Victorian 2017-18 Budget Response


When I looked at this budget I was reminded of the BBC television series Yes Minister, a series which is now almost 40 years old. For many people outside this place, it is regarded as comedy. For people in this place, particularly people who have served in government, it is far more reality than it is comedy. It has stood the test of time, and it is good training ground for many ministers.

Looking at budget paper 2 (BP2), I was reminded of an episode of Yes Minister where you have the lead character, Sir Humphrey Appleby, making the point to one of the junior bureaucrats that if you are producing a report on a difficult subject, the best way to deal with the difficult element of that subject is to put it in the title. That is what I thought of when I looked at budget paper 2, 'Strategy and Outlook' — that if you want to dispatch the issue of a budget strategy, you can stick it in the title and then there is no need to reflect that strategy in the actual budget paper and that is what we have in BP2 of this year's budget. 

The 'Strategy and Outlook' paper does contain a number of very interesting statistics about the Victorian budget and the Victorian economy, most of which are backward looking, which is interesting when you are reflecting on something that is meant to be about strategy. It contains, particularly in chapter 1, all the lefty buzzwords which have become the stock in trade for this government. 

We have a section in here on cultural diversity, we have a section in here titled 'Fair, equitable and thriving communities' and we have a section here on LGBTI Victorians — all within a 'Strategy and Outlook' paper. But what we do not have in the 'Strategy and Outlook' budget paper is a vision. We do not have the government articulating its vision for the Victorian economy. We do not know how the government sees the Victorian economy in 20 years time, in 10 years time or even in five years time. We do not know how the government sees the industry mix in the Victorian economy over any of those time frames. We do not know how the government sees the geographic spread of economic activity in Victoria over a 20 or 10 or five-year time frame. We do not know the government's view on the skills mix that will be required for the Victorian economy in 20 years, in 10 years or even in five years, and because we do not have in this budget paper the framework of that vision — where the Victorian economy should be heading over those time frames — we do not have a strategy on how to deliver them. If you do not have a goal, you cannot have a strategy on how to deliver that goal.

We have challenges in the Victorian economy. The budget paper refers to fair, equitable, thriving communities. It was interesting to look at some Australian Bureau of Statistics (ABS) data today that shows, for example, that the median wage in New South Wales currently is $48 322. By comparison, the median wage in Victoria is only $46 644, so there is a not-inconsequential difference in the median wage in the Victorian economy as opposed to New South Wales which is an economy of a similar industry mix. It is obviously a slightly larger economy but an economy which, unlike Queensland or Western Australia, is comparable to Victoria. We have a distinct difference between the level of wages in those two economies. What we do not have in here is a strategy as to how the Victorian government would seek to address that. Despite the talk about equity and fairness, raising the median wage in Victoria to at least match that of New South Wales is not something that the government sees in its vision or indeed sees as the basis for a strategy.

One of the biggest challenges in Victoria, and I think most certainly Victorians who are living in metropolitan Melbourne would recognise, is population growth. The budget papers indicate that in the current financial year we have had population growth of 2.1 per cent, which is an acceleration on what was forecast last year. That means there are around 120 000 additional people in Victoria each and every year. The vast majority of those new Victorians, around 90 per cent of them, settle in and around Melbourne.

So one of the key challenges for the Victorian government is, firstly, articulating a vision as to how you see Victoria coping with population growth of 120 000 people per annum; where you see them settling, whether it is the fringes of Melbourne with further growth of the Melbourne suburban areas, or whether you see that growth becoming regionally focused with incentives to settle in our regions or our country areas rather than metropolitan Melbourne. Then, having settled on that vision, what strategy do you employ to deliver it?

We do not see that in this budget paper. We do not see it across the budget at all. Yes, there are announcements around building a road or building a train line, but those in themselves are not a strategy — piecemeal projects are not a strategy. 

