My Independent Review of Tasmania’s State Finances was submitted to the Premier of Tasmania, the Hon. Jeremy Rockliff MP, and the three Parliamentary Members of the Jacqui Lambie Network, Ms Miriam Beswick MP, Mr Andrew Jenner MP and Ms Rebekah Pentland MP, on 19th August 2024. Here is a copy of the full Report, and a slideshow summary of its principal findings and recommendations.

Report of the Independent Review of Tasmania's State Finances

 

Independent Review of Tasmania's State Finances - Slide summary

 

Following is the Executive Summary of the Report.

Since the beginning of European settlement more than two centuries ago, government has always played a major role in the Tasmanian economy and in the lives of Tasmanians. The State Government and its instrumentalities account for a larger share of economic activity and employment in Tasmania than in any other part of Australia (with the exception, in some instances, of the Northern Territory); and a larger proportion of Tasmania’s population than of any other state look to the State Government for services that play a vital role in their lives.

The Tasmanian Government’s capacity to meet the expectations which Tasmanians have of it is crucially dependent on its financial position. That doesn’t mean that it should never resort to borrowing to meet some of its expenditure commitments, or that all of the debt which it has at any particular point in time must be repaid by some stipulated later point in time. However it does mean that its financial position should be sustainable – that is, that it should be able to maintain its spending, tax and other policy settings indefinitely without the need for major remedial policy changes.

Sustainability, in this sense, builds confidence among businesses, community groups and individuals that they won’t be suddenly hit with big tax increases, or reductions in funding or services on which they depend, in turn enabling them to plan and arrange their affairs with greater surety. Fiscal sustainability also helps to promote intergenerational equity, by reducing the likelihood that one generation has to pay for the fiscal mistakes of another. Conversely, a protracted failure to ensure fiscal sustainability almost inevitably leads to a fiscal crisis – which in turn increases the risk of political and social instability, and long-term adverse economic consequences.

Fiscal sustainability is arguably more important for Tasmania, given that its long-term economic performance has been consistently poorer than that of any other state or territory – a reflection of persistently below-average participation in employment (and in particular full-time employment) and below-average productivity. One reason why so little has been done to remedy that sub-par economic performance may be that individual Tasmanians are sheltered from many of its consequences by the operation of the national taxation and social security systems. Similarly, the Tasmanian Government is partially shielded from the same consequences by the long-standing system of ‘horizontal fiscal equalization’, whereby Tasmania receives a much larger share of funding from the Federal Government than would be the case if that funding were distributed among the states and territories on an ‘equal per capita’ basis.

Tasmania’s public sector finances have deteriorated significantly since the latter part of the 2010s – despite a noticeable improvement in Tasmania’s economic fortunes, by many metrics, relative to the rest of Australia between about 2016-17 and 2021-22. That deterioration, best evidenced by the shift in all of the principal measures of the government’s budget ‘bottom line’ from balance or surplus in the mid-2010s to persistent and (for the most part) growing deficits since 2018-19, and the government  shift from net creditor throughout the 2010s to a net debtor from 2020-21 onwards.

These trends were partly attributable to the Covid-19 pandemic, and more recently to the need to provide for compensation payments to survivors of child sexual abuse in State institutions. But they began before the onset of the pandemic, and have continued after it.

Drawing on publicly available information, the Review finds that the deterioration in the financial position of Tasmania’s ‘general government sector’ – that is, state government departments and agencies funded primarily by taxation revenue or grants from the Federal Government – over the past decade is entirely attributable to ‘policy decisions’ by government (to increase ‘operating’ or recurrent expenses, and spending on infrastructure projects, and to a lesser extent to reduce taxes). By contrast, ‘parameter variations’ – the effects of factors beyond the control or influence of any state government (such as unforeseen changes in economic activity or employment, or decisions made by the Federal Government) – have, more often than not, had a favourable impact on the government’s finances.

Information publicly available prior to and during the election campaign unambiguously indicates that the financial position of Tasmania’s general government sector will deteriorate further over the next three years (that is, to 2026-27), and that this will be compounded by a deterioration in the financial position of Tasmania’s non-financial corporations (government business enterprises).

Indeed, based on publicly available information, by some metrics – in particular, the cash balance and net financial liabilities of the state non-financial public sector as a whole, relative to the size of the state’s economy – Tasmania’s financial position will become worse than that of any other state or territory (including Victoria and the Northern Territory) over the next three years.

