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RMIT ABC Fact Check

Katy Gallagher says the federal budget is in worse shape than many state and territory budgets. Is that correct?

Katy Gallagher Fact Check David Hayward Finance RMIT ABC Fact Check Alan Duncan Pandemic Victoria ACT Deficit

The claim

As Australia braced for a winter surge in COVID-19 infections, the federal government was forced to reverse track and reinstate pandemic leave payments for sick and isolating workers.

The Albanese government said it would continue the weekly payments of up to $750 for a further three months, starting from July 1, 2022, but flagged that there were limits to its generosity.

In a July 18 interview with the ABC's 7.30 program, Finance Minister Katy Gallagher justified the scheme's eventual demise on the basis that the government's budget was in a weaker position than those of the states and territories.

Watch Senator Gallagher's interview with ABC's 7.30(Sarah Ferguson)

"Now, we are going to at some stage have to start seriously winding back some of this fiscal support because … the Commonwealth budget is in worse shape than many of the states' and territories' budgets at this point if you measured them like for like," she said.

Is that correct? RMIT ABC Fact Check investigates.

The verdict

Yes, Senator Gallagher is correct, but there's more to it than her claim suggests.

There is no single way of assessing the relative strengths of Australia's Commonwealth, state and territory budgets, but on two widely cited metrics the federal government fared among the worst.

Measured by net operating balance, which provides an indication of a government's ability to pay for services, the Commonwealth recorded a deficit in 2021-22 equivalent to 3.2 per cent of the economy.

That placed it second behind Victoria's 3.8 per cent.

On net debt, the federal government owed $631.5 billion, according to its latest budget, equivalent to 27.6 per cent of the economy.

This level of debt was higher than in any other jurisdiction, ahead of the Northern Territory (22 per cent) and Victoria (19.8 per cent).

However, experts consulted by Fact Check said such comparisons were largely meaningless, since the federal government had far greater capacity to issue debt and raise taxes compared with the states, and could typically borrow money more cheaply.

As one expert pointed out, the Commonwealth government was expected to carry a greater financial burden during major economic shocks such as a financial crisis or pandemic.

Assessing the claim

Senator Gallagher made her claim after the financial year ended on June 30.

By then, all jurisdictions but the ACT had handed down budgets for 2022-23, containing estimated outcomes for 2021-22.

Fact Check has relied on these 2021-22 estimates to assess the claim. Final outcomes for the previous year (2020-21) have also been considered, but they do not materially affect the verdict.

No definitive measure

Three economists consulted by Fact Check said there was no single way of assessing and comparing the health of the various budgets.

Although the experts canvassed several different metrics, all agreed that when discussing budget sustainability, "net operating balance" and "net debt" offered a reasonable basis for comparison.

They directed Fact Check to estimates for the general government sector (GGS), which are contained in the budget papers and produced on a consistent basis across jurisdictions.

According to a Federal Treasury publication, the sector covers "all government departments, offices and other bodies that fulfil the functions of government as their primary activity".

It is a subset of the broader public sector which excludes non-financial public corporations (such as Australia Post) and public financial corporations (such as the Reserve Bank).

What is 'net operating balance'?

The net operating balance is a measure of recurrent or day-to-day expenditure; put simply, government revenues versus government expenses from transactions.

It is one of several ways of determining whether the budget is in surplus or deficit. (Another commonly cited measure is the "fiscal balance".)

"By including all accruing costs, including [superannuation and] depreciation, the net operating balance encompasses the full cost of providing government services," the Treasury document points out.

"This makes it a good measure of the sustainability of the government's fiscal position over time and provides an indication of the sustainability of the existing level of government services."

David Hayward, an emeritus professor with RMIT University, told Fact Check the measure had its limitations, such as the fact it excluded infrastructure spending, but said the crucial thing was that governments were "all in agreement that the net operating balance is the key measure".

