Comments by Campbell Newman that Queensland was on the way to bankruptcy are, unfortunately, true. His comment that “Queensland does not have the money…” is globally true - but clearly specifically arguable in areas like disability support where, to me, the real question was why the disabled were to actually receive only $300 million of a $1 billion outlay of our taxes.
The comparison with Spain is off the mark but not totally wrong. After all, Queensland’s financial rating by Moody’s of Aa1 is just one notch below the best, while Spain (at Baa3) is just one above the speculative band. However, both do have very significant financial problems. Fortunately for us, Queensland seems to have a better chance of rectifying things if more adequate policies are adopted.
The particular choice of destitute European nation was perhaps more a reflection of the Prado exhibition at South Bank than any sensible thoughts on George Street. No, it’s not a new Toyota, but an unprecedented exhibition of Spanish masterpieces that has just hit Brisbane.
Unfortunately, Queensland’s financial position is also unprecedented. Not since just before Gympie’s gold discoveries saved the colony have things been so grim.
We knew from an earlier article that debt obligations for the “State of Queensland” held through the Queensland Treasury Corporation (QTC) had increased four fold in eight years to over $85 billion (billion!) last December despite $15 billion raised from asset sales in that period. The party was over in March, and the clean-up task was always going to be formidable.
Now the Commission of Audit has reported on that portion of debt held by the general government sector. This excludes a variety of agencies or organisations who have raised funds through QTC but have a separate financial existence to the main operations of government.
Gross “general government” debt is estimated at $64 billion as at the end of June and projected under current settings to reach $92 billion in 2015-16 and $100 billion three years later. That would be around 50% more debt in just four years.
Faltering revenues and expenses growing at over 10% per annum saw “debt in the general government sector increase ten fold in the last five years”.
The ratio of gross debt to revenue at the end of last month was 125% and expected to peak at 155% in 2013-14. The rivers of debt are slowly rising. Potential damage from such forecast inundation of revenues is extensive, dwarfing the floods of 2011.
However, this ratio is not the real problem. As all readers with mortgages know, you can safely borrow two times, three times and sometimes more of your gross revenue to borrow a house. It is in the servicing of the debt that problems arise. This is where today’s real action is.
There is a danger that the problem is currently being oversold. The response looks confused and desperate, needlessly depressing economic activity and investment more broadly. The balance is a delicate one as Queensland recorded negative growth (from high levels) last quarter and anticipated fiscal contractions appear recessionary. Additionally, Brisbane house prices have already fallen for eight quarters.
How might the LNP government re-balance the books? This is the central issue for the Commission of Audit, public agencies, many businesses, the public and the new government. However, current thoughts of employment cuts, tax rises, asset sales and the like will not deliver on a problem of this magnitude. Something else is needed.
Queensland currently has nothing significant from annual revenues left to pay down debt, or even meet interest requirements. $3.5 billion was the interest bill estimate for last year and this is expected to grow to $5.3 billion per annum by 2015-16. Interest only payments around 10% of gross revenues is the future unless a new course is set.
Unaddressed is the question of whether such “interest payments” and the rate itself are economically or historically appropriate. Real interest rates remain historically high, enervating not just Queensland and its government but the efforts of the whole country. We continue ignoring this issue at our great cost.
Interest due annually is a very substantial sum, enough to pay in one year for the whole Airport link road and tunnel project, which also opened this week. (Those flying in for “Prado on Brisbane” can now have a doubly fantastic experience, and the tunnel is free for the next three months!)
What we have is an aspiring world city in a major trading state without the ability to pay for what is seen as needed. When aspirations moved ahead of wallets, unsustainable finance was arranged. The government has overreached its capacities, which brings us back to Europe.
There, all manner of parties also overreached their capacities during an era of easy credit, slack administration and fraud – innocent or otherwise. Treasurer Wayne Swan was correct in highlighting differences with Spain. There, they have banks with inadequate collateral overexposed to property loans that will not be repaid threatening banks in Spain and parts of Europe with insolvency.
Spain, acting as a “helpful” sovereign, did choose to inject some funds but the efficacy of such actions was always doubtful. Spain has neither a currency nor control of monetary policies. The inadequate foundations of the ill-structured euro and incomplete EU cannot cope.
“Life-support” transfers from northern Eurozone countries to the distressed Mediterranean may well cease soon. Finland’s direct appeal for nationally backed “collateral in exchange for its share in any bailout packages” and ministerial comments that there are limits to solidarity reflects concerns also raised in Germany. Spanish and other intra-EU support funds may ultimately be seen as wasted: “good money (and generational savings) needlessly thrown after bad”.
Here in Australia there are several important differences that allow us other options. Queensland and other states do hold significant public debts and assets on their own account, with Queensland perhaps a “canary in the mine” as far as state debt problems go. Australia does have debt problems, but it also has a well-structured and generally capable federation with a respected if volatile currency and very good prospects.
We could go a long way if we could just add better appreciation of our current and potential problems to our public conversations and policy thinking. “All will be well” dreams of the RBA and like-inclined agencies need to replaced with a raft of effective strategies.
There are acceptable, effective ways to constructively manage the debt problems of the states and Commonwealth of Australia. These need to be explored soon, before a transition from credit-inflation to debt-deflation and worsening cost-revenue squeezes gets seriously underway with foundational damage to the prosperity and capabilities of not just Queenslanders but all Australians.