State governments have lost will to cut spending

NSW, the nation’s biggest state financially, has talked a big game on budget restraint but fallen short of the sorts of measures needed to help the Reserve Bank of Australia board with its inflation challenge.

This said, when compared with what has been happening in neighbouring jurisdictions NSW Treasurer Daniel Mookhey has been positively modest, but the state’s finances still end up in the red. The Minns government’s second budget delivers a deficit of $3.6bn despite windfall income from property taxes.

Government spending is up by around $6bn a year for each year across the forward estimates from what was forecast in last year’s budget. Mr Mookhey tried to shift the blame for the poor bottom line to the federal government because NSW will receive a less than expected share of GST receipts.

This excuse was easily debunked because it relied on Treasury assumptions that the NSW share of GST would remain constant when there was no reason to ever believe this would be the case. As Judith Sloan wrote on Tuesday, the-not-worse-off clause included in the politically driven revised West Australian GST deal means that agreement cannot be blamed either for the NSW outcome, which Mr Mookhey said had cost the state $12bn.

The reality is a $475m surplus forecast in the half-yearly review in December last year has become a deficit, and the budget is expected to stay in deficit across the forward estimates. More important is how the funds that are received are spent. The budget contained handouts to some electricity users, families and essential workers but the largesse was constrained, unlike the pre-election giveaways in Queensland and Labor’s profligate efforts in Victoria.

The common theme is a higher public sector wages bill. The state is fully deploying higher tax revenue into $12bn of new government services, public sector wages and new housing. There is little evidence of cost-benefit analysis to determine whether taxpayers are getting good value for their money. And nothing to show that a leaner public service would not be able to deliver the same or better service.

It is a measure of political reality that the big budget focus was firmly on housing, with more than $6bn earmarked for affordable and social housing. As with all government interventions, the proof of the pudding will be in how many houses can be delivered. The government has adopted the insidious measure of removing indexation from the land tax threshold, above which tax will be levied.

Like bracket creep, this will ensure more and more investors are caught in the land tax net across time. The government already is forecasting a revenue windfall of close to $12bn across the forward estimates, mainly arising from property taxes.

The slide in fiscal prudence is something shared by all states. In NSW, net debt rises from close to $100bn in 2023-24 to $139bn in 2027-28. Gross debt hits close to $200bn at the end of the forward estimates, having been only $29bn in 2011-12. This compares with the smaller neighbouring state of Victoria, which is expecting net debt of $190bn by mid-2027 that will account for more than one-fifth of the state’s output.

To the north in Queensland, despite roaring revenues from coal, pre-election giveaways mean net debt increases nearly 400 per cent by 2027 and gross debt tops $170bn.

State governments, like the federal government, have lost the will to manage their budgets efficiently. This heaps only more pressure on the RBA, which has warned that big-spending government budgets are making its job more difficult.