Two perspectives on Queensland’s debt
by Professor Fabrizio Carmignani and Professor Tony Makin
Professor Fabrizio Carmignani
According to the projections of the Queensland Treasury, the non-financial public sector (NFPS) debt will grow to $81 billion by 2020–21 (Table D1, 2017–18 Budget Paper 2). Is this a reason to be alarmed? Probably not. In fact, alarmism is the only real danger here, as it could lead to the adoption of policies that are at odds with the greater goal of achieving inclusive prosperity.
Some facts about Queensland debt
The first thing to realise is that $81 billion is not a very large amount when compared to the size of the Queensland economy. Assuming a real growth rate of Gross State Product (GSP) between 2.75% and 3% per year over the next four years, State debt in 2020–21 will be just above 19% of GSP. This is much less than what observed in countries prone to fiscal crisis (e.g. Greece, Italy, where debt is more than 100% of GDP). It is also much lower than the level of borrowing incurred by other economic agents. For instance, household debt in Australia is now estimated to be around 100% of GDP.
A second important fact is that NFPS borrowing will decline from 20.7% of Gross State Product (GSP) at the end of the 2016–17 financial year to 19.3% in 2020–21. Hence, debt as a proportion of GSP will be lower in 2021 than it is today. In other words, while the debt to GSP ratio in Queensland has more than doubled since the early 2000s, the phase of rapid debt accumulation that followed the years of the Global Financial Crisis seems to be coming to an end.
The third relevant fact concerns the debt of the General Government (General Government and Public Non Financial Corporations) — The estimated level of borrowing of the General Government in 2020–21 will amount to 9.8% of GSP. The cost associated with servicing this debt is projected to be $1.75bn, or “only” 3% of total general government revenues.
With respect to the General Government, many observers have emphasized the risk of profligacy on the expenditure side. As a matter of fact, over the reference period from 2015–16 to 2020–21, total expenses (i.e. current expenditures) are expected to grow by 2.8% a year. Yet, over the same period, revenues are also projected to grow at a rate of 2.8% per year.
While a significant part of this growth is due to a temporary increase in royalties in 2016–17, revenues are expected to remain in excess of expenses in every single year until 2020–21. This means that throughout the period, the borrowing of the General Government will finance capital purchases rather than operating expenses. According to the terminology used by Treasurer Scott Morrison when presenting the 2017 Federal Budget, this is then “good” debt.
Deconstructing the debt obsession
These facts help deconstruct the view that debt reduction should be the fiscal policy priority for Queensland. To be clear, the suggestion here is not that debt should be allowed to grow out of control. There are too many examples of countries where debt has reached unsustainable proportions, with significant adverse effects on the real economy. In these countries, draconian measures of debt reduction are often necessary, even if costly (incidentally, I do not think this was the case for Southern European countries in 2010–11, but this is another story). However, the case of Queensland is quite different and certainly such that fiscal policy should not be designed just around debt reduction.
First of all, it does not look like government debt is a significant burden on the Queensland economy. The amount of public financial resources drained from the budget for the purpose of servicing the debt is relatively small, as noted above. More importantly, there is no evidence that debt is having a negative effect on the growth of the Queensland economy. In fact, the idea that debt reduces growth is not well established in the economic literature. Studies conducted on large sample of countries suggest that the relationship is either insignificant (i.e. no effect of debt on growth) or that it becomes negative (i.e. debt reduces growth) only when the debt to GDP ratio rises above a very high threshold (e.g. 90%). Furthermore, in the last seven years, GSP in Queensland has increased at an average rate of 3.1% a year against an average of 2.7% in the rest of Australia, in spite of the fact that debt in Queensland is proportionally higher than in other States.
Second, there is no clear indication that Queensland debt is becoming unsustainable. Sustainability (or lack thereof) depends on the increase in the debt to GSP ratio. The facts discussed in the previous section suggest that the rapid increase in this ratio observed in the five or six years after the GFC has come to an end. Moreover, the current rate of growth of nominal GSP (5.8%) is above the interest rate paid by the Queensland Treasury Corporation on interest bearing liabilities (5.2%) . This excess of GSP growth over the interest rate contributes to stabilising the debt to GSP ratio even in the presence of a primary fiscal deficit, (i.e. the fiscal deficit net of the payments of the interests on debt) which, based on the projections of the Treasury, should be around 0.3%-0.4% of GSP over the next four years.
When considering these figures, it is hard to see any case for the introduction of new debt reduction measures in addition to those that are already embedded in the Government’s Debt Action Plan and that underlie the projections reported in the 2017–18 Budget Papers.
Making the best use of fiscal policy
Two key considerations should drive the design of fiscal policy.
First, the purpose of fiscal policy should not debt reduction, but the achievement of inclusive prosperity. In this regard, the central role of fiscal policy is to provide those public goods and services, social welfare, and safety nets that allow every individual, and particularly those at the bottom end of income distribution, to access the benefits of economic growth. Debt is a tool of fiscal policy. Borrowing for the purpose of financing these expenditures should be therefore regarded as “good”, irrespective of the distinction between current and capital expenditure.
Second, government expenditure provides an effective stimulus to the economy. This idea, which comes from the traditional Keynesian analysis, has been challenged on various theoretical grounds. Yet, the data confirm, at least for the case of Queensland, the existence of a significant multiplier effect: a 1% increase in State government expenditure results in a 0.3% increase in GSP, while employment grows by approximately 9,500 jobs. A decrease in government expenditure generates correspondingly negative effects on GSP and employment.
