Image for STATE: The mean little god of small government

If there is a theme in this year’s state budget, it is in the continuing sacrifice of essential services to the god of small government.

Peter Gutwein is perhaps the luckiest Treasurer in recent Tasmanian history. He came into office on the self-immolation of the Labor-Greens government. He has no effective opposition, either in the Parliament or in his own party.

After sixteen years in office, Labor had developed a worsening reputation for simple administrative incompetence. Then there was the brain-snap from Lara Giddings in 2011 which produced crippling budget cuts, sackings of doctors and nurses, and a recession.

But despite Labor’s problems, the new government inherited an economy which was already in strong recovery with unemployment heading down and most other indicators showing swift improvement.

And despite the unremitting rhetoric of the Liberals in opposition and in government, the state did not face a fiscal crisis. Borrowings were low, the GST was starting to produce a series of extraordinary windfalls and the private economy was expanding.

The new government had two main options.

They could proceed gently, reducing debt over time, reforming the public sector to make it work more efficiently, maintaining a level of economic stimulus to make sure the private-sector recovery continued, and rebuild the services Labor had trashed.

Or they could pursue the purely ideological goal of small government for its own sake ‒ downsizing rather than reforming the public service, further damaging essential services like health and education and pulling money out of the economy that the private sector had no prospect of replacing.

Guess which one they chose.

The fiscal program was shaped by ideological fashion and political convenience. The sackings and conflict were to occur in the first year of the four-year parliamentary term, when the old government could still be blamed for the new government’s damage.

In the second year they could declare that the ‘heavy lifting’ was over, even though the cuts would continue. Services would continue to decline but less quickly.

In the third year, we can expect some more money will be pumped into services and a few voter-friendly initiatives announced. Finally, with a massive war-chest created from budget cuts and service declines, the election will be fought with a classic program of giveaways. By then, the electorate will have forgotten the pain.

Not everything has gone according to plan. The Treasurer and his department seriously underestimated the fragility of the private sector recovery and the effect that reducing public spending so suddenly would have on growth.

The recovery began to stall late last year and the economy contracted in the December quarter. In March, Tasmania’s unemployment rate once again became the worst in the nation.

Between November last year and April this year, 5000 jobs were lost, mainly hitting part-time and casual workers. If the downturn continues, we can expect core full-time staff to suffer too.

Before we go on, let’s reflect on how the demonisation of public debt has warped the discussion. You have been told the Tasmanian government has a debt problem but take a look at the actual figures.

In 2015-15, net debt is estimated to be $252.6 million, or 4.8% of revenue. The forecast for 2018-19 is $492.9 million, or 8.7%.

In international terms, that is extraordinarily low. And any $5 billion-a-year company with that little leverage would be punished by its shareholders for failing to use debt to expand and improve the business.

This year, our borrowing costs will be just $10.8 million. And because global interest rates are so low, the Treasury will be able to roll existing debt over into lower-interest covenants. So despite the panic about rising debt, the cost of servicing that debt actually decline over the forward estimates. In fact, we earn more money interest lending our own money than we pay on our borrowings:

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Tasmania’s economic growth is not alone in its weakness. Queensland is in recession. It and Western Australia have been hit by the China slowdown and falling commodity prices. South Australia is suffering from the slow death of manufacturing and will soon suffer more. The Australian Capital Territory has been driven to the edge of recession by mass sackings in the public service. All states have been hit by chaotic federal small-government policies which have trashed business and consumer confidence, and discouraged non-mining investment from taking up the slack caused by the end of the mining boom.

But not all our problems are shared. Our own government’s contractionary policies have made a difficult situation much worse.

Tasmania now badly needs government stimulus and is getting some, but new infrastructure is being funded much less by borrowings ‒ a conventional and entirely respectable procedure ‒ than by taking GST and other money away from services like health and education. Debt has been demonised and a rush back to surplus trumps all other considerations. The social cost is huge.

The government has trumpeted ‘additional funding’ for health of $25 million a year for four years. It’s welcome in its way ‒ anything is better than nothing ‒ but it only makes up for about half of the health budget cuts outlined in the last budget and which are locked in to this one. Overall, the funding pattern is still strongly negative.

Here are the figures:

Health cuts versus additional funding ($m)

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The health system has been badly knocked about by huge cuts over the past five years, starting with Labor’s disastrous 2011 budget which got rid of 21% of doctors and 6% of nurses. Then, in the new government’s first budget last year, ward clerks and still more nurses were sacked. Repairing that damage should be a major priority.

But the government has not even begun to restore its health services. Even with the partial reversal of health cuts, the system is still going backwards and is unlikely, this year, even to keep up with increased costs.

It’s important to remember what drives cost increases in public hospitals.

First, there’s price inflation – the things we buy this year might cost a bit more next year. This is the least significant of all the major cost drivers, currently running nationally at around 2%.

Then there’s the cost of new things – drugs, machines, techniques. That’s where a lot of the increases are.

The third is the inexorable increase in demand, with more and more patients coming through the door. With a large reservoir of untreated or under-treated patients, there is no likelihood of that trend slackening. The ever-lengthening waiting lists are a window into that great pit of need.

The government is relying on the extra funding in this budget, plus the increased productivity from system reorganisation and clinical redesign, to meet these needs. They will certainly meet the first – price increases. They will struggle to meet the second – new drugs and technologies. But increased patient numbers and the level of unmet demand will continue to overwhelm the system.

The state government has the means to do more about this than it is doing. No state has enough money to run its hospitals but most of the GST money we are given because of our particular health needs will still not be spent on health. Some of that money is volatile and may go down in the future, so there is an argument for not spending all of it on recurrent items.

But most of it is rock-solid funding which will continue year after year into the future, as it always has in the past. The health needs of our older, sicker, poorer population will continue to be recognised – and funded – by the Commonwealth Grants Commission.

Within the serious fiscal constraints imposed on him, health minister Michael Ferguson is allocating the money in a rational and constructive way. But unless the Treasurer and the Premier start to accept that the failure to repair the damage done to health by themselves and their predecessors strikes at the heart of why they are in office, sick people will continue to be shut out of the care they need.

State governments exist to provide services. That’s why we employ them. If they do not make that their core priority, what are they for?