“Interest costs are increasing at the staggering rate of 19.7 per cent a year. The government’s debt management strategy (if there is one) is not working”. JON STANHOPE & KHALID AHMED’s deficit predictions for the ACT are coming true. 

The recently released 2023-24 Budget Review has reported a $340 million blowout in the deficit. 

In a series of articles late last year on the 2023-24 budget we predicted just such a blowout. It does not, therefore, come as a surprise.

The Budget Review also adds $164.4 million to the interest costs over the budget and forward estimates. Interest costs are now forecast to reach $684.4 million in 2026-27, which is 7.5 per cent of total expenditure.

Table 3 provides the changes in interest costs and their share of expenditure from the 2023-24 original budget to the Budget Review.

The increase in interest costs, which are presumably a consequence of the recent downgrading of the ACT’s credit rating, reflects an increase in the cost of borrowing on future bonds (to repay the maturing debt, as well as for new debt) from 4.45 per cent to 4.90 per cent.

Interest costs are increasing at the staggering rate of 19.7 per cent per annum. Tables 2 and 3 highlight that the government’s debt management strategy (if there is one) is not working.

Table 2 provides the changes in Net Debt and the Net Debt to Revenue Ratio from the 2023-24 original budget to the Budget Review.

Chief Minister Andrew Barr reportedly expects the decrease in payroll tax to be recognised by the Commonwealth Grants Commission (CGC) as a decrease in fiscal capacity and that the territory will, accordingly, be compensated through the GST distribution.

The CGC assessments of fiscal capacity take into account the relative changes in all jurisdictions and we, like all fair-minded Canberrans, would nevertheless hope for a successful outcome in this regard. 

We are also conscious, following the unrelenting bashing that Scott Morrison received from the Labor and Green Parties for his alleged pork barrelling of Liberal Party electorates, that Anthony Albanese will be loath to bail the ACT government out of the massive financial hole that his Labor and Green colleagues have knowingly dug themselves into.

However, the chief minister’s problem is not the revenue side of the budget, as in fact, the ACT is already the highest taxing jurisdiction in Australia. The real problem is the runaway expenditure, and quality of that spending.

We continue to be surprised by the ambiguous reporting of these issues in local media, and consequently, the misinformed discussion this generates.

To be fair, the reporting is mainly based on government media statements, including claims, for example, that the blowout was due to a shortfall in payroll tax collections, caused by the Commonwealth Government’s decision to reduce expenditure on consultants, and a decrease in GST payments resulting from lower consumer spending.

There was even a cursory, if brazen, reference to an increase in expenditure on new health initiatives. None of these claims are deserving of serious consideration.

Table 1 summarises the aggregate revenue, expenditure and Net Operating Balance in the ACT 2023-24 Budget and the Budget Review. It also details the changes from the original budget.

For the current year (2023-24), of the total increase in the deficit of $358 million, a decrease in revenue is forecast to contribute $189 million (53 per cent) while an increase in expenditure is forecast to contribute $169 million (47 per cent).

Across the four-year budget estimates, which the government is required to produce and update under the Financial Management Act 1996, revenue is forecast to decrease, in total, by $99 million with an increase now incorporated in the last two years that in large part compensates for the decrease in the first two years. 

Over this period, the Budget Review predicts an additional $620 million in expenditure. 

The total deficit, across the estimates period in the 2023-24 Budget, is forecast to be $1.231 billion, which has increased to $1.950 billion with the revenue decrease contributing only 14 per cent and expenditure increase contributing 86 per cent to the increase in deficit. 

The budget remains in deficit in all four years of the cycle, and is forecast to increase by $719 million over the budget estimates period.

In the analysis above we have applied the nationally agreed standard for measuring the operating budget result rather than the ACT government’s preferred measure which, unlike every other government in Australia, includes gains on superannuation investments and hence delivers a Clayton’s surplus in the last two years.

In our commentary on the 2023-24 budget, we questioned the miraculous turnaround of $600 million in just two years. That turnaround is irrespective of which bottom line measure is used. 

The Budget Review estimates now show an improvement of more than $850 million in the operating budget from 2023-24 to 2025-26. Budget adjustments of such magnitude – in the order of 10 per cent – are rare and quite obviously, cannot be achieved without significant pain. 

The government will need, regardless of cost-of-living pressures, to take an axe to services and expenditure, or impose an even greater tax burden or in all likelihood, both.

The revenue trajectory is now forecast to grow at an annual average of 5.7 per cent compared to the original budget growth of 5.4 per cent. This is well above the growth rate of the economy. 

However, the trajectory of expenditure still remains flat although increasing from 2.9 per cent per annum in the original budget to 3.4 per cent in the Budget Review. This is well below the “natural” growth rate of the budget under existing policy settings on service delivery.

We have previously analysed the variance between the forecast budget growth and the actual growth in expenditure, and concluded that over the last decade, the variance has averaged 2.7 per cent (How this high-tax ACT government can’t stop spending | Canberra CityNews).

We have also observed that “based on the 10 years of actual results against the budget forecasts, the estimate in the current budget spend, of $9.021 billion for 2026-27 [in the 2023-24 budget] is almost certainly understated and, in reality, will be in the order of $9.6 billion”. 

The Budget Review has increased the 2026-27 spending to $9.2 billion, and it can be taken as a given that spending growth will not be contained at the level currently forecast.

The forecast increase in expenditure and the resultant deficits will inevitably need to be funded by further borrowings. Net debt is forecast to increase by more than $1 billion. 

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