Friday, September 7, 2012

Newmania: Flatly Wrong

This morning, we heard about a new review into Peter Costello's Interim Commission of Audit Report. The review was conducted by Professor Bob Walker  who was commissioned by the Queensland Council of Unions. The findings in the report are exactly what the unions would want to see: that the report is fatally flawed in a number of ways. Professor Walker's credentials seem to be perfect for conducting this sort of review, but please listen here to Steve Austin's interview with Professor Walker on 612ABC Brisbane this morning, or read my transcript below, and make up your own mind.

SA: A Sydney academic has blasted Peter Costello’s Interim Commission of Audit Report into this state’s finances, labelling it as shoddy, and intellectually dishonest. It’s the document the Government of Campbell Newman has used to justify its aggressive cost cutting programme. Professor Bob Walker, together with his wife who’s an economist from the University of Sydney was commissioned by Queensland Council of Unions to audit the Interim Commission of Audit, or review it. His report was released today. I spoke with Professor Walker this morning before coming on air and asked him to give me his own overview of the document first of all.

BW: I think it’s a rather shoddy piece of work, and it’s intellectually dishonest. It fudges the figures in two main respects. First, it refers to what it calls ‘debt of total government’, and I think 100% of readers would think that includes absolutely every government agency, the whole of government. In fact, there’s a definition on an un-numbered page just after the cover which explains that total government for the Costello report excludes what they call the ‘financial corporations sector’ which includes the agencies which hold $28b worth of investments. So when the Costello report talks about debt – or, has a funny definition of debt. It doesn’t set off those investments and the standard way of talking about government finances is to talk about net debt.

Turning now to the second way in which the report fudges the figures, it defines debt as ‘gross debt less investments’, particularly those held for investment purposes for superannuation. Now that leaves reason to think that $28b would’ve been deducted, but instead it’s not.

SA: So they’ve included things like the debt being carried by government owned corporations which have a means or ability to pay things back, and you think it’s unfair to include that.

BW: I think it’s fair to include that, as long as you have the whole picture, the whole of government, and not define ‘total government’ as something less than all government agencies.

SA: Right

BW: And secondly, or thirdly, I suppose, it makes a lot of projections about future levels of debt and capital expenditure and so forth, and doesn’t justify any of this with tables of data. It looks as though they’ve, eh, made little historical projections as past borrowings, including borrowings for agencies like QR National, which have since been sold, and all in all, I mean they’ve admitted that they didn’t undertake any modelling; it looks as though their projections are prepared by a graphic designer drawing a line on a graph.

SA: Given who prepared this, and how it’s being used, that’s a damning statement. You are saying that they are being deliberately or negligently misleading in the Interim Commission of Audit.

BW: I’d say that, and I’d further emphasise that’s surprising; we have standards for something called performance audits in Australia. They’re prepared by a Commonwealth Government agency, which used to report to Mr Costello. And they’ve issued standards for performance auditing; it’s just uncomplied with in this document.

SA: So this document doesn’t meet accepted Commonwealth auditing standards?

BW: Well those standards apply; they’re mandatory for corporations but the document says they provided guidance for other exercises of this type, and it’s strange that standards issued by an agency that used to report to Mr Costello are just totally ignored.

SA: So how can the ordinary Queenslander see this or approach this Interim Audit. It’s being used as the platform or the reason d’etre for significant job losses in Queensland in the Public Service. How should we regard it?

BW: I think you should be outraged, frankly, because it’s a totally political document, prepared without regard, I think, to the facts.

Prof Bob Walker

SA: My guest is Professor Bob Walker. He’s from the University of Sydney. He was commissioned by the Queensland Council of Unions to audit the Interim Commission of Audit prepared by Peter Costello, former conservative Liberal Treasurer, professor Sandra Harding, from the James Cook University, and Doug McTaggart, formerly head of the Queensland Treasury Corporation. My name’s Steve Austin.
Let me go through some key points then if I can, please Professor Walker? First of all, Tim Nicholls, the Treasurer, will be releasing his budget on Tuesday of next week, said the QTC, the Queensland Treasury Corporation advised him that the state’s level of debt was unsustainable and must be urgently addressed. Do you disagree?

BW: I think the debt is totally manageable. In fact, if you look at the net debt figures, Queensland’s got a net debt…it’s the standard measure used, of around $17b. New South Wales has got almost double that. So I think there’s a lot of scaremongering going on with this report.

SA: Well, I’ll keep going…the Treasurer also said to Queenslanders that because of what he described as “Labor’s Debt Binge”, that the debt was expected to blow out to $85b by 2014-2015, and this is putting pressure on the state’s credit rating. Do you disagree with that?

BW: Well, the credit ratings agencies sometimes don’t get it right, and the ways in which Queensland prepares its accounts is sometimes a bit confusing. But the projections of debt in the Costello report aren’t justified with details of capital commitments. As I said, they’re just figures seemed drawn out of the air.

