Complete ACT Submission to the CGC 1999 Review

Chapter 1 – Australian Capital Territory - An Introduction 1) AUSTRALIAN CAPITAL TERRITORY - AN INTRODUCTION Key Points of ACT Argument  The ACT is a city-State administration, with many different characteristics to the other States that comprise the Australian Federation, including:  its city-State legislature, combining responsibility for State and local government that has no counterpart in the Federation;  the fact that the Territory is anchored in the land boundary of its city limits;  its unique role as the National Capital and Seat of Government with economic and financial consequences for the ACT;  ownership of all land and overarching planning control remains vested in the Commonwealth;  the continued existence of Commonwealth legacies from the pre self-government era with flow-on implications for ACT Government services with no similar imposts faced by other jurisdictions;  a different demographic profile to most other jurisdictions with consequential implications for the Commission’s assessments;  a markedly different economic base, disproportionately reliant on the public sector and lacking in substantial manufacturing, primary industries and resources; and  a markedly different geographical and physical locality with the ACT a land- locked island within NSW, the only jurisdiction with 100% of its population living within 25 kilometres of another jurisdiction, and thus creating cross border considerations at a unprecedented level.  The application of fiscal equalisation in respect of the ACT has its consequential difficulties. The Territory considers that its citizens still have to bear costs associated with these special circumstances which should be rightly shared among the whole Australian community.  The ACT requests the Commission to give full consideration to the issues raised as part of this Review. The Territory cannot be placed in a position of fiscal equalisation without taking account of these special circumstances.

ACT Main Submission to the 2004 Review 1 Chapter 1 – Australian Capital Territory - An Introduction

Australian Capital Territory - Purpose and Perceptions

1.1. Canberra is a city built from anew with a specific purpose to symbolise and administrate a Federated nation. It was built inland with the expressed intention of turning the focus of national identity inward – toward the centre and the land.

1.2. It is identified with the early twentieth century ‘Garden City’ and ‘City Beautiful’ movements. It is a city scattered through a park.

1.3. A modern administration with development dollars and planning foresight and opportunity has created a city, which has contributed to a quality of life not necessarily experienced in all other parts of the country.

1.4. An over-provision of road networks, over-turfed and over-scaled national precincts, extensive buffer zones of native vegetation, and neatly planned residential and commercial clusters organised around 2000-4000 citizens all make the city a benchmark in terms of architectural and urban design and social planning.

1.5. Canberra is also an ecosystem that blends into the country that surrounds and maintains it. The Territory is anchored in the land boundary of its city limits. The very essence of its appeal as the “Bush Capital’ is also the limiting factor on its eventual expansion.

1.6. In Australia, Federation has sought to unite, integrate and establish patterns of society that foster the growth of the whole of the country. Canberra is in a rare position of being a young national capital with a relatively flexible system of governance espousing these virtues. As a caretaker of one of this country’s significant processes of Federation, it is incumbent upon the Commonwealth Grants Commission 1 to reflect in its assessments the concept of the national capital and its associated overheads.

1.7. As might be expected, Canberra’s role in the Federation is not fully appreciated by all. Canberra itself, its role as the national capital, and its population, are continually having to defend the institution of a National Capital against suggestions of a ghastly mistake, appalling public architecture, an expensive and pampered city which survives only by generous dollops of cash from the States 2. This legend develops from notions that the National Capital has silk roads and high public service salaries, generates no national wealth, and that all the garden city’s finery involves massive subsidy.

1 From herein ‘The Commonwealth Grants Commission’ is referred to as ‘the Commission’. 2 From herein the word ‘States’ refers to the ‘States and Territories’ unless otherwise specified. ACT Main Submission to the 2004 Review 2 Chapter 1 – Australian Capital Territory - An Introduction

Australian Capital Territory - Introduction

1.8. This Submission is designed from the outset to address a number of these perceptions or ‘set the record straight’ at least from a financial perspective. It intentionally highlights the ACT’s financial contribution to the Federation. It purposely reinforces the linkage between the operations of the ACT Government and the Federal Government within the setting of Canberra’s role as the national capital, Seat of Government and, at the same time, domicile for 317,000 Australians. It deliberately identifies and quantifies the special characteristics of the Territory arising from these linkages that impose additional financial imposts relative to the States.

