Thursday, June 08, 2006

A return to debt

As he rose to his feet to deliver the 12th Budget of the NSW State Labor Government, Treasurer Michael Costa’s opening words said it all:

"Today, I present the first State Budget of the Iemma Labor Government."

Labor was not just distancing itself from its earlier 11 Budgets, it was repudiating them.

As well it might.

Bob Carr and his assorted Treasurers were proud of cutting their Government’s debt, each and every year. They even adopted the elimination of government debt as a government policy.

Within months of taking on the job, back in 1995, Bob Carr’s first Treasurer Michael Egan declared that, ‘the ultimate long-term fiscal objective is the elimination of general government net debt by the year 2020.’

It is a statement that must have puzzled virtually every businessperson who heard it. It would certainly puzzle executives of the Macquarie Bank for whom Bob Carr now works.

No well-run business of any size aims to be debt free... To do so means to not fully exploit the balance sheet, and to avoid achieving the most you can, given the resources that you have.

In order to cut government debt for a decade the Carr Government starved its hospitals, schools, railways and other services of the money they needed to expand or replace the buildings and equipment they had.
It is a policy that made Carr and Egan look good, for a while. It took some years for the NSW railway system to collapse and for cracks to appear in the operations of our hospitals, schools and outfits such as the Department of Family and Community Services.

That is not to say there weren’t some pockets of massive capital spending — for example, on Olympic-standard sports facilities that now barely pay their way. The replacement program for hospital and schools was wound back further in order to make room.

And that is not to say that there wasn’t new government-induced borrowing within the State. The NSW Government sold many of its buildings, only to lease them back. The private sector was more than happy to borrow the money to buy them.

The Government asked private partners to build its roads in return for tolls and all sorts of other concessions not made public at the time, and those private partners were more than happy to borrow in order to do so.

It is a strategy that would have worked beautifully for the Carr-Egan Labor Government had it not stayed in office so long. It would have had left office with a (false) image as a prudent financial manager, and its successors would have inherited the resultant crises in health, education, transport, electricity, and so on.

As it is, Bob Carr’s political skills in winning elections have ensured that Labor itself has inherited the wells it poisoned. (But not Carr and Egan themselves — each having resigned.)

Now, the Labor Government’s only chance of survival is to repudiate its modus operandi of the last 10 years. That’s why, last night, it announced a record $10 billion program of spending on infrastructure — in just the first year. Over four years, it’ll spend more than $40 billion.

The new Treasurer Michael Costa devoted five pages of his Budget speech to listing the by-now urgent priorities his Government has belatedly decided to fund. It reads like an indictment.

One of Bob Carr’s predecessors as Premier, Nick Greiner had it right. He said that State Governments were essentially businesses. Their customers (their citizens) employ them to provide services. It the Government stuffs up — by, for instance, allowing services to run down — it gets booted out.

The new NSW Treasurer seems belatedly determined to run his operation in a more businesslike manner.

He says his Budget ‘ leverages the State’s sound balance sheet to invest for the future.’

What’s the bet that goal of eliminating government debt by 2020 has been quietly shelved?

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