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Chilling message for business: State Govt now picking "losers"


The state Budget has sent a chilling message to successful businesses in South Australia, argues economics commentator Richard Blandy.

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On 17 May, I wrote in InDaily:

“The recent Commonwealth Budget is like a DeLorean ride back to the future – a regression towards how we were before Hawke and Keating (with Opposition support) reformed our economy towards being more competitive globally, providing higher standards of living for everyone…

“The worst bit of the Budget is the “levy” on (and increased regulation of) the Big Four banks plus Macquarie Bank…

“I await with trepidation the next state Budget from people who have taken this state a long way down the ‘Strong Government’ path already – with alarming consequences for economic growth and jobs for young South Australians.”

My trepidation has been justified.

The South Australian Government has mimicked the Commonwealth Government by duplicating its levy on the Big Four banks plus Macquarie of 0.015 per cent per quarter on their liabilities multiplied by the share of the South Australian economy in the national economy. Hence, if South Australia’s GSP is 6 per cent of Australia’s GDP, the State Government will pick up 6 per cent of what the Commonwealth Government will receive.

This may well be legal, but it is an appalling repudiation of national agreements following the introduction of the GST, when the states foreswore a slew of inefficient taxes (including specific taxes on banking activity like the FIT and BAD taxes) in order to receive a share of GST revenue, collected on their behalf by the Commonwealth. The GST is regarded as an efficient tax because it is a uniform, Australia-wide charge on sales less purchases, with some carve-outs.

… South Australia could expect to have its share of Commonwealth Grants cut substantially in due course.

The real problem for the South Australian economy is that the affected banks, who control a very large proportion of lending in Australia, will respond to South Australia becoming a less profitable place for undertaking banking activities by conducting less of it in South Australia, and more of it elsewhere. They will also attempt to pass on the rise in the cost of doing business in South Australia to their customers in this state by charging higher interest rates on their loans.

However, not all of the $370 million that they have to pay the South Australian Government can be recouped by charging higher interest rates. The new arrangements must lead to the target banks making lower profits, because the volume of loans that maximise their profits will be less. Economic activity in South Australia will fall compared with what it would have been.

A Government which has focussed on “picking winners”, to South Australia’s disadvantage, has now moved on to “picking losers”. This will not be lost on businesses. They now know that if the South Australian Government can see political advantage on picking on a business, it is willing to do so. This can only have a chilling effect on business investment in South Australia.

The risk of investing in South Australia has risen relative to investing in other states. Economic growth in South Australia will fall compared with what it otherwise would have been. Employment growth will be more subdued. Unemployment and underemployment will be greater.

The South Australian Government has argued, as one justification for the new levy, that the banks are too profitable. Economic success brings with it political visibility. The South Australian Government has now made it clear that highly profitable and visible businesses in South Australia can expect that they might be called-on to make a greater contribution to the State Government’s revenues.

The $370 million tax grab from the banks also shows that the much-vaunted surpluses from past state Budgets rest on flimsy foundations. Essentially, the State Government has treated cash from asset sales as recurrent revenue, when it is nothing of the kind. It is like selling the family car so the family can eat. When the cash runs out, the family will starve. Hence, we can expect that State Government taxes will have to rise if Government spending is to be maintained (or Government borrowing will have to rise, perhaps at higher interest rates, because the Government’s creditworthiness will have fallen).

Economic and employment growth could fall to very low levels. Unemployment and underemployment could rise greatly.

In addition, South Australia is receiving a far greater share of national GST revenues than its share of the economy. This is partly due to the complex way that capital grants from the Commonwealth Government are taken into account in assessing GST distributions: more capital grant money to a state means less GST money. But even so, South Australia could expect to have its share of Commonwealth Grants cut substantially in due course. The difference will have to be made up by South Australian taxpayers paying higher taxes, South Australian Government debt increasing, and/or the State Government cutting its spending. All these options mean slower economic growth for the South Australian economy.

The Weatherill Government has been an economic disaster for South Australia. The full extent of the disaster is not yet apparent – but it will be when the credit card maxes out. Economic and employment growth could fall to very low levels. Unemployment and underemployment could rise greatly. Interstate migration could reach new heights. So much for “strong government” as an economic philosophy.

One other curious feature of the South Australian Budget deserves a mention – the $40 million Fund My Neighbourhood program, available to communities to decide what local projects should be funded. This is yet another South Australian Government experiment in “direct democracy”, like citizens’ juries. It is clear that direct democracy greatly appeals, in principle, to the Premier himself.

Two citizens’ juries on South Australian Nuclear Waste considered the Report of the Nuclear Fuel Cycle Royal Commission. To my great joy, they both came up with the “wrong” political conclusion (by an overwhelming majority) to reject the commission’s recommendation that an international nuclear waste dump be constructed in South Australia. Premier Weatherill endeavoured to steer around this roadblock for some time, but eventually conceded that the proposal was dead.

Is direct democracy a sensible way for South Australians to be governed? Local government is the level of government responsible for neighbourhoods. Is it appropriate that councils be by-passed to give an experiment in direct democracy a fly (especially with the memory of what happened to the nuclear dump still fresh in our minds)?

Who is going to control this program? What are the criteria for deciding which projects are going to be approved and where? These details are to be unveiled shortly. Some activities that are not high priority on councils’ agendas are likely to be given a green light. Does this make sense?

Richard Blandy is an Adjunct Professor in the Business School at the University of South Australia and a regular InDaily columnist.

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