In its 2019-20 budget, the ACT government forecast deficits over the coming two years of $89 million and $67 million respectively. The government forecast a return to surplus reaching $413 million by 2022-23 - a turnaround in the headline operating balance of $480 million, or about 7.5 per cent of the total operating budget in just two years.
If the forecasts were realistic, the turnaround would be remarkable, and a rare and possibly unique achievement, by any jurisdiction in Australia. Unfortunately, our analysis and the evidence suggests that little, if any, confidence can be placed in the forecasts.
Before turning to the forecast recovery, it is helpful to understand the underlying causes of the emerging deficit. In the lead-up to the budget, the Chief Minister and Treasurer, Andrew Barr, attributed it to the federal government's lack of support for the ACT, which he claimed had necessitated the ACT government making significant investments, resulting in a temporary deficit. The facts, however, suggest otherwise.
The Commonwealth government collects GST revenue which is distributed to the states and territories.
The ACT receives its fair share following independent annual assessment by the Commonwealth Grants Commission under the principle of horizontal fiscal equalisation which is designed to give all states and territories the capacity to provide the "same standard" of service.
In 2019-20, according to the budget papers, the ACT will receive $272.2 million, or 24 per cent above its population share, of GST, with a relativity above the 11-year historical average.
It is indeed the case that the ACT is expected to receive about $104 per capita in Commonwealth infrastructure funding from 2019-20 to 2022-23, which is only 37 per cent of the national average. The technical part of the budget papers, however, concede that "[t]he ACT does have somewhat lower than average infrastructure investment needs because of our relatively small land mass, our highly urbanised population and higher average income".
In summary, there is no justification for blaming the Commonwealth government for the ACT's budget problems, which have been entrenched for years.
The deterioration in the operating position cannot be attributed, as claimed by the Chief Minister, to infrastructure investment, because infrastructure spending is recorded as capital and not recurrent expenditure.
There may of course be some minor recurrent impacts from a capital project. Should a recurrent budget go into deficit because of such minor impacts, it suggests a fundamental weakness in the operating budget.
The 2018-19 ACT budget forecast a modest and stable surplus averaging $40 million across all the years. In our analysis of that budget we had pointed out that the budget in fact had an underlying deficit masked by the accounting treatment of renewable energy certificates, a treatment that was contrary to the government's stated policy.
The 2019-20 forecast under that treatment overstated the operating budget position by $110 million. In this year's budget, the value of those certificates has been reduced to $51 million. The main reason for the coming year's deficit is the partial correction in the treatment of those certificates. It should be noted, however, that the operating position is still overstated by $51 million in relation to just those certificates.
The published budget balance profile is not unusual when considered in the context of each budget since 2012-13. All those budgets promised a surplus after some "temporary" deficits, successively deferred.
What is remarkable is the magnitude of the forecast turnaround, which will be achieved by accelerating increases in revenue from 4 per cent growth in 2019-20 to 7 per cent in 2022-23, and cutting spending from 6.2 per cent growth in 2019-20 to just 2.8 and 2.9 per cent, respectively in 2021-22 and 2022-23.
What is certain, however, is a major and escalating erosion in the territory's financial position since 2012-13.
Such a slowdown in spending growth is unrealistic, noting that from 2011-12 to 2017-18, aggregate spending grew at a compounding rate of 5.1 per cent a year (excluding any variations relating to one-off expenses), while revenue only grew at 4.6 per cent.
The sustained divergence between revenue and expenditure trajectories is a reflection of fiscal indiscipline by the treasurer and cabinet as the cause of the territory's poor budgetary position.
The balance sheet should also be treated with great caution. Key fiscal measures have had major estimation errors every year since 2012-13 budget. For example, superannuation liability has been underestimated in successive budgets by an average of 50 per cent, net financial liability underestimated by 55 per cent and net financial worth overestimated by 100 per cent on average.
What is certain, however, is a major and escalating erosion in the territory's financial position since 2012-13. The audited financial statements reveal: Net financial worth, $3 billion in June 2012, had eroded to negative $662 million at June 2018; and net debt, which was negative $736 million in 2012 increased to $1.3 billion at June 2018.
The budget forecasts a further increase in net debt in the coming years. Mr Barr appears to have attributed the increase to a change in accounting standards. Even after excluding the effect of that change, net debt is forecast in the budget to grow at an average of 20 per cent per year.
The almost 2.25 per cent reduction in spending growth included in the budget estimates amounts to a cut of $150 million in 2021-22 and a further $145 million in 2022-23. The budget papers include no plan for efficiency improvements, or explanation of how the spending cuts will be achieved.
It is therefore reasonable to conclude that either there are as yet undisclosed saving measures in the budget, or these estimates will not hold.
Having budgeted for a cut of almost $300 million in services in the two years from mid-2021 it is surprising that the government has not taken the community into its confidence and explained which services it proposes to discontinue.
- Jon Stanhope is professorial fellow at the Institute of Governance and Policy Analysis, University of Canberra.
- Khalid Ahmed was executive director of policy in ACT Treasury until 2013.