NSW’s revenue hurdles

Back in April I questioned whether Queensland was heading for recession on the back of stalling credit issuance and a falling housing market. Later in that month I noted that the Victorian government was also showing similar signs of weakness. To complete the trifecta I note today (h/t Lorax) that New South Wales has also caught the same disease:

The NSW financial position has deteriorated by hundreds of millions of dollars since April, the Treasurer, Mike Baird, has warned, as consumer spending tightens during uncertain economic conditions globally.

A week before he delivers the O’Farrell government’s first budget on September 6, Mr Baird has revealed forecast receipts from stamp duty, GST payments and payroll tax have collapsed since the budget position was last published shortly after the March election.

In that report, released in April, the acting Treasury secretary, Michael Lambert, said the budget position had deteriorated by about $1.93 billion since the midyear review in December, mainly due to a sharp fall in expected revenue.

Mr Baird would not confirm specifics, but he said the position had worsened, particularly in the past six weeks amid the global economic unrest over the US credit downgrade and ongoing turmoil in Europe.

”The budget is under increasing pressure, as all government budgets are with the drop in revenues,” Mr Baird told the Herald

I am not sure exactly how the recent financial market turmoil has suddenly meant that NSW coffers have lost $2 billion dollars. It sounds much more likely to me that the NSW treasury simply couldn’t see that credit driven consumerism was stalling and made some highly optimistic predictions based on unsustainable levels of revenue.

The latest NSW OFM annual report  contains many examples of this misguided optimism:

When the 2009-10 State Budget was prepared in the second quarter of 2009 the worst global financial crisis since the Great Depression was underway. Following significant monetary and fiscal stimulus the forecast in that Budget was that the Australian and NSW economies would encounter a mild recession in 2009-10 and a modest recovery in 2010-11. Unemployment was expected to rise significantly.

As 2009-10 progressed, however, the Australian and NSW economies performed considerably better than expected. Rather than being a year of further slowing, 2009-10 was a year of economic recovery. The turnaround can be attributed to the stimulus policies adopted, strong trade links with Asia, high population growth and a sound Australian financial system. Importantly, both business and consumer confidence rebounded sharply from low levels and stabilised at above average levels over the course of the year.

The Budget forecast was for a decline of 0.5 per cent in NSW Gross State Product (GSP) in 2009-10, but the improved global and domestic outlooks meant this forecast was twice revised upwards during the year – to growth of 1.5 per cent in the Half-Yearly Review and to 2.5 per cent growth in the 2010-11 Budget.

….

While taking these uncertainties into account, the 2010-11 State Budget further upwardly revised revenues compared with the Half-Yearly Review forecast.

I am guessing no one at the NSW treasury was tracking private sector debt issuance. If they had been it would have been fairly obvious that the surge in economic activity in 2009-10 was on the back of a sudden break-out in credit which was coming to and end:

A quick look at the Sydney housing market clearly displays this same trend in recent years:

The NSW government seems to have suddenly realised this issue and has re-assessed it predictions of revenues based on credit driven activities:

It is understood the forecast drop in revenue is particularly sharp for 2011-12 and stamp duties have been hardest hit.

In his first comments since being appointed, the new Treasury secretary, Phil Gaetjens, said global economic uncertainties were continuing to make consumers cautious about spending.

When combined with the impact of a high dollar on non-resource exports, Mr Gaetjens described the revenue forecast as ”weak”.

As I have stated previously a long term expansion of credit leaks across the broader economy giving the illusion of sustainability, this obviously includes the public sector:

The NSW public service has blown out to more than 322,000 bureaucrats, 50,000 more than when Labor won power in 1995, costing the state more than $27 billion a year.

The public service has grown from 279,574 employees when Bob Carr took power in 1995 and supporting the bureaucracy now consumes almost half the budget and is projected to blow out past $30 billion in 2013-14.

I don’t see any reason why this downward trend will change so I therefore cannot see any reason why the NSW government’s fiscal position is about to improve. It’s also interesting to note that in the last couple of years, mining royalties have surged, masking the problem to a degree, Luckily, they can still count on royalties and federal government transfers to prop up their budget:


… at least until the Federal budget comes under the same credit issuance stress.