1.9. Finally, it unmistakably sets out to identify the strengths and weaknesses inherent in ACT Government State-like service delivery in the Territory relative to service delivery in the other members of the Federation.

1.10. Most importantly, this Submission:  allows the Commonwealth Grants Commission to assess the ACT Government’s claims for a rightful share of the GST pool from 2004-05 onwards against the claims of the other jurisdictions as part of the Report on State Revenue Sharing Relativities 2004 Review; and  offers the ACT’s full support for the assessment framework implemented by the Commission in the 1999 Review which underpins the application of the principle of horizontal fiscal equalisation for the current Terms of Reference before the Commission.

Australian Capital Territory - Background

Canberra – a Self-Governing Community

1.11. Some 12 years after self-government, the Territory still finds itself attempting to reinvent the basis of a legislature to support the ACT and govern itself as a separate entity in the Australian Federation. This arises principally from the very nature of the self-government model passed over to the Territory by the Commonwealth at time of self-government.

1.12. The ACT was selected as the site for the National Capital in 1907. It subsequently became the seat of government in 1927. In 1988 the Commonwealth Parliament passed legislation establishing self-government for the ACT and in 1989 the first ACT Legislative Assembly was elected.

1.13. Before 11 May 1989, when self-government took effect, the ACT was administered by the Federal Government. From 1974 an elected Legislative Assembly with limited powers advised the Minister for Territories on ACT matters. This Assembly was discontinued by the Commonwealth in 1986.

ACT Main Submission to the 2004 Review 3 Chapter 1 – Australian Capital Territory - An Introduction 1.14. In 1978 a referendum was conducted on the issue of self-government. A substantial majority of 63% of the ACT population rejected self-government principally due to the lack of information made available on the form and costs of self-government. In 1988 the Commonwealth passed the Australian Capital Territory (Self-Government) Act 1988 (the ACT Self-Government Act). This was one of four pieces of legislation that set up self-government for the ACT. It adopted an electoral system known as the modified d’Hondt system. The first elections under self-government were conducted in March 1989 and the first sitting of the ACT Assembly occurred on 11 May 1989.

1.15. There remained considerable community dissatisfaction with self-government to the extent that approximately 20% of the vote in the first election went to candidates committed to the abolition of self-government. The combination of the modified d’Hondt system and a single electorate enabled candidates to be elected with only 5.5% of the vote. This encouraged minor parties to contest the election, with the result that 117 candidates from 28 parties stood for election.

1.16. The election of the second Assembly was held in 1992 using the same modified d’Hondt system. In conjunction, a referendum was held giving voters the choice of single member electorates using the House of Representatives voting system or multi-member electorates using the Hare-Clark system (modelled on the system used in Tasmania). The Hare-Clark alternative was chosen by approximately two-thirds of voters. This new system was used in the election for the third and fourth Assemblies.

1.17. The ACT Self-Government Act provided for the establishment of an Assembly consisting of 17 members. The Assembly is required to elect a Chief Minister who has the power to appoint 3 Ministers from the Assembly to form the Executive. The ACT Self-Government Act specifically provides for the Assembly to be responsible for local government matters as well as those matters normally pertaining to State Governments. Accordingly, the ACT Government is unique in Australia in terms of its range of responsibilities.

1.18. The calls for change are, however, gathering momentum. The Assembly still has only 17 members after 12 years of government during which time the population has increased by a third. There are four Ministers to carry the entire administrative workload associated with running a State, Local Government and in dealing with the Federal Government, which retains some important controls over the management of the Territory. The ACT has the lowest political representation in Australia.

1.19. Governing Canberra is difficult for any particular grouping of politicians because it is unlikely that under the Hare-Clark system any party will win a majority in its own right. To increase member numbers, the Assembly must pass a resolution to that effect itself.

1.20. In the run up to the recent ACT elections on 20 October 2001, the Chief Minister of the day, Mr Gary Humphries, placed on the agenda a local council-style administration with a view to swapping the trappings of State-style government for a council–type administration, with direct

ACT Main Submission to the 2004 Review 4 Chapter 1 – Australian Capital Territory - An Introduction mayoral-style voting for a Chief Minister and membership of the Australian Local Government Association.

