Vol. 7, No. 1
SUMMARY
The Western Australian Government has won our Award for the Most Responsible Budget of 1994.
The South Australian Government and the Tasmanian Government (last year's recipient of the Best Budget Award) also produced very good Budgets in 1994 and were strong contenders for the Best Budget award.
The Commonwealth, for the second consecutive year, has won the Lemon for the most irresponsible Budget.
The NSW Budget is the worst in the States sector in 1994, but it does not come close to the Commonwealth's low standard, and even by the standards of the States it does not deserve a Lemon.
The 1994 Victorian and the Northern Territory Budgets are much better than they appear at first glance. Nonetheless, both Governments have let things slip.
Queensland remains in a budgetary league of its own, enjoying what can only be described as "a virtuous spiral", induced by decades of superior fiscal policy. Queensland is proof that a policy based on balanced budgets, low taxes and low debt is best.
The 1994 budget result for the public sector as a whole is very poor -- thanks to the Commonwealth. The underlying deficit of the public sector will rise to $19.0 billion or 4.2 per cent of GDP in 1994-95, and net financial liabilities of the consolidated sector are set to rise sharply to $288 billion or $51,000 per household.
The reason for the deterioration in the public sector's fiscal position is certainly not a lack of funds: tax receipts are set to increase by 8.0 per cent in 1994-95.
The public sector's fiscal problem arises from continued rapid growth in spending. Commonwealth own-purpose spending will grow by 7.7 per cent in 1994-95 to 21 per cent of GDP -- the highest on record. The States will also increase their spending in 1994-95, though at a slower rate (5.8 per cent); it will be better spent (primarily on capital rather than consumption); and starts from a smaller structural base than the Commonwealth's.
I. REVIEW AND AWARDS
WESTERN AUSTRALIA GETS THE NOD
The Western Australian Government produced the most responsible Budget of 1994.
During 1993-94, the Court Government enjoyed what most governments can only dream of -- a huge revenue windfall. The Government had budgeted for hefty growth in tax receipts in 1993-94 of around 7.5 per cent. Tax receipts, however, grew by over 18 per cent, producing an unexpected bonus of $215 million. The Court Government proved that it had learnt the lesson of the 1980s, by saving rather than spending this windfall. It used the tax windfall, in full, to reduce its deficit and repay debt. So instead of the $223 million budget deficit forecast in the Budget, the Government actually achieved an underlying net financing requirement (1) (NFR) of $26 million in 1993-94: the smallest on record (see Table 1).
Table 1: State and Commonwealth Budget Scorecard (1)
| NSW | Victoria | Qld | ||||
| Outlays -- Per cent Growth in 1994/95 Consumption Net Interest Payments (2) * Subsidies to PTEs Transfer Payments Underlying Total Current Outlays (3) Underlying New Fixed Capital (3) * General Government PTEs Underlying Total Capital Outlays (3) (4) Underlying Own Purposes Outlays (3) | 7.0 -14.7 -14.6 -0.5 4.6 8.0 3.8 11.6 3.5 5.8 | 3.1 2.6 -19.7 0.1 1.4 18.3 5.5 28.4 5.0 2.4 | 5.6 -764.4 29.3 8.5 7.1 22.2 27.0 17.7 27.9 12.1 | |||
| Revenue -- Per Cent Growth in 1994/95 Taxes, Fees, & Fines Dividends Received from PTEs Own-Source Revenue Grants Total for own source for on-passing Total Revenue | 5.0 -16.5 4.0 3.6 3.6 3.6 3.8 | 3.9 -22.2 0.6 1.8 0.9 4.9 1.1 | 4.0 53.9 3.5 0.6 -0.8 6.8 2.2 | |||
| Employment -- Growth FTEs (%) in '94/95 | 2935 | (1.3) | -5044 | (-3.2) | 2531 | (2.0) |
| Balances - $mil 94/95 (93/94) Underlying Current Account Balances (5) Underlying NFR (6) | 1472 895 | (1283) (737) | 658 217 | (431) (298) | 2099 -416 | (2126) (-1058) |
| Liabilities - $bil 94/95 (93/94) Net Debt * General Government Unfunded Employee Entitlements (7) * | 22.0 14.7 17.7 | (21.9) (14.7) (18.0) | 31.8 18.4 16.7 | (31.9) (18.4) (20.6) | -0.7 -4.7 6.2 | (-0.2) (-4.2) (6.3) |
| Net Financial Liabilities (8) * | 39.3 | (39.5) | 46.6 | (48.6) | 5.5 | (6.0) |
| Score Rank out of 9 Ranking Amongst Budgets (out of 9) | 8 | 4 | 6 | |||
| SA | WA | Tasmania | ||||
| Outlays -- Per cent Growth in 1994/95 Consumption Net Interest Payments (2) * Subsidies to PTEs Transfer Payments Underlying Total Current Outlays (3) Underlying New Fixed Capital (3) * General Government PTEs Underlying Total Capital Outlays (3) (4) Underlying Own Purposes Outlays (3) | -2.1 23.1 -2.4 -2.6 4.0 9.1 3.4 18.2 3.0 4.8 | 1.4 1.2 -4.7 5.7 1.7 -1.6 -4.4 0.9 -4.8 -1.0 | 2.2 4.7 -4.5 4.4 4.1 -33.2 -0.7 -49.8 0.0 5.4 | |||
| Revenue -- Per Cent Growth in 1994/95 Taxes, Fees, & Fines Dividends Received from PTEs Own-Source Revenue Grants Total for own source for on-passing Total Revenue | 3.5 104.7 2.3 1.1 0.4 4.5 1.7 | 3.1 12.5 3.0 1.0 0.8 2.0 2.1 | 6.9 17.4 6.4 1.8 1.2 4.9 4.0 | |||
| Employment -- Growth FTEs (%) in '94/95 | -4300 | (-6.1) | -1295 | (-1.6) | n.a. | (n.a.) |
| Balances - $mil 94/95 (93/94) Underlying Current Account Balances (5) Underlying NFR (6) | 80 284 | (86) (410) | 536 -116 | (433) (26) | 33 64 | (14) (127) |
| Liabilities - $bil 94/95 (93/94) Net Debt * General Government Unfunded Employee Entitlements (7) * | 9.0 5.7 5.0 | (8.7) (5.2) (5.1) | 7.9 2.5 5.3 | (8.2) (2.6) (5.1) | 3.3 1.4 1.5 | (3.3) (1.4) (1.5) |
| Net Financial Liabilities (8) * | 14.1 | (13.7) | 13.3 | (13.5) | 4.9 | (4.8) |
| Score Rank out of 9 Ranking Amongst Budgets (out of 9) | 2 | 1 | 3 | |||
| NT | ACT | C'wealth | ||||
| Outlays -- Per cent Growth in 1994/95 Consumption Net Interest Payments (2) * Subsidies to PTEs Transfer Payments Underlying Total Current Outlays (3) Underlying New Fixed Capital (3) * General Government PTEs Underlying Total Capital Outlays (3) (4) Underlying Own Purposes Outlays (3) | 5.0 -1.7 -27.3 6.8 1.2 0.4 -14.1 49.1 -15.6 0.7 | 1.5 13.3 -9.8 1.4 1.2 21.8 3.0 58.8 3.0 1.6 | 3.1 36.1 3.8 4.8 6.6 46.0 25.0 53.7 -4.6 7.7 | |||
| Revenue -- Per Cent Growth in 1994/95 Taxes, Fees, & Fines Dividends Received from PTEs Own-Source Revenue Grants Total for own source for on-passing Total Revenue | -0.5 n.a. -5.9 1.0 0.7 6.2 -0.6 | 2.3 0.0 2.8 0.0 -3.2 1.6 1.4 | 9.3 -30.3 7.7 n.a. n.a. n.a. 7.7 | |||
| Employment -- Growth FTEs (%) in '94/95 | 423 | (3.1) | -430 | (n.a.) | -715 | (-0.5) |
| Balances - $mil 94/95 (93/94) Underlying Current Account Balances (5) Underlying NFR (6) | 79 41 | (43) (21) | 89 10 | (69) (-23) | -12495 17837 | (-13467) (18666) |
| Liabilities - $bil 94/95 (93/94) Net Debt * General Government Unfunded Employee Entitlements (7) * | 1.4 0.9 1.1 | (1.4) (0.9) (0.9) | 0.08 -0.02 0.5 | (0.05) (-0.02) (0.4) | 96.7 85.3 63.1 | (83.7) (72.0) (61.4) |
| Net Financial Liabilities (8) * | 2.6 | (2.5) | 0.6 | (0.5) | 162.0 | (147.0) |
| Score Rank out of 9 Ranking Amongst Budgets (out of 9) | 7 | 5 | 9 | |||
Source: ABS 5501.0 1994-95 Government Financial Estimates; ABS 5513.0 Public Sector Financial Assets and Liabilities; 1994 Budget Papers, and author's estimates.
