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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2008-10-14 Daily Xml
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Ministerial Statement

GLOBAL FINANCIAL CRISIS

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (14:03): I seek leave to make a ministerial statement.

Leave granted.

The Hon. K.O. FOLEY: I rise today to further advise the house of the effects of the global financial crisis on the state's finances. Members will recall that, on 23 September, I made a statement to the house outlining the government's relatively minor exposure to institutions affected by the events in the United States and international developments.

In the weeks since then, there have been extraordinary developments in the global financial system. Falling investor confidence has seen share markets suffer badly, and credit has become scarce as banks and other institutions have become reluctant to lend funds. Intervention on an unprecedented scale by central banks and governments has become a necessity to stabilise financial markets. Only this past weekend, the Australian government moved to protect domestic depositors as well as domestic banks and institutions.

The United States, Britain and the European Union have announced interventions totalling trillions of dollars to support the banking sector and improve confidence in financial markets. The International Monetary Fund's recently published World Economic Outlook predicts that growth in economic activity across the globe will slow significantly through 2009 to be the slowest since 2002. Minimal growth in the United States, United Kingdom and European economies is expected.

However, there is a growing consensus among senior economists that Australia is relatively well placed to ride out the global financial crisis due to our strong and well-regulated banking sector, our solid fiscal position, the ability for further easing of monetary policy and our strong and diversified economic base.

Having said that, Australia and, indeed, South Australia are not immune from the turbulent financial markets and the flow-on effects to the economy. Clearly, the confidence of the Australian household sector has taken a battering and consumers are becoming more circumspect in their spending decisions. Further, activity in the property market throughout Australia is softening.

These developments are concerning, but this is not a time for panic. What is needed is a considered appraisal of our state's financial position. However, these developments have placed further pressure on state finances.

I have already advised the house that negative sharemarket returns have hit Funds SA's investments, with the balanced fund returning minus 9.3 per cent over the 12 months to 30 June 2008. I can now advise that Funds SA's earnings loss for 2007-08 was $1.478 billion for total funds under management. Year to date, figures from 1 July in 2008 to the end of September 2008 show the growth fund is down 5.7 per cent and the balanced fund down 4.7 per cent. Total investment losses for this period to end September from 1 July 2008 are a further $627 million.

As we have seen, the beginning of October has been particularly poor in the sharemarket; however, there has been some recovery in the past day and a half of trading. Part of the total funds under management include the assets part funding our superannuation liability. Continuing negative sharemarket returns in the current financial year have further impacted this liability.

In addition to this, a reduction in the commonwealth government's long-term bond rate (also known as the discount rate) to 5.7 per cent has also increased the value of our unfunded liability. The rate has decreased as people leave equities and move into the relative security of government bonds, decreasing the rate of return offered.

Movements in the long-term bond rate to lower levels change the rate used to calculate current value of the liability. A lower rate results in a larger liability. These two factors have increased the liability from an estimated $6.9 billion at 30 June 2008 to an estimated $8.6 billion at 30 June 2009, an increase of approximately $1.7 billion.

This greater liability is reflected on our balance sheet, increasing our net financial liabilities. Clearly, the government has no control over these external influences. The unfunded liability is our most significant liability, given our low debt levels, but, as members may be aware, the credit rating agencies include the unfunded superannuation liability when determining their credit ratings.

The government maintains its commitment to fully funding our superannuation liabilities by 2034, the target set down by the previous Liberal government. Increased liabilities mean increased payments from the budget are required to meet this target.

In the 2008-09 budget, I detailed the significant impacts the increase in the unfunded liability had had on the budget bottom line. At the time of the 2008-09 budget, this impact was $90 million a year. Since the 2008-09 budget, the further deterioration has meant a further $60 million is required to meet the increased nominal interest expense. This brings the total impact to $150 million.

While the property market in South Australia has shown some resilience over the past year compared with other states, activity has softened in recent months. Housing finance commitments have fallen 19 per cent over the past six months in South Australia compared with a national fall of 22 per cent. Given this slowing in housing activity, Treasury and Finance estimates that overall taxation revenue in 2008-09 will now be approximately $100 million lower than at the time of the state budget, with conveyance duty being the worst hit. Further, economists are predicting the economic outlook for the next one to two years to be less buoyant than in recent years, with more restrained consumer spending.

Treasury and Finance has revised down its 2008-09 GST revenue collections estimated for South Australia (as outlined in the 2008-09 budget) by a further $30 million. However, to the extent that the economy is expected to slow nationally and, as a consequence, consumer spending weakens, GST revenue could be considerably further reduced. This means that from 1 January 2008 the state's finances have weakened due to the financial instability in the globe by about $280 million per year. Markets remain highly volatile and it is likely that figures will change further leading up to the mid-year budget review.

The global financial crisis has clearly had a significant impact on the state's finances. The 2008-09 budget contains significant budget surpluses across the forward estimates to provide a significant buffer against unforeseen pressures. The global financial crisis has significantly drawn down this buffer, so over the coming weeks I will be working through a range of options with Treasury and Finance to ensure the ongoing strength of the state's finances. As always, we will be cutting our cloth to suit the times.

I have said publicly that we will be looking at a broad range of options in both capital and operating expenditure areas. While I will not speculate as to what options may be taken, I can say that the government is committed to maintaining the strength of the state's finances by continuing to focus on key areas of service delivery in health, education, law and order, and water security. I have asked Treasury and Finance to provide cabinet with a full range of options for the deferral or, in some cases, the cancellation of capital projects not considered essential to service delivery in the current financial climate. Of course, projects can be reinstated should financial circumstances improve in the future.

While this government is committed to fair and reasonable wage outcomes, we will be approaching enterprise bargaining negotiations with a need to maintain budget disciplines firmly in mind. Unions seeking excessive and unreasonable wage increases need to moderate their expectations in line with the changed financial circumstances facing the state.

These are extraordinary times. When this financial crisis will end, how it will end and the changed financial landscape we will have to accept at this stage are completely unknown. Therefore, it is vital that the government prepares an appropriate and proportionate response to the financial challenges facing the state. The protection of the state's finances, the maintenance of a strong balance sheet and the retention of our AAA credit rating are of the highest priority for the government, and the work now being undertaken to examine our spending will ensure that these objectives are met. I will report back to the parliament with a full financial statement detailing the measures we have adopted as a government before parliament rises for the end of the year.

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