Ian Macdonald (Queensland, Liberal Party, Shadow Parliamentary Secretary Assisting the Leader of the Opposition in the Senate) Share this | Link to this | Hansard source

I present the report of the Select Committee on State Government Financial Management, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

by leave—I move:

That the Senate take note of the report.

First of all, I extend my and the committee’s thanks to the committee secretariat. This particular reference and this inquiry is a very technical one. I think I speak for all the committee members in saying that much of the evidence we got was of a highly technical nature. Some of us were not as well equipped to deal with that as, perhaps, others were, but the secretariat did a magnificent job. I particularly want to mention Mr Stephen Palethorpe and Mr Tim Watling and their staff for the excellent support they gave to the committee. I also thank all of those witnesses who appeared before the committee. Some travelled great distances to assist the committee with the evidence they gave. The committee is particularly grateful to witnesses.

To speak to this report properly will take more than the 10 minutes that is allowed to me today but I want to make some general comments. I will come back to the report in more detail when time permits later in the Senate’s schedule. By and large, the committee heard and I think accepted that the financial management of the relevant state governments around Australia was pretty poor. You only have to look at the New South Wales situation in recent days to give justification to that conclusion. I particularly want to thank Mr Michael Costa, the former Treasurer in New South Wales, who had a parting shot at his former government colleagues when he resigned. He indicated that stamp duty revenues had fallen by $180 million in the first two months of the financial year, the health budget had blown out by $300 million this year alone, and there was a $5 billion capital funding shortfall over the next five years causing Standard and Poor’s to warn that there was a one in three chance of New South Wales losing its AAA rating which would, in turn, raise borrowing costs by over $500 million over the forward estimates.

If you looked at the material presented to us, perhaps you would see that we have not come to such a clear conclusion as Mr Costa made available to us in his media conference. This was one of the issues that the committee found some difficulty with during its inquiry. State governments across the country put out various reports, graphs and details of their financial positions, but they are practically meaningless. One would almost think that the way they present their reports is designed to ensure that the public has no idea of the real state of play in state government finances. That is why one of the committee’s recommendations is that there should be a uniform and simple process for all state governments to report so that you can make an assessment of the financial management of particular state governments.

The GST has been a huge windfall gain for state government finances but, as I will mention in more detail later, they have in many cases squandered the money that has been received. There is evidence to back this up and it is all mentioned in the report. You might recall that part of the deal for the states was to remove a certain number of state taxes, but the committee was disappointed to learn that not all states have done that. That is set out more fully in the report.

The evidence before the committee showed that state governments have generally failed in infrastructure investment and, in recent years, when they have borrowed to try to catch up on the core infrastructure, they have in fact put upward pressure on inflation. We often hear this government saying a whole lot about inflation. I never hear them saying, though, that to a degree the state governments’ ill-timed infrastructure investment has been a real cause of rising inflation in Australia, and I am delighted that our inquiry was able to highlight that evidence. I will detail that a little later in my speech or when I have the ability at some other time.

I want to refer to particular items in the report that may be of interest. We heard that state governments, as I say, have had a major windfall with the GST but that they have not spent it well. I refer to paragraph 4.42 of the report where we detailed that, between 1996 and 2007, the number of public sector employees in the Australian government decreased by 121,700. But, over the same time, public sector employees at the state level increased by 210,700 in number. If you could say that that is because the states are giving increased service to their constituents that might be excusable, but you can pick up any newspaper in any state capital to see the huge problems that state bureaucracies are having in running hospitals, running schools or, in fact, running anything. So that money has been squandered. Also, the report highlights that, between 1996 and 2007, the amount spent by the Commonwealth government on wages increased by 12 per cent. At the same time, state governments’ wages bills increased by 95 per cent. You can just imagine what that is doing to inflation.

I note table 4.6 in the report. Again, it deals with superannuation. State governments will give you headlines and produce some figures saying that they are doing pretty well, but when you look at superannuation liabilities, which, in the main, are unfunded, you see the real position. In relation to the net debt in the general government sector, Queensland’s figures, for example—I will use my own state—show that they have not a net debt but a surplus of some $24 billion for the current financial year which will fall to a surplus of about $13 billion in 2011-12. But, if you include the unfunded superannuation, you will find that what the Queensland government told us was a surplus of $13 billion is in fact a deficit of something like $11 billion—and that is unfunded. That is the sort of financial management we heard about during the inquiry.

