State austerity to hit growth

By Leith van Onselen

Last month, I noted how Australian State Government Budgets are under increasing pressure from falling stamp duty receipts on the back of the slowing property market:

…last week, the Australian Bureau of Statistics (ABS) released Government finance statistics for the 2010-11 financial year, which revealed that Australia’s state and territory governments reaped a total of $12,331 million in stamp duty revenues in the financial year – an amount that was steady on the previous financial year but nearly -14% (-$2 billion) lower than the peak level reached in 2007-08 (see below chart):

Australia’s state and territory governments forecast that stamp duty receipts will decline further in in 2011-12 (to $11,611 million) before rebounding strongly in subsequent years…

Yesterday, the Australian Financial Review (AFR) provided further confirmation of the states’ budget pain, with state governments set to receive some -$15 billion less in payments and grants from the Federal Government than was projected in the 2010 Federal Budget, with -$12 billion coming from lower GST receipts:

State governments are reeling from a steep decline in forecast goods and services tax revenue as sluggish economic conditions create severe strains on state budgets already stretched after the global financial crisis.

The expected decline could cause more job cuts in the public sector and has prompted calls for a new revenue source to supplement the GST. Total expected federal payments to the states, including GST and grants, for the next two years have fallen by $15 billion since 2010…

Last week’s federal budget stripped more GST from state forecasts, according to analysis by The Australian Financial Review, setting the scene for greater austerity when Tasmania and Western Australia deliver their budgets on Thursday. South Australia will release its budget next week and NSW in mid-June.

“The issue for the states . . . is expenditure constraint, they will have to be a lot stricter than they were in the past,” said Deutsche Bank economist Phil O’Donaghoe. “GST revenues are down . . . that just puts more pressure  on  the  budget  bottom line”…

The analysis of federal budgets by the Financial Review shows the extent of the funding reversal in the past two years. In the 2010 budget, it was estimated that the states would get $54 billion of GST in the 2012 financial year, rising to $57 billion in the 2013 financial year.

That has been steadily written down over the past two years. Now the states expect to share $48 billion in GST in the coming year and just under $51 billion the year after.

That has left the states, whose budgets had already been buffeted in the global financial crisis, $12 billion worse off than expected…

Last week’s austere Federal Budget was forecast by Treasury to shave some -1% off Australia’s GDP growth in 2012-13. Similarly, the sharp decline in state government revenue is expected to result in substantial cuts to spending and higher taxes by the states, thereby acting as an additional headwind to both growth and employment.

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  1. Headwinds seem very strong in May for unemployment as frequency of job loss announcements ramp up:

