The property downturn is forcing the Andrews Government to tighten its belt ahead of pay negotiations with tens of thousands of Victorian workers, including police and paramedics.
Several public sector workplace agreements expire this year with negotiations on many, including for 4,000 paramedics and ambulance support staff, set to begin soon.
Treasurer Tim Pallas met with union bosses recently and offered them an increase of 2 per cent a year for new enterprise bargaining agreements, which is below the current cost of living increase.
It is understood union officials were unimpressed with the proposal, with some saying it was highly unlikely they "would cop something below the cost of living".
Treasurer Tim Pallas said the 2 per cent offer was due to the slump in house prices, which have dropped by more than 9 per cent in the last year.
"We've more than met inflation standards over the previous four years, but we need to recognise that if the circumstances do mean that the state has a limitation on its capacity due to a falling away of revenue, then we have to make hard choices,'' Mr Pallas said.
"We're simply calling it as we see it … are we prepared to have a discussion? Of course we are."
He reiterated that Labor would fulfil all of its election commitments even in the tougher financial environment.
"We're not in the business of the economics of austerity, and I'll just be very clear about that. This will be about managing our finances smart, being effective in terms of the use of money,'' Mr Pallas said.
Stamp duty and property taxes are the biggest sources of tax revenue for the state, while public sector wages are the biggest expense.
Last December's mid-year budget update revised stamp duty taxes down $604 million to just under $6.5 billion.
Since then the property market has deteriorated further.
In its first term the Andrews Government delivered significant pay rises for some in the public sector, including some double digit increases, with nurses securing a seven-year deal.
A campaign on wages, with the slogan Australia Needs a Pay Rise is also part of the Australian Council of Trade Unions Change the Rules campaign for the upcoming federal election.
Last year, Mr Andrews joined union leaders at the front of a mass rally of workers in Melbourne that shut down the city demanding better pay and work conditions.
The Andrews Government is yet to officially set a public sector wages policy.
Since winning office in 2014, the Andrews Government has enjoyed healthy budget surpluses propelled by soaring Victorian property prices.
But the housing market drop coupled with record government spending has created a difficult budget period for the re-elected Andrews Government.
Union secretaries did not comment when approached by the ABC.
Impact on budget bottom line
More than 20 public service agreements are due to expire this year.
The deal for early childhood workers expires in July but the current agreement with state teachers will last until 2021.
Other agreements expiring this year include those for firefighters and public transport workers.
The Real Estate Institute of Victoria chief executive Gil King said property taxes represented 47 per cent of Victoria's tax income, and had underpinned the state economy for the past decade.
"It's really been the equivalent of WA's mining boom," he said.
Mr King said sales volumes were at their lowest levels in six years, with a 35 per cent decrease in the number of house and unit sales comparing the December 2017 quarter to the December 2018 quarter.
"Fewer sales should be of concern to the Government as it translates to reduced levels of stamp duty and other property taxes which are a major contributor to the budget bottom line," Mr King said.