Notes:
(1) Refers to the general government sector, except for items marked with an asterisk (*) which refer to the consolidated sector, and to items listed as PTEs, which refer to the Public Trading Enterprise sector.
(2) Interest payments minus interest received as a percentage of net revenue (total revenue less interest received).
(3) Excludes special redundancy payments (current outlays only) and identified carry-over received).
(4) Includes expenditure on new fixed capital and capital grants; excludes transactions, such as asset sales, which are treated as negative outlays in ABS accounts.
(5) Current revenue minus current outlays; negative (positive) results denote a deficit (surplus); excludes special redundancy payments and identified carry-over expenditure.
(6) Net financing requirement; negative (positive) results denote a surplus (deficit); excludes major asset sales, transactions associated with refinancing of debt held by the Commonwealth on behalf of the States, special redundancy payments, and various other large temporary outlays and revenue transactions including carry-over expenditure -- the adjustment is large and most significant in the cases of Victoria and SA.
(7) Refers to 1993-94 and (1992-93).
(8) Net debt plus unfunded employee entitlements.
Despite the disappointing implications of its 1993 Budget, the Court Government did not, as it turned out, hold back on the reform front. During 1993-94, it began implementing the reform agenda outlined in its Audit Report (the McCarrey Report), yielding immediate savings in both current and capital outlays.
The Court Government plans a repeat performance in 1994-95. Although tax receipts and own-source revenue are expected to grow only modestly (by around 3 per cent) this financial year, the tax windfall received in the previous year is not expected to evaporate. The Government's fiscal reforms are expected to accelerate. Consumption spending is expected to grow at a very modest rate of 1.4 per cent; capital spending is to be cut by 4.8 per cent; and the bottom line is expected to improve further, with an underlying NFR of -$I16 million (a negative NFR signifying a surplus).
If all goes according to plan, the Court Government should be able to continue both to build up its surpluses and to reduce debt and interest payments, so that by 1997 (the year of the next State election) it will be able to meet its 1993 election pledge to produce a budget surplus -- even if the tax windfall does disappear.
Mr Court has been extremely lucky, but he has made the best use of his luck.
SOUTH AUSTRALIA: AN EXCELLENT BUDGET
The Brown Government's first Budget constitutes a big step forward for that State, and is the runner-up for the Best Budget award for 1994 (see Table 1).
The South Australian Government plans a major assault on current spending in 1994-95. Spending on consumption is expected to decline by 2.1 per cent, as a result of large cuts in the budget-sector workforce -- 4,300 positions in early 1994-95, on top of the 4,200 positions cut over the previous two years. Also scheduled are cuts in subsidies to trading enterprises (by 2.4 per cent) and transfer payments (by 2.6 per cent). This hard work, however, will be more than overwhelmed by the expected sharp rise ($174 million or 23.1 per cent) in interest costs, which shows how far South Australia has yet to go.
One area to escape the expenditure discipline was economic development, heralding the start of another South Australian rendition of "picking winners". The fact that similar plans in the past have consistently picked losers, and contributed greatly to South Australia's economic decline, does not seem to have been absorbed.
The 1994 Budget does include an increase in capital spending. But a large proportion of the capital spending planned for 1994-95 is not new, comprising works carried over from the previous year. Adjusting for the carry-over, capital spending will grow by a modest 3.0 per cent.
The Budget does offer tax cuts to the few "winners". For most, however, taxes will rise slightly: the base of payroll tax is being widened to include superannuation, and the land-tax base has also been broadened. Despite the high level of tax effort, tax receipts are expected to grow modestly in 1994-95 (by 3.5 per cent), which is an indicator of a sluggish economy. The Government is again assiduously extracting more money out of its trading enterprises, with dividends expected to increase by over 100 per cent or $135 million. This will eventually, if not immediately, put further pressure on consumer charges.
Once all the various abnormal factors -- and there are a lot of big ones -- are ironed out, the Budget bottom line will improve significantly and by more than in any other State, with the underlying NFR declining from $410 million in 1993-94 to $284 million in 1994-95. Despite this planned reduction, South Australia will still have the largest deficit in per capita terms among the States.
TASMANIA: ANOTHER GOOD EFFORT
The Tasmanian Government -- the States' quiet achiever and the winner of last year's Best Budget award -- also produced one of the better Budgets of the year.
The Tasmanian Government expects to cut its underlying NFR to $64 million in 1994-95 from $127 million in the previous year. The improved bottom line will be achieved mainly as a result of expenditure restraint. Consumption spending will grow by a responsible 2.2 per cent; subsidies to trading enterprises are to be cut (by 4.5 per cent); while capital spending in the general government sector will remain unchanged in 1994-95. Capital spending in the public trading enterprise sector will decline significantly, following the purchase in 1993 of a new Bass Strait ferry. Tax receipts are expected to grow markedly (6.9 per cent) in 1994-95, largely from faster economic growth, but also as a result of higher taxes on cars and gambling. Tasmania will remain a high-taxing State for some time.
