Home > Economic policy > Fixing Queensland’s Budget

Fixing Queensland’s Budget

November 6th, 2009

I’ve been very critical of the Queensland government’s proposed asset sales, which, I think, will worsen the fiscal position of the state in the long term. But, the combination of economic downturn associated with the global recession and continuing needs for infrastructure expenditure mean that the government is right to point out the problems and to state the need for politically unpalatable responses. I don’t have the resources of the Treasury, which means, among other things, that I can’t tell how big the problem is now, given that there has been a substantial recovery since the budget in June. So, I’ll just list some possible responses, some of which can be undertaken unilaterally, others requiring co-operation among the states, and, last but not least, action required from the Commonwealth government.

First, although the government’s case for asset sales has been entirely spurious, it’s reasonable to infer that they think a private owner could improve profitability. It seems likely that Queensland Forest Products gives timber processors more favorable terms than would be strictly commercial, and that a range of other services are being provided. For QR, a private owner would almost certainly try to reduce labour costs – the asset sale has a two-year guarantee against forced redundancies, but two years isn’t all that long. Queensland Motorways and the Port of Brisbane are basically landlords, but the experience of privatisation, most obviously airport privatisation, has shown that there are all sorts of ways to extract more from users.

In the absence of privatisation, the government could, if it had the political courage it claims, implement some or all of these changes itself. That would entail making the case to the public rather than adopting the backdoor route of privatisation.

Second, there’s the option of a congestion charge for the City of Brisbane (I was talking about this on Radio National Breakfast this week). This would both raise revenue and increase the efficiency of the road network, reducing infrastructure costs in the long run.

Moving to actions that could be taken by the states collectively, there is a lot of inefficient and wasteful competition between state governments. The worst is the payment of bribes to attract big corporations, a field in which Queensland has the leader. Then there is promotion of interstate domestic tourism, something all the states do quite a bit of. The net effect is presumably zero, so the only industrty that benefits is the advertising industry (predominantly based in Sydney, I think). Finally, there is payroll tax. It’s not my favorite, but it’s among the least bad of the state taxes, if the states hadn’t competed over the years to raise thresholds and narrow the base. If unjustified exemptions for small businesses were scaled back, the rate could be lowered for everyone, and there would still be a net revenue gain.

Finally, there’s the elephant in the corner – the Commonwealth government. Put simply, the lesson of the crisis, stated clearly by Kevin Rudd himself is that government needs to take a more active role in managing the economy and providing services. That can only be done with more revenue, at all levels, and nearly all the good options for increased revenue are in the hands of the Commonwealth. Unsurprisingly, the states are agreed on this point

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  1. JJ
    November 6th, 2009 at 09:37 | #1

    John,

    I share your rejection of the need or likely benefit from the asset sales as proposed by Anna Bligh. I think it further demonstrates that senior Treasury staff are focussed on budget management and not economic management. I think it also demonstrates that the senior politicians are completely captured by Treasury staff (and numerous highly paid financial advisors) and do not have the ability to draw expertice from other perspectives.

    It was the Treasury mantra of budget surpluses through the 90s and early 00s that created the infrastructure deficit in the first place. This kepy Treasury in an enourmously powerful position. Then when the political heat got too much, they threw together SEQIP and started shovelling money at infrastructure projects. This saw huge increases in power for agencies like DIP, DTMR and even Schools and hospitals.

    While Treasury didn’t like the spending, they managed to hide their disdain and have now come up with this asset sale to take advantage of the GFC and again cement their power within the government. Treasury have recruited huge numbers of extra people and appointed huge number of advisors to help with the asset sale. Their swagger around the corridors of government has returned as they reject anything and everything because they are busy working on the asset sale.

    I recall proposals in mid 90s for the sale of QTC and QIC and allowing these services to be purchased in a competitive environment. I image that these were never even considered.

  2. Monkey’s Uncle
    November 6th, 2009 at 12:46 | #2

    “First, although the government’s case for asset sales has been entirely spurious, it’s reasonable to infer that they think a private owner could improve profitability. It seems likely that Queensland Forest Products gives timber processors more favorable terms than would be strictly commercial, and that a range of other services are being provided.”

    This sort of thing is effectively nothing more than a hidden government subsidy. If government-owned corporations give more favourable treatment to certain industries than a commercial operator would, this means that the public is missing out on a certain amount of the profits and the government must make up more tax revenues elsewhere. So it effectively amounts to a taxpayer subsidy. But it is hidden and doesn’t show as up as a direct cost to the budget.

    It is precisely the potential for these sort of hidden subsidies, rent-seeking and corrupt political payoffs that make government ownership of enterprises a problem.

  3. Matt C
    November 6th, 2009 at 13:31 | #3

    Interesting thoughts John. I agree with you on the payroll tax and congestion charge ideas. What about the GST?

