There is a need to take a genuine look at the big picture for our future when it comes to state and federal budgets.

Preparing the groundwork for what is likely to be an austere 2024-25 Tasmanian budget in four months' time, Treasurer Michael Ferguson reportedly accused federal Treasurer Jim Chalmers of leaving Tasmania off the fiscal map, saying state requests for funding of the Launceston General Hospital Masterplan, the Greater South East Irrigation Scheme, and the Burnie court complex had fallen on deaf ears.

Federal funding for any of the three infrastructure projects would be clawed back via future GST distributions, hence any grant would be, in effect, a loan repayable in equal instalments over three years.

A failure to secure a short-term loan is unlikely to cause our undoing.

It sounds more like Treasurer Ferguson is preparing for a horror budget in September and the inevitable blame game has started.

Most federal grants that support state services are considered when assessing states' GST shares. That's the whole point of GST protocols administered by the Commonwealth Grants Commission, which endeavours to enable states to provide equivalent services. Grants to redevelop the Royal Hobart Hospital were clawed back. So too have all the irrigation grants received to date. So too will the $240m Macquarie Point urban renewal grant.

Only a few grants are overlooked.

Some are partially excluded, like national road projects where 50 per cent of grant amounts are quarantined from assessment. For example, the Midland Highway and Bridgewater Bridge grants. Funding to fix the Lyell Highway is also likely to fall into this category.

The glaring inadequacies of our federal system are becoming apparent. We've got a reasonable system for ensuring states can provide equivalent services (so-called horizontal fiscal equalisation) although the special treatment handed to WA is causing the system to creak a little.

But we still have a system where one level of government raises most of the funds (the commonwealth) and another provides most of the vital services (the states). The commonwealth isn't keen to raise more either via taxation or borrowings even though they're in the best position to do so.

States have always been unwilling and, to some extent, unable to raise more tax because of the narrow tax bases all rely on. At the same time, raising funds by more borrowings is fraught because rising interest rates and flatlining revenues means loans are very difficult to service. In Tasmania's case we are currently borrowing to pay loan interest. That can't continue, especially when unmet demand for necessary government services is growing at an alarming rate.

The commonwealth and states are approaching a Mexican standoff point. Each will blame the other while doing nothing to resolve the issue. It makes sense to collect taxes centrally, but it also makes sense to have service-delivering decisions made closer to the coalface.

The commonwealth this year (2023-24) says it will achieve a cash surplus, of $9.6bn on operating revenue of $689bn. That's 96 cents spent for every $1 raised. However, deficits will return in 2024-25 when $1.04 is expected to be spent for every $1 of revenue.

The 2024-25 year estimates show the Tasmanian government spending $1.11 for every $1 of revenue. That's before 2024 election spending commitments and other boondoggles are included. The federal government has many more weapons at its disposal. Despite all the talk about the level of the federal government's gross debt, its net debt is at a comfortably low figure as roughly one third is held by the RBA.

In 2021-22 the value of the commonwealth's consolidated debt fell by more than $100bn when the RBA bought most of the government bonds it now owns and hasn't moved much since, as inflation has reduced the fair value of debt despite a few more bonds being issued. Who said there are no winners with inflation?

The RBA assisted the commonwealth government through the Covid storm and gave enormous support to the banking system. But the crucial service deliverers, the states, were given steerage "We still have a system where one level of government raises most of the funds (the commonwealth) and another provides most of the vital services (the states) accommodation.

This means the Tasmanian government's strong plan for a 2030 future is being built on shaky foundations. All risks are on the downside. Our lifeline, the federal government, is slowly becoming preoccupied with its own survival and less likely to prioritise helping states.

The fact that states have done little to help themselves makes it easier for the commonwealth to keep its distance.

It is crystal clear that economics is struggling to explain the new world.

Twelve of the last 10 predictions have been wrong. Most economists first spotted rising interest rates in their rear-vision mirrors yet cheerily endorse their use to reduce inflation despite having no credible theory explaining how and why it occurs.

We have a federal system that is not fit for purpose. Every time we have a problem, or an approaching storm, we turn a blind eye and pray for a rainbow. When are we going to start being a little more honest with ourselves?

The Mercury, 17 May 2024