Budget surplus an illusion hiding a problematic deficit
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Budget surplus an illusion hiding a problematic deficit

The ACT government has forecast an operating surplus of $36.5 million for 2018-19 in the budget
brought down in June 2018.

A return to surplus had been announced and deferred in successive budgets since 2012-13. The forecast improvement in the budget position will have been welcome news for those interested in sound financial management, and the sustainability of services to the community. The surplus, however, is illusory. The underlying budget is in deep deficit, and its sustainability and, indeed, the sustainability of priority services is problematic.

Budget outcomes are essentially a balance between revenue and expenses. Three factors, all on the revenue side, appear to contribute to the claimed improvement in the budget bottom line: increases in own-source taxation; land revenues; and large-scale renewable energy generation certificates. Of these, the treatment of large-scale generation certificates contributes approximately $132 million to the improvement in the 2018-19 financial year alone.

Treasurer Andrew Barr hands down the 2018 ACT Budget.

Treasurer Andrew Barr hands down the 2018 ACT Budget. Credit:Sitthixay Ditthavong

Renewable energy certificates are intangible assets that should not, according to the government itself, as stated by it in the budget papers, have a net impact on the budget position. They should, therefore, be excluded in a presentation of the underlying budget position. Yet, perplexingly, the government has not done this and has decided to hold on to the certificates. The certificates must, however, eventually be surrendered but the government has announced that it will delay a decision on this until beyond 2020-21 thereby temporarily improving the budget position. Excluding the temporary benefit achieved by including the certificates, the underlying budget position is a deficit of $96 million in 2018-19, and a deficit of $66 million 2019-20.

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Significant increases in land revenues have already been reported in The Canberra Times. The profit margins booked in relation to land development activities are well in excess of industry norms and standards. The operating budget is therefore further propped up by excessive profits from land sales, which are in effect sales of assets.

Finally, the improvement in the budget position is underpinned by massive increases in ACT taxation which increase by $400 million over a three-year period. The growth in taxation is well in excess of the growth in the economy or incomes. For example, over the four-year period from 2012-13, while taxes increased at 8.2 per cent per annum, economic output as measured by Gross State Product only grew at 3 per cent. State Final Demand (a measure of consumption by all sectors) grew at a meagre 1.1 per cent per annum.

The increase in taxation has been regressive, due to significant increases in flat taxes and levies, and the concessions system not keeping pace with the tax increases. For example the pensioner concession for the fire and emergency levy has reduced from 50 per cent in 2015-16 to 29 per cent in 2018-19. For pensioners, the levy has increased by 368 per cent since 2011-12, and by 142 per cent over the past three years alone.

The ACT Government’s spending priorities are of course reflected through the budget. The 2018-19 budget therefore provides a clear window into the current funding priorities of ACT Labor and the Greens. Transport (which includes funding the tram) and Economic Affairs (which includes renewable energy) grow at the incredibly healthy rate of 7 per cent and 9.9 per cent respectively, while funding for both Social Protection, and Environmental Protection have actually been reduced across the Forward Estimates. Housing has also suffered a cut in funding in real terms. The funding allocated for Health services should be of major concern to the community. Growth in health funding over the forward estimates clearly has not taken sufficient, if any, account of the growth in costs associated with health cost inflation, population increase, ageing, and new technologies.

With frontline staff already raising concerns about resourcing pressures, one can be certain that ongoing inadequate budget allocations will lead to further pressures, and increasing waiting times. Despite significant increases in taxation, budget allocations for essential services, most particularly within health, community services and housing raise serious questions about the sustainability of these services.

It can fairly be said, in light of the funding allocations in the budget, that transport and economic development are the Labor/Greens' highest priority and social protection, environmental protection, housing and health are all of lesser and certainly much lower importance.

Looking forward, the budget forecasts an increase of 7.1 per cent per annum, compounding, in taxation revenue. Again, this rate of increase is well above the growth in population, economy and wages as reflected in the budget papers. This is growth way in excess of that anticipated by the taxation reform policy. It is important to ask how will the ACT economy pay for the changes that will be required to fund the gaps?

There is no doubt there has been growth in the economy and labour market, however not all growth supports ACT Government finances directly. Despite persistent claims about diversification of the economy, the evidence shows the ACT’s economy remains dependent on government activity.

Indeed, the relative contribution of Commonwealth Government activity has actually increased since self-government. Commonwealth consumption now accounts for 35.6 per cent of final demand, while ACT government consumption is just 7.7 per cent. Household consumption accounts for 38.5 per cent.

Data on the structure of the ACT labour market, count of businesses and industry value-add all confirm the relatively heavy reliance of the ACT’s economy on the government sector.

Given the nature of the ACT own source taxes and fees and economic structure, it is clear that the burden of plugging the fiscal gap will fall heavily on ACT households, most of which will earn public sector dependent incomes. The conventional wisdom is that ACT households are income rich on average, which is partly true. The latest measure of mean gross household income for the ACT was $125,788, which compares to $121,160 for Australia. However, not all households earn this average income. Around 57 per cent of ACT households receive below the mean income. Around 88,000 households account for the lowest three income quintiles. Over a five, 10 and 20-year period, real compound annual household income growth has not exceeded 2.5 per cent in any decile. Over the five years to 2015-16 (last reported), eight out of nine categories experienced negative compound growth rates. With ACT's own source taxes already having increased faster than this, ACT government decisions are increasingly having a negative impact on the cost of living in the ACT.

These impacts are, unfortunately, not considered thoroughly in the simplistic presentation of cost of living cameos reported in the ACT budget papers. While the government considers the impact of selected taxes and fees, there is no consideration of the collective trend changes in income, private expenditures, or economy wide prices.

It is not surprising, but increasingly disturbing, that the most vulnerable households in the ACT are suffering. Over the five years to 2015-16, an extra 3 per cent of households reported being in new stress, and an extra 4.4 per cent of households reported experiencing four or more types of stress. The most significant growth in stressors were in socially inclusive activities and the ability to deal with financial shocks.

With the budget in structural deficit, and clearly making insufficient allocations to high priority services, with the notable exceptions of the government’s two highest policy priorities, public transport and renewable energy, the community is entitled to ask what benefits it has received in return for the massive increases in taxation and of the price of land and housing, which have increased stress and exacerbated inequality for the most vulnerable in Canberra.

Jon Stanhope is Professorial Fellow at the Institute of Governance and Policy Analysis (IGPA), University of Canberra. As Chief Minister, he had committed the ACT Government to the review of ACT’s Taxation System.

Adrian Makeham-Kirchner has worked in the public and private sectors as an economist, and notably as an advisor to the then ACT Treasurer Ted Quinlan. He is currently a consultant in the private sector.

Khalid Ahmed was Executive Director, Policy Coordination and Development Division, ACT Treasury. He is currently Adjunct Professor at IGPA, and works in the private sector.

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