1.21. The current system is under pressure. The Territory, its people, Government and supporting bureaucracy is still grappling with the ‘right fit’ for the Australian Federation, given its unique role. At the end of the day, the financial consequences will have a major bearing on the final outcome. It is imperative that the ACT in tandem with the Commission, and in consultation with the Commonwealth Government and States determine the appropriate delineation of financial responsibilities.

Canberra – its Role as the National Capital and Seat of Government

1.22. To begin to understand the rationale of the ACT‘s claims in this submission, it is imperative for parties to revisit, the circumstances the ACT finds itself in providing State-like services in a city-State, national capital environment.

1.23. The Territory, because of its position as the site of the National Capital and Seat of Government, as well as the Commonwealth legislation governing its planning, land management and environmental responsibilities, is unlike any other Australian jurisdiction. The influence of the national capital on the ACT economy and life of its citizens permeates all aspects of the Territory’s activities. It would be quite incorrect not to state that such a relationship has both positive and negative economic and financial consequences for the delivery of ACT Government services and the ACT economy as a whole.

1.24. The Commission, with the agreement of the ACT, in the past has identified the direct National Capital revenues and costs and excluded them from its analysis. It is the indirect consequences that the ACT will raise in this Submission.

1.25. Planning and land management in the ACT is governed by Commonwealth legislation, namely the Australian Capital Territory (Planning and Land Management) Act 1988 (the ACTPLM Act). The ACTPLM Act establishes the National Capital Authority (NCA) as a Commonwealth Government agency to prepare and administer a National Capital Plan (NCP). The NCP is binding on both the Commonwealth and the ACT.

1.26. The ACTPLM Act deliberately requires the NCP to cover the planning of the whole of Canberra and the ACT to avoid the type of situation which has occurred in Washington DC where the area of social significance is a maintained oasis precariously surrounded by a decaying environment 3. The impact of this broader planning approach is that financial responsibility for the cost of maintaining a ‘national capital’ standard is less clearly defined and consequently, substantial costs are imposed on the ACT Government.

1.27. Through the NCP, the Commonwealth has the potential to significantly dictate how the city operates and substantially alter the balance of the local economy, particularly in terms of property investment (for example, office

3 National Capital Planning Authority, National Capital Plan, Principles, Policies and Special Requirements, Draft Proposals, Volume 2, October 1989. ACT Main Submission to the 2004 Review 5 Chapter 1 – Australian Capital Territory - An Introduction developments in Barton rather than the Gungahlin Town Centre) and infrastructure investment.

1.28. The issue of funding for the direct and indirect costs of the national capital is addressed in this Submission. In the Second Reading Speech to the ACTPLM Act, the Commonwealth gave an undertaking that Commonwealth funding to the ACT would fully recognise the effects of Canberra’s role as the national capital on the standards and costs of works and services.

1.29. The NCP states that in considering the implications of these commitments both recurrent and capital expenditures must be considered, together with any limitations on ACT Government revenue raising capacity.

1.30. The ACT considers that costs incurred by it as a result of the special circumstances arising from the Territory being the national capital and seat of government are not fully recognised by the Commission. This matter is discussed further in the Chapter titled ‘Special Circumstances of the ACT’ with the case for increased recognition argued separately in a number of the individual chapters.

Canberra - Past Commonwealth Legacies

1.31. To further understand the basis of many of the ACT’s claims for disabilities throughout this Submission, it is important for parties to again focus on the arrangements applying to the new ACT Government from the Commonwealth at the time of self-government. A period of twelve years to achieve a complete transformation from Federal bureaucratic control to self-government has been a major task.

1.32. The ACT would be the first to acknowledge, however, that the Commonwealth also at the time of self-government transferred zero State-like debt to the Territory which is recognised in the Commission’s deliberations. In effect though, the ACT inherited some debt, for example, $130.1m for the housing rental portfolio and $189.2m for the home loans portfolio.

1.33. The low level of debt has been fully recognised in the Commission’s assessment and consequently in reduced grant shares. The ACT asks that the disbenefits of self-government arrangements attract equal attention to the benefits.

