Something to crow about? Victorian government finances under the Coalition

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The Coalition Government claims a strong economic record going into the election. David Hayward examines its levels of infrastructure spending, social policy spending and debt levels to see  whether the claim stands up to scrutiny.

The Victorian Coalition Government prides itself on its budget performance.

It points to its AAA credit rating, a growing budget surplus and what it claims as record infrastructure spending, as evidence of this.

The Coalition was especially pleased with its last budget, hailing it as a “once in a generation investment in state-shaping infrastructure to create jobs, drive economic growth and boost productivity right across Victoria”.

To support its claims of success, the Coalition points to the recent performance of all other states, which have lost their AAA ratings.

Western Australia, with its turbo-charged mining economy, compared to Victoria’s shrinking manufacturing base, has had its credit rating downgraded. And Queensland, which not so long ago chided Victoria as “Australia’s Mexico without the sunshine”, has suffered a series of credit rating downgrades and is struggling to turn its budget around even after major privatisations.

But is Victoria’s fiscal picture as bright as the Coalition claims?

Figure 1 shows broad trends in Victoria’s revenue (total receipts) and spending (total payments) over the 30-year period to 2016-17. The last two years’ figures are forward estimates and the 2014-15 figure is the budget estimate. Receipts and payments are shown as a percentage of Gross State Product (GSP).

Figure 1: Receipts and payments as percentage of Gross State Product, General Government, Victoria, 1986/87-2016/17

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand- statistics/Financial-data-sets on September 20 2014

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand-statistics/Financial-data-sets on September 20 2014

This graph enables a comparison between the Baillieu/Napthine era and those of the three administrations that went before it.

It shows that, broadly speaking, the current Coalition Government has overseen a fall in both receipts and payments from the highs of the Bracks/Brumby Labor administration, with further falls projected. Spending is falling faster than revenue, which will leave both at around their long-term average. This is notable, but is it worth crowing about?

To answer this we need to delve a little deeper, because the increased receipts and spending during the last four years of Labor’s period in office up to 2010, are part of an unusual phase in Victoria’s recent budget history.

“Barely six months after delivering its first budget, the Government announced a series of cuts and tax increases in a mini statement brought down in December 2011.”

These were the years that the former federal Rudd Government’s stimulus measures were rolled out to counteract the effects of the Global Financial Crisis (GFC).

A large chunk of these were fed through the states, in the form of massively increased infrastructure funding (particularly the ‘Building the Education Revolution’), which increased receipts and payments (money in, money out). Figure 1 illustrates the rapid rollout of this funding in Victoria, peaking in 2009-10, as well as its subsequent withdrawal once the crisis was over.

What would the picture be like without the federal intervention? This is shown in Figure 2, which shows spending, less federal government specific purpose grants, as a percentage of GSP.

This figure focuses only on the Baillieu/Napthine and Bracks/Brumby years and it shows a very different trend to that seen in Figure 1. When not including federal specific purpose payments, the highest spending Victorian government years were not under Labor, but in the early years of the current Coalition Government, although spending has subsequently declined back to levels seen under the Bracks/Brumby governments.

Figure 2: Own purpose expenses, Victorian General Government, 2004/05-2014/15 (% of GSP)

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand- statistics/Financial-data-sets on September 20 2014

Source: Victorian Treasury financial data sets accessed at
http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand-statistics/Financial-data-sets on September 20 2014

The increase in own purpose spending reflects the Coalition’s first budget, which was more generous than Labor’s last.

This increased spending occurred against the backdrop of declining revenues from the GST, the property market and even gambling, rendering the first budget unsustainable. Very quickly, the budget bottom line was put under great strain.

Something would have to give, and it did not take long for this to happen. Barely six months after delivering its first budget, the Government announced a series of cuts and tax increases in a mini statement brought down in December 2011.

Declining revenues was not the only source of pressure on the budget. In trying to keep infrastructure spending at high levels, the Coalition increasingly resorted to debt financing.

“The highest spending Victorian government years were not under Labor, but in the early years of the current Coalition Government.”

