Tom Burton: Don’t mention the B word in Sydney

By Tom Burton

Tuesday June 23, 2015

What bubble economy?

The smell of high octane speculation is evident every successive Saturday in the nation’s biggest city. Add the likes of RBA governor Glenn Stevens, and federal Treasury secretary John Fraser, angsting about the “crazy” 30% increase in Sydney houses prices, and you would have hoped the possibility of a damaging bust would have featured large in today’s NSW budget papers.

Instead there was not a mention of the words ‘bubble’ or ‘bust’. The only B word NSW Treasury was prepared to utter was that the risks were “evenly balanced”. Shades of then US Federal Reserve chief, Alan Greenspan, who months before the global crash of 2008 also declared all the risks were in balance.

The closest Treasury was prepared to go was to muse about the dangers of a medium-term “disorderly correction” in housing prices, if interest rates continue to be low for a prolonged period — as most sensible economists are predicting.

Naysayers are never popular when everyone is enjoying the fruits of a boom. But if our economic advisers are not prepared to publicly address the very real risk of an ugly end to the longest real estate boom in a generation, then we fall into the same trap as the Irish, Icelanders and Californians. They and their governments somehow believed their ‘00 real estate booms were different from previous speculative bubbles.

In another example where policy makers are really struggling to interpret a prolonged period of low interest rates, the budget papers skate over the conundrum of damaging asset inflation, as the central bank is forced to hold down rates to support a lower dollar. The dollar is being pushed down to make the resource states — and high-cost corporates — competitive in a world where resource prices have returned to norm.

Sydney is in effect ground zero for this conundrum — runaway real estate prices as investors logically gear up to take advantage of 30-year interest rate lows. Meanwhile the rest of the country, (Melbourne possibly excepted), limps along with at best tepid income growth, hoping for much awaited post mining boom business investment to arrive.

The point is this is where our economic gurus in the various treasuries around the country need to earn their money. Rather than obliquely comment on medium-term downside risks, there is an urgent need to squarely and clearly spell out the implications of the quite unique circumstance we find ourselves in. The euphoria of the South Sea Bubble meets Japan’s current decades of nowhere growth.

Which brings us to the actual budget. NSW is of course the biggest state, and good luck and good management has got it to a circumstance where its fiscal situation is as good as could be wanted. Substantial surpluses as far as the eye can see, negligible debt, and awash with cash from the surging property and equity markets. And with the real prospect of another $20 billion war chest from the partial lease of electricity assets. Snapped today, that is a triple-A result, with a double star.

But faced with the choice of banking some of the cash for when the boom ends (either softly or with a bang), the recently elected Baird Government has chosen to spend up big, with at least five ministers bragging of their “record” spending.

NSW was long a laggard in public administration, but has made big gains over the last four years, streamlining a bureaucracy that had been left in the dark ages by the previous government.

Service NSW — a portal which brings together over 400 different back-end systems — is probably the poster child for this reformation. But scratch the surface and frankly there remains a mediocrity that is now being asked to drive big new projects and programs — at record levels of spending.

If there is a lesson from the Federal response to the GFC — and mega projects like NBN — it is that government (and probably most big corporates) is not good at rapid project rollout.

While politically and demographically there is a demand to move fast, we know too often this ends in tears. Governments are notoriously naïve when it comes to big contract management, and no matter how many well-paid consultants are there to help, inevitably projects are over-scoped and over-funded, leading to poor and expensive delivery.

This is a gross generalisation, but average yearly infrastructure spend is going to effectively double in just three years, from $6 billion to something well north of $10 billion, once the electricity proceeds are fed into the system.

Sydney has surging population demands, but at a time where there are plenty of signs of overheating in the construction sector, this is all feels like it might not be pretty when it ends.

At the operational level, there have been good gains in NSW, with over $5 billion slated in savings from sensible procurement and organisational reforms. But walk through the corridors of many city-based public agencies and it is a step back into the ’80s.

Large bureaucratic structures are hard to unwind at any time, but it is particularly difficult to seriously restructure, when money is being thrown around on mega projects and programs.

Modern public administration concepts like commissioning and provider economies are just being tested in NSW — and these take time to settle. Ditto, NSW’s further pursuit of social impact bonds is a high-profile example of innovative thinking — but it would be delusional to believe two decades of bureaucratic neglect can be unwound in just one term of government.

Read more at The Mandarin: NSW budget: a booming state spends its war chest

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