To announce a project like the Mordialloc bypass in my electorate is not by itself a strategy. Melbourne Metro is not a strategy. They are piecemeal projects that might be directed towards November 2018. They are not directed towards addressing in a strategic way the population growth that we have been seeing in Victoria for some time and that we will continue to see. We have not seen in this budget the vision and the strategy that would indicate where the government wants to go and how it wants to get there. It is a piecemeal approach of projects potentially directed towards November of next year but not a strategy for the economic future of this state.
I would like to turn now to some of the specific key metrics of the budget and in particular where we are and where we are headed. As we know, a budget in its basic form is a record of the government's expected revenues and its expected expenditure, the surplus as the balancing item and the capital account. In 2017–18, the budget year, the government is budgeting for revenue of just under $63.5 billion — $63 404 million — which is an impressive number. It is in fact just shy of a 20 per cent increase over the last three years.

If you take the baseline for comparing this budget with the legacy of the previous government, you can look back to the pre-election budget update (PEBU), which was a document prepared by the Secretary of the Department of Treasury and Finance released in the week prior to the 2014 election, and which provided an update as of the date of its release on the expected outcomes for the 2014–15 financial year as well as the forward estimates period, which ran through to 2017–18. That was the Treasury secretary's assessment of where the budget was going to be for that year having regard to all the policy decisions the government of the day had made. As an independent document it provides a great baseline against which to assess the progress and achievement of this government in relation to its budget.
When you compare the expected revenue in this year's budget — $63.5 billion — it is, as I said, almost 20 per cent higher than the PEBU forecast for 2014–15. In three years we have seen general government sector revenue increase by 20 per cent.
You would be challenged in an environment of relatively low economic growth — certainly very low wages growth across the economy — to find a household budget that has increased by 20 per cent in three years.
When you compare the estimates which were put in the pre-election budget update (PEBU), which covered, the 2014¬–15 financial year through to this 2017¬–18 budget year, the greater than expected revenue adds up to an extra $12.2 billion of effectively windfall revenue above what had been set down in the PEBU back in November 2014. Tim Pallas, as the incoming Treasurer on 4 December 2014, would have been briefed by the secretary of the treasury, Mr Martine, as to where the budget sat. Since that initial briefing the Treasurer has actually been the beneficiary of an additional $12.2 billion more than was expected when he became Treasurer in December 2014.

It is worth looking at where the state gets its revenue from. Around a third of the revenue in the state's revenue base is from the state's own-source taxation. Around half, give or take, is from commonwealth grants, the majority of which are GST-related, and then you have got the balance from the sale of goods and services, from fine revenue, from dividends and from interest revenue that the state accrues. So a big chunk from the commonwealth, over which the state does not have direct control. The GST deal was a deal by the commonwealth with the states, and the states are the beneficiary of that revenue. Certainly one of the concerns our government had was with the distribution of that GST revenue and the fact that, certainly through that period of time, Victoria was receiving between about 84 cents in the dollar up to about 94 cents in the dollar relative to an allocation in proportion with the state's population.

Victoria was consistently short-changed on GST revenue certainly through our period of government, and that is something that we were very clear with the commonwealth that we wanted to address. There are a number of inequities in the way the Commonwealth Grants Commission allocates the GST revenue to the states, for example one of our concerns was the way in which the proportion of Indigenous population was taken into consideration with the allocation of GST whereas the proportion of multicultural population and non-Australian-born population was not a factor taken into account by the Commonwealth Grants Commission in the allocation of GST.
As a consequence of that and other factors, Victoria was not receiving its fair share of GST revenue which, in our view, should have been proportional to our 25 per cent share of the Australian population.

Notwithstanding that, this government, unlike the previous government, has been the beneficiary of substantial windfall grants revenue. If you compare the actual results in the last three financial years versus the pre-election budget update, this government has been the beneficiary of some $4.3 billion in extra commonwealth grants revenue above what was budgeted in PEBU, above which Tim Pallas had reason to expect when he became Treasurer in December 2014. The government has been the beneficiary of $5.5 billion in additional taxation revenue above and beyond that which Tim Pallas had reason to expect when he became Treasurer in 2014. In total, $12 billion above and beyond the PEBU forecasts have flowed to Victorian coffers over the tenure of Tim Pallas as Treasurer, including the budget year under consideration.