1.34. The ACT Self-Government (Consequential Provisions) Act 1988 provided for the transfer to the ACT of all assets and rights of the Commonwealth that relate to Territory functions (s.5).

1.35. Prior to self-government the ACT management was fragmented over a large number of Commonwealth Departments which were primarily focussed on national issues. The Committee of Inquiry into Assets and Public Debt of the ACT 4 noted that in most instances there was limited accountability in relation to the efficient allocation and use of assets. Under Commonwealth management significant and expensive assets were developed without full

4 Committee of Inquiry into Assets and Public Debt of the ACT, May 1990. ACT Main Submission to the 2004 Review 6 Chapter 1 – Australian Capital Territory - An Introduction consideration of their ongoing costs of administration and maintenance. The Committee concluded that the ACT community must bear significant additional costs that could have been avoided if effective asset management policies had been practised under the Commonwealth administration.

1.36. A further report commissioned by the ACT Government was critical of the legacy of Commonwealth administration. The report on Priorities for Improved Public Sector Management noted that under the Commonwealth Budget there was no discipline for balancing outlays for the city infrastructure against revenue generated locally. “Canberra was a national project and the national economy met its funding needs”. 5

1.37. The report found that planning provisions and standards created a dispersed city well endowed with open space and public services. The report provided clear evidence of overprovision of public services in a range of areas. For example, policies such as the neighbourhood school policy resulted in an overprovision of some 13,000 school and pre-school places.

1.38. Other examples of overprovision of services include:  an excessive endowment of hospital facilities (the report found unused capacity of 21%) resulting from a provision of infrastructure in excess of need;  undue fragmentation of facilities over 11 separate campuses for the ACT Institute of TAFE; and  a high level of public housing, much of which was used for non-welfare purposes.

1.39. The high proportion of public housing in the ACT (approximately 13% of all housing stock) was primarily due to historical factors arising from the need to provide accommodation for government employees transferred to Canberra by the Commonwealth.

1.40. The transfer of this level of overprovision of assets carried with it a financial burden for the newly formed ACT Government. Costs were compounded in many instances due to the mismanagement of these assets. It was found that:  there was an estimated backlog of maintenance on public housing of $15.1m;  the ACTION bus fleet had received no replacement vehicles in the period 1984-85 to 1986-87, resulting in an increase in the average age of the fleet to 15 years;  the Kingston (ACTION) workshop had been handed over in a poor state of repair;  a major survey of roads conducted in 1987 by a private consultant determined that the roads had been undermaintained resulting in reductions in the designed life of the roads; and

5 ACT Priorities Review Board, Priorities for Improved Public Sector Management, May 1990. ACT Main Submission to the 2004 Review 7 Chapter 1 – Australian Capital Territory - An Introduction  accreditation of the Royal Canberra Hospital and Woden Valley Hospital by the Australian Council of HealthCare Standards was withdrawn in 1989 due to weaknesses in medical quality assurance and management structures.

1.41. The Priorities Review Board also found that the ACT economy had been underdeveloped under Commonwealth administration. The vision of the planners did not contemplate an important role for commerce and industry in the national capital. Bureaucratic application of stringent design and siting rules and the conditions of the leasehold system were deterrents to prospective investors. As a result, at the time of self-government, the ACT economy was, and remains, highly dependent on the public sector. The ACT now faces additional costs to encourage private sector development to enable a more balanced and diversified economy.

1.42. In addition, the ACT was not provided with the type of infrastructure necessary to the facilitation of a vibrant and competitive private sector. In particular, the ACT lacks the transport infrastructure enjoyed by the States. This includes:  the absence of direct access to a port facility due to the inland location of the national capital;  the absence of major highways directly accessing the ACT;  the Canberra airport not having international capacity; and  the inadequacy of rail services to the ACT.

1.43. These inadequacies in infrastructure provision impact on the cost of business in the ACT as a result of increased freight costs. Moreover, they impact directly on the size of the transport and storage industry in the ACT.

1.44. Successive ACT Governments have made major inroads into overcoming a number of these identified deficiencies. This in part can be attributed to past decisions by the Commission which recognised a number of the ACT claims and led to the Governments of the day receiving additional financial capacity to make their own policy choices to address such deficiencies.

