Audit shows gains of Labor razor gang

"Annual income #20, annual expenditure #19/6, result happiness," Wilkins Micawber, the character in Charles Dickens's David Copperfield, intoned.

"Annual income #20, annual expenditure #20/0/6 , result misery."

That was played out again yesterday in the state government's audit of the state's accounts, with the proverbial black hole now hitting $5.2 billion - a figure few take at face value - and thus paving the way for a tough budget in September.

The process is similar to the audit of state finances conducted for Morris Iemma when he became premier in 2005.

That report, known formally as the NSW Audit of Expenditure and Assets Report, but better known as the Stokes-Vertigan report, made it clear government expenses had exceeded budgeted revenues by at least $1 billion a year in the previous nine years, which could not continue.

The quick fall in state revenues in 2008 following the global financial crisis forced the state government to speed up its response to the Stokes-Vertigan report, and take an axe to costs.

While the ever growing "budget black hole" will pave the way for a "tough state budget", overlooked are the efforts to wind back government spending that were well advanced under the Labor government.

Under Labor, early moves such as cutting information technology spending were implemented quickly, with longer term reviews of government departments also under way long before the election.

The sprawling Department of Education had allowed Labor's razor gang in early and, under its previous director-general, Michael Coutts-Trotter, cost-cutting plans were well advanced.

Just before the state election the Herald disclosed planned Education spending cuts of more than $1 billion with proposals to close more than 100 schools, axe 7500 teachers, sell surplus land and slash the costs of some special needs programs.

All up the blueprint would save $800 million a year. Other departments, such as Health, were to follow.

The difficulty is that as soon as the Coalition took over the reins, the new Education Minister, Adrian Piccoli, said he would not close schools, throwing a question mark over the government's ability to achieve the spending cuts.

A close reading of the limited portion of the Lambert audit that was made public yesterday discloses that over the four-year budget estimates period, total government costs were estimated to come in at $50 million below budget, as difficult as it may be to believe, in the light of continued generous public sector wage deals.

The budget black hole is due entirely to revenue shortfalls of $500 million a year due to weak GST revenues and the slowdown in property deals over the next four years, which is only a budget variance of "less than 1 per cent".

In other words, after failing consistently to hold expenses to within revenues under premiers Bob Carr and Morris Iemma, the gap has been closed, with the O'Farrell government to reap some of the rewards of the work of the previous government. Now that's something you won't hear the new government say much about as it spins its way to a tough September budget.

To curtail future deficits, much more work to wind back spending will form the prime focus of the government's efforts in the coming months.

While barracking from the sidelines when in opposition, Coalition MPs insisted that when in government all ministers would be forced to meet budget, and could not expect to be bailed out. To underscore the fact, the Coalition decided to corral any unforeseen budget gains into a separate capital fund, which may be a millstone for some in government.

The O'Farrell government also has reviews under way into the unfunded public sector superannuation liability and the level of government debt, both of which are to be completed before the September budget. Whether these reports will be made public is unclear, although both are essential to forming a true view of the state of the government's finances.