement (NFR), (4) of the total public sector (5) is estimated to be a massive $27.5 billion in 1993-94, a sum 20 per cent larger than the already large deficit of $22.9 billion in 1992-93 (Table 1).  The deficit on the general government sector is forecast to increase by 15 per cent to $26.3 billion in 1993-94.  Even the public trading enterprise (PTE) sector, whose financial performance has steadily improved over the last four years, will move into the red in 1993-94.

Table 1:  Underlying (1) Net Financing Requirement ($ billion)

General GovernmentConsolidated
1992-931993-941992-931993-94
Sector:
  States
  C'wealth
  Total Public

4.3
19.0
22.8

6.2
20.8
26.3

3.5
19.9
22.9

6.5
21.6
27.5

Sources:  ABS 5501.0:  1993-94 Government Financial Estimates.

Note:  (1) Excludes proceeds from asset sales and debt refinancing.


At 6.2 per cent of GDP, the underlying deficit of the total public sector (which includes State, Territory, Local and Commonwealth governments) for 1993-94 is expected to be the second-largest in Australian post-war history -- second to 1983-84 (Table 2).  The 1993-94 deficit will even be larger than that in 1975-76, which was the largest deficit during the "big-spending" Whitlam era.

Table 2: Public Sector Fiscal Outcomes
1975-76, 1983-84 and 1993-94:  Consolidated Sector as % of GDP

1975-76
%
1983-84
%
1993-94 (e)
%
Total Deficit4.87.05.2
Current Account-5.2-0.81.1
Capital Account10.07.94.1
Underlying NFR (1)4.87.16.2

Sources:  ABS 5501.0:  1993-94 Government Financial Estimates,
ABS 5206.0:  National Accounts, and 1993-94 Commonwealth Budget Paper No 1.

Note:  (1) Net financing requirement less asset sales.


In terms of its impact on national savings and investment, the aggregate 1993-94 budget outcome is set to be very much worse than the 1975-76 or 1983-84 budgets or, indeed, any budget since at least the mid-1940s.

The current account deficit is estimated to increase alarmingly in 1993-94 (Table 3).  The general government sector is estimated to generate a current account deficit of $13.2 billion, which represents an increase of $3.8 billion or 40 per cent over the record deficit achieved in 1992-93.  Even the consolidated government sector, despite a large current account surplus in the PTE sector, is expected to produce a current account deficit of $4.6 billion in 1993-94, which is the first time (on available records) that this will happen.  Even in the earlier big budget deficit years of 1975-76 and 1983-84, the current accounts were in surplus in both the general government sector and the consolidated sector (Table 2).  That is, the deficits may have been large in these years but they were used exclusively for capital purposes. (6)

Table 3:  Current Account Balance (1) ($ billion)

General GovernmentConsolidated
1992-931993-941992-931993-94
Sector:
  States
  C'wealth
  Total Public

-0.3
11.6
9.4

0.3
15.1
13.2

-5.3
7.6
-0.1

-4.2
11.4
4.6

Sources:  ABS 5501.0:  1993-94 Government Financial Estimates.

Note:  (1) Defined as current outlays minus cutrent revenue.


Public sector dissaving -- defined as the current account deficit of the budget sector plus the value of capital consumed in the form of depreciation -- is set to expand from $17.2 billion in 1992-93 to $20.6 billion in 1993-94 (Table 4).  This will be, by a large margin, the largest level of public sector dissaving in Australia's post-war history.  Dissaving in the public sector is forecast to exceed the savings generated in the private sector by (and therefore to generate a national savings deficit of) around $5 billion in 1993-94, which is about $2 billion worse than the previous year.

Table 4:  Savings -- Private, Public and National ($ billion)

1992-931993-94 (e)
Private14.115.6 (1)
Public-17.2-20.6 (2)
National-3.1-5.0     

Sources:  ANZ Savings Report -- 1993, ANZ Bank;
ABS 5501.0:  1993-94 Government Financial Estimates,
and ABS 5206.0:  National Accounts.

Notes:

(1) Author's estimate based on ANZ Savings data for 1992-93:  assuming growth in 1993-94 of 4.75% for household savings and 20.9% for business sector savings.

(2) Calculated as current accouni deficit of general government sector, plus public capital consumption.


The main reason for the blow-out in public sector borrowing in 1993-94 is consumption spending, which is expected to grow by a nominal 7.0 per cent (Table 5).  Other types of current outlays are also expected to grow:  in particular, interest payments are expected to grow by 7.0 per cent and transfer payments are set to expand by 6.4 per cent.  The only significant category to be reduced is subsidies paid to trading enterprises.

Table 5:  Growth in Own Purpose Current Outlays -- 1993-94 -- Consolidated Sector

SectorStateC'wealthTotal Public
$ Mil%$ Mil%$ Mil%
Consumption42309.311504.25574     7.0     
Redundancy49743.700497 (1)43.7 (1)
Interest-224-1.9108914.81273     7.0     
Subsidies to PTEs-189-7.7-18-3.4-207     -7.0     
Transter payments-159-1.832597.03667     6.4     
Total35795.957417.410117     7.0     

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Note:  (1) Does not include local government.


Contrary to the claims of various governments, and contrary to the clear need for growth in the private sector, taxes and other types of public sector revenue are expected to rise this year (Table 6).  Tax receipts are forecast to increase by 4.1 per cent, an increase in real terms.  Governments will be milking more from their favourite cash cows -- their public trading enterprises -- with dividends and other non-interest levies to grow by 60.9 per cent or $1.2 billion in 1993-94.  Total revenue of the public sector is expected to record an increase of 5.0 per cent in 1993-94.

Table 6:  Growth in Revenue -- 1993-94 -- General Government Sector

SectorStateC'wealthTotal Public
$ Mil%$ Mil%$ Mil%
Taxes, fees & fines13665.731763.647824.1
PTE dividends34521.4850250.7119760.9
Total own source17235.457965.365285.0
Grants480.2n.a.n.a.n.a.n.a.
Own use-264-1.0n.a.n.a.n.a.n.a.
On-passing3125.3n.a.n.a.n.a.n.a.
Total revenue17712.857965.365285.0

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.


Asset sales and user charges, which are treated in government accounts not as revenue but as negative outlays, are also set to grow and to reach very high levels.  Asset sales are expected to reach $5.6 billion in 1993-94, which will represent a $1.0 billion or 22.3 per cent increase on the previous year.  User charges are set to grow by 1.5 per cent to $12.9 billion in 1993-94 (Table 7).

Table 7:  Miscellaneous Income -- User Charges and
Net Asset Sales -- Consolidated Sector, 1993-94 (est)

SectorStateC'wealthTotal Public
$ Bil% growth$ Bil% growth$ Bil% growth
User charges (1)6.76.13.8-6.512.91.5
Net asset sales (2)3.3-17.92.9130.55.622.3

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Sale of goods and services in general government sector only.

(2) Includes sale of second-hand fixed equipment and land, and sale of businesses.


Public sector indebtedness will, naturally, rise.  As shown in Table 8, net debt (7) of all governments is expected to grow from $148 billion or 36.8 per cent of GDP in June 1993, to $172 billion or 40.6 per cent of GDP in 1993-94.  All of the debt accumulated during 1993-94 will be borne by the general government sector and thus by taxpayers.  The PTE sector is expected to reduce its level of indebtedness in 1993-94.

Table 8:  Public Sector Net Debt (30 June)

SectorGeneral GovernmentConsolidated
19931994 (1)19931994 (1)
$ Bil% of
GDP
$ Bil% of
GDP
$ Bil% of
GDP
$ Bil% of
GDP
States379.3429.97719.18018.9
Commonwealth5012.56916.36716.88620.4
Total Public8721.811126.314836.817240.6

Source:  ABS 5513.0:  30 June 1992 and 1993 Public Sector Financial Assets and Liabilities,
ABS 5501.0:  1993-94 Government Financial Estimates,
ABS 5206.0:  National Accounts, and Commonwealth 1993-94 Budget Paper No 1.

Note:  (1) Net Debt for 1994 is estimated as net debt as of 30 June 1993 plus deficit less advances incurred during 1993-94.


Debt is not, of course, the only financial liability of the public sector:  in particular, all governments have large stocks of unfunded superannuation and other employee entitlements.  At the end of 1993, the public sector had unfunded employee entitlements of around $100 billion, an amount greater than the net debt of either the Commonwealth or the States sectors.

As shown in Table 9, the total net financial liabilities of the total public sector, including net debt and employee entitlements, are expected to reach a massive $279 billion -- representing 61 per cent of GDP or about $47,000 per household.

Table 9:  Net Financial Liabilities (1)
Consolidated Sector 30 June 1994

SectorStateC'wealthTotal Public
$ Billion138126 (2)279
$ per household24,00023,000     47,000
As share of GDP (%)3427     61

Sources:  ABS 5513.0:  30 June 1992 and 1993, Public Sector Financial Assets and Liabilities;
ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Net debt plus unfunded employee entitlements, where net debt is estimated as per Table 8 and employee entitlements assumed to remain constant in nominal terms during 1993-94.

(2) Commonwealth employee entitlements are estimated to be $40 billion in 30 June 1993 and 30 June 1994.


Despite the sharp reduction in interest rates over the last few years, the cost of servicing public debt will increase in 1993-94, with the public sector expected to spend 10.5 per cent of its total revenue on servicing debt, compared with 10.0 per cent in 1992-93 (see Table 10).

Table 10:  Debt Servicing -- Net Interest Paid as
Proportion of Total Revenue (1) Consolidated Sector

Sector:1992-931993-94
State12.412.1
Commonwealth5.06.2
Total Public10.010.5

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Note:  (1) Net interest paid equals interest payments minus interest received;  revenue excludes interest received.


In short, the aggregate fiscal position of Australian government will move significantly in the wrong direction during 1993-94:  toward a larger deficit, a higher level of dissavings, growth in consumption, and higher taxes.


State and Commonwealth Sectors

The greatest responsibility for the inappropriate budget outcome lies with the Commonwealth Government.  While the States did, indeed, make a major contribution to the increased deficit, they did so for much better reasons.

