Tasmanian Budget Analysis with Dr Graeme Wells: '4 out of 10'

The Tasmanian state budget presented by Treasurer Guy Barnett shows a 7% increase in spending and a 5% increase in revenues compared to last year, amounting to $10 billion. Debt is also rising, reaching $1 billion in the next financial year and potentially $20 billion when considering all government liabilities. Expert Graham Wells explains the sources of state income, debt payments, and the impact of budget decisions. He highlights the need to assess budget figures in real terms and discusses the role of the efficiency unit in managing government spending. Concerns are raised about the state's debt levels affecting credit ratings and potentially leading to higher interest rates. Wells emphasizes the importance of understanding budgets beyond the surface numbers and the potential impacts of credit rating downgrades on businesses and individuals in Tasmania. Welcome to the Tasmanian Times Budget Podcast with me Tom Allen. Tasmania's government handed down its state budget last Thursday. It was the first for Guy Barnett as the Treasurer. Spending is up 7% compared to last year. Revenues are up 5% compared to last year, up to 10 billion dollars. But debt is also up. A billion dollars in the next financial year into the red, 10 billion in the next four years. But it could be as much as double that, 20 billion according to independent economist Saul Eslick, if you take all government liabilities into account. On top of that, there's the billion spent on the ferry disaster and there could be millions more being spent on the proposed stadium. So what's really going on with Tasmania's state budget? We've had the weekend to digest it, to aid our digestion further. We're very lucky to have highly respected expert, former UTAS economics professor Graham Wells with us. Welcome Graham. Thanks Tom. So first question really I think is sort of budget basics. What is the state budget? How much money comes in? How much money goes out? Where does it come from? Well it's just like a household budget really. We have income and expenditures. Tasmania's budget is on the revenue side dominated by Commonwealth grants. So that provides about two thirds of Tasmania's income and that's partly GST revenue and partly it's grants from the Commonwealth and the tied grants or particular agreements and so on. But two thirds is coming from the Commonwealth, one third coming from own state revenues. Right. And there's been a lot of commentary about obviously debt with this budget but also debt payments as much as two billion could be on servicing the increasing debt for Tasmania. How does that work? Where are those debt payments going to? Well we've got a couple of forms. There's three categories that you might put our obligations into. One is, as I think Saul was referring to, is the debt of the government owned business enterprises. So Hydro and all these people have debt and the way that works is that they approach the central debt issuing agency in the state and it issues debt on their behalf. Right. And so people like Superfunds and so on buy that debt and they receive the interest payments on the debt. Right. So that's one lot. The other obligation is the unfunded superannuation liability which doesn't appear as debt on the books but it is a liability. Can you explain what an unfunded is for anyone who isn't sure? Well there used to be a defined benefit superannuation scheme in the public service and that meant that it was a benefit that was related to your salary while you were in service and the length of service that you had. So if you had joined as some people probably did in their early twenties and they've been there whole working life they will end up getting a salary for the rest of their life on retirement of maybe two-thirds of their salary when they're working. Now that liability isn't actually funded so that doesn't count as debt but it is a major. How much is it? It depends on when you count it. So it's going to peak I gather in the early 2030s and then people are going to fall off the perch and that liability is extinguished when they die. So it will gradually get less but there will be a period where it is quite a large amount and those benefits have to be paid. So that's one trench and the third trench is the amount that is the government bonds that are issued just to cover the deficits that the government earns every year and at the end of the four-year period that the forecasts go for that's going to be about ten and a half billion. Okay thank you. I've heard budgets described as all about decisions what governments pay for what they decide not to fund. Broadly what would you say in this budget the government is getting right what are they getting wrong? Well like basically just carrying on as before there have been very few serious decisions made in terms of choosing priorities and they are trying to slow the rate of growth of government spending by means of various efficiency dividends and so on and the new productivity unit is going to replace the efficiency dividends but that's pretty small beer really. They're hoping to save maybe 150 million a year which is great but it's not going to solve the problem. Now the thing that hasn't been highlighted is that a lot of government spending is increasing in nominal terms but in real terms it's falling and so for instance they highlight the fact that expenditure on health is going to increase by 10 percent okay that's in money terms. After you allow for the fact that the cost the price of health is rising fairly quickly in real terms spending on health is falling and that's not allowing for the fact that the demand for health with an aging population is going to grow. So just to understand that point so in aggregate you're saying that we could be going backwards in our health spending even though the budget allocated may have been an increase and everything else is sort of overtaking that? Yes yes and so the budget is presented in just nominal terms right so it's just dollars here dollars there but it doesn't account for the spending power of those dollars and just as a household budget we just say here's my income here's my spending and what's the difference and that's the correct way to do the budget but if you want to interpret it you need to think about well how much is that dollar going to buy me? Yep so you mentioned the new efficiency and productivity unit that kind of made me think about in the US a far more sort of high profile and controversial doge department of government efficiency we don't have an Elon Musk type figure in Tassie yet. Is there a similarity there or is that jumping at shadows? I actually think it's an improvement on the old efficiency dividends in the efficiency dividend departments were just told to cut a certain percentage off their budget and the easy way to do that is just to postpone things and so the productivity unit I think is tasked for saving roughly the same amount of money but it's treasury that's going to do it which is at arm's length from the various departments and I think the treasury are going to have a little bit more rational approach to this than Elon Musk did so I think that is an improvement. Yep and do you think that efficiency unit could be used to soften up some state government assets for privatization? No I think that's a separate issue I think privatization will be a decision probably made in premier and cabinet actually mind you if I were in charge of the efficiency unit premier and cabinet would be the first place I'd look actually. Controversial to some maybe. Now you talked about how budgets are presented so I have a question about that and about I guess you call