1.45. Indeed, it would be a gross understatement not to acknowledge a number of the turnarounds by successive ACT Governments, including but not limited to, a rationalisation of the hospital infrastructure, restructuring the CIT, upgraded road maintenance programs, financial reforms incorporating accrual accounting, output budgeting, purchase/ownership agreements, employment reforms and many others.

1.46. The delivery of this change has been undertaken by minority Governments, in a relatively new city and even newer Governments with an even younger public service relative to other jurisdictions.

1.47. Self-government for the ACT has been a catalyst for change. The ACT population’s high education status has been critical in equipping the Territory to adapt. In other parts of Australia where fundamental changes have occurred, the urban centres have gone into decline. The higher education ACT Main Submission to the 2004 Review 8 Chapter 1 – Australian Capital Territory - An Introduction level credited to both the diligence of parents and the nature of the employment sector in the city thereby forcing successive ACT Governments to maintain the status quo has enabled the Territory to adopt a more entrepreneurial outlook post self-government. It was also instrumental in enabling the Territory to weather the restructuring of the Federal Public Service in the early 1990’s.

1.48. Small and medium sized enterprises have seized the opportunities presented to them and have grown in importance to the benefit of the ACT community. A strong and dynamic but small private sector is up and running, with ACT’s overseas exports growing a healthy 9.7% last financial year.

1.49. However, the ACT will argue in this Submission that the task is not yet complete, the legacies in some areas of Government service persist and will remain for the foreseeable future.

1.50. In keeping within the provisions of Clause 2 of the Terms of Reference, which requires the Commission to take into account the special circumstances of the ACT due to its role as the National Capital and seat of Government, the ACT requests a reconsideration of a number of claims based on new evidence derived from ACT Government agencies.

Canberra – Financial Flexibility

1.51. Direct and indirect National Capital considerations and past Commonwealth legacies are not the only differentials identified by the ACT as having an impact on government service delivery relative to other jurisdictions. The physical location of the Territory, its island status, limited taxing powers, and constrained economic base all contribute to the assessment of disabilities by the Commission.

1.52. The ACT will again argue in this Submission that while the Commission is aware of many of the ACT’s claims in the past, the development of new data would suggest that the Commission should revisit many of its past decisions.

1.53. In this context, the principle of fiscal equalisation as practised by the Commission is as follows: “ Each State (and Territory) is entitled to receive a level of general revenue funding from the Commonwealth which would enable it to provide, without having to impose taxes and charges at levels appreciably higher than the levels imposed by the other States, government services at standards that are not appreciably different from the standards provided by other States.”

1.54. Under this principle, States are, in theory, free to choose their own standards. This means that States can choose a range and mix of taxes and services and set tax rates and service levels according to their preferences. Ultimately, if a State chooses to provide a higher standard of service for a

ACT Main Submission to the 2004 Review 9 Chapter 1 – Australian Capital Territory - An Introduction function or a number of functions, its options are to provide lower than average standards for other functions, raise higher than average taxes or finance a budget result that is a lesser surplus or greater deficit than average.

1.55. The ACT’s budget options are severely limited in comparison to those of the States because of:  the ACT’s proximity to NSW and its small size reduces its flexibility in regard to tax policy;  its highly concentrated economy limits the range of taxes which can be applied;  the general exemption available to the Commonwealth which excludes a substantial proportion of its economic base from its taxable capacity; and  again, its proximity to NSW results in substantial costs incurred through service provision to non-residents.

1.56. Because of the ACT’s location and size it is constrained in its ability to apply tax rates much in excess of NSW. This is particularly so for the more mobile tax bases. This means that the ACT is not in a position to freely choose to finance higher than standard services through higher than standard taxes. Nor can the ACT recoup, through above average taxes, costs associated with national capital influences or services provided to non- residents.

1.57. The lack of a diverse economy also restricts ACT policies. The absence, to any significant degree, of primary industries, manufacturing and mining limits the range of taxes that the ACT can apply. This means that the ACT must focus its revenue effort on a smaller range of taxes, however, as noted above it has major constraints on the rates it can apply.

