Inside Story

Stimulus, and more, for Victoria

A budget for Covid recovery ventures into contentious territory

Tim Colebatch 25 November 2020 2538 words

Victorian premier Daniel Andrews during a visit to the National Gallery of Victoria today. The Victorian budget included $1.4 billion to transform the Melbourne arts precinct. David Crosling/AAP Image

The main game of the Andrews government’s 2020–21 budget is to deliver stimulus, and it does so in spades. It plans to spend almost $110 billion this year providing services and investing in assets — roughly $23 billion more than it spent a year earlier.

Let that soak in. This year, Victorian government spending will grow by more than 25 per cent. The additional spending will amount to close to $3500 for every man, woman and child in the state. That’s roughly $70 per person, per week, in new spending.

There are tax cuts too, but they are dwarfed by the new spending. If the Morrison government’s budget relies too much on tax cuts to stimulate consumer spending and business investment, the Andrews government’s budget does the reverse: just as its coronavirus strategy was an extreme in top-down control, so is its economic strategy.

Most of that is genuine stimulus: one-off measures in response to the economic devastation of the state by months of lockdown, such as a single line item in the budget papers, with no further breakdown, assigning $2163 million to “business support.”

Some of it is transport and other investment proposed for other reasons, but brought forward as a stimulus to economic activity in a year in which Victoria’s gross state product, even on optimistic assumptions, is projected to be 4 per cent lower than a year earlier. That includes $2.7 billion in this fiscal year that will rapidly, if only briefly, scale up the previously pitiful level of state investment in social housing.

And some of it is not stimulus at all, but uses the cover of stimulus action to step up Victoria’s routine budget spending in areas that interest Labor activists, and to commit to long-term infrastructure investments that would almost certainly fail a genuine cost–benefit analysis.

In short, there is much to praise in this budget, but also much to regret. That includes the government’s commitment to build the worst transport project Melbourne has ever seen: the so-called Suburban Rail Loop, in reality a twenty-six kilometre tunnel under the middle southeastern suburbs from Cheltenham to Box Hill. Tunnels eat money, and the demand for this one is likely to be small. No business case has been produced, and no cost–benefit analysis, but it will cost taxpayers tens of billions of dollars.

It is not the first lemon a Victorian government has tried to sell to voters. The Andrews government won power in 2014 partly because the Liberals thought it would be a great idea to spend $7 billion of taxpayers’ money to build a 4.4 kilometre tunnel under the inner suburbs to link two freeways; the taxpayers disagreed. But the Suburban Rail Loop is the lemon that makes other lemons taste like oranges.

Not surprisingly, the ratings agencies yesterday implied that this budget could lose Victoria its AAA credit rating. Standard & Poor’s said there was a 50–50 chance that the state could be downgraded, and this would happen if it came to the view that “the state’s financial management has weakened.”

Well, with respect, it clearly has: as far out as 2023–24, well past the time for stimulus, the budget projects $3.6 billion a year of new routine spending — $1.6 billion of it net of spending cuts and contingencies allowed for in the budget — plus roughly $6 billion a year of additional investment in assets.

Stimulus is certainly what Victoria needs right now, and this budget delivers it. But it has to be paid for, just as investments in roads, rail, schools and hospitals all have to be paid for one day. Governments should be brave and bold about delivering stimulus at this time. On that front, this budget succeeds admirably.

But equally, governments should be wary about the long-term costs of doing so, knowing that the bills will come in at some point, to be covered either directly or through permanently higher interest bills. They should not use the cover of stimulus to smuggle in a step-up in spending levels, and they need to prioritise asset investments that will deliver most bang for buck. This budget fails on both counts.

A bit of background is necessary here, because Twitter gives me the impression that many Victorians have little idea how different their state’s economic position is from that of the rest of Australia. Not only was Victoria home to 90 per cent of the Australians who died of coronavirus, but even after the unexpectedly large rebound in jobs last month, the state accounted for 94 per cent of Australia’s net loss of jobs in the year to October: 124,000 jobs lost in Victoria but just 8000 in the rest of Australia.

