Image for Budget cuts: The Saul Eslake view

Background: The Tasmanian Government will release its mid-year review (MYR) of the State’s economic and fiscal position – later than any other State or Territory, in part because the relevant Tasmanian legislation stipulates that the MYR must include the half-yearly financial statements, a requirement that has no counterpart in mainland States and Territories. It has been widely speculated that the MYR will paint a fairly dire picture of Tasmania’s position, largely as a result of downward revisions to projections of GST revenue which account for a larger proportion of the Tasmanian Government’s revenue than that of other States.

Angus Livingston, Chief State Political Reporter of The Examiner sought Saul Eslake’s assessment of the likely contents of the MYR. This is Eslake’s verbatim response. Angus Livingston’s report is below this:

I have been waiting for the MYR myself before writing anything fresh about the Tasmanian economy.  Every other State gets its MYR out before Christmas but the relevant Tasmanian legislation requires that it include the half-yearly result which obviously isn’t available before Christmas.

The report, when it does come out, will likely show that (in the absence of policy changes) Tasmania’s budgetary prospects will have deteriorated significantly, largely as a result of downward revisions to GST revenue projections. Note that these revisions flow from weaker-than expected consumer spending at the national level, as a result of the ‘‘new frugalism’’ being shown by consumers across the country, rather than any Tasmania-specific trends. However the impact of any downwards revision to the GST revenue hit Tasmania proportionately harder than any other State or Territory Government, because GST revenue accounts for a larger share of Tasmania’s State government revenue than any other State exc for the NT. Tasmania also benefited disproportionately from Federal stimulus spending because Tasmania has a disproportionately large number of low-income or welfare-dependent households (at whom the cash handouts were directed) and of small schools, Conversely the fading of that stimulus hurts Tasmania relatively more.

There isn’t much connection between Tasmanian economic growth and the State budget, partly because the revenue base isn’t very sensitive to GSP growth and partly because such a large share of the revenue side of the Budget. However it surely isn’t helping that Tasmania gets very little direct benefit from the ‘‘resources boom’’ which is the main driver of economic growth nationally (because we have little iron ore and no coal or gas), or from the investment which the resources boom is driving, but conversely has an above-average share of industries adversely affected by some of the side-effects of the boom, particularly the strong A$ and higher interest rates, such as premium agriculture, and niche manufacturing.

The decline in the forestry industry would be adversely impacting the budget to the extent the government feels obliged to provide assistance to those businesses, employees and communities adversely affected by it, as well as by the loss of timber royalties, payroll tax collections,

Assuming that there has been a significant hit to the budget from all of these developments, there are four broad strategies which the Government might pursue -

1. run bigger deficits for longer, or smaller surpluses later on - the scope for this is limited by the Government’s fiscal strategy parameters and by the importance of running ‘sound’ bottom lines to perceptions of the Government’s economic competence,

2, further run down cash balances such as Don Challen’s Superannuation Provision Account (SPA)  - the last Budget did a fair bit of this, as did Paul Lennon before the 2006 election, and each time it puts back the date at which the unfunded public sector superannuation liability is extinguished. This is really deficit financing by another name, and although many of the general public, journalists and MPs (with the significant exception of Ruth Forrest MLC) are fooled by it,  the rating agencies and knowledgable economic commentators aren’t.

3. Increases in State taxes - could be done, but the problem is that the increases in State taxes would have to be quite large to make a difference (given that State taxes make up a smaller proportion of Tasmania’s revenue than that of any other State exc the NT), and that tax increases big enough to make a difference would also have a substantial adverse impact on Tasmania’s competitiveness vis-a-vis other States.

4. Cuts in recurrent spending - including in major service delivery areas which have hitherto been ‘quarantined’ from previous ‘budget management strategies,. The point here is that the big service delivery areas - education, hospitals and other health care, and police - absorb such a high proportion of recurrent or ‘operating’ expenses that if you exempt them from cutting spending, the cuts requires elsewhere in the budget (eg eco development, arts and heritage, etc) are so large that you risk undermining the entire viability of government programs in these areas.

Tasmania spends relatively more per head of population,  or as a % of gross State product, on these key service delivery areas, than other states without it being at all obvious that Tasmanians get better quality services (indeed most Tasmanians appear to believe their services are worse than in other States, and not without reason). Higher spending for lower quality services is partly due to Tasmania’s small and dispersed population (and the historical insistence that each of the State’s three major regions must have what the others have got) but there’s more to it than that. There’s also a widely held belief on the part of the public and all three political parties that there is a linear correlation between the quality of a service and the number of people employed in delivering it,  That may be true of, say, nursing - but there’s no evidence that it’s true in schooling or policing , and some evidence that it isn’t in those areas.

