The main revisions to the estimates for 1998-99 are a $453m increase in tax revenues (taking the increase on 1997-98 to 7.7 per cent) and a $441m increase in current outlays excluding interest ie as has been the Carr Government’s wont, the above-estimate increase in tax revenue has virtually all been spent, resulting in a 6.1 per cent increase on 1997-98. This is a very large real increase in spending on services.

The estimate for capital outlays has also been revised up - by $671 m. This suggests some sensitivity to criticism of declining capital spending. But will the addition be spent?

The forward estimates for 1999-00 to 2001-02 are based on slower economic growth than forecast in the Budget. Despite this, the forecasts project a lower unemployment rate than previously (7% cf 7.25%). This seems difficult to justify.

The forecast increase in tax revenues over the next three years appears somewhat conservative.

The forecast increase in current outlays implies that spending on current services will decline in real terms. Even on the no policy change assumption used, this seems unbelievable. On the basis of the Carr Government’s previous record of high rates of growth of current spending (about 5% pa) it is clearly unachievable. Thus, the forecast surplus of $954 m in 2001-02 is simply a pipe dream and has no credibility.

The forward estimates continue the declining trend in capital outlays.

None of the reduction of $1.7 billion in general government net debt between end June 1995 and end June 1999 reflects budget results, which have actually added $474m to net debt over the period. The aim of eliminating such net debt must depend on further asset sales, including from privatisations. This seems contrary to Labor’s policy.

Latest estimates of NSW and Victorian tax revenues suggest that per head taxes in NSW will be over 17 per cent higher than in Victoria in 1998-99. This is equivalent to raising about $2billion more in taxes. Even allowing for NSW’s considerably higher capacity to raise taxes, this makes it virtually certain that NSW is now the highest taxed State. Moreover, the burden of taxes in NSW (measured by taking taxes as a proportion of GSP) is estimated at 6.7% in 1998-99 compared with Victoria’s 5.7% ie one percentage point higher.

Grants Commission data show that NSW has moved from being a below average spender in 1994-95 to an above average spender in 1997-98 while Victoria has done the opposite. Latest estimates of current spending suggest that the"gap" will widen further in 1998-99. There are many areas, particularly in transport, where NSW current spending is so far above average as to suggest significant inefficiencies and/or poor policies.

The Feb 1999 half-yearly review revises the current year budget and the forward estimates to 2001-02. The main changes, and queries, are as follows (all comments are based on figures that exclude the one-off payment of $3268 million relating to the superannuation conversion offer).

REVISED ESTIMATES FOR 1998-99

Overall Result and Capital Outlays

The estimated overall result for 1998-99 has changed little - from a surplus of $45 million to one of $2 million. This is in line with the practice which seems to have developed of adjusting estimates, particularly by reducing capital expenditure, to ensure that a responsibleoverall result is achieved. However, for 1998-99 the estimate of capital outlays has been revised up by $671 million, more than offsetting additional estimated capital receipts of $448 million. The Government may have decided that, rather than present a larger surplus, it would bolster the capital figures because it felt vulnerable to criticism for the decline in capital outlays as a proportion of GSP.

It remains to be seen whether the addition to estimated capital outlays (for which few details are given) will be spent. Further, the addition does not alter the general picture that, over the four years of the Carr Government, capital outlays have been "cut" as a proportion of GSP compared with the previous four years (see my note of 15 Jan and below).

Receipts includingTaxes

Current receipts are estimated to be $676 million higher than budget, of which taxes account for $453 million. On this basis taxes would increase by no less than 7.7 per cent in 1998-99, compared with the budget estimate of an increase of 4.2 per cent. The higher estimate is claimed to mainly reflect the faster than expected growth in the NSW economy - the GSP estimate has been increased from 3.0 to 3.5 per cent - and higher than expected Commonwealth safety net taxes.

Current Outlays

Total current outlays are estimated to be $496 million higher than budget, which implies an increase of 4.7 per cent compared with the budget estimate for an increase of only 2.4 per cent. There is no reason why faster than expected growth should lead to higher spending: if anything the opposite should occur. (Although I have not checked it, my feeling is that budget estimates of current spending have been exceeded each year). It has become the custom with the high spending Carr Government not only to increase tax rates but to spend most if not all of tax revenue in excess of estimate.

It is claimed that $216 million of 1998-99 current outlays are"one-off " transactions. Excluding these would reduce the increase to 3.7 per cent. However, every year has its one-offs. No information is given re one-offs in 1997-98.