  4. Monkey’s Uncle
    November 6th, 2009 at 15:20 | #4

    One of the notable features of privatisations is that invariably they are cited as further evidence of evil free market policies being foisted upon the populace and producing bad outcomes. Yet the reality is that governments usually don’t sell assets for purely ideological reasons. They usually only sell assets because they want to get their hands on the cash and find it hard to fund their activities through other means. This is expedience, not ideology.

    The fact that governments can’t manage their finances without needing to sell assets to pay the bills is a failure of government and the political process, not a failure of the market or the private sector.

  5. SeanG
    November 6th, 2009 at 16:35 | #5

    The last point is based on a purely political belief in the benevolent power of the government. The lesson from this crisis, on a global scale, is that conservative fiscal policy management will create the scope for discretionary action during downturns but that persistently large government interference in an economy is not sustinable and will reduce the impact of any discretionary stimuli.

  6. hrvoje
    November 6th, 2009 at 22:25 | #6

    when it comes to saving money for states what about saving money in IT.
    Today I read in the paper that Tanner identified savings of 1bn over four years for Federal government. I work in IT for a large federal government agency, and have worked for a number of fed gov agencies and my impression is that you could easily save another billion without breaking too much sweat, and could probably make those departments work better.

    Following is based on my experience on IT projects for federal government which could be extrapolated to state governments. I suggest investigating joining IT departments or IT systems across state governments, or joining to build IT systems together. Presumably lots of IT systems across state governments are identical in purpose or very similar. You could build one system and let all other states use one solution. Little bit of coordination and legislation tweaking could be required. If you want to save big money little bit of effort is required.

    Current practice goes something like this, one state puts a tender for a system, vendor implements it making nice profit (noting wrong with that by the way, we all do it), then another state puts a tender for a similar system, vendor having already implemented similar system just re-brands the existing system and slightly customises it, but (charges as if they had to do it all over from scratch.), treating the second government for a sucker and so it goes 6 times around. Same practice applies if the system gets build in house, more or less identical system gets build 7 times. You would think that there would be more coordination between state governments, but you’d be surprised. Governments buy, maintain and build hundreds of IT systems, employing thousands of people in the process, and they all cost fair bit of money. My rough guess hundreds of millions each year. By utilising the economies of scale, sharing the cost of building, obtaining and maintain these systems, state government and territories could make significant savings. Same goes for universities, universities spend big sums of money on their IT systems (colleagues of mine make a nice living going from one university to another, solving the same problem all over again, basically re-discovering the “hot water” and charging them nicely for it). Standard excuse being, our system is different. On most of these things 95% is the same stuff, and about 5% is different. To summarise, governments operate hundreds of IT systems (HR and personnel systems, education systems, grant management systems, taxation systems, finance systems, car registration systems, road systems system, health and hospital systems, law and order system etc etc). By consolidating these you can make big savings, and in the process maybe even release all that spare IT capacity into creating bit of an IT export industry. (as a side note we have about $26 bn ICT deficit per year). How big saving, how about ½ bn a year, that sounds like a nice round figure. That was a wild guess of course. Apologies for the long post.

  7. Sam
    November 6th, 2009 at 23:11 | #7

    Monkey’s Uncle Says:

    Yet the reality is that governments usually don’t sell assets for purely ideological reasons. They usually only sell assets because they want to get their hands on the cash and find it hard to fund their activities through other means. This is expedience, not ideology.

    This argument is pernicious. You’re effectively saying that it’s OK, because they’re not following some stupid ideology, they’re just acting corruptly.

    The simple fact is that it’s not OK when in public office to act either stupidly or corruptly.

  8. TerjeP (say tay-a)
    November 6th, 2009 at 23:12 | #8

    Kevin Rudd could help by fascilitating a transfer of income tax powers back to the states. I suppose the federal government could keep the GST.

  9. Sam
    November 6th, 2009 at 23:40 | #9

    John Says:

    Then there is promotion of interstate domestic tourism, something all the states do quite a bit of. The net effect is presumably zero, so the only industrty that benefits is the advertising industry (predominantly based in Sydney, I think).

    I think this is unfounded. I don’t think promotion of tourism can be treated as either a zero sum or negative sum game between the states.

    Promotion of tourism in one state, if it’s effective, will increase spending on tourism in the state by more than the cost of the advertising. (Simply by the definition of “effective”). Nothing controversial so far. If income is fixed, spending must be reduced on something else.

    You’ve assumed that the reduction in spending must necessarily come from spending on tourism in one of the other states. There’s no reason I can think of why that should automatically be true.

    The reduction in spending could quite as easily come from a reduction in spending on overseas travel. In the absence of other data, one could postulate that the reduction could come from reduced spending on video games, or basic nutrition, or anything at all.

    Also, if the fixed income condition is relaxed, then there’s good reason to believe that Australian GDP will increase if tourism operators in QLD are allowed to advertise in NSW and vice versa.

