Victoria's in the sweet spot, but free ride is over

FOR a state Treasurer, it doesn't get much better than this. You raise spending on services by $5 billion, or 12.5 per cent. You raise investment to a record $8.6 billion. And you don't even have to raise taxes to pay for it.

Instead, your fairy godmother puts that new spending on her credit card, while you declare a surplus of $644 million. Sweet!

That is the budget outcome for 2009-10, unveiled yesterday by Treasurer John Lenders. Only a brief word here and there thanked his fairy godmother: the Rudd government, which put most of the new spending on its credit card, as part of its stimulus. But that won't last. If last year was as good as it gets, that means it's going to get harder from here.

Last year, the Commonwealth donated just over half the Victorian government's operating revenue. It paid for most of Victoria's infrastructure spending, including $2.5 billion for upgrading government schools and $1.3 billion for public housing.

But the Commonwealth stimulus is already phasing out. The big tax cuts of 2005-08 have weakened its revenue base, and the nation has three years of austerity ahead as it strives to get back into surplus. And so Victoria, too, must tighten its belt.

The state is in good shape. Treasury estimates that gross state product grew 2.25 per cent in 2009-10, far above the 0.25 per cent originally forecast. People kept pouring in, drawn here for both education and jobs. Employment grew by 100,000, spending by 6 per cent, and Victoria was the only state to avoid a housing slump.

The state's debt is rising, but low. Net public sector debt (excluding financial agencies) is just $15 billion, or 4.7 per cent of gross state product. The operating balance sheet has a healthy surplus.

Debt is rising only to fund infrastructure investment as it should. Better roads and rail cost money, but they're worth it.