Cruising On Easy Street

The Age

Wednesday May 7, 2008

Tim Colebatch

The two Johns have cash to spend, but they are still being cautious.

SUPPOSE you are treasurer in a government that, the polls tell us, has a 16-point lead over its opposition. Your job is to bring down a state budget in times that Treasury predicts will be pretty good. What do you do?

John Lenders yesterday produced his answer. First, you keep doing what you've been doing, because people clearly like it. And second, you make sure no one is left out. Business wants tax cuts? No problem, there's room, we'll find some. Hospitals need more staff and more wards? Sure, we can find money for that. Schools need rebuilding, country rail tracks need upgrading, the CityLink widening is running over budget, teachers need big wage rises to catch up with interstate counterparts? Yep, we can do all that.

This budget feels just too easy. Victoria has never had so much money to spend. This year, Treasury now estimates, it will reap $13 billion in state taxes, a massive $1.4 billion or 12% more than it forecast just a year ago. It now expects to receive $17.2 billion in Commonwealth grants, 6% more than forecast, and it is set to get an extra billion or so in GST grants in the year ahead.

Outside, the storm clouds have gathered. The International Monetary Fund forecasts a marked slowing in global economic growth.

No problem here. Victoria's Treasury, not given to over-optimism, predicts the state economy will grow 3% this year and maintain that into the future. The money will keep rolling in, and rolling out - in all directions.

In 2008-09, in areas under the budget umbrella, the Victorian Government will spend $35 billion to provide services such as schools, hospitals, roads and justice. It will invest another $4 billion to build new infrastructure. One's first impression, wading through the 1000 pages of budget papers, is of sheer profusion: there's so much of it, so many relatively small initiatives, oiling the squeaky wheel and keeping people content.

This is not a budget with a strong sense of direction. It heads everywhere: to widen CityLink and repair country railways, to rebuild 128 schools, expand maternity wards to make room for 2800 more babies a year (does Treasury know something we don't?), to subsidise rooftop solar panels, increase support for the disabled - and cut taxes.

Land tax is set to soar with new valuations, making it easy to cut the threshold and the top rate and still collect 20% more than this year. There's a small cut to payroll tax and workers' compensation charges, and a bigger cut to the most politically sensitive of state taxes, stamp duty on real estate purchases. With a couple of small cuts targeted at first-home buyers and a 10% rise in thresholds, there will be savings of $2460 for a first-home buyer paying the median first-home price of $317,000. That's useful - but with no initiatives to boost housing supply, could soon evaporate in rising prices.

This is not a budget of big initiatives or policy shifts. There's tokenism, such as committing money to design the South Morang railway line, but no money to build it. There's not even money to study the big hole in Melbourne's road system, the missing stretch of the Outer Ring Road from Greensborough to Ringwood. The Government has promised statements later this year on manufacturing, innovation and skills, as well as a response to the Eddington report on east-west transport links. And, of course, Melbourne 2030 is to be revamped.

One thing in the budget does look different. Last year the state shifted its capital works program up from second gear to third: from about $2.5 billion a year to a bit over $4 billion a year from 2006 to 2012. That's nowhere near the levels of Queensland or NSW, but it's more than we saw under the Kennett or Bracks governments. And to pay for it, the Brumby Government plans to take on significantly more debt.

Over the five years from 2007 to 2012, Treasury estimates that net state debt will soar from $4 billion to $23 billion, providing most of the money for an expanded capital works program. That would lift net debt from 1.6% of gross state product to 7.1%.

Is that scary? No, says Standard & Poor's, the global ratings agency. "The Victorian Government can easily afford its projected net debt increases," says its credit analyst, Brendan Flynn. "The strength of the Government's forecast operating performance and existing low debt enables the state to maintain high capital spending without affecting its current credit rating."

A word of contrast. Last year Victoria spent $4.2 billion on capital investment. NSW spent $9.1 billion and Queensland $9.6 billion. We have now moved into third gear. If the economy slows, the two Johns ought to think hard about moving investment into fourth gear: building more homes, building rail lines instead of just designing them. Sir Henry Bolte at his peak lifted state debt to 62% of gross state product. I don't think future taxpayers regretted paying for what Bolte built.

But I doubt that state debt will even clear 5% of GSP under current management. The debt projections are based on Treasury's forecast of future revenues. And as we saw with this year's revenue estimate rising 12% in 12 months, those estimates tend to be wrong.

I have covered state budgets since the time of the pharaohs. Believe me, the Victorian Treasury does not try to provide accurate revenue estimates. Like the Federal Treasury, its job is to provide underestimates, so the Government looks good when the surplus ends up exceeding forecasts. Nothing's changed.

Tim Colebatch is economics editor.

© 2008 The Age

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