Female employment year on year grew by 24,000 in the rest of Australia, but shrank by 105,000 in Victoria, where hospitality and entertainment were largely shut down. For the same reasons, employment of workers aged fifteen to twenty-four shrank by 4000 in the rest of Australia, but by 92,000 in Victoria.

We won’t know the full devastation of lost businesses until JobKeeper ends, but the intensity and duration of Victoria’s lockdowns make it likely that it will also lose more workplaces than the rest of Australia combined. Even with that massive increase in state government spending, projections by the Victorian Treasury and its federal counterpart together imply that while Victoria’s output this fiscal year will be 4 per cent lower than a year ago, output will be only marginally lower in the rest of Australia.

And even that forecast relies on the government’s huge spending increase igniting an extraordinarily rapid recovery. The budget projects that real gross state product will grow by 9 per cent over the course of 2021, the sort of growth rate normally claimed only by China. And most of that would happen in the first half of the year — assuming no more coronavirus and no more lockdowns. As financial market insiders would put it, the risks in that forecast are on the downside.

The level of stimulus is extraordinary, however, and it’s welcome. Unlike the Morrison government, the Andrews government is doing as economists have suggested. In response to the slump in housing construction, it has introduced several new policies, but the big one is a crash program of building social housing, for which waiting lists now extend many years. The promise of another 9000 homes for some of those unable to afford secure and suitable housing in the private market is a marriage of good economic and social policies.

One hopes the government will not then just revert to the inadequate investment levels of the past, as the Gillard government did when Kevin Rudd’s 2009–10 public housing stimulus expired. In fairness, this depends even more on what the federal government is willing to do — which, at present, is not much.

The budget also commits $250 million to the Grattan Institute’s proposal for a two-year program to hire tutors to help struggling schoolchildren catch up, particularly those most affected by the lockdowns. While most stimulus programs, including new infrastructure, provide jobs for blokes, this one will provide much-needed jobs for women.

The budget also envisages lifting the current level of infrastructure spending by almost half, which would be welcome if it also included a transparent, independent way of selecting priority projects. No such luck. In Victoria, as elsewhere, the choice of projects is driven by what the government thinks will give it the most political bang for buck. What will give Victorians the most social/economic bang for their buck is irrelevant.

The Victorian Liberals are still clinging to the East West Link as their branded project, even though it has twice been rejected by the voters and three times by cost–benefit analyses. Labor has done much better with its branded project of removing level crossings, but with that scheme now growing familiar, Andrews has been keen to find a new project.

The federal Liberals have focused on getting a train line built to Melbourne Airport. It might not be needed — it will offer no more than Skybus already provides, except easier access from other suburban lines — but the polls show it is the top project among voters. Saturday’s agreement between the Andrews and Morrison governments means it will now become reality, with the two governments adopting the cheaper of two alternative proposals. The cost is pencilled in as $10 billion, and the completion date as 2029.

Andrews’s own new branded project, however, is the Suburban Rail Loop. It appears that this emerged from his political circle rather than from the railways, let alone transport economists. As originally presented, it was intended to run for ninety kilometres around Melbourne’s middle and outer suburbs, largely in tunnels, with a number of stations in the southeast but very few in the west. The cost was claimed to be $50 billion, which no one believed.

But the government is now proposing to build only the southeastern quarter of the loop, running underground from Southland shopping plaza through Monash and Deakin universities and selected suburban shopping centres (which developers own the redevelopment rights, I wonder?) to Box Hill station in Melbourne’s Chinese heartland.

The budget commits $2.2 billion to the initial stages, primarily for planning, land purchase and so on. Treasurer Tim Pallas promised that a business case will be presented next year, and no contracts for construction would be let until the voters have their say at the 2022 election.

Even the cost of this twenty-six kilometre tunnel might well be $50 billion: no one knows, including the government, which has committed to build it regardless. It is economic lunacy to choose infrastructure projects in this way. Infrastructure Victoria, which was set up to provide objective advice to the government on priorities, has been ignored and sidelined.

