Queensland budget 2015: turning government firms into giant ATM

The 2015-16 Queensland budget is extraordinarily brazen in its disregard for public finance accounting standards.

Freshman Treasurer Curtis Pitt (the Youngest) has rejected the advice of the International Monetary Fund, the OECD, Australian state and federal budget honesty acts, numerous audits of federal and state finances, and the fiscal sustainability metrics of the ratings agencies, not to mention the bitter experience of Victoria and South Australia in the 1990s and various southern European countries this decade.

But the budget needed to be brazen if Pitt were to meet Labor’s election commitments to reduce debt while not selling assets, not increase taxes or charges, absorb reduced forecast revenue growth, and turn the public-sector spending taps back on. An impossible task — unless you cheat, that is.

The central plank of the fiscal charade is that Labor will treat the equity in Queensland’s Government Owned Corporations as a giant ATM providing $4.1 billion in cash to the general government sector. Pitt argues the consequent increase in debt held by the GOCs doesn’t matter because a higher gearing ratio is the “standard” for energy businesses and, besides, it won’t affect retail electricity prices because they are effectively set by the Australian Energy Regulator.

Pitt further argues that GOCs pay off their own debt using their own revenues anyway, so what’s the problem?

There are several problems with Pitt’s argument.

First, Queensland Treasury’s recommendation to aim for a gearing ratio of 70-75 per cent (up from 55 per cent) is counter to the AER’s 60 per cent benchmark and ignores the extremely wide range of gearing across the industry.

Second, the Queensland taxpayer is ultimately responsible for the debts of these businesses. That is exactly why the ratings agencies measure the debts of the whole government sector against a state’s revenue.

Third, it follows that the size of that debt burden matters, as Victoria and South Australia in the 90s and Greece today so clearly demonstrate, because when things go bad, and growth rates decline while interest rates rise, fiscal sustainability deteriorates sharply.

Fourth, by loading the networks up with max debt now, it reduces their capacity to fund future capex with retained earnings, meaning either more debt (but their capacity to borrow more will be reduced) or an equity injection from the state.

Still not content with a lazy $4.1bn from the GOC ATM, Treasurer Pitt set Treasury to work on finding even more idle cash.

And Treasury’s diligent officials have not disappointed, finding a few more billion in public service superannuation and long service leave balances.

Pitt argues the defined benefit scheme is in surplus, so the cash is fair game. But the scheme should be in surplus following the decade-long mining boom and the uncertain economic outlook.

The “surplus” of $2.1bn, measured using standard accounting practice, is very modest indeed compared with the almost $30bn being invested on behalf of Queensland public servants.

It therefore beggars belief that, in this post-GFC, post-mining boom decade of low interest rates, a stalled global economy, and highly volatile stockmarket returns, Queensland Treasury would recommend cutting the relatively small surplus in the public-sector superannuation scheme to zero.

Indeed, the State Actuary advised the Under Treasurer on June 16: “It should be noted that any reduction in the surplus position will reduce the capacity of the fund to withstand adverse outcomes (primarily investment returns below expectation).”

But it gets worse. By funding long service leave on “an emergent basis” (that is, not as the liability accrues as per standard international accounting practice but just as our long-serving public servant is boarding his Jetstar flight to Bali), Pitt gets access to a further $3.4bn from the ATM.

Queensland’s finances are in no state to restart the spending trajectory of the Bligh-Fraser years. The 2010s have been and will continue to be the toughest of decades for Australians. Per capita incomes have been falling and the domestic and global outlook remains uncertain.

Where other Australian governments have heeded these warnings and reined in debt and spending, Queensland — like Greece — thinks it’s a special case, believing that it will be saved by liquefied natural gas exports.

There is very little doubt that Queensland’s finances will be downgraded again; the only thing that has saved them recently was a credible Liberal National Party treasurer who was able to tell a convincing story of fiscal repair.

Despite the balance sheet shuffling, the ratings agencies still know where to look.

Thanks to the Charter of Budget Honesty we have what’s called the uniform reporting framework. And at table 8.1 on page 133 of Budget Paper No 2, the cumulative fiscal deficits across the forward estimates of $4.1bn are reported, a dramatic deterioration compared with the last LNP budget.

With the best card tricks already played, what will Labor do for an encore? Pitt the Youngest is running out of cards faster than Treasury can find new ones.

This article was first published in The Australian.

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