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.

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15 years ago

I can’t work out the thinking behind the budget. It seems deliberately designed to:

a) achieve no worthwhile ends, and
b) piss-off as many people as possible.

I can think of only two possible explanations.

1) Rees/Tripodi/Roozendaal are trying to blackmail Rudd into providing more money.

2) The treasury secretary has bet someone $10 that he can bring down the Rees government, and that no-one in the government will be smart enough to understand what’s going on.

15 years ago

As flawed as it is, I like the move toward a congestion tax. While the NRMA is screaming, the extra burden on commuters from the north entering at rush hour times might have the effect of changing habits. the next step has to be something to catch single occupant drivers from the west, south and east. Not easy.

15 years ago

The treasury secretary has bet someone $10 that he can bring down the Rees government, and that no-one in the government will be smart enough to understand whats going on.

Hmm, maybe, maybe not.

Todays SMH:

JUST days after what has been described as the worst NSW budget in memory, the man who has presided over the state’s coffers for 12 years, the Treasury Secretary, John Pierce, has deserted the Government.

A senior Labor source said Mr Pierce had been unhappy with the mini-budget process and wanted to quit earlier.

Mr Pierce was a key architect of the Iemma government’s failed plan to privatise the state’s electricity industry, and will leave within two weeks.

But the Treasurer, Eric Roozendaal, denied Mr Pierce had quit over the mini-budget. He said Mr Pierce had indicated earlier he wanted to leave but had agreed to stay until the mini-budget was delivered.

Mr Pierce’s departure is a significant crack in the tightly knit group that runs the state.

Then again, according to Terrorgraph, he didn’t jump, he was pushed:

And last night it emerged Premier Nathan Rees sacked senior bureaucrat John Pearse[sic] – the longest serving state treasurer secretary…

The Government’s woes continued last night with the shock sacking of Mr Pearse just days after he handed down the mini-budget on behalf of the government. It is believed Mr Pearse was disillusioned with the new administration.

Sources inside Treasury revealed that a number of senior Treasury staff including Mr Pearse believed that their own credibility was being harmed by the Government’s handling of the economy.

In what insiders claim was a “appalling dismissal, Mr Pearse found out about his sacking after being phoned by associates.

Mr Pearse then contacted Treasurer Eric Roozendaal to confirm his dismissal and was told it was true. Mr Roozendaal then turned around and asked Mr Pearce if he would still stay on for the interim and go to New York on behalf of the Government to argue the case with ratings agencies. Mr Pearce said no. He will be replaced by former head of Sydney Water Terry Schott.

15 years ago

The congestion tax will hit northside commuters big time resulting in wiping out ALP/green votes.

The ALP have a policy of pleasing as many people as possible, its a shame the voters are so easily pleased.