NSW budget: No need for sell-off when the cost of debt is so cheap

The NSW government is the best quality in the country but it should stop selling assets to fund its huge infrastructure pipeline when it can borrow so cheaply.

Liberal Treasurer Dominic Perrottet’s fourth budget has underscored his position as the most reformist of the nation’s treasurers, juggling the largest infrastructure pipeline of any government while pursuing major tax reform of the kind others won’t touch.

If he can unshackle the biggest state from the most unfair and economically damaging tax — stamp duty, the bogey of tax reviews for at least a generation — replacing it with land tax, he’ll make the history books.

Since winning government in 2011, the Coalition has shifted the focus of government from lavishing money on public sector workers — annual expense growth has fallen by 40 per cent — to almost quadrupling annual spending on infrastructure.

The $107bn earmarked for better road, rail, education and health facilities over the next few years would be better funded, though, by more borrowing than selling government assets.

NSW has raised $60bn in recent years selling off the state’s poles and wires, ports, Snowy Hydro and the Land Titles Office. On Tuesday, the state revealed plans to sell its remaining 49 per cent share of WestConnex, and that it’s thinking about selling the state lottery and the rest of Sydney Motor Corporation too.

As the Treasurer said on Tuesday, the state can borrow for 10 years at only 1.1 per cent.

Indeed, Treasury officials could effectively walk across Martin Place and get the money from the Reserve Bank, which recently said it would create $100bn of new money to buy federal and state government bonds over the next six months.

Borrowing has never been cheaper. Yes, NSW net debt is poised to surge from about $19bn last year to $104bn by 2024, yet the annual cost of servicing the debt, 3.3 per cent of revenue, will stay roughly the same.

As a share of the state economy, net debt is poised to grow to 14 per cent, a lower level than in other states and about a third of the ratio the federal government expects by 2024.

NSW is unlikely to lose its AAA rating from the two big global agencies and it wouldn’t matter much if it did, given the parlous state of the balance sheets of most governments around the world.

The argument for privatisation is weaker if it leads to gouging of customers, as the sale of the ports and Land Titles Office have amply illustrated. It’s easier said than done to regulate natural monopolies when they have been fully privatised.

More broadly, selling income-generating government assets to fund infrastructure that doesn’t pay a financial return, such as schools or hospitals, can weaken the budget in the long run.

Shifting to a land tax should shore up the government’s credit rating too, given the revenues would be more stable than stamp duty, which tracks the gyrations of the property market.