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Comments

  1. Greedy State governments are dragging the whole country into recession… its not enough to hit people dangerously speeding 3kmh over the limit, or pokies addicts. Stamp duty and payroll tax should have been abolished with the introduction of the GST, instead those taxes are bringing in more money than ever.

    To paraphrase Kerry Packer, why the hell would we want to give them more money, they’ll only waste it. Look at the State of Victoria, we’ll be suffering for decades because of eleven years of total mismanagement and poor project management. John Brumby’s enormous white elephant desal plant is already billions over budget and guess who will have to pick up the tab? You can bet your life it won’t be coming out of his six figure annual superannuation.

    • Run out of money? Time to slam the middle class again. Worst of all is the Medicare Levy Surcharge – get paid one cent over the limit and you’re taxed on overthing up till then. You wouldn’t get away with a regressive tax like that in a million years anywhere else. The altenative, private health insurance is a joke. The “Gap” makes a nonsense of it. I’d like to see an insurance company that paid for everything, however, you’d have to have a body mass index check once a year – obese and you’re out. I don’t suppose the socialist nanny state would countenance it – smacks too much of taking responsibility for your own life.

      • having health insurance premiums that are priced based on health indicators would be a nice way of reducing the obesity epidemic and as a result strains on the health system would it?

        Of course in our PC nanny state world this is considered “discrimination” and not allowed. So we all pay for an inefficient and bloated health system which has cost increases far above inflation YoY.

        As for the state govts, they are following the typical govt blueprint. Hey, we found a new revenue source, ramp up the number of public servants. We lost some revenue, oh better take on some debt to keep growing.

        Idiots.

        Have any of you seen what NSW public servants get paid BTW? Its an absolute joke!

      • +1000 Rob – we are scratching our heads wondering why we ever took out private health insurance.

        Going to go the Trauma and IP insurance cover and paying cash out of pocket route after this baby arrives.

        You still get back enough from Medicare to make paying the surcharge worthwhile…just.

        Its not sustainable long term structurally (i.e if thousands like me switched from private to zero insurance), but it makes sense financially, personally…

        Might write a quick article about that approach soon…if any interest.

        • Prince
          +1
          I would like to see an article on private health care. I’m in a simialr position to you, after next baby arrives I’m considering letting private insurance go. My missus was pissed after our first baby. The Baby bonus ended up in our doctors pocket. Sure it was our choice and we got excellent care.
          BTW I think doctors deserve what they earn.
          Middle class welfare such as the baby bonus and First home owners grants push the demand side and unnecessarily inflate’s the cost of everything. It never makes anything more affordable.
          Trauma cover provides much better value. Ask the doctors and hospital administrators. You will be gouged when they find out you have private health insurance. I think they exploit the fact that people with private health insurance value health care and as a result are prepared to pay the excessive gaps.
          Looking forward to an article on it thanks Prince

          • My wife (a health care professional) had both our children in the public system (Royal Womens). The care was top notch, we didn’t need expensive private health insurance, and the out-of-pocket costs were modest.

          • Private Health is also a topic I’m very interested in.

            My wife and I had both our babies in the public system despite having full private cover, as no high risk factors were present. Saved us between 6-8k on out of pocket and the service was excellent.

            Private Health cover also doesn’t seem to get you in to see specialists any quicker.

            Another method some people I know use, is to put the money they would pay into private health insurance into a dedicated savings account instead. The account is used to directly fund any private medical procedures they may need. Requires discipline obviously.

      • While some blame goes to the states, the Federal government has been a poor role model to the states.
        .
        I think Fed can start setting a good example by removing middle class welfare like Baby bonus, FHOG and negative gearing (mind you, on all asset classes). They seem to have started work on disability and unemployment welfare reforms already – so I’ll wait before passing any judgement.

      • Rob, my own doctor advised me ten years ago that private health insurance is an obscene waste of money… I’m so glad I never took out a policy, I’ve never needed to go to hospital anyway (touch wood).