If interest payments are excluded, the estimated increase in current outlays is $441 million more than estimated and the increase for the year jumps to 6.2 per cent.

Economic Growth and Unemployment

Reflecting a revised view of the"time profile of the Asian crisis", the estimated growth in real NSW GSP over the three years from 1998-99 to 2001-02 has been revised down from about 3.5 per cent pa to about 3.1 per cent pa. There is a similar downward adjustment in the estimated growth in employment over this three years (from 6 per cent to 5 per cent).This sits strangely with the slight improvement in the estimated unemployment rate from 7.25 per cent to 7 per cent for each of the next three years.

How is the Carr Government going to achieve such a reduction in unemployment with a slower growth in employment and in the economy than previously forecast? The rationale would have to be that it is going to reduce labour market regulation, of which there is no sign.

Taxes

The downward adjustment in forecast growth has been reflected in a downward adjustment in growth in tax revenue from about 3.5 per cent pa to about 3.1 per cent pa ie taxes are forecast to grow about in line with real GSP. Even allowing for the scheduled slight reduction in rates of payroll and land tax next financial year, this appears to be a rather conservative estimate. NSW tax revenues have been increasing significantly faster than nominal GSP under Carr. Although this faster increase would mainly reflect the increase in tax rates, and although the forward estimates (rightly) assume no policy change, tax revenues might be expected to increase somewhat faster than real GSP even without any increase in rates.

Current Outlays

The most striking feature of the forward estimates is that they assume virtually no increase in nominal current outlays between 1998-99 and 2001-02, when it is estimated that there will be a surplus of $954 million. The implication of the estimates is that spending on current services will not even keep pace with the growth in population and will decline in real terms. Even on the no policy change assumption, this seems unbelievable: if one allows for population growth of 1 per cent pa and inflation of 2 per cent pa, a growth of 3 per cent pa would be required to maintain the real value of services per head assuming no productivity improvements. The Carr Government’s high spending record certainly makes the estimates unbelievable in reality. The following contrasts the increases over the four years of the Carr Government with the estimated increases in the next three:

%Increase in current spending*                                                                                       Total        Excl Interest
1995-96	2.8	3.1
1996-97	7.8	9.9
1997-98	4.5	4.8
1998-99 est	4.7	6.2
Average incr 94-5 to 98-9	4.9	6
1999-00	-4.2	-4.8
2000-01	2.5	3.7
2001-02	2.1	2.8
Average incr 98-99 to 01-02	-	0.3
*Increase on previous year except for averages.

Capital Outlays

Leaving aside the revised estimate for 1998-99 (see above), the estimates continue the declining trend in capital outlays identified in my note of 15 Jan:

Capital Outlays-% to GSP
1991 to 1994-95 (average)	2.00
1995-96	1.83
1996-97	1.81
1997-98	1.64
1998-99 est	1.83
1995-96 to 1998-99 (Average)	1.78
1999-00 est	1.51
2000-01 est	1.43
2002-02 est	1.33

If the Carr Government had spent the same proportion of GSP on capital outlays as the Coalition did in the previous four years, it would have spent $1.7 billion more. Alternatively, the budget deficit or taxes would have been that much higher.

Debt

The Carr Government is fond of focussing on changes in net worth and net debt. It is worth noting that net debt of the general government sector is now estimated at $10.4 billion at 30 June 1999 excluding the $3.2 billion temporary borrowings resulting from the superannuation conversion offer. This compares with $12.1 billion at end June 1995. Thus, the Government has reduced net debt of the general government sector by $1.7 billion. However, the contribution of the budget to this has been negative:

Adjusted Budget in $Millions
1995-96	-151
1996-97	91
1997-98	-416
1998-99 est	2
Four years	-474

The reduction in net debt can only have come from the proceeds of asset sales. There is nothing wrong with this, of course. But how is the Carr Government going to eliminate general government debt by 2020? The above record indicates that it has not established a sustainable surplus and the forward estimates of increasing surpluses are, as noted, simply unbelievable. Thus, without further large asset sales ie privatisations, the aim of eliminating general government debt is not credible. Where are these privatisations to come from?

Taxes

The Mid-Year Review has used a different definition of State Taxes to that used in the 1998-99 Budget. Thus, the latter estimated"Taxes, Fees and Fines" at $14,000 million while the Mid year Review has a lower estimate for "State Taxes" at $13,888 million even though the breakdown given for individual taxes shows that they will be $453 million higher than estimated. It appears that the Mid Year Review has excluded fees and some levies from"State Taxes" which makes historical comparisons difficult and is contrary to the ABS definition. One cannot help feeling that this is a deliberate attempt to present as low a level of taxes as possible.

