Various newspapers described Queensland Treasurer Andrew Fraser’s budget outlook review on Friday as providing a “trigger” for an impending poll. That’s something of a misleading formulation. But the budget position does give state Labor – perhaps paradoxically – a political theme to develop and run on.
The Labor Party won’t want issues such as health, which remind voters that it’s had eleven years in office, to be central to the campaign.
Rather, the ALP will want to differentiate its economic approach from the LNP’s. Anna Bligh will be arguing that the state government is doing all it can to kickstart the slowing economy – an argument previewed by Fraser when he pointedly observed that the government had chosen to continue to borrow for infrastructure spending rather than cut its borrowing cloth to the demands of Standard and Poor’s. Jobs above all else was the message.
Graham Young’s polling for the National Forum shows infrastructure still in first place among voter concerns, but the economy rocking up the charts. There’s an obvious connection to be made between the two issues, and the Borg’s constant mantra about debt and the evils thereof boxes the LNP in and prevents them from making big ticket announcements. If they do, they’re destroying their own claims about public debt, and suggesting there’s tons of interest at the moment in public-private partnerships is hardly going to be credible in this economic climate. Labor ends up with a twin focus on the economy and leadership, and it’s hard to see this favouring the opposition. From the point of view of where governments’ political support goes when put to the test in an economic downturn, this will be an interesting campaign.
Elsewhere: Derek Barry:
Embarrassing or not, Dr Nicholas Gruen thinks the downgrading could spread to other states. Gruen is the CEO of Lateral Economics and writes for Club Troppo and is a frequent contributor to the Australian Financial Review. He told Woolly Days today that although he was not across the specific budgetary details of each government, it seems likely there will be a trend given worsening budget positions. He also defended Fraser’s position saying that now is not the time to cut back on capital works. As Gruen wrote in the AFR in September (unfortunately no link, the article is behind a paywall) “the electorate likes to see governments investing in the future. And the alternative – arbitrarily restricting investment whilst commuters nurse their resentments in traffic jams or waiting for late trains – is a political road to nowhere.”
Meanwhile UQ academic and economist John Quiggin believes that an AAA rating is overrated and rating agencies are themselves part of the problem. He says the global crisis has exposed fundamental weaknesses in the way in which ratings are determined and adjusted. According to Quiggin, the likes of Standard and Poor’s and Moody’s have suffered credibility issues in the crisis and a need a lot of improvements to restore independence and transparency. “The privileged position held by these agencies can no longer be justified,” he writes.
In any case, downgrading is not a purely Australian problem. Both Spain and Greece were downgraded earlier this year. Now the Telegraph.co.uk reports that Britain too could be stripped of its AAA rating. The Telegraph says Standard & Poor’s have indicated it might downgrade Britain’s rating because of its asset protection scheme. The scheme provides insurance for so-called “toxic debt” but the Telegraph warns the scheme leaves “the taxpayer exposed to losses on billions of pounds of bad loans made by the banks.” Yet as the article itself points out, it is very unlikely the UK Government will ever default on its debt commitments. A credit rating downgrade is clearly not the end of the world.
Nicholas Gruen thinks credit ratings should be taken seriously but governments need to take risks in tough times. That means taking on projects and debts that the private sector is now shying away from. He says that an obsession with an AAA rating now stands as an obstacle to governments playing their rightful role in dealing with the economic crisis. “There’s a dynamic to fiscal responsibility and fiscal management,” he said today. “Had the Queensland Government invested more in the easy times, it would be worth more now.”
Craig James from CommSec might feature prominently in some ALP ads. Will also be interesting to see what and when Moody’s make of the current situation.
Given the recent track record of ‘Ratings Agencies’, one wonders why they have credibility but apparently their ‘guesses’ still carry weight.
The Qld election is now impending. Is that closer or further away than imminent?
If this is the strategy, then the Opposition have two pretty obvious lines of response:
1. If Labor intends to run up debt anyway and ignore its credit rating, this will cost Queensland taxpayers as there will be an interest premium put on the cost of new borrowings;
2. They may say one thing before the election and do another after they are elected, as is the widely held view of what Morris Iemma did in NSW.
There are real limits to the degree to which state governments can run counter-cyclical policies during recessions, as they are not sovereign borrowers.
If Bligh and Fraser seriously believed they could continue to expand state government spending indefinitely as their tax base shrinks, then there would be a strong economic case for a change of government. Since I don’t actually think they do believe this, then some honesty will be needed about how to deal with the growing budget deficit.
Genuine misgivinsg about the worth of ratings agencies aside, I see one has already downgraded Qld to AA+.
In view of years of constant haranguing from every pollie and most economists under the sun about the importance of retaining AAA, I intend to stay safe because it’s highly likely the sky is about to fall.