    • Greedy and incompetent are the words to describe them. In Victoria land tax has increased by two to three times in 4 years and even with the massive stamp duties the Victorian govt has not been able to make a go of it.

      Many public sector workers also do not pay the same tax as private sector workers as they have entertainment cards. This is illegal under tax law as it is illegal to collude with your employer to avoid tax.

      • +1
        add up all the benefits for the public sector workers and I’m sure they pay less tax than a private sector worker on a similar package!! Rules for them and rules for us!!!
        It is only a rort if your not involved!!!

  2. Waratah bonds anyone? No announcement yesterday, despite some news articles saying Baird will do so.

    • These actually may be a decent investment. The NSW economy may be sclerotic, but the state is unlikely to default…..

      (In 5 years time I may regret posting this)

    • Yes, this a good change – and a better use of private investment savings than over exposure to secondary asset markets.

      However, the question of a lower interest rate than a bank due to a “more secure” rating is open: I wouldn’t consider any State government to have a good risk rating.

      NSW is not Greece, but it ain’t no USA….

  3. One of the penalties for refusing to participate in politics, is that you end up being governed by your inferiors.

    – Plato

    My head hurts…

  4. Mr Baird has revealed forecast receipts from stamp duty, GST payments and payroll tax have collapsed since the budget position

    This is the one-two punch of a housing downturn (stamp duty) and Dutch Disease (GST and payroll tax).

    One wonders how payroll tax has collapsed if we’re at full employment!

    • One wonders how payroll tax has collapsed if we’re at full employment!

      I thought that too! Unemployment in NSW bottomed at 4.9% in December last year, ticked up to 5.0% in April and is now at 5.2%. Total employed persons in December was 3 609 500 and is currently at 3 588 500.

      Unless there has been a massive shift to part-time employment I see no way that the impact on payroll tax receipts could be more than a drop in the bucket.

      It’s political waffle, nothing more.

      • Or unemployment numbers aren’t what they seem….

        In any case, State governemnts are entirely addicted to stamp duty (housing is just one component: anyone sold a car lately??) and pokies. One is buggered (housing) and the other will soon be buggered by Federal legislation (pokies). I see the axe coming for public servants very soon………

    • Re payroll tax – probably just adding it to the mix. Real effect to be felt post carbon tax.

      • Seriously Fanboy, what’s going to be your bogeyman after Abbott is elected and the carbon tax is no more?

        The impact on manufacturing of a timid, over-compensated carbon tax will be negligible compared with the rapid run up in the exchange rate, and high interest rates to quell the mining investment boom.

        • Based on Warwick McKibben’s model of the effects of the carbon tax on unemployment – he says Treasury are using flawed modelling.

          • I repeat the question: What are you (and Abbott) going to blame for our economic ills when the carbon tax is no more?

            Are you suggesting the problems of Dutch Disease and the housing downturn will suddenly go away?

          • Lorax, my comment above was solely in relation to falling payroll tax revenues mindful of McKibben’s forecast of greater rise in unemployment post carbon tax than Treasury modelling suggested.

            Not pushing a barrow here.

    • Would it be because there’s a lot of people going from full-time to part-time, so although they’re technically still employed, they’re earning a lot less?

      i.e: the unemployment figures are a bit of a sham 🙂

      • Actually I seem to remember a similar thing happening in the US last year. The statistics on US consumer spending were showing a rise, but the state government sales tax receipts were falling.

        I think it is fairly obvious which one was correct in that case.

  5. Is this surprising? They latest plan is to built the single most expensive railine in the world (North West Rail) that will cost almost half a million dollars per meter ($10b for 20km). That is more than twice as expensive as the current most expensive underground railline in bureocratic Spain.

    • What do you propose we do then?
      1. Import cheap chinese labor.
      2. Allow private companies to build.
      3. Sit on our hands and not build any new infrastructure.

        • I assume by that comment you do not live in Sydney……..I can just see WA stumping up the cash for a rail link between Epping and Kellyville…….

