‘Net debt has reached $9.044 billion. That is more than $19,000 for every Canberran – young and old, working or not, and even children.’ JON STANHOPE and KHALID AHMED believe another credit downgrade for the ACT is highly likely. 

The 2024-25 Budget Review released last week shows that the operating budget is in deep deficit and we believe a further downgrade in the ACT’s credit rating is highly likely.

That is if the government does not make the “tough decisions” Treasurer Chris Steele has foreshadowed. 

Any such “tough decisions” would, of course, have been unnecessary if the government had exhibited the necessary discipline and the structural issues bedevilling the ACT budget over more than a decade, had been addressed.

The review shows the net operating balance is forecast at $1.228 billion for the current year. This is a blowout of $374 million against the original budget forecast of $855 million deficit.

But we should sympathise with those for whom the budget update was a surprise and a shock. 

There was, for example, Chris Steel, the newly minted Treasurer but no stranger to public finances, who was confronted in November by a major and completely random budget blowout. 

Rachel Stephen-Smith, the Health Minister, was shocked to discover, again after the election, that there has been, in the blink of an eye a major, totally unanticipated increase in demand for health services resulting in a massive cost blowout of more than $200 million. 

Shane Rattenbury, a minister until October, deduced, for the first time, that Canberra is a two-speed city and demanded that those doing it toughest should be protected. 

Then, in a light-bulb moment, the mainstream electronic and print media cottoned on that there is both a deficit and a debt, each of which is really, really big. 

Among the commentary on the reporting, some Canberrans pondered how could it be that they were not told about the true budget position before the election but were clearly consoled by the realisation that the fact they were kept in the dark couldn’t possibly have been deliberate.

However, we have reserved our sympathy for the poor maligned ACT public service.

The government’s posturing on the dire state of the ACT finances seems designed to have us believe that those responsible for anticipating, planning and forecasting activity and costs, namely public servants, are either so inept, lazy or dumb that they either didn’t do it, or alternatively didn’t bother to brief the chief minister the treasurer or the cabinet that the budget was stuffed.

We could say “we told you so”, but for all our sakes it is a pity that we have not been proved to be wrong. 

Table 1 summarises the aggregate revenue, expenditure and net operating balance in the ACT 2024-25 Budget and the Budget Review. It also details the changes from the original budget.

The net operating balance (NOB) has changed from a deficit of $855 million in the original budget to a deficit of $1.228 billion in the budget review, a blowout of $373 million. 

The ministers’ commentary and subsequent mainstream media reporting has, in the main, attributed the blowout to health demand and costs.

However, the 2024-25 Budget Review reveals a revenue shortfall of $169 million and an expenditure increase of $204 million against the original budget estimates, contributing 45 per cent and 55 per cent respectively to the $373 million deterioration in the NOB.

Since 2016, when the government abandoned the health funding formula introduced by Katy Gallagher along with the 2011 health infrastructure plan, we have regularly pointed out, after successive budgets, that health was not being funded appropriately, having regard to the drivers of demand and cost. 

The budgeting strategy clearly has been to keep the health budget on a drip feed with the inevitable cost blowouts funded through supplementary appropriations, as was the case last year, and again this year. This is then presented as a virtue and evidence of the government’s commitment to health care. 

All jurisdictions have challenges relating to the growing cost of health care. The method of cost control being employed by the ACT government is, however, cynical, devoid of imagination and causes avoidable pain and anxiety for both those in need of health services and those on the front line who provide it. 

Table 2 provides a summary of changes in the operating budget in the 2023-24 and 2024-25 Budget Reviews.

It reveals a pattern in ACT budgets of overestimating revenue and underestimating expenses in the original budget, followed by some corrections in the review. The focus then turns to the next year’s budget, with the previous years’ blowouts an irrelevance, a thing of the past. 

Debt is spiralling, growing at a rate of 15 per cent a year. It is forecast to increase by $3.8 billion by the next election in 2028, reaching $12.8 billion.

Just this budget update has increased the debt on every Canberran – young and old, working or not, and even children – by more than $1000, and now exceeds $19,000 each. Does that matter? 

It will, of course, need to be paid, with interest, through higher taxes, and ultimately through higher prices for just about everything, and those doing it tough will be hit relatively harder, as this government’s record demonstrates.

Naturally, interest costs are in spiral as well. Last year (2023-24) interest costs were $380 million (about $1.4 million a day). This year, they will increase to $507 million, and reach $864 million (more than $2 million a day) in 2028.

The Budget Review forecasts a deficit in operating cash, which means the ACT will be borrowing to pay the interest on past debt, and then some more. 

Market borrowings are now forecast to increase by almost $2 billion in 2024-25 compared to the previous year. 

In our commentary on the 2024-25 Budget, we said: “The anticipated increase in revenues and control on expenses reflected in this budget’s forecasts are simply not credible.”