I have many, many examples to support my contention that the states have managed poorly, and I very much look forward to being able to advise the Senate of them. But can I just refer the Senate to page 65 of our report where we look at government business enterprises. The Productivity Commission conducted an investigation and found that over half of the government business enterprises they investigated failed to achieve a return on assets above the risk-free rate of return. Further, they found that 12 GBEs, or 14 per cent, failed to achieve a positive return on their assets and, in total, GBEs made payments to owner governments of almost $4.4 billion but poor profitability has led to inadequate returns. The evidence provided to us listed a number of government business enterprises who paid to their shareholding governments more than 100 per cent of their profits as dividends to suit the political purposes of the relevant state government owner. They are listed in the appendix 6 of the report. I am concerned at the way states have managed their finances— (Time expired)

Michael Forshaw (NSW, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak to this report and particularly to refer to the government senators minority report. Firstly, I endorse the comments of the Chair of the Senate Select Committee on State Government Financial Management, Senator Ian Macdonald, in thanking the secretariat for the work they did during the conduct of the inquiry and in putting this report together. But it is necessary to go back and look at how this select committee inquiry was established because it relates very clearly to what the purpose of this inquiry was about. We have just had that confirmed in the speech by Senator Macdonald.

This select committee inquiry was established within the first couple of days of the sitting of the new parliament following the election of the Rudd Labor government. I can recall the debate that occurred at that time, on 13 February, when the opposition came into this Senate and moved to establish three select committees—one of which is this one to look at state government financial management—with a majority of opposition senators on each of those select committees and an opposition chair.

In all of the 12 years that the Howard government was in office, not once did they ever seek to refer to the standing committees of the Senate—or to establish a select committee on—the issue of state government financial management. That is not to say they were not critical of it. I am not here today to defend state government financial management—that is their job—but not once in those 12 years did the Howard government seek to establish such a committee. And certainly not once since they gained control of the Senate, in July 2005, with a majority of coalition senators did they even seek to establish any select committee into any area. Yet on the first full day of sitting of this parliament under the new Labor government they decided they would get on the political attack straightaway, get stuck into the state governments, and they set this inquiry up.

What is interesting is that the first closing date for submissions was to be 19 March. That had to be extended. In the majority report it says that that was due to time pressures associated with the committee’s hearing program. The real reason why it had to be extended was that they received very few submissions. They had about 18 submissions, and most of their state colleagues in the oppositions had not got around to putting a submission in to attack their Labor governments. They had to be wound up, they had to be contacted and told, ‘Get your submission in,’ so the opposition could actually make something out of this inquiry. That is what happened, so the dates were extended.

We reject the assertions in this majority report that this committee was established, in a serious way, to look at state-federal government relations and state government financial management. While the majority report covers some important and interesting areas, such as specific purpose payments, the need for infrastructure spending, issues to do with financial reporting, Commonwealth-state government financial relations, local government and so on, it is essentially based on the submissions made by state oppositions—state shadow treasurers, shadow finance ministers, leaders of the opposition. You read through the report and they are referred to constantly—it is their evidence—together with that of a number of academics who supported the line that was intended to be adopted by the opposition.

I am prepared to say at the outset that there are a lot of issues of concern with state government financial management. I do not deny that. It was such a godsend for the opposition that Michael Costa had that parting flourish at his press conference and did so just in time for the opposition to take some quotes out of his press conference and put it into their report, because there would have been a big black hole in their report if Mr Costa had not entertained us with his flourish as he departed the Treasury portfolio in New South Wales.

One of the major problems of the majority report is that it fails to take account of what is happening now through the COAG process. We cover this in our minority report, where we refer to the things that are being considered in the current reform process through COAG. The number of specific purpose payments will be reduced from more than 90 to five—that has been negotiated, that has been agreed upon—in the area of health care, early years education in schools, vocational education, disabilities and housing. Secondly, as we state:

... the Commonwealth will give the States the budget flexibility they need to allocate resources where they will produce the best results. The Commonwealth will move away from the prescription of the past, and remove the input controls which inhibit State service delivery and priority setting. Instead, the focus will be on the achievement of outcomes.

