Time for open, honest conversation about state’s financial challenges

Ruth Forrest says Tasmania’s Fiscal Sustainability Report demands action.

WOULDN’T it be nice to pick up a report into the sustainability of the Tasmanian Government’s finances and be told at the outset what is meant by “sustainable”?

If sustainable means still drawing breath, maybe we’re okay. For the time being.

The report into the sustainability of the state’s finances was released on October 8 without an accompanying media release. That’s always a telltale sign.

It makes for grim reading if one can manage to wade through all the graphs, which all head downwards except for the net debt chart, which is pointing skywards.

An issue such as the sustainability of government finances needs more discussion than offered by the frenetic 24-hour news cycle.

The Fiscal Sustainability report is required to be prepared by Treasury, under the Charter of Budget Responsibility Act 2007, at least every five years. It is a report by Treasury to Parliament.

The 2016 report provided a glimpse into the next 15 years. The particular measure of sustainability chosen, termed the primary balance, only makes sense if net debt doesn’t grow.

That fairytale assumption was thrown out the window when the 2019/20 Budget was handed down in May. The primary balance ignores interest and loan repayments, which are destined to become part of future budgets, and capital outlays and equity contributions into government businesses, giving a distorted view of the government’s fiscal position.

Treasury wasn’t required to release another report until 2021. However, an updated Report was released on October 8.

The primary balance measure of sustainability has been reassigned to an attachment. Next time I expect it to be reassigned to the bin.

The prime measure of sustainability used in the 2019 Report is a net debt figure. This is a vast improvement because the movement in net debt over a year, for example, tells us exactly what the cash deficit (or surplus) is for that year.

It includes all receipts and all outlay, the only sensible thing to do if we wish to measure sustainability. Unlike the unsatisfactory primary balance figure and unlike the misleading measure (net operating balance) the government uses each year, when crowing about its budget surpluses.

It’s a pity we weren’t presented with the changes in net debt each year rather than a chart with a steadily increasing pile of debt. That way we could see what the cash deficit is for each year and understand the problem at hand.

The report assumes four different scenarios with differing assumptions about revenue and expense growth. The most unfavourable scenario shows net debt in 15 years’ time at $30 billion, three times the gloomiest figure in the 2016 Report. That’s about three times budget revenue for that particular year. A nightmare scenario. The current budget has revenue of about $6.4 billion and no net debt.

Even under the most favourable scenario, a continuation of the figures in the four years of the current

budget and forward estimates, we end up with $4 billion of net debt in 15 years. A continuation of the pattern budgeted in the next four years will require $450 million of savings for each four-year period thereafter.

The current dose of austerity the government is trying to impose will have to be undertaken each and every four years if we are to limit net debt to $4 billion in 15 years’ time.

Regardless, each scenario shows the state continuing to spend more than it receives each and every year, so how can this be considered sustainable?

While a definition of sustainability is absent, the Act mandating preparation of the sustainability report lists principals of sound fiscal management. Unfortunately, they’re motherhood principles. Managing the state’s finances responsibly, building a robust financial position or improving services by building a strong economy for instance.

What makes the problem even worse is that we are currently behind the eight ball. No one can possibly argue the health system is satisfying principles of sound fiscal management. The sustainability report implicitly assumes we are starting from a position without legacy issues, like waiting lists, backlogs and deferred plans.

All of us are responsible for the position confronting the state. Let’s try to understand the issues before solving them. There is absolutely nothing to be gained from finger pointing. The opposition parties blame the Government. The Government in turn rakes over past performance of the Opposition. All with some elements of truth no doubt. But if we spend too much time fiddling, Rome will become engulfed in flames.

It is delusional to think health expenditure can be constrained to grow less than revenue growth. The report succinctly sums up our dilemma:

“The underlying drivers of growth in health expenditure are likely to continue. This will make it increasingly challenging to maintain fiscal sustainability into the future with expenditure constraint alone. It is recognised that constraining expenditure will present challenges and difficult choices. In addition, maintaining long-term fiscal sustainability for Tasmania, and other Australian jurisdictions, will require not just ongoing management of expenditure but also consideration of sources of revenue that will fund improvements in government services. In particular, longterm fiscal sustainability will require growth in expenditure to be matched with sources of revenue that grow at the same rate.

“The rates of revenue growth required to maintain long-term fiscal sustainability are unlikely to be delivered through expected growth in current revenue sources or minor changes to existing taxation arrangements.

“While noting the challenges involved, it is likely that reform of the existing taxation system will be required, including identifying new sources of revenue.”

As one of the report’s important conclusions stated: “… any corrective policy actions, such as expenditure or revenue measures, used to address the projected fiscal challenges that could face the State would be easier and more effective if implemented early and were focused on the underlying causes of these fiscal pressures.”

It is time for an open and honest conversation. If we don’t solve our own problems, who else will?