Monday, November 10, 2008

Last Roll Of The Dice For NSW Government

Twas the night before the New South Wales Mini Budget, and all through the house not a creature was stirring, not even a louse…. Er, I mean politician. Sadly, this is no fairy tale, and the taxpayers of New South Wales ought not expect much from the Government in the way of gifts. This mini budget was announced by a Government with a massive shortfall in its revenue even before the true extent of the Global Financial Crisis became known.

Confronted with the failure of the plan to privatise electricity, there was really no choice but to revise the budget. The problem is that while the economic downturn is depriving the budget of revenue, any commensurate reduction of spending will inevitably contribute to the downward drag on the economy. Even worse than that is the very real prospect that any reduction in spending will also result in a reduction in services.

It has already been revealed that the Government intends to cut $500 million from the health budget, even though the Health Department is already indebt and struggling to pay its bills. Services are already being cut with bed numbers reduced and specialist wards closed to try to make ends meet. Even if $500 million in savings could be found in the bureaucracy of the Health Department, that money would be better spent on boosting actually medical services rather than disappearing back into the budget bottom line.

Equally, the plan to increase property taxes might sound like a Robin Hood measure to tax the wealthy to help the poor (New South Wales Government), but if the disastrous experience of the exit stamp duty experiment is any indication, there’s a good chance that what little property market investment remains will be killed off.

In New South Wales, the construction industry is supposed to be one of the prime economic drivers, and as such should be a prime candidate for a boost. Of course, it is property and transaction taxes which provide a significant percentage of Government revenue, so it might seem like a good idea to increase them to help boost the budget bottom line. But if there are no transactions, there is no revenue. Cutting property and transaction taxes, on the other hand, should help to stimulate the sector, producing increased activity and therefore increased tax revenue.

With GST revenue also falling because of the economic slowdown, there is a valid argument to suggest that the Commonwealth should do something to bolster State revenue. No relief can be expected on that front for two reasons. First, the Commonwealth has its hands full with its own problems. Second, given the record of mismanagement in New South Wales, it is unlikely the Commonwealth would trust them with the money. Right now, the New South Wales Government is on its own.

This is that last roll of the dice for the New South Wales Government. It is their last chance to rescue their political fortunes. Unfortunately the combination of their own mismanagement and the impact of the wider economic crisis has left them ill equipped to do so. Instead, it appears that they will act to prop up the budget bottom line rather than the State’s economy. If that’s the case, it will be another victory for short sighted thinking over the long term prosperity of the State.

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