Legislative Council Hansard – 20 June 2023 – Proof

ECONOMIC STATEMENT

The Hon. DANIEL MOOKHEY (Treasurer) (16:20): In New South Wales, we take pride in making sure that people who work for a living can always earn a living. Here, we combine to advance the common good so that each of us are better equipped to pursue our individual ambitions. Just a few years ago, we drew on that spirit to solve the problems presented by a once-in-a-century global pandemic. But today we have to deal with a once‑in‑a‑generation cost-of-living crisis, where rising rents, skyrocketing mortgages, ever-increasing electricity bills and even more expensive food is making it harder to live, work and retire in this State.

The new Government is hard at work, tackling the high levels of inflation it inherited. Since March we have got on with the job of providing energy bill relief, with around 1.6 million households eligible for a $500 energy rebate starting from July. We are working respectfully with our essential workers to deliver the biggest pay rise the New South Wales public sector has seen in more than a decade. We have abolished outright stamp duty and land tax for first home buyers purchasing a property up to $800,000. We are getting ready to cap tolls at $60 per week from 1 January, just as we said we would.

Treasury suggests that inflation will remain the pre-eminent economic challenge for New South Wales, and the Government acknowledges that we can do more. The next step in bringing inflation under control is to bring our own spending under control. We can adopt that as our strategy so that families no longer have to tackle the cost-of-living crisis by themselves, so that they need not live month to month in fear of the next interest rate rise, utility bill, visit to the supermarket or notice from their landlord. Twelve interest rate rises in 14 months has led families to sacrifice plenty to stop our living standards from falling even further. The common good demands that this Government and all governments step up and do their fair share too. Just as it is our responsibility to stimulate the economy when it is slowing down, it is our job to moderate our demand if we risk making inflationary pressures worse.

Today, ahead of presenting Parliament with our first budget in September, I intend to shed light on the true state of New South Wales finances and update the House on the status of certain programs. I begin by directing the Parliament's attention to a few matters that heretofore have escaped the public scrutiny they deserve. Yesterday, Treasury provided me with the results of its early analysis of the State's balance sheet. It pointed out the looming need to revalue the State's non-financial assets to the tune of more than $30 billion. In human speak, that means that high inflation is making it more expensive to replace all of the State's roads, schools and hospitals, and the other assets we depend on to deliver essential services. That matters because a $30 billion revaluation will see the cost of depreciation rise by hundreds of millions of dollars per year starting from this July. As a result, we expect the budget deficit to deteriorate further. The full impact of that change will be known by the time of the September budget.

That asset revaluation is the first matter requiring Parliament's attention, but there is another. Upon becoming Treasurer, I learnt about a plan concerning the State's Debt Retirement Fund. I was told that the previous Government intended to raise $25.3 billion of debt to deposit into the Debt Retirement Fund. That money would go towards buying foreign and domestic stocks and bonds. It would be used to invest in property, here and abroad, and it would be invested in hedge funds, high yield funds, bank loans and other alternative assets. The funds balance was expected to reach $50.8 billion by 2027. The hope was that we would gain more from owning those assets than we would have to pay for the debt needed to buy them. Simply put, New South Wales would play around in financial markets using its credit card.

Here is a way to appreciate the scale of the previous Government's plans: $25.3 billion is nearly enough to build the entire Sydney Metro West project. It is enough to build three more tunnels under Sydney Harbour. That money could be used to build 300 new public schools or more than 40,000 new social and affordable homes. Yet we are raising that much debt to bankroll Australia's biggest ever carry trade. That plan is exceptional because New South Wales will have soon used borrowed money to artificially build the biggest sovereign wealth fund owned by a State government worldwide. Aside from Quebec, Canada, no sub-national government in the world plans to use debt like that. That plan is risky because New South Wales stands to lose billions if the economy faces a shock akin to COV1D-19 or the global financial crisis. We are risking $25.3 billion so we can improve the State's net debt position by just $2 billion.

