The federal government's mid-year budget review grabbed headlines by revealing a level of debt growing to more than $400 billion by 2016-17. The growth of state government debt is also troubling but has captured less attention.
Total general government gross debt, including the states as well as the Commonwealth, has passed the $400 billion mark and is heading for more than $600 billion in 2016-17 under current spending and tax policies.
The weakening of states' balance sheets will limit their future capacity to meet expectations in a range of services, including public infrastructure.
Four states have experienced credit-rating downgrades since 2009, and the other two have little margin for error. While the loss of a AAA rating isn't a crisis in itself, the states must be careful to prevent such a loss turning into a slippery slope towards a crisis. This is hardly a good starting point for the costly infrastructure upgrade everyone from the Prime Minister down seems to want.
Treasurer Joe Hockey's asset-recycling scheme – privatisation of existing public enterprises to pay for new infrastructure – can ease the short-term stresses in public finances but can't resolve the underlying tensions. Enterprises can only be privatised once, and there are only so many of them left to privatise even if the political will exists.GFC impact
To go back a bit in time, states' budget results and balance sheets were robust before the global financial crisis. Subsequently, large operating surpluses evaporated as revenue growth eased and consistently fell short of the growth of expenses. At the same time, capital expenditure rose dramatically as the states ramped up their infrastructure spending. This combination of elevated capital expenditure and shrinkage of operating surpluses (or zero internal financing, in business-speak) resulted in large cash deficits and borrowing requirements.
The resulting tensions in state finances will, eventually, need to be resolved through a large cut in infrastructure spending or a return to sizeable operating surpluses. Nobody wants to see the former, but nor has anyone, so far, been able to engineer the latter. In the absence of either, states will continue running up debt.
States' balance sheets were so strong in the mid-2000s they have been able to absorb the subsequent shocks and remain in a manageable position (some, such as South Australia and Tasmania, less than others). However, the states cannot forever draw comfort from their balance sheet strength while inflicting more damage on it.
Tallies of gross debt in the hundreds of billions don't mean much on their own, but even on more meaningful measures, state debt is on a steeply rising slope: general government net debt rose from negative 18 per cent of revenue in 2007 to positive 29 per cent projected for 2017; for the broader non-financial public sector, the increase is from 11 per cent of revenue to 61 per cent over the same 10 years.
Once non-debt liabilities (principally unfunded superannuation obligations) are added, the general government load of net financial liabilities has risen from 35 per cent of revenue in 2007 to 91 per cent in 2013, but is expected to ease back to 80 per cent in 2017 on the assumption of better returns on superannuation fund assets.Privatisation
Privatisation and private sector provision of infrastructure can help ease the burden of infrastructure demands on state finances but the fundamental problem is the lack of significant operating surpluses. For example, Western Australia aims to fund at least half its general government capital program internally from cash operating surpluses. It is falling well short of that benchmark currently, as are other states. This can't go on.
The need for operating surpluses raises a host of issues, not least of which is the underlying mismatch between states' narrow own-source revenue bases and their broad spending responsibilities. Historically, growth in Commonwealth grants to the states (particularly, specific purpose grants with conditions attached) has served as a safety valve. This decades-long drift of power away from the states has reduced Australian federalism to its current sorry state, and we should not wish for more of it, even if the federal budget can afford it. Rather, there should be a review of the spending and revenue responsibilities of the Commonwealth and states, starting from the first principles of federalism.
Robert Carling is a senior fellow at The Centre for Independent Studies.
Home > Commentary > Opinion > States on a slippery debt slope
States on a slippery debt slope
The federal government's mid-year budget review grabbed headlines by revealing a level of debt growing to more than $400 billion by 2016-17. The growth of state government debt is also troubling but has captured less attention.
Total general government gross debt, including the states as well as the Commonwealth, has passed the $400 billion mark and is heading for more than $600 billion in 2016-17 under current spending and tax policies.
The weakening of states' balance sheets will limit their future capacity to meet expectations in a range of services, including public infrastructure.
Four states have experienced credit-rating downgrades since 2009, and the other two have little margin for error. While the loss of a AAA rating isn't a crisis in itself, the states must be careful to prevent such a loss turning into a slippery slope towards a crisis. This is hardly a good starting point for the costly infrastructure upgrade everyone from the Prime Minister down seems to want.
Treasurer Joe Hockey's asset-recycling scheme – privatisation of existing public enterprises to pay for new infrastructure – can ease the short-term stresses in public finances but can't resolve the underlying tensions. Enterprises can only be privatised once, and there are only so many of them left to privatise even if the political will exists.GFC impact
To go back a bit in time, states' budget results and balance sheets were robust before the global financial crisis. Subsequently, large operating surpluses evaporated as revenue growth eased and consistently fell short of the growth of expenses. At the same time, capital expenditure rose dramatically as the states ramped up their infrastructure spending. This combination of elevated capital expenditure and shrinkage of operating surpluses (or zero internal financing, in business-speak) resulted in large cash deficits and borrowing requirements.
The resulting tensions in state finances will, eventually, need to be resolved through a large cut in infrastructure spending or a return to sizeable operating surpluses. Nobody wants to see the former, but nor has anyone, so far, been able to engineer the latter. In the absence of either, states will continue running up debt.
States' balance sheets were so strong in the mid-2000s they have been able to absorb the subsequent shocks and remain in a manageable position (some, such as South Australia and Tasmania, less than others). However, the states cannot forever draw comfort from their balance sheet strength while inflicting more damage on it.
Tallies of gross debt in the hundreds of billions don't mean much on their own, but even on more meaningful measures, state debt is on a steeply rising slope: general government net debt rose from negative 18 per cent of revenue in 2007 to positive 29 per cent projected for 2017; for the broader non-financial public sector, the increase is from 11 per cent of revenue to 61 per cent over the same 10 years.
Once non-debt liabilities (principally unfunded superannuation obligations) are added, the general government load of net financial liabilities has risen from 35 per cent of revenue in 2007 to 91 per cent in 2013, but is expected to ease back to 80 per cent in 2017 on the assumption of better returns on superannuation fund assets.Privatisation
Privatisation and private sector provision of infrastructure can help ease the burden of infrastructure demands on state finances but the fundamental problem is the lack of significant operating surpluses. For example, Western Australia aims to fund at least half its general government capital program internally from cash operating surpluses. It is falling well short of that benchmark currently, as are other states. This can't go on.
The need for operating surpluses raises a host of issues, not least of which is the underlying mismatch between states' narrow own-source revenue bases and their broad spending responsibilities. Historically, growth in Commonwealth grants to the states (particularly, specific purpose grants with conditions attached) has served as a safety valve. This decades-long drift of power away from the states has reduced Australian federalism to its current sorry state, and we should not wish for more of it, even if the federal budget can afford it. Rather, there should be a review of the spending and revenue responsibilities of the Commonwealth and states, starting from the first principles of federalism.
Robert Carling is a senior fellow at The Centre for Independent Studies.
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