NSW State Budget 2011-12 commentary

This is my Op Ed commentary for the local press on the NSW State Budget which came out today. I had 750 words. It might be of interest to readers although it is localised sort of discussion of state public finances which are very different in terms of constraints etc than those pertaining to the Federal level. I will have a blog later today on Ireland as well.

Yesterday’s NSW Budget delivered a deficit of $718 million after two years of surpluses.

The Opposition claimed the deficit was “irresponsible” and would jeopardise the State’s AAA credit rating which tells you how far out of touch the Opposition has become.

The deficit has arisen because State revenue continues to collapse as the economy slows. The Budget does not inject much new spending overall but shifts outlays from recurrent to capital.

In that regard, the deficit is not large enough given the challenges facing the state after years of infrastructure neglect by the now Opposition and the need to maintain service quality.

The Budget forecasts a slowing economy but their estimates are still overly optimistic. The Australian economy will worsen over the coming year which will further strain State revenue.

Thus the Budget forecast of a largely static unemployment rate will be hard to achieve.

The Budget reinforces the lie that the previous Government spent excessively. First, Labor certainly left a “deficit” – they deliberately degraded public infrastructure by enforcing their ideological claim that “debt is evil”. The new Government inherited this infrastructure “deficit” and has to find a way of restoring roads, transport, health, education, etc in the face of declining revenue.

Second, just as now, the State budget went into deficit in 2008-09 largely because state revenues collapsed as the GFC hit.
What is worrying now is the Treasurer’s statement that “expense control” will require expenditures to be aligned with revenue growth. It is irresponsible to cut spending when a slowing economy squeezes revenue growth. But that is exactly what they are proposing.

The Treasurer also indicated that they will deliberately restrain borrowing to protect the State’s AAA credit rating. This is the justification for shifting recurrent spending into infrastructure projects.

First, the credit rating is not in jeopardy although it would have very little impact if it dropped to Aaa or even Aa2.

Second, a credit rating is of value because it allows the State to borrow at slightly lower rates. It makes no sense to have a good credit yet eschew borrowing.

Sound State public finance requires revenue to be aligned with the benefits flowing from the spending. In the case of infrastructure which delivers long-term benefits it is better to borrow to ensure the future generations pay their share of the cost.

The borrowing paranoia led to the Budget decision to rely, once again, on the short-term privatisation hit to generate revenue to fund other infrastructure.

This makes the numbers look good now at the expense of a stable long-term earnings flow. Port Botany was very profitable for the Government.

The Treasurer claimed that selling off Port Botany will also “drive further efficiency on the waterfront”. Previous port privatisations in Australia saw investment decline as private firms bled existing capacity for profit. The resulting delays in building port capacity resulted in lost export earnings. There is no reason why a private operator will drive efficiency. While appealing to the Government’s free market ideology it is a very myopic strategy from a hard dollar perspective.

In general, the Budget provides a significant boost in regional infrastructure funding. The Budget created a new body – the Hunter Infrastructure and Investment Fund (HIIF) – which will concentrate on smaller road and health projects. However, its modest funding suggests a political motive rather than any real ambition to contribute to the Hunter region.

Inasmuch as these are new initiatives the outcomes will benefit our region with better infrastructure and more jobs.

The Budget balance between private (roads) and public (rail) spending is wrongly skewed to the private. We need much more public transport infrastructure to meet the challenge of rising energy costs in the coming decades.

The Budget will see a reduction in public sector jobs – 5000 to be cut with some offset from the new jobs in policing, nursing, teaching, etc. The Government is also deliberately the real pay of its public servants over the next four years by imposing a growth cap below the inflation rate. The old saying “pay peanuts and get …” is apposite.

Young Hunter first-home buyers will now lose up to $30,000 if they choose to purchase an existing dwelling as a result of the Budget decision to drop the stamp duty relief. The plan is to stimulate a waning new housing sector but it will reduce choice and residential location of first-home buyers.

Overall, this is a tough Budget which is not sensible in the face of a slowing economy.