The debts run-up by profligate governments are about to cost us dearly

In short (certainly in Australia) any notion of fiscal rectitude simply went out the window in 2020.  Not only that.  Unfettered public spending had been going on in many jurisdictions well before anyone heard of Covid 19.

A domestic example of what can happen is the case of Norfolk Island, which in 2014 was found by the Australian National Audit Office to be "insolvent", in part reflecting a lack of proper financial controls and poor financial management practices by the Norfolk Island Administration.  Consequently, the territory had its self-governing status removed, and was bailed out by the Commonwealth.

In the 2015-16 budget, the Australian Government provided $136.5 million (more than $75,800 for each of Norfolk's 1800 permanent residents) over the forward estimates.  The recent 2020-21 Federal Budget allocated another $55.6 million of new funding for Norfolk Island over four years from 2020-21.  While the island's problems did not mainly result from excessive borrowing (but also from a combination of a collapse in tourism and an inadequate revenue base) it still illustrates what can happen when a jurisdiction can't or won't put its finances in order.

Turning to the states and territories, the Northern Territory (NT) is in by far the worst financial shape and is now considered by many to be a "basket case".

NT government revenue for 2020-21 is budgeted at $6.3 billion while expenditure is $9.3 billion.  Furthermore, the NT does not expect to achieve a surplus for at least the next decade, with forecast deficits slowly declining to $938 million by 2023-24.  The latest NT budget, besides excessive recurrent spending, also included (an unaffordable) $1.75 billion for infrastructure projects.

An independent audit found the NT's financial crisis was largely caused by unchecked spending over successive governments (though the Gunner Labor government took this to a new level).  By 2018 the Territory’s net debt had escalated from $1.7 billion in 2016 (when Labor was elected) to around $3 billion.  Net debt for this financial year is set to reach $8.4 billionbefore escalating to $12 billion by 2023-24, creating a debt-to-revenue ratio of 179 per cent.

The NT has a bloated territory public service of about 21,760, which is nearly as big as the (itself somewhat bloated) ACT public service, which serves nearly double the population.  About 80 per cent of the NT's annual budget is funded by the Australian Government through grants and GST allocations, and the Territory has a very limited "own revenue" base.

The recent NT Budget has forecast that deficits will continue for at least the next decade, with territory public debt expected to double to $16 billion (the equivalent of $65,000 for every man, woman and child) by 2029-30.  Last June, Moody's Investor Services reduced the Northern Territory's credit rating from negative Aa2 to Aa3.

The Territory had sought a Commonwealth bailout, which has not been forthcoming.  Given that the NT government seems to be unwilling to address its financial issues, something drastic (e.g. abolishing its self-government) needs to be done before the situation becomes much worse (though I can't see such action being approved by the Senate).  Arguably, given the NT's extreme dependence on the Commonwealth, it should never have been granted self-government in the first place.

The other Territory, the ACT, has been ruled for 19 yearsby Labor/Labor-Green administrations (who also like to spend, and, what's more, charge the highest household ratesin the country).  While the ACT is also running up debts, being the most affluent jurisdiction in Australia, and having only 3.7 per cent unemployment and an AAA credit rating, it will take a long time before indebtedness becomes a matter of major concern.

Under current projections, the ACT is forecastto face a budget deficit of $603 million this financial year, after a $681 million shortfall in 2019-20.  Its Government plans to take advantage of low interest rates to borrow and spend, spending about $1 billion every year for four years on capital works.  The string of deficits predicted will see the Territory's net debt peak at $7.65 billion ($18,200 per man, woman and child) in 2022-23, after reaching $4.66 billion by the end of the current financial year.

Turning to the states, Victoria and Queensland have experienced the sharpest deterioration in their finances.