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11mm? Queensland Commission of Audit Interim Report June 2012 Queensland Commission of Audit Interim Report June 2012 This document is printed on Maine Recycled Silk Maine Recycled is a low cost, high quality paper with good environmental credentials. It is is made with fibre derived only from sustainable sources and is produced with a low reliance on fossil fuel energy. Maine Recycled’s low carbon footprint has been neutralised to zero from seedling to delivery at printer through the purchase of carbon offsets. Download environmental fact sheet here. © Crown copyright All rights reserved Queensland Government 2012 Excerpts from this publication may be reproduced, with appropriate achnowledgement, as permitted under the Copyright Act Queensland Commission of Audit Interim Report June 2012 Queensland Commission of Audit Interim Report June 2012 QUEENSLAND COMMISSION OF AUDIT Chi I.. " .. , T~I lionO"tlDle PUI' Cos!ello AC Co .... I.. lo .. ", Pro' SUd r. IUrd inl & Dr Oo., M<hU Ir! 15 June 2012 The Honourable Campbell Newman MP The Honourable Tim Nicholls MP Premfer of Queensland Treasurer of Queensland and Minister for Trade Dear Premier and Treasurer We are pleased to present to you the Interim Report of the Independent Commission of Audit into Queensland's Financial Position, Public Sector Service Delivery and Infrastructure Program. You have asked the Commission to review the Queensland Government's current and forecaslfinancial position, and to make recommendations on: • strengthening the Queensland economy • restoring the State's financial position (including its AAA cred~ rating), and • ensuring value for money in the delivery of fronttine services. This Report COV(lrs the state of the Government's financial pos~ion , in accordance with the first two issues in the Commission's TelTns of Referel'\Cfl. It is disturbing to report that, in recent years, the Government of Queensland embarked on an unsustainable level of spending which has jeopardised the linancial position of the State . Queensland has moved from a position of consldera~e financial strength Just si)( years ago 10 a position of weakness today. When the State began "living beyond its means", ~ began borrowing heavily to support the budget. Th is meant It was particularty vulnerable to eldemal shocks as occurred with the global financial instability of 2008 and the natural disasters of 2011 . State debt is now e)(pected to top $100 billion by 2018-19. Urgent fiscal repair is necessary just to stabilise debt which will continue growing in the absence of corrective measures. After that, the State will need a very large program of debt repayment to recover its AAA rating . The first stage of the repair will require realigning govemment recurralll and capital spending so that ~ can be fully funded from the State·s recurrenl revenue . The Commission considers the State will need fiscal consolidation of $3 billion over three years to put the Budget into genuine surplus. The revenue options open to the State are limited. As a result , most of the effort will have to be taken on the expenditure side, by implementing savings. Queensland Commission of Audit Interim Report June 2012 The magnitude of the task is substantially larger than previously recognised because the former Government has bu ilt in unrealistically optim istic Budget assumptions that have masked the magnitude of the underlying structural problems. The Commission has canvassed a range of options for achievin g the necessary budget savings over the next th ree years, and urges you 10 commence Ihe process immediately starting in the 2012-13 Budge\. The second stage wi ll require a substantial reduction in debt wh ich cannot be done through revenue increases ano;!{or expenditure savings_ It will be necessary to realise assets to reduce debt. If Queensland is to recover the poSition it had In 2007-08, i\ will need to reduce debt by $2 5·30 billion. There are also a larg e number of outstanding unresolved and unfunded risks and contingent liabilities identified by Ihe Commission which will need 10 be carefully managed to avoid further damage to Ihe State's fin anC ial positi on. Remaining issues in the Terms of Reference will be addressed In our subsequent Reports in November 2012 and February 2013. The Commission commends its Reporl lo you. The Commission would li ke 10 place on reco rd its appreciation of the assistance provided by its secretariat in preparing this Report. Yours sincerely The Honourable Peter Costello AC Professor Sandra Harding Dr. Doug McTaggart Chairman Queensland Commission of Audit Interim Report June 2012 Linkage of Interim Report to Commission’s Terms of Reference Terms of Reference Relevant Section of Report 1. Financial position a) the State’s