Sunday, July 12, 2015

Queensland's debt: financial engineering or transparent financial reporting?

If you hadn't noticed local Treasurer Curtiss Pitt has been leaking like a dunny with a faulty faucet ahead of his first budget. The big debate there is now the transfer of debt from the general gummint sector to the GOC's (government owned corporations).

Gene Tunny has been highly critical of this: Accounting trick wouldn’t improve Qld Government’s real financial position

Gene is absolutely correct on that. It does nothing for the overall financial position or interest payments. This has been wrongly reported by some media. It has though also been a 'source of funds' for previous administrations of both colours.

We could go back to basic Miller Modigliani economic theory. The value of a firm doesn't depend on how it is sliced. I recall an interview with Merton Miller. I cant find a link but it went like this:

Q: Can you explain your theory simply.
A: Yogi Berra was asked how he wanted his pizza cut, in quarters or eighths. He said cut it in eighths he was hungry today.
Q: You won a Nobel Prize for that?
A: We proved it rigorously.

There is some value IMHO in distinguishing between different types of government debt. Curtis has said that these GOC's would run with that level of debt in the private sector. Maybe so but is that appropriate? Should the public sector be taking the same risk as a private choice in the private sector?

There is a political issue beyond either the private or economic. During the last election I queried the local Greens candidate on why they were opposed to asset sales of coal power stations when they didn't actually see these as assets anyway. I think the response was that they were opposed because that would make the "assets" easier to shut down ..... in which case they are not "assets" at all.

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