Debt, savings, investment and politics

A column first published in the Fin on the 5th August. 

In the first days of the new parliament, the Opposition called for three Senate select committees. Its new found passion for accountability was deeply hypocritical: when the Howard government ruled the Senate it made sure there were no such committees. But the Opposition was unabashed. One of the committees is examining state finances and, by implication, Australias eight state and territory Labor governments.

The Opposition says it is deeply worried about these governments. Its manager in the Senate, Senator Chris Ellison mourned that We have state governments around this country racking up debt and affecting this nations economy. The shadow Special Minister for State, Senator Michael Ronaldson, was outraged that the states will soon have net debt of $80 billion.

These criticisms were popularised by the former treasurer, Peter Costello, before last years election. They are reflected in comments about mushrooming debt made by Victorias shadow treasurer, Kim Wells, and by the Opposition from four other states. But these criticisms about debt seemed to come only from the Opposition parties.

The committee received 43 submissions. Among the pithier was that made by Standard & Poors. It advised that the credit quality of the Australian states and territories is very high. Six of the eight jurisdictions have an AAA rating and Tasmania has an AA + rating. (The northern Territory is unrated.) The rating agency pointed out that outside of the United States it assesses 190 sub-sovereign governments and only about 16 per cent have an AAA rating. Nor is the company worried about the states recent appetite for debt. While states cannot indefinitely increase borrowings, their debt is low and budget performance is adequate.

In coming to its judgement, Standard & Poors examines a states system support and predictability, management capacity and institutional stability, financial flexibility, liquidity and debt management and off-balance sheet liabilities. These reviews raised nothing which supported state Opposition concerns about debt. The papers lodged by Moodys Investors Service came to the same conclusion.

The submission from the Australian Industry Group, described as Australias leading industry organisation, was critical of those who obsess about state borrowings. Ai Group regards the current level of debt of the States and Territories to be conservative.It is our belief that the borrowings and debt positions of the Australian States and Territories have been overly conservative for some time.It is difficult to rationalise the excessive focus on reducing debt. It has little basis in good economic management but seems rather to be driven by an ideological position.

The Reserve Bank of Australias submission gave scant attention to state and territory borrowings. It noted that in 2006-07 state general government budgets were, as a whole, incurring deficits, predominantly reflecting a large rise in capital spending. But the Bank seemed unconcerned: net state sector debt is budgeted to remain relatively small as a share of GSP over the forward estimates period. The Bank later told the select committee that state and federal spending had remained fairly constant in recent times and had only a minor impact on Australias recent high inflation.

But there is a suspicion that some committee members still believe that state debt is bad. That was an inference in a question addressed on the committees last day of hearings to Professor Henry Ergas, chairman of consulting firm Concept Economics. Ergas pointed out that states were responsible for most public sector infrastructure. It was thus sensible that they borrow so that the costs of capital would be borne by all of the generations which benefited. The short-hand term for this concept is intergenerational equity.

We should also remember that those who condemn debt must also condemn savings because one persons savings is another persons debt. You might have deposits in a bank, but those savings are the banks debt.

So, state debt at current and envisaged levels is not a concern. But this does not mean state finances are well managed. A major shortcoming is state reliance on Private-Public-Partnerships, PPPs. Another is poor selection of infrastructure projects. Other issues raised with the committee concern inefficient state taxes and the states poor revenue bases. These can only be solved with the Commonwealth. We shall see if the Opposition wants to address these real problems.