Little was known about the Debt Retirement Fund before the March election because there has been no meaningful statement about it since December 2021. Yet the fund's effect on the State's balance sheet is real, and so is its effect on the State's budget result. It has the power to determine whether New South Wales reports a budget surplus or deficit. I will explain. The pre-election budget outlook projected a budget deficit of $12 billion this year. Treasury forecasts a deficit of $7.1 billion next year. The State is then expected to post modest surpluses in the two years that follow.

But there is more to the story. It turns out that swelling the size of the Debt Retirement Fund with debt makes the budget look healthier than it is because the budget assumes we earn a return of 7 per cent on every dollar we deposit into the fund, even when it is losing money. If those returns are stripped out of the budget forecasts, New South Wales will not post a budget surplus any time soon. In fact, we will record deficits every year over the forward estimates. The $328 million projected surplus in 2024-25 turns into a deficit of $911 million. The $824 million surplus in 2025-26 becomes a $601 million deficit. Even if the fund performs exactly as it is meant to, its returns cannot be used to pay the Government's bills. Money in the Debt Retirement Fund is not the same as money in the Consolidated Fund. The Act that created the fund says it can only be used to repay debt. The budget might report the fund's income the same way we report taxation revenue, but we cannot spend the money like we do our taxation revenue.

Hence, it is reasonably foreseeable that in just a few years' time we will need to explain why there is no money to offer our essential workers a pay rise when it might appear as though the State is on track to record a bulging surplus. That is why it is dangerous to make long-term budgets by relying on short-term smoke and mirror tactics. Reality intrudes eventually. The Debt Retirement Fund was created in 2018. It was seeded with money we got from privatising WestConnex. Its job was to invest it for the benefit of future generations. The decisions taken thereafter to use debt to turbocharge its growth raises two questions. Is the risk worth it? Is the budget reporting it accurately? We need to make that decision collectively. Tomorrow I am writing to the Chair of the State Development Committee in this place and I am asking her to lead a short inquiry to answer those questions. The Government will then use the committee's report to decide the future of this policy as the September budget looms.

The plan to deposit $25.3 billion more into the Debt Retirement Fund using debt will increase our gross debt levels by $27.8 billion by 30 June 2027. The last budget planned for New South Wales to add $58.7 billion of additional debt in the next three years. By June 2026 we will owe our creditors a total of $188 billion. This is the largest debt any incoming State Government has inherited from its predecessors in more than three decades. Paying for all this debt is not cheap. In three years' time the State will be handing our lenders $7 billion in annual interest payments. This is billions more than we spend to fund the entire NSW Police Force. It is equal to 16 cents out of every dollar the State collects in taxes directly. More money spent on interest bills leaves us with less money for vital public services like our schools and our hospitals, and racking up more debt during times of high inflation risks adding to inflation, especially if we fail to use that money to add to our productive capacity.

There is another reason that New South Wales borrowings are rising so sharply. They involve choices the former Government made in last year's budget and after last year's budget. That is when the then Government chose to accelerate spending. It added $33.9 billion of expenses over the forward estimates over just 14 months after COVID-19. No government of any political persuasion has spent faster than it did in living memory, except in times of war or emergency. Those spending commitments were made even though inflation was already beginning to rise, even though interest rates were already climbing and even though the cost of electricity was already skyrocketing. Many of the programs were key election pledges from the Coalition, but while they were funded many other programs were not. They were left to teeter on the edge of a fiscal cliff. By that, I mean their funding was programmed to disappear altogether.

I am not talking about frivolous programs, nor am I talking about stimulus programs or programs that are nice to have. I am talking about programs that are the core business of State governments. Here are three. Organised criminals are trying to hack governments on an industrial scale, yet Cyber Security NSW—our first line of defence—runs out of money in 12 months. We have a duty to care for children who cannot stay safely in their own homes, yet the out-of-home care system without action will face cost overruns of $800 million over the next four years. Anyone visiting an emergency department knows we need more healthcare workers, but 1,112 healthcare workers face the axe next year because their jobs were only temporarily funded. No bank, business or superannuation fund could get away with tricks like this. They have to budget for all their expenses. So should governments.

