How not to manage government finances: The case of the NT

After three years of divisive Aboriginal art gallery debate, a hole in the ground is all the government has to show for, and the demolition of a perfectly good building, the historic Anzac highschool.

 
By DON FULLER
 
The 2018-19 Commonwealth-published Government Finance Statistics (the latest available) showed the NT had a net operating result (revenues less expenses) of negative $439m.
 
Chief Minister Michael Gunner in presidential pose.
 
It was the only jurisdiction in Australia to have a negative operating result, along with such a large deficit. Since that time it has become negative at an increasing rate.
 
In addition, the Territory had by far the largest net debt as a percentage of revenue, providing more warning signs on a decreasing capacity to service the escalating interest costs associated with such a high level of debt.
 
Consequently for the NT, interest expenses as a percentage of general government revenue were the highest of any other jurisdiction and around twice the average for the other states. By late 2018 it had become clear the Territory was heading for major financial difficulties with no immediate plans to fix deep government fiscal problems.
 
This was despite these emerging serious problems being called out by courageous members of the government’s own side – Ken Vowles, Scott McConnell and Jeff Collins.
 
They were concerned finances were rapidly becoming unsustainable after many years of dysfunction and mismanagement and the Gunner Government was leading the Territory towards insolvency.
 
However, such obvious, natural, responsible and ethical concerns for the Territory and its people were not to be tolerated by the government.
 
The three were forced onto the cross benches and out of the Labor party. This of course, also says much about other senior members of the Gunner Cabinet.
 
There are concerns about a government which has displayed such an inability to utilise constructive and positive suggestions. Is this the way a fair, transparent, accountable and competent government should work? Or are these signs of an immature, naïve, incompetent and authoritarian government?
 
The Gunner Government’s reaction goes a long way to explaining why the Territory is facing an almost impossible Budget challenge.
 
Key concerns of the sacked insiders included misgivings that the NT’s debt was forecast to increase tenfold to $35.7 billion by 2029-30 with the Treasury being forced to borrow to cover day-to-day operating costs.
 

This is seen to be unacceptable financial management by budgetary experts, as debt finance should be used for long term asset financing, such as infrastructure developments, rather than to cover operating costs.
 
Government utilities: The old Ron Goodin power station is still a drain on the Budget.
 
By 2018 the Territory’s net debt had escalated from $1.7 billion when Labor was elected, to around $3 billion. The Treasurer was forced to fly to Canberra for emergency Budget meetings with the Federal Treasurer.
 
Following this meeting Prime Minister Scott Morrison, on a visit to the Territory, ruled out any extra Commonwealth support to help lift the Northern Territory out of its current fiscal black hole.
 
With no apparent ideas on how to fix the problem the NT Treasurer, Nicole Manison, sought to engage an external Budgetary expert to commence a public consultation on how to solve the financial woes.
 
All this seems tragically ironic given that the most sensible and rational ways of proceeding had been available from the members of her own party had the Chief Minister and Treasurer opted to listen.
 
While the Treasurer continued to blame the Territory’s Budget difficulties on declining GST revenues from the Commonwealth and the completion of the Inpex project, she was forced to admit that one of the key factors had been a huge cost blow out in un-budgeted spending and operational expenses.
 
An obvious conclusion is the government isn’t functioning in a transparent, effective and efficient manner.
 
This was certainly the opinion of the NT Chamber of Commerce, who lambasted the government’s “willy nilly” spending, and Charles Darwin University Associate Professor of economics Ram Vemuri, who said the government needed “to fundamentally change the way it did business”.
 
As a result of a lack of internal ideas with which Vowles, McConnell and Collins had been purged from the Labor party, the NT Government was forced to appoint the external Treasury expert, John Langoulant, to provide the ideas and concepts necessary for developing an acceptable plan for Budget repair.
 
Mr Langoulant, the chair of this report, was also to be given responsibility for community and business consultations. As a result, the government and the public service were to be further insulated from the NT community with major government responsibilities to be again handballed to an expert consultant.
 
