New South Wales Mini-Budget

From today’s Fin:

There was hope that todays NSW mini-budget might address the states real problems. But it seems the government will merely increases taxes and reduce spending while selling the odd asset. There will be no major reform. If this is right, the NSW government has failed.

Raising taxation might be irresistible – a panacea for government – but it is the least desirable way to solve NSWs budgetary problems. Whatever measure you use, the state is already high-taxing. It taxes a greater share of State Gross Product than any other Australian jurisdiction, and using the tax effort measure favoured by the Commonwealth Grants Commission, NSW is the third highest taxing body. On a per capita basis, it is also the third highest.

Moreover, the state treasurer, Eric Roozendaal, said he needed a mini-budget because NSW was more affected than others by problems in the world finance industry. If the states current fiscal problems are cyclical, as this suggests, increasing taxes will do no more than transfer the states burden from the government to the private sector. Indeed, you might even argue that a temporary deficit on government operations is not a bad thing given the state of the economy. But lifting tax rates is the lazy way out.

While Roozendaal will also announce spending cuts, his government is not high-spending. ABS data show that NSW government expenses as a share of Gross State Product is the fifth lowest of Australias eight states and territories. The Commonwealth Grants Commission also reports that NSW government per capita spending is below the national average for all categories, except law and order. NSW residents certainly agree that government services are too few and their quality is too poor.

But government spending, while low, is growing at an unsustainable rate: nearly six per cent per annum in the last four years, and four and a half per cent a year over the next four. Happily, many reports show savings are available without reducing services. Reforming rail agencies – including contracting out of train maintenance – should be a high-priority goal. The ever-increasing number of police officers should be frozen. The health sector also needs attention. Union intransigence has previously stopped the government from realising savings; it will be interesting to see if it again features.

NSWs half-billion dollar student travel scheme has been studied many times; however, no government has had the courage to act. This subsidy accelerated when the Greiner government removed restrictions which prevented state schools from accepting out-of-area students, but there is no sound reason for taxpayers to meet the costs of transporting students across the city.

Similarly, asset sales would be useful where they improve the efficiency of capital use.
There is merit in privatising government activities where monopoly issues are not at stake. Government is less efficient than a competitive private sector. But the states financial problems will not be remedied merely by ad hoc tax increases, spending reductions and incidental asset sales.

It seems odd that NSW suffers budgetary problems when its state taxes are higher but its spending is lower than the national average. One explanation is that the state did not get an appropriate share of Commonwealth taxation. Although there was merit in this argument, it is of less importance now that Western Australia and Queensland are no longer directly subsidised by NSW (and Victoria).

A more pressing explanation for the states budget problems – one seemingly not yet captured by the work of the Commonwealth Grants Commission – is that the growth of the NSW economy has been stunted, and this has reduced the capacity of the state economy to support government services or to survive an economic downturn.

This column has argued before that the NSW governments unwillingness to reform – from the Fahey government in the early 1990s to the Carr and Iemma governments – curtailed the states economic growth and severely reduced government income. In recent days, the NSW Premier, Nathan Rees, talked about reform, including a revolution in the way motorists pay for road use. But it seems reform will not be a favoured theme in todays statement. Until the government stops fiddling, there is little hope for the future of Australias biggest but lagging state.