Monday, March 11, 2013

Big debt means staying on same path too risky

Now that the State election is out of the way, the returning Barnett Government should consider a new fiscal strategy to contain WA's runaway debt.

To understand why economists, financial commentators and credit ratings agencies have expressed growing concerns about the State debt, consider the trends since the GST reforms came into place in mid-2000.

Taking the general government sector — consisting of agencies mainly funded by taxes — as the starting point, gross debt fell from about $3 billion in financial year 2001 to about $2 billion in 2007 but has risen dramatically since, to about $10 billion last year.

The midyear financial projections released by the Government in December suggest that general government gross debt will keep increasing to about $18 billion by 2016.

Expressing these figures in terms of total output by the State economy, gross debt fell from about 4 per cent of gross State product in 2001 to about one per cent in 2007 but grew back to about 4 per cent last year.

By 2016 it is estimated that general government gross debt will absorb about 6 per cent of the State's total output.

But these figures exclude the borrowings by other government bodies, such as State-owned electricity generators, ports and water authorities.

When these entities are included the gross debt to GSP ratio jumps to about 12 per cent last year, with expectations it will increase to about 14 per cent by the end of the forward estimates.

These figures do not include the State's unfunded superannuation liabilities or council and shire debts, which, as a share of GSP, conceivably add up to another 5 per cent to the total.

The estimates presented here also exclude State Treasury's recent advice that election campaign promises may further increase debt, even setting aside Barnett Government hopes for Federal funding on transport projects.

In simple terms, public sector debt in WA has moved in one, unflattering direction:  up.

In fairness, the Barnett Government has insisted its borrowing program, fuelling the growing State debt, is financing major infrastructure in a fast-growing jurisdiction.

It also seems the Government is more eager to borrow, than would otherwise be the case, to help protect its Budget surplus.

Although most economists agree that borrowing for long-lived capital is not unreasonable, they likewise suggest that infrastructure must clearly generate economic value, ensuring a more productive State addresses its financial commitments more easily.

On this score, it was troubling that both major parties during the election campaign did not provide sufficient detail as to how their pet capital projects stacked up in cost-benefit terms.

Taxpayers should also be reminded that, though some of the projects will become a reality only in the longer term, a growing interest bill is already gnawing away at other spending priorities in the State Budget.

Concerns about growing public sector debts also centre upon capacities to bear the load of future taxes.

WA's commodities bounty provides the Government with lucrative sources of royalty revenue, although recent reductions in commodity prices have magnified concerns about the State's reliance on volatile revenue sources to repay burgeoning debts.

The States and Territories remain hampered by an upside-down Australian fiscal federalism model in which all the key revenue sources, such as income tax, are needlessly monopolised by big-spending Canberra.

The tax instruments that remain in the hands of the States tend to be inefficient taxes, which generally do not deliver spectacular revenue yields and can hamper market activities, such as jobs creation or labour mobility, that grow an economy and cultivate a more sustainable revenue base.

The State Government is walking a somewhat fine line when it comes to its overall budgetary stance, and if commodity prices soften or domestic economic activity weakens there will be a need for an explicit strategy to deal with the debt overhang.

The best strategies to reduce debt would be to privatise government assets, and direct the sale proceeds towards that and direct the sale proceeds towards that purpose, and reduce recurrent spending providing more Budget room so that a greater share of revenues can be used for debt reduction.

Another strategy for government to ease the burden of public debt is to encourage growth of the private sector, generating more revenue in the process.

To this end, a program of deregulation would be highly desirable for a State with a reputation for extensive red tape restrictions on business.

In recent years, WA has made its own eager contribution to the global public sector debt ocean of more than $50 trillion and counting.

But with the rough weather of economic uncertainty lingering, there seems no better time than the present for the Barnett Government to start swimming against the debt tide.

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