Top-taxing ACT read the riot act over debt burden

Despite being the nation’s highest taxing jurisdiction on a per capita basis, the ACT faces warnings that it is on an ‘unsustainable fiscal trajectory’.

ACT Chief Minister Andrew Barr. Picture: NCA NewsWire / Martin Ollman

The nation’s capital has been the highest-taxing jurisdiction on a per-capita basis for the best part of the past decade, but now faces warnings it is on an unsustainable fiscal trajectory with a review of the most recent budget revealing the ACT’s balance sheet deteriorating over time.

In September, S&P Global Ratings downgraded the territory to AA+ because of soaring debt levels and slower than expected budget repair – the first time in 20 years the territory has not held the top credit score.

The ratings agency forecast the ACT’s debt burden would peak at 163 per cent of operating revenues in 2023-24 (nearly $13bn), driven by a 40 per cent blowout in infrastructure spending in 2022-23 to a record $1.2bn.

The ACT’s most recent budget in August forecast a deficit of $492m for 2023-24 before slowly returning to a surplus of $212m by 2026-27, with gross state product estimated to return to more than 3 per cent in 2025-26.

ACT Chief Minister Andrew Barr said he intended to regain the top credit rating by continuing to grow the economy. He said the long-term fiscal ­strategy, outlined in the budget, was underpinned by taxation ­reform providing a more stable revenue base than other jurisdictions.

“Standard & Poors have once again confirmed the ACT’s economic fundamentals remain very strong, underpinned by high gross state product (GSP) per capita, household consumption, and public demand,” Mr Barr said. “The outlook on the long-term rating is stable.”

A review of the 2022-23 budget by Pegasus Economics, led by Alistair Davey, found the ACT’s net debt and net financial liabilities continuing to grow through the forecast period while net worth was falling. “When expressed as a proportion of GSP, all the territory’s key balance sheet measures are expected to deteriorate over the budget and forward estimates period,” Pegasus found.

“The ACT government will be able to meet its immediate obligations over the budget and forward estimates period but the current fiscal trajectory is not sustainable over the long-term.”

It also noted that promised improvements in the budget position over the forward years had “rarely materialised”.

“In almost all cases, the budget estimate in any year is worse than had been forecast in previous years,” Pegasus said.

Khalid Ahmed, a former executive director of the ACT Treasury, and Stephen Anthony, chief economist at Macroeconomics, have argued the ACT and Victoria stand out as the nation’s worst economic and fiscal managers in recent times.

The economists have compared state and territory jurisdictions on revenue, expenses, net operating balance, net debt and taxation over the last two decades. This exercise reveals that over the past 10 years, the ACT has experienced the fastest growth in taxation revenue in the country. Its tax haul rose from $1.18bn in 2011-12 to $2.4bn in 2021-22 – an increase of 105 per cent. Victoria has the second fastest tax growth in the nation. Its tax revenue rose from $18.8bn in 2011-12 to $37bn in 2021-22 – an increase of 97 per cent.

Dr Ahmed and Dr Anthony have argued the deterioration in both the ACT and Victorian government fiscal positions became apparent from about 2015 onwards. In the ACT, this deterioration overlapped with the formation of the first Labor/Greens government in 2012. At this time, Western Australia had the highest annual per-capita state tax take at $3338. However, two years later, in 2014-15, it was overtaken by the ACT where tax per capita rose to $3513. Since then, the ACT has increased the margin by which it out-taxes other jurisdictions. In 2021-22, per-capita tax in the nation’s capital rose to $5347. Its closest rival was NSW ($4880) followed by Victoria ($4727).

As a percentage of the budget, the ACT’s net operating balance between 2014-15 and 2021-22 has averaged a deficit of 6.6 per cent. The next worst performer has been Victoria which averaged a deficit of 4.1 per cent.

Ranking the state and territories on their fiscal balance as a percentage of GSP for 2023-24 and 2024-25, the federal Treasury also placed the ACT last for both years in an analysis it conducted in mid-2022.

In September, S&P found the deficit would reach 13 per cent of total revenues in 2023-24, up from its previous forecast of 5.5 per cent, and chalked up the deterioration to a “sustained increase in capex beyond our prior expectations”.

“The territory government ... expects to deliver a record $1.2bn in capex in fiscal 2023. This is 40 per cent higher than the fiscal 2022 amount, and 17 per cent higher than our previous base case,” the ratings agency said.

S&P found the debt burden in the ACT had “grown significantly” from 93 per cent of operating revenues in 2018-19 and was set to peak at 163 per cent in 2023-24 before falling to 154 per cent in 2025-26. The downgrade of the ACT leaves Western Australia as the only jurisdiction rated AAA by S&P, after NSW and Victoria were downgraded to AA+ and AA, respectively, in December 2020 as pandemic spending and lockdowns ravaged those states’ finances.

S&P analyst Anthony Walker said cost-of-living support and health care spending – which included the takeover of Calvary Hospital in Canberra’s north – would push the territory’s budget back into deficit in this financial year, before a gradual improvement. “The budget assumes that this spending will cease this year and recover to an operating surplus next year,” Mr Walker said. “(But) there is a risk to that given there is an upcoming election.

“The question is going forward, if we continue to see very large infrastructure spending and rising debt levels then there could be further downward pressure. We have seen very little appetite across the board to reassess capital programs.”

S&P estimated ACT taxpayers would pay $310m in servicing the debt in 2022-23, or 4.2 per cent of the territory’s total operating revenues, and this would climb to more than $500m, or 5.6 per cent of operating revenues, by 2026.

Opposition Leader Elizabeth Lee said current infrastructure spending was not sustainable. She warned that Canberrans were now paying “over $1m a day in interest repayments alone to service Andrew Barr’s debt”. She committed to regaining the triple A credit rating if elected but said it would take “discipline” and a change of government, declaring that “there is no way that Andrew Barr will be able to do this”.

“He’s had over 10 years holding the purse strings of the ACT and he’s now brought us into this devastating financial position,” Ms Lee said.

While she declined to say whether the budget position would become a key focus leading into next October’s election, Ms Lee said that poor service delivery along with waste and mismanagement were key issues of concern to Canberrans. If elected, Ms Lee said the Liberals would seek top prevent hundreds of millions of taxpayer dollars from being spent on “dodgy procurements and projects”.

Pegasus Economics said the most recent ACT budget had included a major projects, infrastructure and capital works program that would cost approximately $8.2bn to 2027-28 but noted attempts to wind-back spending had consistently failed.

“Key projects include hospitals, schools, public housing, urban renewal, transport and roads, community and services, and climate action,” it found.

“One consistent pattern in the forward estimates for capital works program forecasts is the eventual decrease in spending across the forward years that is never actually realised.”

Mr Barr has framed the recent budget around the delivery of “better healthcare, more housing, and cost of living relief to the Canberra community”. He argued the government had made a choice to “invest now in health, housing and cost of living support, to retain our world leading living standards, boosting the capacity of our economy to grow”.

He explained that the fiscal strategy for the short to medium term would be to use operating cash surpluses to pay for transport, health and school infrastructure projects. In the early 2030s, once the government had fully funded the territory’s superannuation liability,

Mr Barr said the ACT government could then redirect those payments to other purposes — including paying down debt.