There are always programs that are genuinely temporary and there are programs that are only temporarily funded. The public should know which is which, just as the public should know which programs are about to have their funding cut. At no time did our predecessors make any mention of cutting TAFE's funding, even though their last budget has TAFE's funding falling from $2 billion to $1.8 billion in the next financial year. That is a 10 per cent reduction. There is no doubt New South Wales needs more people finishing apprenticeships, more people doing cadetships, more people studying trades and more people readying themselves to work in the child care, disability care and aged-care sectors. TAFE's job is to give people those opportunities. Rather than forcing it to beg for basic resources, we should instead be making it fit for modern purposes. This year's budget will have us begin work on this mission. We will start by building three new TAFE centres of excellence, we will hire more apprentices directly and we will seek to enter into a new national skills agreement with the Commonwealth so we can deepen the investments we make in the skills of our people.

There is a slate of mega projects needing a rescue. Finishing Sydney Metro City and Southwest will cost at least $20.5 billion. That is $9 billion more than the original sticker price, $2 billion more than we were last told and it is years behind schedule. Sydney Metro West will cost more than $25 billion. That is $12 billion higher than the original forecast. The Western Harbour Tunnel was supposed to cost $6.7 billion. Its price tag has risen to $7.4 billion, and we signed the contract only in December. The cost of the Parramatta Light Rail stage one has skyrocketed by $475 million and the M6 Motorway project is $400 million above budget. Those projects need more money.

Unfortunately, so do the State's insurance schemes. I can inform the House that on Friday I authorised a $473 million injection into the Treasury Managed Fund [TMF]. That follows the $1.9 billion which was transferred last year and the $1.8 billion that was deposited three years ago. That is a little over $4 billion worth of bailouts in four years. The TMF's responsibilities include making sure our essential workers return to work after they get injured on the job. We all want essential workers to return to work as soon as it is safe to do so and we have begun work on a public sector-wide return to work policy. But fixing this scheme, like fixing icare, will be painstaking. We expect it to take years because this scheme, like the entire New South Wales workers compensation scheme, is bedevilled with a passel of problems. This House exposed them years ago. Had the Government responded faster back then, we might have avoided the costs we are incurring right now. The lesson is obvious: by ignoring a crisis initially, the cost of fixing it compounds tremendously.

Money does not grow on trees, not even for governments. All spending has to be paid for eventually. Treasury told the Government after we were elected that the sharp acceleration in spending, combined with rapidly rising debt levels, is piling pressure on the State's credit rating. There is more pressure on the State's triple-A ratings now than there was in 2020 when Standard and Poor's downgraded us. With a legacy of elevated expenses, high interest costs, an overextended capital program and ever increasing levels of debt, New South Wales finances are starting to fall behind Queensland and South Australia. Maintaining those credit ratings is by no means the be‑all or end-all of budget policy. After all, life continued after Standard and Poor's downgraded us in 2021. In recent years other States, like Queensland, that have lower credit ratings than we do, have had to pay less to borrow than we have.

Yet the State's credit rating still matters. One of the tests which determines its level is the level of State debt. The amount New South Wales owes in debt is compared to the amount the Government collects in revenue. We are already 30 per cent above certain thresholds. We are also probed on the size of our interest payments. Triple-A rated governments tend to spend about 5 per cent of their income servicing their debt. The former Government's last budget will have us begin to approach that threshold in two weeks' time. That is why the finance Minister and I are poring over every dollar the New South Wales Government spends. We are determined to make sure we are spending the public's money on the public's priorities, especially because so much of that money belongs to our children and our grandchildren. We are just borrowing it.