The Review was astonished to discover that the Tasmanian Treasury does not prepare ten-year projections of the principal indicators of the State’s financial position, other than as part of the five-yearly Financial Stability Reports, the last of which was published in 2021, and the next not due until 2026. In order to fulfil its Terms of Reference, the Review has therefore undertaken these projections itself – with more limited resources and less time than the Treasury has every five years, but with the invaluable assistance of the Australian Parliamentary Budget Office.

These projections – made using assumptions similar to those which Treasury has used in previous Financial Stability Reviews – indicate that, in the absence of corrective policy actions, the financial position of Tasmania’s general government sector will worsen further over the next decade, with

• cash deficits averaging almost $1.3 billion per annum and totalling $12.7 billion over the ten years to 2034-35,
• net debt rising to over $16 billion (equivalent to more than 25% of gross state product) by the end of the 2034-35 financial year, and
• interest payments rising from about $250 million in 2024-25 to $730 million in 2034-35 (or from about 2¼% to 6% of total revenues) over that period.

Such an outcome would almost certainly result in Tasmania’s credit rating being downgraded, probably by more than one ‘notch’, if it were allowed to happen.

This should not come as a surprise. Since 2016, the Department of Treasury and Finance has repeatedly warned (in its Fiscal Sustainability Reports) of the risks to the sustainability of Tasmania’s fiscal position in the absence of corrective action (including reform of Tasmania’s taxation system), of the risks associated with taking such action later rather than sooner, and of the impossibility of relying on economic growth alone to maintain fiscal sustainability. Yet these warnings have gone unheeded, not just by the government of the day, but by all of the major participants in  Tasmania’s political process, including during the campaign for the most recent State election.

Returning Tasmania’s public finances to a sustainable position – and no less importantly, keeping them there – represents a substantial and, the Review readily acknowledges, politically challenging, task. It is one which is unlikely to be achieved during the life of the present Parliament.

It is, therefore, one which should, ideally, command in-principle support across the political spectrum. Among other things this would help to instil confidence that the return to fiscal sustainability will not be derailed by changes of government – even if there will inevitably be (as is to be expected in a democracy) differences of opinion as to how best to achieve that objective.

The Review proposes that the government, and all other political parties, commit to achieving a series of fiscal targets over the next four to ten years – including

• a return to an ‘underlying’ net operating surplus within four years;
• achievement and maintenance of an overall fiscal surplus over the following five-ten years;
• reducing the ratios of net debt and net financial liabilities to gross state product to below the corresponding averages for all states and territories; reducing the ratio of interest payments plus defined superannuation benefit payments to less than 7% of revenues within five years; and
• increasing the ratio of ‘own-source’ to total revenues to its long-term average of 37% within the next ten years, with a longer-term goal of increasing it to 40%.

Ideally, these objectives should be incorporated into the Charter of Budget Responsibility Act.

The Review believes that it would be both difficult and undesirable for a large proportion of the task of returning Tasmania’s public finances to a sustainable condition to be undertaken through reductions in ‘operating’ expenses.

That’s partly because, based on assessments made by the Commonwealth Grants Commission (as part of its annual determination of GST revenue shares), Tasmania has in recent years been spending about $530 million per annum less than it needs to in order to provide services similar to the average level and efficiency of all states and territories, whilst raising around $170 million less in state taxes and $42 million less in mineral royalties per annum than it would if its tax and mineral royalty regimes were similar to the average of all states and territories.

It also reflects a judgement that cutting ‘operating’ expenses would have a bigger adverse impact on the Tasmanian economy, and on the most needy or vulnerable Tasmanians, than raising revenues by an equivalent amount, bearing in mind that state taxes paid by businesses are deductible against federal company tax, and at least part of any increase in state taxes paid by individuals would be absorbed by lower saving.

The Government should, of course, be evaluating the efficiency and effectiveness of individual spending programs as part of its ongoing management of the budget – and there would appear to be ample opportunities for improving both the efficiency and effectiveness of current spending in areas such as health and education.

But the Review considers that ‘efficiency dividends’ and ‘vacancy control’ are very poor means of achieving meaningful and lasting expenditure savings.