I have said that approximately half of the state’s revenue comes from commonwealth grants, which the state cannot control. Other things such as interest revenue and sale of goods and services to a certain extent are beyond the control of the state. But one element of revenue which the state has very direct control over is taxation revenue, which, as I said, accounts for around one-third of the state's revenue base. We have seen in this year's budget that state taxes account for around $21 billion, so $21 827 million. 

It is worth reflecting on how that compares with Treasury's estimates from November 2014, the baseline the Tim Pallas could expect to have received in the budget year. We are seeing that around $1.8 billion in extra tax revenue will flow into Treasury coffers in 2017–18 compared to what was expected with those Treasury forecasts. In total over the three years of this government there is $5.5 billion of unbudgeted additional tax revenue that Tim Pallas and this government have been the beneficiaries of. 

State taxes are contributed by the Victorian community, be they households paying stamp duty on property transactions or land tax on investment properties or businesses paying land tax or stamp duty on property transactions; be they employers paying payroll tax on their payroll they pay their employees; or be they gambling taxes. The tax base is contributed by the Victorian community and that $5.5 billion in revenue above and beyond that which had been forecast by Treasury in 2014, the windfall gain that this government has been the beneficiary of, amounts to around $2500 for each Victorian household — an extra $2500 in taxes for each of the 2.2 million households across Victoria.

Having a tax base that has ended up across the PEBU period, being $5.5 billion higher than the Treasury forecast and $1.8 billion higher in this budget year than the Treasury forecast, is not without its cost. One of the costs of that is Victoria's competitiveness. Victoria now has, on an assessment of state taxes to gross state product (GSP), a relativity measure that compares tax revenue collected by the state with the size of the state's economy, the least competitive tax base in Australia.
Victorian taxes as a proportion of gross state product are higher than New South Wales and substantially higher than South Australia, Tasmania, Queensland and Western Australia. We are the highest taxing, on a proportion of GSP basis, of any state and territory, and that makes our economy less competitive and less attractive to investors.

One of the challenges for a government is to attract investment to the state and to attract, along with that investment, jobs to the state. If you are the beneficiary of substantial windfall tax revenue — $1.8 billion this year and $5.5 billion over the period of time you have been in government — and you do nothing to address that and you simply allow that revenue to ratchet up, you end up in a situation where your taxation is less competitive than in other jurisdictions around Australia, and that has impacts. That has impacts on employment, that has impacts on investment attraction and it is to the detriment of this state — and it is not necessary. When you are in an environment where you have $5.5 billion of unbudgeted tax revenue, there is opportunity for reduction in taxation and there is opportunity for tax reform.
It is a challenge to do substantial tax reform when tax revenue is falling. The opportunity to do it is when tax revenue is rising and when taxation is delivering windfall gains, as we have seen over the last three years and as we are seeing with the $1.8 billion windfall gain in this year's budget. But are we seeing tax reduction from this government? No, we are not. In fact we are seeing the exact opposite. We are seeing an increase in taxation in this budget. 

The Treasurer has not gone to the budget and expenditure review committee of cabinet and said, 'We have this windfall revenue, and we have an opportunity to reform and reduce taxation with the benefit of that revenue'. He has actually gone to the committee of cabinet and said, 'We want to increase taxes further'.

In fact we have seen over the course of this government and in this budget 11 either new taxes or increased taxes, and this needs to put into context. The day before the 2014 state election the then opposition leader, Mr Andrews, appeared on Channel 7 news with Peter Mitchell, who said, 'Mr Andrews, if the polls are right, tomorrow you will become the Premier of Victoria, so I want to ask you: do you give an undertaking that if you become the Premier of Victoria tomorrow, you will not introduce any new taxes or increase any taxes?', and Mr Andrews looked down the lens of that camera and said in answer to that question, 'Yes, I give that undertaking to every Victorian'. He looked down the camera and lied to every Victorian live on Channel 7 news in 2014. It was a lie because Mr Andrews, having said that, then went on to increase 11 taxes.

