Report

Is the credit rating tail wagging the budgetary dog?

14 Nov 2010
Description

This report provides results of a preliminary analysis of the direct and indirect employment and economic impact of the South Australian Budget 2010-11.

An input-output model developed by EconSearch Pty Ltd has been utilised to identify the employment and economic output impacts of stated employment reductions and expansions in the State Budget. This model is commonly used within government as a tool for estimation of the impact of new investments.

It is important to note that impacts of the employment reductions will be mediated by the rate of take-up of TVSPs. Our preliminary judgement is that demand for separation packages will be high given the incentives for early take-up put in place by the State Government. For this reason public sector employment losses are likely to outpace employment gains generated by new initiatives in the State Budget.

The objective of focusing employment reductions in areas characterised as back-office functions can be expected to lead to rationalisation and centralisation of administrative and financial support services in an attempt to accelerate the movement towards shared service arrangements. This is likely to have a disproportionate impact on public sector employment in regional areas as shared service functions will almost certainly be based in Adelaide. The focus of the employment reductions in administrative and financial services will disproportionately affect women who are over-represented in employment in these areas.

There is a high risk that the employment reductions will lead to significant losses of ‘corporate knowledge’ and skills which will lead to short term productivity losses in the public sector. The AISR will report on this and the likely spatial and gender impacts of public sector employment reductions in detail in a future report.

In addition, an analysis of the financial significance of small movements in credit ratings is undertaken to identify what the fiscal benefit of a AAA credit rating is given South Australia’s debt profile. While the benefits of a AAA rating are not insignificant they should not be overestimated. AISR modelling of the financial impact of a credit rating down-grade indicates that the cost associated with a one increment downgrade is actually very low, suggesting that the credit ratings tail may be wagging the budgetary policy dog more than it should be.

Expenditure cuts of the magnitude of those in the State Budget are a high price to pay for the modest financial benefits that flow from a AAA credit rating, particularly when it was apparent prior to the State Budget that there was no realistic prospect of a credit rating downgrade for South Australia. This was a consequence of relatively robust economic conditions, low unemployment and strong growth prospects associated with the expansion of the mining and defence sectors.

Report prepared for: Public Service Association of South Australia.

With assistance from Julian Morrison and Lisa Rippin EconSearch.

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2010
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