Inside Story

This year’s budget, last year’s spending

Despite a booming state economy, the Victorian government plans even more stimulus

Tim Colebatch 21 May 2021 2432 words

Victorian treasurer Tim Pallas (second from left) after delivering the Victorian budget in the Legislative Assembly yesterday. James Ross/AAP Image

You could call it inspired opportunism. You could call it class warfare, as opposition leader Michael O’Brien has done. Whatever you call it, Daniel Andrews’s Labor government in Victoria yesterday defied the dominant paradigm of risk-free policies by promising to make business pay for an expensive suite of programs to tackle mental health issues.

Nine days after federal treasurer Josh Frydenberg unveiled a pre-election borrow-and-spend budget, Victorian treasurer Tim Pallas brought down another big-spending budget, but one that adds taxes to the mix — taxes targeted almost exclusively at big business and large landowners.

It was not the only thing worth noting in his budget. Pallas proposes another huge (and clearly inflationary) increase in what is already a record level of infrastructure spending. In government services, mental health is the top priority for new spending. The budget funds Australia’s first truth-and-justice process, a mostly Aboriginal commission to examine the state’s history and shine the spotlight on the dispossession and injustices that followed white settlement.

The budget plans to give 4000 women a year access to low-cost public IVF treatment. It funds innovative early-intervention programs, such as the Rough Sleeping Initiative by the Sacred Heart Mission, which proposes to work with newly homeless people to try to find them housing, social networks, job training and employment, so as to prevent them becoming chronically homeless.

And on the same day that the Bureau of Statistics reported that Victoria’s unemployment rate is now a smidgeon lower than Australia’s, the budget poured even more stimulus into a state economy it projects will grow by 6.5 per cent in the coming financial year. It’s fun to be pouring out the cash as Frydenberg and Pallas are doing, but ultimately someone has to pay for it — and that someone will be the kids.

Most of this new spending is unfunded, resulting in another big deficit by state standards: $11.6 billion on the budget estimates, down from $17.4 billion for the financial year just ending. And that excludes infrastructure spending, which is forecast to soar 67 per cent next year, from $14.5 billion to $24.2 billion.

“There is much to praise in this budget, but also much to regret,” I wrote of last year’s Victorian budget. That seems to apply to every budget the Andrews government produces.

Debate on this one will be dominated by the fact that, unlike its federal counterpart, it had the courage to raise taxes to finance some of its new spending — and is making business pay them.

The new taxes were so audacious, they were startling. Once in place, Treasury estimates, they would raise more than $1.5 billion a year, a not insignificant amount. But just $115 million of that would fall on the general public, mostly from higher fines and taxes on gambling. The rest would come from a range of tax hikes on developers, large landholders and people buying expensive properties (almost $600 million a year), and from payroll tax surcharges on big business, to raise $800 million a year earmarked to finance mental health programs.

That “mental health levy” could be tricky. Pallas said eligibility for the surcharges would be determined by the size of companies’ national payrolls. Those with national payrolls of more than $10 million a year would pay an extra 0.5 per cent on their Victorian payroll, while those with national payrolls of more than $100 million would pay an extra 1 per cent.

It seems cunningly designed to reduce the incentive for business to shift jobs out of Victoria. But it does not remove that risk — and it may provide fertile ground for a legal challenge. Might the High Court rule that Victoria is effectively trying to tax jobs in other states? The lawyers will be giving deep thought to this tax bill.

You couldn’t imagine a Labor government anywhere else in Australia, except perhaps the Labor/Greens coalition in the ACT, targeting higher taxes so directly on those they see as the rich rolling in money. But in 2018, Labor won a stunning 57.6 per cent of the two-party vote; as long as Covid stays under control, it is hard to imagine it losing next year’s election. The Age reports that enough crossbenchers support the tax rises to get them through the Legislative Council.

The biggest tax hike on property would introduce similar surcharges on land tax for property holdings worth more than $1.8 million — primarily hitting land developers, big rental investors and commercial property owners, since homes and farms are exempt. And with Australia now experiencing a massive inflationary boom in house prices, property sales of more than $2 million will attract an extra 0.5 per cent on their stamp duty bills.