This very clear statement was made by the now Premier. He gave an undertaking that there would be no new taxes and no increased taxes, three years down the road we see 11 new or increased taxes under this government, when it has been the beneficiary of windfall taxation revenue of more than $5.5 billion over the period of time it has been in office.

The question that has to be asked is: why? The State Taxation Acts Amendment Bill 2017 is seeking to further increase the tax burden on Victorians and introduce new taxes such as the bizarre vacant residences land tax. The question has to be asked: why? Why in this environment where the government has been the beneficiary of not only commonwealth grants revenue and GST revenue above and beyond what had been budgeted for and forecast in PEBU when the government came to office but also substantial, multibillion-dollar windfall taxation revenue above and beyond which had been forecast in PEBU? Why are we continuing to see instead of tax reform, tax increases and new taxes such as the vacant residence land tax being introduced?

That takes me to the next aspect of the budget that I would like to focus on, and that is the expenditure side of the equation. When this government came to office in December 2014 its approach, as is indeed the approach of most Labor governments, was to dramatically increase expenditure in the general government sector. The government knew it would be criticised for doing that so it sought to insert in the budget papers some boilerplate that justified an increase in expenditure.

I refer back to the 'Strategy and Outlook' budget paper from 2015–16, which was the first budget year of this government. On page 45 it has commentary to the effect that the previous government's constraint on expenditure was somehow unsustainable given the growth in population in Victoria. It then goes on to contradict that statement by including a chart which shows that over the period of the financial years 2005–06 to 2014–15 the compound average growth rate for the general government sector was in fact 6 per cent. We had seen post the global financial crisis (GFC) enormous growth in general government expenditure in those final two years under the Brumby government, and it was only natural that expenditure growth would be constrained over the subsequent four years of the coalition government.

So having criticised the coalition government for reducing growth and expenditure from what had been in the order of 8 per cent or 9 per cent, certainly in the final years of the Brumby government, the current government then went on to show that in fact over that decade the average had been 6 per cent. But it was going to be virtuous: it was going to cut expenditure to an average of 3 per cent. The exact quote is: The 2015–16 budget begins to correct this shortfall —being what the Labor government claimed the coalition had done — with responsible growth in operating expenses of 3.0 per cent a year, as compared with revenue growth of 3.4 per cent on average a year over the budget and forward estimates — period. So in 2015–16 the government was saying, 'We'll be responsible; we'll have expenditure growth of 3 per cent'.

Last year, the 2016–17 financial year — again in budget paper 2, on page 44 — we had another statement about expenditure growth, with the government claiming it would be prudent in constraining expenditure growth. This time rather than saying the average would be 3 per cent over the budget year and forward estimates period — of course it was revised, it was higher — the statement was:The government has also met its objective to ensure that expenditure growth (3.3 per cent a year) is no greater than revenue growth (3.4 per cent a year), on average, over the budget and forward estimates.

We have gone from committing in 2015–16 to average growth of 3 per cent over the forward estimates period to in the next year suddenly an average growth of 3.3 per cent over the forward estimates period. This year, the 2017–18 financial year, the boilerplate is again in the 'Strategy and Outlook' budget paper, page 48, where it says:
Expenditure growth (3.2 per cent a year) is expected to be no greater than revenue growth (3.7 per cent a year), on average, over the budget and forward estimates.
So each year we have this commitment that it will be constrained — 'We will have a bit of a splurge this year, we will be constrained in the out years' — and the story is the same every year. We get to next year — 'We'll have a bit of a splurge this year, but we'll be constrained in the out years' — but unfortunately for the government that catches up with you. You cannot keep having the little splurges that we have seen by this government and hope to keep expenditure under control.

