Monday, May 4, 2009

State Budget Woes Not All self Inflicted

The Institute of Public Affairs describes itself as an independent free market think tank, and claims to have no formal affiliation with any political party, but really it has always been linked to the Liberal Party, and with what is generally considered to be right wing politics. That being the case, it is no real surprise that the Institute has produced research which it says indicates that the budgetary difficulties of State Governments in Australia are caused by their own excessive spending, rather than any fallout from the Global Financial Crisis. The Institute argues that State Governments around the nation squandered the revenue bonanza of the boom years on recurrent spending with nothing to show for it. Now that the good times are over, the States are in poor shape to handle the downturn. Obviously, with all the state governments under Labor Party control up until the recent change of government in Western Australia, there is some temptation to throw darts at an ideological enemy. But is it a valid criticism?

After a dozen years of conservative government at the Federal level, no such criticism has been leveled at the Commonwealth, despite the Howard Government spending at unprecedented levels. Now that there is a Labor Federal Government it is perhaps still to soon to blame them for the economic disaster now unfolding, although the groundwork for that is being laid with every warning about the future tax increases which will supposedly be needed to repay the debt accrued by the current stimulatory spending policy. Nevertheless, the Institute has not criticized the former Federal Government for its record spending during the boom years. So what’s different?

While it is true that the Federal Government clocked up year after year of budget surpluses, paid off all government debt, and put money aside for future needs, it also enjoyed the benefit of controlling the bulk of all tax revenue. While the States also enjoyed buoyant revenue during the good times, it was nowhere near as bountiful as the money flowing into the Commonwealth, which collects more than 80% of all tax. Although the GST is returned to the States, even that is fiddled with by a formula which deprives some States to subsidize others. At the same time the expectations of the public for services provided by the States, especially health, education and transport, have continued to grow beyond the ability of the States to keep up.

Now that the good times have come to a screeching halt, revenue is falling for all Governments. The Commonwealth has already identified a decline of $115 billion since the last budget, and next week is expected to revise that figure to show an even greater decline. For the Institute of Public Affairs to simply accuse the States of causing their own budgetary difficulties by spending too much completely overlooks the obvious fact that all revenue is plummeting, whether State or Federal. Yes, it would have been more prudent to have bigger surpluses, but in the current circumstances it would have made very little difference. Blaming the States for the current economic turmoil is a bit like telling tsunami victims that they should have built bigger levee banks. But just because the Institute is only telling half the story doesn’t mean they are completely wrong either.

It is true that State Governments, desperate to make ends meet, have spend windfall gains on recurrent expenses. It is true that State Governments have failed to adequately invest in infrastructure creation, or even in the maintenance of existing infrastructure. It is true that in the face of the downturn, State Governments are less than well equipped to deal with the fall out. It is also true that as any government goes into debt, there will be an increased cost added to the budget bottom line to service that debt, which in turn will create a need for higher revenue to come from somewhere, and the most likely source is from higher taxes. It is true that those higher taxes do add a drag to the economy, and will have an effect in slowing or delaying the recovery.

But that is the choice we are making now at both the State and the Federal level. We are borrowing from the future to help get us through the present, which is not in itself the wrong thing to do. The real question is just how much are we prepared to borrow to ease the pain now, without creating an impossible burden for the future. While State Budgets are important, it is the Federal Budget next week which is central to that question. That’s where the real decisions will be made about how long we will be paying off the credit card bill when all this is behind us.

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