Still the Sunshine State?

This article from the forthcoming Spring 2020 edition of the IPA Review is written by economists Marcus Smith and Dan Petrie.

The Queensland state election on 31 October will provide voters with an opportunity to vote on the two crises currently engulfing the State. The first being the COVID-19 crisis that arrived in February this year and the second being the economic one, which has strangled the Sunshine State for the last two decades. Prior to the COVID crisis, Queensland held the unenviable position of being the state with the highest unemployment rate as well as the nation’s highest number of bankruptcies; an annual run rate of almost 10 per day. With only two-thirds of Queensland businesses and just over half of new entrants surviving over the five years to June 2019, the reporting of the lowest business sentiment levels on record have surprised few if any seasoned observers of this State’s economy.

Queensland’s finances have been a recurrent political issue for the past decade, particularly since the State lost its AAA credit rating in February 2009 during the global financial downturn when an estimated budget surplus slipped to a deficit of more than $1.5 billion over that financial year. Interestingly, the then ALP administration led by Anna Bligh as premier undertook a significant privatisation program of State assets following her 2009 election victory in a bid to convince ratings agencies of the State’s worthiness as an issuer of AAA paper.

Apart from a brief period of fiscal restraint under the Liberal-National Party (LNP) in the early part of the decade, a resumption of Labor rule and the State government’s penchant for bond issuance has remained. The LNP under then premier, Campbell Newman, who helped engineer a landslide election victory in 2012, adopted a crash or crash-through approach to wrestling the costs associated with a bloated public sector and opted to go to the 2015 election proposing to lease the State’s aging electricity generators to pay down debt. Newman’s approach to reduce headcount within the public sector and efforts to curb crime around outlaw motorcycle gangs quickly earned the then LNP enemies within the legal fraternity, as well as emboldening a union movement desperate to enact electoral revenge after the humiliation of the 2012 election result.

Debt, a bloated public service and crime dominate the issues before Queensland voters.

In 2020, debt, a bloated public service and crime continue to dominate the issues currently before voters despite the saturation of COVID coverage on the nightly news. In January of this year, State government debt stood at $80 billion and has since ballooned following the fallout of a pandemic that started life in China in 2019 as a SARS variant. The public service has the equivalent of 232,000 full-time employees with an average annual salary of $100,000 at a cost of $26 billion. However, Queensland’s regions—responsible for so much of Australia’s export income though agriculture and mining receipts—is where crime is the number one issue. Drought and industry exasperation concerning the length of approval times around key projects continue to weigh heavily on the State’s regions.

The go-slow on approvals has no better example than the foray of Indian conglomerate, Adani, into the Queensland resources sector. For environmentalists, Adani became a Clarion Call for fighting a business they turned into the corporate face of climate change. The Adani Carmichael project was initially lauded as a game changer for North Queensland as a thermal coal mine that would not just have a transformative impact for the region, but also for the people of India now drawing more of their power from coal-fired power stations. Despite the project being scaled down to a relatively small operation at 10 million tons per annum, the mine is symbolic for Townsville whose economic performance is best summed up by an unemployment rate for the region’s males of 9.4 per cent (ABS data).

For the Labor Party more broadly, its firm commitment to green energy and mute responses to coal power has enraged its blue-collar base in regional Australia with what they see as appeasement for the Party’s more affluent voters in the inner city.

Building for the sake of building is not without examples of poor outcomes.

The flashpoint for this anger manifested following the shock result of the 2019 Federal Election, which prompted Premier Annastacia Palaszczuk to hurriedly race to Mackay to publicly demand an end to the impasse instigated in large part by her own government. While Adani has battled for 10 years to win approvals, the New Hope group’s New Acland coal mine is well into a second decade of trying to expand its operations. The latter—while more problematic for the LNP as it is a coal project that pits local farmers against a resources company—shines a light on the main problem confronting the State in not being able to advance key projects for the regions.

