The ACT Budget And Corona Virus - The Implications
The COVID-19 (Corona Virus) pandemic has had a major impact on economies around the world. Even countries that sought to reduce the economic impact by implementing less restrictive public health measures have not only paid a heavy price in human costs but also failed to avoid severe economic impacts.
While Australia has done relatively well in controlling the spread of infection, and is progressively resuming economic activity, its economy will experience significant downturn in the current and the coming financial year. Prior to the pandemic, the summer bushfires also affected economic activity in some jurisdictions in Australia. Australia’s deteriorating diplomatic and trade relations with China are also very likely to have an impact on national, state and territory economies and to slow the recovery process.
The economic shock that Australia has experienced and the emerging recession are set to increase unemployment and decrease household incomes for a significant proportion of the population. There will also be major adverse impacts on government finances due to reduced revenues as well as increased expenditure as governments spend more to provide a stimulus to the economy, as well as to meet the increased demand for services, not just in health care but in broader support for households and businesses. Such programs, while vitally important, will inevitably result in further deterioration in government finances.
To date the policy measures introduced at the state/territory level have varied in their magnitude and targeting, and their effectiveness will no doubt be subject to assessment over time. The ‘baseline’ from which such responses have been made, however, should be established now in order to assist that analysis. An assessment of the financial position of each jurisdiction before the pandemic struck provides an indication of the capacity of a jurisdiction to absorb the financial shock, as well as the extent of that shock.
Regrettably, based on our analysis of the financial positions of all the states and territories, it is clear that the ACT was least prepared and is hence less able to respond to the economic shock resulting from coronavirus due, primarily, to the state of its finances before the pandemic. This is also evidenced by the relatively modest and unimaginative response package of $350 million developed by the ACT government. By way of comparison Tasmania – a jurisdiction with a similar sized budget – committed to a package of measures costed at around $1 billion. Apart from its small size, the ACT’s package of measures was largely untargeted, with a number of relief measures not likely to take effect for quite some time, and poorly communicated – in short, a poorly designed and relatively ineffective package – which is unlikely to be fully spent as intended[i].
There are several fiscal measures and aggregates through which the financial position of a jurisdiction can be assessed. The two most relevant measures are the operating result, commonly reported as Net Operating Balance under the Uniform Presentation Framework[ii] (UPF) and Net Debt. The former provides an indication of the health of the operating budget, while the latter is useful in measuring the overall strength of a government’s fiscal position[iii].
A comparison of the Net Operating Balance reported in the audited financial statements of all the states and territories reveals that with the exception of the ACT and the Northern Territory, all other jurisdictions recorded a surplus in 2018-19 varying between 1% (Tasmania) to 4.3% (Western Australia). The ACT had a deficit of 5.3%, while the Northern Territory had a deficit of 7.1%. Notably, the weighted average of all states and territories was a surplus of 1.6% of the budget.
Table 1: UPF Net Operating Balance and Net Debt[iv]
Comparison of Net Debt as a proportion of revenue reveals a similar picture. The ACT had the third highest Net Debt at 40%, after Western Australia (72%) and the Northern Territory (43%). New South Wales, Queensland and Tasmania – a jurisdiction similar in the size of budget and population to ACT – had Net Debt as at the end of 2018-19 ranging between zero and -13%. The weighted average of all states and territories was 16%. The 2019-20 ACT Budget Review forecast Net Debt in the ACT to increase to 63%, of total revenue, within the next year, resulting in a significant increase in the call on future revenues (and generations) to meet the debt liability.
From time to time, a jurisdiction may experience a downturn in a particular sector of the economy to which its budget is exposed, for example mining, leading to operating deficits. In such circumstances corrective action is usually taken to return the budget to a balanced position, or preferably a surplus, to provide some buffer against any future fiscal shocks.
The Northern Territory is a case in point, where major financial reform measures were developed through a review in an environment of deteriorating revenues and increasing debt[v]. It is instructive to note that over the period 2012-13 to 2018-19, the Northern Territory recorded an annual surplus equivalent to 1.1% of operating revenue on average. By contrast, the ACT recorded an annual average deficit of 5.8% over that period, the largest in Australia, but unlike the Northern Territory, has taken no remedial action.
Chart 1: States/Territories Net Operating Balance 2018-19, and 2012-13 to 2018-19 Average
The ACT is, in fact, the only jurisdiction that had a deficit in 2018-19 as well as posted deficits of the same order on average over the previous seven years, without any corrective action. In six of those seven years, all states and territories recorded average operating surplus ranging from 1.4% to 3.9%, as highlighted in Chart 2 below. As we mention above, only the ACT recorded a deficit across all years and at an average of 5.8%.
Chart 2: ACT Net Operating Balance and All States/Territories Weighted Average – 2012-13 to 2018-19
The Commonwealth-State financial relations framework, in particular, the distribution of Federal grants and GST, is based on providing equal capacity to all states and territories while taking into account their individual circumstances such as revenue raising capacity and expenditure needs. States and territories are then free to make policy choices about the allocation of funds according to their own priorities.
There may be some lag in the distribution of additional funds under the grant funding methods if a jurisdiction’s circumstances change. However, the ACT’s sustained deep deficit over seven years in an environment where every other jurisdictions’ operating budgets have been in modest to strong surplus can reasonably be attributed to a disregard for prudent financial management.
