Wednesday, May 5, 2010

Victoria - cashed up and ready to spend

IN A budget of few surprises, the real surprise is that Victoria's finances have come through the recession in such good shape. In the downturn, it spent more than ever before. And in the upturn, it plans to spend even more and yet end up with a much bigger surplus.

It is worth looking at how this happened. It illustrates more than mere budget numbers, but says something about what is happening to life in Victoria, and its system of government.

We might have thought that the recession, even if it was much smaller than expected, would reduce state revenues. And indeed, in 2008-09, state taxes did fall marginally, partly because the budget had given away tax cuts in the expectation of a normal year, which then turned out to be anything but normal.

But even in 2008-09, total state revenue increased by 5 per cent, because the falls in state taxes were outweighed by a 10 per cent rise in grants from Canberra: partly through a steep rise in Victoria's share of GST revenues and partly through the Rudd government lifting tied grants for schools, hospitals and transport infrastructure.

What about 2009-10? It's turned out to be a boom year for Victorian government finances. Total revenues are now forecast to rise 11.4 per cent. Most of that is coming from Canberra, with total Commonwealth grants up more than $3 billion, or 17 per cent. But state tax revenue is also estimated to grow by $1 billion, or 8 per cent, despite payroll tax receipts turning out weaker than expected.

Why? Treasurer John Lenders is a beneficiary of the boom in housing prices, even as it has killed off young Victorians' hopes of owning their own home. This year, stamp duty revenue on property transactions is expected to rise by roughly $700 million, or 25 per cent, in line with Melbourne's soaring prices.

Should the government cut the tax rates to make housing more affordable? No. There is a case for cutting them in a price slump, but when prices are soaring, experience suggests measures that give people more money to spend whether cuts in stamp duty or rises in first home buyers' grants would flow straight into even higher prices. What Lenders has done instead is very sensible. From July 1, the state's $2000 top-up for first home buyers purchasing existing homes will end, and the government instead will target all its resources on boosting the supply of new housing, lifting the total grant for people building or buying new homes to an impressive $20,000 in Melbourne and $26,500 in regional areas.

In effect, all the state's housing boost is now going into boosting supply, not demand. It is a lesson for Lenders' federal counterpart, Wayne Swan, who wants to keep giving out $5 billion a year of tax breaks to negatively geared investors and more than $1 billion to first home buyers, which boosts demand while doing nothing for supply.

On payroll tax, the extraordinary weak revenues up just 1.1 per cent in a year when the Bureau of Statistics shows Victoria adding 104,000 jobs is kind of stunning.

Maybe a lot of the jobs growth has been in small business or the public sector, which don't pay the tax. Maybe there has been a big rise in tax evasion. Or maybe the bureau's figures, based on a sample of households, seriously overstate how well Victoria has been doing.

What of 2010-11? The budget forecasts more moderate revenue gains. Commonwealth grants are tipped to rise only 3.5 per cent as stimulus programs run down. State taxes are expected to climb 7 per cent, with housing prices flattening out but the boom's impact on land values lifting land tax 12 per cent, while payroll tax collections grow 6 per cent.

Put it all together, and since 2006-07, state revenues will have grown by $11 billion, or 31 per cent, in three years. Frankly, it's not too hard to be a state treasurer when you have that sort of money flowing in. You can boost services across the board, boost investment across the board, and still lock up a decent surplus on your bottom line. And that's what Lenders has done.

Hospitals last year overtook schools as the main recipients of state spending, and with all that extra money flowing from Canberra, this budget entrenches that. Of $3.1 billion of new funding over the next four years to provide government services, $855 million, or 27 per cent, is for health, overwhelmingly for hospitals. Of $10 billion in new funding for capital assets announced in the past year, $2.3 billion is to build or renovate hospitals: $1.1 billion for the Parkville cancer centre alone.

To fund this asset spending, the state expects to increase its total debts from $10.6 billion at mid-2009 to $26 billion by mid-2014. Net debt would rise from $5 billion to $16 billion in that time when on these figures it would flatten out at roughly 4 per cent of gross state product. The wider measure of public sector debt would grow from $10.7 billion now to $32 billion in 2014, when it too would level out at about 8 per cent of GSP. That's a level that does not worry the ratings agencies, as they made clear yesterday in reaffirming Victoria's AAA credit status. It should not worry anyone except debt obsessives.

What does worry me is that it would level out only because the forward estimates suggest net investment in fixed assets will slump from $6.4 billion next year to $3.9 billion in 2013-14. By then, all investment for tomorrow would be financed by taxes on current taxpayers.

That's a formula that bows to the Coalition's scare campaign against taking on debt to finance capital works. But business constantly takes on debt to finance its new investment. If the benefits of the investment outweigh the cost, what's wrong with borrowing to invest?