Borrowing big to fund promises

This week the Brumby Government handed down its second budget, and the Labor Government its 10th.

Arguably the biggest talking point is the State Government's move to increase borrowings from already stretched capital markets to fund its big-ticket spending promises.

Borrowing by the non-financial public sector is expected to grow by 48 per cent over the next four years to $38.8 billion.

This policy decision adds to the stock of net debt held by the Government.  The budget papers show that net debt will more than double from $19 billion in 2009-10 to more than $31 billion in 2012-13.

One of the major questions is whether this increase in financial obligations by the Government is sustainable.

While Premier John Brumby and Treasurer John Lenders insist that net debt will remain below the AAA credit rating trigger point used by rating agencies, the critical net debt to operating revenue ratio of 118 by 2013 is a far cry from the ratio of 65 in 2001.

Another way to look at the sustainability question is to consider what benefits Victorians might expect from the rising debt.  This is where the budget becomes decidedly murky.

One of the flagship initiatives of the Government is to engage in infrastructure spending, supposedly to "secure up to 35,000 Victorian jobs".  This is despite the budget forecasting employment growth to slide into negative territory in 2009-10, and an increase in the unemployment rate.

There is a lack of economic modelling in the budget surrounding the validity of these job estimates.  A Government press release extolling the "jobs, jobs, jobs" virtues of its spending revealed only 6801 jobs secured.  It is then a case of finding out where the missing extra jobs come from.

Some of these are expected to come from Commonwealth capital grants, public-private partnerships or capital works by public corporations.  But Finance Minister Tim Holding presented figures showing that several of these jobs would be created through the magic pudding of Keynesian-style multipliers.

With such analysis typically not accounting for the tax and other costs of government interventions, perhaps Spring Street was too embarrassed to put the fine details of its fudged figures in the budget for external scrutiny.

One of the troubling features of this state budget is the extent to which the Brumby Government has leant on the Federal Government to do its financial heavy lifting.  It is estimated that 87 per cent of the increase for this financial year over last in general government revenue was accounted for by a rise in Commonwealth grants.

The Government is prepared to go to even greater lengths to surrender Victoria's financial autonomy to the Commonwealth, with the Treasurer last week canvassing a proposal to cut stamp duty in exchange for rising income taxes.  Before it installs the Prime Minister as effective state premier, the Brumby Government continues to rake in property taxes to the tune of almost $600 million to 2012-13.

Looking at the revenue side more generally, the budget figures belie the claims made by the Treasurer that the Government was not in the business of raising taxes.  Taxes are expected to increase by $1.7 billion, or 13 per cent, over the next four years.

There are also elements of revenue by stealth in this budget.  For example, the Government has signalled that it wants to double its inflow of dividends and "tax equivalent" payments out of water and other utilities over the next three years.  This is merely a tax masquerading as a share of profits, with the Government effectively dictating that state-owned monopolies must increase their prices.

These figures explain why Victoria's tax competitiveness, on the basis of figures presented in the Government's own budget papers, has remained naggingly above the Australian average.  Data released by the Commonwealth Grants Commission this week confirms this, with Victoria's total taxes above the national average and the state's overall revenue effort exceeding its capacity to raise revenues.

In relation to Victoria's budget surplus, the reality is that the budget bottom line has long been heading in the wrong direction.  In 2000-01, the Government recorded a $2.2 billion surplus, which is a long way from the 2009-10 estimated surplus that breaks the promise of retaining a surplus target of 1 per cent of revenue.

The erosion of the budget surplus has been the product of explicit policy decisions to spend at a faster rate than revenue is coming into the coffers.  Annual expenditure growth increased from 7 per cent in 2005-06 to 9 per cent in 2008-09.  By contrast, revenue growth for the general government sector remained fairly stable at a high rate of at least 6 per cent.

In other words, during the economic good times, Victoria went on a huge spending spree.  The lesson that such conduct greatly weakens fiscal discipline and sets the scene for an unsustainable debt bubble seems to have been ignored by the Government, as its forecast spending for 2009-10 again outstrips revenue growth.

The recession has made it essential that states return to at least a semblance of fiscal order.  With the 2009-10 Victorian budget, however, the states have made a poor start against this objective.

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