A lost opportunity

Dear ,

This is an analysis of the Queensland Budget I sent out to news outlets yesterday. It is depressing how quickly things are deteriorating due to government mismanagement. The best example of this in the analysis is the figures on the growth of health and education employees, which has been well-above population growth, but which is providing declining standards of service. Yes, you read that right - more workers (more than 40% in some categories since Palaszczuk gained power in 2015), and dramatically worse services.

Here is the analysis.

If the state of Queensland were a business its board of directors would be called into its bank manager's office on the basis of its latest cashflow statement, aka State Budget 2022-23.

We believe former Labor premier Peter Beattie is correct and Queensland needs a "reboot". But nothing is further away from a reboot than this budget whose centrepiece is higher spending on government services despite the efficiency of those services having decreased markedly over the period of this government. This is funded by higher taxes, particularly on minerals and payrolls, elements of the productive parts of the economy, high electricity prices, record stamp duties, land taxes, and by increased borrowing.

There is a way to higher service delivery in Queensland – it is by building up the productive parts of the economy, not tearing them down. This budget should have plotted a path out of COVID using it to reset parameters, cashing in on income windfalls to rebuild reserves, and refocussing the economy to increased productivity and investment resulting in higher public and private incomes to service the needs of the community.

Services

Budget Paper No 2 reveals that since March 2015, when this government came to power, and March 2022, there has been an increase in health practitioners of 53.38%, doctors of 39.16%, nurses of 38.10%, and ambulance officers of 29.71%. This contrasts with population growth of 9.99% to September 2021 (the latest ABS data).

Yet in March 2015 there was no ambulance ramping and hospital waiting lists were under control whereas now the hospital system is in disarray. This is a catastrophic management failure which will not be fixed by hiring more staff or building more hospitals.

Over the same period the government has hired 13.75% more teachers and 14.78% more teacher aids, yet again outcomes have not improved, and Queensland underperforms in terms of other states in Australia as well as other countries in the world.

In an interesting demonstration of its priorities the number of police grew at a lesser rate than the population at 6.52%, even though total offences in 2014 were 442,013 which by 2021 had grown to 504,269, an increase of 14%. The government is also relatively relaxed about fire with firefighters growing at only 8.49%.

Debt

In 2021 gross debt was $47.1 billion, it jumped to $58.2 billion this year and then increases to $87.3 in 2025-26. This is an increase of 72% in just 6 years. Net debt grows from $15.8 billion to $39.2, an increase of 113%. Growth of this level is not sustainable.

Queensland increased its gross debt by $11 billion between 20-21 and 21-22, much of which is attributable to COVID. This demonstrates the need to have reserves, and to rebuild them when they are depleted. One thing Queensland should be aware of more than most states is that there is always some sort of a disaster around the corner, whether the traditional fires, floods, droughts or cyclones; or pandemics.

This was the budget to replenish those reserves. This could and should have been done using the windfall income from mining, and coal royalties in particular. Instead that money has been spent propping-up health and education, systems which need rebuilding, leaving Queensland more vulnerable next time there is a catastrophe.

Taxes and royalties

Payroll tax is a tax on employment, so while it is heartening that the government has increased the threshold so as to exempt smaller businesses, it will be increased on businesses with a payroll of over $10 million per annum. The average firm affected will have a payroll of 118 people and greater, so these are not particularly large businesses. Higher paying industries will have even smaller payrolls. Instead of calling this an increase in payroll tax it is characterised as a "mental health" levy, despite the fact that one of the benefits of employment is better mental health. Perhaps the next increase will be characterised as an "obesity" levy, to reflect lower levels of physical mobility in today's workplace?

As a result payroll tax jumps by 6% next year and 27% by the end of the forward estimates.

This increase jackpots for miners who are hit with a punitive taxation regime on "super" profits in addition to higher payroll taxes. The tax hit on miners is particularly dangerous for future economic growth. This year coal royalties $7.3 billion, or 10% of total state government revenue. After monies received from the Commonwealth this is the single largest source of income the state government has.

The new regime will earn more money for the government, and was imposed without discussion with the industry, and over the industry's objections. This is particularly dangerous as it increases the sovereign risk of investing in Queensland. Bringing a new mine to production is a long and financially perilous pursuit, particularly coal mines (ask Adani and New Hope). Capricious changes in government policies make this even more perilous and favour investment in other countries.

