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.
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