John Quiggin

Zero debt may leave the State worse off

Townsville Bulletin ,

May 24, 1995

Yesterday's Budget marks a fundamental change in the political debate in Queensland and elsewhere. For nearly two decades, from the 'fistful of dollars' election campaign of 1977, to the One Nation and Fightback packages of 1993, Federal election campaigns have been dominated by promises of lower taxes. At the State level, the low level of state taxes in Queensland was the principal electoral weapon of the Bjelke-Petersen government.

But lower taxes inevitably means lower spending. Successive Federal governments have protected their own spending by cutting back on grants to the States. As a result, the supply of State-funded community services such as health, education and law and order has fallen behind the demand everywhere, but most notably in Queensland, where a combination of rapid population growth and low expenditure levels have led to crises in regional health services, severe shortages in health and education and overstretched physical infrastructure. Surveys now indicate that most people would be prepared to pay higher taxes in return for improved services, and political parties are beginning to respond to this need.

Although the government continues to exploit the real and rhetorical benefits of low state tax rates, it recognises that the real necessity is to address the consequences of decades of inadequate levels of public spending, such as overcrowded and poorly equipped schools, hospital waiting lists and inadequate police services. The Budget announces increases in spending across the Board. Expenditure last financial year overran the Budget estimate by about 3 per cent, and a further 5 per cent increase has been announced in the Budget. By contrast, almost nothing was offered in the way of tax cuts. An increase in the payroll tax threshold has been announced, but this does little more than adjust the threshold for the general increase in wage levels.

The other prominent feature of the government's rhetoric is the commitment to zero net debt. While there are obvious advantages in having low (or no) debts, zero net debt is not necessarily the best rule for governments (or families) to follow. What really matters is the level of net worth. A zero net debt policy will make the State worse off if the level of infrastructure investment is held too low in order to avoid the acquisition of debt. An even worse result is obtained if more expensive methods of financing, such as so-called BOOT (Build, Own Operate and Transfer) schemes are introduced to avoid taking on debt, as has occurred with a number of tollway projects.

Overall, though, this is a good Budget on which to fight an election. It will be hard for the Opposition, burdened by the legacy of the Bjelke-Petersen years and the continued attachment of the Federal Opposition to cuts in taxes and spending, to mount an effective counterattack.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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