The comprehensive expenditure review the Government is undertaking is informed by three principles: do our bit to fight inflation, fix the State's essential services and only fund programs that work. When we test every spending decision we have inherited against those principles, we expect conflict. After all every project once had a sponsor who fervently believed in its proposal. There are tough choices ahead. They will not be easy, but they cannot be avoided. Ignoring them means taking the risk that inflation continues to persist. Interest rates continue to rise, living standards continue to fall and the State's finances continue to deteriorate. The sooner we act, the sooner we stop working people from losing even more of their purchasing power. The sooner we act, the sooner we stop small businesses having their margins squeezed even further. The sooner we act, the sooner we make sure our younger citizens are not the first Australian generation to inherit an economy worse than the one we have now. This Government will present its budget in September. We will calmly and methodically prepare a strategy that is right for the times. We look forward to keeping the House apprised of our progress.

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The Hon. DAMIEN TUDEHOPE (16:40): The Treasurer's statement reeks of a Government desperately looking to shift blame for its already broken promises and its misguided priorities while abandoning our hard‑won triple-A credit ratings. What we have just heard from the Treasurer is that he still has not figured out he is in Government. He is attacking the State's finances and almost begging the ratings agencies to downgrade us.

The chief obligation of a Treasurer is to talk up the State's economic strength, maintain our triple-A credit rating and run balanced budgets over the long run to ensure that the State can respond to economic challenges. Instead, the first act of the new Treasurer is to lose the triple-A credit rating, which will be a lasting black mark for the remainder of his tenure. In fact, I note with interest his comment that maintaining the credit rating is not the be‑all and end‑all of budget policy. Might I remind the Treasurer that the object of the Fiscal Responsibility Act 2012 is to maintain the State's triple-A credit rating. But he is not even trying to cover up his obvious failure on day one in simply dismissing a core part of his job description.

Despite the revisionist narrative being spun by the Treasurer today, let's be clear about the record of the former Coalition Government prior to the election. State final demand was at 3.75 per cent, the strongest economic growth of any State. Unemployment was at 3.2 per cent, the lowest for any State. We had the largest public infrastructure investment program in the nation, with $220 billion in transformational infrastructure across New South Wales building roads, rail, schools and hospitals that our State so desperately needed. We were delivering record investments in frontline services in health, education and police. We were providing needed support to families, communities and small businesses. We had half the debt‑to‑GDP ratio of Victoria. We were the only State to have two triple-A credit ratings, from Moody's and Fitch, and a pathway back to a surplus in 2024-25. That is what an economically responsible government does and that is what we left this Government. But all that is now put at risk by a Labor Government, just three months into the job.

Budgets are about choices—tough choices—and the economic danger that lies ahead is the cost of Labor's poor choices. It is the cost of choices to put union interests ahead of taxpayer's interests. It is the cost of choices to put political interests ahead of our State's best interest. It is poor choices that put our state's economy and budget at significant risk. The people of New South Wales were told that with Labor they would get a fresh start. In fact, what they have got is a false start. A government floundering to find the money to pay for its unfunded promises and blaming everyone else but itself. Today the Treasurer has demonstrated his inability to tackle the economic challenges our State faces.

Let's talk about debt. We have heard a myriad of complaints from Labor about the debt position it has inherited, debts that it supported as part of the State's response to COVID-19 and natural disasters. The now Premier was fond of saying that he would not play politics in a pandemic, but the shallowness of that slogan is exposed by the blame games the Government lobs up today. The State's net debt is currently at 10.2 per cent and is projected to stabilise at 14 per cent of gross State product by 2026. Compare that with the projected 26.5 per cent for Victoria in 2026 and one gets a better picture of the excellent economic management of the former Government.

Those are not new figures; they are the projections of NSW Treasury in the 2022-23 budget, the2022-23 Half‑Yearly Review and the2023 Pre-election Budget Update issued by the then Treasury Secretary, Dr Paul Grimes. The Treasurer has made allegations about budget black holes and those opposite have been fond of using that expression. The Treasurer's accusations that the former Government left a $7 billion black hole is a clever trick but, unfortunately for him, he does not have the receipts to back it up.