We have previously written about the unsustainable growth in Net Debt[vi], again, a key fiscal measure that highlights the ACT’s consistently deteriorating finances.
Chart 3: ACT Net Debt - 2009 to 2019
It is interesting to note that in 2019 the Northern Territory’s Net Debt was comparable to the ACT in magnitude and as a proportion of revenues, which prompted the ABC to report on a ‘debt crisis’[vii] and a ‘budget crisis’ in the Northern Territory[viii], but not, it is noted in the ACT.
Net Financial Liabilities (NFL) is a broader measure than Net Debt that takes into account unfunded superannuation liabilities[ix]. The liabilities are reported in their absolute value, and as a proportion of operating revenues. The Net Financial Liabilities to Revenue ratio for the ACT has increased at an alarming rate from 51% in 2009 to 188% in 2019.
Chart 4: ACT Net Financial Liabilities to Revenue Ratio - 2009 to 2019
The liabilities must be discharged by all existing Canberra households as well as by future generations. Over the past decade, there has been an increase of $8.8 billion in Net Financial Liabilities, an additional burden of more than $50,000 per household for the current households.
We have previously highlighted the crisis in the ACT’s hospital system[x], most particularly the significant shortfall in available beds against the projected demand, and the fact that the ACT Government has reduced the number of beds in an environment of increasing demand[xi]. It is indisputable that it was the withdrawal by the ACT Government, over the last six to eight years, of foreshadowed investment in hospital and health care infrastructure that necessitated the panic driven erection, upon the arrival of the coronavirus of a temporary facility on the Garran Oval, at a cost of $23 million. This costly and as yet to be used facility stands as a reminder of the potential ramifications for a community when budget funds are exhausted on other than core priorities and fundamental responsibilities of government such as, for example. health care.
In summary, the ACT had the worst performing budget in Australia, with debt spiraling at a compounding rate of 65% per annum, reaching more than $18,000 for every Canberra household in increased debt costs that will need to be met through future taxation. The ACT also had the longest patient wait times, and a hospital system in severe shortage of beds – that was before the COVID-19 pandemic struck.
When the time comes for assessing the impact which the pandemic has had on the ACT budget and finances and the adequacy and quality of government services, such as health care, that assessment should be made from that “baseline”.
[i] The Canberra Times (17 June 2020); Residential and commercial rent reduction scheme to arrive millions under budget; online at https://www.canberratimes.com.au/story/6792948/rent-reduction-scheme-to-arrive-millions-under-budget/?cs=14225#gsc.tab=0.
[ii] Uniform Presentation Framework is utilized throughout Australia, by agreement between the Commonwealth and all State and Territory Governments and provides a common reporting basis for financial information in budget papers, budget updates and budget outcome reporting, in all jurisdictions.
[iii] A positive Net Debt position indicates that cash reserves and investments are lower than gross liabilities which means that the Government will need to call on future revenues to service these liabilities. A negative position indicates that cash reserves and investments are greater than gross liabilities which means that the Government has sufficient reserves to meet those liabilities, and all else being equal, it will not need to increase taxes for this purpose.
[iv] Sources: ACT Government (Consolidated Annual Financial Statements; Respective Years); New South Wales Government (Report on State Finances; Respective Years); Queensland Government (Report on State Finances; Respective Years); The Government of Western Australia (Annual Report on State Finances; Respective Years); Government of Tasmania (Treasurer’s Annual Financial Report; Respective Years); Northern Territory Government (Treasurer’s Annual Financial Report; Respective Years); Government of South Australia (Consolidated Financial Report; Respective Years); Victoria State Government (Aggregate Financial Statements).
[v] Norther Territory Government (March 2019); A Plan for Budget Repair – Final Report by the Fiscal Strategy Panel; online at https://treasury.nt.gov.au/__data/assets/pdf_file/0010/683461/Budget-Repair-Final-Report.pdf.
[vi] Ahmed K and Stanhope J; The Policy Space (February 2020); Deteriorating Finances of the ACT; online at https://www.thepolicyspace.com.au/2020/24/295-deteriorating-finances-of-the-act.
[vii] Australian Broadcasting Corporation (18 December 2018); Why is the Northern Territory in so much debt?; online at https://www.abc.net.au/news/2018-12-19/why-is-the-northern-territory-in-so-much-debt/10632654.
[viii] Australian Broadcasting Corporation (9 May 2020); Before the pandemic, there was a budget crisis. Was the NT Government fixing it?; online at https://www.abc.net.au/news/2020-05-09/was-the-nt-govt-fixing-budget-crisis/12220418.
[ix] Net Financial Liabilities is calculated as total liabilities less financial assets (such as cash reserves and investments). It takes into account all non-equity financial assets but excludes the value of equity held by the General Government Sector (GGS) in public corporations.
[x] Ahmed K and Stanhope J; The Policy Space (December 2019);Signs of an Unsafe ACT Hospital System for Patients as well as Practitioners; online at https://www.thepolicyspace.com.au/2019/10/293-signs-of-an-unsafe-act-hospital-system-for-patients-as-well-as-practitioners.
[xi] Ahmed K and Stanhope J; The Policy Space (January 2020); ACT Public Hospitals Hit by Predicted Health Tsunami; online at https://www.thepolicyspace.com.au/2020/22/294-act-public-hospitals-hit-by-predicted-health-tsunami.