Wednesday, June 9, 2010

NSW budget: Staying on target needs steady hands

So far, so good. A government on its last legs, with everything - and nothing - to lose, has delivered a responsible budget.

Of course, whether the good guys within the Keneally government can keep holding the line against crazy, panic-stricken decisions until election day is another matter.

The Treasurer, Eric Roozendaal, can - and does - boast a return to budget operating surplus two years earlier than expected, with the surplus for the coming financial year forecast to swell to $770 million and $890 million the year after.

In truth, the credit for this goes primarily to the economy itself. What went down has - predictably - come back up. If any particular politicians deserve to share the credit it is Kevin Rudd and Wayne Swan with their huge and timely fiscal stimulus (not forgetting the role of the central bankers in slashing interest rates).

Actually, the flow of federal stimulus money through the state budget has the effect of overstating the improvement in the state's budgetary position. A better measure is given by the Keneally government's annual "net borrowing" (which includes its considerable spending on capital works).

After borrowing $3.3 billion in the recession year of 2008-09, the government expects to borrow $3.8 billion in the financial year just ending, falling to $3.3 billion in the coming year and to $1.5 billion the year after.

Borrowing to finance worthwhile public infrastructure is no crime, particularly if a high proportion of the total capital spending is financed from the government's own funds, including the operating surplus.

The budget papers show that whereas only 38 per cent of the capital works program was financed from internal sources in 2008-09, this is expected to rise to almost half in the year just ending, to 57 per cent in the coming year and to more than three-quarters in the following year.

This is the justification (and explanation) for Roozendaal's claim to be "strengthening the state's balance sheet", along with the decision to use the proceeds from the sale of the Lotteries Office to reduce the government's unfunded superannuation liability.

It's just a pity the same commitment hasn't been given on the use of the proceeds from the pending sale of the electricity distribution companies and other businesses.

When you strip out the effect of federal stimulus money, total budget revenue is expected to grow at an average rate of 5.7 per cent a year over the next four years, compared with average growth in expenses of 4.7 per cent a year.

This, too, is evidence of responsible budgeting, particularly the control of spending growth. It suggests the governments better services and value plan, the announcement of which last year drew much scepticism (including from yours truly), is having some success in limiting growth in public sector wage sand controlling administrative costs.

But with a new round of wage negotiations coming up with the nurses, Kristina Keneallys pre-election nerve will be tested. Protect Labors reputation for cautious budgeting, or buy popularity with the nurses (and other government employees riding on their coat-tails) in the knowledge that, if it fails to do the trick, the bill will be left to your opponents?

The highlight of the budgets new measures is its strategy to increase the supply of new homes by reducing local councils developer charges and offering a temporary incentive for people to buy apartments off the plan.

This a welcome and generally well thought through initiative.

Unfortunately, thes ame cant be said of the decision to increase the already planned reduction in payroll tax, in response towrong-headed pressure from business lobby groups (which use their influence to favour big business at the expense of small- to medium-sized businesses)and an expedient opposition (which will see the light the momentits bum hits th eTreasury benches).

As economists never tire of trying to drum into the thick skulls of business people and politicians, the claim that payroll tax is a tax on jobs is spurious.

The same could be said of many taxes, including the goods and services tax and even income tax.

Nor does Roozendaal get a tick for his wasteful spending on investment attraction (read: competing with other states to have foreign companies play them off for a break, then setup where they were going to go anyway).