Indeed, its importance is made explicit by some states, such as NSW and Western Australia, with the latter describing it as the state's "headline budget measure".

What about net debt?

As Fact Check has outlined in previous articles, net debt is a measure of a government's accumulated borrowings.

It takes into account the offsetting effect of selected financial assets, thus providing an indication of a government's ability to cover its liabilities.

"The stock of net debt is a common measure used to assess the overall strength of a jurisdiction's fiscal position," the Treasury document says, noting that high debt levels can limit a government's ability to adjust its expenditure.

However, experts cautioned against viewing the measure in isolation.

Alan Duncan, the director of Curtin University's Bankwest Curtin Economics Centre, said taking on debt in order to invest was "an instrument to drive growth, and just because you have a higher debt, doesn't actually mean to say you're in strife financially".

Professor Hayward added that a fair comparison of budgets would ideally take into account the full scope of a government's assets, and suggested using an additional measure known as "net worth".

This is calculated by subtracting total liabilities from total financial and non-financial assets.

However, he said, although the measure is broader than net debt, it carries its own caveats, such as the fact it assigns no value to a jurisdiction's population or natural assets.

Adjusting for size

Finally, these indicators need to be compared in a way that accounts for the different size of each jurisdiction.

To do this, Fact Check has considered them as a share of the economy – measured by gross state product (GSP) or, in the case of the Commonwealth, gross domestic product (GDP).

Each expert was comfortable with this approach, although Professor Duncan added that if the point was to assess the strength of the domestic economy, there was an argument for using alternatives to GSP such as revenue.

That's because GSP/GDP "is skewed by exports and imports" which can be volatile and "driven more by commodity prices than anything else", he said, noting that this could particularly affect the numbers for Western Australia and the Commonwealth.

What the data shows

Senator Gallagher claimed that the Commonwealth budget was "in worse shape than many of the states' and territories' budgets".

On net operating balance, the federal government recorded a $73.2 billion deficit in 2021-22, the equivalent of 3.2 per cent of GDP.

That result was the second worst behind Victoria's ($19.5 billion) deficit, worth 3.8 per cent of its GSP.

NSW placed third, with a ($16.6 billion) deficit worth 2.4 per cent of GSP.

Measured as a share of revenue, the Commonwealth slipped to third spot, behind Victoria and NSW.

Meanwhile, the budget papers show the federal government had racked up roughly three times more net debt, in dollar terms, than all other jurisdictions combined.

That $631.5 billion figure was equivalent to 27.6 per cent of GDP, well ahead of the Northern Territory's 22.0 per cent of GSP ($6.1 billion) and Victoria's 19.8 per cent ($101.9 billion).

Viewed as a share of revenue, Victoria's net debt level (130.2 per cent of GSP) was higher than the Commonwealth's (115.3 per cent of GDP).

The federal government was also the only jurisdiction with a negative net worth.

A reasonable excuse?

Senator Gallagher argued that the federal government was justified in winding back pandemic support payments on the basis that its budget was doing it tougher than that of other jurisdictions.

Experts, however, weren't sold on this reasoning.

Professor Hayward said "the fundamental problem" was that "you can't compare a government with a fiat currency — a national government — with a state jurisdiction. It just doesn't make any sense".

"The Commonwealth has much greater capacity to borrow. It's got much greater capacity to increase taxes. Its revenue-raising powers are just vastly superior."

In recognition of that, Professor Hayward said, the federal government "usually borrows cheaper than the states".

Mark Crosby, an economics professor at Monash University, similarly argued that the very different roles of governments made the comparison largely meaningless.

"States are more limited in their debt-raising capability and it's the federal government which should and needs to shoulder the burden of COVID or other big [economic] shocks," he said, adding that this was an "explicit agreement" with the states.

As for the Commonwealth's net debt being higher than that of the states, he said: "The real issue is that this is not surprising."

Principal researcher: David Campbell

factcheck@rmit.edu.au