Decay in a time of penury

New South Wales is asserted to be facing a financial crisis necessitating a mini-budget. In fact the revised estimate of NSW State debt, at just under $8 billion, is miniscule and the overrun of $900 million in the recurrent budget - anticipated as a result of the shortfall in stamp duty on property - is near inconsequential. Cutbacks will drive the State further into real crisis in transport, schools and hospitals. The assertion that the State’s credit rating is threatened is mere intimidation.

This year’s budget

Treasurer Michael Costa’s last budget for 2008-09 revealed net debt at June 30, 2008 as $7.8 billion or 1 per cent of GSP (Gross State Product): it was anticipated that debt would be not much more by June 30, 2012. Budget revenues, $47.6 billion for the forthcoming year, were anticipated to rise modestly and the expenses forecast was of the same order. Capital expenditure was estimated at $5.5 billion for the year and similar amounts were planned through 2012. “The … balance sheet is currently strong [and] net debt and fnancial liabilities will remain at sustainable levels” say the budget papers.

Extraordinary events

At his extraordinary press conference on the morning of Friday September 5, while the Labor Caucus was ousting Premier Iemma, Treasurer Michael Costa painted a picture of a government budget in near crisis.

Blowouts in the recurrent budget because of declines in stamp duty receipts were said to be driving the surplus down by $900 million to a deficit of $700 million and the Iemma government’s failure, after a long and vitriolic campaign to gain approval for sale of electricity assets, together with blowouts in capital works related particularly to the health area, would necessitate a pushing out to later years of originally proposed projects.

Unless remedial action was taken through a mini budget, which Mr Costa generously offered to present, the State’s credit rating would be compromised and interest on debt would threaten the State. The media seems to accept these statements and the new Premier at least initially also acknowledges the impending disaster.

The views of economists, and the situation in the real world of state economies internationally, reveals a quite different picture. Costa’s vision of the State’s finances represents the real danger.

Costa’s (and Treasury’s) assertion of unsustainability rest on two ideological positions: first that the recurrent budget result should always be a surplus; and second that there should be minimum current debt.

Estimates of budget surpluses are just that - estimates. The overrun of some $900 million is less than 2 per cent of total revenue. (In fact the difference between the budget and actual net result for last year was of the same order!) There will be more changes right through the year necessitating further revised estimates of the position at the end of the year; there always are.

Since the adoption by governments of the market or business model - in New South Wales by Harvard MBA graduate Premier Nick Greiner - there have been ongoing reductions in the operating budgets of government agencies through across-the-board cuts, non-funding of awarded salary increases and the notorious “efficiency dividends”.

So far as attempts to bring improved performance together with greater accountability and transparency to the conduct of government services are concerned, the “reforms” have been a failure. Health, public transport, community services, public utilities and many other areas are in no better shape than 30 years ago, except financially in some areas. And they provide fuel to the Opposition for their attacks every day.

Scores of protests, media articles and expert opinion have pointed out the failures.

The abject farce attending the introduction of a universal ticketing arrangement across all public transport - something brilliantly successful in places like Japan, Hong Kong and Singapore - is a good enough example.

The reason is that the “new public management” approach is based on woolly thinking, the primacy of the private sector and the power of self-interest. Organisations succeed through attention to shared goals and recruitment, training and development of staff as well as the practice of leadership, not forcing efficiencies through ongoing reduction of operational funding. Witness Southwest Airlines in the USA and schools in Finland.

While over the longer term, sustained imbalances in recurrent expenditure are clearly unsatisfactory, there surely can be no risk assumed for occasional deficits. Indeed they are appropriate occasionally to even out overall performance. After all, reacting suddenly to declines in the budget position leads to retrenchment of staff who take with them skills and corporate knowledge which have cost a great deal to acquire. It is likely that the reductions have already gone too far in some areas.

Infrastructure

As to capital expenditure the situation is more serious, but not as Mr Costa claimed. Australia nationally has a public debt at 15 per cent of GDP compared with more than 50 per cent for many western European countries. Were Australia to spend up to the same ratio on infrastructure development it could increase its borrowings by over $260 billion. (This is the same as a figure given some years ago by Canberra academic and commentator on leadership and economics Ian McAuley.)

The situation in the State is similar. Only in New South Wales, where investment has been poor for decades, it seems worse!

