South Australian Budget 2018/19

Yesterday Treasurer Rob Lucas brought down the Marshall Government’s first Budget.

The Budget foreshadows a significant contraction in the SA public sector’s share of the economy, with the ratio of expenses to GDP projected to fall from a little over 18 per cent of gross state product (GSP) in 2017/18 to 16.4 per cent of GSP in 2021/22.

This outlook is actually not greatly different to what was foreshadowed in the Weatherill Government’s 2017/18 Budget: it projected a 1½ percentage point reduction in the ratio of expenditures to GDP over the three years 2017/18 to 2020/21. In fact, the 207/18 Budget had committed to an even lower level of spending by 2020/21—16.1 per cent of GDP—than is allowed for in this year’s Budget.

Treasurer Lucas says that the difference in this budget is that rather than relying on past approaches involving across the board expenditure restraint—which often could not ultimately be delivered—this Budget has more actively sought to identify and make decisions about low priority programmes to realise budgetary savings. In addition, the Government has decided that the existing savings targets for SA Health are unrealistic and it has scaled them back.

The substantial scale of the savings task becomes more apparent when one looks at forecasts of general government employment. The Budget forecasts that over the next 4 years full-time equivalent employment in the general government sector will fall by about 4,000 from its current level of about 85,500. About 1,700 of the reduction relates to the transfer of disability services to the non-government sector. The remaining 2,300 of job losses are spread across a range of areas, including the outsourcing of some correctional services functions, and the Budget makes allowance for $170 million of centrally-funded targeted voluntary separation packages in 2018/19.

The Budget plans for surpluses on the net operating balance of the general government sector this year and in each of the next 3 years for a cumulative surplus of $530 million. However, it also plans investment (in non-financial assets) of $3,689 million. As a result, there will be a net borrowing requirement of $3,159 million which will cause an increase in net debt from $5.3 billion (5.0 per cent of GSP) in mid 2018 to $8.7 billion (6.8 per cent of GSP) in 2021/22.

All of the increase in net debt over the next 4 years is attributable to investment. There is a good argument that governments should be willing to borrow to fund productive infrastructure. So long as investments made are productive, in the sense of delivering a valuable enduring service stream, the associated increase in net debt should not be regarded with alarm so long as there is capacity to service it. From this point of view we should not be alarmed about the increase in debt, but it will remain important that the Government ensures that investments made are of high quality.

The Treasurer says that the Government has inherited a budgetary “mess” from the previous Government but that in spite of this it has implemented all of its election commitments. It says that this sets it apart from instances where newly elected governments declared a financial crisis and repudiated election commitments in their first budget—and he cites the Abbott-Hockey budget of 2014 and the Rann-Foley budget of 2002. The “mess” is said to be in the form of, firstly, a failure to divulge the existence of budget shortfall in 2017/18 and, secondly, leaving $715 million of savings targets to be implemented without specifying how the savings should be implemented.

The Budget has benefited significantly from a stronger national economy. So-called “parameter and other variations” since the Mid-Year Budget Review have added $1,243 million to the operating balance over the next 3 years, with the most substantial element of this being a $966 million improvement in projected GST payments to South Australia.

The financial impacts of policy measures in the Budget can be seen by considering their impacts over the next 3-years, which are:

  • taxation initiatives—mainly relating to pre-election commitments on payroll taxes, Emergency Services Levy and land tax—cost the Budget $418 million;
  • impacts on operating expenses from new measures cost the Budget $1,659 million with some $705 million of these clawed back through new operating savings, thus leaving a net impact of $954 million; and
  • these initiatives, along with some other smaller items, cost the Budget $1,309 million.

The Budget also allocates an additional $773 million for investing activities—primarily infrastructure initiatives—over the forward estimates years. These costs are substantially offset by “parameter and other variations” which reduce investing expenditures by $604 million. The parameter variations include “reductions in provisions”, with the provisions being amounts which are held against expected investment activity that has not been scoped out well enough to be identified or committed.

A Budget typically involves a myriad of spending initiatives and this one is no exception. Broad financial aggregates provide a useful summary of budget sustainability and financial directions. But equally important is the quality of the myriad decisions taken in program areas, and in particular the effectiveness of government in ensuring that the community gets the best value possible from budget outlays, and this can never really be determined from the overarching perspective of the Budget. For example, there were question marks over the efficacy of some industry development initiatives under the previous Government and the new Government has wound some of these back. For another example there are also question marks over the merits of some new initiatives such as maintaining local police stations with low patronage and preserving “iconic” health facilities. And decisions about outsourcing need to consider not just immediate budgetary impacts but also impacts on the training of skilled workers. Getting these decisions right is where much of the hard work of public sector resource allocation lies.

In summary, this Budget was framed under the happy circumstances of significant surprises on the upside in the revenue position but with the challenging task of delivering substantial savings in operating expenses. The Government has used the revenue windfall to implement its election promises on taxation and to wind back on the savings targets especially in the health sector. It has also identified more clearly a program of infrastructure works over the forward estimates. But the remaining savings task is still substantial and it will require ongoing monitoring and refinement to minimise adverse outcomes.

The outlook for the South Australian economy is for employment growth of 1½ per cent this year but then returning to the estimated long-term trend of 1 per cent per year for the following 3 years. GSP is expected to grow at 2¼ per cent per year over the next 4 years.

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