In recent times, Australians have become accustomed to the grim menace of budget emergency, as our federal government and many of the states have returned deficits. The dreaded “vertical fiscal imbalance” – which sees Canberra collect most of the revenue but the states and territories deliver most of the public services – is supposed to render state budgets permanently vulnerable
You wouldn’t know it, looking over Victoria’s budget papers yesterday. The garden state’s finances are in rude health. The state is running a surplus of $900m in 2014-15, forecast to grow to $1.2bn in the coming year and $1.8bn by 2018-19, despite the state economy growing at a below trend 2.25%. Net debt will shrink to a tiny 4.4% of gross state product.
The budget papers argue that the local economy is improving. Victorian Treasurer Tim Pallas forecasts a steady return to trend growth of just under 3%, driven by improved dwelling investment, lower interest rates and a lower Australian dollar. As a result, the budget papers say unemployment will “stabilise”, and perhaps even start to inch back down.
The hugely controversial East-West Link continues to dominate Victorian politics, but Labor’s decision to junk the project helps it spend money on different infrastructure priorities.
There is a big $2bn splurge on new trains, trams and carriages. A start is made on the government’s cherished promise to upgrade suburban level crossings, and there are a slew of “medium to small” infrastructure projects that will address bridges and bottlenecks. $1.5bn is also committed to planning and readying the promised Melbourne Metro rail upgrade. All up, Labor has allocated $22bn to the infrastructure investment pipeline.
Public services are not neglected. There’s an extra $2.9bn over the forward estimates for schools, $1.3bn over the forward estimates for health and hospitals, $509m for a jobs and investment program, $300m for Tafes and $150m for disabilities. The state’s arts and cultural industries enjoy a strong package with $202m in new funding, including an innovative $25m for the crucial but neglected independent sector.
Victoria’s opposition would no doubt argue that one reason the state’s budget is in such good shape is that they left a legacy of restrained spending. Daniel Andrews and Pallas have indeed inherited a government expenses ledger growing more slowly than revenue. On the other hand, the Coalition was also bequeathed a surplus by John Brumby in 2010.
But the real reason for the good news is that the state is enjoying a spurt of revenue growth. Revenue is up a full $2bn on the revised 2014-15 figures, or 3.7%. Victoria’s booming house prices are part of the good news: stamp duty will pull in a cool $5bn this year, up 2.9%.
“Since the middle of 2013, the property market has grown strongly, driven largely by investor activity,” the budget papers state. Payroll tax is up 6.2%, GST up 4%. There’s also a handy $1bn windfall in East-West money from the federal government, which Tony Abbott must now be regretting pre-paying.
Of course, there are some potential risks. The Coalition was remarkably successful in tamping down public sector wages. After helping win the election last November with some highly-visible campaigning, public sector trade unions can now be expected to come knocking on Pallas’ door for some big pay rises. And down the track there are big budget cuts coming from Canberra, announced in last year’s federal budget.
Revenue threats are also on the horizon, for instance if Victoria’s overheating housing market suddenly cooled. But with interest rates still heading downwards, a hypothetical housing bust is surely a medium-term prospect.
Hints at the drivers of Victoria’s fiscal strength can be gleaned from a glimpse at the collapsing Western Australian state budget. WA is massively dependent on mining royalties, which are now cratering as international commodity prices plunge. In contrast, Victoria has next to no mining, which means it has essentially zero exposure to falling terms of trade. Indeed, the falling Aussie dollar is helping exporters in the state’s still-sizable manufacturing sector.
All up, it demonstrates just how strong Victoria’s balance sheet remains, particularly compared with hard-up cousins in the north and west. Indeed the real wonder is why the state is not borrowing more to invest more in infrastructure that would grow the economy in the long term.
The state is currently borrowing at very low interest rates and could conceivably invest far more aggressively for the future. Economists will scoff at the ability of a state government to pick winners with its $200m Future Industries Fund but a lower dollar gives the state at least some chance to grow a new export winner in fields like biotech or professional services.
Looking at these budget papers, Joe Hockey must be weeping with envy. The Commonwealth’s budget is heading for a $45bn deficit, and there is nothing like Victoria’s revenue growth in the federal pipeline. No wonder Hockey wants to take future funding away from the states and territories.