Before the pandemic hit
 
As if things were not bad enough before the Coronavirus hit, international and national economic conditions were already weakening.
This was due to have a direct hit on the Commonwealth funding going to the Territory.
 
Before the Coronavirus NT Treasury was forecasting a reduction in GST revenue of around $180m over the coming five years. In addition, the shrinking NT population was expected to further reduce the Territory’s funding.
 
The NT Budget deficit, before the Coronavirus, was estimated to be over $1 billion with net debt of around $6 billion.
 
However, net debt was predicted to blow out further to over $8 billion by 2022-23 as the NT was forced to borrow to cover the wages of public servants and pay increasing interest amounts on the escalating debt.
 
In 2019-20 Budget papers the general government net operating deficit had grown to $632m before the serious negative hits associated with COVID-19.
 
The willy nilly spending approach of the Gunner Government ensured the Territory, unlike the Commonwealth Government, was completely unprepared for an external, unexpected financial shock and risk to the Budget.
 
While this shock has now been provided by the pandemic it could have emanated from a number of sources such as war, trade conflict, or a major natural disaster.
 
Government utilities: The sewage ponds waste billions of litres of water in the driest part of the driest continent.
 
Given the perfect economic storm which has developed from Coronavirus, how it must be asked, can the current government be expected to manage?
 
Likely economic impacts of Coronavirus
 
The Commonwealth Government’s financial response to the Coronavirus outbreak has been estimated to cost more than $320 billion.
 
This is before the possibility of a second wave of economic losses. This would result from businesses and individuals cutting back on spending and investment.
 
Grattan Institute household finances program director Brendan Coates said the impact to the economy coming down the pipeline from COVID-19 was unprecedented, and was certainly bigger than anything Australia has seen since the Great Depression.
 
The Organisation for Economic Co-operation and Development estimated a quarter of economic activity across the world has been curtailed.
 
In the week ending March 29, the ANZ-Roy Morgan Consumer Confidence index plunged to its lowest level in its nearly 50 year history.
 
For the next six months at least, the Commonwealth Government is expected to be paying the equivalent of half of the country’s total wage bill to prevent over a million workers losing their jobs.
 
In the mid-year Budget update, Australia’s net debt was forecast to peak at $392.3 billion in 2019-20, or 19.5% of gross domestic product, before declining.
 
But the emergency wage package will see Australia’s net debt increase by a third, increasing to an estimated $507 billion by the end of June, to hit 26% of GDP.
 
As independent economist Saul Eslake has stated: “The problem is not so much the level of debt, but the government’s capacity to service it.”
 
The consulting organisation Price Waterhouse Cooper, projects a substantial Commonwealth Government’s Budget position impact.
 
They project that the 2020-21 tax revenue would fall by $25.8 billion and the underlying cash balance would fall from a projected $6.1 billion surplus to a deficit of $24.8 billion. This is a $30.1 billion turn-around.
 
Emphasising the impact of paying for the interest expenses of sharply increasing Commonwealth debt, just before the government realised its Budget outlook had ­improved by $60 billion, the Australian Business Review’s Adam Creighton reported that one of the world’s top three ratings agencies, Fitch, warned that it was considering cutting Australia’s coveted AAA rating.
 
Fitch pointed to concerns about Australia’s soaring debt and deficits arising from the Commonwealth’s huge stimulus programs to deal with Coronavirus. It expected economic growth to fall sharply in 2020 and government spending to cause large fiscal deficits and a sharp increase in debt as a percentage of GDP.
 
Such decisions and projections can be expected to have major consequences for government payments to the Territory Budget that has been badly mismanaged for several years.
 
Impacts of high levels of NT Government debt
 
Excessive debt can restrict the government’s capacity to maintain sufficient levels of essential services. As Eastlake indicated, this is mainly due to increased borrowing costs that can escalate due to increased interest rates.
 
