Queensland: perfect one day, broke the next

Queensland always had a reputation for being a fiscally conservative state. In 2003-04, Queensland’s general government debt was only $2.7 billion and the debt held by the government owned corporations was just above $10 billion.

General government debt is now close to $50 billion and another $30 billion is held by the GOCs. That’s over $17,000 for every man, women and child in Queensland.

The Queensland opposition’s Fiscal Strategy isn’t so much a strategy for paying back debt, but a recipe for a Fiscal Magic Pudding.

It is designed to prove that Labor has a plan, while justifying its opportunistic opposition to asset leases and keeping key public sector unions happy. But electors should not take it seriously.

To start with, it double counts income, proposing to direct already committed dividends to repaying debt. If it is going to repay debt, where is the money going to come from for already committed programs as well as the promises Labor is making to increase spending in other areas?

Either promises will be broken, cuts made or taxes raised. If the document were serious, these possibilities would be detailed.

It also relies on the unlikely proposition that the opposition, should it be elected to government, will run surpluses in each of the next 10 years amounting to $12.142 bn.

There hasn’t been a budget surplus in Queensland for 10 years under the Bligh, and now the Newman governments, and this year’s projected surplus is a tenuous $188m.

So impossible was the situation, the last Bligh government itself privatised $18 bn worth of assets. But here’s the thing – the debt continued to rise because Labor, in government, found it impossible to rein in spending.

Labor’s plan doesn’t address the issue of whether the government should be in these businesses or not.

At a time when Labor is spruiking “new green industries” it seems quaint that they are proposing to fund Queensland’s future using what is effectively a geared sovereign wealth fund based on legacy assets in only one industry subject to environmental and financial risk.

Ironically, the Queensland government will be one of the biggest carbon emitters in the country.

If your investment advisor suggested you should put all your eggs into the one high risk basket and borrow heavily to do so, you should probably call the corporate cops, because they could be another Storm Financial.

But this is the course that local Labor is “seriously” suggesting that Queensland take – and without any attempt to look at alternative returns that might be available, or the risks that they are undertaking.

Labor also has an extraordinarily optimistic view of the course of dividends from the GOCs. Treasury, by contrast, regards the dividend flow to be highly uncertain and subject to potentially unmanageable risks, particularly given the concentration of the assets in electricity.

If Labor were serious about government running investments to pay back government debt, then it would set up a structure like the QIC or the Future Fund, have transparent arms-length management and reporting, targeted returns and a conservative attitude to portfolio risk.

What they wouldn’t do is hold on to assets, just because they are the assets they hold now.

With capital markets the way they are, it is likely that, second rate as these assets are, they would find a buyer at top dollar who would be prepared to back their ability to make the organisations more flexible and efficient and get a good return in their investment.

They can also do this whilst reducing costs for consumers. Queensland, with government owned power, has some of the highest bills in the country, higher than states like Victoria with privatised power generation.

The sale of Medibank Private at the top range of estimates shows just how hungry capital markets are at the moment.

The opposition also discounts the flexibility they would gain by paying down debt now in the event that another financial crisis were to occur.

As the biggest per capita debtor state in the country Queensland is dangerously exposed if lending conditions tighten.

And as the government is demonstrating, there are alternative community investments, such as transport infrastructure, which some of the funds raised from privatisation can fund.

In reality, Labor’s plan to repay the enormous government debt will not work. There is no way that two thirds of dividends can be quarantined while running operating surpluses. And bear in mind, there is absolutely no scope to make needed investments in the state other than by raising more debt.

Higher taxes might be part of the mix but that would kill the growth prospects that Labor is so keen to promote.

The end result would be taxpayers left holding unprofitable assets, paying much higher taxes for the privilege and with debt again on the ascendant.

Judith Sloan is contributing economics editor, The Australian, an honorary professorial fellow at the University of Melbourne and a member of the AIP Professorial Advisory Board..An edited version of this article was published in the Courier Mail.

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