Every budget has a theme, whether real or concocted. For the NSW budget tabled last week, the theme is “putting people first”, backed up by a raft of gimmicky spending measures such as free baby hampers (don’t ask) and a Generational Fund with a dash of participatory democracy.
As the clock ticks towards the next state election, the Berejiklian government is attempting to rebrand itself from one that sells assets, balances the books and builds economic infrastructure to something more touchy/feely and caring. It’s out with the spreadsheets and balance sheets and in with the bedsheets.
To date, the O’Farrell/Baird/Berejiklian governments have done a creditable job of containing recurrent expenditure and strengthening the state’s finances while embarking on a major infrastructure program, helped mightily by the rivers of budgetary gold from a classic five-year Sydney property boom.
The question is whether the change of emphasis in this budget is superficial or goes so far that it sacrifices the gains of the past seven years.
Compared with last year’s budget projections for 2018/19 and the years ahead, this budget provides for an additional $2 billion or so a year in operating expenses and between $3 billion and $6.5 billion a year extra in capital expenditure as a result of policy measures.
At the same time, the budget is dealing with a cooling property market — sensibly allowing for a 21 per cent fall in transfer duty revenue over two years — and a falling share of GST revenue, which is a lagged reflection of the boom-time transfer duty revenues. As a result, total revenue is expected to be flat in 2018-19 and then increase by only three per cent a year.
Not surprisingly in light of these developments, the net operating surplus is estimated to shrink dramatically to an average $1.6 billion in the next four years compared with $4.3 billion in the last four years. Net debt — currently negative — will turn positive and balloon to almost $30 billion four years from now.
However, while the exact numbers have changed the profile of the outlook hasn’t — it was much the same twelve months ago. This outcome in part reflects a more favourable starting point. In 2017-18 expenses have been lower than budgeted and revenue higher, resulting in a net operating surplus that is $1.25 billion higher.
Rather like the recent federal budget, this improvement has carried over into later years, with non-policy revisions since last year’s budget favouring the bottom line by around $1.75 billion in each of the next three years. The government has basically used this extra money — and a bit more — to pay for its pre-election spend-up. This choice is wide open to the criticism that some of the savings should have been banked (higher planned surpluses) or committed to tax reforms that lower the overall tax take.
Keeping a tight rein on employee-related expenses is critical to maintaining expenditure discipline in a state budget as these expenses comprise almost half the total. In contrast to Queensland and Victoria, where growth in the wage and salary bill is rampant, NSW is keeping it down to the sedate pace of around three per cent.
However, projected expenditure restraint relies unduly on the efficiency dividend, which has been increased in this budget from two per cent a year to three per cent. It is doubtful that anyone in government has much idea where the extra one per cent a year will come from, but by 2021-22 this seemingly small increment is supposed to yield a saving of $800 million, which accounts for almost half the operating surplus in that year.
As in many federal and state budgets in recent years, the increase in the efficiency dividend looks suspiciously like a last-minute balancing item to make the bottom line look better. It’s much easier to make a book entry like that than to make specific, identified program savings.
Another point of concern is that as so much future fiscal headroom has been used up in increased spending in this budget, any further commitments in next year’s election will go too far in structurally weakening the budget. The government has left itself (and the opposition) little room to manoeuvre.
Moreover, if the property market cooling turns into something more frigid, the fall in stamp duty revenue built into the budget will prove inadequate.
Subject to those qualifications, it can be said that while this NSW budget has committed to too much new spending, it has not abandoned fiscal discipline. But at the same time, it is a budget bereft of new economic reform initiatives.
Robert Carling is a Senior Fellow at the Centre for Independent Studies.
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