When the coalition left office in December 2014, the expected expenditure for that financial year was $51.9 billion — $51 919 million. The expected expenditure for the budget year we are considering this evening is now $62.25 billion. We have gone from less than $52 billion to more than $62 billion in just three years. This government have promised to keep expenditure growth constrained at 3 per cent or 3.3 per cent or 3.2 per cent, depending on which year you listen to them. In reality, when you compare the expected outcome from the pre-election budget update for the 2014–15 financial year through to where the government is now forecasting to be at the end of the 2017–18 financial year, that has been an average of 6.2 per cent — double the promised rate in expenditure growth. They claimed it would be 3 per cent over the forward estimates. In fact when you do the numbers it is 6.2 per cent over the period to date and into the budget year.

If you look at the current year, the 2016–17 year, the expenditure growth is now forecast to be 9.8 per cent higher, or almost 10 per cent higher, than it was for the previous financial year. It is an extraordinary increase and an unsustainable increase in a 12-month period.

We talk in large numbers — $62 billion or $50 billion, as it was under the previous coalition government. Let us make that relevant to Victorian households. The $62 billion that this government says it is going to spend in 2017–18 across 2.2 million Victorian households is equivalent to $28 000. The cost of the Victorian government in 2017–18 is $28 000 for every household. 

Over the three years of this government we have seen just under 20 per cent growth in expenditure. How many households in Victoria can say they have been able to increase expenditure by 20 per cent, or 19.9 per cent, in just three years? To put that in relative terms — the size of the Victorian government compared to the Victorian economy, the expected outcome for 2014–15 suggested that expenditure in Victoria was around 14 per cent of gross state product. For the current year it is up over 15 per cent. It does not sound like a lot, but it is an 8 per cent increase in the relative size of the Victorian government spend compared to the Victorian economy in just three years, and obviously it is a trend which is absolutely unsustainable into the future.

We get commitments from the government and undertakings from the Treasurer that, 'This is our one splurge year. We will come back to a more sustainable trend of 3 per cent or 3.3 per cent', but it does not happen. The history of this government over the last three years shows it does not happen, when the average is more than 6 per cent and for the current financial year that we are coming to the conclusion of it has been close to 10 per cent.

While we have seen a more than $12 billion increase in unbudgeted revenue over the three years of this government, the extra spending which has occurred above and beyond that which was forecast in the pre-election budget update is now more than $16 billion — $12 billion in windfall revenue and more than $16 billion in previously unbudgeted expenditure. One of the biggest elements of that has been the growth in the size and cost of the Victorian public service, with employee expenses up by more than 24 per cent in just three years, also a trend which is absolutely unsustainable.

It should serve as a warning to the government. One of the things the coalition government experienced in its four years in office was softening revenues. The economy is cyclical, the property market is cyclical and the employment market is cyclical. The way in which the commonwealth deals with the allocation of grants to states changes, and we consistently saw through that period of office the forecasts by Treasury needing to be regularly downgraded, as the property market was not generating the turnover in terms of volume, it was not generating the growth in prices that Treasury had expected and the forecast in stamp duty had to be revised down and land tax revised down. Certainly GST forecasts were revised down as the Commonwealth Grants Commission reapplied its formula.

So while the government may think this windfall revenue will continue forever, history shows it will not. But the challenge is that the expenditure has been built into the base. The government has not taken this windfall revenue that it has received and used it for a capital program; it has allowed that revenue and an additional $4 billion to become basic expenditure for the state — an extra $16 billion over three years. The challenge then as the cycle changes, as the revenue falls below the forecast growth, is for government to respond to that with interventions on expenditure or taxation.

So this government has had the opportunity with the windfall revenue growth to make changes and to make reforms, particularly on taxation, to use that revenue for infrastructure investment. Instead it has chosen to boost baseline spending, which will just create structural problems for future governments.

The bottom line item that we often talk about with budgets is of course the surplus, the balancing item — the difference between expenditure and revenue. Of course if you increase your expenditure more than your revenue, as we have seen with this government — compared to the pre-election budget update, an extra $12 billion in revenue and an extra $16.5 billion in expenditure — you will see a smaller surplus.

