AS the holiday season draws to a close, spare a thought for Treasurer Kevin Foley as he begins work in earnest on the State Budget for the next financial year. Many of the difficulties the budget will face are self-imposed, but as the season of goodwill is not too far behind us we can surely still be charitable, for the Treasurer faces some unique pressures.

Foley has set the bar high in pursuit of financial credibility and the goal of restoring the State’s “triple A” credit rating, with a target to achieve, on average, balanced accrual budgets with zero net borrowing over the next four years. He also aims to reduce net debt by over $1 billion by 2007; this means all expenditure will have to be matched by revenue, available cash surpluses will go to reducing debt and more savings will need to be found to fund policy commitments and any new initiatives.

However, as far as the media is concerned, Treasury is awash with cash. Certainly the Government’s Mid-Year Budget Review shows that the property boom and a fired-up economy has delivered a financial bonus by way of increased stamp duties, land tax, payroll taxes and even gaming revenue. The review indicates a steady improvement in the State’s financial bottom line over the next few years, particularly as estimates of GST revenue have been revised up significantly and will start flowing to SA much earlier than expected.

So far the Treasurer has stuck to the line that he is putting the money away for when times get harder. He is particularly not interested in spending it on programs that will result in ongoing recurrent costs.

The politically difficult task for the Treasurer is to convince the electorate through the filter of an increasingly aggressive and populist media that using surplus cash to reduce debt is the right strategy. At the same time he has to manage the pressure from Cabinet colleagues to broaden the agenda – and he has to deal with the anxieties of Caucus and the broader Labor Party that fiscal rectitude may be defined in voter land as “uncaring government”. Adding to the mix are the public sector unions who have the potential to become quite feral in pursuit of their wage claims.

The stakes are quite high. This is the last Budget before the nervousness of an election year adds new pressures and new constraints. If the Treasurer gets the balance right he’ll set the scene for continued momentum to that election, and he will get the “State Bank debt” and financial mismanagement monkey off Labor’s back for good. If he gets it wrong, he sets the scene for a grumbling electorate, a baying media and a restless Caucus.

This balancing act will unfold during the mind-numbing grind of “budget bi-laterals” – a series of meetings in which ministers and their public servants sit opposite the Treasurer and Treasury officials exhaustively reviewing each minister’s proposed spending.

Treasury will have already ranked each item either A, B or C; there will be scant hope that anything alphabetically lower than B will see the light of day but, nevertheless, every initiative, each bid for more funds is scrutinised, as are the savings offered up by the Minister and, inevitably, the further savings identified by Treasury.

The Government – like all governments in recent years – will wrestle with the inherent inflexibility of the Budget, which is mostly committed to existing programs before the process even begins. The Budget is also heavily weighed towards paying wages and salaries; health and education account for about 50 per cent of expenditure, from which 60 per cent goes to pay wages and salaries.

The impact of this inflexibility is felt during public sector wage negotiations. For instance, if public sector unions won their current six per cent wage claim, the Treasurer would require $219 million to cover the cost.

THE bi-laterals will also be informed by opposing views on what SA should spend to provide its citizens with services appropriate to their needs. The media will fuel one view with suggestions of “crisis” and an apparent determination to see government spend more money – inconvenient for it to acknowledge the difference between a cash surplus driven by unusual events, and a final result calculated on an accrual basis.

The Commonwealth Grants Commission will present a more sobering assessment through its five-yearly review of the formula for distributing national tax revenue to the states. Its report in March will determine the basis for the distribution of the “untied” grants from the Commonwealth for the next five years – totalling about 33 per cent of state revenue.
The commission’s methodology is based on the principle of horizontal fiscal equalisation. This means that smaller states, such as SA, get a greater share than they would if Commonwealth grants were distributed on a simple per-capita basis.

SA was delivered an extra $636 million in 2002-3, while NSW and Victoria were worse off by $1.4 billion and $1 billion respectively. Both these states continue to campaign vigorously for the abandonment of the equalisation principle. Luckily for SA there is no sign they will succeed.

Nevertheless, a small change in the relativities between the states can have a devastating effect on the Budget. The Treasurer is budgeting for a reduction in SA’s share, though indications suggest it will not be a crippling decrease. However, SA cannot expect the commission to support its lifestyle by way of increased government expenditure.

A key element of the commission’s methodology is that each state should be given the capacity to provide an average standard of public services. The aim is that Australians should have access to broadly the same quality of services, regardless of where they live on the continent.

The difficulty for those who want extra spending is that, according to the commission, SA already spends significantly more than the “standardised” expenditure across most areas of government.

In 2001-2002, SA expenditure on education was assessed by the commission as being $331 million or 18.6 per cent above the standard. In health, they estimate the figure as $254 million or 15.8 per cent above. Law, order and public safety is $117 million (19.3 per cent above), culture and recreation $111 million (63.1 per cent above) and general public services $105 million (43 per cent above). It may be that where SA spends significantly more, we enjoy superior services compared to other states, or we are less- efficient service providers, or there are peculiar factors related to population distribution. It is probably a combination of all three, although few would argue that services are dramatically better here than in other States.

However, while the grants commission does not penalise states for exceeding the standard, it does not assist them to maintain higher levels of expenditure. It assumes states will find a way to pay for it themselves – or fix inefficient delivery of services.
Politicians have played their part by calling forth a flood tide of rising expectations at election time, and successive oppositions have been content to benefit from the collateral damage done to governments by a populist media.

To correct the problem will take either a massive bi-partisan effort or a government with a massive majority. Bi-partisanship would appear to be totally at odds with the way politics is currently practiced, and when a massive majority occurred in 1993 it was squandered.
In the meantime, Kevin Foley does a political balancing act on the fiscal high wire.