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How the states measure up

Robert Carling | 18 February 2011

Fiscal management attracts a lot of attention at the Commonwealth level but less so at the state level. Even though large budget deficits in recent years have driven up Commonwealth debt, the Commonwealth’s debt burden at the end of 2009–10 was still smaller (as a percent of revenue) than that of any state. This is one of the findings of Tax, Borrow, Spend: How the States Compare, a new CIS report that evaluates and compares the recent performance of the states in fiscal management.

Fiscal management isn't everything; it says nothing, for example, about the quality or efficiency of government services or how much taxpayer money is wasted. But sound fiscal management is an essential platform for efficient delivery of quality services and a stable climate conducive to private investment.

My assessment is based on a limited government perspective, which takes the view that lower levels of government spending, taxation and debt are desirable. The study looks at the latest positions and trends over time in indicators such as debt, other financial liabilities such as unfunded superannuation, government spending, public sector job numbers, and taxation.

Broadly speaking, none of the Australian states is in poor financial condition. They all have the prized triple-A credit rating except Queensland and Tasmania, and even their rating of AA+ would be the envy of many comparable sub-national governments in other countries. However, there are clear differences, with Victoria and Western Australia in the best positions in 2009–10 and Queensland and South Australia the worst. This status represents a remarkable turnaround for Queensland, which once boasted of negative net debt and claimed with justification to be the 'low tax state.' Now Victoria and Western Australia are the lowest taxing states and South Australia and NSW the highest, with Queensland just average.

The overall trend in state finances over the last three years has been one of deterioration driven by strong growth in recurrent and capital spending in addition to losses on financial assets inflicted by the global financial crisis. The latter may self-correct over time, but the strong growth in spending will need to be actively curbed if the trend deterioration is not to continue.

Robert Carling is a Senior Fellow at The Centre for Independent Studies. His report Tax, Borrow, Spend: How the States Compare was released by the CIS this week.