The underlying NFR (8) of the Commonwealth total public sector is expected to increase by $1.7 billion to $21.6 billion in 1993-94 and to account for 79 per cent of the total public sector borrowing requirement (Table 1).  The underlying NFR of the State public sector is expected to grow much faster than the Commonwealth sector, by 86 per cent to $6.5 billion, and the underlying NFR of the State general government sector is expected to grow by 44 per cent to $6.2 billion.

Despite the relatively large increase in the underlying NFR, the States will, in terms of reducing their structural deficits, outperform the Commonwealth in 1993-94.  The States and Territories will, in general, use their increased borrowings for more productive purposes -- namely, to achieve lower staffing levels and to expand capital outlays -- while the Commonwealth plans in the main to use its additional borrowing to expand ongoing spending.

Indeed, the Commonwealth will again be overwhelmingly responsible for both the current account deficit and public sector dissaving.  The Commonwealth is expected to incur a deficit on the current account in its general government sector of $15.1 billion in 1993-94, which will represent an increase of $3.5 billion or 30 per cent.  In contrast, the States and Territories are expected to go into the red in their general government sector during 1993-94 by the much smaller, but still worrying, sum of $0.3 billion (Table 3).

The Commonwealth will be using the vast bulk of its borrowing to fund current outlays.  In 1993-94, the Commonwealth expects a current account deficit in its consolidated sector of $11.4 billion;  whereas it expects a capital account deficit of only $6.4 billion.  This means that the Commonwealth sector will consume over 64 per cent of its new borrowings in funding current outlays.  In contrast, the States will use 98 per cent of their new borrowings in 1993-94 for capital purposes.

Both the Commonwealth and State sectors expect to increase spending significantly in 1993-94.  The size and use of the additional expenditure differ fundamentally, however, between the two sectors.  In general, the States will increase spending less, and use the additional spending more productively, than will the Commonwealth.  More importantly, the States plan to use their additional spending to reduce their structural levels of spending, whilst the Commonwealth is committed to a large structural expansion in spending.

The Commonwealth plans to expand its own-purpose current expenditure by 7.4 per cent in nominal terms in 1993-94 (Table 5).  It will also expand expenditure on "social capital" by 15.7 per cent this year (Table 11), as shown by the increase in new fixed capital in the general government sector.  At the same time, new fixed capital expenditure in the PTE sector will decline to its lowest level in over five years.

Table 11:  Growth in New Fixed Capital -- 1993-94 (Per Cent)

SectorStateC'wealthTotal Public
General Gov't2.515.74.1
PTE9.8-3.70.2
Consolidated6.30.23.9

Source:  ABS 5501.0:  1993-94 Government Financial Statistics.


As shown in Table 5, the increase in Commonwealth spending is being driven by the need to finance its ballooning debt and by the growth in entitlements or transfers, which -- given that the economy is in its third year of recovery -- is huge.

Overall, the State sector expects to increase current spending by 5.9 per cent in 1993-94 (Table 5).  Spending in the State sector is, however, significantly affected by a number of one-off transactions, particularly in Victoria.  For example, if Victoria is excluded, growth in current spending by the States and Territories is expected to be only 0.8 per cent in 1993-94.

Consumption spending in the State sector is expected to grow dramatically in 1993-94 -- 9.3 per cent -- but this again is driven solely by "one-off" factors.  If these factors are excluded, State sector consumption spending is actually expected to decline this year.  Other categories of current spending in the State sector are also expected to show little or negative growth in 1993-94;  with interest payments down by 1.9 per cent, subsidies to trading enterprises down by 7.7 per cent, and transfer payments down by 1.8 per cent.

The State public sector plans a sizeable increase in capital spending, with new fixed capital expenditure set to increase by 6.3 per cent.  In marked contrast to the Commonwealth, however, this additional capital spending by the States will take place largely in the PTE sector and accordingly be used to fund revenue-earning assets (Table 11).

As shown in Table 6, contrary to the rhetoric of their budgets, governments -- and most pointedly the Commonwealth Government -- expect a sizeable increase in taxation and other revenue in 1993-94.  As a result, there will be little, if any, net stimulus flowing from the Commonwealth's much-touted tax cuts, as any stimulus provided by those cuts will be more than offset by increases in other taxes and charges by the Commonwealth and other governments.

The tax take of the State sector is set to expand by 5.7 per cent, or by $1.4 billion, in 1993-94.  As with spending, this growth is concentrated in Victoria.  Despite income tax cuts, the Commonwealth will in fact increase its tax revenue by 3.6 per cent, or by $3.2 billion.  The growth in tax receipts in the State sector is being driven both by faster economic growth and by the flow-on effect of large tax increases announced before the beginning of the present financial year.  There were few tax increases announced in the State budgets.  The Commonwealth tax ledger is a complicated mess, with cuts to some taxes, increases in other taxes, and significant changes in a wide range of bases.  The net effect, however, will be an increase in tax receipts to the Commonwealth.

The Commonwealth is again applying the fiscal squeeze to the States and Territories.  The overall level of grants from the Commonwealth to the State sector is expected to remain virtually unchanged in 1993-94.  But the Commonwealth has cut grants for the States' own use (by 1.0 per cent), and increased grants for on-passing by the States (by 5.3 per cent).  This is another step towards greater fiscal domination of the public sector by the Commonwealth.

Dividends and other equity-type levies on public trading enterprises are again expected to grow enormously.  The Commonwealth Government plans to increase collections from its trading enterprises by a remarkable 250.7 per cent in 1993-94;  while the States plan to increase collections from their PTEs by 21.4 per cent.

The Commonwealth expects total revenue to grow by 5.3 per cent and the States expect more modest growth of 2.8 per cent.  Once again, if Victoria is set aside, the total revenue of the State sector will actually decline this year.

The Commonwealth also plans to draw heavily on temporary receipts to plug some of its large underlying deficit (see Table 7).  It is committed to selling $2.9 billion worth of assets this year, which would represent a rise of 130.5 per cent on 1992-93.  The States are planning an asset disposal programme of $3.3 billion in 1993-94, which is less than the previous year.

One very positive feature of the 1993-94 round of budgets is the increase in productivity implied by the planned cuts to the various public service establishments.  As shown in Table 12, the general government workforces of all governments are expected to decline by around 21,100 full-time positions this year.  The largest reduction will take place in the States, primarily in Victoria.  The Commonwealth does, however, plan to reduce its workforce by 3.1 per cent or around 4,900 positions over the year.

Table 12:  Growth in Employment, General Government, 1993-94

FTE (1) 'OOOs% Change
State-16,231-2.3
Commonwealth-4,857-3.1
Total Public (2)-21,088-2.4

Source:  State, Territory and Commonwealth 1993-94 Budgets.

Notes:

(1) Full time equivalent.

(2) Does not include local government.


The Commonwealth's total net debt is set to increase by 28 per cent to $86 billion in 1993-94, and for the first time in many years it will account for the majority of debt held by all governments.  Net State sector indebtedness will expand slightly to $80 billion (Table 8).

The greater part of the increase in public debt will be generated by the Commonwealth general government sector and will therefore be serviced by taxpayers.  The Commonwealth's general government net debt is expected to reach $69 billion in 1993-94;  that will represent an increase of 37 per cent (or nearly 4 per cent of GDP) and will result in around 80 per cent of the Commonwealth's debt lying in the general government sector.

The State PTE sector, which contains the bulk of State net debt, is again expected to reduce its stock of net debt.

Overall the State sector is in a better position than the Commonwealth in respect of net debt.  The State sector has a lower stock of net debt;  its debt has in general been accumulated for more productive purposes;  and its stock of debt is accumulating at a slower rate.

Nevertheless, because of its lower average credit rating and resultant higher interest rates, the State sector will, despite its better position, spend a larger proportion of its revenue on debt-servicing than will the Commonwealth (Table 10).  In 1993-94, the State sector will spend 12.1 per cent of its total revenue on debt servicing, whilst the Commonwealth sector is expected to spend only 6.2 per cent of total revenue on debt-servicing. (9)  In terms of the general government sector, the States will for the first time in many years actually spend a smaller proportion of revenue in 1993-94 on debt-servicing than will the Commonwealth.

Given that the State sector has a lower stock of debt, has used its debt more productively, and is currently controlling its accumulation of debt more effectively than is the Commonwealth, then it is apparent that the risk premium attached to State borrowings has a lot do with the malapportionment of tax powers between the levels of government.


MEDIUM-TERM OUTLOOK

The most positive aspect of this budget round is the widespread commitment to reducing the public sector deficit over the medium term.  All governments are committed to reducing their budget deficit (or, in the case of Queensland, maintaining a surplus) over the next few years.  As shown in Table 13, the (unadjusted) NFR of the total public sector is, in terms of 1993-94 dollars, forecast to decline from around $21.8 billion or 5.3 per cent of GDP in 1993-94 to $10.1 billion or 2.1 per cent of GDP in 1996-97.

Table 13:  The Public Sector Medium-Term Budgetary Outlook -- $ billion (as % of GDP)

ActualForward Estimates:  1993-94 Budget (1993-94 Dollars)
1992-931993-941994-951995-961996-97
State (1)2.6 (0.6)4.7 (1.1)3.9 (0.9)2.1 (0.5)2.0 (0.4)
Conmonwea1th (2)14.6 (3.6)16.1 (3.8)12.8 (2.8)10.9 (2.3)6.5 (1.2)
Total Public (3)18.4 (4.6)21.8 (5.3)18.4 (4.2)14.7 (3.3)10.1 (2.1)

Sources:  State Sector:  Access Economics (1993):  Budget Sector Monitor, December, page 51;
Commonwealth Sector:  Commonwealth Treasury (1993), Fiscal Estimates, unpublished;
GDP:  ABS 5206.0:  National Accounts, and Commonwealth 1993-94 Budget Paper No. 1.

General Note:  The fiscal outlooks of the States and Commonwealth are not fully compatible as they are based on different economic assumptions, use different accounting formats and refer to different government sectors, and are combined here merely for indicative purposes.

Notes:

(1) Refers to the net financing requirement of the consolidated State sector measured according to ABS format.

