Team Bracks Now Facing the Hard Yards

It is approaching crunch time for the Bracks Government on fiscal policy.

The pressure for even more spending is mounting and while the state's finances are in good shape, they are based on fragile foundations.

The evidence was provided in and by the reaction to the Financial Report of Victoria 2002-03 released this week.

The Report indicated that the States budget sector ended the 2002-03 fiscal year with a surplus of $236 million and net debt of $1.3 billion.  While the realised surplus was half the level forecasted in the budget, the fact that the budget was in surplus and debt levels low, set off calls for many quarters for more spending and borrowing.

Naturally these pressures exist in any democracy.  The calls for more spending and borrowing however, overlooked a number of crucial factors.

First, under accrual accounting standards adopted by governments in the 1990s, the budget bottom-line is the difference between recurrent revenue and recurrent spending.  It does not include spending on new capital works.  Indeed it measures the amount of funding, available to invest in new assets.  Therefore pushing the budget into deficit, as demanded by many, would result in the borrowing to pay the wages bill.  This was that very action that brought the Cain/ Kirner Governments and the state's economy to a halt over a decade ago.

Second, spending on public infrastructure is currently at very high levels and the problem lies not with it quantity but its quality.  The State Government directly spent a total of $3.3 billion on capital works in 2002-03.  This was 25 per cent more than the previous year.  Much "public" investment is now, however "off-budget" and undertaken by the private sector through the Private-Public Partnerships (PPP) and the privatised businesses.  In 2002-03 alone the State Government made commitments through the PPP program to capital works totalling $4.5 billion.  The privatised businesses also have a hefty capital works programme underway.

Third, the budget surplus was only achieved as a result of massive $900 million revenue windfall from the housing boom.  While the housing market, with the exception of the inner city apartment sector, is unlikely to collapse, turnover is expected to slow in the near term.

Fourth, the Government once again failed to control public sector wages.  During 2002-03 the public sector wages bill grew by 7.7 per cent and was $500 million over-budget.  As a result expenditure growth once again outstripped revenue growth, despite the revenue windfall.  Moreover, decisions were made during the year that resulted in a 10 per cent increase in future wages liabilities.

More ominously the public sector unions have begun campaigns for huge increases in wages which even if meet half way will send the budget into the red.

As the Auditor General warned last year, the State's finances are, despite there rosy appearance, in a fragile state.  The budget is excessively reliant on income from a housing bubble and the government has proving unable to control public sector wages growth.

The last thing the State economy needs is a reversion to the policies of the distant past, where the government borrows supposedly for infrastructure, but with the proceeds used to fund declining revenue and excessive wages bill.  And the Bracks Government knows it.

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