Canberrans would have to lower their expectations of government services, the chairman of the Commonwealth Grants Commission, Dick Rye, said yesterday.
Mr Rye also warned the ACT Government against using borrowings for current spending.
His warning comes as the ACT Cabinet prepares its 1993-94 Budget facing an extra financing requirement of $110 million unless its changes policies or borrows.
He said also that in the past the ACT had been “”sheltered from the harsher realities of the outside world”.
“”Reality is now breaking in,” he said. “”But it is doubtful whether this has really sunk in among the wider community.”
The ACT had the lowest debt to gross state product of all states and territories with perhaps the exception of Queensland, he said. It provided for opportunity and temptation.
“”The temptation it provides is to defer the hard decisions and use the ACT’s high credit rating to borrow to finance current spending,” he said. “”Go too far down that road, of course, and the end is a fiscal trap of the kind the southern states are finding so hard to cope with.”
The opportunity was to keep the debt charges down so that money could be spent on more productive things.
Mr Rye was speaking at the launch of the July edition of Trends, the Advance Bank’s bulletin of ACT economic developments.
The lead article in Trends said, “”There is a legitimate case for funding part of capital spending programs through debt and to fund some of the adjustment to lower Commonwealth funding as a transitional measure”.
But borrowing for current spending was not fair on future generations.
The ACT Cabinet and senior bureaucrats have been looking at the debt issue in recent days as part of the Budget process, according to government sources.
The Chief Minister, Rosemary Follett, warned yesterday that the ACT had a tough battle to meet the gap caused by a drop in Federal grants.
She was welcoming Australian Bureau of Statistics figures that showed the ACT had the lowest debt ratio of any state or territory compared to gross state product.
The figures confirmed the ACT’s “”responsible approach to financial and economic management”.
The bureau’s figures for 1991-92 showed a 10 per cent reduction in debt due to the budget surplus and loan repayment. It would fall further in 1992-93 with no new borrowing and further loan repayments.
The ACT’s debt level of 3 per cent of gross state product was substantially better than the next best, Queensland, on 10 per cent.
However, she warned that the ACT faced dramatic cuts in Commonwealth grants for several years to come and that the ACT would have a tough battle meeting that funding gap.
Both Trends and Mr Rye said the ACT economy was in good shape compared to the rest of Australia. This was largely because of lower unemployment and higher incomes giving it more revenue. The ACT economy had come through the recession in comparatively good shape.
However, the future was not so rosy. The ACT had to cope with the phasing out of special grants in the transition to self-government.
Mr Rye said that with the exception of health, education and police, all those special grants would dry up in 1993-94. And grants in those three areas would continue to be phased out over the next four years.
Mr Rye’s message was that the ACT was no on all fours with the states. Its per capita Commonwealth grant was now almost exactly on the Australian average, whereas Victoria and NSW got 16 per cent less than the average.
Trends said the ACT had a self-inflicted weakness, however. It had a projected increase in spending of $103 million, but had only achieved an increase in revenue to pay for it of $48 million.
It warned against increases in stamp duty, payroll taxes and the like because it would make the ACT unattractive for investors thus jeopardising the revenue base. The increases would be self-defeating.
It and Mr Rye warned that the ACT community would have to lower their expectations on the scope and quality of services.
Mr Rye said the ACT had a couple of special handicaps. The large presence of the Commonwealth meant less payroll and land tax because the ACT could not tax the Commonwealth as an employer or land-holder.
The fact the ACT was an island meant it could not tax beyond NSW thresholds without facing a flight of investment and spending over the border that would decrease revenue.
The commission gave allowances that “”equalised” the states and territories so that people throughout Australia could get the same standard of governmental services provided their governments made average revenue efforts and administered with average efficiency.
He explained why the ACT could expect less from the Commonwealth next year, aside from the cut in transitional allowances. The commission was working on 1991-92 figures. In that year the ACT did better than the state economies, so it was relatively better off and thus needed less Commonwealth equalisation allowances.
The commission introduced some new categories for equalisation _ roads and public housing _ where the ACT was a long way ahead and needed less for equalisation.
He rejected that the commission had been unfair in its treatment of the ACT. He thought the disadvantages of small scale, the fact of the national capital, the island effect, the need for more education and child welfare for the young population were more than offset by the advantages of compactness, low proportion of aged and Aboriginal people and the relative affluence of the population.
ACT spending was well ahead of the commission’s standardisation calculations. Either it was getting more and better services or they were being provided less efficiently or a combination of both.
It was a political decision for the ACT to spend more or less; the commission merely equalised according to Australian standards of revenue and expenditure.
It would not be easy to educate the community that it must lower its expectations in the face of lower Commonwealth funding.