The failure in infrastructure provision is critical. Hospitals are a well known example. Transport is another. In city after city across the world, excluding much of the USA and Britain, modern and comfortable fast trains transport millions of people who are told in clearly intelligible announcements where they are going and even when they will get there. Timetables are near unnecessary because the frequency is about every 10 minutes. In Mexico City for example, the trains are fast, frequent and there is not a scrap of rubbish to be seen anywhere. In Denmark trains run to suburbs scores of kilometres away late into the night. In Rome small electric buses transverse the city.

But in the northern beaches of Sydney and many parts of the outlying west and south transport is infrequent and ceases by early evening. Train lines have been ripped up, big buses lumber through the narrow crowded streets and train stations at peak hour resemble New Orleans facing Hurricane Katrina.

The kinds of assertions made by Mr Costa, and accepted by journalists like Glenda Korporaal (“Hard work ahead for NSW Premier battling state debt”, The Australian September 10, 2008) who observed, "Former treasurer Michael Costa … revealed the true extent of the state's financial problems” are simply not universally accepted and haven’t been for many years.

It is significant and unfortunate that former Commonwealth Treasurer Peter Costello loudly proclaimed the evils of “excessive” borrowing by the States which would drive up interest rates by cramping the style of the private sector.

Former chairman of the Australian Competition and Consumer Commission Alan Fels, writing in The Age in July 2004, lamented the absence of significant new borrowing:

The principle that public infrastructure benefiting several generations is most fairly financed by government debt repaid by the taxes of several generations is simply no longer accepted by Treasury economists. Relative to the rest of the developed world, Australia's public sector carries barely any debt.

Fels noted:

By far the most dogged opponent of government debt is the rhetorical difficulty it presents for politicians. … [There is] now a concrete association in the public mind between a government that borrows and a teenager recklessly running up a credit card bill.

Sydney Morning Herald finance editor Ross Gittins, talking not too long ago, of the changes Treasurer Michael Egan was making to the structure of the budget said of the focus on debt:

… this is a hugely parsimonious way to conduct the state's finances, insisting that the current generation of taxpayers cover the full cost of new general government capital works - hospitals, schools, roads etc - that will still be delivering services to taxpayers 20 or 30 years hence and catch up on the repayment of debt incurred to fund the capital works of previous generations.

He continued:

But why is such parsimony necessary? It never was. Unlike some other states, NSW (like the Commonwealth) never went overboard and so never had an excessive level of debt. If it ever had excessive debt it wouldn't have retained its triple A credit rating. And I doubt that rating was ever under threat. In any case, if you've sworn off borrowing why does your credit rating matter?

More recently, Ian McAuley (in the Centre for Policy Development online in November 2007) observed, “Evidence of infrastructure neglect surrounds us whenever we drive on a highway or catch a suburban train … People feel insecure in their employment, and are wondering why, if we are so prosperous, we have to work such long hours.”

That we should be contemplating “pushing out” infrastructure plans, especially in the areas of public transport and energy in the face of impending global climate change, in education with ever greater demands on a knowledge economy, and on hospitals, is irresponsible.

Credit ratings

Professor of Accounting at the University of Sydney Bob Walker, author with Betty Con Walker of Privatisation: Sell Off or Sell Out (Sydney University Press, 2008) pointed out the misleading nature of asserting that rating agencies would downgrade the State because of greater infrastructure expenditure. Standard & Poor’s September 2007 report noted, the Walkers say, that the forecast debt increase resulting from the capital program was unproblematic; the intention to retain the balance sheet in surplus and the intention to sell electricity generating businesses was noted.

Leaving aside whether rating agencies are any more than agents of globalisation and that they have been sometimes unreliably recommending investments in companies like Enron up to the day before they crashed, the notion that the State’s future should be hostage to such agencies is grossly distasteful.

The public debt for Western European countries ranges from 26 per cent up to 64 per cent of GDP (excluding Norway and Italy which are special cases), yet their credit ratings are over 90 out of 100. As already noted Australia’s public debt is 15 per cent of GDP; NSW’s debt is around 1 per cent of GSP.

To assert that the level of debt necessary to fund vitally important infrastructure is unsustainable is nonsense! More than that, it is dangerous.

A few months ago, distinguished New York Times columnist Thomas L. Friedman (“Who will tell the people?” International Herald Tribune, May 4, 2008) noted “If all Americans could compare Berlin's luxurious central train station today with the grimy, decrepit Penn Station in New York City, they would swear we were the ones who lost World War II”.

Change a few words and he could be writing about Sydney, indeed the whole of New South Wales. It is time we stopped simply accepting that what ideologically driven politicians tell us is correct. It doesn’t even add up. When it doesn’t make sense and feel right then it is time to demand a different truth.