The Tasmanian Government's fiscal strategy, begun in 1990 under Mr Field and continued and extended under Mr Groom, has run its course and achieved its targets. The bad news is that Tasmania's public finances remain, despite these adjustments, very fragile. The Tasmanian Government has explicitly acknowledged this, by issuing a new fiscal strategy designed to continue fiscal consolidation, although at a much more gradual pace.
VICTORIA: SHAKY, BUT STILL ON TRACK
The 1994 Victorian Budget is not easy to decipher. The initial impression is that it back-tracks on reform; on closer review, however, it becomes clear that reform is still proceeding, but at a slightly slower pace.
At first sight, consumption spending is projected to rise by 3.1 per cent, which is very high, given the substantial cuts (14,000 positions) made to the budget-sector workforce over the last few years and the additional staff cuts (5,044) planned for 1994-95. The figures are, however, distorted by a number of legitimate reforms, including the special redundancy programme, the funding of superannuation liabilities, the reclassification of repair and maintenance expenditure from capital to consumption, and allowing departments to carry over unspent funds so as to diminish the incentive for the annual end-of-year spending spree. Adjusted for these factors, current outlays are expected to grow by less than 1.4 per cent in 1994-95.
Capital spending also appears to be up sharply; but because of the high level of carried-over expenditure, this is in large part an illusion. Capital spending in the general government sector, after adjusting for carry-over, will grow by a relatively modest 5.0 per cent, compared with the rate of 31.4 per cent indicated before the adjustments. Capital spending in the public trading enterprise sector will grow significantly (28.4 per cent).
Own-purpose outlays, adjusted for transitional factors, will increase by 2.4 per cent in 1994-95. Although this is not a bad effort, and much better than first appears, it does constitute slippage from forward estimates.
Similarly, the Budget bottom line, adjusted for abnormal items and carry-over spending, will decline by over 27 per cent in 1994-95. The Victorian general government sector is also expected to achieve, after adjusting for abnormal outlays, a $658 million current (or operating) account surplus in 1994-95, which is a huge improvement on the $1 billion-plus deficit recorded regularly in the pre-Kennett days.
A.C.T.: NOT A BAD PRE-ELECTION BUDGET
The ACT's 1994 Budget continued the process of fiscal contraction which comes with self-government. Given that it was a pre-election Budget, it did not do too bad a job. But the ACT Government should and could be doing more, and the pay-off from doing so will be huge.
Current outlays are to be held tightly in check, with total current outlays growing by 1.2 per cent. Consumption spending will be held to an increase of 1.5 per cent, assisted by another significant reduction in staff (down by 430 positions). Indeed, the only type of current outlay which is expected to show significant growth in 1994-95 is interest payments (up 13.3 per cent).
Capital spending will grow only modestly (3.0 per cent) in the general government sector; though a very large capital works programme is planned by trading enterprises (up 58.8 per cent).
Taxes and own-source revenue will rise by 2.3 per cent and 2.8 per cent respectively, which is low by comparison with all other States.
The ACT's problem is that the Commonwealth is much more frugal when it comes to spending by other governments, than it is with its own spending; and with self-rule came large cuts in grants. The downward trend in grants will continue in 1994-95, with grants for the ACT's own use set to decline slightly, by 0.2 per cent, and grants for on-passing to increase by 1.6 per cent.
In sum, the ACT's bottom line will deteriorate this financial year. After achieving an underlying surplus (a negative underlying NFR of $23 million) in 1993-94, the ACT expects a deficit (positive underlying NFR) in the general government sector of $10 million in 1994-95.
The ACT Government should really be doing more while the economy shines. Moreover, the Commonwealth bestowed on the ACT a number of gifts -- including a recession-proof economy, a huge stock of gold-plated facilities, and very little debt -- which make the Territory's adjustment process much easier to tackle than in other States. Indeed, the ACT has the chance, if it makes the necessary adjustment, to become as competitive as Queensland.
QUEENSLAND: EXPLOITING ITS INHERITANCE
The Goss Government continues to exploit its fiscal inheritance. For the fifth consecutive year, the Queensland Government expects to implement large increases in spending. Consumption spending will increase by 5.6 per cent, and new fixed capital expenditure by a whopping 27.0 per cent in the general government sector, with similarly large growth in the public trading enterprise sector (17.7 per cent) during 1994-95. Own-purpose outlays are expected to grow by a massive 12.1 per cent -- a rate over twice the all-State average. Notwithstanding the increase in spending, Queensland will again produce the best bottom line of any Australian government, and that by a Queensland country mile, with a budget surplus of $416 million. This surplus will be achieved with a relatively low level of revenue growth (2.2 per cent), and full funding of superannuation liabilities.
How does the Goss Government achieve this truly wonderful set of numbers? By what can only be called "a virtuous spiral", induced by years of superior fiscal policy. Successive Queensland Governments have implemented a fiscal strategy of balanced budgets, full funding of superannuation liabilities, retaining earnings within trading enterprises to fund capital works, and low taxes (taxes in Queensland are about 20 per cent below the all-State average). The accumulated effect of these policies is that the Queensland Government has a net interest bill which is about $1.5 billion below the standard set in other States. This allows the Government to provide a high level of services and the highest level of capital spending, to maintain the lowest taxes, to balance the budget and to reduce debt. These outcomes in turn attract migrants and investors from the tax- and debt-ravaged States to the south, thus boosting the economy and job growth, and providing the State with more revenue.
Of course, the usual vested-interest groups are trying hard to persuade the Goss Government to abandon its fiscal strategy, but so far it has resisted their pressure. The decision should be final, but the power of interest groups and the allure of an untapped tax base make it difficult and in need of constant defence.
Since the release of the Budget, the Goss Government has announced further expenditure associated with the employment of 300 additional teachers. Although the Goss Government can probably meet this, as well as the large increase in spending announced in the Budget, without abandoning its commitment to a balanced budget, it is pushing its inheritance very close to its limit.
NORTHERN TERRITORY: STILL LIVING BEYOND ITS MEANS
The 1994 Budget of the Northern Territory was a journeyman's effort, though one does not get that impression from a first reading of the financial accounts.
Consumption spending is set to grow by 5.0 per cent in 1994-95; however, this arises primarily from carry-over expenditure of $24 million. Transfer payments are also expected to grow sharply (by 6.8 per cent), but this growth is largely, but not solely, driven by Commonwealth policy rather than by decisions of the NT Government. The NT Government plans to hold in other types of current outlays quite tightly in 1994-95. Overall, current outlays, adjusted for abnormals and carry-overs, are set to grow by a modest 1.2 per cent in 1994-95, which is one-third the rate indicated by the unadjusted data, and, given the large growth in Commonwealth-driven outlays, is a very good effort.
The NT Government does finally plan to cut back on its huge "state building" capital works programme, undertaken over the last decade or more, with expenditure on fixed capital in the general government sector expected to decline by 14.1 per cent in 1994-95. But capital spending by public trading enterprises will more than make up for the decline in the general government sector.
