Concerns of ACT fiscal slide

Catherine Carter | Tuesday, 26 May 2009 1:31 PM | One Comment

Investment, job creation and thriftiness is crucial

In its budget handed down earlier this month, the ACT Government clearly focused on projects providing direct economic stimulus to the Territory as well as potential environmental benefit.

The Tune Up Canberra initiative, proposed by the Property Council, is an example. It offers incentives for commercial property owners to improve energy efficiency in existing buildings. We are delighted that the ACT Government supports it and keen to work with government to roll it out as quickly as possible.

This budget also simplifies and clarifies the Change of Use charge and reduces rates.

Commercial developments, delayed by difficulties arranging finance, are now free of the fees such delays normally incur, thanks to a moratorium. Our hope is that these fees – which present such a significant deterrent to investment in the Territory – will ultimately be abolished altogether.

The ACT Budget also increased funding to ACTPLA to provide professional and timely service, and for a range of infrastructure works supporting the land release program, and to support projects which deliver direct economic stimulus into the Territory.

The ACT Government, through this Budget, also moved towards developing a sustainable transport plan for Canberra by providing $1 million for the pilot of new rapid transit buses, increasing parking fees across government parking areas, and increasing ACTION bus fares. These three initiatives encourage people to use public transport, by removing the price advantage in driving and parking; by assisting to make much-needed private investment in parking facilities economically viable and helping to reduce the burden on the Canberra community (around $74 million in 2009-10) from subsidising ACTION.

In spite of these many good initiatives, the Property Council has serious concerns about the Territory’s deteriorating financial position.

There is no doubt that the ACT is having to deal with the unprecedented triple whammy of the impact of the global financial crisis, the downturn in the property market, and spending cuts by the Commonwealth Government.

GST payments to the Territory will be reduced by $186 million over four years, a loss partially offset by general revenue grants and special purpose payments ($141 million greater than forecast in the ACT Budget). So even with all Commonwealth payments taken into account, Canberra is worse off than expected by $45 million over the next four years.

Before this was known the ACT Government expected to accumulate operating deficits of over $1 billion by 2012-13, with the budget not balancing again until 2015-16. The Government will now be forced to find further savings in coming budgets because of reduced GST income. The savings and revenue required are daunting.

Considering the Government’s track record on spending, it will need much greater commitment and discipline to achieve its budget targets. Since 2002-03 actual expenditure has exceeded planned expenditure by $735 million – an average of $105 million each year. This record must improve to avoid crippling taxes or prolonged debt.

From 2002-03 to 2008-09 the average annual rate of increase in government expenditure was 8.8 per cent. If this rate continues, expenditure in 2012-13 will be $4278 million, or $180 million more than estimated in the budget. That would bring the operating loss to $476 million by 2012-13.

However, the budget assumes that government spending will only increase by 4.2 per cent. It is difficult to see how that will be possible without cutting programs and services, when from 2002-03 the annual increase in spending has been more than double that rate.

Worryingly, the ACT economy still relies too heavily on a very narrow tax base. The ACT Government currently depends on Federal Government grants (mainly GST) and taxes on ACT property for some 60 percent of its total revenue, and that weakness is getting worse.

In 2009-10 property taxes account for 50 per cent of all ACT tax revenue, with that burden projected to increase to 52 per cent by 2012-13. And property taxes, already very high, are also increasing much faster than other revenue sources. Over the five years to 2007-08 conveyancing taxes increased by 57 percent more, and total property taxes by 54 percent more, than total government revenue.

At present the ACT Government shows little appreciation of the longer-term consequences of such a creeping reliance on property taxes, and has announced no plans to broaden the tax base or reform the tax system.

This trend clearly cannot continue without eventually losing investment in property, which will reduce the tax take and, inevitably, further impact publicly-funded services.

One thing governments can do to bolster economies is provide support and injections of capital for infrastructure works. Infrastructure is important, not only because of the jobs involved in delivering it in the short term, but because it provides community assets in the longer term.

Regrettably, the Federal Budget provided almost nothing for ACT infrastructure projects. One reason for this may be the lack of a long-term infrastructure plan – a project which has ACT Government commitment but, as yet, no action. On the plus side however, the ACT Government has committed $762 million for new and current capital works. The ACT Government has also taken a sensible approach in terms of funding for delivery of some of these works, using government debt to invest in infrastructure – an innovative and practical approach which will ensure that future generations who benefit also share the bill.

The Government has made a public commitment to consult with the community over the coming year on Budget decisions and management of the Territory’s economy. The task is to live within our means and, at the same time, foster an environment favourable to investment and job creation.

Catherine Carter | Tuesday, 26 May 2009 1:31 PM | One Comment

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