an AAA to Z guide to running the NSW economy

ALPHABETICALLY speaking, successive NSW treasurers have suffered from a rather limited vocabulary. Their obsession has centred on the first letter of the alphabet, repeated three times. But the task of running the finances of Australia’s biggest state economy demands familiarity with the entire alphabet, not just the state’s AAA credit rating. So here it is. An easy to read, A to Z guide to running the NSW economy:

AA+ credit rating: Despite the fuss politicians make about keeping the top credit rating, a downgrade to the next rung down on the ladder, AA+ rating, would not cost as much as you might think. NSW pays about 5.87 per cent on debt with a five-year expiry date. Queensland, downgraded to AA+ in 2009, pays 5.97 per cent, just 0.1 percentage point more. Even if NSW’s entire debt of $37 billion had to be rolled over to the higher interest rate, that would still mean only $37 million extra a year. Not insurmountable.

Business confidence: For most of the noughties, business confidence in NSW ranked below the national average.

Construction activity: NSW accounts for 31 per cent of Australia’s population, but builds just 19 per cent of all new homes. Poor planning, stunted land release and high costs, including developer and local council charges, have choked new home supply. Victoria, by contrast, is home to 25 per cent of the population, but builds 36 per cent of new homes.

Debt: The state’s net debt and unfunded superannuation liabilities as a share of total revenue has risen sharply, from about 60 per cent in the early 2000s to a forecast of 102 per cent this year and 112 per cent by 2014. When it reaches 120 per cent, it triggers a credit rating review. A back of the envelope calculation suggests the next government could spend only about $6 billion over the next four years and be confident of escaping a ratings review (assuming no offsetting spending cuts).

Electricity: Labor’s failure to sell its electricity assets back when anyone was willing to pay much for them has exacerbated the debt position. The proceeds of the most recent $5.3 billion electricity sale will be almost entirely offset by associated spending promises. Enough said.

Federalism: NSW, along with every other state, suffers from limited revenue-raising abilities. States deliver services, but the federal government raises the lion’s share of revenue. States are left to beg for handouts from Canberra, supplemented by a grab bag of volatile property taxes, payroll, mining royalties and gambling charges.

Gross state product: NSW was the slowest-growing economy of any any state or territory in the noughties. Economic output grew by an average of 2.3 per cent a year, well below Western Australia on 4.4 per cent and Queensland on 4.1 per cent. This gap has narrowed, however, in more recent years, as NSW benefited from lower interest rates and government stimulus.

House prices: Sydney is the most expensive city to live in in Australia, with a median house price of $525,000, according to RP Data. The high cost of housing does more than just dash the dreams of would-be homebuyers. NSW residents have less money to spend on retail and going out, depressing the entire state economy. Measures to boost home supply must be a first priority of the next government.

Infrastructure: Reversing a decade of chronic underinvestment in vital infrastructure, including roads, railways and public transport will be tricky given money for new projects will be tight. Tough choices are inevitable.

Jobs: Employment has been a surprising bright spot for NSW in recent months. Despite the direct blow to the finance sector during the global financial crisis, lower interest rates and government stimulus have fuelled a mini jobs boom. NSW added about 130,000 jobs last year, the most of any state, helping the jobless rate fall.

Kaleidoscopic: “A constantly changing group of bright or interesting objects”. NSW’s people and diversity are perhaps the best things this economy has going for it.

Local councils: have a surprising degree of power over everyday life in NSW. More pressure should be placed on councils to speed up higher density housing, sensitively done, in well-located parts of Sydney to ease the housing squeeze. Assistance should be given to help councils clear their considerable infrastructure backlogs.

Mining/Manufacturing: Do you want the good news or the bad news? Low-cost imports from China have cut manufacturing’s share of the NSW economy. But the Chinese-induced mining boom has not passed NSW entirely by. Rich coal deposits in the Hunter Valley and elsewhere generate nearly $1 billion in coal royalties a year.

Narcissism: NSW has relied for too long upon good looks, Sydney’s dazzling harbour, rather than brains. Policy makers must look beyond the surface and accept there is a problem – that living in Sydney, travelling and affording a home, is a daily struggle for residents – before they can fix it.

Olympics: Remember the good old days? The Olympics marked the high point for the NSW economy. Since then, the state’s share of economic output and population has declined.

Population: However, the population in NSW is still projected to swell from 7.2 million today to 9 million by 2036. An estimated three-quarters of that growth will be in Sydney, which will swell to 6 million people, putting extra stress on transport, infrastructure and housing prices.

Quality control: Government decision making must be reformed so that spending decisions are evaluated against meaningful performance indicators.

Revenue: NSW Treasury downgraded its budget review forecasts for average annual revenue growth over the coming four years from 3.6 per cent to 3.2 per cent.

Spending: At the same time, forecasts for spending growth were revised up, from
3.4 per cent to 3.7 per cent. Spending can’t continue
to grow faster than revenue indefinitely.

Two/three speed economy: By far the biggest economic challenge facing NSW. The mining boom is pushing up the value of the Australian dollar hurting manufacturers and tourism operators, many of whom call NSW home. Higher interest rates are also likely as the Reserve Bank seeks to head off inflationary pressure, placing a bigger burden on the state’s highly indebted households.

User pays: The Herald’s transport inquiry, headed by Ron Christie, advocated user charges as a way to fund increased investment in NSW’s ailing transport system. Given the fiscal straitjacket the new government will be in, user charges, such as increasing
fares and rates could be just the ticket.

Value for money: But if taxpayers are to pay more, they must be confident their money is well spent. Ministers should have to sign a formal contract with the treasurer: to get funding, they must prove they are delivering value for money.

Waste: The next government should institute a whole-of-government spending review to identify waste.

Xenophobia: As Sydneysiders struggle with creaking infrastructure and expensive mortgages, it is only natural that hostility to new arrivals has increased. Solving these underlying problems would help to ease stress and make Sydney a welcoming and happy place.

Yes: it can be done.

Zzzzzzzzzzzz: but only if we wake up to the problems at hand.

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One Response to an AAA to Z guide to running the NSW economy

  1. Max Carnage says:

    Lack of infrastructure in NSW is destroying quality of life for millions of Australians. The reserve bank should hike interest rates to slow the property boom but they’re afraid of the political repercussions. They’ve allowed a dangerous two speed economy to threaten the prosperity of millions of Sydneysiders. If the economy expands by over 3% this year as predicted on AustralianPropertyForum.com then we’ll see Aussie employers creating jobs at a rapid pace. The economy is set to boom and high wage growth must lead to rampant inflation. In turn this leads to strong demand for high migration. The population booms but where are the new roads, houses and other infrastructure? Successive inept governments put infrastructure development on the long finger and that’s why the public feels negatively about high migration, since insufficient rail, housing, road and water result in high migration leading to degraded quality of life for those living in Sydney already. Of course, high income means more cash to spend on property, and more money for the banks to lend, where’s the additional housing supply going to come from? Our failed governments must invest for our future, something they fail miserably to do.

    Max Carnage
    AustralianPropertyForum.com

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