Budget papers for 2016–17 being prepared at the printers in Fyshwick, Canberra. They could so with a lot less red ink in future years. Photo: Alex Ellinghausen. Source: AFR

How to fix up the government’s red ink-drenched balance sheet

The Commonwealth government was $70 billion in the black at the end of the Howard era. It is now $265 billion in the red, equivalent to $11,000 for every single Australian. And as each new budget brings a deficit, we are going further and further into the red.

Governments should not be in the red. Government debt amounts to a decision on our behalf to have the next generation pay for today’s spending. Nor should governments be in the black to any significant extent. This would amount to providing an inheritance to the next generation. Governments ought to have a neutral balance sheet, leaving to individuals the decision on the size of any inheritance they leave their children.

To get out of the red, the Commonwealth government needs to run budget surpluses each year until it regains a neutral balance sheet. Each area of government spending should be pared back, with welfare properly targeted to the poor and duplication between the Commonwealth and states in areas like health and education eliminated. And hard-nosed decisions about defence, such as the number of surface warships, are also needed.

The Commonwealth government should also boost its balance sheet by ceasing the $100 billion of annual grants from the Commonwealth to the states. Each state’s balance sheet could readily withstand this hit in the short term, as they are significantly in the black. Over the longer term, the states can easily constrain their spending through measures such as introducing means testing for public hospitals and schools.

Both the Commonwealth and state governments could also improve their balance sheets through privatisation. Privatising a government-owned business does not generate immediate benefits, because the government relinquishes shares in the business at the same time that it gains cash — it’s a straight swap.

However, over time, the benefits from the cash exceed the dividends that would have come from the business under government ownership. As is well known by all except committed socialists, the surest way to make a business suffer cost blowouts and underperform is to keep it in government ownership.

Australia Post, NBN Co and student loans are among the businesses that should be privatised. Last year Australia Post made a $350 million loss, but still paid its top 17 staff an average of $800,000 each. NBN Co made a $1 billion loss, but still plans to deliver broadband services where it is not commercially viable to do so. And if student loans were owned by private banks, they would be far more successful than the government at compelling graduates to repay these loans when they go overseas.

Of course, such privatisations require an appropriate regulatory environment. While replacing a government monopoly with a private monopoly for which there is little or no competition will certainly assist the government’s balance sheet, it won’t necessarily benefit consumers.

State governments should sell off thousands of square kilometres of land. This would allow environmentalists to put their money where their mouth is by bidding against developers for ownership of land they regard as important. It would leave forestry to the private sector and give concerned communities an opportunity to own their local areas, providing them with a direct stake in conserving native flora and fauna. At the moment environmentalists have no option but to rely on park rangers, whose idea of conservation is to simply lock the gate.

What we need

Privatisation would not prevent government from meddling in markets, but it would ensure that such meddling is transparent and subject to scrutiny.

Governments should also improve their balance sheets by stopping their pursuit of unnecessary risks. For instance, the Commonwealth government provides a line of credit to the IMF to use as it sees fit, and guarantees bank deposits and state debts.

The government also has a policy of borrowing more than it needs to ensure there are always a lot of Commonwealth government securities for financial markets to trade. This peculiar form of industry assistance leaves the government with excess borrowed funds, which it uses to buy shares and other financial assets. If those assets lose value, taxpayers are the losers.

Fixing government balance sheets requires responsible, ongoing action with a clear vision of the objective. It is nothing that Australia could not achieve. What is needed is persuasive leaders with some political courage and a convincing narrative. Unfortunately, I can’t think of any like that.

David Leyonhjelm is a Senator for the Liberal Democrats

AFR Contributor

Originally published at www.afr.com on September 1, 2016.