By contrast, the Review considers that there are a number of options which should be considered in order to raise additional revenue, with a view to returning Tasmania’s finances to a sustainable position. Specifically, the Review recommends that the Government consider some or all of the following:

• broadening the base of payroll tax by lowering the existing tax-free threshold (which is the highest of any state and which the Review considers has done little or nothing to boost employment), with a longer-term aim of lowering the rate of payroll tax (which is the highest of any state);
• over the longer term, abolishing stamp duty and replacing it with a broadly-based land tax (including owner-occupied residential property) with an appropriate tax-free threshold, provision for asset-rich but income-poor landowners to defer land tax payments as a charge against their estate, and transitional provisions to avoid ‘double taxation’ of recent property purchasers);
• ahead of a ‘land tax for stamp duty’ switch, imposing a modest surcharge on municipal rates on residential property similar to the existing fire and waste levies;
• extending the surcharges on stamp duty and land tax payable by foreign investors in residential real estate introduced in recent years to mainland-based investors in established residential real estate (with an exemption for new builds);
• increasing motor vehicle registration fees, and duty on the purchase of expensive new motor vehicles (with appropriate concessions for pensioners and other low-income earners) to levels more commensurate with other states and territories; and
• increasing mineral royalties to levels more commensurate with other states and territories.

The Review recommends that the Government explore options for moving the now relatively small number of public sector employees who are members of defined benefit superannuation schemes which were closed in the late 1990s to defined contribution schemes of which the vast majority of current public and private sector employees are members.

The Review notes that, based on currently available Forward Estimates, Tasmania will over the next three years (and probably beyond) be running the largest public sector infrastructure program, relative to the size of its economy, of any state or territory – and questions whether Tasmania can afford to do this.

The Review instead recommends that the Government should as part of the annual Budget process, determine, based on Treasury advice, how much it can afford to spend on infrastructure having regard to both the requirements of fiscal sustainability and the capacity of the Tasmanian construction industry, both over the following ten years and in each of those years.  After having done so, it should then determine which projects are to be financed by ranking them according to robust estimates of their social and economic benefits relative to their costs – rather than, as appears to have been the case, arriving at an infrastructure spending program via a ‘bottom-up’ process.

The fact that Tasmania has found itself in an unsustainable fiscal position for the third time in less than four decades (following the previous episodes in the early 1990s and early 2010s) suggests that Tasmania needs stronger institutions and more robust rules around the management of its public sector finances.

In particular, the challenge of returning Tasmania’s public finances to a sustainable condition over the next five-ten years will require Treasury to be better resourced than it has been over the past decade, and a greater willingness on the part of the Government to seek, and pay heed to, its advice than appears to have been evident over this period.

While there are some respects in which Tasmania’s annual Budget Papers offer more comprehensive information than those of other states and territories (or indeed those of the Federal Government), there are others in which there is scope for improvement, which would assist in promoting greater public awareness and understanding of Tasmania’s public finances and hence in restoring and maintaining fiscal sustainability. In particular, the Budget Papers and the mid-year Revised Estimates Report should include:

• more comprehensive and detailed analysis of recent developments in and the outlook for the Tasmanian economy;
• ten-year projections of key fiscal aggregates;
• more long-term historical fiscal data;
• tables and data underpinning charts in excel spreadsheet form; and
• a more detailed and quantified Statement of Risks

The Review recommends that the Revised Estimates Report should be brought forward from February to December, in line with other states and territories and the Federal Mid-Year Economic and Fiscal Outlook.

The Review considers that the Charter of Budget Responsibility Act should be amended to remove the requirement that political parties present “fiscal objectives and targets for the budget year and the following three financial years” during election campaigns, and to require instead that political parties indicate how they propose to pay for their expenditure or revenue commitments, or (alternatively) to state explicitly that they will pay for those commitments by running smaller budget surpluses or larger deficits.

It also recommends that political parties be required to publish their election costing statements at least nine days before polling day, rather than  on the Friday afternoon before polling day (long after a growing proportion of voters have cast their ballots) as has become the ‘norm’ at recent elections.

In order to enhance the capacity of the Parliament to comprehend and discuss fiscal issues, and to formulate policies which will have an impact on the Budget, the Review recommends that Tasmania follow the Federal Parliament, and the Parliaments of New South Wales and Victoria, in establishing a Parliamentary Budget Office.

Finally, the Review notes that other states and territories have in recent years implemented measures to enhance the independence of their Audit Offices, and recommends that the Parliamentary Public Accounts Committee investigate and report on how to enhance the independence of the Tasmanian Audit Office in order to bring it into line with ‘best practice’ in other jurisdictions.

In total, the Review has made 26 recommendations, which are set out at the end of Chapter 6 (pages 104-106) and Chapter 7 (pages 119-120).