No government can build every project we want: it has to prioritise, and select which projects will give the community most value for money. Building the Suburban Rail Loop means the government will not have the resources to take up other, more urgent projects such as the second line of the Metro, intended to run from Clifton Hill to the massive redevelopment site of Fishermans Bend.

Choices have implications. In the ACT, the Labor–Greens government had to shelve its hospital redevelopment plan for a whole four-year term to pay for its own branded infrastructure project, Canberra’s first tramline. The huge cost of building a long underground railway to meet scant demand will push many other projects to the sidelines, possibly for decades.

It would be welcome if, in 2022, the Liberals ditched the East West Link and promised instead to ask Infrastructure Victoria to carry out cost–benefit studies of the key infrastructure choices under discussion. Get the facts, then decide. By contrast, the Andrews government has taken its lead from the Queen of Hearts in the trial scene of Alice in Wonderland: “Sentence first — verdict afterwards.”

The Suburban Rail Loop is the prime example of a problem that afflicts not only the Victorian budget but also Australian politics generally. Just as the hard right sees every issue through the prism of its fixation on waging culture war, so governments focus on what they brand as their projects, and which projects are politically rewarding to announce, rather than on delivering services to us that provide the best bang for buck.

Then, once the political gains of the announcement have been banked, they lose interest in delivering outcomes. The $5 billion the federal government promised for projects in northern Australia, and failed to deliver, is a classic example. But all governments now make wide use of another form of it: financing new projects by “reprioritising” old ones.

This budget has a beauty: a one-line item “reprioritising” $1836 million (2 per cent) of government spending this year alone, and a similar amount over the next three years. It was obscured so well in the budget papers (as one line in table 4.5 of Budget Paper 2) that as far as I can see, no one in the mainstream media reported it. It’s a way of saying: “Oh, by the way, $3.7 billion of the spending we promised you in past budgets won’t be delivered. But just look at what we’re offering you this time!”

There is no information on what past promises have been discarded in this way. It’s politically much easier to make spending cuts that are not announced than to make ones that are. This budget appears to have no announced spending cuts, but if you can cut 2 per cent from spending without announcing what you have cut, why go to the trouble of being transparent about it? This is an issue that oppositions and transparency reformers need to focus on.

One of the budget papers was also discarded: the old Budget Paper 4, the detailed statement of the government’s investment program. Treasurer Pallas blamed the rush of getting the budget ready, and promised it would be back for the budget next May. We have to take him at his word, but the issue matters.

Among other things, BP4 told us exactly how much the government has spent, is spending, and plans to spend on each project, and when it is expected to finish. It is the annual fessing-up to any blowouts in cost or completion dates. It is also a full account of the government’s investment priorities. It should be required by other governments as well, not least the federal government.

It’s also notable that policy commitments are now being made under increasingly long timespans, to make them look bigger. The budget papers tell us Victoria has now committed to $134 billion of new investments, which is roughly ten times the level of its annual investment up to now, and seven times the level projected from here on.

There is only one tax rise in this budget: the little tax on electric vehicles ($250 a year for fully-electric vehicles, $200 for hybrids) to ensure that they pay something towards the cost of providing the roads they drive on. This has provoked predictable outrage, but I seriously question whether it will change anyone’s decision on whether to buy an electric car. Pallas said yesterday that Treasury assumes it will have no impact on vehicle demand.

Politically, despite all the problems it has/had created with Covid-19, the Andrews government remains dominant. This budget comes at the midway point of its four-year term, and the polls tell us Labor would comfortably win any election held now. The apparent eradication of the virus, at least while Victoria was isolated from the world, has turned a looming disaster into a political triumph.

Coronavirus is an ongoing story, with more twists and turns to come. Economic concerns have been ignored by Victorians and their government, but they will become more prominent as fears of the virus recede. This budget seems to leave out nothing in its willingness to lift the economy out of recession through government spending. But I did find one place where the government had exercised spending restraint.

On the same page as the commitment to spend $2200 million on the preliminaries of the Suburban Rail Loop, the government has committed to spend just $4 million over the next four years to improve bus services — the form of public transport that residents of the outer suburbs most rely on. •