State government budget deficits are putting upward pressure on interest rates, the Prime Minister has claimed as a rate rise looms.

Despite saying rates should not be lifted next month, the Prime Minister is warning that the states will run up a $70 billion deficit over the next five years.

“These are Labor government deficits, they’re not Liberal government deficits,” the PM says.

“By contrast the federal Liberal government has paid off $97 billion in debt.”

It might be time to jump into the RBA Chart Pack.

They show that the Commonwealth Government has run sustained surpluses for several years. Treasury says that surpluses around 1% of GDP will be sustained.

They also show that state governments have been increasing their surpluses for seven straight years (the latest data comes from 2005-06). The RBA doesn’t include projections, but the surpluses have been increasing in recent times, rather than deteriorating. This looks very quite prudent of the Labor states.

The graphs also show the amazing situation where for every year since 1991-92, the state government sector (orange line) has had lower debt and then moved to accumulate financial assets earlier that the Commonwealth government (the black line). Every year for the last 15, the State fiscal position has been superior to that of the Commonwealth government. The gap between the two narrowed a little in 1996-98 as the Commonwealth corrected the fiscal position, but since then the gap in favour of the states over the Commonwealth has been broadly stable.

There is no sign of a turning point in state government finances that would support the Prime Minister’s claim. The state government sector as a whole started accumulating financial assets in 2001-02. The Commonwealth moved into that position only in 2005-06.

The last chart below is a little messy. It comes from ABS data. It shows annual growth in total Commonwealth and state government expenditure – that is the addition of consumption and investment in the ABS national accounts data base.

There is a problem with the data – the move of Telstra to private ownership means Telstra spending is now private and is excluded from the Commonwealth spending numbers – there are probably some distortions in the State data too, but we’ll take the data as given.

It shows that since the March quarter 2003, annual growth in Commonwealth spending has been in excess of growth in state government spending in 13 out of 17 quarters. That’s 76.5% of the time in the last four years,

So much for Commonwealth management.