Reducing debt without austerity: Queensland govt strikes fair compromise

Since the surprising victory of the Labor party in the Queensland state election back in January 2015, public and media attention has focused on how the government would deal with the issue of debt.

Over the last ten years, general government debt in Queensland has increased from less than 10% of Gross State Product to 25%.

It could be argued that this is not necessarily a problem and that this level of debt is still sustainable. Nevertheless, the general perception is that Queensland has a debt problem and the government should take care of it.

In principle, a government can reduce debt by cutting expenditure and increasing taxation and/or privatising public assets. This in turn generates a budget surplus which can then be used to pay back (some) of the debt.

The problem is that in so doing, the government risks depressing the economy. Given the already weak state of the Queensland economy, a budget that contained harsh measures of fiscal consolidation would be highly undesirable.

The challenge for the Queensland Treasurer Curtis Pitt was therefore to provide some budgetary stimulus to the economy (and hence avoid unnecessary austerity measures) while at the same taking a convincing step towards reducing debt.

The solution proposed by the previous government – asset privatisation – was obviously off the table. In the months prior to the election, the Labor party had strongly opposed Newman’s long-term lease plan and the promise not to sell public assets was one of the strong points of Palaszczuk’s campaign.

Three initiatives

The budget contains a debt action plan that is expected to generate a A$9.6 billion debt reduction over the current term of office, with A$3.5 billion savings in interest rate payments.

This would be a remarkable result if it were obtained without cutting public goods and services delivery, increasing taxes, or selling assets.

Three specific saving initiatives are central to the plan of the government.

First, investment in defined benefit employer contributions for public servants will be temporarily suspended for a period of five years. At the same time, the government assured that workers’ superannuation entitlements will not change.

Second, public servants long-service leave obligations will be met on a required basis (that is, when the need arises), instead of setting money aside for future claims. This will align Queensland to standard practices in the rest of Australia.

Third, A$4.1bn of debt owed by state-owned power companies will be shifted from the government’s books to those companies’ balance sheets.

With this shift, power companies will become responsible for the payment of a higher proportion of interests on their debt. The estimated saving for the government is around A$600 million in four years

The Treasurer also announced that this is the first step of a longer-term plan to merge the existing five companies into two.

This third initiative, however, encounters two main objections.

One is that the shifting will increase the debt/revenue ratio of the power companies, which might then decide to increase the price they charge for electricity.

In fact, the current debt/revenue ratio for the five state-owned firms is around 55%, well below the standards for the energy sector. It is therefore the view of the government that the power companies will be able to absorb the increase in debt without having to raise prices.

Perhaps, a more robust objection is that the government will in the end still owe the debt that is being shifted. This is because the government owns the public companies and therefore is responsible for the payment of interest on their debt.

Savings without austerity?

The estimates of the government indicate the change in long-service leave arrangements will result in a debt pay down of A$3.4 billion.

Another debt reduction of A$2 billion can be expected from the suspension of employer superannuation contributions to the defined benefit scheme.

Added to the A$4.1 billion in debt shifted on to power companies, this gives a total debt reduction of A$9.6 billion over the government’s first term.

On paper, this is a remarkable result, achieving the debt reduction without any form of austerity. In fact, the budget also contains some significant measures on the expenditure side to support health, education and innovation, and infrastructure development.

The fear of being seen as a “high-spender” has somewhat limited the government’s ability and willingness to provide a stronger demand stimulus. But overall this budget strikes a reasonable compromise between the need to support the recovery and the pressure to reduce debt.

And perhaps, in these economic conditions, we could have not asked for more from a debutante government.

Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the multivariate piecewise linear continuous model and its applications in macroeconomics.