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As we wait for the release of the 2018-19 Queensland Budget this afternoon (or at least the parts of it that haven’t already been announced) we wanted to focus attention on the employee costs component.
Much attention will be given over to the infrastructure promises which will be made, and which we welcome, and no doubt much will also be made of increasing debt levels to finance those infrastructure plans. The chart below makes it clear why we welcome the increased focus on infrastructure investment spending; it’s been too low for too long. In real (inflation adjusted) terms public sector capital investment was 44% lower in the final quarter of 2017 than it was seven-and-a-half years ago.
Certainly funding any sizeable increase in public sector investment will require government borrowings to increase, but (and this is a big but) doing so can make perfect economic sense when the investments are made in projects that have solid positive economic benefits in the future. That requires that projects are committed to based on solid business cases and economic assumptions rather than political expediency; something for which Governments of both colours have remarkably poor track records. Despite scary talk about the cost of debt interest payments it’s worth bearing in mind that current interest payments account for some 3% of operating revenues. Even a substantial increase in debt levels would likely see that increase to no more than 3.5%.
What is spoken about rather less often, and certainly what the Government would like to talk about less often, is the upper line on the chart above; the level of government spending. While investment has fallen this has soared. Employee expenses (when we add in superannuation costs) make up the single largest component of operating expenses. In the 2017-18 MYFER total employee expenses accounted for more than 46% of all operating revenues. This is a far thornier problem, and one that requires urgent attention, than interest expenses. More worryingly still the relative impact of employee costs is on the rise. In 2016-17 they accounted for 43.5% of operating revenues; by 2020-21 MYFER forecasts that to have risen to 48.7%!
It’s not as if the Government aren’t aware of the problem. The Labor Government put in place a series of Fiscal Principles. Principle Number 6 was to “Maintain a sustainable public service by ensuring that overall growth in full-time equivalents (FTE) employees, on average over the forward estimates, does not exceed population growth“. So how have they done?
In his 2017-18 Budget then-Treasurer Pitt estimated the number of FTEs in the public sector would increase by 2.8% (the data so far, to Dec 2017, suggests we are on track for an increase closer to 3.0%). That Budget stated that “average growth (of public sector FTEs) over the forward estimates period from 2016-17 to 2020-21 is 1.7%. This compares to an estimated Queensland population growth of 1½% annually.”
By the time of the 2017-18 MYFER operating revenues had been revised up 1.1% while employee expenses had been revised up 1.3%. The MYFER still insisted that forecast growth in FTEs remained at 1.7% (despite a clear trajectory well above that pace) but also somehow managed to increase the projected population growth rate to 1.75%.
The Government’s own population mid-range projections forecast Queensland’s population to grow at an average annual rate of 1.6% in the five years from 2017 to 2022.
So while applauding (with some reservation) the move to increase investment we will be watching closely what today’s Budget has to say about employee expenses and growth in the public sector workforce If we are to see budget repair it is this component, employee expenses, that we must get under control. Confected outrage about interest costs of 3% of revenues pale into insignificance if we see employee expenses on a march towards 50% of revenues.
We are proud to have CBC Staff Selection as supporters of the Conus/CBC Staff Selection Trend Employment and Jobseeker data series