Economists Say Budget Surplus is Unjustified

Several well-known economists have criticised the large Budget surplus recorded by the ACT Government. They have accused the Government of poor economic management and they all say that the Government should be spending some of the surplus instead of sitting on it.

ANZ Chief Economist, Saul Eslake, was not impressed with the ACT Government’s financial management. He said that the ACT surplus stood out from that recorded by other states. “It’s a big miss, it’s hard to understand,” he told the Canberra Times (17 August).

Mr. Eslake said that the surplus raised questions as to whether school closures had to be so severe.

Phil Lewis, Professor of Economics at the University of Canberra, accused the ACT Government of peddling “dodgy numbers” and poor economic management. He said that the 2006-07 Budget was based on incorrect figures and was “very unsound”.

He said that the Government was either incompetent, or had deliberately plotted to use the threat of a deficit to pursue its financial agenda.

These comments echoed those made earlier by Professor Glenn Withers from the ANU when the initial upward revision of the Budget outcome was made. He told the Canberra Times (8 June) that Canberrans are being short-changed by the ACT Government because it is sitting on budget surpluses instead of spending the money.

In particular, he dismissed the argument that surpluses are needed to guard against future fiscal uncertainty by observing that the bottom line is just as likely to benefit from unexpected gains.

He said that leaving surpluses in the bank was of less benefit to the ACT than spending the money in ways that would have long-term benefits and that there is a higher rate of return in spending wisely than in saving. A deficit is not a tragedy if it is incurred for long-term gain.

The comments were made in response to revisions to the 2006-07 ACT Budget outcome whereby the Government now has $200 million more than it had forecast.

The ACT Government has one of the strongest financial positions of any government in Australia. It has accumulated budget surpluses of $735 million since 2001-02 while ignoring fundamental issues in government school education. A further $320 million surplus is estimated for the next four years.

The strong financial position of the ACT government sector is also confirmed by other broad financial indicators.

The ACT is estimated to have substantial negative general government sector net debt in that its cash reserves and investments are much greater than its gross debt liabilities. Its net debt to revenue ratio was estimated at over -80 per cent in 2006-07 and 2007-08 and it has the highest level of negative net debt of any jurisdiction in Australia.

The ACT also has a lower level of net financial liabilities than most other jurisdictions in Australia. Net financial liabilities as a proportion of revenue in the ACT was 53 per cent in 2006-07, compared to over 60 per cent in NSW and Victoria and 90 and 111 per cent respectively for the two other small jurisdictions of Tasmania and the Northern Territory. The ACT position is even stronger in 2007-08 with a ratio of 36 per cent.

In addition, the ACT has strong positive net worth. Net worth measures the total value of all assets less all liabilities. In 2006-07, net worth as a proportion of revenue in the ACT was 358 per cent and was the strongest of all Australian jurisdictions. A similar ratio is expected for 2007-08.

Such figures demonstrate that the Government’s financial rationale for school closures is not sustained and that the community is entitled to feel duped by the Government.

Trevor Cobbold

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