Article:

SA State Budget 2019-20: Comment

21 June 2019

David Fechner , Partner, Corporate Finance, Tax & Advisory |

South Australian small-to-medium businesses had little to get excited about in the Marshall Government’s second budget, released on Tuesday.

If we were to apply a score from the perspective of the State’s SMEs, the 2019-20 State Budget is a 6 out of 10: Happy to have few surprises pop up but little to inspire joy, either.

Reviews of the budget over the coming days and weeks, however, will no doubt raise questions about the wisdom of growing general government net debt from $6.3 billion estimated at June 2019, to $13.2 billion by 2023.

As with anything in life, the answers to these questions will be influenced by the individual’s outlook.

From the Government’s perspective, the servicing of the debt is probably not a significant consideration given the current interest rate environment. While household interest rates sit at three or four percent, the Government can borrow from the markets at interest rates in the high one to mid three percent range. It can issue bonds to raise funds with significant time frames of 20 and 30 years if it wishes to secure the cost of the debt.

The questions we should really be asking are the same that any business or household must consider when debt is incurred: What the money is being used for and how will the deployment of these funds assist in repaying the debt in the future?

Will this spend generate future revenue streams for the government, allowing them to repay the debt raised? Will it provide for improvements in productivity? Will it entice more businesses to stay in South Australia, move here, or encourage startup and innovative businesses to grow in SA?

The State Budget indicates infrastructure spend over the four year forward estimates of $11.9 billion. This includes $3 billion towards a joint investment with the Federal government of $5.4 billion in the completion of the North-South Corridor.

It is likely that this investment will result in improved productivity, reduction in cost of business and increased liveability.

One challenge for the State Government is that it relies upon a significant contribution from the National GST revenue. This contributes approximately $7 billion to an expenditure budget of $20 billion. On a per capita basis, South Australia receives 150% share of GST. Given that Gross State Product per capita in South Australia is lower than average revenue, it could be considered that for every $1 of economic activity that generates GST in South Australia, the State Government receives $1.60.

The other states have made noise about the GST carve up and the current budget reflects a $2.1 billion reduction in GST revenue grants over the coming four years.

If you reflect that the $20 billion of State Government expenditure is approximately 20% of economic activity in South Australia, a $1 billion reduction would have significant effects for employment and sentiment.

Likewise, any slash to expenditure on health, education, law enforcement and utilities would leave most South Australians decidedly unimpressed.

If you are excited about the growth prospects in South Australia, about food and agriculture, new mining opportunities, high technology, quality education, our creative artists and the entrepreneurial spirit that leads to growth in productivity and likely population growth, then you might consider that now is a good time to invest in infrastructure.

Note: A version of this opinion piece appeared in The Advertiser’s State Budget lift-out on Wednesday, 19 June 2019 as ‘Debt fuels exciting growth prospects but be careful.’