SA: Now, I’ll go on. The statement issued by the Treasurer in June of this year said that Queensland’s current net financial liabilities compared to operating revenue was forecast to reach 123% by June next year. Do you think this is a misleading approach?

BW: I think it would be better to look at the statistics published by the Australian Bureau of Statistics which standardises all figures from around Australia. Also, look at the figures in the audited financial statements which the Costello Report does not refer to except in passing. It’s quite astonishing that claims have been made, for example, that Queensland had to borrow to support the budget when the audited statements of cash flows shows that Queensland Government has reported surpluses from its operating activities. Cash surpluses.

SA: That to me is quite shocking because we’ve had this debate here in Brisbane some time ago, that the Government says they are borrowing to pay wages, and they have been very definite on that. You’re telling me that that’s not the case.

BW: That is flatly wrong, and all you need to do is look at the audited statements of cash flows, which have been reviewed by the Queensland Auditor General to see that the operating activities of Queensland have produced cash surpluses. Money has been borrowed, but it’s been used to invest in infrastructure.

SA: So we were borrowing money, but it was used to invest in infrastructure, not being used – and you can tell this from the audit you’ve done, you can tell this absolutely, put your professional reputation on the line - that it was not being borrowed to pay public servants’ wages in Queensland.

BW: I rely on the audited financial statements which have been reviewed by the auditor general which showed that Queensland produced surpluses from operations. It also invested heavily in infrastructure. These statements show the results of operating, borrowing, er, financing and investing activities and they clearly show that the bulk of borrowings went into infrastructure. In fact, looking over a ten year period, about half of the investment in infrastructure was funded by cash surpluses from operations.

SA: Half? By cash surpluses?

BW: Roughly. I don’t have the figures with me, but roughly, yeah.

SA: You’ve made the point and referred repeatedly to Peter Costello. He’s not the only person on the commission of audit. Doug McTaggart, respected financial mind, generally regarded on the conservative side of the ledger, former head of the Queensland Treasury Corporation: He has signed the Interim Commission of Audit, as has Professor Sandra Harding of James Cook University in North Queensland, generally regarded as being sort-of centre-left if you like, ideologically. She has also signed off on these figures. Now they are not obviously political figures, but why would they be a party to something which you’re telling me is so obviously misleading?

BW: I don’t think…whatever their skills in other areas, I don’t think they have skills in financial analysis. In relation to their past academic roles, I would say that if I received this report in my role, as I often do, refereeing articles submitted to international research journals, I would treat it as not worthy of publication. Revise and resubmit.

SA: Can I get you to repeat that? Not worthy of publication?

BW: If I received it in that context, because so much money has been invested in it, you’re reluctant to trash it totally, but I’d invite the authors to revise and resubmit.

SA: My guest is Professor Bob Walker from the University of Sydney, commissioned by the Queensland Council of Unions to audit the Interim Commission of Audit that was prepared for the Queensland State Government.

BW: Can I add that this report is solely my own work. It’s prepared with my wife, Dr Betty Con Walker, who’s an economist, and formerly worked in New South Wales Treasury and is very familiar with budget papers.

SA: All right, thank you for that. So then, leading into the state budget which is an extraordinarily late state budget next Tuesday, how should Queensland taxpayers approach what they hear from the mouth of the Treasurer Tim Nicholls?

BW: I think with a great deal of…a grain of salt. We’ve already seen extravagant statements coming from Government Ministers, extrapolating from the Costello report that Queenslanders faced $100b debt now. That is flatly wrong, and I notice that a couple of parliamentarians have had to clarify their statements in parliament. There’s been gross exaggeration on the basis of this report. That’s a risk. We have a section in our report talking about the dangers of Commission of Audit reports. In the hands of inexperienced or not financially numerate politicians, some of the extravagant language in the report can be exaggerated and wrongly interpreted.

SA: The Treasurer did say in June of this year that feedback from financial markets indicated that the market considers the Queensland state fiscal position to be “unsustainable” and looking for the state government to deliver a credible strategy to address our state level of debt. Can I ask you to respond to that, that the financial markets from whom we, the state government, borrows money, say that the debt here in unsustainable, and they need to develop a strategy to pay down the debt.

BW: Well, I’m not sure. They’re probably relying on some of these credit rating agencies, whose performance leading up for the Global Financial Crisis is quite a lot, but in my own experience, the staff at credit ratings agencies aren’t quite on top of the figures. Some years ago I pointed out that when the state government in New South Wales was claiming to have a budget surplus; it was in fact only reporting about the results for the consolidated fund, not for what we now call the General Government Sector, and when that report was published, they put New South Wales on Credit Watch. (Laughs) So I’m fairly sceptical about some of the interpretations by ratings agencies.

SA: I really appreciate your time. Professor Bob Walker, thank you.


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