In budgets, as in life, everything is relative. And as the Treasurer Tim Pallas delivered his seventh budget, it was a much rosier picture relative to his last one in November and a much more prudent fiscal blueprint than delivered by his federal counterpart last week.
Last November the Victorian budget was shrouded in rivers of red as far as the eye could see, but on Thursday we see black back on the horizon as the Victorian economy recovers more strongly than anticipated from the depths of its second COVID-19 lockdown.
Black on the horizon: Treasurer Tim Pallas at the state budget lock-up. Credit:JOE ARMAO
Reflecting the nationwide jobs boom, Victoria has hit its 2022 jobs target a year early generating 200,000 jobs since November. Victoria’s economic growth is forecast to hit 6.5 per cent next year, well ahead of the national rate and making up for the losses endured last year.
Unlike the federal government, the Victorian government is banking the improvements to its bottom line, and funding new spending across mental health and infrastructure from increases in revenue and reduced spending on its public sector workforce.
Overall government debt will grow $16.4 billion less than previously forecast to June 2024 and should help maintain Victoria’s credit rating. While fiscally responsible, these changes come with economic costs.
The increase in payroll tax – for businesses with more than $10 million in wages nationally – to fund the investments for mental health, will slow employment growth, although by keeping it below NSW’s rate for most businesses the long-term impacts from changed investment flows will be muted. The outcry from the big end of town less so, and they have reason to feel singled out in the government’s tax agenda.
The rise in the rate of stamp duty on properties over $2 million puts more onus on an inherently inefficient tax, which alongside federal tax settings feeds into worsening housing affordability for households.
Stamp duty reform as implemented in the ACT and flagged in NSW would place the Victorian budget on a more stable footing and drive economic efficiency. While such reform is always hard, its inclusion in this budget would have improved its overall reform credentials. As it stands, the negative impacts of the increase in taxes must be judged against the benefits that will flow from the new spending.
On this front the direction of investments into care industries, mental health and infrastructure will build a much stronger and more resilient economy.
Without deposits of iron ore, Victoria relies on its people more than any other state for its economic success, and investing in those people is critical to achieving higher living standards.
Poor mental health is estimated to cost the Victorian economy $14.2 billion per year, and the $3.8 billion in new spending over four years will act to reduce that cost and lift economic growth.
There are the jobs that will come from this additional investment in our mental health infrastructure, estimated to be around 3000. On top of these direct jobs there is the improved productivity and participation that will be delivered from improving individual mental health. Businesses will ultimately benefit from this improvement in productivity. And even more importantly, the lift in participation for unpaid carers, particularly women, that will flow from increased services.
Overall and coupled with the federal government’s $2.3 billion national boost last week, the focus is long overdue and as important to our economy as it is to our people.
It may well be, however, a lack of people that derails the estimates underlying the budget. Any economic plan is based on assumptions, and the return to strong growth and fiscal sustainability relies on migration and international education rebounding quickly following assumed border re-openings in 2022.
But there are real risks around this timeline due to the painfully slow vaccine rollout, and the ability of our higher education providers to recapture market share in the competitive international education market.
As with last week’s federal budget, there was no lifeline for the sector that has been so critical to Victoria’s economic fortunes.
But unlike the Commonwealth, the Victorian government has moved to enshrine a permanent gender lens on its spending by establishing a women’s budget unit within Treasury. This small initiative will be crucial in driving women’s economic security, equity and economic growth into the future.
While the Premier is himself absent, the 2021-22 budget is very much a continuation of the Andrews government’s economic blueprint – spend, spend and spend some more on services and infrastructure to strengthen the community and the economy.
The agenda is large, and can sometimes feel overly ambitious but suddenly feels more constrained in the face of the federal government’s big spending budget last week. Everything is after all relative, and in an age of fiscal abandonment, the fiscal discipline showed by the Victorian government is a welcome plot twist.
Dr Angela Jackson is lead economist at Equity Economics, and was deputy chief of staff to federal finance Minister Lindsay Tanner during the Global Financial Crisis.
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