One way of analysing NSW taxes is to use the Grants Commission figures up to 1997-98 and to estimate what they would be in 1998-99 if they increase in line with the Mid-Year estimates. A similar approach cam be used for Victorian taxes.

The Grants Commission figures show that, although NSW taxes per head were over 12 per cent higher than Victorian in 1997-98, Victoria still had the most severe taxes in that year - 6.8% above average compared with NSW’s 4.7% above average. The reason for Victoria having the most severe taxes is that NSW was assessed as having a considerably greater taxable capacity ie even with the same rates of taxes NSW would raise considerably more revenue per head. Indeed, the estimates imply that NSW’s capacity to raise taxes was 14 per cent higher than Victoria’s in 1997-98.

However, using estimates for taxes for 1998-99 based on each State’s mid-year revised budget figures, the per head"gap" between NSW and Victorian taxes would increase to over 17 %. Assuming that NSW’s relative taxable capacity stayed at 14 per cent higher, that would mean that NSW would become the highest taxed State in 1998-99.

XXXXXXXXXXXXXXXX NSW Taxes xxxxxxxxxXXXXXXxxxxxVictorian Taxes
xxxxxxxxxxxxxxxxxxPer Head xx %Above xxx %Above xx Per Head xxxxxx %Above xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Standard xxx Victoria xxxxxxxxxxxxxxxxxx Standard
1994-95	1629	4.7	3.8	1569	9.7
1995-96	1659	3.4	1.8	1629	10.9
1996-97	1849	5.8	9.5	1687	6.3
1997-98	1973	4.7	12.2	1759	6.8
1998-99	2103	na	17.2	1795	na

Most important, the fact that NSW per head taxes will be about 17 per cent higher than Victorian in 1998-99 means that NSW is raising about $2billion more from its citizens than if it taxed at the same level as Victoria. Does NSW really need to impose such higher per head taxes on its citizens?

Another way of looking at NSW and Victorian taxation levels is to compare ABS tax figures, with updates for the 1998-99 estimates based on each State’s Mid-Year reviews. The following shows the steady upward trend in the NSW tax bu rden under the Carr Government and the downward trend in the Victorian tax burden since 1996-97 to the point where it is nearly one percentage point below NSW:

XXXXXX                                         NSW Taxes %GSP    Victorian Taxes %GSP
1994-95	6.19	6.06
1995-96	6.11	6.33
1996-97	6.37	6.53
1997-98	6.56	5.93
1998-99 EST	6.72	5.75

Current Outlays

Grants Commission figures show that in 1997-98 NSW moved to a spending level 1.7 per cent above average, which is equivalent to"excess" spending of about $370 million. While this may not appear to be of much significance, it needs to be interpreted against the following background.

First, in 1994-95 NSW’s spending was 1.7 per cent below average while Victoria’s was 6.0 per cent above average. By 1997-98 Victoria had reduced its spending level to 3.1 per cent below average. If NSW had been spending at Victorian levels in 1997-98 it would have spent over $1 billion less. Similarly, if NSW had been spending at Queensland levels (best practice) it would have been spending nearly $1.7 billion less.

Second, there are many specific areas where NSW is spending so far above average as to suggest that there must either be significant inefficiencies or scope for policy changes. Transport spending is a major area of"excess" spending. Following are some major areas of"excess" spending.

Average Spending Per Head
Vocational training	+21%
Transport of rural school children	+37%
Hospitals	+6%
Aged & disabled welfare	+18%
Freight concessions	+15%
Non-urban passenger transport concessions	+78%
National Parks & Wildlife	+66%
Other general public services	+33%
Primary industry	+21%
Roads	+14%
Urban transit	+52%

Third, the estimated increase of 6.2% in NSW current outlays excluding interest in 1998-99 compares with the estimated increase in Victorian current outlays excluding interest of only 1.7 per cent. This suggests that NSW spending in 1998-99 will be assessed as even further above average than in 1997-98 and that the"gap" relative to Victoria will be even wider.

Overall

The Carr Government has produced"responsible" overall budget results but has not established a sustainable surplus position. The reduction in net debt has been due to asset sales. The"responsible" overall results have been achieved within a context where NSW has become a big spending (on current services) and big taxing State and its competitive position has slipped relative to Victoria and Queensland. Capital outlays appear to have been adjusted at the margin to achieve the desired budget outcome. The reduction in capital outlays (relative to GSP) has helped achieve the"responsible" overall results.