    Summary of Headlines

    Ford to shed 240 local jobs, cut production as demand slumps April 14, 2011
    BlueScope confirms 1000 jobs cut August 22, 2011
    Westpac to shed jobs as cost cutting bites (200 IT jobs) November 9, 2011
    MF Global’s Aussie arm to close, 83 jobs lost November 21, 2011
    Jobs go as Fletcher Jones tailors for buyer (61 Jobs) December 15, 2011
    Jobs cut as strong dollar burns NSW smelters (250 Jobs) January 11, 2012
    ANZ to slash hundreds of jobs January 13, 2012
    Thousands of bank jobs face axe: UBS January 16, 2012
    Bottle maker sheds 70 jobs January 20, 2012
    Toyota cuts 350 Altona jobs January 23, 2012
    Telstra to shed 200 jobs in latest cuts January 31, 2012
    Mortein-maker culls 190 manufacturing jobs February 1, 2012
    BHP gears down nickel mine, jobs lost (150 Jobs) February 1, 2012
    Strong dollar claims jobs at Holden (140 jobs) February 2, 2012
    Westpac set to announce job cuts February 2, 2012
    Macquarie flags more job cuts February 7, 2012
    Hundreds of smelter jobs at risk February 8, 2012
    Suncorp to axe more workers: union February 8, 2012
    Qantas axes 500 jobs as profit slumps February 16, 2012
    60 jobs go as largest tomato grower crushed February 21, 2012
    OneSteel to cut 430 jobs as shares soar February 21, 2012
    Anzac biscuit maker crumbles, placing 170 jobs at risk March 1, 2012
    Westpac axes more jobs to bolster profit (119 jobs) March 6, 2012
    Almost 600 people to lose jobs at WOW March 7, 2012
    IAG to axe 600 jobs over three years March 9, 2012
    Rising rents force job cuts at discount stores (60 jobs) March 9, 2012
    Jobs to go in OneSteel plant closure (60 jobs) March 15, 2012
    Electricity merger will cost 780 jobs March 19, 2012
    Optus poised to cut hundreds of jobs March 20, 2012
    Gearbox maker stands down 250 workers March 27, 2012
    Metcash cuts 478 jobs April 3, 2012
    BHP Billiton to close Norwich Park mine (1500 jobs) April 11, 2012
    130 jobs to go in federal law office April 12, 2012
    St George IT jobs on the line (200 jobs) April 26, 2012
    More jobs on line as Macquarie cuts costs April 27, 2012
    Qld public sector fears massive job cuts Tue May 1 2012
    Optus cuts 750 jobs May 2, 2012
    At least 500 Vic TAFE jobs to go Wed May 2 2012
    Workers locked out, 600 jobs gone as 1st Fleet shut down May 3, 2012
    Wine industry faces job cuts, ongoing grape glut (85 jobs) May 03, 2012
    Budget to slash 40 jobs from Department of Prime Minister and Cabinet to save $9m May 03, 2012
    Public service bracing for job cuts May 04, 2012
    CBA cuts jobs in Melbourne (100 Jobs) May 7, 2012
    Where the job losses will be (From Budget 5277 Jobs) May 8, 2012 (Agriculture, Fisheries and Forestry – 111, Attorney-General’s – 353, Climate Change and Energy Efficiency – 39, Defence (civilians only) – 674, Parliament – 23, Education, Employment and Workplace Relations – 1255, Finance and Deregulation – 68, Foreign Affairs and Trade – 29, Health and Ageing – 120, Human Services – 440, Prime Minister and Cabinet – 219, Resources and Energy – 56, Treasury – 1890)
    Murray Goulburn sheds 301 jobs after revamp May 10, 2012
    120 jobs to go at Bendigo Tafe Friday, 11 May 2012
    GAME over: retailer goes into administration (500 jobs) May 14, 2012
    Hundreds of jobs lost as RailCorp split in two (750 jobs could end up 4500) May 15, 2012
    VIC TAFEs spell out job losses in meetings with government as feds up pressure against cuts (1500 jobs in the next year) May 15, 2012
    Stockland’s fourth R is for redundancy (30 jobs) May 15, 2012

    Always the 1000 part time delivery jobs being created by Domino’s

    http://www.smh.com.au/small-business/franchising/pizza-maker-offers-1000-new-jobs-20120312-1utlf.html

  2. This could be something to keep an eye on. One of the theories I’ve heard about the US recovery (or lack thereof) is that the Federal stimulus was effectively cancelled out by “anti-stimulus” from the states and local governments, most of whom are required by law to run surpluses.

    This time round it looks like all levels of Government are cutting back, and indeed could lead to a spiral – if austerity reduces consumption and house prices, that hits two very big sources of revenue for the states, namely GST (via the Feds) and stamp duty.

  3. State (and Fed) Governments are going to have to tax something(s) to make up the shortfall, but what can they tax that won’t slow GDP growth further?

    Might be too late to tax the hell out of the mining boom though. And we probably would have pork barreled that extra winfall anyway. *smh*

    • Karl FitzgeraldMEMBER

      In 2010 land values increased some $370 billion. Capturing some of this benefit via Land Value Tax and using it to remove Stamp Duty, Payroll and the GST (if only) would be a good way to bolster business and consumer activity. It would also put downward pressure on rents, something that is overlooked in importance.

      Having collected just $12,331 million in stamp duty revenues in 2010, all tiers of govt allow too much economic rent to be capitalised into higher and higher mortgages.

      The Real Estate 4 Ransom mentality must end!

    • Pork barrelling: AKA Julia’s forthcoming household assistance package coming to a million or so households imminently.

      What a joke. All necessary to compensate households for increased costs concomitant with the ‘price of power’ (pun intended), the carbon tax.

      • Lighter Fluid

        Come off it – it’s just a mini-stimulus package – just like the cash drops to students/spenders in ’08-’09. It’s an admission that the consumption economy is once again on the brink.

