Looming revenue pressures will challenge State Governments

The media usually portrays each new Government budget in terms of immediate winners and losers, highlighting the complaints of a few of the most vocal interest groups. With this heightened focus on winners and losers, it can be easy to lose sight of the bigger picture.

Australia’s system of government is supposed to fund activities and infrastructure by sharing the burden across our society. Significant government revenue is raised at a federal level, then distributed to states to enable them to deliver their core services.

In NSW, the Fiscal Responsibility Act 2012 (FRA 2012) adds a layer of discipline (and complexity) to NSW state budgets. It sets fiscal policy targets that are intended to limit annual growth in general NSW government expenses to less than the long-term average of government revenue growth of the State, while also targeting the elimination of the NSW unfunded superannuation liability by 2030. In other words, expenses should be lower than revenue, and expenses should grow (on average) at a slower rate than revenue.

Perhaps most interestingly, FRA 2012 states that a key guiding principle is “achieving intergenerational equity”. It essentially achieves this by saying that budget measures need to be analysed based on both today’s financial impact, and the potential financial impact on future generations. Underlying this principle is the belief that this will stop governments from using debt to fund the cost of today’s services.

After the recent July 2019 cuts to interest rates by the Reserve Bank, and the rapid approval of new Federal tax cuts, it should be crystal clear to many business leaders that the economy is on shaky ground. There is likely to be serious pain for many Australian businesses during the second half of 2019.

Australia’s domestic economy has been slowing rapidly. Fortunately, the Federal government seems to realise that serious economic measures are required to avoid a hard landing for the economy.

Commonwealth funding is falling as a share of total revenue

The NSW Treasury forecasts in the 2019/2020 budget indicate weak growth for the NSW economy in the short term, and long-term State revenue problems ahead. The longer term issues appear to be caused by Federal tax settings and Australia’s rapidly ageing population demographics.

As the NSW Budget Papers describe the situation, the long-term revenue shortfall is well known, and while that shortfall isn’t being made worse, it also isn’t getting any better.

The 2016 Intergenerational Report highlighted that if current trends continue, a widening fiscal gap will emerge where expenditure would exceed revenues resulting in a fiscal gap of 3.4 per cent of GSP by 2055-56.

There is no change to the fiscal gap as a result of measures in this Budget. Savings initiatives such as reducing expenditure to reflect recent machinery of government changes allow the Government to invest in new services and infrastructure for the NSW community without further impacting long-term fiscal sustainability.

It will certainly be challenging for government leaders to balance these revenue and budgetary pressures, while facing a large future shortfall.

Unfortunately, that challenge is likely to grow. Demographic projections from the Australian Bureau of Statistics show a concurrent increase in the proportion of citizens over 65 years of age. This ageing of the population will potentially lead to greatly increased demand for a wide range of state delivered government services.