The NT Government's revenue problems are set to continue in 1994-95. Tax receipts and own-source revenue are expected to decline in 1994-95 by 0.5 per cent and 5.9 per cent respectively. Although the decline in tax is caused by a large, and largely unexpected, burst in conveyancing receipts in 1993-94, the growth in own-source revenue will still be very sluggish by the standards of other governments. The Commonwealth, not unexpectedly, has again been stingy with grants to the Territory. Grants for the Territory Government's own purposes are set to grow only 0.7 per cent, while grants for on-passing are set to increase by 6.2 per cent in 1994-95.
The bottom line is that the underlying NFR will increase in 1994-95 (up from $21 million in 1993-94 to $41 million in 1994-95). Net debt -- which is, on a per capita basis, already the highest by a large margin amongst the States and Territories -- is set to increase by 7 per cent in 1994-95, as are unfunded employee entitlements.
In summary, the Territory is right to keep taxes low, and has done a passable job in restraining the growth in spending during 1994-95. However, it is still living well beyond its means, and must either raise taxes or, preferably, reduce its expenditures further.
NEW SOUTH WALES: A PRE-ELECTION BUDGET -- ALL CARROT AND NO STICK
The 1994 New South Wales Budget suffered from an excess of carrots and a shortage of sticks. Relative to the other State Budgets, it was a disappointment. This is hardly surprising, given that it is the pre-election Budget of a minority government.
Consumption spending, driven by an additional 2,935 full-time staff positions (an increase of 1.3 per cent), will grow by 7.0 per cent in 1994-95, which is the highest among the States and even exceeds that of the Commonwealth.
The Fahey Government avoids a fiscal débâcle by achieving cuts to all other types of current spending, including interest (down 14.7 per cent), subsidies to trading enterprises (down 14.6 per cent) and transfer payments (down 0.5 per cent), and also by holding capital spending in the general government sector to a relatively low 3.5 per cent rate of growth. Once again, the reforms put in place under Mr Greiner, and continued under Mr Fahey, are coming to the Government's aid. This outstanding example of the long-term benefits of microeconomic reform should be more widely acknowledged.
The Fahey Government did little on the revenue front, aside from a very large (16.5 per cent or $106 million) cut in dividends from trading enterprises. This should take some of the heat out of industry claims that the Government is appropriating all the gains from reform to itself. The net operating surplus of the State's trading enterprises is also down, largely because of the cuts to electricity and other charges.
The bottom line for the Fahey Government is that its underlying NFR will expand from $737 million in 1993-94 to $895 million in 1994-95. The next government will need to reverse the growth in spending and improve the bottom line if it is to maintain the State's high credit rating. The Fahey Government's proposal to hold a referendum to require future New South Wales governments to balance their Budgets is spot-on.
THE COMMONWEALTH: GETS THE LEMON AGAIN
For the second year running, the Commonwealth wins the Lemon Award for Most Irresponsible Budget.
The 1994 Commonwealth Budget was a disaster. It added fuel to an already over-heated economy, thereby putting even more upward pressure on interest rates. It consumed most of the nation's scarce savings, just as industry was starting to invest again. It forced onto future generations a large stock ($12.5 billion) of non-performing debt. It contributed to a large increase in the welfare state. It pushed even more of the onus of fiscal reform onto the States. As we are now beginning to see, it will result in further large increases in taxation.
Commonwealth own-purpose outlays (excluding grants passed to the States for their own use) are set to increase by 7.7 per cent in 1994-95, taking them to the highest level, measured as a share of GDP, in decades.
Most areas of spending are projected to grow, with the most pronounced increases being net interest payments (36.1 per cent) and transfer payments (4.8 per cent). The only major area of expenditure to be cut was capital. Capital grants to the States, which make up the vast bulk of the Commonwealth's capital budget, are to be cut by 14 per cent; causing overall capital spending by its general government sector to decline by 4.6 per cent in 1994-95. True to form, the Commonwealth plans to increase spending on capital under its own control by 25 per cent.
The Commonwealth's problems are not caused by a revenue shortfall. Tax receipts are expected to grow by $10 billion, or 9.3 per cent, and overall revenue by 7.7 per cent in 1994-95.
Despite rapid revenue growth and because of the expansion in its own spending, the Commonwealth's underlying NFR will decline only slightly, from $18.7 billion in 1993-94 to $17.8 billion in 1994-95. At 3.9 per cent of GDP, the deficit in 1994-95 will be three times the deficit experienced during the comparable stage of the business cycle during the 1980s.
The worst aspect of the 1994-95 Commonwealth Budget is that it will result in another large current account deficit, of around $12.5 billion, which will consume most of the nation's savings and force future generations to pay for today's consumption.
The faster economic growth experienced since the release of the Budget will lower the deficit marginally, but it will not overcome its fundamentally irresponsible nature.
II. FISCAL ASSESSMENT: COMMONWEALTH,
STATES AND TOTAL PUBLIC SECTOR
FISCAL TASKS FOR 1994
Australia's governments faced six main tasks when framing their 1994-95 Budgets. They were to:
- meet the national savings targets identified in the National Savings Report; (2)
- phase out borrowing to fund current outlays;
- slow the growth of, and in some States reduce, debt;
- reduce the level of unfunded superannuation and employee-related liabilities;
- stop the decline in capital spending, where necessary; and
- keep taxes and charges, particularly on job-creating businesses, low.
The Commonwealth also faced the high-priority task of cutting back the huge fiscal stimulus ($23 billion or 5.4 per cent of GDP) which it pumped into the economy over the 1990s. (3) The States have only a minor and supplementary role in fiscal stabilisation, and they did not contribute to the fiscal expansion of the last five years -- that was solely the Commonwealth's doing. Moreover, the States have, since 1992, cut back significantly on their spending and deficits.
The Commonwealth also faced the task of putting some balance back into the federal system, by reducing its stranglehold on State spending and by providing parity between its own spending and grants to the States.
Figure 1: Commonwealth Fiscal Policy -- 1993-94 and 1994-95 Budgets
(Changes in Budget Deficit)
Source: Commonwealth Budget Paper No. 2, 1993-94 and 1994-95.
ECONOMIC STABILISATION: IT'S THE DEFICIT, STUPID!
Despite the need for fiscal restraint, the Commonwealth injected yet another sizeable fiscal into the economy in 1994-95 and beyond. As shown in Table 2, the underlying NFR of the Commonwealth general government sector is set to decline slightly from $18.7 billion or 4.4 per cent of GDP in 1993-94 to $17.8 billion or 3.9 per cent of GDP. However, this reduction is illusory: it arises exclusively from cyclical, therefore temporary, factors. In structural terms, the 1994 Commonwealth Budget added about $2.2 billion or 0.5 per cent of GDP to the deficit in 1994-95, as well as to the prospective Budgets for 1995-96 and 1996-97 (see Figure 1).
