“An improvement of almost $2 billion, or $500,000,000 a year over each of the next four years, is far-fetched even by the ACT government’s standards, and surely demands that the budget papers be categorised as fiction.” JON STANHOPE & KHALID AHMED reveal the crushing reality driving the ACT’s credit rating demotion.

In a column revealing the shortcomings of the 2025-26 ACT Budget in July, we warned that with net debt rising at 10.1 per cent annually another downgrade of the ACT’s credit rating was inevitable and imminent.

That downgrade, from AA+ to AA, was announced on September 5 by the ratings agency S&P Global. 

We had also predicted the previous credit downgrade in 2023 from its longstanding, and highest possible, AAA rating to AA+.

As we wrote at the time of the earlier downgrade, it gives us no pleasure that our prediction was then and is again, correct. 

There are tangible consequences from these downgrades in, for example, the degradation of public services such as health and public housing, and a regressive increase in taxation, or more likely both, given this government’s appalling record.

In any event, the costs are disproportionately distributed to those on low-to-moderate incomes. 

We would, of course, have been pleased to have been proven wrong since that would have meant that the ACT government had abandoned its reckless management of our finances and its apparent disinterest in the needs of those Canberrans for whom life is a struggle.

Unrealistic budget: brace for another blowout

It may appear a very short time span over which the ACT has gone from having the highest credit rating of all Australian states and territories to the equal lowest, along with Victoria.

However, this outcome had been in the making for well over a decade because of sustained financial mismanagement and was only delayed because of the strength of the finances Andrew Barr had inherited when he was appointed Treasurer – a budget in surplus and negative net debt, while coming out of the global financial crisis.

The nationally reported reasons cited by S&P Global for the downgrade, refer to the “territory’s significant budget deficits and large capital spending pipeline, including an extension to the city’s light rail”.

From a surplus of 1 per cent (of the total budget) in 2011-12, the ACT’s budget dipped into an uninterrupted and increasing sequence of deficits from 2012-13 onwards, blowing out to $1.06 billion in 2023-24, ie 12.2 per cent of the budget.

An even larger deficit is expected for the recently completed 2024-25 financial year – Chief Minister Barr’s 13th and final deficit budget before handing the poisoned chalice to Chris Steel.

The deficit during the 12 years of Barr’s reign over the Treasury portfolio was an average of 8.2 per cent every year, ie they were deep and persistent.

Compounding the impact of this unprecedented run of deficits on the ACT’s finances is the large capital works program that, year on year, was largely or entirely funded through borrowings.

These two factors (deficits and debt-funded capital programs) have produced a third whammy – rising interest costs that cannot be accommodated from the available finances – necessitating additional borrowings for interest payments. This is indicative of a debt spiral, and if unchecked will potentially result in financial disaster.

“Primary Balance” is a budget measure that reflects a government’s ability to service its debt. It is calculated by taking revenues and subtracting expenditures on operating activities as well as capital works, but excluding interest costs. In effect, the measure excludes the historical cost of debt.

If the Primary Balance is in surplus, the budget has the capacity to service debt depending, of course, on the magnitude of the surplus. For example, if the surplus is larger than the interest costs, it is reflective of a capacity to pay the interest on past borrowings and repay some of the principal. For a government committed to prudent financial management, this is a most desirable position.

However, if the Primary Balance is in deficit, the government will need to borrow to pay its interest costs in addition to the borrowing required to fund the deficit. If this state continues, debt will obviously grow with no prospect of being either stabilised or repaid. The ACT has, worryingly, been in this state persistently for some years now.

Table 1 details the Primary Balance and interest costs from the past three years’ audited financial statements, and the estimates from 2024-25 to 2028-29 as published in the current budget. The table (in the last row) also details the proportion of interest costs funded from borrowings.

Table 1 confirms that the ACT government has not only been borrowing to fund the deficit and then more, but to also pay all the interest costs. Notably, while borrowings to pay interest will continue over the forward estimates, the government has forecast that 39 per cent of the interest costs in 2027-28 but only 9 per cent in 2028-29, will need to be funded from borrowings, with the forecast improvement to come from a forecast turnaround in the operating budget. While this does seem rather fanciful, to be fair, as they say in the classics, “pigs may fly”.

The rating agency has a grim view of the government’s forecast return to surplus, reportedly noting “the territory’s return to budget balance had been repeatedly delayed”. That is a significant vote of no confidence in the ACT government’s forecasts.

In fact, Barr made such a forecast in each of the years he was Treasurer – turning out to be wrong – as we have previously highlighted, on every occasion.

Table 1 forecasts that in the next four years a Primary Balance deficit of $1.089 billion in 2024-25 will flip by 2028-29, to a surplus of $872 million – an improvement of almost $2 billion or $500,000,000 a year over each of the next four years – is far-fetched even by the ACT government’s standards, and surely demands that the budget papers be categorised as “fiction”.

Of course, 2021-22 is not the first year that the Primary Balance was in deficit. We have reported previously that the Primary Balance was negative on average over the decade 2011-12 to 2020-21, which was a major turnaround from the preceding decade.

Table 2 provides average Primary Balance and interest costs over 2021-22 to 2023-24 and the previous two decades.

We have previously pointed out the seriously flawed argument from the light rail project’s fans, urgers and devotees that the project has a small cost relative to, say, the overall budget, or the sum of budgets over the life of the project, or the total economy.

S&P has now taken the unusual step of naming this project within the large capital spending pipeline as the reason for the ACT’s credit downgrade. 

S&P has reportedly foreshadowed that it “could further downgrade the territory if it reported materially weaker operating margins or deficits after capital accounts compared with forecasts”. Given the government’s record over the last decade, that is highly likely.

Insolvency haunts debt-heavy ACT government

The number one question we should surely now explore is whether Treasurer Chris Steel has the capacity and/or the will to dig the ACT out of the hole that his predecessor Andrew Barr has knowingly dropped us in. 

However, we’re not encouraged by his now infamous entreaty, at a time when the government was borrowing to pay interest on its borrowings, that the government should borrow because “debt has never been so cheap”. 

The government is also blindly persisting with the tram to Woden via Barton notwithstanding its negative transport benefits and the fact that much higher priorities, notably health and housing are in crisis. Not much hope there!

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

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