Find above the master chart for general government finances released yesterday by the ABS. I’ve a few observations.
Yesterday the press was filled with gloomy forecasts for today’s national accounts figures on the basis that government spending contracted more than anticipated in the September forecast. And yes, as you can see, there is a minuscule dip in the September quarter (roughly 4% yoy). But really, so what? I remain bullish on today’s GDP figures for the quarter. We had record exports, a falling CAD, a general surge of services activity on the realisation that rates had plateaued and a spectacular boom in capital investment. The fall in inventories will drag but the private sector should carry the day.
But in a sense, the main point of the chart is that that will be a Pyrrhic victory. There is no mistaking the trend in the chart, government borrow and spend has been integral to growth since 2008. Even accouting for seasonality, with a drop in revenue in the Sep quarter to be offset by the rise in Dec, the austerity we have, across all levels of government, is virtually invisible in this chart. This supports several of my long term contentions. The slow growth we’re stuck in, with the services economy dragged down by disleveraging and tradable goods by the high dollar, cannot be offset by mining investment. The boom in the latter may be spectacular but the sector itself is just not big enough.
The gap is being filled by government spending at all levels. And the longer this growth paradigm lasts the more this imbalance will grow. Becasue competitiveness is waning in everything but mining, we’ll see insufficient new investment in other sectors and only government, through royalites and the mining tax take, will grow its revenues (slowly given the wider malaise).
In short, unless government recalibrates the fiscal settings of the economy – such as through the super profts tax idea revived yesterday – to reboot wider competiveness and investment, only it and mining will grow and productivty will remain dormant.
Of course, if the global weakness causes disleveraging to become deleveraging then combined government revenues will also struggle to hold the line and pretty much the only two things growing in the country will be mining and the GFS deficit.
The fallout from this circumstance is becoming more obvious by the day and, as the AFR reports today, a wave of state government deficits are in prospect:
State governments will report in the next few weeks that they have been hit by falling GST, stamp duty and other revenue, pressuring them to curb spending, cut services or delay big projects.
The Victorian, South Australian and NSW governments will publish half-year budget updates that will show that economic conditions have deteriorated over the past three months and damaged their finances. Queensland’s budget update is due in January, while NSW’s plan to deliver a small budget surplus next financial year may be at risk.
Western Australia, where the mining boom is driving up tax receipts, is the one main exception.
The other states are being hit by a variety of problems, including declining manufacturing, and big public sector wage claims in Victoria, and weak tourism and property markets in Queensland. NSW and Victoria have suffered a large decline in spending on education by foreign students.
…NSW forecasts a $718 million deficit for 2011-12 but a planned $8 billion savings drive over four years is aimed at returning the budget to average surpluses of $200 million by 2012-13. Mr Baird said the Coalition had significant savings measures in place – including 5000 public-sector job cuts – and its priority was to go through with them rather find new cuts.
…The Victorian government’s most recently published budget figures are for the September quarter, which showed a $660 million deterioration in the budget balance from the same quarter in 2010. Treasurer Kim Wells is sticking to his forecast surpluses. “In 2011-12 and over the forward-estimates period, the government will manage these external financial challenges to achieve surpluses of at least $100 million a year,” Mr Wells said.
One of the challenges is less revenue from the GST. Last week’s federal Mid Year Economic and Fiscal Outlook stripped $1.2 billion out of the expected GST payments to the states in this financial year.
South Australia relies on those payments more heavily than most and is set to lose its AAA credit rating.
“The downward GST revisions last week will add further pressure to what is an already constrained budget,” said Acting Treasurer Tom Koutsantonis. The government has struggled to push through public-sector spending cuts and has flagged asset sales.
Stamp duty is very important to state governments. Australian Property Monitors senior economist Andrew Wilson said the official statistics on loans for housing finance were a good leading indicator for revenue because they provided an indication of the total dollar value of transactions. The value of new loans in NSW over the first nine months of 2011 rose 5.6 per cent to $3.2 billion from a year earlier. In Victoria, the rise was less than inflation: up 1.5 per cent or $740 million as loans to housing investors fell $1.2 billion. Queensland’s figures were the worst as loans plummeted 13.1 per cent to $4.3 billion the same period in 2010. “They have been smashed,” Dr Wilson said.
The Queensland government has already forecast a budget deficit of more than $4 billion for 2011-12 and $6.7 billion in cumulative deficits up to 2014-15. The state lost its AAA credit rating in 2009 and state debt is expected to exceed $85 billion by 2014-15. “We’d all like the property market to be more active than it is right now,” Queensland Premier Anna Bligh told the recent Australian Financial Review Queensland Economic Outlook Lunch. “We are in the process of going through the revisions . . . there is going to be some push and pressure on those forecasts from the global uncertainty. We need to be realistic about the impact and the pressures from those external impacts are likely to be significant in the short term.”
