Another time bomb left behind by a politically & fiscally incompetent current member of the World Wide Speakers Group and sometime Liberal MP for Cook, Scott John Morrison

 

Then Prime Minster Scott Morrison & Treasurer Josh Frydenberg - political mates and housemates before the Liberal-Nationals Coalition sank the ship of state. IMAGE: The Australian, 26 August 2020

 

On 5 July 2018 then Australian Treasurer & Liberal MP for Cook Scott Morrison unveiled his plan to overhaul the Goods & Services Tax (GST) state distribution scheme.

This involved changes which ‘would protect all taxpayers, update the grants commission process and deliver certainty to States and Territories. “This problem has been kicked down the road for too long and it is time we now got on and fixed it,” he said. “A fair and sustainable transition to a new equalisation standard will be ensured, through an additional, direct, and permanent Commonwealth boost to the pool of funds to be distributed among the States."

By 12 November 2018 the Australian Coalition Government now lead by Prime Minister Morrison introduced Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of GST) Bill 2018 which was duly passed by Parliament and became law on 29 November 2018.

On 25 February 2019 Treasurer John Frydenberg put his signature to this contentious document.

Thus a political and fiscal time bomb with a relatively long fuse was activated…...

The Age, 14 November 2022, p.3:

A deal put in place to placate Western Australia when its share of GST revenue was tumbling is on track to cost the nation's taxpayers 10 times more than forecast, helping drive up federal government debt and interest payments to record levels.

Originally pulled together by then-treasurer Scott Morrison in 2018 before being put through parliament by his successor, Josh Frydenberg, the deal that expected to cost $2.3 billion is now on track to cost more than $24 billion. [my yellow highlighting]

WA, which delivered four seats to Labor at the May election on the back of a 10.6 per cent swing, is vowing to fight to keep the arrangement, due to expire in 2026-27.

Morrison struck the deal at a time when WA's share of the tax pool had fallen to an all-time low of 30 cents for every dollar of GST raised within the state. Its iron ore royalties were effectively being redistributed among the other states and territories based on a Commonwealth Grants Commission formula that takes into account each state's revenue sources and expenses.

Under Morrison's deal, from 2022-23 WA must receive a minimum of 70 cents in the dollar before increasing to 75 cents in 2024-25. When the policy was put in place, it was expected iron ore prices would fall and WA's share of the GST pool would therefore rise. Instead, prices have soared.

The Morrison government ensured other states and territories wouldn't be worse off, which requires the top-up funding for the deal to come from outside the $82.5 billion GST pool.

It was originally forecast to cost federal taxpayers $2.3 billion over three years, including just $293 million in 2021-22, but the surge in iron ore prices has meant more top-ups and for longer.

The October budget revealed that last year, the deal cost $2.1 billion and is forecast to jump to $4.2 billion this financial year. By 2025-26, the cost of the entire deal is on track to reach $22.5 billion, with another $2-3 billion likely the year after that.

Throughout the entire period, the budget is expected to be in deficit, forcing the extra cash to be borrowed. In percentage terms, the blowout in cost is larger than the NDIS, aged care, health or defence.

Independent economist Chris Richardson said the deal had been ill-conceived from the beginning with the cost to be borne by future taxpayers.

He said all significant spending programs needed to be properly assessed, including the GST deal.

"Yes, the politics of it are difficult. But we have a whole host of other issues, like the NDIS, and the economics of them have to be dealt with," he said…….

The extra borrowing for the GST deal has contributed to the lift in gross debt, which on Friday reached a record $909.4 billion.

Treasurer Jim Chalmers said the cost of servicing the debt was getting more expensive and was the budget's fastest-growing expense. [my yellow highlighting]

"Since Premier Dominic Perrottet was appointed NSW treasurer in January 2017, he has presided over an unprecedented, $106 billion surge in taxpayer debt" and "has been systematically misleading" NSW voters about how he created this multi-billion dollar debt mountain

What the Premier is telling the people of New South Wales

We have transformed our state - and we will keep transforming it.

We are going to build our way forward.#SMHInfrastructure

— Dom Perrottet (@Dom_Perrottet) May 31, 2022

Another perspective on the "transformation of our state" 

From the pen of Financial Review contributing editor, Christopher Joye, @cjoye, Portfolio Manager & Chief Investment Officer at Coolabah Capital…...