“You don’t get that much in inner Melbourne for $2 million,” an old friend laments. Core Logic reports that housing prices in Melbourne have already risen 10 per cent since the state’s lockdown ended, with even bigger rises in regional towns (partly from city investors outbidding local residents). This surcharge could put some brake on price rises at the top end.

Developers will also have to pay a windfall levy equivalent to half of their gains when land is rezoned in their favour. Pallas was unable to give a convincing answer when asked why the government didn’t impose similar windfall levies on owners of the shopping centres who will benefit if Labor ever builds its scandalously wasteful so-called Suburban Rail Loop.

You could not imagine any previous Labor government in Victoria contemplating hits on business like this. John Cain, Steve Bracks and John Brumby all ran essentially centre-left governments that put a high priority on keeping business happy so it kept generating jobs. But Daniel Andrews is no centrist. He is a self-confident, skilful leftie who dominates Victoria’s political stage and gives the impression that keeping business happy is not high on his priority list.

If his government gets away with this one, it would be thanks to Brumby, the last government leader in Australia to pursue a Hawke–Keating agenda of economic reform. As treasurer and then premier, Brumby pursued jobs rather than votes, cutting Victoria’s payroll tax rate across the board to 4.9 per cent, the lowest rate in the nation for most of the businesses Andrews and Pallas are now targeting.

An economics graduate, Brumby’s goal was to simplify and streamline the tax structure and minimise the impact of taxes on economic activity. This government has the opposite goal: it is run by social engineers, who want to make every tax or spending measure discriminate between those they see as underprivileged (who will benefit) and those they see as privileged (who won’t).

The silliest of yesterday’s tax increases would exclude “gender-exclusive” clubs from the land tax concessions available to all other clubs. It is aimed at the Melbourne Club, of course, but why bother? Treasury estimates the measure will raise the grand total of $600,000 in four years. Wow.

Andrews has been out of sight for the past two months after falling downstairs at a holiday home and suffering spinal damage. But close observers say he still keeps in touch from home, and would have been calling the shots on key decisions in this budget — such as making the mental health reforms its centrepiece, and soaking the rich to pay for it.

The row over financing should not obscure the importance of the government giving priority to mental health reforms. Like the federal government’s aged care reforms, they follow a royal commission that highlighted how widespread mental illnesses are, and how few resources and programs we have to tackle them.

“Around half of Victorians experience a mental illness at some point in their lives,” Pallas told parliament. “Around one in five are struggling with it right now. They are our children, parents, partners and friends. They are us. But in our worst moments, we turn to a system which is clearly broken.”

The budget rolls out a wide range of programs designed to meet the needs of particular groups, from primary students up. From the stories you hear, you do wonder how much difference it can make without overcoming the shortage of psychiatrists — which presumably would require their professional college to lower the bar which blocks other doctors from entering their specialty.

In all, the budget proposes $19 billion of additional spending on services over the next four years, with sizeable dollops to fix Victoria’s under-resourced ambulance service, attract more filmmakers to Victoria, rebuild and better protect bushfire-hit communities, build and repair more schools, and build a new sporting centre at La Trobe University to be the new home of the Matildas. Most of this will be ongoing new spending, added to a budget already in structural deficit.

On the definition used by Victoria and other states, the budget will still be in deficit in 2025 — that is, revenue won’t pay for government services, or make any contribution to new infrastructure — and that would be after four years of recovery. Precisely because its tax rises are so narrowly targeted, they cannot raise the revenue needed to close the gap and create a surplus to pay for some of the infrastructure. Net borrowing is projected to continue at $18 billion a year into the blue horizon.

I am no deficit fetishist, but running a deficit in a booming economy is weak government. Victoria’s economy is booming. Treasury projects it to grow by 6.5 per cent in the coming financial year before settling back in its long-term groove: high population growth, relatively high economic growth, and wages rising faster with each year.

