Is it really all smiles for NSW?

 

Alarm bells should ring when treasurers resort to hyperbole to describe their budget achievements. With Paul Keating in the late 1980s it was ‘bringing home the bacon’ — not long before the economy went into recession and the budget into large deficits. Now we have the New South Wales treasurer Dominic Perrottet trumpeting his 2017-18 budget as ‘the envy of the western world’.

While the state’s finances are strong and the governments of O’Farrell, Baird and Berejiklian deserve some of the credit, the Treasurer is getting carried away. He could have said more soberly and accurately that for NSW this is as good as it gets, and don’t expect it to continue this way.

What treasurers throughout the western world would find to envy in the NSW budget is the flood of revenue over the past four years that has made budgeting so much easier — a flood that owes much to the good fortune of a property boom that started in 2012.  Transfer (stamp) duty and land tax revenue combined has risen from $6 billion a year to $13 billion in 2016-17. Total budget revenue has risen by 30 per cent in just four years from $60 billion in 2012-13 to $78 billion in 2016-17.

NSW has seen this before, from 1997 to 2003, resulting in surpluses proportionately as large as they are now. Once the property cycle turned in late 2003, property-related revenue slumped and budgeting became much more difficult.

The best thing a government can do to manage a revenue boom is to avoid the temptation to spend the proceeds. They should spend as if there was no boom, and build up reserves (or reduce debt) to prepare for harder times. Politically, this becomes harder the longer the boom continues.

The O’Farrell and Baird governments did a reasonable job holding expenditure down, with growth in operating expenses averaging 4% a year in the first five years. However, there are signs the purse-strings are being loosened, with expenses growth stepping up to 5% in the current year and the budget year. The government is favouring dubious new programs such as $100-a-year voucher for sport-related expenditure for each school-age child.

The government says all is well because growth of expenses averages only 2.8% a year in the four years to 2020-21. However, this average depends on low rates of increase in the years after 2017-18, which history suggests will almost certainly be exceeded.

Just as the pace of recurrent expenditure is quickening, capital (‘infrastructure’) spending is being ramped up. This gives less cause for concern, as it is being financed by privatisation proceeds and because the capital expenditure tap is much easier to turn off than recurrent expenditure if the budget gets into trouble.

On the revenue side, the budget assumes only modest increases in the next four years. However, the concern is that the real estate market doesn’t just level off — as assumed — but crashes, and the government suddenly finds a hole of $2 billion a year or more in its sums. History suggests this could easily happen.

Robert Carling is a Senior Fellow at the Centre for Independent Studies