Live Wire, 25 June 2022:

In the AFR I write that after 12 years of Liberal leadership, encompassing four premiers and four treasurers, NSW is sadly degenerating into one of the worst run states in Australia.

Since Premier Dominic Perrottet was appointed NSW treasurer in January 2017, he has presided over an unprecedented, $106 billion surge in taxpayer debt. That means Perrottet and his fierce internal rival, Treasurer Matt Kean, will have saddled NSW residents with $13,000 of extra debt per person. One day, that debt has to be repaid.

If the annual interest rates on this debt converge to current levels around 4.2 per cent, NSW taxpayers will be paying almost $7 billion a year in interest alone. Put differently, NSW residents will be spending the equivalent of seven new hospitals each year in interest.

It is ironic that supposedly imprudent Labor leaders are running rings around NSW, with resource-rich states like Western Australia and Queensland reporting budget surpluses, which has allowed them to slash debt issuance as the economy rebounds post pandemic. Even Victoria is starting to look more fiscally conservative. In the coming financial year, NSW will issue twice as much debt as Queensland, one-third more than Victoria, and about six times more than Western Australia. It is also more than quadrupling South Australia’s debt supply.

In a desperate attempt to cling to power, Treasurer Matt Kean has blown a $7.1 billion improvement in NSW's budget with $8.8 billion in new spending next financial year alone. This means that NSW will issue almost $10 billion more debt in the 2023 financial year than it did in 2022 when the budget was smashed by COVID-19. Perrottet and Kean are literally stealing from future generations to bribe the current one to allow them to remain in power.

While some of this debt was unavoidable due to the pandemic, Perrottet’s government increasingly resembles a degenerate gambler, addicted to spending money they don't have.

As a lender to the state, my worry is that that this tale of mismanagement gets worse. It turns out that Perrottet’s government has been systematically misleading taxpayers. The 39 year old Premier promotes himself as the great "asset recycler". Perrottet claims he is selling taxpayer-owned infrastructure to invest this money in new infrastructure….

But this was untrue. Instead of funding new infrastructure, Perrottet took $7 billion of the $9.3 billion in WestConnex proceeds and put it in a speculative investment vehicle called the NSW Generations Fund (NGF). Technically, the money was actually allocated to a subsidiary fund inside the NGF called the Debt Retirement Fund.

Since 2018, not a single cent of the $7 billion has been used to pay for infrastructure. It has instead been gambled on stocks and illiquid junk bonds, amongst other risky assets. Amazingly, this has involved lending money to Russia ($75 million), Saudi Arabia ($45 million), China ($225 million), UAE ($15 million), Cayman Islands ($30 million) and Angola ($15 million).

Perrottet might have actually helped build President Vladimir Putin’s new palace rather than NSW roads, schools or hospitals. (After we expressly warned this was nuts last year, NSW has had to write-off $30 million of the money it lent to Russia.)…. [my yellow highlighting]

Yet in 2022, NSW taxpayer’s $7 billion still sits in the NGF. It is still invested in listed equities, private equity, and junk bonds. And it has lost money in 2022 (as it did in 2020) as markets have tumbled. In fact, since its 2018 inception, the NGF has now formally failed to meet its own performance benchmark of a return in excess of inflation plus 4.5 per cent.

The question is who benefits from this scheme? Who has a vested interest in it? Unsurprisingly, it is the folks punting the money. That is, TCorp. The NGF represents about 15 per cent of TCorp’s assets. Former Perpetual CEO David Deverall, who runs TCorp, has been desperate to turn it into a global asset manager, and aggressively grow its capital.

While TCorp blames NSW Treasury for the now-discarded plan for NSW to issue tens of billions in extra debt to enable TCorp to speculate on markets, the truth is that TCorp are the ones who directly benefit. Across TCorp’s 180 staff, the average compensation cost in 2021 was a staggering $323,000 per person. That is almost double the average pay of the RBA’s 1,300 plus employees.

The NGF is currently worth $15 billion, partly because it has been bolstered by the asinine decision to divert billions of NSW taxpayer royalties and income to it, and due to a debt-funded transfer of more than $2 billion to the NGF in 2020, despite the NSW budget being in record deficit.