The former Government made all disclosures about the State's financial position as required under legislation. To suggest otherwise is to question the integrity of the former Treasury Secretary, who signed off on the relevant accounts, and also to question the dedicated, hard-working public servants in NSW Treasury, who provide all the relevant facts and figures while making the best estimates possible about future contingencies. We know the Treasurer has a reputation for reading budget papers with meticulous detail, so perhaps he may recall the following words from the2022-23 Half-Yearly Review:

The Estimated Financial Statements have been prepared to take account of economic and financial data available to Treasury as at 24 January 2023 and estimates of Government policy decisions and parameter and technical adjustments up to 3 February 2023. Any estimates or assumptions made in calculating revenues, expenses, other economic flows, assets or liabilities are based on the latest information available at the time.

Further, the2023 Pre-election Budget Update issued by then Treasury Secretary, Dr Paul Grimes, once the caretaker period had begun, provided a further revision of figures based on changing economic factors, as well as any policy decisions made before the caretaker period began. It made clear:

The budget forward estimates face significant pressures and risks, including future pressures associated with programs and functions that are presently funded on a time limited basis, and a range of cost and service delivery pressures.

Time-limited programs are not funded into the forward years because they are required to be considered by the government of the day in the light of all claims on the budget. If the entire detailed expenditure for the forward years was locked in, then governments would need only to prepare a new budget every four years. Further, the pressures and risks referred to by the then Treasury Secretary in the2023Pre-election Budget Update include inflation, supply chain issues and coal price fluctuations affecting royalties. It is the job of Treasury officials to be pessimistic and to warn treasurers and governments of worst‑case scenarios, economic headwinds and unavoidable pressures from external factors beyond the control of governmental levers.

Responsible governments listen to those warnings seriously but get on with the job entrusted to them by the people of New South Wales of producing a budget that balances all the relevant factors in the best interests of the whole community. Sadly, it appears that this Government is simply not up to the job and wants to blame someone else for its own inability to manage the future. We heard the Treasurer talk of cost blowouts for projects. He neglects to talk about the primary driver of those increased costs: inflation, supply chain issues and industrial action. What we did not hear is what he will be cutting of those vital infrastructure projects. Despite Labor's track record of cutting infrastructure projects, we await confirmation that this will not occur.

The myth of an undisclosed $7 billion budget black hole has been worked up by the Minns-Mookhey Labor Government as a cover for its plans to massively cut services to the people of New South Wales, while offering unfunded wage rises to public sector workers to satisfy its union masters. Labor's wages policy presents the biggest threat to our State's two triple-A credit ratings. Do not take my word for it; listen to the words of S&P Global's Martin Foo, who said:

We see slight downside risk to the rating from potentially higher overall spending on public sector wages. This spending represents the state's single-largest outlay.

He then went on to say:

If wages were instead to rise in line with inflation and without countervailing savings, there could be a further delay in the return to operating surplus. This, in turn, could call into question the quality of the state's financial management.

This was reinforced again in March when S&P Global endorsed the former Government's wages policy in saying that State governments had generally "struck pragmatic middle ground" in recent wage negotiations. Despite those warnings, we have seen the industrial relations Minister in the other place just today cheering about "busting the wages cap". That is hardly the sign of fiscal and spending restraint that the Treasurer insists he is exercising.

The Treasurer has offered his assistance to the Reserve Bank to help slay the inflation dragon, while ignoring the repeated warnings of its governor, Philip Lowe, that any increase in wages beyond 3.5 per cent, unaccompanied by real increases in productivity, risk feeding that dragon. The Treasurer's reckless, unfunded 4.5 per cent public sector wage rise offer, with no productivity offset, must be making the inflation dragon feel all warm and fuzzy and ready to roar. Despite a clear election promise that any rise in public sector wages in excess of the existing wages policy would be fully offset by identified productivity gains and hence have a net-zero effect on the budget, we now know that the offer of a 4.5 per cent wage rise for 2023-24—1.5 per cent above the policy—will cost the budget an unfunded $618 million in 2023-24 alone. That is approximately $2.5 billion over the four years to 2026‑27.

