Lenders Budget No. 3 “GFC Gone. Growing Again!” or “The Bicentenary Budget”

1. Lenders Budget No. 3“GFC Gone. Growing Again!”or“The Bicentenary Budget” Presentation by Dr Vince FitzGerald Director, the Allen Consulting Group to IPAA Victoria State Budget Briefing 5 May 2010

2. Bicentenary?? • Mr Lenders is Victoria’s Treasurer No. 46 • And this is Victoria’s Budget No. 154 46 +154 = 200! • Apologies for starting with trivia

3. Criteria to assess a Budget • Last year’s list: • Sustainable financing • Meeting major challenges, notably population growth (& effects – congestion, excess demand for housing) also environment-related (water, bushfires, prospective carbon pricing) • Maintaining, improving core services (esp health) • Maintaining the State’s competitiveness • Optimising engagement with the Federal system.

4. Criteria cont’d • List, as always, remains much the same, but the order changes • This year, ‘sustainable financing’ drops a couple of notches below ‘meeting major challenges’ • Linked to it, ‘optimising engagement with the Federal system’ rises in significance, with the Commonwealth: • Seeking to exert greater control over areas of State responsibility and expertise (health, education) • Taking back 30% of the GST • Impinging on State payroll and resource tax bases (and Henry canvassed ‘federalising’ some other taxes).

5. Growing dependence on the Commonwealth is not a happy road for the States, or the citizens to whom they deliver services Source: Victoria’s submission to Henry

6. The economic basis of the budget projections • What a difference a year makes! • The GFC is behind us, unless the ‘Acropolis now’ scenario plays out and there is a return to global credit drought • Victoria clearly remains the best economic performer among the non resource States (and recently vis-à-vis the resource States) • And revenues are bouncing back, e.g. conveyancing stamp duty back to 2008 levels. • Economic forecasts in Budget if anything conservative • GSP growth 3.25% 2010-11 then 3.0%, c.f. private sector forecasters 3.25-3.5% • Employment 2.0% then 1.75% c.f. private forecasters over 3% next 2 years (but slower later) • Nevertheless Budget assumptions well within the credible range.

7. Jobs created, last 12 months

8. Sustainable financing • Projected operating surpluses of $872m 2010-11 and average $1.2 billion over FE period credible and commendable – especially as all will go to financing infrastructure investment Operating surplus ($m)

9. Quibbles, and emerging risks • Is it prudent to reduce the payroll tax further, albeit marginally, to 4.9%? • This is the only truly broad tax base the States have at present, and in Henry’s thinking would be ‘federalised’ • Commonwealth’s raising of employer super contributions by 3% of payrolls puts further pressure on this base • as well as costing the State as an employer

10. Payroll tax rate (%)

11. Risks (cont’d) … and tax possibilities • The Commonwealth is also (indirectly, using a super profits tax) intruding into resource taxation, constitutionally a State prerogative • Notwithstanding that States can still levy mining royalties • Is it time for another review of taxation options open to the States? (Last done in Victoria in early 80’s – Nieuwenhuysen review) • Such a review could pick up some of the neglected Henry ideas e.g. congestion (or possibly cordon) taxes, and again, look at re-entering the income tax field, at wider use of land tax, even inheritance tax! (N.B. Congestion taxes pre-suppose good public transport.) • And generally seek ways to reduce fiscal dependence on Canberra and improve tax structure efficiency.

12. The State’s Balance Sheet • The State’s balance sheet is now remarkably strong. Projected at 30 June 2011: • total financial assets $74.8 bn (c.f. $48.9 bn March 2009) • Total non-financial assets $97.7 bn (c.f. $67.1 bn March 2009, but mainly boosted by adding in about $19 bn of land under roads!) • total liabilities $46.7 bn (c.f. $42.5 bn). NB super liabilities -$400m • net debt $11.7 bn (c.f. $4.4 bn) • However projected net debt to GSP ratio is quite low at not much over 4% c.f. around 5% projected last year • No risk to State’s AAA rating – which should not be a primary objective in any case, especially given infrastructure needs.