(2) Refers to the deficit of the Commonwealth Budget measured according to Commonwealth's own format, which is not compatible with the deficit measured under the ABS format and used elsewhere in this paper.  It does include adjustments made by the Federal Parliament during the passage of the 1993-94 Budget.

(3) Refers to the net financing requirement of the total public sector.  It is the author's estimate based on the received forward estimates and assumes a zero deficit in the local government sector throughout the period, and that the level of provisions 1996-97 period.


The problem is that even if these commitments are met, they do not go far or fast enough, nor are they to be achieved in the best way.  There is, moreover, a high probability that actions will fall far short of promises, and that, with increasing political pressure to boost expenditure, particularly at the Commonwealth level, deficit reduction will become synonymous with tax hikes.

This problem is most acute in the case of the Commonwealth Government.  The States in aggregate are on the right track.

The Commonwealth Government is committed to reducing its budget deficit (measured differently from the estimates of the Commonwealth deficit used in this paper) to 1.2 per cent of GDP by 1996-97 (Table 13).  This is, however, inadequate, and in a number of ways.

First, the Commonwealth sector should aim to achieve an overall budget surplus and not simply a reduced deficit.

Second, the Commonwealth does not propose to start the reduction until "next year".  Realists should note that most of the reduction is to be achieved after 1995-96 and thus after the next federal election -- which effectively puts the plan into never-never land.

Third, the Commonwealth deficit is to be reduced solely through higher taxes and charges.  Revenue, most of which is taxes, is projected to increase by 32.2 per cent in real terms between 1992-93 and 1996-97 under the Commonwealth's medium-term strategy (Table 14).  This will be the fifth-highest increase in taxes during any four-year period since World War II. (10)  Total outlays are, despite the expected cyclical improvement in the economy and consequent decreased demand for transfer payments, set to continue to grow each year through 1996-97, and indeed to expand by 20.5 per cent in real terms over the four-year period (Table 14).  This will represent a large structural increase in outlays.

Table 14:  Forward Estimates -- Revenue and Outlay Growth
1992-93 to 1996-97 (1993-94 Dollars)

State (1)Commonwealth
Outlays
  Recurrent
  Capital
Total

9.5
-9.9
6.0

22.5
-42.1
20.5
Revenue
  Grants
  Own Source
Total

7.3
16.9
12.8

n.a.
32.2
32.2

Sources:  State, Territory and Commonwealth 1993-94 Budgets.

Note:  (1) Includes forward estimates for outlays and revenue for NSW, Victoria, Tasmania, ACT and outlays only for Queensland.  NSW provides forward estimates to 1995-96, which were expanded for 1996-97 by the author assuming current rate of change forecast in 1995-96.


Fourth, the Commonwealth deficit reduction strategy will continue the shift in spending from capital into consumption.  Capital outlays are projected to be reduced by 42.1 per cent between 1992-93 and 1996-97, while current outlays are to grow by almost 22.5 per cent over the same period -- despite, as noted earlier, the diminishing call for "cyclical" welfare spending.

Fifth, there is a high probability that the plan will be derailed by further increases in spending or slower growth (if not both).  It is based on forward estimates, which merely record the minimum cost of ongoing policy;  they do not include provision for new programmes or for the expansion of existing programmes.  And already the Commonwealth Government is, even before it begins to reduce its deficit, examining a range of new spending proposals including a job compact, additional support for regional development, a new industrial development plan, health-care reform, and Mabo-related "social justice" and compensation programmes.  Moreover, given the dominant influence of big-spending lobbies and parties in Federal Parliament, and (for what it is worth) the Prime Minister's commitment to no further cuts in spending, the likelihood of these and other additional spending programmes is very high.  The forward estimates are also based on the assumption that the economy will experience the longest sustained recovery in its history.  If this does not eventuate, the Commonwealth will either have to ditch its deficit reduction strategy, raise taxes, or, which appears at this stage unlikely, cut spending.

The States and Territories are also committed to deficit reduction programmes over the medium term and, on the available information, seem likely to do a much better job of it than is the Commonwealth.

First, the States have already begun the process of cutting their underlying budget deficits, whilst the Commonwealth is still just promising to do so.  Second, the targets set by the States and Territories are, in aggregate, consistent with the recommendations of the FitzGerald Report.  The deficit of the State sector is forecast by Access Economics to decline steadily -- from 1.1 per cent of GDP in 1993-94 to 0.4 per cent of GDP in 1996-97 (see Table 13) -- with most States committed to achieving or maintaining a Triple-A credit rating.  If these goals are achieved, then the State sector could even be a net contributor to domestic savings by 1997.  Third, the States' and Territories' strategies are better balanced and targeted than is the Commonwealth's.  As shown in Table 14, the States' plans place much more emphasis on restraining current outlays and less on cutting capital outlays and raising taxes than does the Commonwealth's.  For example, over the next four years, current outlays are set to grow by 9.5 per cent in the State sector in comparison with 22.5 per cent in the corresponding Commonwealth sector.  In short, the States appear to be more committed to the spirit of fiscal reform.

The biggest threat to the success of the States' fiscal adjustment is the Commonwealth, in particular its future funding of States' grants.  The Commonwealth has refused to renew the agreement, which expired in 1993-94, to maintain grants in real terms.  There are frequent and clear signals coming from Canberra indicating that the Commonwealth is likely to take the coward's approach and to force the States and Territories to bear even more of the overall burden of fiscal adjustment.

The fact is that excessive spending by the Commonwealth Government is the primary cause of the nation's savings crisis and budgetary problems, and it should therefore be the primary target of fiscal reform.  The States are doing their bit;  they can do much more;  but they are clearly leading the way.


PART III:  INTER-STATE COMPARISONS

New South Wales

The 1993-94 New South Wales Budget confirms what many have long suspected:  that the Fahey Government lacks the strong and methodical commitment to fiscal reform which characterised its predecessor.  Mr Fahey's Government appears to be content to sustain rather than improve its fiscal position, and as such its 1993-94 budget is essentially a holding operation.  This is a pity:  both the nation and NSW itself need committed fiscal leadership from the NSW Government, now more than ever.

The Fahey Government has not given up on fiscal responsibility.  It is still committed to maintaining its Triple-A credit rating;  and it has not reversed or abandoned existing reform.  Barring a fiscal shock, moreover, the NSW Government should, under current policies, be able to maintain its top credit rating over the medium term.  That it can do so illustrates vividly the appropriateness and quality of the many reforms set in train under Mr Greiner.

That does not mean that all is well.  There are a number of possible and probable fiscal shocks looming, any of which could set the State's credit rating back a notch.

The Olympic Games to be held in Sydney in the year 2000 will undoubtedly require substantially more taxpayer funding than is currently planned;  it could, as have all modern Olympic Games with the exception of Los Angeles, become a financial black hole for the host government.  And despite the recent bail-out -- which will cost NSW taxpayers $400 million over the next ten years -- the Homefund rescue programme could still require further budgetary support.  There is also a real risk that the Commonwealth Government will cut its grants to the States in the near future.  The Commonwealth's medium-term deficit-reduction strategy is clearly inadequate;  judging from past behaviour and current rhetoric, it is likely to pass on the substantive pain of fiscal adjustment to the States via reduced grants.

Given these threats, the NSW Government's failure to keep up the pace of fiscal reform -- specifically, to tighten fiscal policy -- is short-sighted.  This is, alas, a common trait of minority governments.

The central weakness of the NSW Budget is that consumption spending is estimated to increase by 5.9 per cent (see Table 15), which is, after deducting expenditures on special redundancy programmes, the fourth-largest increase in the State sector during 1993-94.

Table 15:  NSW Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

14695
248
(1777)
3449
833
3538
20738

4572
2194
2377
(1745)
3002

23740

15568
183
(2040)
2985
718
3493
20724

4537
2120
2417
(585)
4063

24786

873
-65
263
-464
-115
-45
-14

-35
-74
40
-1160
1061

1046

5.9
-26.2
14.8
-13.5
-13.8
-1.3
-0.1

-0.8
-3.4
1.7
-66.5
35.3

4.4
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

9305
2100
909
13336
9723
7749
1974

23059

9693
1770
1012
13119
9661
7587
2074

22780

388
-330
103
-217
-62
-162
100

-279

4.2
-15.7
11.3
-1.6
-0.6
-2.1
5.1

-1.2
Total Deficit
  Current Account
  Capital Account
-852
-1824
972
542
-2124
2666
1394
-300
1694
163.6
-16.4
174.3
Underlying NFR
  General Government
  PTE
982
1381
-199
1203
1440
-69
221
59
130
22.5
4.3
65.3
Net Debt
  General Government
20964
13329
21506
14473
542
1144
2.6
8.6
Total Net Financial Liabilities (3)39729402715421.4

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


The fiscal reforms already in place will, however, come to the NSW Government's rescue in 1993-94:  the additional consumption spending will be fully offset by savings in other areas of current outlays.  Interest payments are expected to decline by 13.5 per cent as a result of reduced levels of debt and lower interest rates;  and subsidies to public trading enterprises will be cut, by 13.8 per cent, to the lowest level in at least 20 years.  Transfer payments will also be reduced.

The capital programme for 1993-94 is quite responsible, with restraint overall, and a shift away from "social" to revenue-earning purposes.

The NSW Government has, over the last few years, run a very large capital works programme, particularly in the general government sector.  A number of the components of this programme are coming to an end;  accordingly, overall expenditure on new fixed capital in the general government sector will decline by 3.4 per cent in 1993-94.  New fixed capital expenditure is expected to grow slightly (1.7 per cent) in the PTE sector, but to decline slightly overall.

Asset sales, which are treated in public sector accounts not as revenue but as "negative capital outlays", are set to decline from $1,745 million in 1992-93 to $585 million in 1993-94.  The big difference is that the NSW Government does not expect to sell any businesses in the current year, whereas last year it received $1,225 million from the sale of the GIO in 1992-93.

The State's tax receipts are expected to increase by 4.2 per cent in 1993-94, which is below the average of all States.