Because of this multiplier effect, the ideal approach to fiscal policy is to use government expenditure counter-cyclically. That is, in times of economic contraction, i.e. when the economy runs below its potential level and unemployment increases, then the government should actively intervene by increasing public expenditure (particularly for the provision of public goods and welfare). This will support the recovery. At the same time, a fiscal deficit will be generated and debt will increase. However, once the contraction is over and the economy turns into an expansion, the government should reduce public expenditure; as a result a surplus will be generated and debt will decline. In this way, debt will also follow a counter-cyclical pattern, increasing during a contraction and declining during an expansion, but remaining overall stable and sustainable in the medium-term.
It is therefore possible to design fiscal policy in a way that contributes to the fundamental goals of the society, without the need to obsess about debt.
Professor Tony Makin
In a paper published in Economic Analysis and Policy in 2014, Julian Pearce and I examined the sustainability of public debt for all Australian States and Territories. We showed that, of all the Australian States, Queensland had most to do in terms of fiscal repair to stabilise its public debt and restore it to its pre-Global Financial Crisis (GFC) level. Little has changed since.
We estimated that just to stabilise Queensland’s public debt (that is prevent it from growing as a proportion of Gross State Product, GSP), considerable fiscal consolidation was necessary, though such consolidation has not occurred.
As an update, we estimate that a budget deficit close to $3 billion less than the $5 billion deficit predicted for 2018/19 is necessary just to stop Queensland’s public debt growing as a proportion of GSP, that is stabilise debt.
How can this be achieved? The only means of stabilising (and reducing) State public debt are: spending restraint, raising taxes, or selling/leasing state government assets.
There are several options for reducing government spending programs that are unjustifiable on economic grounds.
1. Industry Assistance: The Queensland government provides over $5 billion a year in industry assistance across a range of services, construction, electricity, gas and water, agriculture, fisheries, forestry, manufacturing, tourism and mining sectors. This is in addition to industry assistance provided by the federal government to many of these industries e.g. tourism.
In 2015 the Queensland Competition Authority identified 112 measures providing over $25 billion in State government industry assistance from 2013 to 2018, including around $6 billion in budget outlays, $17 billion in tax concessions and the rest as undervalued assets and services. This equates to over $1000 per Queenslander per annum.
Considerable scope therefore exists for pruning industry assistance as the top priority.
2. Public Service Wage Growth: According to recent ABS data, public service numbers in Queensland in the past two years have risen by over 8% while the salary bill has risen by over 14% to $25.5 billion. This State wages bill is only 4% less than Victoria, despite Victoria having a population 20% larger. The average salary for Queensland’s 322,000 public servants is also significantly higher than in NSW and Victoria.
This suggests a need to increase efficiencies in the public service to meet the benchmarks set by the most efficient state governments.
3. First Home Owners’ Grant: Schemes such as these see the value of grants largely capitalised into the sale price of properties, mainly to the benefit of sellers, not buyers. Saving $30 million.
Economic theory suggests higher taxes adversely affect efficiency, involve “deadweight losses” and make an economy less attractive to investors. That said, on the revenue side, the State government could:
- Re-introduce income taxes, ceded to the federal government during the Second World War,
- Apply a one-off deficit levy on all Queensland ratepayers, as recommended by the 2013 Costello Commission of Audit, and as implemented by the Kennett government in Victoria in the early 1990s under similar circumstances,
- Increase land taxes on a permanent basis.
These revenue measures alone are unlikely to reduce the stock of state debt to a more sustainable level and are the least attractive budget repair option in light of Queensland’s already poor tax competitiveness relative to major Asian trading partners.
A combination of the options listed above could yield savings of around $3 billion per annum which would help stabilise Queensland’s public debt.
However, that much budget repair only stabilises public debt as a proportion of GSP, it does not reduce it.
Though electorally unpopular, the most effective way to reduce the stock of Queensland’s public debt is privatisation of government assets.
Contrary to the recommendations of the 2013 Costello Commission of Audit, the LNP government did not pursue the outright sale of assets the Audit identified for sale — Energex, Ergon, Powerlink and the Queensland Investment Corporation.
However, State government involvement in some commercial activities is questionable and the proceeds from privatising commercial assets could be put to better use eliminating public debt to minimise future risk. In the past for instance, Queensland governments have seen the advantages of withdrawing from owning butcher shops and from selling beer, fish and timber.
A major misconception about privatisation is that selling (or leasing) government owned assets somehow creates a budget ‘black hole’ into the future because the government loses the stream of revenue these assets deliver when in government hands.
This argument is misleading as it fails to recognise that any asset sale price or lease terms negotiated between the state government and private sector would normally reflect the future stream of returns the government would otherwise have received.
To the extent privatisation improves the productivity of Queensland’s capital stock, there would also be an efficiency dividend of a different kind that manifests as higher income in the private Queensland economy.
Privatisation of select government assets would yield the billions needed to reduce Queensland’s public debt to less risky levels.
ABOUT THE AUTHORS
Fabrizio Carmignani is Dean (Academic), a Professor of Finance and Economics in the Griffith Business School, and Vice President of the Economic Society of Australia (Qld).
His research is in the broad field of applied macroeconomics and applied econometrics. His recent publications are in the areas of conflict economics, tourism economics, policy modeling, spatial econometrics, and the economics of natural resources.
Tony Makin is Professor of Economics and Director of the Griffith APEC Study Centre at Griffith University, and has previously served as an International Consultant Economist with the IMF Institute based in Singapore and as an economist in the federal departments of Finance, Foreign Affairs and Trade, The Treasury and Prime Minister and Cabinet. He has a PhD from the Australian National University, has previously taught at the University of Queensland and has published widely on Australian and international macroeconomic policy issues, many with an Asia-Pacific focus.