        To me, this policy was as sure a sign that we are now heading for a deeper turn than the GFC. This time the govt is hamstrung and the WGT (worlds greatest treasurer) won’t be able to save the day. Worse, we are even more dependent on the stumbling giant to the North.

        Perhaps if we weren’t all in debt we’d be able to do something positive about clean living – developing technology to put us on a more sustainable path – but let’s face it, we are broke. The carrot won’t save us, so all we get is the stick – try and break the dirty habits and, in the least, be incentivised to waste less energy. Surely even as a colifile, you would prefer to see this precious store of energy used sparingly and not wasted by appliances sitting idle in standby mode? Those behavioral adjustments won’t happen in the era of cheap energy.

        The progressive future is gone, blown in an ogiastic debt and consumption binge. Fukuyama was right, though not as he intended – End of History = no more ideology, no vision, no hope for a better future, just a downward spiral thanks to the mistakes of our elders.

        All sunshine and rainbows on here today, think I might go back to bed…

        • I tend to agree that it is a mini-stimulus package – ‘pork barrelling’ used fairly loosely as it targeted traditional Labor heartland who have abandoned Labor in droves…must’ve worked, the recent Newspoll has pushed them a few points higher as a result.

          Pandering to yet another vested interest.

  4. UE…so higher water and electricity charges, rents, rates Land tax?
    Non-tradables Inflation?
    We can just keep borrowing?

    Which can/will we choose?

  5. As I have read previously on this forum, there’s speculation that the state and federal governments committing to surpluses for the first time since the GFC is going to plunge us further into recession. I’m inclined to agree with this thesis – higher charges, fees and fines pulls money out of everyday Joe’s pocket and they already aren’t spending… it all adds up to substantial problems for employment and growth.

    On a more specific level I’ve heard anecdotally from a friend of mine in regional VIC that the cancellation of the First Homebuyer construction grant has totally buggered regional builders – they’ve been having cancellations left right and centre because people who can’t settle before June 30 are having their finance revoked. Goes to show how much people were relying on that government money I guess but then again a $20,000 grant is a rather big lot of money to lose in one hit. Anyway it’s all just the thin edge of the wedge in my opinion… Keynes was right you know, the government has to keep borrowing and spending in a flatlining economy !

    • If they were relying purely on on the grant to finance their house then they had not business attempting to enter the market in the first place.

      Too many people have already overextended themselves in this bubble and they will be royally f****d for a long time, perhaps for life.

      If you believe everything you’re told and dont do the research, expect get burned.

      • Christiaan take this to the bank.

        If I was over extended as you describe I would take full advantage of the bankruptcy provisions allowed to me.

        The bankster spruiker cohort are gonna own this mess.

        Lets sit down and watch hey?

    • We are in this mess because of Keynes ideas in the first place.

      We borrowed and stimulated ourselves into the mother of all housing bubbles.

      Its time to liquidate the banks, liquidate the malinvestments, and end the stimulus.

    • SaenG I sympathise with your good intentions. There is no doubt we have arrived at difficult times for ordinary people particularly the small businesses and those who work in them.

      However Govt spending is not free money. The Govt makes nothing. It has no production. Therefore any Govt spending in an economy shows up in debt somewhere in that economy.
      In order to be able to apply a Keynesian stimulus we must have a balanced economy without excessive debt. Indeed we must have a clear path ahead to reduce the stimulus and the debt. The other half of Keynes policies was saving. Keynesian policy as now proposed is that we have massive credit growth resulting in over-consumption and debt. This results in a huge growth in Govt revenue (as per Howard years)which Govt spends. Then when the debt gets too high we now must increase Govt expenditure further to make up the short fall of increased credit creation debt?

      These are the sorts of reasons our food chain, our mines, and large tracts of agricultural land are owned by foreigners. We have to sell them off to pay our debts that result from the profligate lazy lifestyle we have adopted.

  6. tsport100MEMBER

    Landcom is a state owned corporation! Now that FHB stamp duty discounts have been halted in NSW the State Government could partially make up it’s budget shortfall by speeding up the release of North West Growth Center land and reap dual income from land sales + stamp duty. (of course, they’ll have to price the land at *new* market price levels – otherwise it will be a total failure)

    States have been obstructing new land releases for years with the effect of corralling FHBs into current dwellings to support current inflated prices.