Table 2: Underlying Net Financing Requirement (1)
$ billion (% of GDP)
| Sector: | General Government | Consolidated | ||||||
| 1993-94 | 1994-95 | 1993-94 | 1994-95 | |||||
| States | 1.2 | (0.3) | 2.2 | (0.5) | -0.3 | (-0.1) | 1.8 | (0.4) |
| C'wealth | 18.7 | (4.4) | 17.8 | (3.9) | 17.6 | (4.1) | 17.7 | (3.9) |
| Total Public (2) | 20.0 | (4.7) | 19.4 | (4.3) | 17.4 | (4.1) | 19.0 | (4.2) |
Source: ABS 5501.0: 1994-95 Government Financial Estimates
Notes:
(1) Excludes proceeds from major asset sales and refinance of State debt. It differs from the underlying NFR measurement referred to in Table 1 in that it includes special redundancy payments and carry-over expenditure.
(2) Includes local government.
The Commonwealth has thus increased its structural deficit in each of the two Budgets since its deficit reduction plan was announced. The 1993 Budget eased fiscal policy by $2.5 billion; it did, however, include a range of revenue measures aimed at cutting back the deficit through to 1996-97. But the 1994 Commonwealth Budget more than offset the cuts put in place for the 1994-95 fiscal year, resulting in the structural deficit for 1994-95 being $1.3 billion higher than before the debt reduction plan was even announced. The cuts put in place in the 1993 Budget for 1995-96 and 1996-97 were also significantly eroded -- indeed, the cuts for 1995-96 were reduced by over 60 per cent.
The States and the trading enterprise sectors of both Commonwealth and States will add to the fiscal stimulus by running higher deficits or reduced surpluses in 1994-95. The result, as shown in Table 2, is a higher total public sector deficit in 1994-95 of $19 billion or 4.2 per cent of GDP. Even though, as discussed above and below, there are some good reasons for the deterioration in the bottom line of the State general government sector and trading enterprise sectors, the fact remains that the fiscal stimulus generated by the public sector will expand in 1994-95, at a time when it should have been cut dramatically.
Higher-than-forecast growth will undoubtedly result in the deficits of both State and Commonwealth sectors coming in below budget forecasts. If realised, however, these reductions will be only cyclical. The structural stimulus will remain and, indeed, will represent even more of a danger to sustainable growth. There is also the very real possibility that the large increase in capital works planned for the trading enterprise sector and the general government sector of some States will not eventuate. If so, this will ease the pressure on the economy in the short term, but in the wrong area.
NATIONAL SAVINGS: REMEMBER DOCTOR'S ORDERS
The National Savings Report, prepared by Dr Vince FitzGerald in June 1993 for the Federal Treasurer, set out what can reasonably be taken to be a minimum set of national savings goals for the Commonwealth and the States. They are that:
... the Commonwealth should seek to return its overall general government budget to its "natural position" of surplus, while the States should seek to return to the historical long-term trend decline in their overall general government deficit. [emphasis added] (4)
Under policy settings in place prior to the 1994 Budget, the States sector was on track to achieve its national savings goals. The Commonwealth's policy settings prior to the 1994 Budget fell substantially short of the mark. Its much-heralded deficit reduction plan aimed only to reduce the deficit, not to achieve the necessary structural surplus. Thus the 1994 Commonwealth Budget, for national savings as well as economic stabilisation purposes, should have reduced the budget deficit significantly in 1994-95 and in each subsequent year.
As indicated above, the Commonwealth failed to meet its national savings goal. The 1994 Commonwealth Budget will produce a larger deficit annually over the period 1994-95 to 1996-97 than would have occurred under previous policy settings (Figure 1).
The States sector also diverted from its national savings goals in 1994, by producing a large increase in its budget deficits (Table 2). However, according to forward estimates, the States expect to return to the straight and narrow in 1995-96; producing a reduction in their deficits, culminating in a budget surplus for the States sector in 1996-97, which, if achieved, will more than meet its savings goals. Moreover, from a savings standpoint, the rise in the States' deficit in 1994-95 is no problem, as it is driven almost exclusively by an increase in investment. In contrast, the Commonwealth's is driven solely by consumption.
Another indicator of public savings is the current account balance of the general government sector, which shows whether (and by how much) a government is borrowing to fund current consumption.
As shown in Table 3, the Commonwealth in 1994-95 is expected to produce another large current account deficit -- $12.5 billion, or 2.8 per cent of GDP. Although this represents a reduction on the previous year (by $1.0 billion or 7 per cent), it still represents a very high and unacceptable level of dissavings.
Table 3: Current Account Balance (1)
$ billion (% of GDP)
| 1993-94 | 1994-95 | |||
| States | 3.5 | (0.8) | 4.0 | (0.9) |
| C'wealth | -13.5 | (-3.1) | -12.5 | (-2.8) |
| Total Public (2) | -8.3 | (-2.0) | -6.6 | (-1.5) |
Source: ABS 5501.0: 1994-95 Government Financial Estimates.
Notes:
(1) Current revenue minus current outlays.
(2) Includes local government.
In contrast, the States sector is expected to produce a large current account surplus of $4.0 billion in 1994-95, which is up on the previous year and, at 0.9 per cent of GDP, is the highest in at least 20 years. Moreover, if the large special redundancy payments made by the States over the last few years are excluded (on the reasonable grounds that they represent an investment designed to achieve lower future costs), the current account surplus would be significantly larger at around $5.0 billion or 1.1 per cent of GDP in 1994-95, which represents an increase on 1993-94 of 13 per cent similarly adjusted.
Even though the States' current account result is an improvement on previous years, and a far superior result to the Commonwealth's, it is, however, nothing to crow about; more can and should be done. The current account surplus does not include depreciation or "capital consumption"; if this is included -- as it should be -- it is likely to cause the States' current account balance to turn negative. The consideration of "capital consumption" would also have a depressing effect on the Commonwealth's balance, but since the lion's share (80-90 per cent) of general government capital is owned by the States, the effect will be greater on the States' balance.
INTERGENERATIONAL: TIME TO STOP RIPPING OFF OUR CHILDREN
Current account deficits are not just an economic concern, but also a moral one. When a government runs a current account deficit, it is not just putting pressure on savings and stimulating the economy; it is also forcing future generations to pay for today's consumption. If current account deficits are a rare event, caused by a severe recession, and compensated by current account surpluses in other years, there is little problem. But this is not the case in 1994-95; indeed, it seldom is the case. The Commonwealth racked up large current account deficits over the three successive years to 1993-94 despite a recovering economy. The moral task for the Commonwealth in 1994-95 was, then, to cut back sharply on its current account deficit. If it wanted to increase assistance to the long-term employed, then it should have found the funds from current sources. It not only failed to do this, but claimed to be acting in the name of fairness and equity. Obviously, the Commonwealth's sense of fairness does not extend much beyond current voters.
