Spending growth unsustainable

Middle Australia copped a double-whammy on Wednesday. First, ratings agency Standard & Poor’s warned that government spending was putting states’ credit ratings at risk. This can lead only to higher taxes and poorer services as governments pay higher interest bills. And second, the new Selected Living Costs index for working families with mortgages was higher than the consumer price index – again. According to the Australian Bureau of Statistics, living costs for wage and salary earners was up 4 per cent on an annual basis, way more than self-funded retirees and various categories of people on welfare. Unlike the CPI, the living costs survey includes mortgages.

The best thing about the new cost-of-living index for working people is that it is better than it was – 9.6 per cent in June 2023. Yet Wednesday’s numbers are still terrible for families who pay their own way and have a home loan. These are the people who bear the burden of state government profligacy through taxes and charges and who are enduring the inflation pain caused in part by the Albanese government’s inability to understand electricity subsidies do not end price rises.

Nor is government demand on wage and salary earners’ incomes likely to improve. S&P downgraded credit ratings for the ACT, NSW and Queensland late last year but now warns what it euphemistically calls “fiscal consolidation” is necessary. The problem, it suggests, “is spending, not revenue”, with the states outlaying $212bn more than planned from 2020 to 2023.

Some, but nowhere near enough, of the spending discipline S&P wants to see can be quickly found. The new Queensland government has cancelled a pumped hydro scheme because its costs soared from $12bn to $30bn. And it has pulled $1bn to pay for construction of a green hydro plant that had more to do with optimism than economics.

There are reasons for this. A review of the state’s books last month found the operating deficit the LNP government inherited from Labor will rise from $4.9bn this financial year to $30.2bn in 2027-28. But politics gets in the way of other cuts. Premier David Crisafulli has kept the 50c fare for all public transport introduced by his predecessor, Steven Miles. It is an ominous indicator and Mr Crisafulli should consider that money is more easily borrowed than paid back without unpopular taxes, which is what is happening in Victoria, where the Labor government predicts its deficit will increase by a third to $3.6bn over the next six months, and state debt will be $155bn. A predictable response by the government is to jack up taxes on homeowners.

There will be more state taxes and charges for families with a mortgage as public service costs increase across the states. The NSW government headcount, for example, was up nearly 3 per cent last year on 2023. In Victoria, the public labour force grew from 322,000 in 2020 to an astonishing 382,000 last year. The Queensland public sector expanded from 232,000 to 258,000 full-time equivalent workers between 2020 and 2024. And the governments always want more.

In the past financial year, government employee expenses increased in a range of 10 per cent to 15 per cent in the ACT, NSW, Queensland and Tasmania. And now in NSW, Premier Chris Minns is dealing with a rail union demand for a 32 per cent pay rise over four years, a dispute closely observed by other unions. The Queensland government also faces a round of wage negotiations.

With the states employing 75 per cent of the national public sector workforce, the only way to reduce their cost is productivity reform, which their unions will always resist. In Sydney, the rail union is opposed to the new driverless metro.

The solutions to state governments’ addiction to spending and cost increases that hit workers hardest are public sector discipline and economy-growing productivity. Neither is easy and both take time – but governments must act, if only because it is in their own interests.

As Donald Trump’s re-election demonstrated, working families grow tired of paying for big government.