It should be noted that on 5 June the Government announced that part of its wages policy would apparently be funded from revisions to the out-of-home care provisions. Yet we are also told that part of the apparent $7 billion black hole is made up of a $700 million shortfall for out-of-home care. It is a case of Mookhey's Magic Millions—you can spend taxpayer money and have it too. This, along with the rest of the economic statement today, reveals the truth about this new Treasurer that he is nothing but a snake-oil salesman. According to him, it is all someone else's fault and he has the magic serum to fix it.

The grift is well and truly on when the Treasurer claims that he wants to restrain spending to help tackle inflation while also heaping petrol on the inflation fire with the Government's wages policy. Despite the big promise that Labor would give the union movement the wages policy it wanted, we are already seeing the unions renege on the pre-election deal by asking for more. The NSW Teachers Federation is still demanding 15 per cent over two years, and the Health Services Union is engaging in rolling strikes to press its demand for a 6.5 per cent wage rise for 2023-24. If those demands are met, $7 billion will seem like a very small black hole indeed.

What about raiding the NSW Generations Fund [NGF]? There was never ever a proposal to borrow $25 billion and invest in the NGF. That is just straight-out not true. If the Government has developed a policy strategy predicated on that, it is plain wrong. So how does the Government propose to pay for all those problems of its own making? One implied solution we have already started to hear today is to smash open the piggy bank and raid the NSW Generations Fund to pay for recurrent expenditure. It is robbing tomorrow to pay for today. We already knew that contributions to the NGF were suspended when the former Government decided to pause contributions while the State was in a cash-operating deficit. However, the decision to pause contributions indefinitely and request a Labor-dominated committee to start a review can only be viewed as the first step in abolishing the fund.

We hear the spin that the NGF is borrowing to play the stock market. What this Mookhey misdirection neglects to mention is that contributions into the NGF are made up of the proceeds of asset recycling transactions, like the sale of WestConnex, and the proceeds from mining royalties and State-owned corporation dividends—not borrowed money. This investment took place when debt was acquired at an interest rate of 2 per cent while investment returns were projected at 9 per cent, delivering long-term value for the taxpayers of New South Wales and helping future generations manage the State's debt obligations.

The Treasurer also addressed the cost of living. The Treasurer said, "We are in a once‑in‑a‑generation cost‑of-living crisis." Family budgets in New South Wales are struggling to make ends meet and pay the bills. In response to this crisis, one of the first decisions of this Government was to deny energy bill relief to thousands of households by cutting energy bill rebates.

The Hon. Penny Sharpe: That is not true either.

The Hon. DAMIEN TUDEHOPE: "Either", I will take that. After promising to continue Active Kids vouchers so that our children can remain involved in community sport, this Government seeks to increase the cost to families for children participating in organised activities with a cut to Active Kids, Creative Kids and First Lap vouchers. The Treasurer is no longer in opposition. He cannot simply wax lyrical about problems. He must come up with solutions, particularly to help families and households with the cost of living.

What we have seen today is a government that is still, after three months, not ready to govern. The Treasurer needs to remember that he is in government now, not opposition, and what he does and says has real‑world ramifications for workers and businesses in New South Wales. Today we have heard a fiction that everything is terrible because of the Coalition, but when it comes time to cut the ribbon on a Coalition-era project, like the Prince of Wales Hospital or the Central Station main concourse, it is all smiles and laughs from members opposite. The reality is that the former Coalition Government ran a responsible budget, managed debt, controlled spending and delivered transformational projects for New South Wales while also investing for the future of New South Wales. Labor has made a false start for New South Wales, and it is just the beginning of tougher economic times ahead. We should all have grave concerns for what is in store for New South Wales in September.