Does Iemma Deserve to Win?

Over the past week, friends and colleagues have expressed amazement to me that the ‘hopeless’ NSW Labor Government appears to be cruising to victory at Saturday’s elections.

When I’ve asked why they think the Iemma Government is so bad, views differed. Some pointed to ministerial scandals and service delivery failures. Others alleged that in a frenzy to reduce debt, the Government has failed to deliver on that central responsibility of State infrastructure.

Is this conventional wisdom correct?

First, some history. In 1994, to counter suspicions that Labor could not be trusted on economic matters, Bob Carr, then NSW Opposition Leader, promised to eliminate State Government debt by the year 2020.

That promise became the key pledge of the 1995 NSW campaign. In one stroke, it took out the main economic argument against Labor and was the decisive factor at the election which Labor won by a nose.

The Carr Government survived financially until the new century for one reason the booming property market. NSW tax receipts are notoriously volatile and dependent on that market because they are derived mainly from payroll tax, stamp duties and land tax.

During a property boom, stamp duty receipts soar with the increased number of land sales at higher values. Land tax receipts also increase, and, if a property surge coincides with a period of economic prosperity, payroll tax receipts also rise. Until 2003, when the property market peaked, that is what happened.

Soon after they took office Premier Carr, and his Treasurer, Michael Egan, decided to use the overflow proceeds of the property boom to quickly reduce State debt knowing the healthy state of NSW tax receipts could not last forever.

It is not true, however, to say that funds were diverted away from infrastructure spending to reduce debt. The evidence for that comes from a traditionally anti-Labor source, the Property Council of Australia.

Last year, the Council commissioned the Centre for International Economics (CIE) to provide it with a report on infrastructure spending. The CIE examined this spending in NSW over the 18-year period from 1987 to 2005, and the report focused on ‘engineering construction activity,’ which is the best measure of infrastructure provision.

The CIE showed that engineering construction activity, both private and public, peaked twice during those 18 years. The first peak was in 1987 at just under 3 per cent of Gross State Product (GSP), and the second was in 2005 at just over 3 per cent.

The point is that these peaks were during the final year of Barry Unsworth’s Labor Government in 1987 and under the Carr/Egan regime in 2005. The figures also showed that although there were fluctuations over the period, they were generally within a narrow band between 2.5 per cent to 3 per cent of GSP. The lowest point was in 1989 during the Nick Greiner Coalition years.

The conclusion is clear it was the property boom tax receipts, not funding diverted by reducing infrastructure spending, which paid off most of the State’s debt. In all, $10 billion in government debt was re-paid.

Thanks to Fiona Katauskas

It should also not be forgotten that during this period, the Carr Government funded infrastructure for the only Olympics in history not to increase government debt.

Therefore, three years ago, when the property boom ended and the Government needed to substantially increase infrastructure spending, it was perfectly placed to do so. Despite the easing property market, the CIE reported substantial increases in engineering construction activity since 2004 fuelled by State Government funding initiated first by Egan and then by his successor, Andrew Refshauge.

Last May, new Treasurer Michael Costa announced a massive $41.3 billion in extra capital spending over the following four years with almost half that funding to be debt-financed. Even so, State Government debt will remain relatively low and is estimated to reach only 2 per cent of GSP by 2010, compared to the 7.1 per cent which Carr inherited in 1995.

The projects to be financed by this four-year program include the building and renovation of hospitals, TAFE colleges and schools; building new rail lines to Sydney’s northwest and southwest and new city rail stations; and the rejuvenation of power and water infrastructure particularly in Sydney’s western suburbs.

To put this infrastructure plan in context, $41 billion is to be spent over four years four times the $10 billion in debt re-paid over 10 years.

The State Opposition though, seems to have missed a shift in the electorate’s views about infrastructure spending. After a sustained economic boom with voters more fully employed but working harder, people have realised the importance of the contribution to their daily lives made by government or collectively-supplied services including infrastructure.

After a long period of prosperity, excuses made by governments for not providing those services are falling on deaf ears. This realisation that there are certain services which can only be provided collectively, does not suit the Coalition either in Canberra or Sydney.

It would have been sensible for NSW Opposition Leader Peter Debnam to recognise this shift and to deal with it even though his Federal colleagues are unable or unwilling to do so.

Yet the key election promise Debnam has made is to cut 20,000 unspecified public service jobs and use the savings to fund his own promises. This has sent precisely the wrong message to the electorate that the Liberals and Nationals are not interested in providing services, just in cutting them.

Debnam’s promise to transfer State industrial relations powers to the Commonwealth has also unsettled an electorate who are fearful of the effects of John Howard’s pro-employer WorkChoices changes.

The Opposition’s dopey attitude to ‘Law and Order’ has not helped either. Debnam’s proposals that juries make sentencing decisions, and that the independence of the Director of Public Prosecutions be diluted, are stupid. The former is impractical and unnecessary; the latter is just dangerous a back-to-the-1970s regression to a corrupt era when politicians interfered with justice.

Critics attack the Iemma Government for not spending more on infrastructure earlier, but that criticism in itself will not win the election.

It is therefore not so amazing that the Government seems headed for victory. If Morris Iemma wins, however, he should celebrate quietly and not for long.

As he says himself there is more to be done.