This revenue had to be replaced with extra NSW debt, which explicitly contradicts the legislated objectives of the Debt Retirement Fund. These focus on three goals: maintaining NSW’s AAA rating, which Perrottet lost in 2020; reducing the cost of NSW borrowing, which has soared; and repaying NSW debt.

After widespread criticism last year, NSW suddenly stopped diverting taxpayer revenue to the NGF and then belatedly committed to using $11 billion from the sale of the second-half of WestConnex in 2021 to repay taxpayer debt.

Yet Perrottet and Treasurer Kean still refuse to invest the original $7 billion from the sale of the first half of WestConnex in 2018 into the infrastructure they promised. They also refuse to use this money, and the NGF’s remaining (partially debt-funded) $8 billion, to meet the Debt Retirement Fund’s legislated mission of repaying taxpayer debt.

We can quantify the cost of this madness: Perrottet and Kean would rather NSW taxpayers spend $630 million a year in extra interest on the $15 billion in new debt they will issue next year (but could have avoided) just to allow their TCorp pals to gamble this money on markets…..

Our interest in this matter is that as a fund manager, we lend money to all Australian states, including NSW. And we expect them to behave ethically from an ESG (specifically the “g” or governance) perspective. The huge ESG conflict of interest at the heart of the NGF—whereby NSW taxpayers have to pay $630 million a year in extra interest to allow TCorp to continue to punt their money—is unacceptable to all stakeholders.

Kean says he cares about ESG concerns. Time will tell if this is actually true.

Read the full article here.

Ahead of the week's Budget 2022-23 announcements, a brief look at how the federal government remains afloat

Budget Papers 2022-23 are expected to be presented to the Australian Parliament this sitting week.

This budget - like all other Morrison budgets since 2016 - comes with a background of increasing public debt. This fourth Morrison-Frydenberg budget can be no different, whatever clever accounting tricks are employed.

Financial Review, excerpt, 9 February 2022:

Commonwealth budgets and mid-year reviews have been ramping up spending, right up to the last mid-year review in December. As a result, spending in 2023/24 is estimated to be $41 billion higher than when it was first estimated in 2020. This increase has little to do with the pandemic.

The fiscal outlook is further clouded by the approach of a federal election. In recent weeks, the Prime Minister has been out and about sprinkling more fiscal largesse, which sits uneasily with his Treasurer’s “lines in the sand”.

Australian Office of Financial Management, Annual Report 2020-21 Financial Statements excerpt, 25 October 2021:

The cost and risk of the debt portfolio is managed through debt issuance and (where appropriate) investment activities. Since early 2009, budget deficits have required debt issuance volumes that have exceeded those necessary to maintain liquidity in Treasury Bond and Treasury Bond futures markets, affording the AOFM with a greater level of flexibility in setting its issuance program. In recent years the AOFM has lengthened the duration of its Treasury Bond portfolio through longer term issuance as a means of reducing refinancing risk and the variability of debt servicing costs over time.

Australian Office of Financial Management, 2021-22 Issuance Program, 7 January 2022:

This notice provides updated details of planned issuance of Australian Government Securities by the Australian Office of Financial Management (AOFM) for the remainder of 2021-22.

At MYEFO the AOFM indicated planned Treasury Bond issuance of around $105 billion (of which $44.3 billion has been completed). Two tenders will be conducted most weeks. A new November 2033 Treasury Bond will be issued by syndication in the final quarter of 2021-22 (subject to market conditions).

Planned issuance of Treasury Indexed Bonds is $5-5.5 billion (of which $4.1 billion has been completed). Two tenders will be held most months.

Regular issuance of Treasury Notes will continue. Weekly issuance volumes will depend on the timing and size of government receipts and outlays and the AOFM’s assessment of its cash portfolio requirements.

Details of weekly transactions will be announced at midday on the preceding Friday.

As at 28 February 2022 the total of Commonwealth borrowings liability was $859,702,529,974 (calculated in Australian dollars). That is an eyewatering amount of billions in anyone's language.

Two Treasury Bond tenders and a Treasury Note tender with a combined value of $2.8 billion were announced on Friday, 25 March 2022.

The next tender for the issue of Treasury Indexed Bonds is planned to be held on Tuesday, 12 April 2022.

