Hemmed in by political, economic and constitutional constraints, Treasurer and Chief Minister, Kate Carnell, has made a fair fist of dealing with the ACT’s long-term fiscal difficulty without doing the slashing and burning predicted by some and urged by others.
Realistically, the ACT could not take any more slashing and burning of government spending right now. It has had pretty well all it can absorb. Across the board — business, consumers, wage earners and pensioners — were in no mood to absorb spending cuts or the flow-on from them. Nonetheless, the ACT can still with more efficient spending so that taxpayers get more for their money, and this Budget put in train methods to identify inefficiency more readily to set up the groundwork for later change, even if it did not bite the bullet now.
On the revenue side, there was little room for business, consumers, wage-earners or welfare recipients to absorb increases in taxes. Mrs Carnell’s extra revenue measures were therefore quite astute. Critics of heavy increases in parking and traffic fines may well say that the poor old motorist is slugged again, but these increases are easily avoidable: just do not break the law.
The registration increases are also defendable. Heavy cars are less environmentally friendly and cause greater road damage and often cause more injuries than lighter cars. The extra stamp duty on more expensive cars is also defendable because the burden will fall on people who can obviously afford it.
The insurance levy is perhaps more difficult to defend. It comes in at about $80 a household, which will cause some hardship, though some of the total of $10 million to be raised will come from businesses. In practice everyone has to insure their home. In effect, there is little difference between this levy and an increase in rates. But politically, the two are very different. If it had been a rates rise, it would have been a 10 per cent increase. Getting revenue through a levy, rather than rates, means that the Government can still assert that it has fulfilled its election promise not to increase overall rates by more than the consumer price index. Also, a levy will come via the insurance bill, and so voters will tend to blame the insurance company for the increase.
The charge brings the ACT into line with most other states. The main justification is that the Government provides emergency services which put fires out quickly, thereby reducing the amount of damage claimable on insurance and so reducing premiums. In effect, it is a GST on insurance.
The tight range of new levies and charges indicates a more fundamental problem with state and territory financing. In this Budget Mrs Carnell has quite reasonably paid attention to activities which cause harm and looked at capacity to pay. In doing so, her range was virtually limited to heavy and expensive cars and traffic-infringers because most other avenues have been closed.
She could have raised extra revenue through tobacco, alcohol and petrol, but the High Court has closed that off. Last year it ruled that state and territory taxes on these goods, indeed all goods, are invalid. The Commonwealth now has to raise them and pay the proceeds to the states. Though the revenue is preserved, it means, that the rates of tax are frozen. No state or territory can vary the amount because the Commonwealth is constitutionally prohibited from raising variable taxes. On this, Prime Minister John Howard and Treasurer Peter Costello are right. Tax reform is pressing.
This Budget is a clear illustration of the constraints placed on the states and territories. It is compounded in the ACT by minority government. That can be seen, for example, in the way that Independents Paul Osborne and Michael Moore have shaped the education budget: no classroom cuts, but plenty of central office cuts. Up to a point there is merit in that, but there comes a time when resources in administration are well spent because without it, the ensuing bungling can be more costly than good administration.
Another difficulty with the narrowing tax base, is that if the base is narrow the tax rate has to be higher to get the revenue in. But high tax rates invite avoidance or change conduct to avoid the tax.
Increased parking fines may not yield a proportionate increase in revenue because people will be more diligent in avoiding fines. To take an extreme example if parking fines were set at $10,000 presumably there would be no revenue because no-one would be mad enough to infringe. Similarly more people will shy away from heavy and expensive cars, thereby reducing the revenue expected.
The Government may also be a tad optimistic in saying employment growth and swaps to the private sector will yield 10 per cent more payroll tax. Once again, the narrow tax base has a poor effect. The tax is a deterrent to employment.
On the spending side, the money for mental health and asthma is welcome. The money for job-creation is a bit more problematic. Education and sound economic fundamentals will always be better for job creation than artificial government schemes.
This Budget the Government also introduced some new accounting techniques and a determination to deal with the problem of unfunded superannuation. Eventually these will reveal where the efficiency problems are in government. In the meantime, though, they enable the Government to sprinkle the superannuation repayment throughout agency budgets, making year-to-year comparisons more difficult. Ultimately, though, the new methods will make it much more difficult for governments to fudge figures. Indeed, the effect of the plan for Actew to borrow $100 million to buy the streetlights and for CanDeliver (the new IT entity) to borrow $80 million to set up shop will filter transparently into next year’s Budget, just as last year’s Actew forced asset purchase filtered into this Budget and, in the absence of self-generating revenue, resulted in the insurance levy.
In all, the Budget was a reasonably disciplined and fair effort in difficult circumstances that were not of this Government’s making.