Third, the Commonwealth will provide the States with more funding certainty.

There is a very interesting comment in the majority report—and like Senator Macdonald, I am going to need more time not only to deal with this report but also with the important issues that this report starts to deal with, but unfortunately, as I said, from a starting point which was clearly intended to be an attack upon state governments. It is at paragraph 2.4, where the majority report, being the opposition senators, states:

With the propensity of the Commonwealth Government in recent years to proclaim large ‘surpluses,’ one wonders why the states are not making a greater political call for ‘surplus revenue of the Commonwealth’ to be returned to them, although over the years the Commonwealth has found ways of ensuring that no true surpluses exist.

What a fascinating comment! What is being said by the opposition majority senators of this committee is that the states should have just asked for more of the Commonwealth’s money, because the Commonwealth, as we know, through the Howard years—the highest taxing government in the history of this country—racked up huge budget surpluses. We have in our minority report a table which demonstrates the level of surpluses that grew each year under the Howard-Costello budgets. These were surpluses which were often projected to be at one rate but ended up at 100 per cent, 200 per cent or more above that level—surpluses regularly in excess of $5 billion to $10 billion per year. The opposition argues that the states should have asked for more money and then obviously they would not have been in such a difficult financial position. Well, I remind the opposition, I can never recall an era when the state governments have stopped asking for more money from the Commonwealth and asking for more taxation revenue—it is just an article of faith.

What it points to is one of the other major criticisms of the opposition majority report, which is that the states failed to spend on infrastructure when they should have. I can agree with that to an extent, because the states clearly have major infrastructure problems at the moment—ageing infrastructure, much of which was put into place post-World War II, that needs to be upgraded, whether it be rail, health or whatever.

The criticism that is made by the opposition is hypocritical because the prevailing orthodoxy right through the Howard government years was to budget for a surplus and reduce government debt. That was the fiscal direction set by the Commonwealth and it was clearly the prevailing economic orthodoxy that states were expected to follow, and they did. Now they are in opposition, we have the coalition coming in here and saying: ‘The states should’ve spent more money. They should’ve borrowed money, maybe, to invest in infrastructure.’ You cannot have it both ways. If the states had spent massively in the Howard years, you would have criticised them for going into debt. Now you turn around and criticise them for not building infrastructure. (Time expired)

Sue Boyce (Queensland, Liberal Party) Share this | Link to this | Hansard source

I will speak briefly to give other members of the Senate Select Committee on State Government Financial Management the opportunity to say something. I would like to add my thanks to those of Senator Macdonald and Senator Forshaw to the secretariat, particularly Mr Palethorpe, Mr Watling and their staff, for this report.

Unlike Senator Forshaw, I am confident that this report in the years to come will make a valuable contribution to our understanding of how the states have managed their funds. It has some very, very useful information on the history of payments from the Commonwealth to the states. It contains some other extraordinarily useful graphs and tables, developed specifically for this select committee, on the way that the states have gone about accounting for their expenditure and for their assets, particularly in regard to the government business enterprise accounting procedures.

I will briefly comment on Senator Forshaw’s rather extraordinary claim that the Senate should not inquire into matters other than those that the government thinks should be the ones that get inquired into. We apparently now need the Rudd Labor government’s permission to decide on topics to inquire into. But even Senator Forshaw could not help but comment that in fact the inquiry came up with some important and interesting results; he could not get past that.

Of course Senator Forshaw could now happily bag the former Treasurer of New South Wales. But the fact remains that, even if this inquiry had happened when the Howard-Costello government was in power, the now government, the Labor Party, would still have had to produce a dissenting report. They would have had to look after their Labor mates irrespective of whether they were doing the job or not doing the job, and this report clearly points out that they were not doing the job. If this report had come down two or three months ago, I am sure the government would have been telling us what a sterling job New South Wales was doing and what a wonderful man Mr Costa was. Now that he is no longer the Treasurer, they feel safe to criticise him—when he is finally the one telling us the truth about where the big black holes are. They are not in this report but in the accounting procedures of the states.

