Queensland isn’t Greece or Spain (crosspost from Crikey)

Here’s my latest from Crikey:

Campbell Newman’s hyperbolic claims that Queensland is on the verge of becoming the “Spain of Australia”, is on a “slide into bankruptcy” and about to execute a “power dive into the abyss” have been rightly derided. Queensland has a strongly growing economy, unemployment rates at near 40-year lows and a budget that is close to balance, and likely to return to surplus, even without drastic cuts.

Credit ratings agencies are overrated, but they are paid to estimate the likelihood that a given bond will go into default as a result of corporate or state bankruptcy. Despite some egregious failures, they are more often right than wrong. The comparison between Queensland’s AA+ ranking (the same as that of US Treasury bonds) and Spain’s BB- speaks for itself.

Unfortunately, Newman’s silliness is an echo of the interim report of the Commission of Audit, headed by Peter Costello, which the Liberal-National Party government commissioned on taking office. The recommendations of the commission are drafted as if Queensland is facing a Spanish-style crisis, and propose austerity measures similar to those adopted in Spain.

The key statistic that drives the recommendation is the ratio of gross public sector debt to government income, which is projected to peak at 132% in 2013-14. That might sound alarming, when you consider that Spain has run into difficulty with debt/GDP ratios of only 80%. On the other hand, almost any Australian household with a new mortgage owes more than one year’s income, which is what is meant by a debt/income ratio of 100%.

It’s crucial to look at the numerator and the denominator here. Let’s start with the denominator. In looking at the sustainability of government finance, it’s reasonable to focus on the ratio of debt to revenue, rather than debt to GDP, since governments can only command part of GDP. That’s particularly true of state governments, which have limited revenue flexibility. Equally though, it’s important not to be misled by comparisons with the more widely quoted figures. European governments usually command around 40% of national income, so Spain’s 80% debt/GDP ratio translates to a debt/revenue ratio of around 200%. Even the eurozone’s official target of 60% (which Spain was meeting before the financial crisis) implies a debt/revenue ratio of about 150%.

The real problem though is with the commission’s use of “gross total government debt” as the denominator in its analysis. The use of gross rather than net debt measures is economically unsound. Queensland has huge financial assets, totalling $41 billion in 2010-11. The largest single component is the fund accumulated to meet future superannuation obligations, an asset which few other governments hold.

The audit commission proposes a gross debt measure on the basis of the purely circular reasoning that (under current government policy) the investments held to meet superannuation liabilities cannot be used to reduce gross debt. Apart from being entirely circular, this claim ignores the fact that the governments financial assets exceed its superannuation obligation by a substantial margin. Net government debt, taking account of both financial assets and the superannuation liability, is only $41 billion.

The inclusion of the debt associated with government business enterprises represents an even larger error. This debt is fully serviced by the earnings of the enterprises concerned.

The most relevant single measure of the state’s fiscal position is net worth, the difference between the value of assets and debts. Net worth is currently $171 billion, compared to $60 billion at the beginning of the 2000s. It’s true that net worth declined slightly in the aftermath of the fiscal crisis and natural disasters. but the overall trend remains strongly positive.

Maximising net worth is not, however, the best route to get AAA credit-rating. Ratings agencies represent the interest of bondholders, and for them more debt is almost always bad, even if it is used to finance productive investments. The commission displays an uncritical acceptance of this goal. Its report contains no discussion at all of whether the cuts it proposes will enhance the economic and social welfare of Queenslanders: the desirability of pleasing bondholders and ratings agencies is taken as self-evident.

None of this is to say that Queensland has no fiscal problems (could that ever be said of any state government?). As the commission correctly points out, Queensland used to be, in the Bjelke-Petersen era, a low-tax, low-service state. Over the past 20 years or so, service levels have approached the national average. For example, Queensland students used to get only 12 years of school education, whereas everywhere else, on a K-12 system, there were 13 years. Historically, this was reflected in lower-than-average rates of participation in tertiary education, low wages and other negative outcomes.

Over the past 20 years or so, services have been improved to the point where they are now about equal to the national average. But there has been no corresponding increase in tax effort. The Labor government sought to maintain Queensland’s low-tax status while delivering high-quality services. While real estates markets were booming, the revenue they generated filled the gap. But, as the commission correctly argues, this can’t work in the long run. Queenslanders must either pay the same taxes in other states or accept lower-quality services.

Unfortunately, the commission’s report pays almost no attention to the feature in which Queensland differs most from other states, that of low tax effort. A serious attempt to address the budget problem would look at tax concessions and public expenditure, and seek eliminate those items whose costs exceed the benefits. The commission has focused only on public expenditure and has been particularly critical of the increasing funding for “front line” public services such as education, healthcare and police under the Labor government.

