Wednesday, October 29, 2008

Billions lost as SA finances melt away

In the modern economy, everything is interconnected.  Poor financial regulation in the U.S. leads to a meltdown in their housing market;  banks around the world start building up bad debts as international credit flows tighten.  A financial sneeze halfway around the world leads to the cold of an economic downturn in Australia.  Nobody is immune from the market adjustment.

South Australia's production is growing more slowly than the rest of the country.  House prices in Adelaide have fallen by 2 per cent over the September quarter, while manufacturing jobs have been lost over the past year.

The State Government Budget has also been affected by global financial market frictions.

Treasurer Kevin Foley made a statement to the Parliament in mid-October which makes for sobering reading for SA taxpayers.

The Government's superannuation investment arm, Funds SA, recorded a loss on its investments from July to September of $627 million.  This was on top of losses of close to $1.5 billion for 2007-08.

Unfunded superannuation liabilities are expected to increase by an additional $150 million.

Overall taxation revenue is expected to fall by about $100 million in 2008-09, mainly due to declining housing finance commitments impacting on the expected duty revenue take.

Declining consumer confidence is likely to reduce the flow of GST revenue by a further $30 million.

The extent to which the state's finances have melted away has been sudden as well as substantial, and looks likely to wipe out the $160 million Budget surplus estimated for 2008-09.

The Treasurer has not ruled out spending cuts or the deferral of capital projects.

However, the reforms needed to scale back the public sector are going to be much more painful than should otherwise be the case.

This is because the Rann Government coasted along during the good times, spending as much money as it could get.

From 2002-03 to 2006-07, the general government sector raised $2.4 billion in revenue and spent $2.6 billion.  This led to deterioration in the Budget surplus over those years.  In other words, less money was set aside for the "rainy day" of the current global financial crisis.  In its latest annual report, the Auditor-General also revealed a range of cost blowouts and poor management practices within government.  As government inefficiencies have grown, key ministers seem to have turned the other cheek.

The years of "maximum spending" and waste have come to haunt the Government as it undertakes the necessary task of putting the State Budget on a more sustainable footing.  The time for action is now.  Yet, Mr Foley has indicated that an economic statement informing people of the fiscal implications of the financial crisis will be deferred.

By contrast, other states such as Tasmania are bringing forward their midyear statements to bring business and the broader community into a discussion of the reforms that need to take place.

Now is not the time for the Treasurer to act like a rabbit in the headlights.

The State Government has no option but to cut the excess spending built up over the good times, and to do it quickly.


  • Additional spending from 2002-03 to 2006-07 helped subsidise the employment of an extra 13,800 bureaucrats across the SA public sector.
  • In 2006-07, about 14 per cent of people working in SA were employed by the Government, the second highest state proportion after Tasmania.
  • The wages bill to support the extra state public servants has also increased over the life of the Rann Government.  Bureaucrat salaries now account for about 48 per cent of the general government Budget.
  • With teacher unions taking industrial action seeking more pay, the challenge is on for the Government to quell further increases in public sector wages in the interest of taxpayers.

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