Queensland falls back with the pack

QUEENSLAND has squandered its low-tax edge and become a public-sector spendthrift, putting at risk its long-term growth potential and ability to attract investment.

QUEENSLAND has squandered its low-tax edge and become a public-sector spendthrift, putting at risk its long-term growth potential and ability to attract investment.

As the nation emerges from the global financial crisis, The Australian has found there has been a realignment in the federal economic order.

The two-track economy of the resources boom years, when the frontier riders of Queensland and Western Australia left the southern rust-belt states in their wake, is no longer in play.

The cyclical income hit from the commodity export surge was masking deep structural shifts in public finances that are now apparent in the early days of economic revival.

Export-led WA is back to its previous trajectory. Well-managed Victoria barely missed a beat. Even politically poisoned NSW is on the mend. But Queensland has lost its way, ditching the tight fiscal formula that underpinned its success for almost two decades. A former top-level Queensland bureaucrat, now an executive in the private sector, says: "The Treasury orthodoxy, the so-called trilogy of low taxes, a budget surplus and low public debt, was dismantled during the third Beattie government. Labor has become even more populist under Anna Bligh and it has splurged on health and education spending in subsequent years. Good leadership has gone out the window."

Amid the stale aroma of 150 blown-out birthday candles, the Sunshine State has forfeited its AAA credit rating and has embarked on a risky approach to get its budget back in the black.

The five-term Labor government appears legless, as coal royalties have evaporated, tourist dollars are scarce and construction work has plummeted.

Access Economics director Chris Richardson says: "In practice, the national downturn in the wake of the GFC, was a downturn on speed. Everything happened according to economic theory - but it happened very quickly. Now we're recovering rapidly. Queensland, however, has seen fewer green shoots. Housing, the traditional turbo-charger of the state's economy, and commercial construction have taken a big hit."

After posting 0.8 per cent growth in 2008-09, Queensland's worst economic performance in 18 years, the state's Treasury is forecasting a 1 per cent rise in gross state product this financial year. The state budget will not be in surplus until 2015-16.

Rather than reining in spending after its mining royalties were savaged, Anna Bligh's government is taking the tax-hike road, plus asset sales, to repair its budget bottom line.

The contentious $15 billion privatisation program, which has encountered a union-orchestrated popular backlash, could go the way of Labor's forlorn experience in NSW last year: imperilling state finances and capturing the scalp of an embattled premier.

Since January last year, Queensland has increased vehicle registration duty, transfer duty, land tax, gaming machine taxes and light vehicle registration fees. A state where tax per capita was once a mere three-quarters of the national average is pushing towards 90 per cent. During the past decade - as taxes as a share of GSP have tumbled in NSW, Victoria and WA - Queensland's ratio has drifted up to the national average.

The burden it places on its revenue base - once a point of pride - is now back with the pack.

Queensland once boasted of its low-tax status to attract workers and businesses; now it is reduced to touting "tax competitiveness".

A forthcoming study from Melbourne's Institute of Public Affairs will show that the state has again dropped down the rankings in terms of a business-friendly tax regime.

Comparisons between jurisdictions can be tricky, given that each state relies on different sources of revenue. In 2008-09, for instance, Queensland and WA each collected more than $3 billion in mining royalties. It allows them to reduce their taxation effort compared with states such as Victoria, whose mining industry is minuscule.

Using a broader measure that includes royalties sees Queensland as the top revenue-raiser (as a proportion of GSP) in the federation last financial year. This year, and the subsequent two, will see Queensland tracking alongside the national average on this measure - hardly a "competitive advantage" in attracting capital.

As well, without the help of commonwealth stimulus dollars from tropical kin Kevin Rudd and Wayne Swan, Queensland's fiscal position would be even worse. The state's revenue will get a $3.9bn boost in grants from Canberra this financial year and next.

The one-time fiscal pace-setter, with a rolled gold commitment to a prudent budget charter, is faced with a relentless population growth that is testing its planning and construction capabilities.

"Under Bligh, the recurrent bill for social spending and economic infrastructure, and the growth of the public service, is unsustainable and business is paying for it," says the former senior state bureaucrat. "The low-taxing state has become the high-taxing state.

"The wages bill is out of control and unions are exerting too much influence in the policy process. The reality is that the Queensland public sector needs to be cut back and Bligh and Treasurer Andrew Fraser show no sign of having the steel to do it."

During the past decade, the number of public servants (full-time equivalent) has grown by 39 per cent, while the number of health workers employed by the state has grown by 45 per cent. The size of the Queensland government has ballooned in recent years. Ten years ago, total spending was $17bn; this financial year, spending is forecast to be $39bn.

"The Bligh government's rhetoric is about efficiency in the public sector. But their recent spending performances would make drunken fiscal sailors blush," says Julie Novak, research fellow at IPA think tank.