I wouldn’t be King for a hundred pounds, says Alice.
Well, I wouldn’t like to be ACT Treasurer cobbling together a Budget even for 116 pounds.
There seems very few places to move for a state or territory treasurer these, and things can only get worse unless the Feds do something in the tax package. At present, though, the Feds raise the lion’s share of the all public sector revenue (72 per cent to be precise) but the states and territories have all the lion’s share of the responsibility for delivering the services. And these are the services that profoundly affect our lives: education, health, police, roads and so on.
The ACT has perhaps even less room to move than other states and territories.
Here are some of needles and threads hemming in ACT finances:
1. The ACT economy has already been smacked around by federal cuts. Any further public-sector spending cuts (territory or federal) would be greeted with extra horror. The ACT has a lower growth rate than the Australian average; a public-sector contraction would be bad economics.
2. Since self-government the ACT has done nearly all the easy revenue raising. At self-government ACT revenue raising was only 90 per cent of the average per head revenue by states and territories. Now it is average, or slightly higher. So there is less room to move with revenue raising
3. The Commonwealth is less generous. At self-government the Commonwealth gave us 60 per cent of our revenue; now it provides only 45 per cent and falling.
4. The Commonwealth is more restrictive about what we spend that money on. At self-government it used to tie only 30 per cent of its grants and let us spend the remaining 70 per cent how we liked. Now the Commonwealth lets us spend only 50 per cent how we like. So there is less Commonwealth money and less of it is available to the Treasurer to spend as she pleases.
5. The revenue base is getting narrower. Some silly states have cut revenue avenues as part of competitive federalism to attract people and business from other states. All have now abolished death duties. This, of course, enabled the Feds to impose a capital gains tax which is a form of death duty. All have had to cut stamp duty on shares because Queensland naively thought it could attract more share business if it cut its duty. Most, particularly South Australia, offer tax holidays for “”new” business. These foolish bribes give only short-term benefit to a state and are overall damaging to the nation as there is no benefit to industry moving from one state to another for a tax holiday.
6. The High Court has ruled state and territory petrol, tobacco taxes invalid. These are now collected by the Commonwealth, so no revenue is lost, but the rate and mix of the taxes are now frozen, so the ACT Treasurer has nowhere to move.
7. There is now social pressure against the one boom revenue area: gambling.
8. There is less room for budgetary tricks now, on three grounds. The ACT has moved to accrual accounting so depreciation and all other costs are brought into account and are assigned to each department, so there is no robbing Peter without telling anyone to pay Paul to finance a handsome vote-catching program which is made very public. Secondly, the Grants Commission makes continuous assessments of revenue effort and efficiency of spending. It humiliated the ACT into bring revenue into line with other states, but spending is still less efficient than average in health, education and transport. Thirdly, competition policy Australia-wide embraces the states. The real cost of inefficient monopoly services is exposed and has to be paid for in lower Commonwealth grants.
In all, these pressures mean there is little room for movement in either revenue or spending. Many people expect a lot of slash and burn this budget, especially as it is the first year of the government’s term. But this is a minority government. Persistent squeals from interests whose funding is cut will see support for the Government on the floor of the Assembly erode. Cuts to green and social programs would enrage Kerrie Tucker. Cuts to cops would enrage Paul Osborne and Dave Rugendyke. Now Wayne Berry has been replaced as Labor leader, there is no impediment for those three to swap support, particularly as the Liberals have now lost Trevor Kaine and officially have the same number of MLAs as Labor. I don’t think that a change of guard at Buckingham Palace is imminent. But once the law-and-order legislative agenda of the Osbornes is completed, they would have less reason to stay with Kate Carnell and her Liberals, and a change would be entirely possible.
The Osbornes and Tucker are opposed to big economic changes like asset sales and privatisation. And Carnell needs them on side. It does not matter that some of the economic changes can be made without legislation, Carnell needs their general support to stay in Government. Once again, less room to move.
I think the Government would be foolish politically and economically to cut spending. Sure, the bits within the overall spending limit might need changing. Continued reduction in the subsidy to the buses (which mainly fund inefficient work practices) would make room for health and education spending, for example. Cut a bit here; spend a bit extra there, to improve services overall, but the bottom line should stay roughly the same. It is not a good time to slash and burn.
Similarly on the revenue side, except the ACT is running at an operating loss. It cannot go on indefinitely. There seems to be little long-term benefit in lowering taxes to attract businesses from interstate if the lower revenue results in rising debt or poorer government services. Those things will deter the businesses you want to attract or offset any benefit that you get from attracting them. It hasn’t help South Australian much.
At present the ACT is running an operating loss of about $200 million a year. And there is a problem with unfunded superannuation.
Now, an operating loss is not the same as a deficit. It embraces the full depreciation of the asset base, like buildings, plant and equipment and so on. It does not come home to roost as quickly. Indeed, it may not come home to roost at all, if you decide to reduce the asset base because you can deliver the same services with fewer assets.
The ACT has a higher than average asset base and a much lower than average debt.
None the less, the operating loss is still there, and if spending cuts are unwise, some extra revenue should be raised to help meet it, particularly in areas were we are taxing less than other states.
Even so we are still tinkering around the edges until and unless the Feds do something major to give the states the ability to raise the money they spend, rather than relying on the Commonwealth. (It would be better, of course, to abolish the states, but that simply will not happen.)
A couple of columns ago I put the suggestion that the GST could be a states’ tax and only raised if the Premiers agree, thus imposing on them the political responsibility for raising the money they spend, instead of bleating with hands out to the Commonwealth.
Perhaps a fixed share of income tax, according what was raised in each state and territory, would be the go. The trouble is that if the Commonwealth is doing the collecting, the Constitution demands that rate has to be the same in every state. It would needs a referendum to change it. Having the states collect their own income tax would be an administrative nightmare.
In fact, if the states were to take all income tax levied above the company tax rate, it would just about eliminate what is called the “”vertical fiscal imbalance”, and we could have a more sensible arrangement that each level of government has to raise what it spends and carry the political can for it.