Fact and fiction … NSW Budget

I wrote this for the Fairfax press early this morning before a 10km run around the Vondelpark in the heart of Amsterdam – in cold pouring rain. They call it high summer. Anyway, the opinion piece was confined to 500 words. I could have said a lot more but you can extrapolate each line accordingly. I also did an ABC radio interview hiding under a tree in the park – the juxtaposition of talking to Sydney about the NSW Government’s failure to deliver adequate services and being among the wonderful urban amenities (for example, public transport and bike paths) and public spaces provided by the Dutch was not lost on me. Pity public spending can’t fix the lousy weather over here. Anyway, now I am off to work for the day over here. Part 3 of the fiscal sustainability series coming next – for Wednesday.

Opinion piece follows:

There is fact and fiction in yesterday’s NSW Budget. The fact is that NSW, and particularly Sydney, is in bad economic shape and needs urgent surgery. The fiction is that the troubles will pass quickly and allow the Government to run surpluses again (that is, withdraw net spending from the economy).

NSW faces two particular challenges. First, the brunt of recession is being borne by Sydney because the financial sector is concentrated there and also because its property boom was bigger than elsewhere. The boom left a massive debt legacy and defaults are rising as recession bites.

Second, the government has to improve its appalling service delivery. The degradation of services is the legacy of the past surpluses. This challenge will remain long after the recession is gone.

My estimate is that deficits will be required over an extended period to address both challenges. I fear that a rush to get back into surplus will further undermine the quality of service delivery in crucial areas such as education, health and environmental infrastructure provision.

The Government has accepted its current role is to stimulate rather than cut. Last November’s contractionary mini-budget was a disastrous sop to the “deficit hysteria” dominating the public debate.

Informed opinion knows that deficits are good in crises and largely reflect the in-built “automatic stabilisers” which moderate the impact of the economic cycle. In bad times, tax revenue falls and welfare spending rises. The process reverses in the upturn.

Policy should thus not focus on any particular deficit outcome but on the underlying driver – declining economic activity. Responsible leadership should aim to minimise the job losses. No government (federal or state) should sit idle when the unemployment rate is projected to rise to 8.5 per cent by next year.

In this regard, the Budget contains several excellent initiatives including the cuts in payroll taxes and stamp duties on new homes. Both will boost jobs across all areas of the state including the Hunter. The stamp duty reduction is a much better way to boost growth than first home buyer scheme which mostly increased prices. The increased infrastructure spending over the next four years is also excellent and will provide enduring benefits to the State.

But Government’s plan to freeze public employment is inconsistent and will undermine the service delivery challenge.

The projected growth in public debt is modest and no cause for fear as long as the investments generate long-term returns. The unwillingness of the NSW Government in recent times to use debt to underpin infrastructure development has damaged the State.

The Budget fiction is twofold. The built-in growth forecasts (the same used in the Commonwealth Budget) are too optimistic and deficits will persist for longer than projected. Moreover, the longer-term service delivery challenge militates against any return to surplus in the foreseeable future.

My other concern is that this unpopular government will use its budget for political purposes in the forthcoming election cycle and take its focus off the longer-term service delivery challenges.

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    8 Responses to Fact and fiction … NSW Budget

    1. Lefty says:

      But will cutting payroll tax automatically result in employers employing more people or will many of them simply pocket the windfall?

      A comment from the business lobby I read today suggested cutting payroll tax for business while hiking the GST to make ordinary people bear the cost.

    2. Alan Dunn says:

      Much of the so called infrastructure spending by NSW state government is nothing more than a transfer of state funds to their private sector contractor mates.

      Certain banks, certain property developers all seem to be in the mix time and time again. Moreover, when a former Premier suddenly retires only to take up a position with one of these businesses in question it all seems more than clear to me what’s going on.

      Hence the NSW state government are usually willing to deficit spend for the big end of town but they will always cry poor whenever infrastructure or assistance is required at the community level.

      They deserve to be flogged comprehensively at the next election. Unfortunately they will robably dip into the public purse and fund the neccessary propoganda campaign for re-election.

    3. James Davies says:

      Hi Prof Mitchell, as you corectly point out the federal government is not revenue constrained but the state government is because it does not use its own soverign currency. They have to pay back their debt eventually.

    4. bill says:

      Dear James

      That is true. The state government (or any sub-national government) has a budget constraint similar to the household. The only difference is the state has the power to tax and impose fines which gives it superior (cheaper) access to credit.

      best wishes
      bill

    5. bill says:

      Dear Alan

      I agree with your concerns about the infrastructure spending. I am always reluctant to use NSW and Government in the same sentence by way of association. They are an appalling government. But their private sector mates do employ people though.

      But at least they are not trying to run surpluses at present.

      best wishes
      bill

    6. bill says:

      Dear Lefty

      Cutting payroll taxes may not change much in employment. The real driver of job is demand. But at the margin the cuts may help as long as they are accompanied by spending that will stimulate demand. That seems to be happening in the Budget.

      So in some small sense, the Budget is better than it could have been. As I said in my reply to Alan, at least they have given up trying to run surpluses for a while. That is some relief.

      best wishes
      bill

    7. James Davies says:

      Dear Bill

      I am fully aware that “The only difference is the state has the power to tax and impose fines which gives it superior (cheaper) access to credit”, but nonetheless in the end they have a budget constraint, and any new taxes will dampen demand. There is an assumption that the economy will adequately recover. Would it not be more feasable to encourage the federal government to take over some of the states powers (burdens) and since they have no budget constraint they are then more able to increase spending to necessary levels to allow the non government sector to benefit and net save? It comes back to convining the public and our so called leaders that the federal government does not have to finance its spending. Once this is done the politics will take care of itself.

    8. bill says:

      Dear James

      I agree with you. I would collapse State Governments into a two tier system (federal and local). Although the idea that Tom Uren used to push when he was Minister for Urban and Regional Development of having an intermediate layer – Regional Governments – a sort of meta local goverment entity – is still worth considering. But in general I would just have 2 tiers. The federal because of its sovereign capacity (fiat currency) and local because it knows what is going on in the street. Then I would pass laws to reduce the influence at the local level that property developers and other nefarious types exercise (that is my dream) – and then immediately introduce a Job Guarantee – funded federally operated locally. All this would be done in the first 5 minutes of the new system being enacted.

      best wishes
      bil

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