          • That program covers 4 states. The rail line you speak of covers a dozen suburbs in one city. The real reason why these programs are so expensive now is that previous NSW governments have steadily sold off corridor land and the cost of compulsory acquisition at todays market prices is about 10 times what it would have been 15 years ago when the rail link should have been considered

      • Option 5: Public-private partnership – allow private companies to build, own and operate.
        .
        We have numerous examples on how well that worked out – AirportLink, Brisconnection, Downer-EDI Waratah train wreck, Sydney Airport!!
        .
        Most notorious is the Sydney AirportLink line owned by.. surprise..surprise.. Westpac.

  6. More good new then. This is where public debt does matter with declining revenues, and we best be prepared to be raided.

  7. Great article. When people disparage comparisons between Aus and other countries like the US, they overlook issues like these. Aus State govts swallowed the Kool Aid that this growth was sustainable and based on “fundamentals” without so much as a second thought.

    Of course, it was all dependant on the great debt, housing and consumption boom of the last 20 years which has just ended.

    In the meantime, govt agencies are spending money like water. I have worked at a couple and budgets of 10s and 100s of millions are discussed as if they are nothing. The complacency is unbelievable.

  8. Ken Henry realised, this is a huge structural issue, and neither political party will ever touch it. The Greens wont go for it either.

    This is causing a huge reliance on issues such as CSG, where any government will go for the money today and not worry about the lack of drinkable water tomorrow.

    We will also have local governments that are soley reliant on residential rates getting into trouble as well.

    I have gone to the trouble after a long time of rejoing a nation wide political party and try to regrow and reform it along the agenda of political reform and economic efficency.

    http://www.caf.gov.au/documents/Henry%20Tax%20Review%20-%20Submission%20-%20Word%20version.DOC

    • The Greens think government revenues appear from thin air, are there to be spent on the ‘needy’ and touchy-feely programmes, and bugger business.

      I think they miss something in the economic equation.

    • But at a state level it does appear out of thin air. You just stick your hand up and the Federal gov gives it to you.

  9. Don’t know much about NSW politics, apart from the appalling Labor years. So thanks, really interesting and likely to be echoed around the country.

    Re the growth of the public service – astounding. Even more astounding that any are paid above private sector rates, have long argued that public sector employees must accept more moderate pace of wage growth in exchange for relative security and lack of accountability. Further, once wage increases are granted to the public sector, they are there for eternity, indexed, and an ongoing escalating burden for all taxpayers. Of course, if total economic collapse occurred, public servants may be the only taxpayers….until the coffers ran dry.

  10. Re Public sector wages for a long time public sector wages were less than private sector, the offset being a generous hybrid defined benefit superanuation scheme, SSS for white collar and SASS for blue collar. These schemes were closed off in the early 80’s and 90’s , however they still remain as large liabilities to the State.
    Public secotr super is now FSS an accumulation scheme, and wages have risen to be competitive, however members of the old schemes enjoy the benefit of the wage increase as the retirement benefit is based on exit salary and or highest average salary. So while no new members have joined the scheme, inflation and wage inreases have increased the state’s liabilty for the old schemes, although thankfully not as much had they remained open to new membership

  11. The NSW public service has blown out to more than 322,000 bureaucrats – this is a dangerous assumption to make calling all of this expansion “bureaucrats”. Note these numbers include front line staff like police and nurses – which all have to grow with population and needs.

    Lets not get into reductionist statements on statistics that discount a complex situation.

    • AK, I know that the term “bereaucrat” is applied in blanket fashion to all state employees, but in the case of NSW, growth in administration/desk roles has far outstripped those of front line jobs.

  12. One government department that was cutback by Carr was Landcom. i remember talking to a fellow who was retrenched, and he stated, mate , why would the State govt want to release land, they get more stamp duty on the lots they do sell and there is less cost to develop.

    Can DE do a break up on all the States as I reckon they would all be hurting, i know Tassie is, and I am pretty sure WA is now an issue due to the reliance on property revenues, the other interesting one will be local governments