Published in The Conversation on 11 September 2012 under the title “Queensland budget 2012: experts respond”, along with the opinions of two other economists.
Before the budget came down, Campbell Newman described it as a “once in a generation budget”. That is certainly what Queensland needed. Our long-term budget position is actually worse than the audit report or old budget papers claim, since they don’t factor in the growing fiscal pressures over the coming decades caused by an ageing population. Put simply, current policies are unsustainable, and some tough decisions are needed.
The first thing to note is that the government decided to give up on fixing the 2012/13 budget.
They have allowed the operating deficit to increase from an estimated $4.9 billion (Audit) to $6.3 billion, and the fiscal deficit to increase from an estimated $9.5 billion (Audit) to $10.8 billion. This is perhaps understandable since the federal government has been playing games with their grants (shifting money around to try and manufacture a federal government surplus) and the lag time involved in reforms. So the real place to watch is the estimate for the 2013/14 budget balance.
To their credit, the government has made some tough decisions for the 2013/14 budget. The best indicator of whether a government is serious about fixing a budget problem is to look at estimated spending, and budget papers show that government spending is forecast to reduce slightly from $48.5 billion (2012/13) to $47.9 billion (2013/14).
It is this spending freeze (along with extra mining royalties) that allows the government to forecast an improvement in the budget balance — with a 2013/14 operating surplus of nearly zero and a 2013/14 fiscal deficit of $3.8 billion. The forecast for a fiscal surplus in 2014/15 is nice, but it is hard to take long-term budget predictions too seriously.
The government deserves credit for that effort, but there are still issues of concern.
First, it is easy to predict future austerity and surpluses, but it is harder to actually make it happen. Spooked by a bit of bad press, governments often feel the pressure to keep handing out taxpayer money to loud lobby groups in the hope of buying favour and another term in office. Already we have seen hints of this with unnecessary and wasteful handouts to tourism and other privileged industries in the budget. The Newman government will need to hold fast to strict fiscal rules, practice saying “no” to special interest groups, and make sure they actually achieve their promised surplus.
Second, given the strong economic growth in Queensland and Australia at the moment, we really should be in surplus already. The idea of balanced budgets over the cycle means that we should be running surpluses during times of growth and then we can allow deficits in times of economic stagnation. The budget papers predict healthy economic growth of 4% and yet we have deficits predicted for the next two years. Given that the government was going to be attacked for cutting spending anyway, a case can be made that they should have cut harder and quicker.
Third, this budget has not looked at the necessary reforms that Queensland (and all other States) need to make to ensure the budget is sustainable in the medium term. An ageing population and a growing welfare mentality is putting upward pressure on government spending over the coming decades that cannot be afforded. At some stage, a brave government will need to start a transition towards health and education systems that involves more personal responsibility and individual contributions. Change is always hard, but if we don’t start preparing for these reforms now then the problems are only going to grow. The first budget of a new government is generally the best opportunity for dramatic reform, so this might be seen as an opportunity lost.
In all, this budget is above average without being brilliant.
As a postscript it is worth noting something about the big issue of public service jobs. Some commentators have complained that the bureaucracy is being gutted, but the budget papers show that total employee expenses have moved from $18.2 billion in 2011/12 up to $18.5 billion in 2013/14. All dramatic rhetoric to the side, that doesn’t represent “massive cuts”.