The NSW Government will continue to use the gains generated by the reform of its public trading enterprises to fund general government spending.  Dividends and other non-interest related payments by the PTE sector to the general government sector are expected to grow by 11.3 per cent to just over $1,000 million this year.  These payments have increased tenfold since 1988-89.  It is little wonder that NSW and other State governments are increasingly reluctant to privatise trading enterprises.  This also explains the growing concern among informed observers that the benefits of microeconomic reform are not flowing through to business or consumers but are being captured by the public sector.

The operating performance of the PTE sector is expected to deteriorate in 1993-94, with its net operating surplus expected to decline by 15.7 per cent;  a result which will curtail the Government's ability to maintain PTE dividends at their current levels.

Total grants income is expected to decline as a result of a large cut to "own-use" grants.  Grants for on-passing are, however, set to increase by 5.1 per cent.

The NSW Government's commitment to the greater use of user charges is evident, with over $2.0 billion in income expected in 1993-94 from these levies, representing growth of 14.8 per cent.

In terms of the bottom line, NSW is expecting generally higher underlying net financing requirements (NFR) and debt levels in 1993-94.  The underlying NFR of the consolidated sector is expected to reach $1,203 million, which will be 22.5 per cent higher than in the previous year.  Nevertheless it will still represent in per capita terms the fourth-lowest in the State sector during the current year.

The underlying NFR of the general government sector is expected to increase from $1,381 million in 1992-93 to $1,440 million in 1993-94.  By contrast the PTE sector is again expected to be in surplus (denoted by a negative underlying NFR) in 1993-94.

If the State's public finances go according to expectations, NSW will end this year with a net debt of around $21.5 billion, which is about $500 million higher than at the end of 1992-93.  The general government sector is set for a substantial $1.1 billion, or 8.6 per cent, increase in net indebtedness during 1993-94;  the net debt of the PTE sector, on the other hand, is expected to decline.

The NSW Government as a whole is set to end 1993-94 with total net financial liabilities (net debt plus employee entitlements) of around $40.3 billion, which is equivalent to around $20,700 per household and is the third-lowest in the State sector.

According to the forward estimates published in the 1993-94 Budget, public sector debt is expected to stay in real terms at the 1993-94 level -- and therefore to decrease steadily as a proportion of GSP (gross state product) -- over the next four years.  Since the NSW Government has reformed its superannuation scheme over the last few years, its level of total liabilities (measured as a share of GSP) should improve.  So the 1993-94 NSW Budget should allow the State to preserve its good credit rating, which it currently maintains by the slimmest of margins.  Nevertheless, investors and credit agencies will remain concerned about the Government's capacity to deal with any large fiscal shocks.


Victoria

The 1993-94 Victorian Budget continues the Kennett-Stockdale revolution, which is arguably the largest fiscal adjustment process implemented by any Australian government in modern times.  Although the prime objective of this revolution is to reduce debt and the deficit, it will have the opposite effect over 1993-94.

Indeed, almost all budgetary indicators for 1993-94 apparently point strongly in the wrong direction.  The main reason for this perverse outcome is that structural change, like all investments, does not come cheaply;  given the magnitude of the adjustment required in the Victorian public sector, the cost will be substantial both for Victoria and for the nation.  It should also be noted here that a number of liabilities left off the books by previous Victorian governments have correctly been brought to account in 1993-94.

The Victorian Government plans to increase consumption spending by a massive 19.1 per cent in 1993-94 (see Table 16).  This is nearly 5 times the all-State average in 1993-94, and in real terms is the largest increase committed by any State over at least the last thirty years.

Table 16:  Victorian Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
  superannuation repayments
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

11353
773
0
(1406)
3770
1025
2260
17003

2678
1142
1536
(1071)
1651

18654

13522
1300
1400
(1425)
3922
856
2390
19256

2939
1218
1721
(325)
2864

22129

2169
527
1400
19
152
-169
130
2262

261
76
185
-746
1213

3475

19.1
68.2
-
1.4
4.0
-16.5
5.8
13.3

9.7
6.7
12.0
-69.7
73.5

18.6
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

6487
2341
441
9555
7003
5403
1600

16558

7093
2332
692
10055
7259
5562
1697

17314

606
-9
251
500
256
159
97

756

9.3
-0.4
56.9
5.2
3.7
2.9
6.1

4.6
Total Deficit
  Current Account
  Capital Account
1163
687
476
3902
2021
1880
2739
1334
1404
235.5
194.2
295.0
Underlying NFR
  General Government
  PTE
2318
2575
-268
4294
3848
334
1976
1273
602
85.2
49.4
224.6
Net Debt
  General Government
32073
18182
35975
21794
3902
3612
12.2
19.9
Total Net Financial Liabilities (3)532145711739037.3

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


Things are, however, not as they appear:  $1.9 billion or 90 per cent of the $2.2 billion in additional consumption spending planned for this year will be used for one-off structural improvements.  If these factors are excluded, consumption will grow by only 2.1 per cent in Victoria during the year, which is less than in most other States.

The largest one-off expenditure planned for 1993-94 is a payment of $1.4 billion owed but not paid by the previous Victorian government to various Victorian public service superannuation schemes.  The Victorian Government also plans to spend $1,300 million on redundancies during 1993-94, which will take the total spent on redundancies over the last two years to $2,000 million.

Most other areas of current spending are also expected to expand in this year, including interest payments.  The only area of current outlays forecast to decline in 1993-94 is that of subsidies to public trading enterprises, which will be reduced by 16.5 per cent or $169 million -- this, therefore, is one of the first benefits to flow from Mr Kennett's revolution.  Overall, current outlays are set for a hefty increase of $2.3 billion or 13.3 per cent in 1993-94.

Victoria is also planning a sizeable expansion in capital spending in 1993-94.  Expenditure on new fixed capital is to increase by 12 per cent in the public trading enterprise sector (the second-highest of the States), and by 6.7 per cent in the general government sector (the fourth-highest of the States).

As a result of a sharp decline in receipts from the sale of businesses, asset sales are expected to drop sharply in 1993-94 -- from $1,071 million to $325 million.

Tax receipts are forecast to increase by 9.3 per cent this year, which is by a large margin the largest increase of any State in 1993-94, and which will bring the total tax increase over the last two years to 18.3 per cent.  It will also ensure that Victoria regains the title of the highest-taxed State in the nation.

Over the last decade, Victorian Governments have, like their counterparts in NSW, used their trading enterprises as cash cows.  This will continue in 1993-94, with dividends and other non-interest payments made by the PTE sector to the general government sector expected to increase by $251 million or 56.9 per cent.

As with NSW, the operating result of Victoria's PTEs will deteriorate (albeit more slightly) in 1993-94:  a result which is primarily caused by the cuts in subsidies paid.  The poorer operating outcome of the Victorian PTE sector is at odds with the higher dividends to be paid out by the sector.

Surprisingly, the cash-starved Victorian Government has not yet resorted to greater reliance on user charges.  Such charges, already low by the standards of NSW, are expected to increase by only 1.4 per cent in 1993-94.  Expect a greater effort next year.

The Victorian Government expects to incur a huge increase in its underlying net financing requirement and indebtedness in the current year.  The underlying NFR of Victoria's consolidated sector is expected to reach $4,294 million in 1993-94, which is 85 per cent or nearly $2,000 million more than incurred in 1992-93, and about 3.5 times the level expected in NSW this year.  The underlying deficits of both the general government and the PTE sectors are expected to deteriorate in 1993-94.

The most disconcerting forecast for 1993-94 is the large increase in the current account deficit.  The current account deficit, which implies consumption of the nation's very scarce savings, is set to treble to $2,021 million this year.

What this means, in simplistic (if ironical) Keynesian terms, is that the Victorian economy will receive its largest fiscal stimulus in thirty years.  Contrary to the cries of their opponents, Mr Kennett's and Mr Stockdale's reforms will, if Keynesian policies still have any effect, actually stimulate the Victorian economy in 1993-94.

It also means that the costs of structural adjustment in Victoria come very high:  not only are the redundancy payments large, but they are in effect being funded by domestic savings, thereby inhibiting private investment at a time when it is most badly needed.

As a result of the large deficits, State net debt is expected to increase by $3.9 billion to $36 billion by the end of 1993-94.  Most of this will be in the general government sector, and therefore borne directly by taxpayers.  Importantly, Victoria's debt levels will in per capita terms be 2.5 times and 40 times higher respectively than NSW and Queensland.

If the Budget runs to plan, the Victorian Government will end the year with net financial liabilities of around $57.1 billion, which, at nearly $40,000 per household, is 65 per cent above the all-State average.  This, along with Victoria's relatively high level of taxes and charges, will do nothing to discourage further northward migration from Victoria in 1993-94.

There is a silver lining to the Victorian Budget, which is that the expansion in spending, taxing and borrowing has been used productively.  The redundancy payments will reduce the public service by 32,000 full-time positions and yield cost savings in the vicinity of $1.5 billion per year.  The payments to the superannuation schemes will reduce future superannuation payments, and the capital outlays have been concentrated in trading enterprises.

According to forward estimates published in the 1993-94 Victorian Budget, the current account deficit, which is the prime target of the Kennett-Stockdale reforms, will be transformed into surplus by as early as 1994-95;  if this is achieved, it will add around $1.5 billion per year to national savings.  The underlying NFRs of the consolidated sector and the general government sector are expected to decline sharply in 1994-95 and steadily thereafter.

Nevertheless, even if the reforms run according to plan, the net debt and interest payments of the Victorian public sector will continue to grow through 1997;  and without further action Victoria's fiscal position will not improve to the level of NSW until well into the next century.

The Kennett Government has accomplished a very great deal during the last eighteen months.  It is a reflection of the quality of its inheritance that, even though the cost so far has been very high, there is still much more to do.


Queensland

The 1993-94 Queensland Budget continues the Goss Government's full and accomplished utilisation of its immense fiscal inheritance.

When that Government came to power in 1989, it inherited the best fiscally-managed government in Australia.  Public sector debt was 75 per cent less than the all-State average, with no net debt in the general government sector.  It was the only government with a fully-funded superannuation scheme.  It had large surpluses in all sectors including the general government sector.  It was the lowest-taxed State, with a total tax take about 28 per cent below the then all-State average.  Most services -- and particularly the big-ticket items (health, education and welfare) -- were provided more effectively and efficiently than in any other State.  Its public trading enterprises were relatively efficient, highly capitalised, and had the lowest debt and charges in the country.  It had no State Bank, and its other financial enterprises were both profitable and conservatively managed.  It had none of the hidden liabilities which came to haunt most other States.  In addition to this financial position, and in large part because of it, Mr Goss also inherited a State with the best overall economic prospects.