balance sheet, including net debt position and associated debt 2 servicing charges b) the forecast trend in the balance sheet position over the forward estimates 2 period c) the trends and long-term projections in growth of own-state revenue, 5 including the various state taxes and charges as well as resources royalties d) the trends and long-term projections of GST Revenue under current 6 arrangements as well as potential future arrangements as a result of the Greiner-Brumby-Carter report, which will be released before the Commission of Audit is due to report e) the trends and long-term projections of growth in expenditure across the 3, 7 and 8 various classes f) whether there are any events, such as the 2018 Commonwealth Games 9 funding obligation and the Carbon tax, not adequately provided for in the Mid-Year Fiscal and Economic Review or forward estimates g) any contingent liabilities that should be brought to the Government’s 9 and 10 attention. 2. Improving the State’s financial position a) policy settings and strategies to address any structural factors affecting the 1, 4, 11 and 12 State’s finances, and to restore its AAA credit rating b) strategies to improve the State’s balance sheet management 1 and 12 c) strategies to improve the sustainability of the State’s capital program 8 and 12 beyond the forward estimates period to 2030 3. Service delivery a) benchmarking public sector management and service delivery issues, * including procurement, corporate services, and asset management, against other states b) identify any potential improvements to productivity, service quality, and * value for money in service delivery across the public sector c) effectiveness of existing performance metrics and options for greater transparency and accountability through improved public reporting * d) the adequacy, affordability and deliverability of the capital program over the forward estimates period * e) strategies to encourage greater private sector involvement in the funding and/or direct provision of public infrastructure and services * f) the efficiency of current pricing arrangements for regulated infrastructure, including electricity, water, rail and ports. * Queensland Commission of Audit Interim Report June 2012 2 4. Government commercial enterprises a) the financial performance of Government owned corporations (GOCs) and * commercial agencies b) the level of indebtedness of GOCs and commercial agencies, how such * indebtedness compares with private sector peers and whether it is a prudent level c) measures to improve the operational performance and financial returns to * the State from GOCs and commercial agencies 5. The economy a) whether any government policies, taxes, regulatory arrangements, * ownership structures or actions or inactions represent a constraint on Queensland’s economic growth b) recommendations to generate long-term systemic reform to grow and * strengthen the Queensland economy. * These elements of the Terms of Reference will be addressed in the Commission’s subsequent Reports in November 2012 and February 2013. Queensland Commission of Audit Interim Report June 2012 Key terms used in this Report The Commission uses several key concepts and terms throughout this Interim Report. In some cases, the terminology used differs from that regularly employed in the State’s financial statements, particularly the standard definitions used in the Uniform Presentation Framework. This reflects the Commission’s intention to ensure that the key concepts and recommendations are user friendly, and can be readily understood by readers. The fiscal balance refers to the net lending/(borrowing) balance, as defined in the Uniform Presentation Framework operating statement. The fiscal balance provides an indicator of the State’s annual borrowing requirement, by combining the net operating balance and net acquisitions of Fiscal balance non-financial assets. The fiscal balance is broadly equivalent in accrual terms to the underlying cash balance, which is the Australian Government’s headline budget measure. Gross debt refers to the stock of borrowings accumulated over a period of time. It is equivalent to the “borrowing” item in the Uniform Presentation Framework Gross debt balance sheet. This is the primary debt concept used throughout the Report. As outlined in Section 2, debt refers to the measure of Queensland’s “net financial liabilities” as generally defined for credit rating analysis, especially by the Standard and Poor’s Ratings Services. Debt Debt is broadly the sum of gross debt and superannuation liabilities, less investments (particularly those held for superannuation purposes). It differs from the definition of net financial liabilities used in the Uniform Presentation Framework, which takes into account a broader range of