It also embarked on a series of public private partnerships, requiring finance lease payments that have the same effect on the budget as interest payments. The increased infrastructure spending in turn required increased maintenance spending, putting further pressure on the budget. Together, interest payments and maintenance spending have risen rapidly to reach almost $4.7b, over $2.1b more than they were in 2009-10. This is shown in Figure 3, which shows maintenance and interest as a percentage of GSP.

Figure 3: Depreciation and interest expenses, GeneralGovernment, Victoria, 2004/5-2017/18 (% of GSP):2014/15-2017/18 are budget estimates

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand- statistics/Financial-data-sets on September 20 2014

Source: Victorian Treasury financial data sets accessed at
http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand-statistics/Financial-data-sets on September 20 2014

The broad pattern of spending and financing is illustrated in Figure 4, which shows infrastructure spending (purchases of non-financial assets), cash operating surpluses and borrowings as a percentage of GSP over the 30 years to 2017-18, with the last three years being the budget forward estimates.

Figure 4: Net cash flows from operating activities, net purchases of non-financial assets and net borrowings, General Government, Victoria, 1986/6-2017/18 (% of GSP)

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand- statistics/Financial-data-sets on September 20 2014

Source: Victorian Treasury financial data sets accessed at
http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand-statistics/Financial-data-sets on September 20 2014

“The Napthine Government’s single largest project is the East West Link, the cost-benefit analysis for which has not been released for public scrutiny, nor even put through the Government’s own High Value High Risk (HVHR ) procurement evaluation framework.”

The figure shows falling operating surpluses in the Coalition’s early years, from the highs seen under Labor, and rising infrastructure spending, after an initial drop. Over the last year operating surpluses have again risen, infrastructure spending is now set to increase and borrowings are falling. This is projected to continue into the future, although it should be noted that infrastructure spending will still not reach the highs they did in Labor’s last years (helped by Rudd stimulus spending).

There has also been a rapid rise in net debt under the Coalition, as shown in Figure 5. This shows that under the Coalition net debt has increased to levels not seen for 15 years.

Figure 5: Net debt as a percentage of GSP, General Government, Victoria, 1987-2016

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand- statistics/Financial-data-sets on September 20 2014

Source: Victorian Treasury financial data sets accessed at
http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand-statistics/Financial-data-sets on September 20 2014

Facing these infrastructure related budget strains, the Coalition has embarked on further rounds of cost cutting and tax increases, on top of those announced in December 2011. These are shown in Table 1.

Table 1: Spending cuts and revenue increases ($m), 2011/12-2014/15

Note: Casino tax was not enacted due to Casino refusing to agree. Sources: Victorian Government (2012), Budget Strategy and Outlook, 2012/13, Budget Paper No. 2: Table 1.1, p. 2. Victorian Government (2013), Budget Strategy and Outlook, 2013/14, Budget Paper No. 2: Table 1.2, p. 3. Victorian Government (2012), 2012/13 Budget Update: Table 1.1, p. 2. Victorian Government (2013), 2013/14 Budget Update Table A2, p. 130.

Note: Casino tax was not enacted due to Casino refusing to agree.
Sources: Victorian Government (2012), Budget Strategy and Outlook, 2012/13, Budget Paper No. 2: Table 1.1, p.2.
Victorian Government (2013), Budget Strategy and Outlook, 2013/14, Budget Paper No. 2: Table 1.2, p. 3.
Victorian Government (2012), 2012/13 Budget Update: Table 1.1, p. 2.
Victorian Government (2013), 2013/14 Budget Update Table A2, p. 130.

The cutbacks are further demonstrated in Figure 6, which shows the government’s own purpose spending (total spending less federal government specific purpose payments) less interest and depreciation, as a percentage of GSP. After a leap in 2012-13, there is a significant fall in own purpose spending in 2013-14, which is projected to continue.