The Goss Government has over the last four years exploited its legacy to the hilt.  It has undertaken a huge expansion in spending, with consumption expenditure up by 47 per cent and new fixed capital expenditures up 57 per cent between 1988-89 and 1992-93.  It has also added a host of new programmes and increased the number of public servants.

Although the gap between Queensland and the other States has been diminished, nevertheless it is still very large.  Importantly, the Goss Government has adopted the fiscal limits of its predecessors:  namely, not to borrow for social capital purposes, which means achieving a surplus in the general government sector;  to fully fund superannuation and other employee entitlements;  and to be a low-tax State.

Despite the vociferous lobbying of the many interest groups, many of whom are Labor supporters, the Goss Government will achieve its stated fiscal goals in 1993-94.  It will at the same time, thanks to its inheritance, be able to produce one of the largest increases in spending in 1993-94.

Consumption spending is expected to increase by 6.8 per cent in 1993-94, which is the third-highest increase among the States after Victoria and South Australia, and the highest if one-off expenditures, such as redundancy payments, are excluded.  Most other types of current spending are also to increase in 1993-94 (see Table 17).

Table 17:  Queensland Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

7280
0
(1208)
1457
40
1151
8720

2713
1422
1291
(120)
2750

11470

7777
0
(1298)
1496
43
1215
92324

3297
1532
1765
(991)
2541

11773

497
0
90
39
3
64
512

584
110
474
871
-209

303

6.8
0.0
7.5
2.7
7.5
5.6
5.9

21.5
7.7
36.7
725.8
-7.6

2.6
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

3381
1346
53
6690
5781
4810
971

12471

3459
1431
101
6858
5778
4770
1008

12636

78
85
48
168
-3
-40
37

165

2.3
6.3
90.6
2.5
-0.1
-0.8
3.8

1.3
Total Deficit
  Current Account
  Capital Account
-1400
-3098
1699
-1295
-2944
1649
105
154
-50
7.5
5.0
-2.9
Underlying NFR
  General Government
  PTE
-1242
-841
-393
-134
-91
-39
1108
750
354
89.2
89.2
90.1
Net Debt
  General Government
1926
-3721
631
-4128
-1295
-407
-67.2
-10.9
Total Net Financial Liabilities (3)69965701-1295-18.5

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


Spending on capital outlays is set to increase sharply in 1993-94, with new capital expenditure expected to grow by 21.5 per cent, the lion's share being in the PTE sector.  Asset sales are also to increase sharply, chiefly as a result of the planned sale of the Gladstone power station for an expected $750 million.

Total revenue is expected to grow by a modest 1.3 per cent in the current year, largely because of a reduction in Commonwealth grants (grants for the State Government's own use are to decline by 0.8 per cent).  Tax revenue is expected to grow at 2.3 per cent during 1993-94, which is, aside from the Northern Territory, the lowest in the State sector.  The public trading enterprises will be called on to make up some of the shortfall in other revenue sources, through dividends and other non-interest payments, which are set to go up by $48 million or 90.6 per cent.

The key to the Queensland Government's superior financial position is its large stock of financial investments.  The Queensland Government has over $14.8 billion in financial investments which, on a per capita basis, is around 270 per cent higher than the all-State average.  The main reason for Queensland's relatively large stock of financial assets is that, unlike other States, it has set aside funds to cover all superannuation liabilities.  These investments (not included in Table 17) are expected to generate $1,374 million in investment income during 1993-94, which is, adjusted for population, about $1,000 million higher than the level earned in other States.  Despite the expected reduction in interest rates, investment income is set to grow slightly in 1993-94.

Although Queensland is again expected to achieve a surplus in all sectors in 1993-94, these surpluses will be much reduced.  In fact, of all the States, Queensland is, after Victoria, expecting the largest deterioration in terms of dollars in 1993-94.  What makes this acceptable is that it will still be the only State to make a contribution to national savings by achieving a surplus (signified by a negative NFR).

The Queensland consolidated sector is expected to achieve an underlying NFR of -$134 million, which is substantially less than the surplus (-$1,242 million) achieved in 1992-93.  The general government and PTE sectors are both expecting large declines in their bottom lines, but will still achieve surpluses (or negative underlying NFRs).

These surpluses, plus the sale of the Gladstone power station, will result in a further large reduction in net debt.  The net debt of the consolidated government sector is estimated to decline from $1,926 million in 1992-93 to $631 million in 1993-94.  The surplus of assets over debt in the general government sector will grow by $407 million to $4,128 million in 1993-94.  In terms of net debt no other State or Territory, except the ACT, even comes close to Queensland.

It is important, particularly for Queensland, that one examine all financial liabilities and not just net debt.  Queensland is in the unique position of having moneys set aside for future employee liabilities.  These funds, however, are subtracted from gross debt in the calculation of net debt, and this is what gives rise to Queensland's negative net debt in the general government sector.  If these funds were used to cover loan liabilities, it would result in there being insufficient funds to cover superannuation liabilities.  Put simply, the same dollars cannot be used more than once.  The trick is to look at net debt plus employee entitlements, labelled here as total net financial liabilities.

If the 1993-94 Budget goes according to plan, the Queensland public sector will end the year with net financial liabilities of $5.7 billion or about $5,600 per household, which is about 23 per cent of the all-State average.

According to the forward estimates included in its 1993-94 Budget, the Queensland Government expects to maintain its surplus position without increasing taxes over the next four years.  Indeed, if all goes to plan, the Queensland public sector will have no net debt by 1996.  But to achieve this, it will, as planned, have to cut back sharply on capital outlays.

It is little wonder that people in their thousands are heading north to Queensland.  In terms of State financial management, it really is in a league of its own.


South Australia

The 1993-94 South Australian Budget began a new reform programme designed to cope with the damage flowing from the losses of the State Bank of South Australia, the SGIC and other government ventures, as well as with a State economy in severe decline.  By the standards of other States, the changes introduced by Mr Arnold in the Budget are at first glance impressive.  The problem is that South Australia's difficulties -- fiscal and economic -- are much deeper than most other States', and than the government of the day publicly acknowledged;  and as with past South Australian Budgets, caution must be exercised in interpretation, as great skill has been used to present a "good set of numbers".  In particular, the Budget and the then government overstated the degree of change.  For example, a large volume of one-off revenue has been used to reduce the budget deficit.  The reduction in public servant numbers said to flow, at huge cost, from the special redundancy programme will be significantly offset by expansion in public servant numbers through other programmes.

Since the Budget was released, a Liberal Government has been elected in South Australia.  The Liberal Party took great pains during the campaign to distance itself from the Kennett-Stockdale type of reforms.  It promised increased spending in most areas, no more cuts to the public service workforce beyond those already committed in 1993-94, and no new taxes or tax increases.  It also promised to reduce the deficit and State debt faster and more than was promised by the Arnold government.  In other words, it promised to serve up a huge slice of magic pudding, an offering unquestioned by the South Australian electorate.

The Liberal Party's proposed way out is privatisation -- which just goes to show that last year's loathsome frog can become this year's handsome prince.  The Liberals promised to pull in $1.3 billion through the sale of government businesses and to use these revenues to reduce the stock of debt and the attendant interest bill over the next few years.

There are good reasons to be sceptical about the financial benefits of the Liberals' privatisation plans and therefore their whole fiscal strategy.  Many of the businesses identified by the Liberals for disposal were already so identified and factored into the debt-reduction plans of the previous government.  The expected sale prices of many assets may be optimistic, and do not adequately consider all the costs -- including the cost required to bring the businesses to a commercial position, the cost of community service obligations, the discount that will be applied by the market for various restrictions to be applied by the Government (such as maintaining headquarters in South Australia), and the revenue lost in the form of dividends, advances and interest surcharges.

Mr Brown's privatisation programme is a good idea, but mainly because it will free a number of enterprises from the clutches of government, rather than because of any potential to generate buckets of money.

Sensibly, Mr Brown has set up a review of public sector finances, which should provide a more feasible direction to his Government's fiscal goals.  In the meantime, the Brown Government plans to continue with the 1993-94 Budget brought down by its predecessor.

The most telling aspect of this Budget is that despite the commitment to expenditure restraint, spending will in fact grow enormously (see Table 18).

Table 18:  South Australia Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

4279
70
(799)
1196
253
525
5455

975
499
475
(151)
1540

6995

4714
210
(806)
1317
256
562
6043

1062
629
433
(555)
512

6555

435
140
7
121
3
37
588

87
130
-42
404
-1028

-440

10.2
200.0
0.9
10.1
1.2
7.0
10.8

8.9
26.1
-8.8
267.5
-66.8

-6.3
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

1755
507
126
2855
3284
2804
480

6139

1843
453
95
3255
3178
2660
518

6433

88
-54
-31
400
-106
-144
38

294

5.0
-10.7
-24.6
14.0
-3.2
-5.1
7.9

4.8
Total Deficit
  Current Account
  Capital Account
503
-453
956
-179
-273
94
-682
180
-862
135.6
39.7
-90.2
Underlying NFR
  General Government
  PTE
672
596
73
396
360
31
-276
-236
-42
-41.1
-39.6
-57.5
Net Debt
  General Government
8486
4862
8310
4801
-176
-61
-2.1
-10.9
Total Net Financial Liabilities (3)1354713371-176-1.3

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


Consumption expenditure is to expand by a massive 10.2 per cent.  Even after excluding outlays for redundancies (expected to grow from $70 million in 1992-93 to $210 million in 1993-94), consumption spending will grow by 6.2 per cent, which is, after Queensland and Victoria, the largest of any State.  Moreover, all other types of current spending -- including interest (10.1 per cent), subsidies to the PTE sector (1.2 per cent), and transfer payments (7.0 per cent) -- are set to expand in 1993-94.  As a result, total current spending is expected to grow by 10.8 per cent this year -- hardly consistent with expenditure restraint.

