Tuesday, June 05, 2007

The ACT: "like a tiny boat tossed around in an ocean of unimaginably large Commonwealth spending"

If you are looking for false reassurance you will find it in ACT budget paper number 3. It declares that “the Territory economy, while not immune to risk, tends to be insulated from many of the uncertainties faced by the national economy due to its significant public sector activity”.

Anyone who has lived in the Territory for more than a few decades will remember that we are not so much insulated as totally at the mercy of the whims of whoever is running the Commonwealth government of the day.

At the moment we are seeing it in a (mostly) good way. An sudden unforeseen boom in the public service has seen our unemployment rate fall to what the budget says is a “record low”; it has brought on a surge in office construction “unprecedented in the Territory’s history”; it has kept our house prices high due to “pent up demand”.

Surely a change of government, or a change of mind by a reelected government right after the October election couldn’t bring it all crashing down?...

Few people know better than Jon Stanhope that it could. He delivered his own horror budget 20 months after an election. His federal counterparts might deliver a horror budget sooner.

I am not necessarily predicting that there will be a post-election purge in public service numbers (although if there is to be a purge, the most-likely time is after an election). I am saying that there are countless precedents and that no-one would be able to prevent the carnage that would follow.

The budget papers tell us in reassuring tones that the “associated employee job security that arises from low unemployment in the ACT also supports sustained demand for housing”. But what if that feeling of job security ended? It has happened before in the ACT.

The papers show that for every 1 per cent that Canberra house prices rise Jon Stanhope’s government gets an extra $4.6 million in revenue. The same logic suggests that if house prices slide 10 per cent (as they well might if a razor gang is set loose on Commonwealth public servants) his government would lose $46 million – roughly half of its budgeted surplus.

It would happen right at the time the much-delayed new houses and new housing blocks are pouring on to the Canberra market. Just as the ACT was caught flat-footed by the unexpected boom in Commonwealth hiring and spending, it would be caught out when it went into reverse.

Almost every aspect of the ACT’s income depends on decisions made by the government on the hill. In a budget appendix headed “Statement of Risk” the Treasury names some. It says “Payroll tax, stamp duty, rates and land tax are exposed to risk associated with employment levels and wages in the ACT, which are driven largely by expenditure in the public sector.”

The ACT is like a tiny boat being tossed around in an ocean of unimaginably large Commonwealth government spending. It can neither control the tide nor do much to lean against it.

Jon Stanhope gave an indication of just how exposed the ACT is to even small shocks yesterday when he revealed that as he was preparing to deliver his budget speech the Bureau of Statistics had made its numbers obsolete. It released census data showing that the ACT had 5,709 more residents than had been previously believed.

The more residents the Territory has, the more GST revenue it gets to keep. Apparently an extra 5,709 residents means an extra $10 million of income and an extra $10 million of budget surplus.

(It’s little wonder that the Chief Minister has announced plans to spend $120,000 on a campaign to encourage new Canberra residents to update their Medicare addresses. By my reckoning he would only need to get 60 of them to change their registered addresses to make the campaign pay off.)

Faced with complete uncertainty about what the Commonwealth is going to do next year Jon Stanhope’s budget planners have assumed more of the same, but at a less hectic pace. They say our employment growth should ease back to its long-term average of 1.5 per cent next after its present extraordinarily fast growth of 3 per cent.

It is the sort of forecast almost guaranteed to be wrong. No-one, not even the Commonwealth Government itself, has any idea of the direction in which it will send ACT employment next year. It would be most unlikely if Mr Rudd, Mr Howard, Mr Costello or whoever gets the top job decides merely to return public service employment growth to its long-term average.

Faced with this near-total uncertainty the only correct thing to do is what Jon Stanhope has done – accumulate a surplus. The ACT economy is better than it has ever been thanks to the Commonwealth’s loose purse strings. That means the odds are it’ll get worse again soon. Economists call this pessimistic way of thinking “reversion to mean”. They would argue that we need to build up savings now to spend when things turn down, in much the same way as Peter Costello has managed to do (while spraying money around) during good times at the federal level.

If there is a criticism to be made of this Stanhope’s budget it is that it hasn’t salted away enough money. Its surplus is paper-thin. If the drought continues and ACTEW can’t pay a dividend much of it will vanish. But it would be an unfair criticism. Jon Stanhope has done more to turn around the ACT’s finances (and caused more pain doing so) than has anyone else in our short self-governing history.

The Opposition yesterday did nothing to instill confidence that it would do it better. Astoundingly, given the uncertain future direction of the ACT’s economy and the importance of salting away a surplus its Shadow Treasurer Richard Mulcahy suggested giving much of the surplus away in tax cuts. I am hoping he didn’t mean it.