There’s a certain macabre fascination to watching the NSW ALP’s post-election recriminations, a bit like watching the aftermath of an horrific train smash. However, it’s an essentially pointless exercise given that the size of the Coalition’s majority means that there isn’t an even slightly realistic scenario that would have Labor back in power in New South Wales inside 8 years at the very least.
The only useful questions revolve around what policies the O’Farrell government intends pursuing and, even more importantly, how it proposes to fund them. Troppo colleague Richard Green has been focused on those issues for some time, as evidenced by his excellent post recording and analysing an enterprising interview with (likely) incoming Liberal treasurer Mike Baird. Judging from an article in The Australian only a few days ago, Baird continues to favour a financing scheme involving infrastructure bonds assisted by “incremental tax financing” rebates from increased stamp duty revenues generated by the infrastructure in question. It’s an interesting idea. Even more promisingly, Baird seems so far to have retained the scepticism Richard noted about the discredited vehicle of Public Private Partnerships for which NSW Labor became notorious. Baird and O’Farrell also propose setting up Infrastructure NSW, which we can only hope will be a body with sharper regulatory teeth and greater independence than its federal equivalent created by Kevin Rudd.
However, even if Richard’s reservations about infrastructure bonds and tax increment financing prove unfounded, they’re unlikely to prove capable by themselves of underpinning more than a small proportion of the massive public infrastructure backlog which is just about the only lasting legacy of the failed Labor government (apart from a successful Sydney Olympics early in its 16 year term in government). The central challenge for O’Farrell, Baird and the NSW Coalition is to find an economically and electorally sustainable means of financing these huge public expenditures that is also consistent with Liberal principles. The Libs certainly won’t get away for long with Labor’s hackneyed recipe of empty spin and dressing up in hard hats to provide a televisual illusion of growth and development. NSW voters’ bullshit detectors are well developed after 16 years of training from local Labor spin doctors.
If (as I hope) PPPs are no longer a favoured vehicle, there’s always the option of increased public borrowing. However, as Richard Green reported, Baird is understandably wary of going far down that road, in part because of the perceived danger to NSW’s AAA credit rating. Despite Nicholas Gruen’s regular arguments in favour of increased public borrowing to fund productive infrastructure, and the simplistic Costello-induced public aversion to government debt, I’m rather persuaded by this observation from veteran Troppo commentator Derrida Derider:
John Quiggin has written several times (eg here) about the way governments and corporations are held to very different standards by the ratings agencies, and how this seriously distorts infrastructure financing. It makes PPPs viable that ought not to be and government projects unviable that ought to be.
More sophisticated governments that go in for PPPs know this, but it is a fact of life they’re powerless to change and so have to take into account. They would say don’t confuse “is” with “ought” – that government bond financing of infrastructure ought to be more favourable doesn’t necessarily mean that it is.
If O’Farrell and Baird favour neither heavy reliance on PPPs nor major short-term increases in government debt, they are logically left with only 3 options: increased state taxes, large cuts in existing government spending, or asset sales. It’s unlikely the Coalition will adopt the first of those to any significant extent. They’ll almost certainly undertake a razor gang exercise early in the first term, but that isn’t a long-term recipe for funding infrastructure on the scale that is needed.
That leaves asset sales, but O’Farrell unwisely ruled out selling the remainder of the NSW electricity system in the wake of the Keneally’s government’s disgraceful and probably corrupt bargain basement sale in its dying days. It’s almost impossible to see those sales as anything other than a ruthlessly cynical move to deny at any cost to the public interest O’Farrell’s access to a huge pot of privatisation proceeds that could fund the public infrastructure investment that Labor squibbed for an entire decade. O’Farrell and Baird simply can’t afford to let Labor get away with it, and that doesn’t just mean using a royal commission to reveal the depth of iniquity. They probably shouldn’t attempt to unwind the deals themselves for fear of inflaming business concerns about sovereign risk. However, if the ABC’s Alan Kohler is right they don’t need to do any such thing:
But he needs to move fast – once the price of carbon reaches $30 a tonne, black coal power generation starts to become non-viable, which is the point of the exercise.
The real value lies in the distribution assets – Energy Australia, Integral and Country Energy. Industry sources say these could raise more than $20 billion for NSW taxpayers. And then there’s the 58 per cent of Snowy Hydro owned by NSW, for which there would be keen bidding – say, another $5 billion.
All up O’Farrell could raise $30 billion for his state if he hadn’t wimped it during the campaign and promised not to privatise. He needs to quickly announce that the state’s finances are so bad that that promise can’t be kept.
I couldn’t agree more. Unlike Labor, the Coalition isn’t hamstrung by owing fealty to the trade union movement, and it should capitalise on that strength while it can. The combination of asserting (however dubiously) a “black hole” bequeathed by Labor and a royal commission showing graphically just how disgraceful the Labor asset sale really was, should allow O’Farrell to walk away from his ill-advised “no sale” promise with minimal damage. It’s clearly the best policy response if “Juliar”-style reputational damage can be avoided or kept to a minimum. With that sort of money plus local capital works funded from “tax increment”-subsidised infrastructure bonds, not to mention more competent NSW applications to Infrastructure Australia for federal funding appropriate to Australia’s erstwhile “premier state”, we could actually see New South Wales return to its position as Australia’s economic engine-room and Sydney become the exciting world city that it should be but sadly just isn’t after 16 years of squandered opportunities under what was, at least over the last five or six years and possibly longer, arguably the worst government Australia has even seen.1
- Although it’s a photo finish with WA’s Burke government and Queensland’s Bjelke-Petersen regime. ~KP