1.58. The Commission’s assessments take account of the absence of a revenue base and adjust the relativities to compensate to the extent of a standard tax effort. However, the narrower range of taxes limits the ability of the ACT to adopt tax policies designed to encourage investment and activity in certain economic areas while compensating through higher taxes on other activities. These limitations have major consequences for the ACT which is attempting to create a more diversified economy and reduce its dependency on the public sector.

1.59. The circumstance of a limited range of taxes and the constraints imposed by the proximity of NSW would be exacerbated by the use of global and sub-global revenue base measures. As States cannot directly tax income they must rely on transactions, activities or assets on which to base tax. If such expenditures or activities do not take place then States cannot collect revenue. Where the Commission uses global tax base measures and a State’s citizens do not undertake the taxable activity to the extent implied by the global measure, that State must seek to make above standard revenue efforts to compensate. The more limited the range of taxes or the greater are other constraints, the more difficult for a State to compensate. The ACT considers that global or sub global measures of revenue capacity are not conducive to fiscal equalisation and will argue this further in this Submission. ACT Main Submission to the 2004 Review 10 Chapter 1 – Australian Capital Territory - An Introduction

1.60. The ACT is also restricted because of the general tax exemption of a major part of its economy - that is, the Commonwealth Government. The Commission currently recognises the exemption of the Commonwealth from taxes by removing from the ACT’s revenue base a measure that equates to the Commonwealth. In effect, this means that the general revenue grants (GST in the main) received by the ACT include an amount as compensation for the inability to tax the Commonwealth. However, the amounts received reflect only the amount that the ACT would have received if it had been able to tax the Commonwealth at the standard rate.

1.61. The ACT serves as a centre for South Eastern NSW. The substantial proportion of non-residents use of ACT services has major implications for ACT costs not covered by any direct revenue stream. While some of these are recognised by the Commission, many are not.

1.62. This Submission again seeks the Commission’s assistance in addressing the full cost to the ACT community of the provision of services to non-residents. In theory, where these costs are not fully compensated for, the ACT must either reduce service standards or make an above standard revenue effort.

Australian Capital Territory – its Economic Profile

1.63. The ACT economy is markedly different to all other jurisdictions in that it is still dominated by the public sector. It has a highly specific economic profile due to the nature of its services and industries, the high proportion of people in Commonwealth employment, and the education sector incorporating the Australian National University, the Australian Institute of Sport, the Australian Defence Force Academy and the University of Canberra.

1.64. In 2000-01, Public administration and defence, General government, Education, and the Health and community service sectors accounted for 42.4% of ACT Gross State Product (GSP) compared to 16.1% of national Gross Domestic Product (GDP).

1.65. The contribution to the ACT economy by primary industries (agriculture, forestry and fishing) and mining is negligible, whereas nationally these industries provide 8.8% of GDP. Additionally, the contribution of the manufacturing sector is much lower for the ACT at 1.9% compared with 12.8% nationally. Figure 1.1 below displays the factor proportions for both ACT GSP and Australian GDP.

ACT Main Submission to the 2004 Review 11 Chapter 1 – Australian Capital Territory - An Introduction FIGURE 1.1 – GROSS STATE PRODUCT AND GROSS DOMESTIC PRODUCT AT FACTOR COST (%), JUNE 2001

ACT Australia Source: Australian Bureau of Statistics, AusStats, Table 5220024

1.66. The comparison of the ACT economy with the national economy highlights the Territory’s substantial dependence on the public sector and related services. It also clearly shows the lack of diversity in the ACT economy. This lack of diversity has major implications for the ability of the economy to sustain itself, particularly in the face of major economic shocks such as the recent Commonwealth public sector cutbacks.

1.67. Growth in ACT GSP has been volatile due to the relative narrowness of its economic base compared to the national economy. Over the 12 months ending June 2001, ACT GSP grew by 3.4% while nationally GDP grew by 1.9%. In the four years up to and including 2000-01, ACT GSP grew by an average 5.0% while GDP averaged 4.0%.

ACT Main Submission to the 2004 Review 12 Chapter 1 – Australian Capital Territory - An Introduction FIGURE 1.2 – REAL OUTPUT, ACT AND AUSTRALIA, 1997-98 TO 2003-04

1.0 1997-98 1999-00 2001-02 2003-04

ACT-GSP Australia-GDP

Source: Australian Bureau of Statistics, AusStats, Table 522003; Access Economics, Access Business Outlook, March 2002.