DEBT: TIME TO PUT AWAY THE BANKCARD
Although public sector net debt in Australia is low by OECD standards (the fifth lowest in the OECD in 1993), there are six good reasons why the growth of debt should have been cut back in 1994-95:
- debt is very high in some individual States;
- total general government debt has been growing at an alarming rate during the 1990s -- 64 per cent over the four years through 1993 -- and under current policy settings, it will continue to expand through the decade and approach the level considered by the IMF to be excessive (viz., 40 per cent of GDP);
- the cost of servicing debt, after being cushioned by declining interest rates during the last recession, was beginning to rise sharply (up 14 per cent in 1993-94), and will continue to rise under the pressure of higher interest rates;
- a large portion of new borrowing ($32 billion over the three years to 1993-94) is being used to fund recurrent outlays;
- unfunded employment liabilities (mainly unfunded superannuation), which are often strategically overlooked, are large and growing -- under current policy settings, they are, indeed, forecast by 2032 to consume 24 per cent, in comparison with the current 15 per cent, of the Commonwealth wage bill; (5) and
- the OECD average does not constitute an appropriate fiscal benchmark. Most of the OECD countries have serious debt problems, and many have full-blown debt crises. By Australian standards, the standards of our Asian neighbours and the standards of intergenerational equity, the level and growth in debt are currently way too high.
As shown in Table 4, the Commonwealth failed to meet its debt objective, while the States performed admirably.
Table 4: Public Sector Net Debt
$ billion (% of GDP)
| Sector: | General Government | Consolidated | ||
| 1993-94 | 1994-95 | 1993-94 | 1994-95 | |
| States | 38.8 (9.1) | 38.9 (8.6) | 75.1 (17.7) | 74.8 (16.5) |
| C'wealth | 72 (17.0) | 85.3 (18.8) | 83.7 (19.7) | 96.7 (21.3) |
| Total Public (1) (2) | 110.8 (26.1) | 125.8 (27.6) | 161.4 (38.0) | 175.7 (38.8) |
Sources: 1993-94 -- ABS 5513.0 Public Sector Financial Assets and Liabilities, Australia; and
1994-95 -- author's estimates based on data from ABS 5501.0 and ABS 5513.0.
Notes:
(1) Data on general government do not include local government.
(2) Data on consolidated sector do include local government.
The level of net debt in the consolidated Commonwealth sector is estimated to grow by 15.5 per cent to $96.7 billion during 1994-95. Given that the Commonwealth trading enterprise sector will, for the third consecutive year, reduce debt, the expansion in debt will arise solely in the general government sector (up by 18.5 per cent to $85.3 billion, or 18.8 per cent of GDP); and in turn virtually all (95 per cent) of this will be used to fund current consumption.
Net debt in the States sector is expected either to decline (by $0.3 billion in consolidated sector) or to increase only slightly (by $0.1 billion in the general government sector) during 1994-95. As a result of the Commonwealth's huge borrowing requirement, total public sector debt will again rise in 1994-95, reaching $175.7 billion or 38.8 per cent of GDP. Total general government debt is expected to reach $125.8 billion or 27.6 per cent of GDP.
The Commonwealth will suffer the penalty and the States reap the rewards from their approaches to debt in 1994-95 (see Table 5). The Commonwealth's debt-servicing cost will increase sharply from 6.1 per cent to 7.6 per cent of total revenue. The rise in interest costs is particularly alarming in the general government sector, where net interest payments are set to swell by 36 per cent to $6.7 billion (Table 1) -- to a level, that is, nearly twice the sum allocated to all labour and employment programmes.
Table 5: Debt Servicing Cost, (1) Consolidated Sector
(Net interest paid as % of total revenue)
| 1993-94 | 1994-95 | |
| State | 11.5 | 11.0 |
| C'wealth | 6.1 | 7.6 |
| Total Public (2) | 10.0 | 10.7 |
Source: ABS 5501.0: 1994-95 Government Financial Estimates.
Notes:
(1) Interest payments minus interest received as a percentage of total revenue less interest received.
(2) Includes local government.
In contrast, the debt-servicing costs of the States sector will decline in 1994-95, from 11.5 to 11.0 per cent of total revenue. Indeed, as a result of their efforts to reduce debt and interest costs, the States will spend about $2.5 billion (or 3.5 per cent of total revenue) less on interest costs in 1994-95 than they did in 1990-91. Nevertheless, the debt-servicing ratio of the States sector remains high -- much higher than the Commonwealth's. There is still much work to be done, although, according to the forward estimates, the task is recognised and in hand.
The Commonwealth and States sectors are approaching the management of unfunded employee entitlements in a manner similar to their approaches to debt. Although forecasts of unfunded employee entitlements for 1994-95 are not available, the approach of the two levels of government is apparent from the 1993-94 results (as published by the ABS) and from the various policy initiatives announced in the Budgets.
As Table 6 shows, during 1993-94 the Commonwealth's (consolidated sector) unfunded employee entitlements grew by $1.7 billion, or 2.8 per cent, to $63.1 billion. During the same year, the States cut their unfunded employee entitlements by $3.9 billion, or 6.7 per cent, to $54 billion. The cuts at the State level in 1993-94 were large enough to result in a reduction in unfunded employee entitlements for the public sector as a whole. The States achieved these cuts through a range of reforms, including special redundancy programmes; funding of newly-accruing entitlements; and, in some States, actual funding of accrued entitlements.
Table 6: Unfunded Employee Entitlements, 1993-94
| Sector: | Consolidated | ||
| $ Billion | Growth | ||
| % | $ Billion | ||
| State | 54.0 | -6.7 | -3.9 |
| C'wealth | 63.1 | 2.8 | 1.7 |
| Total Public (1) | 117.1 | -1.8 | -2.2 |
Source: ABS 5513.0 Public Sector Financial Assets and Liabilities, Australia.
Note: (1) Includes local government.
The Commonwealth has done little or nothing in the general government sector to reduce the cost of its unfunded employee entitlements. This is particularly worrying given that the Commonwealth provides, by a large margin, the most generous set of entitlements across the public sector, with Commonwealth superannuation entitlements being around 25 per cent higher than the levels paid in the States sector. (6) The Commonwealth public trading enterprises sector, however, has a low and declining level of unfunded employee entitlements.
The States sector, according to the information supplied in the State Budget papers, will again reduce unfunded employee entitlements in 1994-95, while the Commonwealth announced no policy change, clearly implying further growth.
I estimate for 1994-95 of the net financial liabilities of the public sector (net debt plus unfunded employee entitlements) are presented in Table 7, based on available information. Three observations can be made: unfunded employee entitlements make up a large proportion of public sector liabilities; these liabilities are very large; and the Commonwealth, despite the fact that it is responsible for only a small share of the public sector capital base and workforce, accounts for the majority of public sector liabilities.
