ACT debt worsens as government spends more than it earns

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“A child in primary school in Canberra today will pay for this government’s fiscal management until he retires.”

Treasurer Andrew Barr argues that as the economy grows over time, the value of debt relative to the size of the economy will decline. JOHN STANHOPE and KHALID AHMED think that this point of view has no merit. Here they explain why…

OVER the past few weeks, we’ve compared key debt measures and operating budget trends in successive ACT budgets over the past two decades and the medium-term outlook in the government’s budget forecasts. ACT.

Based on our review of these trends, we have concluded that unless the ACT government refrains from accumulating more debt, a downgrade is inevitable.

A rating downgrade is a clear signal to potential lenders that the risk of lending to the relevant entity has increased and therefore lenders will almost certainly charge a risk premium through a higher interest rate. raised. It is also an unequivocal signal to the entity to resolve its debt service and repayment capacity problems.

Institutional arrangements at government level in Australia are underpinned by significant financial transfers from the Commonwealth to the States and Territories. This gives great confidence to lenders.

For the ACT, the fact that the Commonwealth Civil Service is headquartered in the territory and employs nearly half of our workforce is an added advantage.

However, these arrangements are unlikely to come to the rescue of a jurisdiction if it (for example) faces a downgrade in its credit rating but chooses not to change its financial management policies.

Being placed on negative watch by rating agencies or experiencing a downgrade is not uncommon for subnational governments in Australia.

However, it is also not uncommon for the poor state of a jurisdiction’s finances to be a major factor in voters rejecting a government. It is therefore not surprising that most state and territory governments facing significant fiscal pressures and financial decline are responding with both urgency and determination.

For example, over the past decade there have been audit commissions in New South Wales and Queensland (2012 and 2013 respectively), an independent review of state finances in Victoria (2011) and a fiscal repair plan in the Northern Territory (2019).

ACT’s Strategic and Operating Review (2007) was different, its rationale being to focus on increased spending on priority services. The ACT did not have a “debt problem” at that time. However, the desire for greater spending discipline, efficiency improvements and a focus on core government functions were themes that the functional review had in common with other reviews.

The basis of the ACT government’s growing debt problem is its inability to control spending growth below revenue growth, while nonetheless continuing to finance capital spending through borrowing.

A key element of fiscal strategy in the decade to 2011, and indeed under the Liberal Carnell government from 1995 to 2001, was no new loans, a strategy reflected in successive annual budgets. This was underpinned by a policy of (a) achieving a budget surplus and (b) limiting capital spending to the capacity provided under the budget cash surplus. This approach was also taken to ensure that the provisions of the Financial Management Act relating to prudential financial management were adhered to.

We are surprised that ACT’s deteriorating operating budget and deteriorating debt sustainability, as the two are inextricably linked, have persisted for a decade.

The ACT government seems to be of the view that the problem will go away with time or no one in Canberra will really care. The argument made by Treasurer Andrew Barr, in his media comments on the matter, is that as the economy grows over time, the value of debt relative to the size of the economy will decline. We believe, with respect, that this view has no basis.

It’s a matter of simple arithmetic that if debt increases at a rate greater than the rate of economic growth, which it currently is, then debt as a proportion of gross state product (GSP) will continue to increase . Indeed, the government’s own budget review forecast indicates that the gross debt-to-GSP ratio will rise from 18% in 2020-21 to 24% in 2024-25.

Arguments are made from time to time that the general government sector should not have debt, but aim for balanced budgets, and that any debt-financed infrastructure project has sufficient revenue flow to repay the debt.

We recognize that borrowing may sometimes be necessary to manage external shocks or to finance major infrastructure projects. However, in such cases, there should be a plan to pay off the debt in a timely manner.

It is misleading to suggest and delusional to think that the ACT government debt problem will solve itself. This is the consequence of persistent structural budget deficits and a flawed fiscal strategy. These problems will not resolve themselves. It will take easy, but above all difficult, decisions to restore the budget surplus and focus on essential infrastructure spending with high benefit-cost ratios, such as public health, education and social housing.

The government’s failure to address its structural fiscal problem has also created a disturbing ethical problem – the consequences of passing on the huge burden of our expansive borrowing to future generations of Canberrans. A primary school child in Canberra today will pay for this government’s budget management until he retires. If the ACT government does not act now to rein in its spending, it is highly likely that their children will also be responsible for paying off our debts.

It is ironic that the Greens, whose purpose is to avoid the intergenerational transfer of costs, have been not only accomplices but active participants in placing this massive burden on future generations of Canberrans.

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Thanks,

Ian Meikle, editor

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