JON STANHOPE & KHALID AHMED offer the government a ‘silver bullet’ to budget success: end the dysfunction by complying with the financial management laws and copping the consequences.

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

We have written previously about the importance of the Micawber Principle – living within one’s means – and its relevance, in particular, to public finances. 

While our discussion referred in the main to the operating budget, the principle also applies to the capital budget, that is infrastructure spending. 

There is a view that has become entrenched over the last decade that state and territory governments not only need to, but must, borrow for infrastructure investment. This has serious consequences. 

It is clear that if the entire capital works program is funded from borrowings on an ongoing basis, debt will spiral and interest costs will consume an increasing proportion of the operating budget.

That is, unless the existing borrowings are repaid at or at a faster rate than the new spending, in which case debt is not a funding source but merely a mechanism for managing cashflow.

Infrastructure investments can be used to maintain capacity or the economic life of existing infrastructure or to commission new infrastructure. The former should, in principle, be funded from the operating budget and the latter could be financed from borrowings that  should ideally be repaid over the economic life of the infrastructure, noting the intergenerational consequences of delaying the repayment of debt. 

Sounds too rigid? This was the norm in the general government sector until discipline was abandoned – for reasons that require a separate discussion – resulting in skyrocketing debt in the state/territory sector with the ACT and Victoria spearheading the race. 

By way of comparison, take the 1999-2000 budget presented by then chief minister Kate Carnell. It provided an investment of $134 million in capital, all of which was funded from a cash surplus of $146 million in an operating budget of $1.6 billion. 

The 2008-09 budget brought down by then treasurer Katy Gallagher funded $570 million of capital works from $300 million of asset sales and the remainder from a strong cash surplus of $488 million in an operating budget of $3.5 billion. It was the strength of the operating budget that enabled the ACT to remain in a negative net debt position through the global financial crisis. 

No prospect of retiring debt for decades

By comparison, under Chief Minister Andrew Barr and Treasurer Chris Steel, relatively smaller capital programs have been funded through borrowings because the operating budget has been in deficit, with the deeply concerning result that there is no prospect of retiring that debt for decades to come and well past the life of the relevant assets. 

There will be economic and/or social consequences when the constraint – of maintaining expenditure within the revenue available – is relaxed. There will, of course, be circumstances when it does need to be relaxed. Revenue may, for example, drop due to an unanticipated economic shock, while replacement revenue measures may not be feasible and/or immediate expenditure adjustment may not be desirable. It is indeed possible that expenditure may in fact need to be increased to maintain or enhance services. 

The 2019 pandemic is a recent example of where a reduction in economic activity, albeit, from policy choice lockdowns and quarantine measures, needed to be responded to with income support as well as increased expenditure on public health measures and hospital capacity. 

The legislation governing financial management in the Territory, namely the Financial Management Act 1996 (FMA), recognises the possibility that a proposed budget may depart from the principles of responsible fiscal management.

However, it stipulates that any departure must be temporary, the government must provide reasons to the Legislative Assembly for the departure, the approach it intends to take to return to the principles, and when the principle of fiscal responsibility will be reinstated. 

The guardrails around a temporary deficit resulting from any departure from the principle of prudent financial management are not so much to protect against a government’s disposition towards spending or efficiency, but in recognition of more fundamental risks to finances from a departure, even if it is externally driven and justifiable at that time. What may start as transient is almost certain to become chronic – if left unaddressed. 

Once in deficit, budgets rarely, if ever, correct themselves because output/revenue lost will need to be generated back to their previous levels through active measures, and any expenditure boost (for whatever reason) will need to be pared back. Otherwise, temporary deficits inevitably become structural and grow over time. 

The ACT’s run of deficits have not only persisted for the last 13 years, but they have also grown, averaging 5.7 per cent before the pandemic and 13.6 per cent per annum post pandemic over the last two years. Debt has spiralled with interest costs forecast to reach 10 per cent of the total budget, about $1 billion.

The budget papers presented over these years, with forecasts of a surplus in the future, cannot be reasonably considered as a statement required under the FMA in substance or form.

The forecast surplus is an illusion

Since before the pandemic we have pointed out repeatedly that the forecast surplus is an illusion, and that the budget estimates are unrealistic, farfetched and fanciful. 

Some key financial strategies have, worryingly, been left to the media to analyse or assess, for example the infamous debt management strategy championed by Barr or infrastructure investment based on relentless borrowings proposed by Steel. Both proposals were deeply problematic from the outset. 

It is clearly the case that there has been a serious failure of compliance with the financial management legislation and an absence of accountability for that failure.

We can therefore offer the first “silver bullet” for both the executive and the legislature: namely the need for compliance with the financial management legislation and accountability for non-compliance. 

The persistent deficits and spiralling debts, and the extent in duration and magnitude, while not conceived in the financial management legislation, are symptoms of a deeper malaise and dysfunction. 

Operationalising and implementing, therefore, the seemingly mundane requirement to comply with relevant legislation – has serious challenges stemming from (a) a permanent majority and/or an unqualified support from the coalition partners in government or on the crossbench; and (b) convenient but misguided  explanations and excuses for a permanent departure from the principle of prudent financial management. The latter has been quite evident in the public commentary from government ministers both before and after the inquiry was established.

Practical action is needed 

In addition to those “mindset” problems, which we will discuss in a separate article due to their significance, practical actions will be required to: 

• Enhance forecasting skills and budget development and management capacity within the ACT Treasury. 

• Establish independent review processes, to assure the Legislative Assembly and the community that the forward estimates properly reflect the cost of, and revenue from, current government policies, and that the budget papers correctly explain those policies. 

• Establish rigorous project development and assessment processes with external review and oversight to ensure the realisation of benefits and value for money. 

• Strengthen contract/project management capacity within the public sector to avoid cost overruns and project failures.  

• Develop and adopt a set of Budget Rules for recurrent and capital expenditures that ensure fiscal discipline and allocation of resources to the best social, environmental and economic outcomes. 

Each of these and many other necessary tasks will be major undertakings. The question is whether the government is ready or even willing to go down this path?

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

Calling on Mr Micawber to fix Barr’s budget vanity