On the left: Premier Annastacia Palaszczuk.
Photo: Annastacia Palaszczuk MP Facebook page.
On the right: LNP Leader Deb Frecklington.
Photo: Supplied

So, with little in the way of private sector projects, the State government has opted for the ‘build infrastructure’ mantra in a bid to lift economic activity and talk about a growing economy. While roads and rail are core deliverables for state government, big-ticket items include continuation of the Cross River Rail, Bruce Highway, Pacific and Ipswich motorway works and infrastructure projects at Townsville and Gladstone ports. The $5 billion Cross River Rail project is headline rich in possibility but detail poor in terms of economic outcomes. Infrastructure Australia notes many of the promoted future benefits are overstated, despite the much-touted transformational effect it will have on the eastern corridor into Brisbane’s CBD. This project is one where the premier has proudly stated that Queensland is going it alone.

Premier Annastacia Palaszczuk could take a cursory glance abroad at the historical examples that have led to poor economic outcomes by ‘going it alone’. The divergence in industry policy between Germany and Japan lays bare the consequences of favouring a ‘build it and they will come’ approach over good industry policy. Japan’s embrace of infrastructure projects came at the end of the 1980s when the country’s post-World War II revival in manufacturing fuelled a property boom that exploded spectacularly on the eve of the 1990s; the period that was to become known as the lost decade. Japan was not prepared to let go of its status as the world’s second-largest economy, embarking on a generous public works program that in large part delivered roads and bridges that served little benefit and came at the expense of a more prudent investment in education and social services. The latter, of course, yields far greater overall return for any society.

Building infrastructure with a lack of transparency around industry policy or the businesses that will emerge from said projects can prove to be costly. This is not to say Queensland’s building priorities are misplaced, but rather the political approach of building for the sake of building is not without examples of poor outcomes. In an interview with The New York Times, University of Tokyo economics professor Toshihiro Ihori said “one lesson from Japan is that public works get the best results when they create something useful for the future”.

Germany—whose diaspora laid the seeds of Queensland’s advanced manufacturing sector when the first immigrants arrived in Australia’s newest state in the mid-19th century—have mostly been pragmatic or simply German by ensuring efficiency and design remain at the core of everything they do. The German question is more nuanced: How do we as a country ensure we are keeping our competitive advantage in industries we dominate? Yet both cases highlight that any capital spending embarked on by government must pass the economist crucible of providing a tangible ‘bang for buck’.

The Labor spending trajectory that started with Bligh’s tenure as treasurer in the Beattie government has remained intact, with the $100 billion debt ‘beachhead’ finally falling as Queensland responded to the COVID-19 crisis. The State’s newly minted treasurer, Cameron Dick, released the much-anticipated COVID-19 Fiscal and Economic Review (C19-FER) that detailed the sobering reality of the State’s financial wipeout. Dick’s predecessor, Jackie Trad, whose penchant for political power was matched only by her optimism around Queensland’s finances, has delivered her successor one of the great budget messes of all time.

A recovery to Queensland’s parlous public finances demands a strong economy.

A previously trumpeted yet slender surplus of $150 million has all but been wiped out by a $6 billion deficit over the last financial year, with an expected deficit for the current year marked down for $8 billion. The culmination of $2.5 billion in GST revenue write-downs and steep declines in State revenues and royalties only exacerbates the challenge of providing near-term support to industries that have been heavily impacted by the virus.

A recovery to Queensland’s parlous‌ public finances will thus necessarily demand a strong and expanding economy which, in turn, will sufficiently grow fiscal revenues to replenish government coffers. Yet, Gross State Product (GSP) data reported by the ABS shows economic growth in Queensland has stagnated over the past decade. While annual GSP growth averaged 2.3 per cent during the decade to 2019-20, in contrast the economy grew over the preceding decade to 2009-10 by twice that rate at an average of 4.7 per cent per year. ABS data further indicates that while during 2018-19 the economy grew by 1.4 per cent, Queensland’s population grew 1.7 per cent. This implies real per capita GSP, as an imperfect but convenient proxy for the living standards of Queenslanders, declined last year.