This begs the question whether the updated forecasts are any more credible? Table 1 shows that total revenue is forecast to increase by 11.4 per cent in 2025-26 over the current year. In our opinion that is highly unlikely.

The ACT has not posted a surplus since 2011-12. The string of 13 deficits (including the forecast for 2024-25) is the longest for any jurisdiction and a treasurer. Every other jurisdiction has posted multiple surpluses over this period. 

A return to surplus was forecast in every budget, and never achieved.

As a result, service delivery performance is among the worst in the country, with the worst wait times in hospital emergency departments, long waits for elective surgery, more than two years’ wait for public housing, the highest recidivism rates, and poorly maintained infrastructure including uninhabitable schools and police stations.

Ironically, the budget and service delivery problems are not related to lower revenue raising because the ACT is the highest taxing jurisdiction among states and territories, whether measured against its taxing capacity by the Commonwealth Grants Commission, or as reported by the Australian Bureau of Statistics (ABS).

Added to that, over the past decade, taxation has grown at the highest rate in the country, year on year.

The ACT’s relatively higher taxation has social and economic consequences.

For example, business investment and investment in dwellings has been suppressed below the long-run average. Household consumption, generally the engine room of the economy, has been suppressed and rental affordability is the worst in the country, with the highest proportion of people with low income paying more than 50 per cent in rent. 

Disadvantaged and vulnerable people and groups have been affected more, with relatively poor access to and trust in services. 

Where have we come from?

The deterioration in ACT’s finances and service delivery has been just over the last 12 years since 2012-13, after Andrew Barr took over as Treasurer.

In 2011-12, the budget was in surplus on the nationally agreed (and tougher) measure. It had been in surplus in the two prior years as well.

At that time the Territory had a negative net debt, meaning there was more cash in the bank than was owed.

Per capita taxation was below average and taxation against its assessed capacity was about average as reported by the ABS and the Grants Commission respectively.

Service delivery performance was better than average, and among the best in some cases.

What has gone wrong?

Financial management generally requires discipline, but that is even more important for a jurisdiction like the ACT that doesn’t have the flexibility of some of the larger states, or the revenue bases such as agriculture, mining or manufacturing.

The financial framework of the federation ensures that the ACT, along with others, has capacity to deliver average levels of service taking into account their respective circumstances.

The presence of the Commonwealth government and its associated activity provides a level of economic stability. In fact, when the national economy has a shock, the increase in federal government spending benefits the territory, as was the case during the GFC and COVID-19. The converse is also true, which means there is little room for lazy  financial management or poor policy choices. 

In fact, “good times” require discipline so that unsustainable expenditures are not baked into the budget.

The causes of the precarious financial position and its service delivery are:

• Poor fiscal discipline where expenditure growth has not been controlled, and the relatively easier path of increasing taxes had been adopted.
• Lack of prioritisation of key services such as health, education and public housing. More than a thousand public housing dwellings were sold with the proceeds directed to light rail. The health infrastructure plan and recurrent funding formula were abandoned in 2016, resulting in cuts in real terms to health, and a shortfall in hospital beds in the order of 200.
• Waste, mismanagement and absence of accountability. Failure of the $77 million IT project, or the digital records project in health, or the complexity thinking project in CIT, or the procurement relating to Campbell Primary School show not only waste but also absence of accountability for mismanagement. They are symptomatic of a culture where there is no accountability.

Beware the ‘operating balance’

The media is reporting a deficit of $972 million against the original budget estimate of $624 million. This is because the ACT government uses a different measure, which it calls the “Headline Operating Balance”. 

This is unique to the ACT government. All jurisdictions, states and territories and the Commonwealth Government, and the reporting and professional bodies (such as the ABS and the Accounting Standards Board) agreed to a common measure called the Uniform Presentation Framework (UPF) Net Operating Balance. This has been used for almost two decades.

The ACT government is required to report on that measure under the national agreement. It appears at the back of budget papers.

The measure used by the ACT government includes gains on public servants’ superannuation funds as revenue, which are obviously not available for spending. No one else measures an operating result that way.

This has the effect of making the budget look better (by about $200million-$250 million), but it is in such a poor state that even on that measure, there is a deficit of just under a billion dollars.

However, are encouraged by Mr Rattenbury’s declaration that the Greens “will not support cuts to services that are supporting those who need them most in our community”. 

This would include, of course, both hospital care and public housing, that as we have repeatedly noted, were savagely cut and sold, respectively, in order to fund light rail.

Mr Rattenbury went on to say that “Labor cannot punish those on the lowest income in our city just to try and balance the books.” 

He is, of course, as responsible for the woeful condition of those “books” as Labor. Only now, he may have to realise that budgets are about choices, and he will have to stand up and be counted for those choices in the bright light of the Legislative Assembly, rather than hide behind the veil of cabinet confidentiality. 

He may wish to begin by pondering what cuts to vital services could have been avoided but for stage 2a’s $577 million spent on a 1.7 km tram journey.

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