it kind of almost budgetary democracy most people aren't economics experts the budget is sold with lots of big numbers doing some good things but it also feels like we don't really scratch the surface for example you had Sawless Lake on ABC saying actually real debt is double what the government says it is. Do you have views about how budgets are sold the popular understanding of them and then how we sort of go on our merry way of a public kind of being fleeced and spun? Well the budget is a document that has to be passed by parliament so it has to have quite a lot of all the expenditure and any changes taxes have to be legislated so that has to be set out in quite a lot of detail and you can't avoid that. I think I'm not sure that the spin on the budget is any worse than spin on a whole lot of things. I think it is to some extent up to commentators to point these things out which people like Sawle do very well and the rating agencies certainly don't they look through this stuff and so I mean a lot of this economic stuff is hard to get your head around and I think it could be made more I think they do the problem is it's not a treasury document it's the treasurer's document and so if you look at the treasury's pre-budget economic outlook that is possibly a lot clearer than the budget itself so when politicians I know they work hard and all that and they have an incentive to present it the best possible light so and that's always going to be the case and it's easier for them if they've got good news than the bad news obviously. So you talked about rating agencies there the debt scenario for Tasmania by consensus isn't great as much as 16 billion in the red by 2035 according to just one take do you think there's a risk of credit rating going down according to any of the rating agencies? Oh certainly, the state is in a position where the federal government is never going to allow the state to default that's just not going to happen but the rating agencies are concerned that the state will be able to meet its interest liabilities and as and when they're due and so they are concerned about that I don't think the rating agents are ever taking into account the possibility that state will default on its debt I mean if there was that possibility the Australian federal government ratings would be affected as well so but I think we're on negative watch now and I wouldn't be at all surprised if we don't go down another notch. Okay and what impact could that have? The interest that we have to pay on our debt will go up and any knock-on effects from that? Oh well it's just things become more expensive it's like a household where the interest on the mortgage goes up. And what I mean would that have a noticeable effect to Joe by you know day-to-day business in Tasmania? It might have I mean there aren't that many a lot of business in Tasmania doesn't issue long-term debt so but if a company was based in Tasmania and had to issue long-term debt then it's rating probably would be affected by a change in the government rating and that's more particularly true Australia-wide really. Okay last two questions Graham if this budget was a school report and you were the principal what would you say about it what marks out of 10 would you give this budget? Four. And any comments for student Barnett to go home and consider? I think a bit harder about the revenue side of the budget. Right I lied when I said two more questions one more I forgot to ask you about revenue so going back to Saul Eslake he rattled off when he was interviewed by the ABC last week a whole range of revenue measures that he said the government could consider but apparently they are not so he suggested things like mining royalties, aquaculture royalties such as those paid in Norway, things like increasing the rego for more expensive vehicles are these things the government should be considering? Do you agree with Saul Eslake there needs to be a more serious take on revenue raising it sounds like you do? Yeah I'd add a few others to that list but I agree with all those. What would you add? A lot of concessions should be means tested so I think about 500 million dollars worth of concessions yeah and I'm the beneficiary of some of them but so for example we have a household battery and basically we don't pay anything for electricity but we get the electricity concession and what happens is it just goes to Aurora because we're in and all it is is a transfer from the government to Aurora it doesn't affect me at all yeah now that money could be better directed and old age pension recipients get the concession regardless of how dependent they are on the old age pension so at one point I did work out that you could be about better off at about a third of Tasmanian families and still get pension and concessions and that's crazy. Not fair. And the other thing I consider is an inheritance tax partly because the generational distribution of income is on average and not for everyone but on average is widening and so Tasmania doesn't tax old age assets at all while a lot of younger people are really struggling yeah and I this is a problem not just in Tasmania but I think in Australia generally and the states do have the power to alleviate inheritance tax and it doesn't have to be a big tax and the federal government made a tiny little step in terms of tax on superannuation balance which probably might be better designed but the intention I think is correct yeah so there are a range of things that could be done yeah and collectively they would probably help would help. Last question so if you were a treasurer but unlike Guy Bonnett you had a magic wand what would you do with it a magic economic one I should say? Well I'd implement those things that I suggested and some of them would take a couple of years or maybe a whole budget cycle to sell you can't. So you've got a magic wand you don't have to worry about selling it anything more dramatic? Oh one thing I would think about is whether the north of the state should have three hospitals and I know I mean the hospital at La Trobe is really a legacy of a short-run political decision made by Tony Abbott a long time ago and I don't think either of any of the hospitals really provide a really good service for the people in northern Tasmania and part of the reason for that is I think is the money is spread too thinly and I wouldn't anticipate closing the one at La Trobe is necessarily saving a lot of money but would improve services a lot I think. Okay some interesting choices there inheritance tax to your hospitals does this sort of go to the issue of political courage do you think these ever become realistic things the governments would do? Well you did say I had a magic wand. Oh well needs must so at some point there are going to have to be some difficult decisions yeah that's I think that's pretty obvious and the sooner we start thinking rationally about what things one might do the better I think so it's and as I think I we said before I started I think partly the government has wedged itself in terms of simultaneously trying to get the stadium up and acknowledging that the long-run fiscal problem exists so on one hand it's saying that this is fine we can afford it but on the other hand it needs to recognize that there are long-run problems and that that's I guess a problem they made for themselves but and that's not a comment from me on whether the stadium is a good idea or not that's just the reality that they're making a very large decision to spend some money when they really don't have any. Yeah all right well thank you Graeme that's a wrap for our budget podcast thank you we'll be doing interviews throughout the week thanks for tuning in.