I would also like to point out that Senator Forshaw claimed that we only had evidence from a few Liberal shadow treasurers and a couple of academics, who presumably are in Senator Macdonald’s pocket, to comment on financial management. I would have thought that perhaps Mr Derek Bazen, who is an analyst with the State Finances and Reporting Unit of Treasury, might be considered someone who is not entirely in the Liberal Party’s pocket. He talks about the need for a uniform presentation framework for the way budgets are presented. I do not think Treasury are known for their overblown language. In fact, they are known for their very measured assessments of things. Mr Bazen points out that the states do not publish their budgetary information in a uniform way; they can do it to suit their own purposes. He says:

In our monitoring of state finances we tend to rely on a uniform presentation framework, particularly because of the ability to compare what is happening between jurisdictions. But states do vary in terms of what they feel the most important fiscal indicator for their jurisdiction is, and this is why the headline measures that states report often seem a bit at odds in terms of how they present their material.

That is the very dry Treasury view of the sort of accounting that went on, which others in the report call creative accounting and even in some circumstances duplicitous, had it been used in the private sector. There is of course a lot more material in the report on infrastructure spending—the need for it, where it went and the way funding has been used by government business enterprises. But the core of this report is about the desperate need for a charter of budget honesty for the states to use in their accounting so people can be clear about what is held, what is not held and how it is being expended on behalf of the Australian taxpayers, who the opposition represents as does the government.

Helen Polley (Tasmania, Australian Labor Party) Share this | Link to this | Hansard source

I rise, too, to make a few comments in relation to the Select Committee on State Government Financial Management report. Firstly, I would like to acknowledge Steve Palethorpe and his secretariat for the work that they have done on this report and for their cooperation in putting together our minority report. I only want to make a few comments because I think Senator Forshaw more than adequately put the case for the government in response to what was without a doubt a committee that was established to target state Labor governments. It was one of a number of select committees that the opposition rammed through and was obviously designed to be more of a witch-hunt than a serious attempt to investigate financial management.

Might I say that from the outset this committee was a shameless political exercise by the opposition. That has been borne out by the comments of the two opposition senators who have already spoken. The opposition members were there to score as many political points as possible. Those of you who want to take the time to read the majority report will gather that. If the coalition had been serious, they would have recommended these issues to the relevant standing committee rather than setting up the political exercise we saw here. It is worth noting that the submission date for the committee was extended by six weeks back in March. Obviously the political motivations of the opposition behind this committee had not got the response from their state colleagues that they would have liked.

I do have some experience of financial management, having previously worked for the state Labor government of my home state of Tasmania. The Tasmanian Labor government has done a fantastic job in the last 10 years since it has been in government. It inherited an absolute mess from the previous Liberal administration when it took power. I am a bit disappointed that my opposition colleagues from Tasmania failed to ensure that there was some credit given to a state government that actually has turned the tables. It took the good management of that Labor government to rebuild the faith of the business community, to reinvest in the future of our state and to help build the prosperity that Tasmania finds itself enjoying now. Even the opposition senators from Tasmania should give credit where credit is due—although I will be surprised if they do. It is no surprise to those of us in Tasmania, though. It is a bit of a theme in Tasmania that a Labor government seems to always have to pick up the pieces and rebuild after the Liberals have mismanaged the state.

Let us just look at what Hawke and Keating did. We are doing the same here now at the federal level after the high inflation and interest rate rise legacy of the Howard government. The government senators do not support the core conclusions and recommendations of the majority report. We do not support the first three recommendations in the majority report. While we can see merit in each state and territory government considering the benefits of implementing a charter of budget honesty, it is simply not appropriate for a Senate committee to be making recommendations requiring the direct action of other sovereign parliaments.

I also find it curious that the opposition have recommended that the prospect of state income taxes be investigated—a more complex tax system! What do we get once again from this opposition? Another layer of complexity for the Australian public to deal with. They come into this chamber relentlessly espousing the importance of small business and yet here they are wanting to introduce another level of taxation on the Australian community. I seek leave to continue my remarks later.

Leave granted.

David Bushby (Tasmania, Liberal Party) Share this | Link to this | Hansard source

In the 20 seconds I have I would like to record my thanks to Senator Ian Macdonald for chairing the committee’s meetings in an excellent manner and my thanks to the secretariat. They approached this in a very thorough and professional manner. I would like to record my thanks to them and to back the remarks which have been made by Senator Boyce and Senator Macdonald.

Gary Humphries (ACT, Liberal Party) Share this | Link to this | Hansard source

Order! The time for the debate has expired.