By TCCI Chief Economist Richard Dowling

Richard Dowling

IT has now been more three months since the State Election was called and Tasmania has only had a functioning State Government for the past two weeks or so.

Some friends in business have wryly commented that far from eroding business confidence, they enjoyed the temporary nirvana of limited political interference. The fact that Tasmanian businesses and consumers continued to go about their daily lives in spite of a functional government perhaps indicates that sometimes political junkies and the media overstate the importance of politics on economic and social affairs.

All medical practitioners would be familiar with the Latin phrase Primum non nocere, meaning ‘first, do no harm’. Perhaps it would be worth our new Government and our politicians to consider this in the months and years ahead.

During the lead up the election, Premier Bartlett insisted that he was implementing a ‘back to basics’ agenda. Presumably he was talking about a renewed focus on the traditional responsibilities of state governments like health, education, police and infrastructure. A move back to core business for the Government is something that should be embraced, not least for the sake of the State Budget.

It is worth remembering that the ALP and Green parties collectively committed almost $1 billion in new spending through the election campaign.

However, the Budget cannot sustain any level of new spending and actually requires significant expenditure cuts.  Therefore, election commitments can only be implemented via savings offsets from other expenditure.

The reality is that despite a significant improvement in taxation revenue since the last Budget was handed down in June 2009, the deficits have actually become larger, even before factoring in election commitments.  The deficits have grown by $87 million despite a $686 million improvement in anticipated revenue (see graph).

In December 2008 the TCCI published the Sustaining Growth report by Professor Sinclair Davidson and Julie Novak. The report was a comprehensive review of taxation and expenditure in Tasmania. A key finding was that the Tasmanian Government was living beyond its means and the only meaningful remedy was for it to withdraw from non-core activities - in other words, get back to basics.

The next Budget will be handed down in June and will likely confirm operating deficits for another two years followed by a small surplus in 2012-13. This is potentially an optimistic scenario, because it does not factor in any net impact from the billion dollar election commitments.

The importance of returning to operating surpluses is widely under-appreciated. The operating result (the surplus or deficit figure which is normally reported by the media) only deals with what is known as recurrent expenditure. This is the ordinary or day-to-day expenditure of the Government like salary and administrative and operating expenses, including building services and maintenance and furniture and equipment purchases.

Whatever funds are surplus to the recurrent expenditures can be allocated to capital expenditure. This relates to the construction, purchase and maintenance of capital assets such as roads, public housing, schools, hospitals and equipment. It is estimated that to simply maintain our current capital stock, the Budget needs to maintain an operating surplus of at least $200 million. If the Government wants to look at building new infrastructure such as irrigation then the operating surplus needs to be even greater.

Infrastructure investment has been neglected in Tasmania over recent years. The Budget priorities are out of balance and the only way to fix this is to spend less on public sector wages so that more funds can be allocated back to economic and social infrastructure. The fact is that in recent years, 55 cents in every dollar from the $4 billion State Budget has been spent on public sector employee costs and just eight cents on infrastructure.

In short, recurrent spending is unsustainable and capital expenditure has been starved. The TCCI will be strongly advocating for a better balance in the 2010-11 Budget and beyond.