Former Chief Minister Kate Carnell… her financial reforms were adopted across Australia. Photo: Holly Treadaway

“The ACT government’s budget forecasts are simply not credible – and, indeed, they have not been credible for almost a decade,” write JON STANHOPE & KHALID AHMED. 

The ACT’s current financial management framework was established in 1996 under the Liberal government of Kate Carnell. 

As a consequence the ACT became a national leader in public financial management reform. Indeed, the reforms introduced by Carnell were subsequently adopted across Australia.

Over the past 24 years, while there have been changes and updates to the Financial Management Act 1996, the broad framework is virtually unchanged. Key elements of the framework were:

• Output based, accrual budgeting that fully captures the revenue raised and costs incurred by government.
• A system of both performance measures and targets for outputs and deliverables including quantity, quality, timeliness and cost of outputs and services. (This was improved a decade later to distinguish/incorporate strategic and accountability measures.)
• Preparing budgets that, under the generally accepted accounting principles, link the annual budget and annual financial reports (both at the agency and whole of government level), with the latter being a report on commitments in the former.
• Performance measures being subject to annual audit, in effect, attaching performance statements to the financial statements with equal audit rigour.

The framework was designed to not just improve managerial efficiency, but more broadly to embed the principles of transparency, disclosure and accountability in all levels of government. The Financial Management Act, in addition to prescribing controls on public monies, requires adherence to the principles of prudent fiscal management, sustainability and intergenerational equity.

While this may seem highfalutin or esoteric and somewhat boring it was designed to ensure confidence in the integrity of the system and its accountability. It is, as such, an important enabler of informed and democratic processes. Scrutiny of the Legislative Assembly and in its committees, and reports by the auditor-general, are fundamentally important elements of this framework.

Interestingly, it’s the budget that attracts most attention. Annual reports and audits by statutory office holders that, for example, detail and provide an independent assessment of performance by government agencies receive, by comparison, little coverage for reasons that, in our opinion, go beyond the timing of their release. 

It is, for example, not uncommon for such reports to be released during the festive season.

For example  the Auditor-General’s most recent Financial Audit Report, namely No 11/23, was released by the government on December 19. 

The report provides an objective and independent assessment of the ACT’s financial position, free from the rhetoric and spin that has found its way into the budget papers in recent years. 

In addition, the report provides results and findings on individual reporting entities. In any event, the public is poorly served by the release of such a fundamentally important report at a time that the media and the community are otherwise distracted.

The audit makes a total of 52 findings. It concludes that: “Almost half of the reported findings are related to internal controls, increasing to 25 this year compared to 18 last year. 

“The number of findings relating to reporting issues decreased to 18 from 21 last year, while the number of governance findings was unchanged from the previous year at nine reported findings. 

“The increase in new audit findings and remaining unresolved audit findings mean that agencies need to focus on maintaining appropriate governance arrangements, implementing well designed and effective internal controls, improving reporting practices and promptly addressing the recommendations made by the Audit Office to resolve reported audit findings in a timely manner.”

Given the scope of the audit, we are unable to cover all the issues raised by the auditor-general. We recommend that anybody with an interest in the state of the ACT’s finances, visit the website for this and a number of other illuminating reports that have gone unnoticed in local mainstream media. 

However, we have highlighted just some of the auditor-general’s comments in relation to the state of the ACT’s financial position and its reporting.

In relation to the operating budget, the audit concludes: “A net operating balance deficit of $892 million was incurred by the Territory in 2022-23 as the cost of services delivered by the ACT government ($8,496 million) exceeded its revenue ($7,604 million). 

“The net operating balance deficit ($892 million) was greater than the budgeted deficit ($863 million) by $29 million (3 per cent) mainly due to higher than expected employee expenses and lower than expected revenue from land sales. 

“The territory estimates that net operating balance deficits will continue to be incurred over the next four years, however, they are anticipated to steadily decline from $794 million in 2023- 24 to $214 million by 2026-27. 

“This means that the costs of delivering public services are expected to continue to exceed projected revenue over this period.”

The last sentence sums it all up – deficits across all the forward estimates and, almost certainly, until well beyond the 2028 election.

To clarify, the audit is discussing the results at the total territory level, which includes government businesses such as the Suburban Land Agency. It is important to remember, when discussing the “net operating balance” that it is the budget reporting measure agreed by all jurisdictions in Australia including the Commonwealth. 

We have previously provided a comprehensive analysis of the ACT budget forecasts over many years and concluded that the ACT government’s budget forecasts are simply not credible –  and indeed that they have not been credible for almost a decade. 

We have accordingly and correctly predicted that the ACT budget deficits would increase, that there will be new taxes and charges, and/ or cuts to services. 

The audit has made no comment on the achievability of the forecast improvements – that is not within its remit, and therein lies an opportunity, indeed a need, for important reform of the Financial Management Act.

Turning to individual agencies, the ACT Health Directorate received from the auditor-general a noticeably limited assurance report on its performance statement because it was simply unable to measure the results for four of its accountability indicators as required by the Financial Management Act 1996. 

Canberra Health Service was similarly unable to measure results for seven of its accountability indicators as required by the act. The ACT Local Hospital Network was also unable to measure the results of all of its accountability indicators. 

In all these instances, the necessary data was not available from the Digital Health Record system. In short, none of these three health agencies met their legal obligations – a damning and shameful outcome for them and the responsible Minister – Rachel Stephen-Smith.

In relation to the Chief Minister, Treasury and Economic Development Directorate, the auditor-general found that the interim results reported for two accountability indicators in the statement of performance, had been calculated on a basis that was not consistent with the method prescribed in the Budget Papers.

There was a similar audit finding in relation to the Environment, Planning and Sustainable Development Directorate with the auditor bluntly observing: “When results for accountability indicators included in the budget papers are incorrectly measured or misinterpreted, there is a risk that the readers of the directorate’s statement of performance being misled on the actual performance of the directorate. The directorate corrected its statement of performance to accurately reflect the results.”

Audit findings on Chief Minister Andrew Barr’s own directorate have, of course, an added significance noting that the chief minister is also the treasurer.

The auditor had previously made a finding about the usefulness of certain indicators in the performance statement. The auditor-general believed that the issue had not been fully resolved and asked the directorate to review all its accountability indicators in its statement of performance and remove or amend any indicators that did not report useful information on the directorate’s performance.

Worryingly, the current audit report reveals that the directorate has not resolved an audit finding that was first reported in 2013-14, relating to the timely review of fortnightly salary reports. It observed that the lack of a timely review of salary reports increases the risk that incorrect, including fraudulent employee payments, will not be promptly detected and addressed. 

Any framework or legislation is, of course, only ever as good as the commitment to and compliance with them, which they receive from those responsible for their implementation. 

The auditor-general has, in this report, exposed major failings in financial management by the ACT government. 

One possible reform that we consider may improve the credibility of the ACT budget is for the budget estimates to be subjected to either a formal audit, or as a minimum for an assurance report from the auditor-general be provided to the Legislative Assembly validating the claims made by the government about the estimates and the state of the budget.

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