The ACT government released the mid-year review of its 2018-19 budget in February, showing, among other things, changes in revenue and expenses since the 2018-19 budget was brought down. Chief Minister and Treasurer Andrew Barr is reported as saying the budget is in balance.
Last year, in an Institute for Governance and Policy Analysis seminar on the 2018-19 budget and in an article, we raised concerns about the state of the budget. Unfortunately, the budget review not only confirms those concerns, but reveals that the budget position has deteriorated even further.
On the revenue side, there is a significant decrease in revenue of $63.3 million in the current year. The total change in revenue over the four-year budget and forward estimates is less, at $31.6 million.
On the spending side, while the budget review foreshadows a decrease in spending of $28.3 million in the current year, it forecasts a total increase of $71.4 million over the four‑year budget period.
The combined effect of these changes is a decrease in the headline operating surplus of $35 million, down from $36.5 million, to $1.5 million in the current year, and a turnaround of $72 million in 2019-20 and a deficit of $27.9 million in that year. Over the four-year budget period, with the revenue and expenditure changes, the operating budget position will deteriorate by around $103 million.
The budget review incorporates new spending and revenue initiatives. It also includes capital initiatives of $16.7 million over the four years.
Notwithstanding the new initiatives in the review, almost all of which replace existing initiatives which have either been abandoned or deferred, the change in the operating position cannot be said to be negligible or unremarkable.
In commenting on the 2018-19 budget, we raised concerns about the massive and unsustainable increase in net debt of more than 20 per cent a year over the four-year budget period. Remarkably, net debt (excluding superannuation) is now forecast to increase from $1.3 billion in 2017-18 to $2.95 billion in 2021-22, a further increase of $115 million from the previously published forecast.
Debt is increasing at an average of more than $400 million a year or $1.65 billion in just four years. By way of comparison, net debt in 2010 was -$942 million, the negative sign indicating that investments (excluding those related to superannuation) exceeded the debt at that time.
Under the revised estimates, the territory’s market borrowings will also increase by a further $194 million.
The question which the Treasurer needs to answer is: If the operating budget is in balance, why is there a need for an additional $194 million in borrowings? The apparent answer is that the government is not only borrowing for capital initiatives, but also for recurrent initiatives, and other changes in the operating budget, and some more.
It would be deeply concerning, having regard to the size of the budget, to ignore or dismiss the increase in net debt or borrowings as “negligible” compared with the size of the budget. The potential impact of this level of debt on Canberra households is alarming. The 2018-19 budget foreshadowed an increase in borrowings of more than $10,000 per household. The budget review, just delivered, has added approximately $800 in borrowings plus interest. At some point in time this debt has to be paid off by households and businesses.
While ACT households have relatively higher than national average incomes, it is wrong to assume that all households have a commensurately higher capacity to pay because of the significant proportion of Canberra households that are at or below the Australian average income. Unfortunately, this does not appear to have been taken into account by the ACT government, contrary to the principles and recommendations of the ACT Taxation Review which the government had accepted in 2012.
Notwithstanding that the higher incomes of territory residents have already been taxed, the relatively higher financial capacity could, in principle, be drawn on, provided (a) its impacts on low to moderate income people are cushioned as recommended by the Taxation Review, and (b) the government is delivering services at a higher than average level.
That is clearly not the case. Indeed, the increased taxation burden resulting from the implementation of the taxation reforms has involved an inordinate increase in flat charges and levies over the past five years that has placed a disproportionate burden on low to moderate income households. The costs of the repayment of the additional debt incorporated in the budget review will similarly be disproportionately borne by people on low to moderate incomes in the community.
A number of national reports highlight the ACT’s poor performance in waiting times for surgery and mental health services, incarceration rates, recidivism rates, child removal and educational outcomes for children from disadvantaged backgrounds. Therefore, despite the additional taxation burden, services to the community have been demonstrably inadequate.
The extent to which the new initiatives will deliver benefits and improve outcomes for disadvantaged and vulnerable people in our community, or are a priority, should in principle be assessed through the normal Estimates committee process. It is notable, however, that all the health initiatives are proposed to be funded through offsets - that is, no new funding is being provided for health services.
In analysing the 2018-19 budget, we had observed that growth in health funding of 4.1 per cent a year over the forward estimates had not taken sufficient account of the growth in costs associated with health cost inflation, population increase, ageing, and new technologies. We note that the introduction of new initiatives to be funded through offsets will further erode growth capacity, which is vital to the sustainability of health systems.
The budget review includes a write-down of $114.5 million over two years in the valuation of large-scale generation certificates. Unfortunately since 2013-14, the government has ceased to publish the underlying budget net operating balance, which excludes the one-off factors affecting the operating budget, thus providing a truer picture of the operating budget.
In the analysis of the 2018-19 budget, we pointed out that the headline operating budget position was misleading. It was propped up by $242 million over two years through accounting treatments for these certificates that were contrary to government’s stated accounting policy.
With the partial write‑down in the budget review, a further $128 million is yet to be written-off, and in the absence of any as yet undisclosed treasury hollow logs, the budget is in a much worse state than the chief minister would have us think.
Jon Stanhope is professorial fellow at the Institute of Governance and Policy Analysis, University of Canberra. As chief minister, he committed the ACT government to the review of the taxation system. Khalid Ahmed is adjunct professor at the institute, and was executive director of the policy coordination and development division at ACT Treasury.