From: ajw@squid.mel.dit.CSIRO.AU (Andrew Waugh)
Subject: Re: Will Victorians vote stupid yet again...?
Organization: CSIRO, Division of Information Technology, Melbourne
Distribution: aus
Date: Sat, 3 Oct 92 05:45:16 GMT

In article <1992Oct2.113609.7459@monu6.cc.monash.edu.au> suter@fawlty8.eng.monash.edu.au (Mr D. Suter) writes:
>BTW did you know that the Labor governments TARGET
>in their policy is to reduce state debt to the stage where
>it is 15.5% of government revenue. THEY HAVEN'T LEARNED!
>They are still content with throwing away 1/6 of
>our taxes in interest payments (and that's a target!-
>we can't even be sure, with their hopeless record
>that they can even come close to this!). Moreover,
>the very notion that they should set
>such a target (predicated on a percentage of our
>revenue rather than an absolute sum) is in
>keeping with their complete lack of determination to
>really tackle the problem. One suspects that they hope that
>our revenue will rise (coming out of recession) and
>that they will throwaway another bucketload of money
>if given a chance.

Victorian governments have always financed assets from borrowings.
Right from the start of 'reponsible' government. Consequently we
have always had to pay interest payments. Expressing these payments
as a % of revenue and setting a target is a sensible step. The
Liberals, of course, have done exactly the same thing although they
have not expressed it in those terms.

(Incidentally, asset financing is exactly the same in all other states
of Australia.)

The 'rational' for financing assets from borrowings is that the assets
benefit future generations; it is only fair that these future
generations help pay for the assets. 

In practice, however, I suspect that there was no other way assets
could be funded. Initially Victoria had almost no revenue stream;
consequently the only method of raising funds to buy assets was to
borrow. Without assets, of course, Victoria couldn't have been
developed. Once a state debt had been built up, however, it was
politically impossible to switch to funding from revenue. To do so
would have required the Government to simultaneously fund i) paying
back the interest and capital of the original loans and ii) purchasing
assets. This could be done either through high taxes or the ceasation
of asset purchases. Neither has ever been popular with the electorate.

>As for the principle of selling off government enterprises/assets -
>again you didn't read my posting. I'm not really against this.
>In fact I'm generally for it. But the point is that you
>ought to be making headway on reducing debt if your selling
>off all of your assets NOT INCREASING IT!

To be fair, the Government has faced many problems in selling assets.
Some of these problems are a consequence of their policies (but not
all) and very few of the problems will go away with a change of
Government.

One obvious problem is that the Government is being forced into
selling into a depressed market. The requirement for forced sales
won't change tomorrow. Nor will the prices obtained for assests
increase. Melbourne CBD property prices, for example, won't increase
for years, neither will world aluminium prices.

A second problem is that asset sales generate immense electorate
resistance. It is all very well for the electorate to agree to asset
sales -- in the abstract -- but it is very different when the asset
is the local (unused) courthouse, or a park. When the Kirner
government tried to sell such assets there was immense pressure
from local organisations, state organisations (such as the National
Trust), the media (especially the Herald-Sun), and, of course,
the Liberal Opposition.

A final problem is that a large amount of the assets are essentially
unsaleable. Who do you sell the road system to? Consequently, the
assets that are sold have to serve twice. They have to cover their
own cost and the cost of the assets which cannot be sold. This leads
to the selling of the `plums' -- assets which are readily saleable --
and, potentially, leaves the State with a core of unsaleable assets
which generate little or no revenue to cover their debt.

I doubt the Liberals will be any more successful in selling assets
than Labor was. But I won't judge them harshly for this.

andrew waugh

(Incidentally, the debt problem is not new. The financing of assets
was largely the cause of the collapse of the rail systems in Australia
after WWII. Railways, like all other assets, were funded by borrowing
money. The revenue from railways was set to a level to just sufficient
to cover operating expenses and interest payments (in a good year). 
This was largely by conservative rural based governments wishing to
lower costs to the farmers -- their electorate -- as much as possible.
Governments were not, of course, interested in increasing the costs
to the electorate to pay back the capital costs of the railways.

The result, of course, was that a large and increasing part of the
revenue went to pay interest. Further, every improvement made by
the railways (new locomotives or improved signalling) simply added
to the capital account and increased the interest that had to be
paid. The result was a low level of investment and crippling interest
charges.

For those readers saying "typical bloody governments", I should point
out that the collapse in the U.S. railway system was from exactly the
same cause. A very large amount of the capital used to build the
U.S. railway system had come from the sale of bonds rather than stocks.
These bonds were simply rolled over as they became due and no serious
attempt was made to pay the bonds off out of revenue.)
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