No such criticism was heard from Campbell Newman before the election: on the contrary, the LNP platform makes much of their plans to improve front line services. An honest public debate would assess the mix of revenue increases and expenditure reductions needed to achieve a sustainable budget balance over time. The best time to have such a debate would have been before an election?—?the LNP was certain to win in any case, and could have afforded a bit of honesty. But even if pre-election honesty is too much to ask, it ought to be possible to have the debate now. Instead, we are seeing unplanned cuts rammed through in an atmosphere of spurious crisis.

There’s nothing in Queensland’s actual situation that resembles Spain or Greece. But the panic-stricken policies being pursued by the Newman government will have similar effects, if on a smaller scale, to those of the austerity policies adopted by Spanish and Greek governments. The difference is that those governments are acting under duress?—?Newman’s follies are all his own.

20 thoughts on “Queensland isn’t Greece or Spain (crosspost from Crikey)

  1. Seems politicians nowadays ride to victory on the monumental lie. Abbott and friends also seem to be doing extremely well with stories of doom and gloom so far off the mark they might as well be of an alternative universe. Clearly his seminary training is serving him well. Less pious folk would be unable to maintain a straight face.

  2. Campbell Newman seems to be driven by a physiocratic view, expressed in a statment to reporters that there is a ‘real economy’ (agriculture, mining, etc, where people produce ‘things’) and the public service, which is relatively dispensable, though he ranked the importance of public services as ‘frontline’, ‘supportive’ and completely redundant (implying this is a large segment). If not driven by an ideological view, why is he persisting with the silliness? The need to discredit the previous government in order to avoid difficult election promises (the usual pretext) hardly seems to apply.

  3. Campbell Newman is a goose.

    He tries to say he has been given a bare cupboard nay broken cupboard but equally there is a full cupboard coming up soon.

    He shows Swan like ability to tel a story.

    You are right Tom

  4. What are the policies being pursued and how do they vary relative to the previous government?

  5. The Queensland Treasury Mid Year Fiscal and Economic Review shows Queensland Government revenues of $44.416b and expenses of $47.269b which includes a cost for the natural disasters of $6.884b ($1.4b of this has been provided by the feds for a net expense to the State of $5.48b). So, if Queensland didn’t have the disasters it would have been in the black by about $2b THIS year (probably more because royalties from the mining industry fell due to lost production during and after the natural disasters). Rather than randomly sacking public servants, Campbell Newman could have done nothing and (in the absence of further major disasters), the state would have had a budget surplus next year anyway.

    The Queensland Treasury investor booklet dated 30 June 2012 also exposes the lie. It shows the state has total borrowings of $79 billion (some of which does not need to be repaid until 2033) against a Gross State Product of $255 billion growing at 2.63%, but financial assets of $118.2 billion including cash in managed funds. It notes that “The amount of money spent by Queensland on interest payments, when expressed as a share of revenue, is also low relative to its international peers”.

    As Nobel Prize-winning economist Paul Krugman wrote in the New York Times earlier this year, government debt is different to private debt. As long as your tax base is growing faster than your debt, it is not crippling or even an issue you need to worry about. Some US Govt debt from WW2 was never paid off, it just became irrelevant because the economy grew faster than the debt.

  6. @Tom
    There is a more detailed version of the investor booklet with more details exposing the lie: http://www.qtc.qld.gov.au/qtc/wcm/connect/1ac2d9004fee846892ccfb140bc6de40/Investor+booklet+31March12.pdf?MOD=AJPERES&CACHEID=1ac2d9004fee846892ccfb140bc6de40

    This is also the version the Treasurer was passing around at the Queensland Treasury Corporation Roadshow in Tokyo. But back in Queensland he claims a “debt to revenue ratio climbing to 155 per cent” when QTC itself shows (p42) that “Queensland’s net debt to revenue ratio is negative as the state has established a net asset position by accumulating financial assets”.

  7. Spain did not run into difficulties because of government debt or deficit prior to the GFC but because it failed to regulate its private sector banks and because there is no generally agreed mechanism in place to isolate national economies from the global financial system. Until the Euro-member countries agree to a uniform financial sector regulatory framework, via the ECB, each national government is more or less in a similar position as the USA regarding bank failure, except that the US currency seems to still ride on some version of exceptionalism.

    Interestingly, both Australia and Germany were at least partially successful in isolating their financial system from the worst effects of the GFC. In both cases it is too much to claim their success is entirely due to the regulatory framework. Nevertheless, it did play a role, I believe.

  8. Creation, de novo, of a state like Greece or Spain is perhaps possible by application of enough boneheaded (in generous interpretation) effort. Doing so will be sure to hugely benefit a few well placed parties in the gatekeeper economics game. And there is the rub. The beneficiaries must be identified, and that is a matter where politics intersects economics. If Newman is doing this out of pure ideology, that would be unusual.

    The game being played to bankrupt the USA’s postal service is case in point. By changing the rules of funding of pension to require 100% fundiong of an egregious number of years forward (72) the US Postal Office has been forced to shutter offices. The beneficiaries of a destroyed national postal service are obvious since the USPO handles huge amounts of bottom price mail. The private post services are slobbering to take that over and raise prices. The US press is useless.

