MOST discussions about economic issues, and the state of the State is no exception, usually resort to what Paul Krugman in the preface to his breezy offering The Age of Diminished Expectations described as ‘up-and-down economics.’
Professor Krugman said:
“Up-and-down economics is what one encounters on the business pages of newspapers, or for that matter on TV. It is preoccupied with the latest news and the latest numbers, hence its name:”According to the latest statistics, housing starts are up, indicating unexpected strength in the economy. Bond prices fell on the news…” This kind of economics has a reputation for being stultifyingly boring, a reputation that is almost entirely justified.”
But it’s all we get in Tassie. See for example award winning journo Sue Neales tackle an analysis of the latest Mid Year Financial Report released just prior to Xmas HERE:).
It’s little wonder that the level of debate that we are now experiencing and will have to increasingly endure over the next 2 months not only causes boredom but it fails to explain our predicament leading up to an important election for this State.
A year ago we were softened up with talk about a’ black hole’, initially describing an anticipated shortfall in GST revenue. Few dared ask why a slowing of GDP growth of 1% or 2% was going to lead to a 17% drop in GST revenue compared to forward estimates 12 months earlier. The need to explain anything to the public was soon forgotten as the anticipated black hole of $500m grew to $1 billion. Pollies from all sides participated. It was like a crazy auction. Mr Hodgman upped the bidding at one stage with a claim of a $1.5b hole.
What happened to the black hole? No reports of its whereabouts for at least 4 months.
The analysts then turned to identifying ‘backflips’. Much easier than trying to tell us what’s really going on?
The Mid Year Financial Report was released in December 2009. The Mercury quoted the Premier as describing the figures as “a beautiful set of numbers” HERE:
The article went on to say:
Liberal leader Will Hodgman said the Government had shirked on its savings targets and was still spending more money than it earned.
“This is a government that spent more than it budgeted for, that hasn’t made the savings it said it would. This is a government that is in self-preservation mode and worrying about the next election, not the long-term future of the state.”
What has happened to the State’s financial outlook over the last 18 months? And can either Mr Bartlett or Mr Hodgman be believed? Or Mr McKim for that matter? Are the Liberals’ proposed changes to land tax based on their concerns for the long-term future of the State?
On 1st July 2008 the General Government (this excludes GBEs etc) cash balance was $1243m and the projected cash balance at the end of the forward estimates period in 2011/12 was expected to be $1914m. Things were looking rosy.
But buried amongst all the bank a/cs, trust funds and special deposit a/cs at 1st July 2008 (a total $2372 m, the largest of which was the Superannuation Provision a/c(SPA) designed to set aside amounts so the State’s unfunded superannuation liability can be extinguished by 2035)) was a Temporary Debt Repayment a/c (TDR) of $1129m. Hence the net amount in cash and deposits at 30th June 2008 was only $1243m.
But what is this TDR a/c? It can best be described as an overdraft or a line of credit. But one needs to go back in history a little to discover the origins of the a/c.
Prior to 30th June 2003, Government accounts were prepared unlike accounts in the commercial world. It was only then that accrual accounting standards producing the familiar P&L and Balance Sheets were introduced by Governments.
The practice was, say a loan had matured and needed to be either paid out or rolled over, if there were enough funds in a Trust a/c or Special Deposit a/c, those funds were used to discharge the loan rather than take out a fresh loan. A quite sensible use of available funds. At 30th June a Temporary Debt Repayment a/c was established, a temporary overdraft, so that the various Trust a/cs and Special Deposit a/cs could be topped up to their correct levels. The TDR a/c was included in the list of State Debt.
To reiterate, the Trust a/cs and Special Deposit a/cs topped up with the temporary borrowings were reported as Cash and Deposits and the TDR amount was included as State Debt.
This can be seen at statements 8 and 9 starting on p 32 of the 2002 Treasurer’s Financial Statements
Statement 8 shows loans redeemed of $863 m as well as borrowings for redemption of maturing loans of $863m. Statement 9, a breakup of the State’s Debt shows $743 m in loans due to mature in the next year 2002/03. The bulk of this ($698m) is the TDR a/c.
Now looking at the 2002/03 Treasurer’s Financial Statements, statements 8 and 9 starting on p 32 at HERE:
Statement 8 indicates that loans of $698m were redeemed from the TDR a/c reducing the State’s debt from $1441m at 1st July 2002 to $693m at 30th June 2003.
But the usual temporary overnight borrowing was not utilised on 30th June 2003 in order to repay amounts borrowed from other trust funds and deposit a/cs. The system changed. The TDR a/c was removed from State Debt and hidden amongst the cash balances in the various Trust a/cs and Special Deposit a/cs But it hasn’t disappeared.
By 2008/09 if one fasts forward to the Treasurer’s Financial Statements at HERE: on page 4.17, the TDR a/c is now $1156m overdrawn. No repayments were made during 2008/09. In fact it increased by $27m.during that year. It seems the Temporary Debt Repayment a/c has a particularly inapt title.
The Temporary Debt Repayment a/c grew from $698m at 30th June 2002 to $1156m at 30th June 2009, an increase of $458m.
At the same time the SPA a/c was $465m at 30th June 2002 and $1324m at 30th June 2009, an increase of $859m.
In the 2009/10 Budget, the projected cash at the end of the forward estimates period was $435m in 2012/13.The Mid Year Financial Report has amended the 2012/13 projected balance to $313m
But it must be remembered that the SPA a/c is currently $1324m and will be probably be $1500m by 2012/13. But the actual cash balances held by the General Government will only be $313m, the rest already spent, used to repay debts in the past.
Imagine you borrowed $450,000 from a bank 5 years ago. You were required to pay interest and each year make a principle reduction of say $30,000. You never had the funds to meet the principle repayment so you used the Trust Funds that Grandma had left to you to be held in trust for your kids until 2035. So you have borrowed $150,000 from the kids trust a/c to pay the bank. The bank are only owed $300,000.You’ve drained the kid’s a/c completely. This a/c is supposed to have a balance of $150,000, including accrued interest. But that’s ok ‘cos you’ve set up your own Temporary Debt Repayment a/c. But what’s your debt position? The Government’s interpretation is that your debt is $300,000. But arguably it is still $450,000, what you owe the bank plus what you pinched from the kid’s a/c.
The issue of the TDR a/c crops up occasionally but because of our reasonably strong cash position no-one in the past seemed to be too worried. The net balance in cash and deposits was always greater than say the balance of the SPA a/c. But now the situation is different. The cash position will fall well short of what’s supposed to be in the various trust a/cs. And what if another event like GFC affects us?
Or maybe our existing narrow and fragile tax base is further sacrificed in an attempt to achieve electoral success?
All pollies are or should aware of the above dilemma. But they all keep spending like there’s no tomorrow, oblivious to any problems that may result.
Will Hodgman for example is well aware of the TDR. To his credit he has tried to pursue the matter at Estimates hearings. But like a boy lost on a man’s mission his questions were easily deflected, probably because he didn’t really understand his brief in the first place.
Why hasn’t Mr Bartlett, Mr Hodgman or Mr McKim confronted us with the problem of the TDR. Either they don’t understand or they don’t have any answers.
Surely we’re entitled to a frank and transparent discussion of all the issues at this crucial time.