By David Hayward
There is a real scandal brewing in Victoria, but you won't hear about it in the major media outlets. It involves the Kennett government and the state's finances.
This scandal has touched the lives of all Victorians. From the closing of nearly 300 schools through to fatal six-hour delays in the arrival of an ambulance, from the withdrawal of local democracy through to the fire-sale prices at which state assets are being sold, the effects are mounting day by day.
What is scandalous about this vicious "reform" program is that it has been put in place to tackle a problem that never existed.
We were told that the budget deficit and the state debt had both reached unsustainable levels, and that without a radical change of course, Victoria was destined for bankruptcy. These were remarkably exaggerated claims, used to justify an unjustifiable set of reforms.
In the 1992 election campaign, we were promised that Coalition policies would not be changed once the election had been won. No Victorian, we were told, would be one dollar worse off under the Kennett government.
During his victory speech, the premier made his first gaffe, referring to "Victorians" as "victims". It would not take long for us to work out why.
No sooner had the election victory been sealed than the government changed its mind. The government claimed it had discovered a massive hole in the state's finances, which it had not been aware of during the campaign. All bets were off.
Budget 'crisis'
What was the crisis in public finances? To understand this we need to distinguish between two parts of the budget, the current account and the capital account. The current account records all transactions involving short-term expenditures — such as the day-to-day running expenses of government — and receipts, of which the major item is tax revenue. The capital account deals with long-term expenditures such as spending on roads, bridges, hospitals and school buildings.
The government claimed that the current account of the budget was running a deficit of $1.5 billion, which was subsequently revised upward to $2 billion. This, the government argued, had to be tackled as a matter of urgency.
The solution the government came up with was massive expenditure cuts and tax increases, announced in the government's two economic statements in October 1992 and April 1993. These shaved $1.2 billion off state expenditures and increased tax revenues by $1 billion. They simultaneously took almost 40,000 people off the state payroll, closed close to 300 schools and reduced social spending by 10% across the board.
According to the government, so bad were the state's economic woes that even these extremely tough measures would not turn the current account deficit into surplus until the late 1990s. In its April 1993 statement, the government reckoned that, by 1994-5, the best that could be hoped for was a deficit of $600 million.
What is interesting about these measures is the magnitude of the mistake made — around $2 billion. For by the end of this financial year, rather than be in deficit $600 million, the current account of the budget will be running a surplus of $1.4 billion.
Why did the government get it so wrong? Governments' budgets move in cycles in line with economic conditions. When the economy is booming, the budget looks very healthy; when economies go into recession, tax revenues drop away, while expenditures automatically increase.
When the Kennett government came to office, Victoria was just beginning to come out of a severe recession. During the early 1990s, the Victorian economy shrank by 5%, while the rest of Australia increased by 1%. This downturn wrought havoc on the state's public finances.
Now that the economy has belatedly recovered, tax revenues have again begun to surge, while expenditure commitments have begun to fade. The expenditure cuts and tax increases have been unnecessary, for the current account of the budget would have basically been back in balance without them.
But by cutting so much and increasing taxes so dramatically, the government has ensured that the current account is now in massive surplus. By next year, the budget current account surplus will be close to $2 billion.
Debt
The other "crisis" concerned the state debt. We were told that Labor had been a big debt government, all too willing to pay on the never-never. State assets, we are told, must be sold to repay debt as quickly as possible; hence the fire sale prices at which state assets have been sold.
In fact, when Kennett came to office, Victoria's public debt was not high by any reasonable criterion. In 1992-3, the state's public sector debt was two thirds its level of 1960-61, and it was one third the level of public debt held by other western governments. The justification for the sell-off is a sham.
The size of the government's budget surplus makes it especially bogus. So large has this current account surplus become, that it is now possible for the government to maintain a high level of capital spending and yet keep the overall budget in surplus by about $500 million. This surplus can be used to retire debt. Even without any sell-offs, the government would be able to retire all the state's debt in about 60 years.
But does a zero debt target make good economic sense? It is possible to reduce debt in real terms, simply by keeping the growth in debt less than the rate of growth in the economy.
With the exception of the late 1980s and early 1990s, Victoria's debt has consistently been used to build a stock of public assets. It makes sense to build up a stock of non-commercial assets like schools, hospitals, roads and the like through debt, because they last a long time. Debt funding means that the cost of providing the assets is shared over the generations which benefit from them.
Debt used to build up profitable commercial assets — like public utilities — is not a problem because it is self-financing. Our public utilities are able to generate sufficient revenue not only to meet interest payments and return a profit, but also pay the state an annual dividend not far short of $1 billion.
There is little economic sense in what the Kennett government has done. By failing to challenge the government's debt crisis line, the establishment press has presented as heroes those who should really be treated as villains.
The government now sits in a very comfortable political position. Its budget surplus is so large that it can begin to return the funds that it should not have taken away. In 1994-95 it gave its first tax cut, rewarding the racing industry with a $54 million tax reduction. In 1995-96 it will remove the hated state deficit levy, popularly known as the poll tax, at a cost of $180 million.
It is tragic that tax cuts like these will be preferred to increased social spending.
In a speech to a meeting of investors in New York in February, Kennett talked glowingly about the havoc he had wrought on Victoria's public sector. He mentioned his government's popularity, and the lack of sustained public opposition. The premier explained he had managed to do this by making full use of a recession and a crisis in state finances to push through his radical right reforms.
What he omitted to mention was that the crisis in public finances was not real, but cleverly manufactured for political reasons, and that his reforms have left in their wake a disturbing pile of social damage, from fractured educational futures to lives that have been lost while waiting for the arrival of a late ambulance.
All this unnecessary social damage is the real scandal of Victoria's public finances.
[David Hayward teaches sociology at Swinburne University of Technology.]