That's a question for constitutional lawyers, governance experts and others in contemplating a sobering NT report that indicates the Territory is spending over $1.5 billion pa ($4 million a day) more than the revenue it collects and is borrowing to meet the shortfall, with net debt projected to increase from $3 billion in 2017-18 to $35.7 billion by 2029-30.
The report - A plan for budget repair: Interim report – an independent assessment of the Northern Territory’s fiscal position and medium-term outlook - comments
What’s the problem?
The Territory budget is in structural deficit, meaning there is a fundamental imbalance between receipts and expenditures that is not related to one-off or short-term factors. This problem will persist in the absence of a plan for doing business differently.
How has this situation arisen?
Over the past 20 years the Territory has incurred fiscal deficits not only during contractions in the economic cycle but also in times of expansion. This practice has complicated the budget and debt management task in the current economic downturn. When the government came to power in August 2016, the Territory had been enjoying the highest level of untied GST revenue since the GST commenced in 2000-01. However, in the following 18 months, encompassing the 2017 and 2018 Budgets, a total of $3.4 billion was wiped off the Territory’s share of GST between 2017-18 and 2021-22, without a corresponding reduction in the Territory’s expenditure needs.
At the time of the 2018 Budget, the outcome for the Territory of the Productivity Commission inquiry into horizontal fiscal equalisation was unknown. However, following the passage of Commonwealth’s Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of GST) Act in November 2018, there is now greater certainty that the Territory’s GST revenue share will remain below historic trends over the medium term. Although the Commonwealth assistance and time-limited guarantees in the Act have reduced the decline to $2.4 billion from 2017-18 to 2021-22, this is still in excess of $500 million per annum, and the changes have effectively entrenched a significantly lower share of untied Commonwealth funding for the Territory for the foreseeable future.
With a relatively small own-source revenue base, the Territory Government is reliant on the Commonwealth for $4 in every $5 of revenue and has little capacity to withstand fiscal shocks of this magnitude.
The reduction in GST revenue is a major burden for the Territory’s finances. Unlike larger states that have more diverse and robust sources of other revenues, the magnitude of the reduction in the Territory’s GST is pronounced and the impact harder to defray. This fall in GST revenues has also coincided with a pronounced moderation in the Territory economy, reflecting the transition of one of the largest ever projects in the southern hemisphere, the Ichthys liquefied natural gas (LNG) project, from the construction phase with a peak workforce of over 10 000 to the operational phase with a workforce of around 400.
The Territory has enjoyed the economic benefits of a succession of major projects since the Adelaide to Darwin railway project in the early 2000s, culminating in the Territory’s largest ever construction project (Ichthys). However, there are currently no major projects of a comparable scale to cushion the impact of the Ichthys transition on the Territory economy. While the Territory Government has sought to arrest the resultant economic and population impacts through increased infrastructure investment and economic stimulus measures, such as tourism marketing and promotion, and targeted housing industry support, it does not have the fiscal capacity to offset a decline in private investment of this magnitude.
Historically, the growth of government operating expenses has consumed all revenues available to successive Territory governments. This has built an underlying expenditure base, which has become entrenched. Additionally, one-off revenues from asset sales have predominantly been used to fund a range of infrastructure stimulus and investment initiatives rather than retire debt.
Increasing demand for government services, notwithstanding flat population growth, and rising community expectations regarding service standards have seen the cost of public services continue to grow despite the revenue declines. This trend has further compounded the Territory’s fiscal challenges. The current Territory Government has also faced unexpected expenditure demands such as the need to respond to the Royal Commission into the Protection and Detention of Children in the Northern Territory. The culmination of these events has placed the Territory Budget on a debt and deficit trajectory which is unsustainable.
Why is it such a big deal?
In 2018-19, the Territory is forecast to spend over $1.5 billion, or $4 million a day more than the revenue it collects, and is borrowing to meet the shortfall. If Territory Government spending continues to grow as it has in the past, the Territory’s net debt is projected to increase tenfold from $3.0 billion in 2017-18 to $35.7 billion by 2029‑30, with the net debt to revenue ratio increasing to around 320 per cent and the annual interest bill rising to almost $2 billion. Such an outcome would have severe economic consequences for Territorians.
Since the 2016 Pre‑Election Fiscal Outlook, the Territory Government has made significant efforts to restrain expenditure growth through the introduction of cumulative savings and budget repair measures of around $830 million between 2017‑18 and 2021-22. Despite these measures, significant budget deficits are forecast across the forward estimates as expenditure has continued to grow due to increasing demand for government services (for example, health and child protection), unexpected costs associated with the Royal Commission, and costs associated with significant economic and infrastructure stimulus.
If left unattended, the structural deficit will result in growth in the Territory’s debt that will undermine the confidence in the Territory economy and future governments’ flexibility to implement its policy objectives.
A significant slowing in the rate of operating expenditure is needed urgently. While even more extreme measures to immediately halt the growth in debt could be advocated, they would be counterproductive to the Territory’s economic interests. To balance the competing priorities of supporting the Territory economy while returning the budget to balance, the Territory Government will need to take a medium-term approach to fiscal reform. This will require a new fiscal strategy supported by systemic reform to the public sector and how it operates.
Successfully implementing a new fiscal strategy will require a resolute commitment by current and future governments and the broader community. The strategy will need to be supported by smarter approaches to resource allocation, a contemporised public service and greater accountability for expenditure effectiveness. Fiscal reform should focus on innovative solutions that increase the productivity of government services, making every dollar count towards better outcomes for Territorians.
The scale of this issue is beyond normal electoral cycles.
Scenarios for the future
The interim report presents an independent assessment of the Territory Government’s financial position and medium‑term fiscal outlook, including scenarios for the period to 2030. It provides a plan for structural reform to return the budget to balance in a sustainable manner.
Delivering meaningful and sustainable fiscal reform will require a reduction in the Northern Territory Public Sector’s operating cost growth. This can be achieved through reorganising how the public sector operates, enforcing greater discipline around meeting budget targets at the agency level, and looking at greater technological means to deliver services more efficiently. These reforms can be achieved while maintaining public sector employment levels and service delivery to remote areas.
