Thursday, July 18, 2013


Institute of Public Administration Australia NSW State Conference, Sydney

The most useful contribution I can make is to talk about the general economic and budgetary environment I think you’re likely to be facing in the next few years. I don’t want to depress you, but my best guess is that it’s likely to be increasingly challenging.

For a start, the Australian economy isn’t likely to be getting a lot of help from the rest of the world. The US economy looks like it’s finally on the mend, but it’s not likely to be setting any records for growth. The Europeans are still mired in their own problems - which could easily get a lot worse - and are likely to stay a drag on the world economy for many years to come. The Japanese economy has its own problems. As for China, it’s possible it will fall in a heap as the pessimists fear, but if it did it would bounce back pretty quickly and I think it’s more likely we’ll China continuing to grow, tho at rates of 6 or 7 per cent rather than 10 or 12. All told, we won’t be getting a lot of help from abroad.

As I’m sure you’ve heard, the big issue for our economy is for a ‘rebalancing’ - we need to make a transition from mining investment-led growth to growth in the rest of the economy, particularly home building and non-mining business investment. It may be we make this engine-swap without too much of a hiatus, but it’s not clear we will, and were mining investment to fall sharply before these other sources of growth got going properly it’s not inconceivable the economy could contract. The more we see the dollar fall the more confident we can be, and it’s likely we’ll see more cuts in interest rates.

All this says it’s hard to see federal or state tax revenue growing strongly in the coming years, which will inevitably keep a lot of pressure on the spending side of federal and state budgets. The Reserve Bank is very keen to avoid a real estate boom that would cause states’ collections from conveyancing duty to grow strongly, and consumer spending is likely to grow no faster than household incomes, which isn’t likely to be rapid. Added to this we have the structural weakness in collections from the GST, which is likely to keep a lot of pressure on the premiers before, eventually, the pressure gets so great that the premiers and the prime minister do a deal and increase the rate of the tax, or widen its base, or a bit of both.

Your problem isn’t just that the ordinary natural upward pressures on the spending side of state budgets are likely to be stronger than the upward pressure on the revenue side, it’s compounded by the medium-to-longer term structural spending pressures identified by successive federal intergenerational reports. It suits the politicians to portray this problem as the ageing of the population. If that were true, there wouldn’t be a lot for premiers to worry about. Unfortunately, the real problem is the irresistible pressure for very strongly growing health spending arising from expensive advances in medical technology - meaning it’s very much a problem for the premiers and well as the feds. When the states did their own intergenerational exercises a decade ago they found that hospital spending had the potential to take over their budgets in coming decades and I doubt anything’s changed. That says the health department will be under intensifying pressure to control cost growth, but its nonetheless rapid growth will keep pressure on every other state spending category.

One bit of good news is that, between the states, it’s now NSW’s turn to be among the faster growers, with Queensland and WA much harder hit by the downturn in mining investment. Another point worth remembering is that, tho the pressure to limit staff numbers and annual pay rises will remain, much of the strong growth in spending during the previous Labor government’s term went into correcting the long-running deficiency in public sector wage rates relative to private sector rates.

There HAVE to be better, more cost-effective ways to deliver the services the state government is responsible for delivering without great loss of quality - which is fortunate because the pressure on you guys to find those ways will only intensify in the next few years. If you’re planning to stick around my advice is to accept that reality and get on with finding those ways rather than thinking that if you drag your feet for long enough the brighter fiscal days will return. That makes it fortunate this conference is addressing itself to this challenge.