Previous ACT administrations have balanced budgets, provided above average service delivery, kept taxation at or below average rates, invested in infrastructure, and all without accruing debt. What’s changed? JON STANHOPE & KHALID AHMED know the answer…
“In summing up it’s the constitution, it’s Mabo, it’s justice, it’s the law, it’s the vibe and, no that’s it, it’s the vibe. I rest my case.”
These words, spoken by the hapless suburban solicitor Dennis Denuto in the iconic Australian film The Castle (1997), illustrate the confusion and desperation often seen when an argument lacks substance.
Denuto, out of his depth, clutches at straws to convince the High Court judges he was appearing before that he has a case.
When the Legislative Assembly finally turned its focus to the ACT’s precarious finances and sub-standard services, the government and its supporters seem to have channelled Denuto’s approach.
Their explanations and excuses came thick and fast, passing largely unchecked and unchallenged in the media. The flavour of their reasoning included:
It’s the Commonwealth Grants Commission methodology, it’s the national capital influences, we can’t put high-rise housing in the parliamentary triangle, we can’t tax Commonwealth government departments, it’s the federal government being unfair, it’s the city-state model, not enough revenue, it’s the Greens blocking revenue measures, it’s health costs. These are the reasons for the deficits and debt.
While Denuto is well meaning and manages to identify the constitution as the central issue, his inability to express it authoritatively mirrors the ACT Government’s vain attempt to explain the dire budget situation.
Many of the “explanations”, delivered with confidence, have apparently even persuaded some in the opposition to accept them as valid despite them being either incorrect, irrelevant, or having minimal impact. Even if valid, they certainly don’t explain or justify last year’s $1.4 billion deficit, which accounts for 15 per cent of the budget.
Some explanations have been walked back, such as payroll tax on the Commonwealth, after the Commission advised that the ACT would be worse off in that scenario. In response, Treasurer Chris Steel reportedly expressed support for Horizontal Fiscal Equalisation, the principle that guides the distribution of funds across jurisdictions.
The “mindset problems” referenced previously are not new. They have manifested over time in various ways: blaming service users for health performance, attributing homelessness to interstate migration or the preferred choice of the homeless themselves, changing performance indicators or targets to present a better narrative, or simply removing measures that reveal poor performance.
Poor performance and a tendency to deny it reinforce each other. Resolving one would in large measure address the other. The following sections briefly discuss the specific factors that have been suggested as the underlying causes of the ACT’s financial viability issues.
Grants Commission assessment
We have explained previously the principles and approaches adopted by the Commission. The key principle is to provide all jurisdictions with the same fiscal capacity considering their individual circumstances.
The ACT has always received payments above what it would be entitled to under an equal per capita distribution by between 10-20 per cent. Any suggestion, therefore, that the ACT’s fiscal capacity is adversely affected by the Grants Commission’s distribution is contrary to or completely misunderstands the fundamental arrangements of the federation.
Tellingly, as far as we are aware, the ACT has never raised this issue in a relevant forum.
There were, for example, three five-yearly methodology reviews and more than a dozen annual updates during the time Andrew Barr has been the treasurer or chief minister.
Notwithstanding the regular public complaints by the ACT Government of unfair treatment, we have been unable to find a single formal objection to the principles in the Territory’s submissions to relevant reviews or updates. Notably, the ACT has been generally supportive of the proposals for approach/methodology changes or their retention by the Commission.
While the ACT has indeed raised concerns about the undercount of population by the ABS in the inter-census years it has been unable, to date, to propose a method or data source that the Commission could universally apply.
The Commission has decided not to adjust for (ie, provide benefit for) any potential economic benefit from tax reform – readers may not have heard about it – because there is no evidence for it according to, yes, the ACT’s own consultants’ report! We have written previously on this issue and will revisit it to illustrate how tax reform failed in delivering the claimed economic benefits.
Taxation capacity and effort
It is indeed the case that the Territory has a relatively low taxation capacity due to its inability to tax the Commonwealth and absence of (say) mining, manufacturing and agriculture. As we have explained previously, the ACT is, however, compensated through additional GST payments in a way that assumes it had an average capacity.
Notably, however, having pocketed those compensation payments, the ACT nevertheless taxes its available bases at the highest rate of all jurisdictions.
In 2012-13, the ACT was a below-average taxing jurisdiction. However, through some of the highest and persistent tax increases, the ACT is currently the highest taxing jurisdiction in Australia.
City-state model
From time to time the city-state model is identified as a cause of poor municipal services or poor execution of state functions under the premise that focus on one detracts from the other.
That, with respect, may be a reflection on the capacity of the current administration because the model of itself did not cause a deterioration of services in previous administrations.
In fact, combining the functions and powers of local and state government provides unique opportunities for efficiency and reform that are not available in other jurisdictions.
Take for example the phase out in the ACT of stamp duty with general rates as a replacement base, as has occurred in the ACT. Other jurisdictions, notably NSW and Victoria have, because of their two-tiered governance arrangements, had to adopt quite convoluted and effectively unworkable mechanisms. It is, sadly, however, another “reform” in the ACT that has been squandered through the ACT Government’s contradictory and flawed policies.
Health and cross-border services
Health has not, as is regularly touted, broken the ACT budget. The $200 million blowouts in the past two years have been due to poor budgeting practices in the massive underfunding in the budget, to the extent it did not meet wage costs or inflation in existing activity.
Cross-border use of hospital services (by NSW patients) is also wrongly used as an excuse for the relatively higher unit costs in health. In fact, activity related to NSW patients provides economic and more importantly clinical scale without which many specialties would not be viable in the ACT.
The ACT receives payments under a bilateral agreement from NSW broadly on the basis of marginal costs of service provision rather than fully distributed cost. This has been in place for a long time and could hardly be blamed for the overall budgetary problems.
As such, the ACT does not have a structural financial viability problem; its current financial position and service delivery performance are a consequence of more than a decade of poor budgeting and a lack of fiscal discipline, financial mismanagement and the misallocation of resources to low benefit projects rather than to high-value core services.
Clearly, there is a reluctance to accept inconvenient truths: previous ACT administrations of different political backgrounds have managed to balance the budget, provide service delivery above the national average, keep taxation at or below average rates, invest in infrastructure, and achieve all this without accruing debt.
This begs the questions: what has changed and what was different then? It also points to our second “silver bullet”: adhere to the standard principles of public financial and budget management, namely: (a) fiscal discipline; (b) prioritisation and balanced resource allocation to high-value outcomes; and (c) efficiency in service delivery.
We will, in a future article, discuss some of the specific tools adopted by prior administrations which have been recklessly abandoned by the current government.
Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.
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