Not only will capital spending increase, but it will be redirected to social, non-revenue-earning purposes, which is the opposite of what is required.  Expenditure on new fixed capital in the general government sector is set to expand by 26.1 per cent in 1993-94.  Spending on new fixed capital in the PTE sector will be cut by 8.8 per cent;  however, the huge growth in "social capital" will result in growth over the whole public sector of 8.9 per cent.

Asset sales are to increase sharply in 1993-94, by $404 million or 49 per cent, largely through the sale of equity in Sagasco.

The Government expects to pump an additional $87 million into the State Bank this year, which is less than the $650 million poured into the bank in 1992-93, but is, after all these years and billions of dollars wasted on the bank, still a lot of money.

As in years past, South Australia is expecting a hefty increase in revenue.

Revenue from own sources is expected to rocket up by 14.0 per cent in 1993-94, which is, by a considerable margin, the largest increase of any State.

Tax revenue is expected to increase this year by 5.0 per cent, which is the third-highest in the State sector, after Victoria and the ACT.  As is traditional in pre-election budgets, there were no tax increases or new taxes introduced in this Budget;  but the Budget did benefit from the flow-on effect from tax hikes announced in previous years.  South Australian Governments have increased their tax take over the last five years more quickly than any other State, and at twice the rate of the all-State average.  In fact, South Australia, by its above-average tax increases implemented over the last five years, will earn about $400 million in additional revenue in 1993-94.  Given that this represents about twice the interest bill arising from the State Bank bail-out, it is clear that government has so far relied on tax increases rather than expenditure cuts to fund the State's business disasters.

The government planned to extract a very large increase in revenue from its various financial enterprises, much of which will be of a one-off nature.  It is one of the ironies of politics that the outgoing South Australian Government was looking to the State Bank and the SGIC -- institutions which have imposed huge costs on taxpayers (about $3.6 billion) and caused irreparable damage to that Labor Government -- to generate money and produce a good set of numbers for a pre-election budget.  The State Bank and the SGIC, which were large consumers of State funds over the past three years, are expected to pump $318 million into the Government's coffers in 1993-94.  The Bank is expected to make payments totalling $297 million, including a special dividend of $160 million, and dividends, tax-equivalent payments and a guarantee fee of $137 million.  Since its reported operating profit for 1992-93 was only $108 million, the bulk of the moneys to be paid out in 1993-94 must be of a temporary nature and be generated by the drawing-down of assets.  Likewise the $21 million to be paid out by the SGIC in 1993-94 is (despite its description as "a payment in lieu of income tax") actually a transfer of assets, as the SGIC achieved a loss before tax of $42 million in 1992-93.

South Australia does expect a sizeable reduction (5.1 per cent) in own-use grants in 1993-94, but this is largely as a result of the special grant of $263 million received during the later part of 1992-93 from the Commonwealth Government, officially as compensation for the losses of the State Bank, but unofficially as an inducement to vote Labor in the 1993 Federal election.

The pay-off from the large redundancy programme of 1993-94 is likely to be much less than expected.  The programme is expected to result in a reduction of 3,000 full-time positions in the total public sector, including 1,650 in the general government (or budget sector) by the end of the current year.  These cuts will, however, be significantly offset by the creation of new positions under other programmes.  The result is that the total public service will in net terms be reduced by only 1,800 positions and the general government sector by as few as 600 positions.  Given that $210 million is expected to be paid out under the redundancy programme in 1993-94, the cost per net job lost will be about $117,000, which is very high by any standards and will require at least three years with no additional job growth in order for the programme to be justified.

Taken at face value, the South Australian Budget appears to yield a good bottom line in all sectors.  The underlying NFR of the consolidated sector is expected to decline by 41.1 per cent to $396 million in 1993-94, with a similar decline expected in the general government sector.  The PTE sector is also projected to produce a sharp improvement.

Appearances are, however, deceptive, which may not be surprising in a pre-election South Australian Budget.  For if all the temporary sources of revenue and expenditure -- including redundancy payments, asset sales, the capital injections to the State Bank, special dividends from the State Bank and special Commonwealth grants -- are excluded, the NFR in the general government sector will actually increase in 1993-94.

The good news is that net debt should decline in 1993-94 to around $8.3 billion for the consolidated South Australian government sector.  The bad news is that, on a per capita basis, it will remain the fourth-highest in the State sector, after the Northern Territory, Victoria, and Tasmania.

At the end of the current year, it is estimated that the South Australian public sector will have net financial liabilities of around $13.4 billion, which is equivalent to around $28,000 per household and is in per capita terms about 18 per cent above the all-State average.

The South Australian Budget did not include forward estimates.  Given the heavy reliance in the 1993-94 Budget on one-off transactions and the large growth in consumption spending, however, the outlook is unlikely to be promising.  It is clear that much more than is currently planned must be done to reduce State debt over the next three years.  The target should be to reduce consumption spending, particularly in non-essential services such as recreation and arts, and in further cuts to the public service.


Western Australia

The 1993-94 Western Australian Budget was a real surprise;  not because of what it did but because of what it failed to do.

This was the first budget of the Court Government, which had campaigned heavily on the need to reduce debt, cut the size of the public service and reduce taxes.  Indeed, the Court Government is officially committed to achieving a balanced budget, a Triple-A credit rating and a substantial reduction in payroll tax, all during its first term.  Hence a tough first budget was expected.

Expectations of a tough budget were heightened by the First Report of the Independent Commission to Review Public Sector Finances, headed by former Under-Treasurer, Mr Les McCarrey.  The Report supported the need for fiscal reform, and outlined a philosophy and a process through which the reforms could be achieved.  Although the first Report came to the Government a little late (early July), there was still time enough for it to have some impact.

To universal surprise, the 1993-94 Budget was neither tough nor different.  In fact, it was shaped very much like the budget the previous government, led by Dr Lawrence, would have brought down if it had won the election.  It received the acclaim of the big spenders and was roundly criticised by the proponents of fiscal reform.

What happened?  The answer is, very little.  The Court Government, for reasons yet to be fully explained, failed to take control of budgetary policy, and as a result delivered what the head of the Trades and Labor Council of WA called, "a good Labor budget".

The bad news is that the failure of the new WA Government to act in its first budget means that its task is now greater and more urgent.

The good news is, first, that the strong, well-structured WA private sector will make the government's task much easier;  and, second, the government is still committed to reform.  Thus as long as there are no external shocks, such as a reduction in grants from the Commonwealth, the Court Government can still achieve its objectives.

Consumption spending in the WA public sector is set to grow by 3.7 per cent in 1993-94, which, taken on face value, is not large and is below the all-State average (see Table 19).  As is common in this year's round of budgets, however, first appearances are deceptive.  The Western Australian Government, unlike most other State Governments, will not have a special redundancy scheme in operation during 1993-94, which is in itself surprising.  If all one-off expenditures are excluded, WA is set to record the fourth-highest growth rate in consumption spending amongst the States, after Queensland, South Australia and NSW.

Table 19:  Western Australia Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

4675
0
(745)
1153
140
774
5997

1455
683
772
(93)
1443

7440

4850
0
(728)
1102
237
736
6198

1370
636
734
(62)
1437

7635

175
0
-17
-51
97
-38
201

-85
-47
-38
-31
-6

195

3.7
0.0
-2.3
-4.4
69.3
-4.9
3.4

-5.8
-6.9
-4.9
-33.3
-0.4

2.6
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

2010
811
44
3545
3215
2641
574

6760

2161
810
8
3685
3245
2645
6004

6930

151
-1
-36
140
30
4
26

170

7.5
-0.1
-81.8
3.9
0.9
0.2
4.5

2.5
Total Deficit
  Current Account
  Capital Account
485
-335
820
332
-602
934
-153
-267
114
-31.5
-79.7
13.9
Underlying NFR
  General Government
  PTE
604
452
158
421
316
76
-183
-136
-82
-30.3
-30.1
-51.9
Net Debt
  General Government
8346
2598
8678
2922
332
324
4.0
12.5
Total Net Financial Liabilities (3)13376137083322.5

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


More surprisingly, the growth in public sector consumption expenditure -- which must be the focal point of any government intent on cutting its spending -- will be larger in 1993-94 under the Court Government than it was in 1992-93 in the Lawrence Government's pre-election budget.

Another indicator of the Court Government's relatively lax control of consumption spending in 1993-94 is the projected growth in the public service.  The WA Government expects the number of public servants employed in the budget or general government sector to increase by around 610 full-time positions this year.  In contrast, all other governments -- including the Commonwealth and Queensland -- expect to reduce their budget-sector workforce in 1993-94.  Even the Lawrence Government reduced the public service in each of its three years.

The other types of current spending are expected to have mixed fortunes in 1993-94.  Interest payments are expected to decline by $51 million or 4.4 per cent.  Subsidies paid to PTEs will be up by $97 million or 69 per cent, primarily as a result of the new electric rail system in Perth.  Transfer payments are expected to decline by $38 million or 4.9 per cent.  The net result is that total current spending is set to grow by 3.4 per cent in 1993-94.

The WA Government expects to reduce spending on capital in 1993-94, with overall expenditure on new fixed capital set to decline by 5.8 per cent, reductions being scheduled for the general government (6.9 per cent) and PTE (4.9 per cent) sectors.

Asset sales and user charges -- both prime targets for a government intent on cutting debt and the deficit -- are actually expected to decline in 1993-94.

The biggest movement in 1993-94 will be in tax revenue.  Contrary to the Government's election rhetoric, tax receipts are set to increase by 7.5 per cent or $151 million in 1993-94, the largest increase among the States after Victoria.  The rise in tax receipts will be driven by an increase in tobacco franchise fees announced before the Budget and by Western Australia's rapid economic growth.

The PTE sector is expected to put in a poor performance in 1993-94, with a lower operating surplus, sharply lower dividends and higher subsidies.  The cause is again the large losses arising from the State's new passenger rail system, which mask good and improved operating results in a number of other trading enterprises.

Total grants and grants for own use are expected to increase in 1993-94, though, as is common in all States, grants for on-passing grow markedly.

Total revenue is expected to grow by a modest 2.5 per cent.