1.68. The outlook for GSP is less optimistic. In the March 2002 Access Business Outlook, Access Economics forecasted a four year average for ACT GSP from 2001-02 of 3.5%, compared with 3.6% for GDP over the same period. What is troubling about this comparison is that while both economies are expected to achieve slower growth rates over the next four years, the ACT is expected to drop 1.5 percentage points versus a much smaller 0.4 percentage point drop in average GDP growth. Figure 1.2 displays the change in real output for both the ACT and Australia from 1997-98 to 2004-05. More recently, the Commonwealth Treasury has upgraded its forecast for the national economy, along with a number of private sector economists. The more positive national outlook is based upon anticipated growth in world demand. The ACT economy is not expected to benefit to the same extent.

1.69. Looking further out, the ACT appears likely to slip even further relative to the other jurisdictions. According to BIS Shrapnel, the Northern Territory, Queensland and Western Australia are set to lead Australia’s economic growth over the next 15 years, with the ACT set to join Tasmania and South Australia as ‘branch office’ economies. These results highlight the ACT’s limited scope for economic expansion and draw further attention to the Territory’s relatively narrow industrial base. Table 1.1 details BIS Shrapnel’s average annual growth forecasts for the States and Territories from 2001-02 to 2006-16.

ACT Main Submission to the 2004 Review 13 Chapter 1 – Australian Capital Territory - An Introduction TABLE 1.1 – AVERAGE ANNUAL GROWTH (PERCENTAGE) 2001-02 2001-06 2006-16 % % % NSW 1.7 3.9 3.3 Victoria 1.8 3.4 3.1 Queensland 3.0 4.2 3.6 WA 4.0 4.3 3.9 SA 0.5 2.6 2.5 Tasmania 3.0 2.4 2.0 ACT 3.6 3.2 2.5 NT 9.2 6.5 4.3 Source: BIS Shrapnel, State Industry Prospects 2001-2016

1.70. A close examination of the components of final demand further highlight the structural differences that exist between the ACT economy and the Australian economy. In this regard, the largest difference is the relative importance of government, particularly in final consumption expenditure. In the December quarter 2001, government final consumption expenditure comprised 51% of ACT State Final Demand (SFD) and only 18% of Australian Domestic Final Demand (DFD).

1.71. The highly concentrated economy of the ACT means that options for revenue raising are considerably more limited than that of the States. This has major implications for the budget flexibility and fiscal independence of the ACT.

Australian Capital Territory – its Demographic Profile

1.72. The ACT population profile varies somewhat to other jurisdictions, which has a consequential impact on the Commission’s assessments.

1.73. Growth from natural increase has been, and is expected to continue to be, the major component of ACT population growth. However, due to decreases in fertility and the general ageing of the population, the level of natural increase is steadily diminishing.

1.74. Net interstate migration has varied widely in the past decade. Large movements away from the ACT occurred between 1997 and 1999 however, minor net interstate departure is forecast by the ABS over the next decade in response to economic growth in the ACT and an expanding labour market. Figure .1.3 displays the components of population growth within the ACT.

ACT Main Submission to the 2004 Review 14 Chapter 1 – Australian Capital Territory - An Introduction FIGURE 1.3 – COMPONENTS OF ACT POPULATION GROWTH, 1999 TO 2010

-4000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Natural Increase Net Overseas Migration Net Interstate Migration Source: Australian Bureau of Statistics, AusStats, Table 310102, 3101023a, 3101023b.

1.75. An ageing ACT population has important implications for the Commission’s assessments. For example, with respect to education, it may be expected that as a population ages, the funding requirements for education will fall. However, with the move to life long learning education requirements may remain the same, or possibly increase, in a bid to ensure current and future workers remain productive. The effect on the ACT’s education budget will be problematic as the increase in education will occur in higher education (funded by the Commonwealth) and the VET sector (partially funded by the ACT). Pressures for expenditure on school education are likely to be reduced unless demands grow for the continued operation of schools that are no longer viable as student numbers decline.