13. Net debt (% to GSP)

14. Addressing major challenges • The State is still ‘playing catch-up’ in the face of strong population growth (including in the regions), but is responding with record levels of infrastructure investment • Total TEI: • ‘economic’, mainly transport $13.7 bn ($3 bn already done) • ‘social’, i.e. health & education $6.4 bn • Other $3.9 bn • PPPs $4.2 bn • It is difficult to see in the Budget papers (despite new document giving detail) where the individual projects fit into overall plans for the respective systems, but one can look elsewhere e.g. to the Victorian Transport Plan • I also query the benefit/cost of some items • Myki, obviously; also the $4.3 bn Western ‘Regional Rail Link’. Aren’t the Loop and the Flinders Street viaduct the bottlenecks? What of other Eddington road proposals? • Nevertheless, much being done to address the pressures.

15. Infrastructure spending ($ billion)

16. Maintaining core services – especially health • Victoria’s health system was in many ways the model, not the reason, for the Commonwealth intervention in health • But Victoria has suffered with the others in the retreat from 50% Commonwealth funding to little over 40% • The Premier achieved considerable gains in COAG (albeit not the retention of all the GST) • Commonwealth effective share 41 to 45% (extra $4.7 bn over 10 years) • State still running the system • Hence the pleasing $4 billion “two health budgets in one” or “Putting patients first package”, including • Extra $935m over 4 years for more hospital and sub-acute services, and extra $386m for Commonwealth health and aged care services in Victoria (primary health care, mental health etc) • $2.3 bn of asset investment.

17. Maintaining core services – community safety • Once again (it must be an election year), the Government and the Opposition are competing on funding of more front line police! • 1966 more over 5 years, after substantial previous increases • And unfortunately, with more need for prison places (notably for women), $127m to be spent to increase prison capacity, over 4 years • Plus $26m on programs to reduce imprisonment rates for women

18. Maintaining core services – education and training • Commendably, among other school education initiatives, the Government is set to exceed its 2006 commitment to upgrade schools • 553 cf 500 promised, after this Budget • And worked with the Commonwealth to get best value for Victoria from Canberra’s $2.6 billion spending in its (somewhat inflexible and re-oriented to stimulus) ‘Building the Education Revolution’ program • However there does not seem to be the same focus on TAFE (but $24m and $19m for facilities at North Metro and Holmesglen, some other miscellaneous funding) • Despite the fact of recurrent skill shortages in Australia and the importance of skills in Victoria’s competitiveness

19. Competitiveness • The State is clearly performing very competitively vis-à-vis the non-resource States and recently, even vis-à-vis the resource States, especially Queensland • Demonstrating that low tax rates are not the only significant dimension of competitiveness (and need to balance low tax rates against other considerations, as mentioned earlier) • Others are non-tax on-costs (e.g. WorkCover premiums, which the Budget projects to fall), the quality of infrastructure, the availability of skills, availability of land, ‘user-friendly’ regulation and reduced red tape etc • Also (Chapter 5 in Budget Paper 2), continuing commitment to reform • This budget scores well on most dimensions, although • query the projected red tape savings of $500m p.a. by 2012 • and query the need to pare down payroll tax.

20. Summing up • Once again, the Budget scores well • Victoria, absent further significant moving of the fiscal ‘goal posts’ by the Commonwealth, will have very sound finances, going forward • The State is, within its fiscal parameters, maintaining and steadily improving core services • The State, while still ‘playing catch up’ in the face of population growth pressures, is addressing the major challenges it faces • The State is maintaining its competitiveness vis-à-vis other States (but may also need to protect and extend its tax bases rather than compete on tax rates) • The State has made the best of the recent hand dealt to it in Federal financial relations, but that game has yet to run its course!