Despite the lack of reform, the WA public sector is expected -- surprisingly -- to produce an improved bottom line in 1993-94.  The underlying NFR of the consolidated sector is expected to decline by 30.3 per cent to $421 million in 1993-94.  Similar reductions are expected in the general government and PTE sectors.  This goes to show that it is easy for a government to look good if it has a growing and competitive private sector.

The net debt of the Western Australian public sector is estimated to grow from $8.3 billion in 1992-93 to $8.7 billion, or by 4.0 per cent, in 1993-93;  in direct conflict with the Court Government's pledge to reduce debt.  Debt will also increase in the general government sector, but decline in the PTE sector, in 1993-94.

It is estimated that the Western Australian public sector will have accumulated net financial liabilities of $13.7 billion by the end of 1993-94, which is equivalent to $25,200 per household, and in per capita terms will be 5 per cent above the all-State average.

The Western Australian Government -- despite numerous commitments to do so -- has still failed to publish forward estimates.  Forward estimates calculated by the WA Treasury were, however, included in the McCarrey Report, and these showed that the general government sector confronts a large and growing deficit.  Since little was done to change budgetary policy in the 1993-94 Budget, one can only assume that the outlook outlined in the McCarrey report still holds, and that Mr Court has a big task ahead of him.


Tasmania

The 1993-94 Tasmanian Budget is a good, honest budget, which builds on the process of fiscal consolidation begun by former Premier Field in 1990.  The people of Tasmania should be thankful that their political leaders have had the foresight to tackle the State's burgeoning debt since then and to stick with the task;  otherwise they would now be facing a fiscal position much worse than that of either Victoria or South Australia.  Instead, if the process is continued, the State should achieve a higher credit rating within the next few years.

As in past years, the key aspect of the 1993-94 Tasmanian Budget is expenditure restraint, with total outlays expected to decrease by 1.4 per cent (see Table 20).

Table 20:  Tasmania Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

1416
48
(145)
474
45
188
1978

310
167
144
(22)
260

2239

1456
15
(144)
456
44
181
1994

298
138
161
(90)
215

2208

40
-33
-1
-18
-1
-7
16

-12
-29
17
68
-45

-31

2.8
-68.8
-0.7
-3.8
-2.2
-3.7
0.8

-3.9
-17.4
11.8
309.1
-17.3

-1.4
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

560
199
18
940
1144
993
151

2084

587
198
24
954
1129
966
163

2083

27
-1
6
14
-15
-27
12

-1

4.8
-0.5
33.3
1.5
-1.3
-2.7
7.9

0.0
Total Deficit
  Current Account
  Capital Account
15
-85
100
-22
-133
111
-37
-48
11
-246.7
-56.5
11.0
Underlying NFR
  General Government
  PTE
52
75
-23
81
66
16
29
-9
39
55.8
-12.0
169.6
Net Debt
  General Government
3180
1287
3158
1287
-22
0
-0.7
0.0
Total Net Financial Liabilities (3)46824660-22-0.5

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


Consumption spending is expected to grow by 2.8 per cent, and all other types of current expenditures are expected to decline in nominal terms, resulting in growth in total current outlays of 0.8 per cent.

The special redundancy programme will continue, with outlays of $15 million expected in 1993-94.  The programme will contribute to the expected net reduction in the public sector workforce of around 3.5 per cent or 800 full-time positions during the year, and will enable further reductions in consumption spending over future years.

Capital spending is also expected to decline and to be reorientated to more productive purposes in 1993-94.  Expenditure on new fixed capital in the general government sector is expected to decline by 17.4 percent.  This will, however, be partially offset by an increase in new fixed capital expenditure in the PTE sector of 11.8 per cent.

Tax receipts are expected to increase by 4.8 per cent in 1993-94, which is about the average of other States.  The expected rise in tax receipts is based on the full-year effect of the higher tobacco franchise fees announced last year, and on faster economic growth;  no tax increases were announced in the 1993-94 Budget.

As with most other States, the operating performance of the PTE sector in Tasmania is expected to deteriorate slightly in 1993-94, while the dividends paid by the sector will increase sharply.

Revenue from Commonwealth grants is expected to decline and fully offset the increase in own-source income.

The Tasmanian Government will -- primarily through the sale of the TGIO -- treble its asset sales to $90 million in the current year.  Despite the tight control over outlays, the underlying NFR of the Tasmanian public sector is to expand by 55.8 per cent to $81 million in 1993-94.  This will, nevertheless, still be the smallest level in per capita terms among the States, aside from Queensland.  Moreover, the increase emanates totally from increased capital spending in the PTE sector for revenue-earning purposes.  The general government sector is expected to produce a lower (12 per cent) deficit, of $66 million, this year.

Net debt is expected to decline slightly in nominal terms, by 0.7 per cent, to $3.2 billion in 1993-94.  Likewise total net financial liabilities are set to decline to about $4.7 billion.  Despite this decline, Tasmania will continue to have the third-highest level of financial liabilities in per capita terms, after the Northern Territory and Victoria;  the adjustment process, therefore, still has a way to go.

The Tasmanian Government publishes the most comprehensive set of forward estimates of any Australian government, and these show that the Government is clearly on track to achieve not just a steady reduction in its deficit and debt, but a higher credit rating in the near future.

Mr Groom and his Treasurer Mr Rundle are to be congratulated for producing the best and most responsible budget for 1993-94.


The Northern Territory

In its 1993-94 Budget, the Northern Territory followed the lead of the Commonwealth Government in using the slow recovery as an excuse to ease fiscal policy and take a break from fiscal reform.  Fortunately, the NT Government will use its money in a much better way than the Commonwealth:  through increasing capital spending and restraining taxation.

Since 1990, the NT Government has steadily improved its fiscal position.  The NT public sector deficit was reduced from $113 million in 1989-90 to $31 million in 1992-93.  More importantly, the current account deficit was eliminated.  These improvements were achieved through a combination of expenditure restraint, staffing cuts and tax increases.

Despite the gains made during the last few years, the NT public sector's fiscal position remains precarious.  In 1992-93, the NT Government still had the highest stock of public sector debt, and one of the highest deficits, among the States, both in per capita terms and as a share of GSP.  Its own sources of revenue are very limited, narrowly based and fully exploited.  And most importantly, the NT remains inordinately dependent upon the Commonwealth for funds, with Commonwealth grants making up 80 per cent of total revenue, compared with 45 per cent for the overall State sector.

Given the NT Government's fiscal position, and the very high probability that the Commonwealth will cut grants in the near future, the 1993-94 Budget should have continued with the process of deficit reduction and expenditure control.  Instead the Government used the recession as an excuse to ease its purse strings.  It did so in a relatively acceptable manner;  that is, by spending on capital works rather than on recurrent spending and the public service.  It also made a commitment to cut back on capital outlays next year and to continue the tight control over recurrent spending.

Consumption spending is set to grow by 3.2 per cent in 1993-94, which is below the average of other States (Table 21).  Unlike most other States, however, the NT does not have a special redundancy programme.  Moreover, its expenditures were inflated in 1992-93 by an extra pay period, which in turn understates the growth in consumption spending expected in 1993-94.

Table 21:  Northern Territory Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

995
0
(131)
224
42
139
1269

248
188
60
(51)
203

1473

1027
0
(129)
220
38
149
1305

271
207
64
(53)
235

1540

32
0
-2
-4
-4
10
36

23
19
4
2
32

67

3.2
0.0
-1.5
-1.8
-9.5
7.2
2.8

9.3
10.1
6.7
3.9
15.8

4.5
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

182
30
0
285
1123
1062
61

1408

180
31
0
280
1132
1074
58

1412

-2
1
0
-5
9
12
-3

4

-1.1
3.3
0.0
-1.8
0.8
1.1
-4.9

0.3
Total Deficit
  Current Account
  Capital Account
31
-19
51
94
-5
100
63
14
49
203.2
73.7
96.1
Underlying NFR
  General Government
  PTE
89
38
51
152
120
32
63
82
-19
70.8
215.8
-37.3
Net Debt
  General Government
1451
915
1545
993
94
78
6.5
8.5
Total Net Financial Liabilities (3)23672461944.0

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


Aside from consumption spending, most types of current outlays are expected to decline in 1993-94.  In particular, despite a sizeable increase in net debt, interest payments are expected to decline in 1993-94, largely as a result of lower interest rates and the high cost associated with the refinancing of debt in 1992-93.  The exception is transfer payments, which are to grow by a large 7.2 per cent.  The net result is growth in total current outlays of 2.8 per cent in 1993-94.

Capital spending is expected to increase sharply in 1993-94, with new fixed capital expenditure in the public sector set to increase by 9.3 per cent.  The bulk of the additional capital outlays will take place in the general government sector (with new fixed capital spending set to increase by 10.1 per cent), and as such it will be used for "social" rather than commercial purposes and be funded directly by future NT taxpayers.

Asset sales are expected to grow, and user charges decline slightly in 1993-94.

Tax revenue is expected to decline by 1.1 per cent in 1993-94.  Indeed, total own-source revenue will also decline in 1993-94.  The NT is one of the few governments which expects an increase in total and own-use grants, but then only by the tiniest of margins.

The main problem with the NT Budget is the blow-out in its bottom line and a very large increase in net debt.

The underlying NFR of the NT consolidated sector is expected to reach $152 million in 1993-94, which will represent a 70.8 per cent increase over the previous year.  The biggest increase will take place in the general government sector, where the underlying NFR is expected to increase from $38 million in 1992-93 to $120 million in 1993-94, or by 215.8 per cent.

In its Budget, the NT Government emphasises that the level of new borrowing will decline in 1993-94.  Although this is technically correct, it only tells half the story;  when the two halves of the story are combined, the conclusion is radically different.  Governments obtain funds to cover a shortfall between outlays and revenue from two sources:  borrowing and liquidating investments.  In 1993-94, the NT Government will borrow less ($92 million compared with $133 million in 1992-93);  but it will more than compensate for the reduced borrowings by consuming investment.  In general, it does not matter how much of one of these sources of funds is used;  what matters is how much of both of them is used, and combined they are set to increase in 1993-94.

