States' actions shape nation's economic outcome
Into the foreseeable future, Australian economic outcomes will be heavily shaped by circumstances faced by NSW, Victoria, Queensland and Western Australia.
Collectively these states accounted for almost $9 out of every $10 of national output last financial year. Queensland and WA have Australia's largest mineral deposits, while NSW and Victoria are our corporate and financial centres.
If any of these jurisdictions perform below their economic potential, as has been the case for NSW for the best part of a decade, the risk is that Australia's prosperity becomes compromised.
It follows that the integrity of state budgetary settings must be conducive to the attainment of strong economic growth and robust market productivity.
With the release of the NSW and Queensland budgets this week, and from WA and Victoria last month, it is possible to appraise the fiscal performance of Australia's four largest economies. Barring the notable exception of Queensland, state premiers and treasurers are breathing audible sighs of relief at having seemingly escaped the worst of the global financial crisis.
For their part, states have sought to blame the budget deficits or threadbare surpluses of recent years on the crisis, and have highlighted the adverse effect on revenue collection.
While consolidated taxation receipts fell in 2008-09 compared with the previous financial year. they accounted for less than a third of general government sector revenue. Actual total revenues received by the four states grew in every year of the decade.
An even more representative figure of changes in state revenue positions can be found by removing Commonwealth-tied .grants to and through the states, including National Partnership Payments, from the total revenue figures. This adjusted revenue amount grew by 2 per cent in 2008-09 and again the following year.
In other words, the oft-quoted states' revenue bust, in fact, failed to materialise. In 2010•11, revenue growth is expected to pick up extra pace as property markets in NSW and Victoria bubble away and mining royalty revenues escalate in WA and Queensland.
As research by the Institute of Public Affairs has indicated, the key determinant of the eroding state budget positions in recent times has been spending growth in excess of revenue inflows.
The latest budget figures are slating cuts to expenditure growth over the forward estimates, particularly in WA, but it remains to be seen if state policymakers will successfully deliver promised savings' measures in the face of heated opposition.
An ongoing worry associated with state public finances is a forecast increase in government indebtedness, particularly in Victoria.
Because states are reporting that their borrowings will be used to finance additional capital works, there are clear concerns about the pro-cyclical nature of such expenditure that may in turn fuel inflationary pressures and crowd out more efficient private sector investments. More fundamentally, it is disconcerting that states have failed to undertake reform by embedding stronger fiscal institutions that would secure long term budget sustainability.
The transition of the Queensland budget from shining light to basket case of Australian state public finances is a textbook example of the consequences of poor fiscal discipline. From the 1970s to the late 1990s, successive Queensland government budgets were developed with reference to a "fiscal trilogy" policy framework emphasising low taxes, low public debt and budget surpluses.
From that period, explicit policy decisions were made to compromise on those principles in order to lift government spending towards the national average level Government ministers regularly castigated the alleged "spending neglect" of previous conservative administrations and extolled the virtues of higher levels of expenditure.
The consequence of this change in policy stance was that annual general government spending growth reached 14 per cent compared with revenue growth of 6 per cent in one year alone.
A persistent excess spending trend eventually contributed to a turnaround from a $3.9 billion
surplus in 2004-05 to a $1.6 billion deficit in 2007-08.
The Queensland government estimates that budget surpluses will not return until 2015•16. Waiting for the cavalry of economic growth to boost revenues will be insufficient to return the state's budget to surplus in the medium term.
Now is the opportune time to renovate and strengthen state fiscal institutions, ensuring that overspending does not spill over into budget deficits if economic conditions deteriorate.
To this end, jurisdictions could investigate the feasibility of implementing caps on spending and revenue growth combined with a rule to maintain balanced budgets. Such fiscal rules could be
complemented by stronger limits on borrowing and debt levels.
Certain enforcement measures, such as rebating excess revenue collections back to taxpayers or tying the remuneration of parliamentarians to fiscal performance, could promote adherence to such rules.
Such constraints will in turn ensure that state governments live within their means, and not engage in profligate fiscal behaviour that could compromise the next phase of Australian economic growth.