State governments crunched by the downturn: Kohler

Once the Carr car plan, which has suddenly turned into a rescue, is out of the way today, and having temporarily kept childcare afloat, the Federal Government will now have to focus on the next industry facing collapse – the “state government industry”.

Once the Carr car plan, which has suddenly turned into a rescue, is out of the way today, and having temporarily kept childcare afloat, the Federal Government will now have to focus on the next industry facing collapse – the “state government industry”.

It’s not just NSW, although Morris Iemma appears to be the Eddy Groves of government.

The collapse in real estate transactions and an increase in unemployment are about to significantly erode the tax revenue of all states – based, as it is, on property stamp duties and payroll taxes.

And on Friday the Queensland Treasurer Andrew Fraser highlighted the erosion of GST revenue that was shown in the Federal Government’s mid-year economic and fiscal outlook. He said Queensland would lose $241 million in projected GST revenue this financial year, and that the total downward revision to state revenue in the forthcoming mid-year review of the budget would exceed $700 million.

There’s not much point in the Federal Government announcing massive fiscal stimulus packages if it’s all being undone by state governments doing the opposite to stay afloat themselves.

The NSW Government has been in trouble ever since the former Iemma government failed to get privatisation of the power industry up and, with real estate stamp duties and GST revenue collapsing, it is already facing a deficit approaching $700 million.

The new NSW Government of Nathan Rees is now planning a mini-budget next week to announce a series of cost-cutting measures to rescue the NSW budget.

All states are being forced to rethink infrastructure plans. For example, Victoria is scaling back its ambitious transport master plan, though state Treasurer John Lenders was quoted in The Australian on Saturday as still hoping to get the $10 billion in Commonwealth funding needed to support the public transport project.

Likewise South Australia is looking at deferring or cancelling a series of infrastructure projects.

Moreover, with the sudden collapse of the federal budget surplus, there must be some doubt over the series of deals with the states that are expected to be signed off at the next COAG meeting, involving $23 billion in transfer to the states for education, health, housing and disability services, in return for specific reforms.

Rather than announce its own infrastructure spending and stimulus transfers, the Rudd Government might be forced instead to make cash injections directly into state budgets.

This is not just a problem in Australia: in the United States the same thing is happening.

US states rely on sales taxes, and the Center on Budget and Policy Priorities (a think tank) has found that the median decline in sales taxes in the September quarter was 7.3%. Overall median total tax revenue declined 5.9%.

Moody’s has calculated that 30 states are in recession and another 19 are “at risk of recession”.

But with revenues collapsing, state governments are being forced to raise taxes rather than cut them, offsetting the efforts of the White House and Congress to keep the national economy afloat.

This article first appeared in Business Spectator