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Is Queensland Labor's Election 'War Chest' washed away by TC Debbie

After three months it is nice to be back in the saddle being referenced in a few stories appearing in the Courier this week.

I wanted to quickly place some context around the numbers being quoted in those stories and write about Severe Tropical Cyclone Debbie’s impact on the State Budget and Queensland Labor’s Election ‘War Chest’.

About two weeks ago I was thinking the State Government would be very well positioned going into this year’s State Budget.

With a State election on the horizon I was anticipating a significant election ‘war chest’ to be spent as part of the State Budget in the second week of June this year.

Thought was there would be a good old fashioned ‘infrastructure’ budget to outlay the projected $2.75 billion windfall from additional GST receipts and revised coal royalties that the State Government has scored in recent times.

Where this number comes from is relatively straightforward.

As part of the 2016-17 State Budget delivered in June last year it estimated 2016-17 coal royalties to be $1,531m and 2017-18 royalties to be $1,619m. However off the bat of rising coking coal prices these estimates were revised significantly upwards at the Mid Year Fiscal and Economic Review in December (MYFER) to be $2,987m and $2,022m respectively, delivering a $1,456m windfall across the two years.

When coupled with an extra $889m in additional GST revenue recently announced for 2017-18 (see blog below) that was an impressive but theoretical $2,748m election ‘war chest’. This would have no doubt been earmarked for major infrastructure projects in the State Budget. 

It would have gone a long way to addressing the relative infrastructure underspend that has been occurring in recent years.  At present the State Government is spending about 1.5% of GSP on infrastructure where as recently as 2009-10 we were at 3.5%. A two per cent difference literally accounts for billions of dollars in infrastructure underspending that has serious repercussions for the economy (I will do a story on infrastructure spending in coming weeks).

A similar trend is also clearly evident for GOCs which are now instead channeling greater monies to the State Government in dividend payments. 

However things have obviously dramatically changed as a result of Severe Tropical Cyclone Debbie. In short coal and GST have given with one hand and Mother Nature has taken away with the other.

Firstly there is concern that the impact of the cyclone on rail and ports will impede the export of up to 17 million tonnes of coal which is roughly 6.9% of annual production.  If unable to made up by the end of the financial year this will deny the State Government about $206m in royalty revenue.

The damages bill is notoriously hard to calculate and some of the estimates have certainly been ‘impressive‘ however TC Yasi and the floods can serve as some indication.

Tropical Cyclone Yasi and the December 2010 and January 2011 flood events (three separate natural disasters) resulted in State Government expenditure in the billions of dollars mainly to replace roads.

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How TC Debbie impacts on the 2017-18 State Budget and that theoretical election ‘war chest’ all comes down to timing, both when the expenses for TC Debbie are appropriated and when assistance payments from the Commonwealth are received. 

No doubt there will again be another stoush with the Commonwealth on when the State Government is reimbursed for 75% of the damages bill paid out under NDRAA arrangements. We only just recently settled the 2010-11 event.

We can see from the above table that the damages bill will mostly land in 2017-18 and it will not immediately hit the State Government as much in 2016-17.

So in summary the $206 million in foregone coal royalties will land in 2016-17, the $1,446m in additional coal royalty revenue will also land in 2016-17. In 2017-18 we will have landing an additional $889m in GST and another $403m in coal royalties but we will have the expenses bill of TC Debbie hitting the budget. The Commonwealth typically drag their feet on reimbursing the State and we will not see that money for a while.

Working almost opposite to these flows is the impact on economic activity that the State Government earns taxes from. When it comes to natural disasters there is an immediate hit on the economy in the form of lost resources activity (discussed above) foregone agricultural production and impact on tourism that will occur in 2016-17. However as the rebuild occurs in 2017-18 this creates economic activity that will buoy the economy and tax receipts. In the longer term we have to pay off the rebuild which reverts to being a drag on economic activity.

My sense is once the final rebuild bill is known and Queensland is reimbursed from the Commonwealth for it, the original sugar hit from coal royalties and GST will almost have netted itself out but the cash flows are definately in favour of the State Government.

So where this all leaves us is as clear as mud ……. the election ‘war chest’ is either still in tact or already spent depending on your perspective. It’s a question of whether you want to splurge the cash whilst you have it or apportion it to pay off the looming natural disaster expenses bill.

The 13 June State Budget will deliver that answer.

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