Credit ratings are the result of an assessment of a government’s fiscal strength including its ability to repay debt.
 
Weak financial performance and high debt burden lead to worsened credit ratings and higher interest rates on borrowings and even more to pay back.
 
It appears inevitable any commercial banking lending to the NT Government will re-evaluate the risk of lending to the government.
 
This will further compromise the NT Government’s ability to provide essential services in the key fields of education and training – the big ticket items in any Budget.
 
Corona virus
 
The Territory’s credit rating was last assessed by Moody’s on the 2018-19 Budget. It then changed the outlook to negative. The credit rating will soon be reassessed and there is a high chance that it will be downgraded.
 
Factors likely to further increase NT debt
 
As pointed out in the NT Budget papers, the amount of revenue received from Territory taxes and royalties is dependent on the performance of the Territory economy and “other external factors”.
 
While such factors are difficult to forecast it is clear that if the Territory economy continues to stall, as it has in the past three years, revenue from employment, wages and commodity prices will be low and falling.
 
While economic conditions in 2018-19 were thought to be some of the most challenging in the Territory’s history, the Budget forecast that there would be a recovery in the economy in 2019-20.
 
While the projection appeared overly optimistic to say the least, how does it look now following coronavirus?
 
Gross State Product (GSP), a key measure of Territory economic activity, was previously forecast to grow at over 3% per annum over the next four years as peak export volumes are achieved, private investment stabilises, and economic growth is supported by moderate growth in household consumption and public investment.
 
However, there is no way that Territory GSP will grow by this amount. In 2018-19 it was minus 0.2%. It is far more likely that this will decline further to below minus 2.0%.
 
Employment fell by 1.6% in 2018-19. NT Treasury previously forecast a zero percentage change in 2019-20 and then for growth of 0.7% in 2020-21 rising to 0.9% in 2021-22. This is also most unlikely.
 
Now it is more likely to be at least minus 2.5% in 2019-20 and a fall of over 3% in 2020-21. While the unemployment rate has been projected to average 4.5% over the forward estimates, this rate is also likely to climb sharply over the next two years.
 
Government commercial entities and government debt
 
Government commercial entities are meant to be self-supporting. However, low profitability and high capital requirements can pose important risks to the Territory Budget in the form of lower returns and increased demands for financial support.
 
The Territory’s debt levels and fiscal targets can be heavily impacted by the financial performance of government trading entities. These include, for example, the Power and Water Corporation, Territory Generation and Jacana Energy.
 
This is a particularly problematic area. It requires far more attention and careful strategies to strengthen their commercial sustainability and reduce their reliance on government support.
 
No convincing strategies have been advanced to explain how this might be done. For example, in the Budget papers it is stated: “Decreasing demand growth and increasing generation and retail competition needs to occur.”
 
However, it is far from clear as to what this means or how this can be achieved, or the likely impact on operational and capital expenditure levels.
 
Decreasing Territory population
 
The effect of a ±1 percentage point variation in the Territory’s forecast population growth is estimated at ±$26 million in 2019-20.
 
The cumulative impact of a ±1 percentage point variation in the estimate of the Territory’s population growth rate over the Budget and forward estimates period is estimated to be around ±$296 million over the four years to 2022-23.
 
The rate of population increase is highly associated with the health and growth of the Territory economy.
 
As this has stalled and is in danger of weakening much further, it is not likely that such economic conditions will attract an increasing population. What is needed is a vision capable of stimulating private sector enterprise and activity.
 
Empty mall shop
 
The strategies of the current government have not been conducive to such a vision for the Territory.
 
The impact of high levels of public sector debt on private sector investment in the Territory
 
As pointed out in the Langoulant report, growth in private sector investment is the only sustainable and equitable approach to reducing the serious budgetary problems faced by the Territory. A private sector investment recovery will increase government revenues and boost GST revenue through population growth.
 
While this may not be sufficient to fully offset the reduction in GST revenues it will increase the pace of Budget repair if coupled with restrained expenditure growth.
 
