The Commonwealth might have a ripped a $100 million hole in the ACT budget’s bottom line, but the state of the territory budget could hardly have been described as pretty before the federal king hit.
The Gallagher government had already blown out this year’s deficit by more than 40 per cent by the halfway point, with the mid-year review projecting a deficit of $361 million for 2013-14. That is $107 million worse than budgeted.
The government has held up a return to surplus as a central aim, declaring that deficits must only ever be temporary and must be offset with surpluses.
“One of the key financial objectives for the government is to achieve an operating surplus,” the 2013-14 budget papers declare. “Temporary deficits must only occur if they are offset by surpluses at other times. The budget is in deficit in 2013-14 and 2014-15. In 2009-10 the government accepted thee temporary deficits as part of the budget plan and targeted a return to a balanced budget in 2015-16. This objective has been maintained.”
Well, maintained no longer. The plan for a 2015-16 surplus was abandoned at the mid-year review in February.
The government is still forecasting a return to surplus in the following year, 2016-17, which will be the final budget it delivers before the 2016 election. But so slim is this hopefulsurplus, just $11 million, that it will surely have disappeared by the time Treasurer Andrew Barr releases his third territory budget in just over a week, on June 3.
Not only is the $11 million so marginal as to be easily turned into a deficit, the budget forward estimates have yet to account for big works such as the new hospital and Capital Metro. (Athough if ituses a public-private partnership model the government might succeed in keeping the Capital Metro debt burden, if not the risk and the suck on territory finances, off the public books – but that’s another story.)
The $11 million surplus forecast was made before the deep federal cuts, which will deliver a blow to ACT revenue across the board – in income from the GST, land tax, stamp duty, rates and other revenue streams dependent on buoyant employment, a growing population and a thrumming property market. Plus the ACT will have to find a way to make up for the federal cuts to health and education, and to fund the extra call on concessions and other services made by a community under stress. In all, Barr estimates an impact of more than $100 million a year.
If it cannot hang on to the realistic possibility of a surplus in 2016-17, the Labor government will face an election with a string of five deficits in a row to its name. Which is not a good look for a government which will by then have been 15 years in office.
It also looks likely to have a substantial new debt burden on its books, given Barr’s enthusiasm for borrowings as a way to fund a bunch of new buildings and projects and keep the ACT economy moving in a time of economic stagnation – if not a recession then close to it. Big borrowings threaten the territory’s AAA credit rating, another of the key aims trumpeted in its budget papers.
It’s not a pretty scenario. But then, the budget papers have such a dismal record in making accurate predictions about deficits or surpluses especially in the out years, that the wafer-thin $11 million return to surplus for 2016-17, difficult to sustain before the federal hit and perhaps impossible after it, probably has only a remote connection with reality in any case.
The Treasurer maintains his characteristic sunny outlook when confronted with these questions, if not unperturbed then certainly on the optimistic front foot about his ability to sell the scenario to the voting public. He concedes the budget might well be still in deficit at the next election and the credit rating might well be on a negative outlook or downgrade, but such is the reality when you’re trying to keep a smile on the face of the economy.
He is not, Barr declares, “in the business of running surpluses for the sake of it”.
"If the question is would I deliver a surplus at all costs and put people out of work for the sake of a surplus? Then no, that’s not the measure of the economy. Equally, would I run any size deficit? No. But the bottom line for the territory economy, at least for the next few years, is that with the Commonwealth Government contracting their expenditure the ACT Government is going to have to make some investments in our economy."
He was prepared to take on a “prudent” level of debt and make other spending decisions to pay for new infrastructure, including asset sales. But he stresses also that he’s “not about to embark on a spendathon,” saying, "In the end the decision that we face in the next couple of budgets is do we want to make our economy smaller or larger and if we withdraw our spending - remembering that 50 per cent of our budget is in salaries and wages - if we withdraw our spending that means sacking people. We will be adding to unemployment in the city, further reducing confidence and will be hurting our own revenue streams as well, so it’ll just be a downward spiral.”
Treasurer Barr says his June 3 budget will not only include asset sales, infrastructure and new debt, but measures to encourage businesses to boost employment – which would bring a short-term hit to revenue streams to government but encourage growth in the economy.
In sum, we can expect a “Labor budget”, he said, “quite a contrast in philosophical approach” from the federal budget. “They are basically saying the government should withdraw. We are saying we see a role for government to stimulate growth through partnerships with the private sector.”
Liberal Treasury spokesman Brendan Smyth has a very different take, pointing to an underlying fly in the ointment of the ACT budget - the government consistently spending more than it earns. Not true, says Barr, the territory runs strong cash surpluses. Mr Smyth, who has a long history of watching ACT budgets, maintains the Liberal government of Kate Carnell inherited the same problem from Labor in 1995, before the 1996 Howard-era federal cuts. In those years, “I don’t think we sold a new block of land”, he says, the property market having been already flooded from the Labor years before and the Liberals having to wind up a series of failed private-sector joint ventures.
Then, in 2001, Labor inherited a balanced budget from the Carnell years, enjoyed the “rivers of gold” from the GST in 2000, and was at the wheel in the boom years that followed, also benefiting, in Mr Smyth’s analysis, from big growth in the federal public service, the property boom and big construction projects. The global financial crisis brought a reality check, and the 2012-13 budget showed the damage done, with a devastating $274 million deficit.
Mr Smyth describes the hope of returning to surplus in 2016-17 as “pie in the sky”, pointing to property vacancies “going through the roof”, lower population growth, job losses and less from the GST, and a series of projects not yet funded in the budget.
In the end, while Smyth characterises Labor as irresponsibly spendthrift and Liberals as having the never-ending task of cleaning up Labor’s mess, like the resigned cleaning team trudging in at the tail end of a louche party, the analysis of both Labor and Liberal points to the enormous influence of factors outside the territory’s control.
The ACT faces the core problem that 43 per cent of its revenue comes from the Commonwealth, leaving it extraordinarily vulnerable to the wind on the hill. After the Commonwealth, the biggest source of revenue for the ACT is its own taxes, most of which relate to the property market – rates and stamp duty. Then there’s income from fines, care rego, parking and the like. And none of that gives you much room to move when you’re trying to keep the economy, and especially the property market, alive. Nor do the ACT revenue sources have much ability to target higher income earners – you raise parking or fees or fines and you hit everyone.
Barr points, by the way, to another vulnerability and another reason our budget forecasts can be so significantly awry: the Commonwealth decides when to make its payments to the territory – and can time them for its own benefit, making payments, for example, at the end of a financial year to get them out of the way before its fresh budget – an unpredictability in timing which can muck up the territory’s own forecasts.
The ACT is working to make some of its sources of income more predictable, which is part of the thinking behind the shift from stamp duty, an unpredictable tax that depends on activity in the housing market, to rates, which are more stable.
When Treasurer Barr explains the ups and downs in the graph on this page, he points out that Labor’s first deficit came with the global financial crisis, after which a row of deficits had been forecast, but were avoided again by the Commonwealth which saved the day with massive stimulus spending. Stimulus over, the second-last Wayne Swan budget withdrew the drip line into the arm of the local economy and it has been downhill from there.
“No one’s budget has looked pretty since the GFC,” Barr says, pointing to the $300 million turnaround the moment it hit. “The GFC smacked every budget in the world.”
Which begs the question of where to look now for budget-saving intervention, with no massive new tax such as the GST and no massive federal stimulus spend on the horizon.
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