Fiscal Squeeze on South Australia

The federal fiscal squeeze on South Australia is more than political rhetoric from the newly elected State Labor Government.

It is a diabolical problem facing all states with the Abbott Government breaking previous national partnership funding commitments in health and education. The impact is nontrivial. South Australia loses around $900m over the next four years and $5.5 billion over the decade. While this would be difficult to manage during favourable economic times, it is a nightmare when state revenue is sliding and unemployment is rising. It has understandably forced difficult decisions on the State Government. Some argue that the budgetary difficulties facing Labor are of its own making and that the problem is largely attributable to not making hard decisions in the past. This is difficult to reconcile with the fact that we are still living with the legacy of the Global Financial Crisis (GFC) and the wrecking ball on manufacturing that has been the high Australian dollar. The impact of the GFC is still playing out in South Australia with unemployment rising in response to the end of the Federal Stimulus Package, the sustained high dollar and a weaker commodity price outlook for our mineral resources. All of these flow into a decline in tax revenues to the South Australian Budget, a problem compounded by the Abbott Government’s deep cuts to health and education. Pushing home responsibility for the state’s budgetary woes to the Federal Government, Treasurer Koutsantonis has been arguing that the State Budget was one he had to present rather than one he wanted to present. How much room to move did the Weatherill Government have in framing the budget? Not much. To be fair, the Treasurer was presented with one of the most difficult budget formulation tasks of the last few decades. Not since the recessions of the 1980s and 1990s have circumstances been so difficult on the revenue side of the budget. The GFC forced a sharp decline in revenue, a problem that was compensated for over the short term through the Stimulus Package. Growth was sustained and the impacts of the GFC remained manageable, so long as the Federal Government remained willing to play the stimulus card when required. The Coalition has chosen to play the austerity card at a time when South Australia needs stimulus and revenue from the Federal Government. One thing can never be repeated enough in the current environment – sustained growth in Australia, in the face of the GFC, was not generated by austerity policies but stimulus policies. It is no accident that Australia out performed nations throughout the OECD during the great recession, which wreaked havoc in the United States and Europe. Australia has one of the lowest public debt levels in the world and an enviable record of employment growth during a period when other nations have faced catastrophically high unemployment. This could be our lot to, if austerity policies are able to take firm root in Australia. If they do, they will undermine what is left of the Australian post-war settlement – which, in simple terms, recognised that governments must intervene to ensure a fair go for all Australians, to counter unemployment, homelessness, poverty and hardship. More than this, it means governments must, on our behalf, play an active role in shaping social, economic and environmental outcomes for the common good. This is the backdrop against which the State Budget needs to be viewed. A great values struggle is taking place in Australia, one that affects us all very directly through budgetary decisions. A harsh reality must be accepted when we judge the effectiveness of state budgets. The fact is that state governments have limited policy levers available to them to affect economic and employment growth rates. Importantly, this includes constrained revenue-raising capacities, which means that the Federal Government must take increasing responsibility for funding health, education, income support and infrastructure expenditure. The former Labor Federal Government was heading in this direction but the Coalition seems hell-bent on reversing this by cutting funding to the states with the expectation that they will call for a politically unpalatable increase in the GST. This, of course, is all about cost and revenue shifting, part of the endless political game played in our frustrating system of government. The next Federal Budget is unlikely to offer any relief from the federal fiscal squeeze on state governments. The pressure will intensify, generating great and enduring hostility between the states and the Abbott Government. Labor and Liberal state governments will unite to pressure the Federal Government to reverse its cuts to health and education spending. An increasingly frustrated and angry electorate will not tolerate political intransigence by the Federal Government. The Weatherill Government has cleverly highlighted this by making blindingly clear the impact of the Federal Budget on the State Budget. Associate Professor John Spoehr is theExecutive Director of the Australian Workplace Innovation and Social Research Centre at the University of Adelaide @JohnSpoehr

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