RAJ REPORT

Curtis Pitt should worry about the credit rating then a recession————Strong growth in operating revenues and a relatively modest capital program in the General Government sector allowed for the delivery of substantial operating surpluses and minimal borrowing requirements for a number of years in the early 2000s. However, from around 2006-07 onwards, the Government moved to significantly boost recurrent expenditure levels and increase capital spending

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Page 56 Queensland Commission of Audit Interim Report June 2012 Page 7 Strong growth in operating revenues and a relatively modest capital program in the General Government sector allowed for the delivery of substantial operating surpluses and minimal borrowing requirements for a number of years in the early 2000s. However, from around 2006-07 onwards, the Government moved to significantly boost recurrent expenditure levels and increase capital spending. As consecutive budgets continued to forecast operating surpluses, the fiscal principles did not act as a meaningful constraint on either increased recurrent or capital expenditure. Strong revenue growth continued into 2007-08 (which was the peak of the Queensland property market) and, to some extent, 2008-09 with a tripling of coking coal prices driving royalties growth. This offset weakness in state taxation and GST from an operating balance perspective. However, during 2008-09, the outlook for the State’s revenues across the forward estimates period deteriorated significantly as the impact of the global financial crisis on the domestic and global economy materialised. Chart 4.2 below shows trends in the fiscal balance and operating balance over the past ten years, as well as projections to 2015-16. Prior to 2006-07, significant operating surpluses and fiscal surpluses were recorded in the General Government sector. However, the two measures began to diverge from around 2003-04 as capital spending accelerated, with significant fiscal deficits emerging from 2007-08 onwards. In 2008-09, for example, the State recorded a small ($35 million) operating surplus, but there was a fiscal deficit of $4.4 billion. While the operating position provides an indication of the State’s balance of revenues and recurrent expenditure, it is a weaker surplus target, and provides only a partial picture of the State’s overall financial position. In particular, it does not provide a comprehensive measure of the State’s borrowing requirements and consequent impacts on the balance sheet. Chart 4.2 General Government fiscal balance and operating balance Source: Treasury -10,000 -8,000 -6,000 -4,000 -2,000 0 2,000 4,000 2000-01 2003-04 2006-07 2009-10 2012-13 2015-16 $ million Fiscal balance Operating balance Actual Projection Previous Fiscal Principles 4. Queensland Commission of Audit Interim Report June 2012 Page 57 Page 7 Strong growth in operating revenues and a relatively modest capital program in the General Government sector allowed for the delivery of substantial operating surpluses and minimal borrowing requirements for a number of years in the early 2000s. However, from around 2006-07 onwards, the Government moved to significantly boost recurrent expenditure levels and increase capital spending. As consecutive budgets continued to forecast operating surpluses, the fiscal principles did not act as a meaningful constraint on either increased recurrent or capital expenditure. Strong revenue growth continued into 2007-08 (which was the peak of the Queensland property market) and, to some extent, 2008-09 with a tripling of coking coal prices driving royalties growth. This offset weakness in state taxation and GST from an operating balance perspective. However, during 2008-09, the outlook for the State’s revenues across the forward estimates period deteriorated significantly as the impact of the global financial crisis on the domestic and global economy materialised. Chart 4.2 below shows trends in the fiscal balance and operating balance over the past ten years, as well as projections to 2015-16. Prior to 2006-07, significant operating surpluses and fiscal surpluses were recorded in the General Government sector. However, the two measures began to diverge from around 2003-04 as capital spending accelerated, with significant fiscal deficits emerging from 2007-08 onwards. In 2008-09, for example, the State recorded a small ($35 million) operating surplus, but there was a fiscal deficit of $4.4 billion. While the operating position provides an indication of the State’s balance of revenues and recurrent expenditure, it is a weaker surplus target, and provides only a partial picture of the State’s overall financial position. In particular, it does not provide a comprehensive measure of the State’s borrowing requirements and consequent impacts on the balance sheet. Chart 4.2 General Government fiscal balance and operating balance Source: Treasury -10,000 -8,000 -6,000 -4,000 -2,000 0 2,000 4,000 2000-01 2003-04 2006-07 2009-10 2012-13 2015-16 $ million Fiscal balance Operating balance Actual Projection Page 8 In February 2009, the Government released an Economic and Fiscal Update (the Update), prepared on a ‘no policy change’ basis, which forecast General Government operating deficits across the forward estimates of around $3 billion per year. While the Update indicated that future budgets would seek to return the State to an operating surplus, the Government also indicated that it intended to maintain a record capital program, and by implication would require a significant increase in borrowings for the foreseeable future. Standard and Poor’s Ratings Services downgraded Queensland’s credit rating from AAA to AA+ almost immediately after the Update was released. In its Research Update accompanying the downgrade, Standard and Poor’s stated6 : “The state’s capital program is substantial. Given the significant decline in operating revenue as a result of a weakening economic environment and the state’s commitment to its large capital program, Queensland’s balance sheet is unlikely to remain consistent with a ‘AAA’ rating.” 4.5. CHARTER OF FISCAL RESPONSIBILITY A revised set of fiscal principles was established in the 2009-10 Budget, which was designed to restore the State’s strong financial position over time, while also providing greater restraint around growth in both expenditure and borrowings. The revised fiscal principles formed part of the new Charter of Fiscal Responsibility (replacing the previous Charter), which was a requirement of the new Financial Accountability Act 2009. The revised fiscal principles, which the Treasurer is required to regularly report on, are based around three themes7 : “Fiscal Sustainability  In the General Government sector, meet all operating expenses from operating revenue (where operating revenue is defined as total revenue from transactions and operating expenses are defined as total expenses from transactions less depreciation)  Growth in own-purpose expenses in the General Government sector to not exceed real per capita growth  Achieve a General Government net operating surplus as soon as possible, but no later than 2015-16 Competitive Tax Regime  Maintain a competitive environment for business Managing the State’s Balance Sheet  Stabilise net financial liabilities as a proportion of revenue in the Non-financial Public Sector  Target full funding of long-term liabilities such as superannuation in accordance with actuarial advice”.

 

 

 

 

 

 

The yearly bill went up a staggering $200 million overnight after Queensland’s AAA credit rating was downgraded to AA+ as the economic crisis deepened.

 

 

 

 

 

www.commissionofaudit.qld.gov.au/reports/interim-report-previous-fiscal-principles.pdf.

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