In my view the ‘right’ strategy is 4, but it is also the most politically difficult, by far.

The Examiner report by Angus Livingston:

FRONT-LINE services in education, health and police should not be “quarantined” from budget cuts, economist Saul Eslake said yesterday.

In the face of what is expected to be a tough mid- year financial report, Mr Eslake said the state government had to make some politically difficult choices.

He said refusing to cut budgets in the big service delivery areas of education, health and police was a mistake.

“(They) absorb such a high proportion of recurrent or `operating’ expenses that if you exempt them from cutting spending, the cuts required elsewhere in the budget - for example, economic development, arts and heritage etc - are so large that you risk undermining the entire viability of government programs in these areas,” he said.

Mr Eslake said Tasmania spent relatively more per head of population on key service delivery, without it being clear that Tasmanians got better quality services.

“Higher spending for lower quality services is partly due to Tasmania’s small and dispersed population (and the historical insistence that each of the state’s three major regions must have what the others have got) but there’s more to it than that,” he said.

“There’s also a widely held belief ... that there is a linear correlation between the quality of a service and the number of people employed in delivering it.

“That may be true of, say, nursing, but there’s no evidence that it’s true in schooling or policing, and some evidence that it isn’t in those areas.”

Mr Eslake said the government should avoid drawing down the Superannuation Provision Account as “this is really deficit financing by another name”.*

Mr Eslake also said Tasmania was hit harder by falling GST revenues as they made up a larger proportion of state income.

He said the stimulus dry-up had also hit Tasmania hard due to the state’s higher proportion of welfare recipients.

Read the article HERE and, Tasmanian Health faces $100m cuts: MORE than $100 million could be cut from the state’s health services because of a budget shortfall.

Premier and Treasurer Lara Giddings is expected to announce details of her mid-year financial report on Thursday, including wide-ranging health budget cuts.

Front-line services will not be spared, with other key sectors like education also facing cuts.

Economist Saul Eslake warned yesterday that the government would have to make tough decisions and argued front-line services in education, health and police should not be ``quarantined’‘.

Health and Community Sector Union assistant state secretary Tim Jacobson said he was bracing for significant job cuts across the sector, including hundreds of forced redundancies.

``It looks like the previous commitment the government has made to the protection of front-line service delivery will go,’’ he said.

Mr Jacobson said the capital works at the Launceston General Hospital would prove pointless if the new facilities could not be appropriately staffed.

``We will end up with a huge monument at the LGH that will serve no other purpose than as a holding bay for patients,’’ he said.

ED: *An issue addressed on Tasmanian Times in John Lawrence’s forensic analysis: Bartlett’s mess. It appears to be the first time a commentator (other than John Lawrence) has referred to the Government spending the SPA ... the SPA has already been spent, according to John Lawrence in Bartlett’s mess.

Saul Eslake is Director, Productivity Growth Program, The Grattan Institute, and a former Chief Economist of ANZ Bank.

Greens:

TASMANIANS WISELY PRIORITISING ESSENTIAL OVER NON-ESSENTIAL EXPENDITURE
Tim Morris MP
Greens Treasury spokesperson

The Tasmanian Greens today said that the recent Australian Retailers Association figures showing a decline in retail sales for December indicate that Tasmanians are making prudent household debt-control decisions, which should be encouraged.

Greens Treasury spokesperson Tim Morris MP said that families reprioritising their discretionary spending into savings and avoiding the credit-card debt trap on non-essential items, was a good example for the State to follow.

Mr Morris also warned that previous governments have fallen into the bad habit of using the Superannuation Provision Account as if it was government’s own form of credit card, and this should be avoided.

“The reported drop in December retail figures indicates that Tasmanians are making the wise choice to rein in their discretionary spending, cut their credit card debt, and instead boost their savings,” Mr Morris said.

“Clearly retail trade and prosperity is connected to national triggers, one of which is the interest hikes that banks have imposed on mortgage loans.  This obviously is not within the role of state government to address, but Tasmanians are making decisions to control their own household debts.”

“This prudent approach will assist in stimulating local economies as family budgets are reprioritised to buying food, essential services, and paying bills, rather than prop up the profits of large department stores.”

“This sensible approach of Tasmanians should also be mirrored by Treasury in the upcoming budget process, that prioritises savings being directed into maintaining essential services rather than non-essential.”

“Treasury should also avoid indulging in drawing down the Superannuation Provision Account as all that does is prolong the debt-problem, similar to out of control credit-card debt,” Mr Morris said.