    Hopefully budget short falls will force their hand to kick-start the new home market again which while it might kill the banks, will revive the construction industry!

    • Will it? if they kill the banks, who is going to finance the new home construction? it is going to end ugley regardless…… Sad even for all the happy renters as their jobs may be affected by the float on effects……

    • tsport
      I currently live on the Sunshine Coast. RE here is in free-fall. It’s not as bad as the GC but experiencing severe falls. The reason is that once building stops there is no employment. There are no factories. The farms have all been built on for real estate. As a result all the furniture factories are gone. The dairy factories are gone. The sugar mills are gone and so the sugar cane farms are gone. The engineering works that serviced them all are gone. etc etc

      So sure we need to get some cheaper land. But what is the point of satellite cities that don’t produce anything. Can they all catch the train to Sydney to work for the Govt framing new WHS laws to inhibit production?

      The theory of urbanisation shows that for consumption you get a centre based city. If you are a productive economy then that is reversed and you get more decentralisation.

      So it’s not just land and housing policies that are needed to make your plan a success. We need a whole rethink of what we are about as a nation. We need to start making and producing things again.

      • It is fascinating and horrifying to watch. The really sad thing is that we have been here before ie the 1890’s and I suspect that the result will be similar in that property prices will stagnate for 1 1/2 generations and I keeping coming up with the solution which was a government owned trading bank that lent to productive enterprises, refinanced government debt so that local government and utilities in particular wasnt subjugated by the private banking system.
        I agree flawse that we need a rethink and a reset. The Swiss and German concept of local government being rewarded for contribution to GDP is certainly an aspect.
        Does Buderim still have its ginger factory?

        • Yes Jack Now it is at Yandina. I’m not too sure if tourism isn’t its main source of income! Still a bit of Ginger grown around…also a few lychees et al…none of it pays!
          I tried to buy a lychee farm recently with some furniture cabinet trees thrown in. I’d have got all the infrastructure at about half replacement cost…and it still wasn’t a proposition!

      • drsmithyMEMBER

        Flawse,
        I’d be interested to hear your thoughts on the sunshine coast. I have a cousin living there and she and her husband are looking at buying something (as a home, not an investment). I’m inclined to advise them to continue renting and not buy, but I’d like to hear an opinion from someone on the ground first.

        In particular, is it still cheaper to rent than buy ? I pulled up a couple of random places in caloundra near the beach and it looked like places renting for ca. $400/wk had similar houses in the same streets on the market for $450k+.

        Much as I would like to live in that area I’m tied to a job in Brisbane, so I only really watch prices in the parts of Brisbane I’m prepared to tolerate (inner west suburbs).

        Cheers.

        • Smithy

          I’m no RE expert! I just try to watch what is happening. I think your maths is about right re rental value and price.

          I pay $460 per week in a house probably worth $600 to$650K in the current market.
          Talking to friends who have bought houses you buy a house for about $600K that would have been worth $780K. Higher priced houses, particularly without sea views or some aspect are down a greater percentage. I’ve seen one house originally on the market for $3.9M only bid $1.2M at auction. I think it was sold later for about $1.5M. It was an awful house though! Grand but awful!

          I’m not sure about prices in the $400-$500K. Less fall i think and interest rate falls have stimulated a little demand in that range.

          Whether it is a good time to buy is another matter and wish I had a crystal ball. I’ve tried to buy in the last week or so but don’t think I’ll get what I was after. In the end you’re buying your own home. I’d say they have a good look, be patient there are plenty on the market, and wait for the house they want at the right(?) price.

          Who knows? If the RBA keeps dropping rates in the face of obvious inflation, the Chinese keep coming here buying up mines and land, maybe in nominal terms this is as cheap as it gets?

          I’m a doddery old ba…rd (63)so I’m scared as hell of debt.

          I hope that is of some help. As I say I’m not a RE man. I was getting a valuer to do teh one i was interested in but it was a bit of an unusual property so I didn’t have a clue!

          • Flawse. You’re on fire today. But what I really love is your preparedness to tell it how you see it. And more importantly share experience from a place of reflection and, dare I say, humility.

            Cheers mate.

    • Corralling FHBs – I like that and will use it. Unfortunately – land release will never be enough on its own to stop the upward price spiral, but it definitely helps

      A happy renter