The $100 billion debt is a millstone around the necks of young Queenslanders.

Key indicators of business conditions in Queensland portray a sobering picture of the State’s private sector, with ABS statistics reported for business survival rates tracked over a five-year period to June 2019 indeed illustrating how difficult it is to remain in business in Queensland. Accordingly, of those businesses operating in June 2015 only 63.9 per cent were still operating in June 2019, while the proportion of business entrants during 2015-16 fared worse with only 53.1 per cent of those surviving until June 2019. Australian Financial Security Authority statistics reveal Queensland continues to lead the nation in bankruptcies, with 3,582 reported cases over the year to June 2020.

Comparing annual ABS business counts from June 2018 and June 2019 shows the Queensland business community grew by 2 per cent, or 9,145 businesses. Non-employing, medium and large businesses experienced growth over the 12 months. However, the number of small businesses employing one to 19 workers fell by around 700 (-0.4 per cent).

While the business counts do not distinguish between the number of businesses with 1-19 employees that grew to medium-size businesses of 20-199 employees from those that simply closed, the greatest decreases were reported in industries including the retail trade, transport, postal and warehousing, manufacturing, hospitality and agriculture.

The government’s total debt measured as borrowings by the government and state-owned corporations was forecast to be $78 billion by the financial year ending June. The $100 billion state government debt is now a proverbial millstone around the necks of the state’s youth that are already struggling with poor job market outcomes.

The ‘millstone’ label was gifted by the state’s former and indeed famed Under Treasurer, Sir Leo Hielscher, who applied this tag during his 2018 Sir Thomas McIlwraith Lecture where he was quite explicit that debt was a major worry: “We should be trying desperately to cap and then reduce the size of this millstone.”

My Beloved Brisbane – Sir Leo Hielscher,
an oil painting by Tom Macbeth (digitally altered).
Source: Brisbane Portrait Prize 2019

“A state budget is not complex. It is very similar to the one at home. If you haven’t got the cash, you shouldn’t spend it”
— Leo Hielscher

Sir Leo—who served as Under Treasurer to 15 Queensland treasurers across the political divide—is one of many former top civil servants lamenting how a state with high immigration, a strong mining sector, and favourable export opportunities for its agricultural sector has performed so poorly over the last decade. For Treasurer Dick, who was unsuccessful in hiring his own Under Treasurer, selling the government’s economic message is difficult when the prevailing climate has been overly politicised.

Integrity scandals, stealth taxes, and union subservience characterised Palaszczuk’s second term.

The Palaszczuk government’s second term can be largely characterisied by own goals through integrity scandals, imposition of stealth taxes, and a widely held perception of subservience to the all-powerful trade union movement. While former Treasurer Trad was a noted political pugilist, frequent appearances fronting the Queensland Crime and Corruption Commission have done little to enhance the government’s standing going into the 31 October poll.

In the absence of an economic narrative, the Queensland Government has embarked on a strategy of returning to a traditional strength in health outcomes achieved during the coronavirus crisis. The problem for the government, however, is that the health issues being discussed are focused on prevention and not adequately addressing the mental health impacts resulting from an economy running below normal capacity. For Premier Palaszczuk, the optics of glossy brochures with the moniker of ‘unite and recover’ understates the enormity of the challenge facing Queensland to achieve a level of economic activity that will meaningfully reduce the state’s jobless rate.

For the electorate, the obvious critique of the incumbent gives way to what the other side is offering. The Opposition leader, Deb Frecklington, is a lawyer and former small business owner who to her credit has unified a party that historically has a fondness for ill-discipline and disfunction following the amalgamation of the Liberal and National parties in 2008. Frecklington has followed the time-honoured tactic of negative state Opposition leader: a formula that has been successful for the likes of Bob Carr in New South Wales, Mike Rann in South Australia, and more recently Annastacia Palaszczuk.