The need to kick-start private investment was widely appreciated during the interim report stakeholder engagement process, with a number of participants stating the Territory needs to recognise that government stimulus is unsustainable and attracting private investment is the key to viable economic growth.
 
However, while obvious to those in business and students of basic economics, this major point seems to have escaped the Gunner Government, with a disastrous impact for the Territory economy and Territorians.
 
Private investment fell by 15% to $8.5 billion in 2017-18 due to the Ichthys LNG project moving into the commissioning phase.
 
In 2018-19, it was estimated by the NT Treasury to fall by a massive 42.8%. Following the pandemic it is likely to flat line at a far lower level.
 
Rising private investment is the common feature of the last twenty years of regions with strong economic growth and development, creating efficient economic growth and development, through job and income creation.
 
Economic growth and development depend essentially on a region’s ability to invest and make efficient and productive use of its resources. The private sector is very important in both contributing to the quantity of GSP and its ability to allocate and employ resources efficiently.
 
It also plays a role in the provision of both infrastructure and social services.
 
High levels of government debt act to significantly reduce business confidence in investing in the Territory.
 
These impacts have become important in the context of the Northern Territory. In particular, government has not been careful enough about assessing the impacts of spiralling levels of expenditure and levels of debt on private sector investment and development in the Territory.
 
It appears the government has been content to keep the Territory as some sort of government nursery dependent on high levels of government expenditure and handouts.
 
As a result, the Territory is experiencing severe limits in economic growth and development.
 
Private investment from outside the Territory is very sensitive to government control and dominance. It would be far better if the NT government had spent more time and effort working out how to attract private sector investment as it diversifies the economy and would help overcome the serious economic effects from Coronavirus.
 
Conclusion
 
Despite the serious budgetary situation facing the Territory Government in mid October 2019, the NT Treasurer was reported as announcing the government had spent almost $170m in unbudgeted money, including $12m on the Fannie Bay racecourse grandstand.
 
This was two months after the May Budget was presented to Parliament. It was also despite clear warnings from Mr Langoulant to avoid spending outside the Budget.
 
“Successive Territory Governments have also approved a significant amount of funding outside the annual Budget development process, which erodes the integrity of Government’s fiscal strategy and targets,” the report stated.
 
“These issues require urgent remediation through cultural change at both the agency and ministerial level.”
 
Despite such valuable and expert advice the Treasurer is reported to have stated: “This (the unbudgeted expenditure) is also about stimulating the economy as well as delivering long-term economic benefits.”
 
But, surely it is asked, there would be far better projects to stimulate the Territory economy and provide long-term economic benefits than the grandstand in times of serious economic hardship?
 
Chief Minister Michael Gunner has since been reported as saying the NT’s economy would “bounce back” quicker than other states in Australia, but offered no firm plan or data to back up his statement.
 
“We’re gonna get back to a new normal quicker than the rest and so we’ll see a much quicker rebound out of this,” he said.
 
His comments came as Federal figures estimated 21,400 jobs in the NT could be lost in the near future.
 
Such unfounded optimism is not supported by the Darwin Major Business Group head Ian Kew, who said he held grave concerns about the government continuing to not listen to business when it gets around to developing an economic recovery plan.
 
“We will struggle more than other jurisdictions because the NT Government is in a far worse place than the rest of the country. The capacity to invest is nowhere near the other states,” he said.
 
“We won’t bounce back quicker, we will have to work harder. We were already in a poor position.”
 
While this is a far more realistic expression of the reality confronting the Territory, “poor position” seems to be an overly gracious and overly generous description of the budgetary and economic challenges, given the budgetary competence demonstrated by the Gunner Government.
 
 
The author of this article, Dr Don Fuller (pictured) holds a first class Honours degree and PhD in economics from the University of Adelaide. He has worked as senior public servant in the Territory and as Professor of Governance and Head of the Schools of Law and Business at Charles Darwin University. He grew up in Darwin and attended Darwin High School.