State austerity to hit growth

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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:

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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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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.