Table 7: Net Financial Liabilities (1)
Consolidated Sector 30 June 1995
| Sector | States | C'wealth | Total Public (2) |
| $ Billion | 127 | 162 | 288 |
| $'OOO per Household | 23 | 29 | 51 |
| As % share of GDP | 28 | 35 | 63 |
Source: Author's estimates based on ABS 5501.0 and ABS 5513.0 and the 1994 Budget papers.
Notes:
(1) Net Debt plus unfunded employee entitlements.
(2) Includes local government.
REVENUE: WHERE IS THE SHORTAGE?
In the 1993 Budget, the Commonwealth put in place a large range of tax increases. Indeed, the indirect tax measures imposed in the 1993 Budget will, by 1997, raise more revenue per annum than would have been collected by the GST proposed by the Coalition Parties during the 1993 Federal election. Many of the changes announced in 1993 will begin to take effect only in 1994-95. The States have, to differing degrees, increased taxes during the 1990s, some to an unprecedented extent. Indeed, the tax effort in place prior to the 1994 Budgets in the States sector was arguably greater than at any time since the States lost income tax to the Commonwealth in 1942.
As shown in Table 8, tax receipts are expected to grow significantly in 1994-95, with the most marked growth in the Commonwealth sector. Public sector tax receipts will rise this financial year by 8.0 per cent, representing an increase in real terms of 5.3 per cent. Commonwealth tax revenue is expected to increase by 9.3 per cent (or 6.6 per cent in real terms) this year even without any major tax initiatives. The States' tax receipts are predicted to show relatively modest growth of 4.1 per cent in 1994-95. This is not, however, nearly as slight as it appears, since it comes on top of very large, and largely unexpected, growth the previous year. State tax receipts grew by 11 per cent in 1993-94, which was twice the rate of growth predicted in the 1993 Budgets. The States have probably again underestimated the growth in tax in 1994-95, though not by as much as they did in the previous year.
Table 8: Revenue, General Government, 1994-95
(per cent growth)
| State | C'wealth | Total Public (1) | |
| Taxes | 4.1 | 9.3 | 8.0 |
| PTE dividends | 2.1 | -30.3 | -6.8 |
| Total own-source | 4.2 | 7.7 | 6.9 |
| Grants | 1.8 | n.a. | n.a. |
| Total Revenue | 3.1 | 7.7 | 6.9 |
Source: ABS 5501.0: 1994-95 Government Financial Estimates.
Note: (1) Includes local government.
Other sources of revenue are expected to be rather subdued in 1994-95, primarily because they have been pushed to the hilt over the last decade by governments desirous of money but not wanting to be seen to be taking it. The decline (Commonwealth sector) or slow growth (States sector) in dividends paid by trading enterprises is a significant reversal from previous years, and illustrates the point that a cow can only be made to give so much milk.
The Commonwealth is continuing its beggar-my-neighbour grants policy. States grants are expected to grow by only 1.8 per cent (down 0.9 per cent in real terms) compared with growth in Commonwealth current outlays of 6.6 percent.
CURRENT OUTLAYS: EVER UPWARD
The public sector's problem in 1994-95, very clearly, is not a shortage of revenue, but an excess of spending. The Commonwealth's large structural deficit has arisen not primarily as a result of cuts to taxes, but rather from large increases in current spending. (7) Between 1989-90 and 1993-94, Commonwealth current outlays grew on average by 8.5 per cent per year, and from 23.5 per cent to 27 per cent of GDP. In the past, States got into debt problems not because they failed to raise taxes and other revenue, but because they let spending on recurrent consumption outstrip their very ample means. Some States also squandered a lot of money in underwriting entrepreneurs.
Although the Commonwealth Government and the pixies in the Senate made a great deal of noise about cutting outlays in the 1993 Budget, the reality is that virtually no structural cuts were achieved. The 1993 Commonwealth Budget was simply a revenue-raising exercise. In contrast, the States as a whole were able to approach their 1994 Budgets with spending under control, having over the previous two years implemented the most thorough overhaul of current spending in their history, with current outlays growing by 0.5 per cent a year in nominal terms despite large increases in redundancy payments. Thus in 1994, the Commonwealth had ahead of it the hard task of reining in current outlays, while the States had simply to keep on the straight and narrow.
The Commonwealth did not even try to contain current outlays in its 1994 Budget (see Table 9). Despite a rapidly-growing economy, with a consequent decline in demand for welfare and other transfer payments, Commonwealth current outlays are expected to increase by $7.6 billion or 6.6 per cent in 1994-95. The main sources of growth are transfer payments (up $2.4 billion), interest (up $2.2 billion or a whopping 36.1 per cent), and grants to other governments and the private sector (up $2.1 billion or 6.6 per cent). Indeed, all areas of current spending will grow in 1994-95 in the Commonwealth sector. In structural terms, the Budget increased current spending $2.2 billion in 1994, as well as in each of the three subsequent years (Figure 1).
Table 9: Growth in Current Outlays, Consolidated Sector, 1994-95
| State | C'wealth | Total Public (1) | ||||
| $ billion | % | $ billion | % | $ billion | % | |
| Consumption | 1.9 | 4.1 | 0.9 | 3.1 | 3.3 | 3.9 |
| Net Interest | -0.2 | -2.5 | 2.2 | 36.1 | 2.1 | 14.5 |
| Subsidies to PTEs | -0.2 | -9.3 | 0.0 | 3.8 | -0.2 | -7.0 |
| Grants | 0.1 | 4.5 | 2.1 | 6.6 | n.a. | n.a. |
| Transfer Payments | 0.1 | 1.0 | 2.4 | 4.8 | 3.0 | 4.8 |
| Total | 2.4 | 3.8 | 7.6 | 6.6 | 8.8 | 5.8 |
Source: ABS 5501.0: 1994-95 Government Financial Estimates.
Note: (1) Includes local government.
The States' control over current outlays appears to be a little shaky. The States sector plans to increase consumption spending (which is primarily made up of wages and salaries) by 4.1 per cent. Given the large cuts made to the States sector workforce over the last few years and the additional workforce reductions (some 5,180 positions), as well as the reduction in expenditure on special redundancy programmes planned for this financial year, this is a large rate of growth. The States are undertaking a number of reforms which will artificially inflate consumption spending in 1994-95, including increased funding of superannuation liabilities, reclassifying some expenditure as consumption, and allowing departments to carry over expenditure. Nevertheless, consumption expenditure is set to increase in real terms, and to erode the costly gains made by the States in previous years. The main reason for the sharp growth in current spending is the usual one -- elections. New South Wales and Queensland, the States which account for the lion's share of the growth in consumption spending, are both expecting elections in 1995 (see Table 1). On the positive side, the States made up for the growth in consumption spending in 1994-95 by very tight control over all other areas of current spending; so that total current outlays will grow by only 3.8 per cent in the States sector in 1994-95.
CAPITAL: GROWTH? MAYBE ...