  9. You can find the text of the ‘Workers Audit’ – a leaflet a small group of us produced based on the Interim Report and Treasury reports here:

    Posted by Workers' Audit on Tuesday, July 24, 2012

  10. One of the key issues at the national level remains currency sovereignty. This is the ability of a sovereign government with control of its own fiat currency to make and implement its own decisions with respect to monetary and fiscal policy. If it is a democratic government, as in Australia, it means that the people and not the financial capitalists have the final say on the policies adopted. In Australia, a national government, of any party, knows that if it allowed unemployment to go to 25% (as in Spain) and if it allowed the large banks to fail (the big 4) so that most Australians lost most of their savings… then this government would be thrown out and remain unlikely to be re-elected for at least twenty years. That is a powerful incentive to take proper state interventionist action.

    Reasoning from first principles we can deduce that on the day after a major economic crash of the financial kind (if it happened overnight as it were) a country has the same real resources that it had the day before the crash. That is, it has the same labour force, the same skills, the same capital equipment, the same stores and inventories and the same natural resources (less one day’s consumption of non-renewables if you want to nitpick).

    Hence, any disruption of economic activity (closing factories, newly unemployed workers etc.) is wholly a result of nominal factors and not of real factors. *(There is the exception of structural distortion as discussed below.) The financial flows of the mixed economy system are these nominal factors. In standard times of the reasonable operation of these nominal flows, we are pleased to allow them to continue because of the (partly) self-regulating and goal-seeking nature of such a system. (Though it is also permitted to continue because a lot of rent-seeking parasites with oligarchic power do well out of such a system.)

    In a time of system failure (market failure), only fools insist on allowing the system to “self-right” when it has gone beyond a tipping point to a position where it will not self-right or will not self-right without a long intervening period of immiseration and lost development. At this point, direct democratic citizen and democratic state intervention are required to get the real system working again and working quickly.

    Since, the loss of the nominal flows of finance and wage monies are the proximal cause of the real system’s run down in the case of a merely financial crisis then restoration of these financial flows by state action is the straightest and nearest way to restore the activity of the real economy. This means deficit spending and creation, if necessary, of a labour force reserve with guaranteed work and wages.

    *Note: A prolonged period of mal-investment via all the standard ponzi schemes and artificially inflated asset bubbles of the laissez-faire system will leave an economy with structural distortions. These, along with the failure of finances at the critical juncture, will combine to plunge the economy into recession or depression. However, righting these structural distortions is a clear and proper target for state spending and dirigist action.

  11. To quickly take my discussion back to the state level. The presentation of the facts by Prof. John Quiggin, the State Treasury Report and the Workers’ Audit posted by Dave, clearly refute the ideologically motivated LIES and DISTORTIONS put forward by Campbell Newman, Peter Costello and the LNP. Their modus operandi is straight out of their failed neoliberal, neocon, zombie economics playbook. These are all the failed policies that led to the GFC in the first place and to rising unemployment and economic crisis on Europe and the USA.

    The contemptible neolibs prefer to damage and reduce the overall economy and impoverish many unemployed, elderly and workering people as this strategem gives them (the neolibs) a larger slice in absolute terms of a cake that is smaller overall. That is their entire motivation. When intelligent, well-educated people (the neolib elite) lie and distort the facts, they clearly have a dishonest and self-interested agenda. There is no other explanation.

  12. @Paul Syvret
    Hi Paul, the “rightfully derided” line referred to your piece (there were some others I think, but yours was best) – I’ve now added a link. Thanks for your good work on this.

  13. Your name is Ikonoclast so you have to smash images and move on, but as I tried to ask earlier, is it more complex than this? Is this really Can-Do’s “entire motivation”, cycnically embraced, or is he also driven by the half-remembered ideas of defunct economists and his own self-perception as a “practical man of action” who can take “tough decisions” – these tough decisions no doubt defined by the horde of zombies he chooses to occupy his imaginary world.

  14. @Marginal Notes

    We will each have our own opinion on this. I think it is pretty much Campbell’s entire base motivation as it is the basic motivation of his class. His dubious links to developers (some being relations) whilst Lord Mayor are an illustration of his real motivations. No doubt, if he does not understand himself fully and consciously he will like to have various comforting superstructure myths and self-delusions to fool himself and enable to view himself as a kind and considerate fellow and a good citizen.

  15. Absolutely agree. People should remember the state of Queensland infrastructure left by Joh 20 years ago; the RBH/RWH and PA hospital were red brick dinosaurs 50 years past their use by dates. The Gold Coast ‘motorway’ and Bruce ‘Highway’ were mostly single lane goat tracks and the list goes on. Sadly the ALP seemed too dumb or preoccupied with Campbell to advertise this fact during the election. Same goes at a federal level; our economy is in great shape but the feds seem unwilling to advertise the fact !!

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