Yesterday’s jobs figures from the Bureau of Statistics show that even the end of JobKeeper hasn’t derailed the state’s remarkable comeback from last year’s massive job losses. In April Victoria squeezed past New South Wales to claim the second-lowest unemployment rate of any state, bettered only by Western Australia. Pallas proudly points out that since the long lockdown ended, most of Australia’s job growth has been in Victoria.

No one expected that to happen when last year’s budget planned a 25 per cent growth in Victorian government spending. It seemed appropriate then, and Pallas and Andrews can fairly claim their share of credit for the exceptional rebound since. The government hired unemployed women as tutors for struggling schoolkids, hired tradies to build social housing, and hired jobless blokes to repair roads all over the state. It handed out subsidies so groups and businesses could hire people themselves. It helped restore confidence, which has proved as infectious as Covid.

In the end, it looks like spending growth in 2020–21 will be 19 per cent: the government spent a bit less than it planned on services and a lot less than it planned on infrastructure — despite substantial hikes in the estimated cost of works such as the Melbourne Metro tunnel (now $12.25 billion), the Monash Freeway upgrade, regional rail upgrades and so on. Yet the government has responded by rolling the undone works into an even bigger package, and projecting a 67 per cent rise in infrastructure spending in the coming year.

Get real. Infrastructure spending is already at record levels as a share of the Victorian economy: roughly 3 per cent of gross state product. Andrews and Pallas now propose to raise that to almost 5 per cent — despite evidence throughout the state that the resources just aren’t there to carry out the work. A home-building recovery is getting under way, partly through the state’s own laudable program to build social housing. Andrews and Pallas don’t need to aim for the sky — and they can’t reach it anyway.

Their government has been applauded and re-elected for having lifted Victoria’s infrastructure spending off the floor. It has used these years of low interest rates to build projects that previous governments found too hard: the replacement of fifty level crossings in suburban Melbourne, building the first metro line under the city, planning the North East freeway link, and many lesser but locally important projects throughout the state.

Rather than trying to increase spending by another 67 per cent, it should consolidate and focus on the quality of projects rather than the quantity. Labor is still locked into building the Suburban Rail Loop, a very expensive underground tunnel to take a small number of passengers between six stations in marginal seats in southeast and eastern Melbourne. It was dreamed up in Andrews’s office, and it’s the lemon that makes other lemons taste like oranges.

One remarkable thing to note about Labor’s infrastructure program is that, both next year and in the long term, it plans to spend more on rail than on roads — and the roads budget includes spending on new trams and replacing level crossings. (This government spends very little on buses, even though they serve its outer-suburban voters, and its own surveys find they have the highest customer satisfaction of any public transport mode.)

Victoria’s net debt, once negligible, will reach 20 per cent of gross state product next year and 27 per cent by 2025. As the budget papers remind us, it has been much higher in the past, so that’s no cause for alarm. But nor is it a good thing. With the economy entering a boom, Labor should be moving quickly into surplus, allowing current revenues to make a substantial contribution to current infrastructure investments.

This should have been the budget that flicked the switch from stimulus to consolidation. Pallas and his team did make some efforts to do that — $2.9 billion of spending in the next four years was “reprioritised,” the annual indexation of departmental budgets was reduced, saving $1.9 billion, and $1.7 billion of savings were found from “departmental efficiencies.”

Yet even so, the bottom line is that now that the need for stimulus has gone, the Andrews government plans to spend $20 billion more in the next three years than it had last year when stimulus was needed. It is as economically dumb and politically driven as the same strategy is in the Morrison government’s budget.

Victorian Labor, like the federal Coalition, is giving us more of what was appropriate last year, not what is appropriate now. Yes, you can always increase jobs now by borrowing from the future. But that just means future generations will lose jobs whenever the bills have to be paid.

There’s a country that has tried out this strategy extensively in the past. Its name is Italy. It is the only country in the Western world that is now poorer than it was twenty years ago. Italy may be a role model in many areas of life, but fiscal policy is not one of them. •