As a result of the large NFR, net debt is expected to increase in 1993-94 by 6.5 per cent to $1.5 billion, which will be the largest increase in the State sector aside from Victoria and the ACT.

The NT Government is expected to have net financial liabilities totalling around $2.5 billion by the end of 1993-94.  This will be equivalent to almost $45,000 per household, and will be the highest of any State or Territory -- 87 per cent above the all-State average.

The Government made a commitment in its 1993-94 Budget not to allow its interest bill to rise in the future.  This commitment very much depends, however, on interest rates remaining low (which is beyond the Government's control) and achieving lower deficits (which it did not do in 1993-94).  Interest payments are expected to decline slightly in 1993-94, but this is primarily a result of the refinancing of a large proportion of the Government's debt that took place in 1992-93.  The consequent inclusion of a large one-off refinancing charge increased the interest bill by $29 million or 14.8 per cent in 1992-93, and allowed a lower average rate of interest in 1993-94.  Although similar refinancing activities may be possible in the future, they are no substitute for lowering the deficit and the rate of growth of debt.

The NT Government does not provide forward estimates with the Budget.  It is clear, however, that the NT Government's task of living within its very meagre means has been set back by the 1993-94 Budget;  as a result the Government will have to compensate by more stringent measures in the future.


Australian Capital Territory

The 1993-94 ACT Budget continues the fiscal contraction which came with self-government, and it does so in a responsible manner.  Of course, the adjustment process is made easier by the gifts bestowed by the Commonwealth:  a recession-proof economy;  a huge stock of gold-plated facilities;  and very little debt.

The ACT Budget, along with that of the Northern Territory, highlights the huge disparity between the largesse the Commonwealth lavishes on its own, and the frugality it shows towards spending by other governments.

The ACT Government is expected to achieve tight control over spending, with total outlays expected to grow by 1.4 per cent (Table 22).

Table 22:  ACT Financial Transactions 1992-93 and Est. 1993-94

Consolidated Sector1992-93
$ Million
Est. 1993-94
$ Million
Change
$ Million%
Outlays
Consumption
  redundancies (1)
User Charges (2)
Interest Payments
Subsidies to PTEs
Transfer Payments
Total Current

New Fixed Capital
  General Government
  PTE
Net Asset sales (2)
Total Capital

Total Outlays

953
0
(118)
51
62
131
1079

248
170
78
(74)
196

1275

961
17
(142)
51
61
140
1070

248
149
99
(69)
222

1293

8
17
24
0
-1
9
-9

0
-21
21
-5
26

18

0.8
-
20.3
0.0
-1.6
6.9
-0.8

0.0
-12.4
26.9
-6.8
13.3

1.4
Revenue
Taxes, Fees, & Fines
Net Op. Surplus PTEs
  Dividends Paid to Gen Govt
Own Source Revenue
Grants total
  for own use
  for onpassing

Total Revenue

481
53
20
606
656
598
58

1262

512
55
25
611
588
525
63

1199

31
2
5
5
-68
-73
5

-63

6.4
3.8
25.0
0.8
-10.4
-12.2
8.6

-5.0
Total Deficit
  Current Account
  Capital Account
-46
-155
109
41
-110
151
87
45
42
189.1
29.0
38.5
Underlying NFR
  General Government
  PTE
48
58
-12
119
111
6
71
53
18
147.9
91.4
150.0
Net Debt
  General Government
59
-160
100
-112
41
48
69.5
30.0
Total Net Financial Liabilities (3)3754164110.9

Source:  ABS 5501.0:  1993-94 Government Financial Estimates.

Notes:

(1) Special redundancy programmes only.
(2) Treated as negative outlay in ABS accounts.
(3) Includes net debt plus employee entitlements.


Consumption spending is expected to grow by 0.8 per cent in 1993-94.  If the special redundancy programme of $17 million is excluded, consumption spending is actually set to decline slightly.  Most other types of current spending are expected to decline in 1993-94, resulting in total current spending shrinking slightly in 1993-94.

Capital spending will also be tightly controlled in 1993-94, with the emphasis on revenue-earning activities.  New fixed capital expenditure in the consolidated sector is expected to show no growth in 1993-94, with cuts in the general government sector of 12.4 per cent and an increase in the PTE sector of 26.9 per cent.

The ACT expects a large reduction (5.0 per cent) in total revenue in 1993-94.  Tax revenue will grow (by 6.4 per cent) as a result both of tax increases and more rapid economic growth.  This will not, however, make up for the expected reduction in other sources of revenue, particularly in grants.  Commonwealth grants for use by the ACT Government will be cut by $73 million or 12.2 per cent, representing the lowest level of grants received in dollars of the day since self-government.

All the evidence suggests that the ACT has received too large a share of Commonwealth grants and therefore that its grants should be reduced.  Nonetheless, it is worth noting that the cutback in grants to the ACT has only taken place after self-government and not under Commonwealth rule.  Indeed the ACT is a clear example of the Commonwealth's inability to provide services efficiently and effectively.

The ACT Government has followed the lead of the larger States in pursuing non-tax sources of revenue.  User charges have risen significantly since self-government, and are expected to rise again in 1993-94 by 20.3 per cent to $142 million (a sum equivalent to 28 per cent of the Territory's total tax take).  Dividends and other non-interest levies on public trading enterprises have also increased sharply since self-government, and will increase again in 1993-94 by 25 per cent.  The ACT Government has also maintained a very large asset sales programme, which will be continued into 1993-94 albeit at a slightly lower level.

Despite tight control of spending and large increases in various own-source revenue, the bottom line of the ACT public sector is expected to deteriorate sharply in 1993-94, though from an excellent position.

The ACT has, since self-government, achieved surpluses in all sectors, which gives it, after Queensland, the best fiscal record amongst Australian governments over the last few years.  The ACT was greatly assisted with parting gifts from the Commonwealth, in the form of generous grants, low debt, low taxes, the most extensive and gold-plated infrastructure system in the country, and a rapidly growing economy.

In 1993-94, things are set to change.  The ACT Government is expecting an underlying NFR of $119 million, which will represent an increase of 148 per cent on the previous year.  Similar deterioration is expected in both the general government and PTE sectors.  Aside from the Northern Territory, the ACT will have the largest underlying NFR in per capita terms in the State sector during 1993-94.

The ACT entered 1993-94 with a very low public sector debt.  The net debt of the ACT consolidated sector stood at $59 million at the end of 1992-93, which in per capita terms was lower than any state including Queensland.  As a result of the 1993-94 Budget, net debt will increase by 69.5 per cent to around $100 million.

The ACT Government believes that it can, over the next four years, reduce its deficits steadily in real terms and thereby contain debt at a manageable level.  This is based on forward estimates which assume continued restraint in current outlays and a large (24 per cent) decline in capital spending.  With the gifts to the ACT Government by the Commonwealth, the ACT should be able to achieve these targets.  Whether or not it will remains highly dependent on Commonwealth policies towards grants.



ENDNOTES

1.  FitzGerald, V.W. (1993), National Savings:  A Report to the Treasurer, AGPS, June.

2.  ANZ Bank (1993), ANZ Savings Report:  1993, November.

3.  In assessing the bottom line of a budget, the primary objective is to ascertain its impact on domestic savings and the private sector.  Accordingly, the liquidation of financial assets by the public sector to fund a shortfall of revenue over outlays is treated as a financing transaction and as part of the deficit.  Although the sale of physical assets has the same impact on the private sector as does the sale of financial assets -- which is that both draw upon savings which would otherwise be available for new private investment -- asset sales are treated as negative outlays rather than as a financing item in government accounts.  Asset sales, being "lumpy", can also, as they do in 1993-94, present a misleading picture of the underlying financial position.  These distortions can be overcome by examining the underlying deficit, which excludes asset sales.

4.  The national accounts format provides two related and often identical measures of the public sector's impact on savings:  the deficit and the net financing requirement.  The deficit measures the difference between total revenue and total outlays minus the amount set aside for provisions.  The net financing requirement is equal to the deficit less advances paid to other governments.  The two measures are identical for the total public sector and the Commonwealth sector.  Since State and Territory governments pay advances to the Commonwealth, the two measures differ in the State sector.  The net financing requirement is often the preferred measure as it can be added across all government sectors.

5.  The total public sector includes States and Territories, Local Governments and the Commonwealth sector.  Each of the governments is, under the national accounts format, divided into:  the general government sector (which includes the non-commercial activities of government and is similar to the budget sector), the public trading enterprise sector (which includes the commercial or semi-commercial businesses of government but not their financial enterprises), and the consolidated sector (which is the consolidation of the general government and the public trading enterprise sectors).

6.  In the public sector care must be shown when dividing outlays into capital and current expenditure.  Some recurrent outlays, such as education, may have an investment component;  whereas some capital expenditure may have no continuing use or salvage value.

7.  Gross debt less financial assets and investments.

8.  In addition to assets sales, payments for refinanced State debt are excluded from the calculation of the underlying net financing requirement.  Since 1991, the States and Territories have been refinancing debt held on their behalf by the Commonwealth.  These payments are treated in the ABS accounts as a below-the-line financing transaction by the States, and have the effect of increasing their net financing requirements.  The repayments do not, however, change the underlying debt position of the States nor do they denote the use of domestic savings by the States.  Conversely, the repayments are treated as an above-the-line source of revenue to the Commonwealth, or, more precisely, as a negative capital outlay, with the effect that its net financing requirement is reduced by the same amount as the State sector's is increased.  However, the Commonwealth does not use the repayments to decrease its stock of debt, but rather to fund its deficit;  accordingly, the repayments represent a draw upon domestic savings by the Commonwealth.  This perverse outcome is overcome by excluding the repayments from the calculation of the State and Commonwealth net financing requirements, thereby reducing the States' reported NFR and increasing the Commonwealth's.  The adjustment will have no effect on the NFR of the total public sector.

9.  These calculations make the Commonwealth's debt-servicing look better than it is, as it includes revenue which is on-passed to other governments in the form of grants and thus not available to meet the Commonwealth's interest payments.  If grants are excluded, the Commonwealth's debt-servicing cost in 1993-94 is expected to reach 9.2 per cent of revenue.

10.  Syntec (1993), Corporate Brief, October.

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