New term should prompt spring clean of shaky budget settings

Tasmania’s fiscal position does not paint a pretty pictures, writes Graeme Wells

WHILE parliament has not been sitting, members have had an opportunity to think about longer-term issues, including Tasmania’s parlous fiscal position.

Perhaps the start of the spring sittings provides the chance to re-set policy.

Table 1.2 of this year’s budget papers should focus attention. It reports the underlying net operating balance, or the deficit or surplus, after the accounting smoke and mirrors have been cleared away. This measure of the fiscal position is, as John Lawrence has told us, the most relevant measure. It removes the temporary effects of unspent Commonwealth money on infrastructure projects.

It is not a pretty picture. Including last year and the four years of the forward estimates, the accumulated deficits total $528 million. A surplus is nowhere in sight.

At last Tasmania is enjoying reasonably solid economic conditions. Ongoing deficits when times are good tell us the problem is structural, not cyclical. How did we get into this position?

For too long both major parties have avoided the hard decisions needed to promote long-term growth and fiscal sustainability. The result is a poor public health system, congested roads, and underfunded schools.

Take the spending side first. Too often spending decisions are driven by short term political advantage. There are plenty of examples.

Over the past few decades, hundreds of millions of support has been provided to the forest industry. To what end? Last year’s financial statements from Sustainable Timbers Tasmania show that income from forestry operations still do not cover costs. Forestry policy has been a disaster. We have clearfelled native forests on an industrial scale. Together with the loss of important environmental values, we have achieved the trifecta of also losing jobs and money.

Then there is the monopoly licence for poker machines. In 1993 this was granted to Federal Hotels without a tender. For free. That decision has been estimated to cost the budget $30 million a year.

As a third example, take the funds allocated to replacing the river crossing at Bridgewater. Two weeks ago, the independent umpire, Infrastructure Australia, reported on the business case for the bridge. It does not stack up. The costs outweigh the benefits. Sadly, this independent analysis hasn’t been sufficient to overcome pork-barrel politics in marginal electorates.

The revenue side has not been much better. Short term politics has prevailed.

Tasmania is heavily reliant on GST revenue and other transfers from federal government. Grants and GST distribution comprise nearly

two-thirds of state government revenue.

In the longer run it would be naive to expect salvation from a federal government that is hellbent on cutting spending. Grants to the states are unlikely to escape unscathed.

GST revenue is also likely to grow more slowly than before, because spending on untaxed items such as health and education is taking an increased share of total household budgets.

Both federal and state governments may have to face the unpalatable truth that provision of services the community expects requires a lift in overall tax rates.

Although we often complain about high taxes, Australia is a low-tax country by international standards. The average tax share of GDP for the OECD, which includes all high-income countries, is about 35 per cent. Australia’s tax share is about 28 per cent, marginally higher than in the US. The problem is that our tax system is inefficient. It creates a range of disincentives. In turn this makes it very difficult to increase the tax take without adding to disincentive effects.

While Tasmania cannot do much about federal taxes, we can address local problems.

A decade ago, there was a glimmer of hope — Treasury was asked to prepare a review of state taxation. Submissions were invited. A report was prepared. But at the last minute both the major parties squibbed. The report was buried. As a consequence, we are left with an inefficient tax system.

There appears to be little political appetite for change.

Reforms endorsed by almost every informed commentator, such as the gradual replacement of stamp duties with a broad-based land tax, have been shelved.

Instead of taking a more rational view of tax and spending priorities we are fed a diet of efficiency dividends and misleading statistics.

We deserve better.

Graeme Wells is principal of Wells Economic Analysis, and a former associate professor at the University of Tasmania.