Mark – I think Terry and Phil have a point here on the debt. Regardless of whether one thinks that countercyclical fiscal policy is a good idea in principle (and I think it is for the Commonwealth), state governments are in a worse position to raise debt at reasonable interest rates. In the current environment, with governments all around the world flooding markets with sovereign bonds, and investors highly risk averse anyway, investors are likely to demand a premium for holding non-sovereign debt. Everyone knows that because of the vertical fiscal imbalances in Australia it is harder for state governments to raise revenue efficiently. Rating agencies are in a sense besides the point – they will generated headlines for downgrading Queensland debt, but the downgrade likely reflects the greater premium that investorss would have sought anyway. That is what is happening in Europe anyway, where the premium was priced in before ratings downgrades occurred.
I don’t follow the Queensland economy closely, but I am surprised that they didn’t have a larger surplus to draw down on after a historic boom – so that might be the opposition’s best angle – but not being a Queenslander, I have no idea how these issues will play out electorally.
The best solution would probably be for the Commonwealth to use its sovereign rating to borrow in international markets and then direct enough of that to the states (in the form of a loan) so that they don’t have to borrow in international markets themselves – that way the same amount of debt is generated, but the interest rate paid on that debt will be lower. Of course, there are all sorts of complications with that and the Commonwealth would have to put conditions on such loans, together with a clear repayment schedule. I’m just thinking as I go here, but one option would be to give state governments a choice, borrow from the Commonwealth (which in turn borrows in international markets) and accept strict lending criteria, or borrow the money directly and pay the higher borrowing premium (with the risk of that premium increasing even more over the coming year(s).
“… the Borg’s constant mantra about debt and the evils thereof boxes the LNP in and prevents them from making big ticket announcements.”
Very true, Mark. And the real irony is that the LNP have already made $64.5 billion worth of promises, as evidenced by this tabled paper at the QLD Parliament website. How they plan to continue to attack the Government over debt, balance the budget and fund $64.5 billion worth of promises is beyond me. And I think most voters will think the same, whenever the election ends up being called.
h3llbee – I think that’s right, because while Terry is no doubt right about the opposition’s capacity to hone a line of attack, it may not be effective given that they don’t have a lot of credibility.
And Terry and LO – you might recall some speculation earlier in the year about the Feds allowing the states to use their auspices to create sovereign debt. I wouldn’t be at all surprised if something along those lines is a rabbit pulled out of a hat during the campaign.
Did anyone else get a letter in the mail from Can Do Campbell along the lines of “The State government is going to make you to register and microchip your dogs and cats, we tried to reason with them and make it voluntary but they insisted on making it mandatory”. Nicely timed bit of mass mailing.
Elsewhere: Derek Barry:
Herein lie the problems. Having governed Queensland for 16 of the last 19 years – a fair amount of time to make your own stamp on things – Labor has basically accepted the old Joh mantra of Queensland being a ‘low tax state’. As a result of this, and an associated reluctance to get into debt, they has relied on passive revenue growth arising from the mining boom and population growth to fund their activities. This is one reason why the infrastructure of S-E Queensland is surprisingly poor given its relatively low population density.
Little has been done during this period to develop industries that are not majorly trade-exposed or which rely on population growth to keep moving (low-value-added services). As a result Queensland is more exposed to the global economic downturn than it should be. It has also failed to develop ‘green’ industries or do much to prepare for a world where unlimited resource development is more politically constrained than was the case in the 20th century.
Don’t get me wrong. I’d rather a mediocre Labor government in Queensland than th Borg and the LNP. Bligh/Fraser also have a long way to go to reach the depths of Rees/ Roozendahl in NSW. The point is that there is no value in being polly-Anna-ish (to use a pun) about their record as economic managers of the state. It is 6/10 at best.
The real problem is not with spending on infrastructure when the economy is down, it’s spending on infrastructure that makes no sense given wider trends.
Big-ticket spending on roads and supporting coal exports, for example, misses the reality that the world is moving to a post-fossil-fuel economy. Hillary Clinton is in China to start working with the Chinese on a workable worldwide emissions reduction regime, and we are investing in the infrastructure to increase emissions.
We also need to rid ourselves of the nineteenth century mindset that all wealth derives from what you can dig out of the ground. 80% of a modern economy is services. Mining suffers booms and busts: great in good times, bad in bad times. We need to diversify the economy, not invest more in sectors that all tend to do well at the same time.
And we’re off, apparently.
http://www.news.com.au/couriermail/story/0,23739,25093194-952,00.html
“PREMIER Anna Bligh is on her way to Government House to ask Governor Penny Wensley to dissolve Parliament and will then call a general election for March 21.”
It’s on!
The visit to the governor is happening right now according to a news report I just heard.
And here’s the ABC report.
Queensland election comments can now be made on this thread:
http://larvatusprodeo.net/2009/02/23/breaking-news-anna-bligh-calls-queensland-election/