1.76. Pressures on expenditure on health, various age-related concessions on transport and aged care and public housing are all likely to increase with an ageing population.

Australian Capital Territory – its Employment Profile

1.77. As at March 2002, 175,100 ACT residents were participating in the labour force, representing a participation rate of 71.0%. Although current labour force participation is down on the high of 74.6%, it remains above the national average participation rate of 63.8%. Of those participating, 95.9% were employed and 4.1% were unemployed.

1.78. Although the ACT has relatively high participation rates and relatively low unemployment, the range of employment opportunities available within the ACT are limited and generally require higher levels of qualifications. This increases the demand for school and vocational education in the ACT, thus putting pressure on the ACT’s education budget.

ACT Main Submission to the 2004 Review 15 Chapter 1 – Australian Capital Territory - An Introduction 1.79. Almost 70% of ACT employment is centred in five industries with over 40% directly linked to government. Government administration and defence, Education, and Health and community services account for almost 42% of ACT employment while Property and business services and Retail trade account for another 29%. These figures underscore the economy’s reliance on the public sector and related industries.

1.80. Although the ACT has experienced solid employment growth in recent years, year-to-date data for 2001-02 suggests a decline in year average employment growth is likely in the current year. In the March 2002 Access Business Outlook, Access Economics forecast employment growth of –0.7% for the ACT in 2001-02. This is the lowest result for Australia and, along with Tasmania, the only jurisdiction to record negative growth. Although ACT employment is expected to pick up in the next few years, average growth over this period is still likely to be below the national average. A comparison of forecast employment between States for 2001-02 is at Figure 1.4.

FIGURE 1.4 – FORECAST 2001-02 EMPLOYMENT, BY STATE

g 4.0 n a

h 3.0 c

a 2.0 t n e

c 1.0 r e P 0.0

-1.0 NSW Vic Qld WA SA Tas ACT NT Aust

Source: Access Economics, Access Business Outlook, March 2002.

Australian Capital Territory – its Earnings Profile

1.81. Historically, Average Weekly Earnings (AWE) for the ACT have been significantly higher than that for Australia overall and are the highest of any State. AWE in the ACT have risen steadily since August 1999 after bottoming out at $668.

1.82. Since August 1999, AWE have increased by 8.5% while nationally they have increased 11.8%. The increase for the ACT has lagged that for Australia due to a trending down in AWE in the ACT since February 2001, suggesting that the other jurisdictions are catching up to the ACT. Figure 1.5 provides a comparison of State AWE for the November quarter 2001.

ACT Main Submission to the 2004 Review 16 Chapter 1 – Australian Capital Territory - An Introduction FIGURE 1.5 – AVERAGE WEEKLY EARNINGS, BY STATE, NOVEMBER QUARTER 2001

$1,000

$0 NSW Vic Qld WA SA Tas ACT NT Aust

Source: Australian Bureau of Statistics Catalogue No. 6302.0

1.83. AWE in the ACT is heavily influenced by the industry structure that is concentrated towards highly skilled employment. Workers employed in the public sector account for about 42% of total employment. Consequently, ACT AWE are overly sensitive to fluctuations in Commonwealth expenditure and movements in Commonwealth employment levels.

Australian Capital Territory – Household Expenditure

1.84. The 1998-99 ABS Household Expenditure Survey found that expenditure by Canberra residents is higher than all state capital cities. The survey details household expenditure on various goods and services including housing costs (selected dwellings), food and non-alcoholic beverages, transport, recreation and expenditure on miscellaneous goods and services.

1.85. In 1998-99, average weekly household expenditure in Canberra was $860 per week. This was $113, or 15.1%, greater than the average expenditure of all Australian capital city households. Expenditure in Canberra was higher across all expenditure groups, but was particularly high for alcoholic beverages (34.1%) and household furnishings (28.3%).

1.86. The survey also examined levels of income tax and average weekly household income and found that ACT residents paid a higher rate of income tax than the national average. In 1998-99, ACT residents paid 22.9% of average household income in income tax while the national average was 21.2%.

ACT Main Submission to the 2004 Review 17 Chapter 1 – Australian Capital Territory - An Introduction

ACT Main Submission to the 2004 Review 18