In our view there is a strong economic and moral case for the government increasing its income from coal by approving more mines more quickly and making Queensland a better place to invest. As a result of the Ukraine war there is a supply disruption in energy around the world which will kill people, particularly in the northern winter, unless it is solved. Queensland coal and gas are indispensable to that solution. Our thermal coal has the added benefit of being the lowest-emitting in the world. If countries are going to be forced to use coal, then let it be Queensland coal before any other.

The new regime is particularly savage on the high prices being achieved at the moment. It imposes three new royalty rates on coal in addition to the three already in existence. Currently the top rate of royalty is 15% up to $150 a tonne. The extended regime then charges a rate of 20% at $175 a tonne, which moves to 30 per cent at $225 and 40 per cent at $300.

Given that every additional dollar over the all-in cost of mining goes straight to the bottom line we can deal with these royalty rates as being straight-out taxes on income.

This is a bad scheme in that it is a progressive tax on the profits of a narrow sector of the economy. Generally company tax around the world is a flat rate, which is the most efficient and equitable way of taxing companies. (Australia currently has a tiered system, but this is as part of a transition for all companies to go to a lower rate of company tax). This rate ramps up significantly to a rate which is higher than the company tax rate.

On top of the royalty, miners still need to pay company tax. The combination of the royalty and company tax means that out of every dollar of profit while the price is over $300 a tonne 58% is going to governments and only 42% to shareholders. While coal prices are currently high, no one expects them to stay there, and being a cyclical industry, a period of higher prices is needed to compensate for the billions of dollars of losses the industry made in the preceding couple of years. The forward estimates of the government project that next year the changes will yield $765 million, but on average only $145 per million a year after that. So the treasurer has shredded his credibility for a long-run rounding error in the state budget.

Power generation

In the last budget the demise of income from Queensland's power generation system was forecast. This year they are back with a bang. After a loss of $457 million in 2021 the budget anticipates profits next year of $1,067 million followed by $1,472 million the year after. These profits contrast with promises to keep the cost of electricity low in Queensland and are a further disincentive to business. It is hard to avoid the conclusion that the generators are taking advantage of erratic market conditions in the rest of Australia to hike prices as a means of revenue generation for the government. The premier's promise of $385 million in rebates to households is an inefficient way to compensate the community for a cost-of-living increase that is partially caused by mismanagement of the power network, and a fraction of the profits the government is reaping.

Administrative priorities

The Budget provides a list of public service employment by department. This is a good guide to the government's priorities and demonstrate that their focus is anywhere but building the income of the state.

What we find is that there is an increase in staff employed in some departments including, starting with the largest, the Electoral Commission (7%), Health (6%), Premier's (5%), Employment (5%), Justice and A-G (4%) and Police (4%).

While Health and Employment are expected, the ECQ, Premier's and A-G were surprises, while the police were welcome.

There is also a decrease in a number of other departments, including, starting with the largest, Resources (-7%), Public Trustee (-5%), Seniors, Disability and Aboriginal and Torres Strait Islanders (-3%), Queensland Treasury (-2%), Communities, Housing and the Digital Economy (-2%), State Development, Infrastructure and Local Government (-1%).

With Resources providing the biggest single state-based kick to the budget, it is particularly puzzling that they have been cut-back so savagely. Housing and State Development would also appear to be key drivers of growth, but they too have suffered.

Others suffer no change, but due to increases in population, are experiencing a real cut: Transport and Main Roads, Agriculture, Energy and Public Works.

Conclusion

Halfway through its term, and with the opportunity and a need to reset now COVID has become endemic, this budget demonstrates that this government has no viable plan for the future apart from featherbedding its dysfunctional delivery of services by taxing and contracting the productive areas of the economy.

Coal royalties and stamp-duty receipts gave it the opportunity to rebuild reserves to make the state more resilient, but instead it is squandering that opportunity in hiring new public servants to repeat the mistakes of the last 7 years. The outcomes will be no better, but the cost to every day Queenslanders will be higher.

Regards,

GRAHAM YOUNG
EXECUTIVE DIRECTOR