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Canberra Today 18°/21° | Wednesday, February 21, 2024 | Digital Edition | Crossword & Sudoku

Deeper in debt, but where’s the money gone?

Going down the drain… Annual interest costs on gross borrowings of $16.2 billion are forecast to reach $595 million by 2026-27. “ACT residents have paid heavily, both in higher taxes and in degraded services. Future generations will, for decades to come, be paying off the debt.”

The ACT faces annual interest payments of nearly $600 million on a staggering projected deficit of $16 billion and still Andrew Barr, as treasurer, keeps borrowing at a billion a year. He taxes us to nation-leading levels while essential services, such as health and housing, falter. So where’s the money gone? JON STANHOPE & KHALID AHMED think they know… 

IN a series of recent articles we highlighted the precarious state of the ACT budget. 

In a nutshell: the operating budget is in deep deficit. Contrary to the government’s insistence it will return to surplus in coming years, it is almost certain to remain in deficit. 

Debt is already at an unsustainable level, and is forecast to increase in the foreseeable future at an average of $1 billion a year.

With the highest increase in taxation over the last decade, the ACT is now the highest taxing jurisdiction in Australia. 

Service provision, particularly in health, has deteriorated over the decade from better than average to the worst in the nation. 

ACT residents have paid heavily, both in higher taxes and in degraded services. Future generations of Canberrans will, for decades to come, be paying off the debt accumulated so far, together with that which the government has announced it plans to generate in coming years.

The ACT government’s cavalier approach to the territory’s finances is clearly causing consternation within the community and we are regularly approached by people who ask us for our views, for example, on where we think all the money has gone and whether we believe that the light rail project is central to the dire state of the ACT’s finances. 

Many of those inclined to defend the light rail project are wont to insist that the pandemic was central to the continuing run of budget deficits and the massive increase in debt.

We have previously, and comprehensively, addressed this latter point. Over the seven years from 2012-13 to 2018-19 (ie, before the pandemic), the ACT’s average deficit was 5.3 per cent of the budget, the largest of all jurisdictions, while the states and territories as a whole were in surplus, averaging 1.2 power cent. 

Similarly, in this period, the ACT’s net debt, as a proportion of revenue, increased by 56 per cent, the second highest rate in Australia behind only WA (71 per cent). Including the pandemic years, the ACT’s deficit averaged 6.9 per cent, again the highest in Australia, while the states and territories, as a whole, recorded a deficit of 1.2 per cent on average.

Finances and services nation’s worst

The light rail project by itself does not explain the persistent deficits and rising debt levels. However, it most certainly exemplifies, in its processes and the substance of its policy, the poor financial management that has reduced the ACT’s finances and services to the worst in Australia. 

The generally accepted principles of sound public financial management espoused in both the literature and by practitioners are:

  • Fiscal discipline;
  • Strategic resource allocation; and
  • Efficiency of service delivery.

In addition, transparency and accountability are givens in well-functioning democracies, and key attributes of sound public financial management.

The ACT government has failed on all of these objectives of public financial management and good governance.

Aggregate fiscal discipline in managing public finances is paramount, and in principle, can be considered an end in itself. 

Abandoning expenditure control or its loss will inevitably lead to a structural imbalance in the budget that (a) becomes increasingly difficult to correct; and (b) if allowed to persist, will seriously erode service delivery capacity. 

As an example, in the ACT in 2012-13, expenditure grew by 9.5 per cent over the previous year. However, there was no matching growth in revenue. That resulted in a deficit of $347 million, which has persisted, averaging $294 million in the period from 2012-13 to 2018-19. 

The 2012-13 deficit, perhaps conceived as a one-off temporary aberration, is now an embedded structural feature of every ACT budget.

We have also previously noted that the Chief Minister and Treasurer, Andrew Barr, has been unable or unwilling to control expenditure since 2012-13, and that based on that history any and all forecasts of a return of the ACT budget to surplus are illusory. 

Our most recent articles were based on the 2022-23 estimated outcome as published in the 2023-24 budget being $208 million more than the original budget. 

The recently published audited financial statements show a further increase in expenditure and a blowout of $254 million in the current budget. 

The original 2022-23 budget forecast a deficit of $701 million. This was revised down to $640 million in the Budget Review and $664 million in the 2023-24 budget, but has now been confirmed as a massive $772 million in the final outcome. This suggests a culture within the ACT government of unchecked and unmanaged expenditure.

The other two principles of public financial management relate to “efficiency”. Strategic resource allocation refers to allocative efficiency. Government budgeting suffers from a tragedy of the commons where stakeholders in a particular cause, project or a policy are oblivious to the collective benefit, or to the benefit of others.

Allocating resources to their best use does not mean the government cannot set priorities, rather that it should seek to maximise the benefit across the community as whole.

‘Debt has never been this cheap’

According to the Auditor-General, stage 1 of the light rail project had a benefit to cost ratio of 0.49, ie, costs outweigh its intended benefits. It is, however, difficult to imagine that there was no other project or service that would have delivered a net benefit.

Disability Adjusted Life Year (DALY) is a measure of health used internationally by the World Health Organisation. The annual expenditure on the tram is equivalent to more than 800 DALYs or more than 13,000 hospital separations. The choice of a 14-kilometre tramline that, according to the ABS data has simply substituted bus journeys to work, clearly fails the allocative efficiency test.

After the 2021-22 budget Minister Chris Steel famously said: “Debt has never been this cheap. Financing costs have never been lower, and interest rates are also at a record low”. 

Mr Steel was apparently seeking to reassure the community after the 2021-22 budget that forecast a 15 per cent deficit in net operating balance. It is a worrying mindset with worrying real-life consequences. Money raised through taxes or debt is not “free”. The costs are ultimately borne by Canberrans, and disproportionately by those less well off, some of whom may have to forgo essentials such as doctor’s visits and even food to meet their tax obligations or pay rents inflated by tax.

In 2011-12, the interest costs on historic debt were $96 million. In 2022-23, those costs had increased to $315 million, significantly more than total expenditure, for example, on environmental protection. 

The additional interest costs equate to approximately 37,000 hospital separations or more than 2300 DALYs. 

Interest costs on gross borrowings of $16.224 billion are forecast to reach $595 million by 2026-27. 

The waste is there for all to see

Obviously, if borrowings were kept stable, there would be significantly more funds available for the Canberra hospital system that, as a consequence of serial underfunding, is now one of the worst if not the worst in Australia as it languishes with insufficient clinicians and beds.

Notwithstanding its appearance as a mere technical concept that is far removed from the real life political and social considerations, allocative efficiency has serious ethical and moral implications.

Operational efficiency means delivering the maximum possible outputs at the lowest possible cost. It also means eliminating waste and unnecessarily inflated prices. 

Governments are entrusted with public monies and any waste or misuse of these are a breach of that trust. In this context we note ready examples of such a breach of faith in the expenditure of public monies:

  • The failed IT contract that the Minister Steel considered a mere “learning experience”. 
  • $34 million spent on the Garran surge centre that would have been unnecessary if the government had invested in the hospital in a timely way. 
  • an extra $900,000 paid for a school renovation because of an alleged veto by a Labor-affiliated union. 
  • $8.5 million for advice on complexity.

These clearly do not fully account for the debt and deficits racked up by the ACT government, however they are not only significant contributors but the proverbial tips of the icebergs symptomatic of a culture of waste and mismanagement.

So, where has all the money gone? While that is not at all clear, but in our view, it has been misallocated with the resultant economic inefficiency, social inequities, ad hoc remediations and outright waste there for all to see.

Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.

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Jon Stanhope

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