THE Victorian government's half-year budget report card is not as bad as it looks at first glance. Low Australian government bond rates have produced a new $6.5 billion non-cash loss that will be backed out just as rapidly when the bond rate rises.
The accounts are tight, though. Tight enough to show the weakness that is being imported as demand stays weak and the resource boom forces up the value of the Australian dollar. Tight enough perhaps to raise questions about whether the Baillieu government can continue to have a defence of its AAA credit rating at the core of its strategy.
Let's get Victoria's "loss" out of the way first. It relates to superannuation liabilities in the future, and it's unlikely to be permanent. About $1 billion of it reflects market weakness and the impact of that on existing superannuation assets: the markets were in disarray in the December half and are higher now, so some of that shortfall should already have been recovered.
The balance is a bookkeeping adjustment that flows from the way the government values future super payouts to public servants. It arrives at a current-day value for the liabilities by discounting them using Australian government bond yields as the benchmark and Australian government bond yields are unusually low right now as investors seek havens amid global uncertainty.
The lower government bond yield produces a lower discount rate for the state's future superannuation liability, and the lower discount rate in turn magnifies the size of the liability. When the detritus of the global crisis is cleared and global growth gets back to normal, Australian government bonds yields will rise again, and the net present value of the state's superannuation liability will fall.
Victoria's December-half accounts nevertheless show pressure. Taxation revenue was flat in the December half compared with a year earlier, and sales of goods and services were softer, in the government sector and also on a broader measure that ropes in state-owned enterprises and corporations.
Cost were reined in as the government worked to keep its budget in the black, and its triple A credit rating secure: it stepped up its search for savings in December in its mid-year economic statement. But the government still posted a deficit of $341 million from transactions in the half-year compared with a $484 million surplus a year earlier, and an $810 million deficit if government corporations are included.
The government says that the December-half result is an "imperfect guide" to the annual result, because revenue including Commonwealth grants for specific projects will flow more heavily between now and June 30. It has also not changed the June-year revenue or expense predictions that were trimmed in last December's budget update, and is still shooting for a surplus of $147 million for the full year.
There are still formidable headwinds, however. Victoria's industrial economy is being hurt by relatively high interest rates and a high Australian dollar, as the Reserve Bank tries to moderate demand in the resources sector and keep inflation under control. House sales and house prices have softened, pulling down stamp duty and other property-related income. And consumer sentiment and consumer demand remain chronically weak.
The cyclical weakness was underlined by Myer chief executive Bernie Brookes, who yesterday reported that the department store chain's first-half profit fell by almost 20 per cent, and said that he saw no signs that the consumer spending strike was easing materially. Myer now says its full-year sales will be flat at best. And the structural pressure on Victoria from a high Australian dollar and relatively high interest rates will continue as the Reserve Bank focuses on containing inflation flowing from the nation's resources boom.
The Baillieu government says the pressure on the state reinforces the need for sound economic management that can deliver consistent surpluses that rein in debt, and generate funds in the medium term for infrastructure renewal. The strategy aims at entrenching the state's triple A rating, it said in December, adding that it was "the cornerstone of the government's agenda to build confidence, boost growth and improve productivity".
This year's surplus is contingent on the state not losing more economic momentum between now and June 30, however, and that is far from assured given last week's news that state final demand in Victoria expanded only 1.6 per cent in 2011 compared with 11 per cent in Western Australia and 10 per cent in Queensland. February's job numbers also showed Victoria, New South Wales and Tasmania lost 66,900 jobs in a year: Queensland, WA and South Australia added 83,400.
The downturn in the non-resources states is creating a vice for Victoria and NSW. To maintain their balance sheets and their triple A ratings they are being pushed towards spending cuts to offset revenue shortfalls. That, in turn, is further undermining their economic growth.
An increase in spending, for example on infrastructure projects that provided jobs in the short term and a boost to productivity in the longer term, would see their debt rise. Their surpluses could become deficits, and ratings downgrades would loom.
But as the south-eastern states struggle, the pros and cons become less clear-cut. A rating downgrade that marginally increases borrowing costs might yet be seen as an acceptable price for spending programs that boost productivity and protect Victoria and NSW from the backwash of the resources boom.