“Eslake’s final report confirms everything we have written in these columns for years – persistent deficits, mounting debt and interest impacting on social services.” JON STANHOPE & KHALID AHMED critique the independent economist’s review.
Independent economist Saul Eslake’s headline conclusion in his interim report to the Select Committee on the Fiscal Sustainability of the ACT that the deficit, totalling more than $7 billion, is due to the ACT Government’s policy decisions, has remained unchanged.
However, the final report includes more data and discussion on the various aspects of the territory’s finances over time, and in comparison, to other jurisdictions.
Overall, the final report confirms everything we have been saying in these columns for many years regarding persistent deficits, mounting debt, and interest costs consuming an ever-increasing proportion of expenditure, thereby impacting expenditure on key social services.
The final report notes that the Auditor-General cast doubt on the 2025-26 budget projections, which raises questions about the reasonableness of the forward estimates in the 2025-26 budget, albeit, in more moderate terms than we have used, pointing to the “challenges” of maintaining expenditure growth at less than half of CPI.
This is not just an issue specific to the 2025-26 budget; rather it has persisted for more than a decade as we have repeatedly pointed out in our analysis of successive annual budgets, notably that the estimates were fanciful and that the government’s forecasts lacked credibility.
This column, however, is not about claiming vindication. Our purpose is, apart from highlighting some of the key conclusions as above, to elaborate, clarify some parts and to seek to ensure that the report is not misinterpreted or misrepresented.
Fiscal Sustainability – what does it mean?
The report states that “financial or fiscal ‘sustainability’ is an elusive concept”, and that “one can only be absolutely sure that a government’s financial position is “unsustainable” when it is faced with a crisis that it cannot deal with in the absence of external financial assistance”.
We do not subscribe to this view, or the operational definition proffered in the report, which we believe is not applicable to state and territory governments in Australia.
Fiscal sustainability is no more elusive than “environmental sustainability” and certainly less elusive than the principle of “fairness” – principles that have been anchors of public policy.
However, if this view is accepted, does that mean that governments cannot operationalise and implement this principle as an objective? Does that mean that the ACT Government should not be held responsible for the current dire financial position?
We will address this important matter and its potential legislative implications separately. Suffice to say, the ACT’s finances were clearly on an unsustainable path years before the pandemic.
Long time coming – problem predates pandemic
The Executive Summary of the report states that there has been “a significant deterioration in the financial position of the ACT public sector over the past decade, and in particular during the past five years, as a result both of the COVID-19 pandemic in the early years of the current decade, and of decisions taken during the years immediately after the end of the pandemic.”
Reading the full report with the data as well as the accompanying discussion, does not, in our opinion, support the conclusion that the current state of the ACT’s finances, which the report characterises as unsustainable, can be attributed to the pandemic.
In fact, as reported in the media, the report attributes it to policy and expenditure decisions of the Government.
The ACT’s finances were clearly on an unsustainable path years before the pandemic, with annual deficits averaging almost 6 per cent and net debt growing at a compounding rate of 20 per cent annually since 2013.
Existence of disadvantage and poverty
While discussing the socio-economic circumstances, the report concludes that the ACT has the most socially and economically advantaged population of the states and territories, with less than 8 per cent of the population in the lowest two, and almost 51 per cent of the population in the highest socio-economic status quintiles, respectively.
It is important to note that this data relates to the national population. It therefore masks the relative disadvantage within the ACT population and is in fact misleading.
The ACT’s high average incomes are driven by a cohort of double income households in the public sector. The inter-quintile disparity between the highest and lowest income quintiles within the ACT is quite similar to that in the Australian population.
Survey reports from non-government and charitable organisations such as the St Vincent de Paul Society indicate that around 10 per cent of the Canberra population lives in poverty.
In our columns, we have repeatedly highlighted the housing and rental stress and long wait times endured by many Canberrans, as regularly reported by the Productivity Commission and the Australian Bureau of Statistics.
It would be a mistake to think, based on aggregated statistics and national comparisons, that there is no poverty or disadvantage in the ACT, and that the government can increase taxation and/or cut universal access to public services such as health without serious social impacts.
This is the mistake the government has made over the past decade, for example, in selling off public housing for investment or cutting the health budget to finance light rail.
Appropriate and relevant measures
Mr Eslake has highlighted the vagueness of the ACT Government’s fiscal strategy and suggested adopting specific measures and targets on operating balance, cash surplus, debt and interest costs. We endorse this as a principle, having raised this issue in our columns on numerous occasions.
Any measure so adopted should, however, be relevant and meaningful. As an example, the report states that the ACT’s net debt to Gross State Product (GSP) ratio is lower than both Victoria and the Northern Territory. It also notes that while economists (as in the report) measure debt and deficits in reference to the size of the economy, the rating agencies measure it in reference to revenue.
On that measure – the Net Debt to Revenue ratio that we regularly utilise in our commentary – the ACT has the second highest level of debt in Australia after Victoria. However, the ACT was downgraded to the same rating as Victoria because the rating agencies refer to this ratio as an indicator of debt-servicing capacity.
Reference to the size of the economy when assessing the financial position and management of a specific jurisdiction may have some relevance in relation to the states, but is misleading if applied to the ACT for interjurisdictional comparison.
That is because around half (more than 45 per cent) of the economic output of the ACT relates to Commonwealth Government activity, which is exempt from state taxation.
As a further example, the report observes that the ACT’s revenue to GSP ratio is the lowest of all states and territories.
The ABS data reporting shows that the ACT, despite having a lower-than-average capacity for taxation due to the absence of major revenue bases available to the states, is an above-average taxing jurisdiction. The Commonwealth Grants Commission’s assessment places the ACT’s taxation effort relative to its capacity as the highest of all the states and territories.
However, it would be a mistake to think that the ACT has the capacity to increase its taxation effort to achieve the average of the states – a mistake based on a wrong measure.
Mr Eslake has, quite appropriately, left the specific budget decisions to address the fiscal problems to the government as policy choices, however, in addition to the revenue side, he has indicated some areas of higher-than-average expenditure.
Again, it is important to use appropriate measures when assessing unit cost of service. We will address potential policy choices in a future article.
In conclusion, we did note the rather bizarre response to the interim report from the then-Greens leader Shane Rattenbury. The Greens’ reported response to the final report was equally perplexing, calling on the ACT Government to seek a waiver of its historic housing debt.
While Mr Eslake has observed that the ACT has a strong case in arguing for a waiver, the outstanding debt is less than 1 per cent of the debt accumulated under the Greens-Labor coalition through their policy choices.
We would, of course, support any effort to have the debt waived but do think it more than a tad hypocritical of the Greens and Labor to seek the waiver of the housing debt in light of their joint decision to sell off thousands of units of public housing in order to finance the tram.
Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.
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