  10. SJ
    November 6th, 2009 at 23:52 | #10

    Comments #7 and #9 were actually from me, SJ rather than from “Sam”. I’m not sure how that happened, but it wasn’t intentional.

  11. Seve
    November 7th, 2009 at 07:46 | #11

    Looks like you have upset Andrew Fraser. He has started attacking you:
    http://www.news.com.au/couriermail/story/0,23739,26314835-3102,00.html

  12. November 7th, 2009 at 10:22 | #12

    Dear friends,

    Thought you might be interested in the article we have today at ‘Left Focus’ – on Queensland privatisation. It was passed on by the QLD ETU.

    see: http://leftfocus.blogspot.com/

    All the best,

    Tristan Ewins

  13. November 7th, 2009 at 10:25 | #13

    And in case anyone is browsing this thread in the future and cannot find the ETE article – after it has gone from the front page you’ll be able to find it at the URL below:

    http://leftfocus.blogspot.com/2009/11/queensland-privatisation-fight-betrayal.html

  14. November 7th, 2009 at 10:26 | #14

    Oops – I meant ‘ETU article’…

  15. Alice
    November 7th, 2009 at 12:31 | #15

    @Seve
    Hey Yes Steve,

    Andrew Fraser is attacking JQ!
    This is what he says

    “Treasurer Andrew Fraser said: “The global financial crisis has ripped a $15 billion hole in the state budget. There is no evidence to suggest the state is about to see that hole repaired despite the marginal turnaround in the economy.

    “The fact is, Queensland will be better off.

    “The myth is that John Quiggin represents the view of mainstream economists.

    “The Government is not undertaking this process for the fun of it.”

    I would suggest that the real myth here is that Ms Bligh and Mr Fraser are representing the interests of mainstream Queenslanders. So why are they privatising the lot? Because Moody’s told them so? (and they want an A rating in the IQ test – ie “Influential Queenslander” test)?

    How about JQ for QLD premier! – a better representative for the QLD people than either Bligh or Fraser.

  16. Monkey’s Uncle
    November 7th, 2009 at 14:04 | #16

    “This argument is pernicious. You’re effectively saying that it’s OK, because they’re not following some stupid ideology, they’re just acting corruptly.” – Sam

    Nonsense Sam. I didn’t say anything that implies that this is perfectly okay. I was simply offering an explanation as to how and why things happen.

    I never suggested that it is okay simply because they are not following ideology. I was merely refuting the oft-repeated claim that privatisation is driven purely by ideology.

  17. TerjeP (say tay-a)
    November 9th, 2009 at 08:13 | #17

    I agree with the objection to governments selling assets at a price well below what they are clearly worth. What I don’t understand in terms of the likes of John Quiggin is why he doesn’t have the same concern about governments buying or creating assets at a price well above what they are clearly worth. Specifically Kevin Rudds national broadband network.

  18. JJ
    November 10th, 2009 at 10:37 | #18

    I think a move to a congestion charge should be considered carefully, as it could easily become a sideshow on it’s own.

    The SEQIP contains an enormous number of significant projects, many of which are not well developed and are not integarted. When looking at SEQIP, and talking to the people who have developed it, it is clear that it isn;t the result of a ground up approach to planning for the future, but rather a wish list of ideas. Which suggests that even if all projects were progressed they wouldn;t resolve the problenms we are faced with. At the same time almost 80% of SEQIP (when considering cost) is about transport projects (road, rail, bikeway and PT). Problem is they dont fit together with each other or with the land use planning (and other service delivery).

    Overlaying a congestion charge runs the risk of further exacerbating the problems of poor planning. A ground up approach to planning and consideration of infrastructure for the South East corner needs to be confirmed, then appropriate policies that support the preferred behaviours can be incorporated into that.

    At the moment both city and state are pushing for the majority of jobs growth in the CBD and major new housing developments on the fringes of the city. This forces longer commutes (even by PT). Those that live near the city, with best ability to pay for congestion charge are also services best by PT. A congestion charge for CBD potentially creates equity issues for those that dont have access to quality PT.

    More important is getting the underlying plan right. Clear land use planning (that will actually accomodate the planned growth) road functional hierachy and integrated public and active transport planning. I guarantee you could build a plan cheaper than SEQIP.

  19. TerjeP (say tay-a)
    November 10th, 2009 at 14:12 | #19

    Still keen to get an answer from John Quiggin or one of his proxies on the question I raised above.

    Also if a free market oriented government wishes to privatise a government owned company but can’t get a good price then what it ought to do is to corporatise the entity and gift the shares in equal portion to all citizens (or state resident citizens in the case of state governments). It could do this in stages also or using a mixed approach with some selling of shares when the price was good and some gifting of shares at other times.

    The LDP wants to privatise the ABC and would do it via gifting not selling. Whether it should be a corporate model or some form of mutalised co-op structure is open to debate. Clearly the former would require an alteration to advertising restrictions.

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