Figure 6: Own purpose expenses less depreciation and interest as % of GSP, General Government, Victoria, 2004/5-2017/18

Source: Victorian Treasury financial data sets accessed at http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand- statistics/Financial-data-sets on September 20 2014

Source: Victorian Treasury financial data sets accessed at
http://www.dtf.vic.gov.au/Victorias-Economy/Economic-indicatorsand-statistics/Financial-data-sets on September 20 2014

Core social policy areas have borne the brunt of the cuts. The Coalition has argued that these were in back office areas that did not directly affect service delivery (for example, in the head office of the Department of Education rather than the classroom). No real evidence was produced to prove this, nor any evidence to show that ‘front line’ staff did not end up having to pick up tasks previously performed by those who were made redundant.

The cutbacks represent a significant, yet not generally well-recognised, shift in government spending patterns and priorities. Effectively, core social service delivery has been squeezed to fund the Coalition Government’s commitment to infrastructure spending.

This raises the question of the value of the infrastructure spend. This is difficult to determine, because the Napthine Government’s single largest project is the East West Link, the cost-benefit analysis for which has not been released for public scrutiny, nor even put through the Government’s own High Value High Risk (HVHR) procurement evaluation framework (in the case of Stage Two), as pointed out by the  Auditor-General earlier this year.

“Effectively, core social service delivery has been squeezed to fund the Coalition Government’s commitment to infrastructure spending.”

A similar cloud exists over other major infrastructure projects, which are being rolled out with great haste. As the Auditor-General put it:

“The government announced funding commitments of up to $27 billion as part of the 2014-15 Budget for infrastructure projects, with most ($24 billion) designated as HVHR projects that have not progressed through the HVHR process. These included projects funded under government’s unsolicited bids policy and multi-billion dollar projects for a rail tunnel linking Southern Cross
and South Yarra stations and stage two of the East West Link”.1

So, to return to the theme with which we began: how well does the current Government’s financial record stack up?

By comparison with the performance of previous administrations, it is not overly impressive, especially when judged by its own evaluation criteria: the size of its operating surplus, the need to reduce net debt, and the desire to crank up infrastructure spending to record levels using operating
surpluses to pay for this.

Its operating surpluses have been smaller than those of previous administrations, infrastructure spending is still lower than during the high point of the Rudd stimulus measures, and debt has increased dramatically, increasing in real and nominal terms in each of its years in office, to hit a 15 year high. Spending on core programs has been cut sharply.

It is only into the future that the Coalition Government’s record looks more impressive, but that is a promise, not a reality.

What can be said is that should these policy settings continue, core service delivery will be screwed down in the interests of funding infrastructure that is being delivered under a heavy blanket of secrecy. That may not be good for anyone other than the private interests that benefit from the massive contracts being awarded.

What of the state’s AAA rating? That is a significant achievement, but it is also something of a pyric victory, for after the GFC, the reputations of the credit rating agencies that bestow these evaluations have been trashed.

There is currently a wave of potentially very expensive litigation around the world, coming off the back of a successful court action launched by Australian church groups, charities and local councils, who purchased AAA rated products, only to find that the products were duds.

Commentators are pointing out that these ratings (which incidentally gained currency through government decisions to require AAA ratings for public sector investments) no longer appear to be of great value, as financial markets now have the information at their disposal through the internet to make their own determinations of credit worthiness, and are increasingly doing so following the credit rating agencies’ failures in recent times.

As US economist Nigel Gault recently put it:

“Credit rating adjustments, in and of themselves, I don’t think are important…To a large extent, downgrades simply confirm what financial markets have already seen.”

It is noticeable in this regard that when the US Government’s credit rating was downgraded in 2011, interest costs fell rather than rose.

And there seems little point focusing everything on a AAA rating designed to keep interest expenses low, when the Government’s fiscal policy goal is to reduce debt and fully fund infrastructure out of operating surpluses anyway.

A seemingly contradictory goal like this appears to make little ‘cents’ overall, and even less ‘sense’ when wrung from a social policy budget that is being so tightly squeezed.

David Hayward is Professor and Dean of the School of Global, Urban and Social Studies, RMIT University. He also provides advice to Shadow Treasurer, Tim Pallas.

1 Auditor-General, Impact of Increased Scrutiny of High Value
High Risk Projects, VAGO, June 2014, p. 17 

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