And why is this a problem? Well, it is a problem because the surplus plays an important role in providing a buffer to the state — the capacity to absorb shocks. When you see GST revenues reducing below forecast, when you see stamp duty revenues fall below forecast, having a buffer in your surplus to absorb that means you do not have to take substantial interventions on expenditure or revenue on a six-monthly basis as the budget update cycles come through. You have got the capacity to withstand those shocks and corrections. If you have a decent surplus, you have the capacity to fund an infrastructure program without substantial increases in debt, and the coalition government has committed to a $27 billion infrastructure program over the course of its term in office.

But because of the expenditure patterns of this government, notwithstanding that massive windfall revenue gain we have actually seen the surplus shrink. It is down by $4.2 billion over the forward estimates period. The first year of this government, the 2014–15 year, we had a deficit — as accounted for by the Auditor-General — of $286 million, and we have seen aggregate surpluses over the subsequent years down by $4.2 billion. For the current financial year, the 2017–18 year, the surplus, notwithstanding the extra billions, in revenue, is $1.8 billion less than was forecast by the treasury back in the pre-election budget update.

If a government wants to continue to build infrastructure and it is reducing its surpluses because it has either had soft revenue or, in the case of this government, a massive blowout in expenditure, then it needs to resort to increasing debt. That is what we have seen in this budget. We see that with the reduced surpluses the general government net debt — in the budget year 2017–18, is now $23.79 billion.

The previous government had committed to reduce net debt as a proportion of gross state product and to reduce net debt in nominal terms as well. That trend has now changed, and we are seeing as a consequence of the reduced surpluses an increase in net debt, which in nominal terms in the 2017–18 year will be 21 per cent higher than was forecast in the pre-election budget update. 

So where we had a declining trend in nominal terms under the previous government, we now see debt increasing in nominal terms and also increasing as a proportion of gross state product. By the final year of the forward estimates period, 2020–21, we will see state debt forecast at $28.9 billion, which is a further 21 per cent increase on what it is going to be in the current budget financial year, with no indication that that trend beyond the published forward estimates period will reverse and start to decline in nominal or even in proportional terms to the Victorian economy. 

This government has produced a budget which does not have a strategy. It does not set out a vision for what the government seeks to achieve for the Victorian economy or for Victoria more generally. It does not set out a strategy on how it will deal with things such as population growth or how it will deal with the changing mix in the Victorian economy, with changing geography and job locations, with the changing industry mix and with the change in the skills mix that can be expected across the economy.

We have seen massive windfall revenues over the last three years which have not been used for structural changes to the budget. The opportunity for tax reform has not been taken. The opportunity to use those windfall revenues for infrastructure investment has not been taken. We have seen it simply flow through to the expenditure line with massive increases in expenditure, particularly in public sector employment, without addressing the opportunity for reform. So we have a budget which sets up problems for future governments. It is a budget which builds in structural weaknesses which will become evident as the revenue cycle turns.

The shadow Treasurer in the other place was charitable about this budget. He said that the best thing about this budget, the third budget of the Andrews government, is that it means that there is only one more budget before the election — before the Victorian people have the opportunity to pass judgement on this government, to pass judgement on the way in which it has used $12 billion in windfall revenue, the way in which it has increased taxes, the way in which it has failed to undertake structural reform of the budget with that massive opportunity that has been afforded it by that windfall revenue and the way in which it has failed to use that windfall revenue for infrastructure investment rather than for bottom-line expenditure.

I pick up the interjection of Mr Dalidakis, who obviously does not read his own government's budget papers. If he were to read his own government's budget papers, he would see that over the forward estimates period where the government has accounted in a line item for infrastructure investment there is no doubling in infrastructure investment compared to that which was already in the budget under the previous government. There is no doubling at all. We have seen debt increase, but we have not seen a doubling in infrastructure investment.

This budget does not deliver for the people of Victoria. It builds in structural problems which future governments will need to address. It wastes the opportunity of having windfall revenue and it fails to deliver the vision and the strategy that Victorians and the Victorian economy need for the 21st century.

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