Although governments have not been shy in singing the praises of public infrastructure, their actions have fallen far short of their rhetoric. Over the last ten years, capital expenditure in the public sector has been on a declining trend, and in some States it has failed even to keep up with depreciation. A large proportion of this decline in capital spending can been justified: by the excessive spending and surplus capacity generated in the early 1980s; by the shift towards greater private provision and ownership of what was once public infrastructure; and by improvements in capital productivity. Nevertheless, in some States -- though not all -- these reasons are starting to wear thin, and it is time for more to be spent on capital.
The ABS accounts imply that the public sector is about to put aside its parsimonious ways, and spend big on capital in 1994-95. As shown in Table 10, expenditure on new fixed capital is predicted to expand sharply at all levels and in all sectors of government. The Commonwealth is expecting the most rapid expansion, with 25 per cent growth predicted in the general government sector and 53.7 per cent growth in the public trading enterprise sector. The States are also forecasting sharp growth in new fixed capital, in both the general government sector (14.2 per cent) and in public trading enterprises (13.7 per cent).
Table 10: Growth in New Fixed Capital, 1994-95 (per cent)
| Sector | State | C'wealth | Total Public (1) |
| General Government | 14.2 | 25.0 | 12.4 |
| PTE | 13.7 | 53.7 | 25.3 |
| Consolidated | 13.9 | 46.0 | 19.0 |
Source: ABS 5501.0: 1994-95 Government Financial Estimates.
Note: (1) Includes local government.
Not all is as it appears. A very large proportion of the planned increase for 1994-95 has been carried over from the previous year. One must also be sceptical about the ability, let alone the desirability, of governments to achieve the large level of capital works planned in 1994-95 at a time when private capital spending will be going like gang-busters.
The Commonwealth will actually reduce its overall expenditure on capital in the general government sector (see Table 1). As a result of its unilateral decision to eliminate general-purpose capital grants to the States (it continues to provide grants with strings attached), Canberra has cut total capital grants by 14 per cent; consequently, total capital outlays will decline by 4.6 per cent in 1994-95.
OWN-PURPOSE OUTLAYS: COMMONWEALTH'S UP, STATES' UP
Overall spending in the Commonwealth sector is up sharply and to a record level (Table 11). Commonwealth own-purpose outlays (excluding grants paid to the States for their own purposes, but including grants for on-passing by the States) are expected to grow by 7.7 per cent in 1994-95, to a level equivalent to 21 per cent of GDP -- which will be the highest on record. This figure, more than any other, should expose the deceit behind the Commonwealth's current claim that its outlays are as low as they should go.
Table 11: Own-purpose Outlays, (1) General Government,
1994-95 (per cent growth)
| State | 5.8 |
| C'wealth | 7.7 |
Source: ABS 5501.0: 1994-95 Government Financial Estimates.
Note: (1) Excludes grants, advances, subsidies, other payments made on behalt of other governments and trading enterprises but includes grants for on-passing by other governments.
The own-purpose outlays of the States sector (capital and current outlays, excluding grants paid to local government and Commonwealth grants on-passed) are also expected to grow markedly (5.8 per cent) in 1994-95, and at a much higher rate than expected. However, if the data are adjusted for the many temporary factors, the expected growth in State own-purpose outlays is 4.6 per cent, which, although a more respectable figure, is still higher than predicted under the 1993 Budget settings.
FEDERAL-STATE RELATIONS: STILL DEGENERATING
During the 1980s, and even more significantly in the 1990s, the Commonwealth increased its control over the public purse and the States' finances. For those who consider the federal system, as enshrined in the Constitution, to be the appropriate system of government for the Australian nation, this is a very disconcerting trend. The 1994 Budget provided another chance to reverse this trend.
Not surprisingly, however, the trend will continue in 1994-95. Commonwealth own-purpose outlays will grow (by 7.7 per cent), and will do so more rapidly than will grants to the States (by 4.5 per cent). Grants paid to the States for their own purposes will grow at a much lower rate (1.2 per cent) than grants for on-passing (4.4 per cent). Grants provided by the Commonwealth with strings attached (tied grants) are expected to grow more rapidly in 1994-95 (4.0 per cent) than will general purpose grants (2.3 per cent). (8)
The Commonwealth did, surprisingly, agree to maintain general-purpose current grants in real per capita terms (increasing by 4.5 per cent) in 1994-95. This was, however, offset significantly by the elimination of general-purpose capital grants. The Commonwealth also promised to maintain grants in real per capita terms over the medium term (through 1997), which (if honoured, and not subject to other offsetting cuts) will be a positive move.
SUMMARY
The public sector's Budget result for 1994 was, on the whole, a poor effort -- thanks to the Commonwealth.
The public sector deficit, which should have been cut significantly in 1994-95, will grow as a share of GDP in 1994-95.
The public sector will diverge even further from its national savings goals, and remain a big net consumer of national savings.
The current account balance of the public sector will improve in 1994-95, but not by enough.
Public debt and debt-servicing costs will grow sharply in 1994-95, as will the total financial liabilities of the public sector.
Unfunded employee entitlements, thanks to the hard work done in the States sector, will decline in 1994-95.
Capital spending will rise significantly in the public sector.
The tax take will again increase in 1994-95, as a result of tax hikes announced in previous years and a few additional measures announced in the 1994 Budgets.
Current outlays will again rise sharply.
Centralisation of revenue, spending and fiscal control to Canberra will continue.
The Commonwealth is overwhelmingly responsible for the poor overall result. Indeed, the 1994 Commonwealth Budget failed to accomplish a single fiscal task.
The States sector did falter a bit in 1994, particularly on consumption spending, but not badly; and it is still on track to meet most of its fiscal task in 1994-95 and over the medium term.
The 1994 round of Budgets widened the gap between the Commonwealth and the States. It proved yet again that the States are setting the pace of fiscal reform, while the Commonwealth is not only lagging behind the States but showing signs of having lost the plot altogether.
ENDNOTES
1. The national accounts format provides two related and often identical measures of the public sector's bottom line: the deficit and the net financing requirement. The deficit measures the difference between total revenue and total output, 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 to get a consolidated total and accordingly will be used herein.
Each of the levels of government -- Commonwealth, States (which includes the Territories) and local government -- and the total public sector (which includes Commonwealth, State, Territory and local government) are, 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 commercial and semi-commercial businesses of government but not their financial enterprises); and the consolidated sector (which is the consolidation of the general government and public trading enterprise sectors).
2. FitzGerald, V.W. (1993), National Savings: A Report to the Treasurer, AGPS, June.
3. See Richard J. Wood, "Commonwealth Budget Expenditure -- It Can (and Should) Be Cut", Study Paper No. 23, December 1994.
4. FitzGerald, op. cit., page 73.
5. The Auditor-General (1993), "The National Bankcard: ho Will Pay the Piper?", Audit Report No. 34, AGPS.
6. ABS, Labour Costs Australia 1993, Cat. No. 6348.0.
7. Wood, op. cit., page 11.
8. Grants under the Better Cities programme are here treated as tied grants, and grants to the Australian National Training Authority and TAFE are excluded.
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