Wednesday, May 07, 2008

Budget day is spending day - in the ACT

And also in Victoria it seems. Both had their Budgets yesterday, as did the Northern Territory.

In the ACT the government says it is "ready for the future" and it is preparing to spend most of its accumulated surpluses on infrastructure to prove it.

Yes, an ACT election is just around the corner.

No, that has nothing to do with its decision to abandon austerity. It says so.

But given that the ACT's golden days are probably about to end - until now it has been right up there with Western Australia as the biggest beneficiary of the boom - the ACT government might just have the timing right.

What do you think?

Below are the two pieces I wrote for this morning's Canberra Times:

The ACT's Chief Minister Jon Stanhope has smashed the piggybank and grabbed $700 million of accumulated surpluses.

With another $300 million from vaguely-defined future savings he is planning a $1 billion infrastructure spending spree “unmatched in Canberra’s history”.

Delivering yesterday’s budget he said the decision had nothing to do with the impending ACT election.

“That’s not how this government thinks. It is not how this government acts,” the Chief Minister declared.

“The naysayers will always find some explanation for our timing on these things,” he protested at the budget press conference, “but at the end of the day we do what’s needed”.

What’s actually needed, according to the Chief Minister is a $1.5 billion infrastructure spending spree, which is the grand total taking into account the $500 million that the government is planning to borrow on behalf of ACTEW to help it build up our water supply.

Is the spending worthwhile? Probably. Indeed much of the general spending in the Budget reverses earlier cutbacks. The government has promised to open one school each year, to spend $4.4 million to enhance library collections and to spend $10 million a year upgrading the ACTION bus fleet.

Is it well-timed?

Almost certainly.

The Chief Minister didn’t say it, and the budget papers don’t highlight it, but the ACT’s economy is turning down.

As he said when talking about the record high in building investment reached a year ago, “Everest has a summit. The sky has a limit”.

A year ago the Stanhope budget forecast that state final demand would grow by 4 per cent in 2007-08. This budget has wound that forecast back to 1.75 per cent.

It forecast that Gross State Product would climb by 2.5 per cent. This budget has wound it back to 1.5 per cent.

Employment and population growth, forecast a year ago to grow at 1.5 per cent and 1.25 per cent respectively, are now each forecast to grow by only 1 per cent, with employment growth to slide further to 0.75 per cent in the coming financial year.

Growth in retail spending, mentioned with pride in last year’s speech as outstripping the national average, isn’t mentioned this time. It’s anemic.

As the Chief Minister says this year, “economies are not immune from apprehension when they witness – or even just anticipate - a change in the activity level of the town’s big factory, the city’s major employer”.

His speech says he has taken into account the potential for “a tougher than average Commonwealth Budget”.

But he hasn’t, fully.

His budget documents say that his forecasts are made on the assumption that the Commonwealth will deliver a surplus of 1.5 per cent of GDP in next week’s budget.

In fact the Commonwealth Treasurer Wayne Swan has promised to deliver a budget surplus of at least 1.5 per cent of GDP meaning that the assumptions behind the forecasts in Jon Stanhope’s budget will almost certainly turn out to be optimistic.

Asked yesterday by the Canberra Times whether Jon Stanhope had got it right in assuming he would deliver a Commonwealth surplus of 1.5 per cent of GDP the Treasurer said only that he wouldn’t comment.

Canberra’s economic outlook is the worst it has been for years.

It’s almost certainly the right time to start a five-year infrastructure-spending program to ease the downturn.

Even previously silly spending such as the $200,000 per year Live In Canberra program is beginning to look worthwhile.

We might soon have empty houses for new residents to live in.


2008/09 ACT forecasts

. Employment growth - 0.75 per cent

. Population growth - 1.0 per cent

. Gross State Product - 2.5 per cent

. Consumer Price Index - 3 per cent

. Wage price Index - 4.5 per cent

ACT house prices are expected to stay flat in real terms in the year ahead as high interest rates, job cuts, weaker population growth and a deteriorating share market cut demand.

The ACT budget papers say that “the Reserve Bank’s monetary policy stance, the Commonwealth Government’s employment intentions and moderating growth in wealth (including superannuation) associated with financial markets, have created an environment conducive to moderating demand”.

At the same time the ACT’s accelerated land release program should bring supply and demand closer to balance resulting in flat real residential property prices throughout 2008-09.

The papers warn that the “overall confidence of recent years resulting from the perceived job security associated with low unemployment” will be replaced with “relative uncertainly” due to the cutbacks expected in next week’s Federal budget.

The cutbacks will also hit ACT revenue. The Statement of Risk attached to yesterday’s budget papers warns that “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”.

“A significant change in Commonwealth Government public sector expenditure, particularly in the form of ACT based staffing levels, would affect the property market in the ACT with a flow-on effect on property related taxation revenue,” it says.

“This would also have a flow-on effect on private sector economic activity, and therefore affect payroll tax revenue.”

The ACT budget has been prepared assuming that the Commonwealth cuts back spending to the point where it achieves a budget surplus of 1.5 per cent of GDP, around $18 billion.

But the Chief Minister Jon Stanhope conceded yesterday that the assumption was “technical” and that the cutbacks could be bigger.

“We have not been involved in conversations at that level of detail,” he told the Canberra Times. “We have just a wink and a nod”.

The Commonwealth Treasurer Wayne Swan has pledged to bring in a budget surplus exceeding 1.5 per cent of GDP, implying that the projections in the ACT budget will turn out to be optimistic.

Those projections have the ACT government’s net operating surplus deteriorating from $192.2 million in the current financial year to just $33.7 million by 2011-12.

They suggest that if the Commonwealth cutbacks do turn out to be bigger than the ACT has assumed, that the future surpluses will be in doubt.

The Chief Minister said that it was the right time to launch a $1 billion five-year infrastructure spending program and the health needs of an aging ACT population would not wait.

He gained partial support from Chris Richardson, a Canberra-based director of Access Economics who said that investing in infrastructure all around Australia made sense.

“The only difficulty is that all Australian governments are coming to that realisation at the same time,” he said.

“The price of bricks, the price of capital and the price of skilled workers is climbing as the states and territories catch up.”

“But that doesn’t mean that it shouldn’t be done. Just that playing catch-up at the same time costs money.”

The spending plans unveiled in the budget will boost the Act economy at a time when it is likely to turn down.

The ACT government plans to spend a total of $3.3 billion during the coming financial year - around $9,570 per resident - a hefty increase on the $9,140 per resident spent during the current financial year.

It expects to increase its spending by around 5 per cent per year in each of the coming four years.