Commonwealth gross debt has been rising since the Global Financial Crisis, but in the last three and a half years as the country lurched though mega bushfires, pandemic, catastrophic flooding and a significant loss of export market share in China, the Morrison Government budget papers have been exercises in hopeful fiction. Next Tuesday night's budget papers might possibly be accompanied by glittering unicorns.

With the 2020-21 national budget deficit now standing at $134.2 billion Morrison & Frydenberg wield the financial razor – and it’s no surprise that COVID-19 support payments are first in line to be trimmed

 

The Final Budget Outcome 2020–21 was released on 30 September 2021 showing a general government sector 2020-21 budget underlying cash balance deficit of $134.2 billion and a net public debt of $592.2 billion which is 6.5% of Australia’s Gross Domestic Product (GDP) for the last financial year.

Given that Morrison & Co are positioning the Coalition for a second ‘presidential style’ federal election the immediate reaction was to fall back on a favourite Scott Morrison tactic as Treasurer and then Prime Minister – impose support payment cuts that would impact most heavily on low income individuals and households.

Australian Treasurer & Liberal MP for Kooyong Josh Frydenberg, media release, 29 September 2021:

COVID-19 Disaster Payment

Joint media release with

Senator the Hon Bridget McKenzie

Minister for Emergency Management and National Recovery and Resilience

Minister for Regionalisation, Regional Communications and Regional Education

The temporary COVID-19 Disaster Payment has supported around 2 million Australians with over $9 billion in payments made since it was announced in June this year.

Under the payment, eligible recipients have received $750 per week if they lost over 20 hours of work, $450 per week if they lost between 8 and 20 hours and $200 per week for those on income support payments who lost over 8 hours of work.

As part of our economic recovery plan, the temporary payment will begin to transition once a state or territory reaches 70 per cent full vaccination of its population (16 years and older) in line with the movement into Phase B of the National Plan agreed to at National Cabinet.

Once a state or territory reaches 70 per cent full vaccination, the automatic renewal of the temporary payment will end and individuals will have to reapply each week that a Commonwealth Hotspot remains in place to confirm their eligibility.

In line with the movement into Phase C of the National Plan, where a Commonwealth Hotspot remains in place and a state or territory reaches 80 per cent full vaccination of its population (16 years and older), the temporary payment will step down over a period of two weeks before ending.

In the first week after a state or territory has reached 80 per cent vaccination there will be a flat payment of $450 for those who have lost more than 8 hours of work, while those on income support will receive $100.

In the second week, the payment will be bought into line with JobSeeker at $320 for the week for those who have lost more than 8 hours of work, while the payment will end for those on income support.

For those who haven’t already returned to the workforce following the end of the temporary payment as the economy opens up, the social security system will support eligible individuals back into work.

The Government will also leave in place the Pandemic Leave Disaster Payment until 30 June 2022.

Since the start of the pandemic the Morrison Government has provided $291 billion in direct economic support to households and businesses. [my yellow highlighting]

Note

The Pandemic Leave Disaster Payment program provides financial support if you can't earn an income because you must self-isolate or quarantine, or are caring for someone with COVID-19.

Where Australia's finances stand ahead of the convening of the 46th federal parliament

Given that Australian Prime Minister Scott ‘liar from the shire’ Morrison has already signalled that he does not intend to allow truth to interfere with his political rhetoric – describing truth telling as verballing that he “won’t be allowing to happen” – now is perhaps the time to remind ourselves of the truth about the nation’s finances under Morrison & Co ahead of the commencement of the 46th Parliament.

According to the Dept. of Finance the Morrison Government’s Assets and Liabilities as at 31 March 2019 (12 days out from the start of the 2019 federal election caretaker period) were:

• net worth minus $450.5 billion;

• net debt $376.7 billion; and

• net financial liabilities $656.4 billion.

In March 2019 the general government sector’s total revenue fell short of its total expenses by $1.5 billion.

The Australian Office of Financial Management reported on 17 May 2019 (the day before the federal election) that the face value of Australian Government borrowings (ie the national debt) stood at $538.2 billion.

The Reserve Bank of Australia’s May 2019 Statement on Monetary Policy - Economic Outlook  has expected Gross Domestic Product (GDP) growth for the year ending in June 2019 at 1¾%, revised down from 2½% due to a slower domestic economy.