Frecklington’s detractors point to a lack of cut-through with media messaging and small target strategy. The Opposition, while keen to avoid a showdown around public servant headcounts and asset sales, have resorted to the ‘cut wasteful spending’ and restore confidence strategy. Given the campaigning prowess of the Labor incumbent, the LNP’s path to the Treasury benches is more dependent on self-discipline and voter anger with the government.

The Opposition’s economic plan is built in large part on reviving the Bradfield inland water irrigation plan, a water diversion scheme first devised in 1938 by Sydney Harbour Bridge architect Dr John Bradfield. The original scheme proposed the diversion of rivers fed by the monsoon activity in northern Queensland through the Great Dividing Range to flow into the Thompson River in inland Queensland and eventually into Lake Eyre. A ‘New Bradfield Scheme’ has been championed by Sir Leo Hielscher and businessman Sir Frank Moore. The project proposes to extend on the approved Hells Gate dam by capturing and diverting water from inflows into headwaters of the South Johnson, Tully and Herbert Rivers into the upper Burdekin and then tunnelled through the Great Divide to the Flinders River. A series of further stages of the scheme would see water channelled and piped into the headwaters of the Warrego River helping to drought proof the northern- and central-western grazing areas and foster a more permanent water flow south to the Darling River system in southern Queensland.

Artist impression of the Hells Gate Dam proposed for the New Bradfield Scheme.

The New Bradfield Scheme promises to provide vital water security for north Queensland, central Queensland and southern Queensland and invigorate inland Queensland as new and existing farmlands attract new industries in turn opening the interior of the state to population growth and much-needed employment opportunities. The scheme has broader appeal with the potential to mitigate much of the politics in southern states dealing with inflows into the Murray, providing an environmental outcome that addresses salinity downstream as well as providing greater support to environmental and biodiversity outcomes that have dominated much of the inland rivers legislation during the post-World War II era. The state government has also flagged its intention to address water security by engaging high-profile national economist Professor Ross Garnaut, publicly supported by former Queensland premier Peter Beattie.

The New Bradfield Scheme promises to provide vital water security.

Small target strategies are no doubt a safer option for opposition parties, but the current economic and political environment will weigh more heavily on an incoming Premier charged with the responsibility to effect change. The growth in public service of more than 15 per cent to 232,500 over the last five years is not sustainable and the pace of hiring (including outside consultants) will have to slow. The precarious nature of Queensland’s public finances means the sale of State-owned assets will inevitably return to the table when bondholders and rating agencies assess the outlook for Australia’s third-largest economy. Assets that fall outside ‘social obligations’ (such as schools, hospitals and police stations) obviously should not be sold, whereas commercial assets including power generators and ports offer greater value for the taxpayer dollar in private enterprise than under public ownership.

With a recovery to Queensland’s public finances being conceivably decades in the making, the magical ingredients that have in the past made Queensland attractive coalesce around being a low-tax region with burgeoning mining resources and building on the immense export opportunity of the State’s agricultural sector. Industry policy will demand a strong focus on fostering a business-friendly environment for the State’s small and medium enterprises.

On 31 October whoever forms government has to return Queensland to being a State where key projects observe a clear and concise approval process, regulation reform is undertaken to underpin agricultural and mining export opportunities, and the government has to excise the highest level of financial discipline with taxpayers’ dollars.

Dr Marcus Smith holds a PhD in Economics from Griffith University, and works as an Adjunct Lecturer of Economics and Finance. He has previously held roles working for the Queensland government as well as in private sector consulting and small business advocacy.

Dan Petrie is the Chief Information Officer of economics and financial data firm, Grafa.io. He has previously held roles at Bloomberg L.P., Macquarie Bank, Teradata and with the Queensland Government.