Vic budget crumbles on falling stamp duty receipts

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By Leith van Onselen

This year’s Victorian State Budget predicted that the state’s second biggest source of tax revenue – stamp duties on property transfers – would take a -$624 million hit in the 2011-12 budget year before recovering by $162 million in 2012-13. Land taxes, on the other hand, were forecast to fall only slightly in 2011-12 before recovering strongly in 2012-13 (see below chart).

It won’t be a surprise to MacroBusiness readers, but it has now been revealed that the Victorian Government had been way too optimistic in its stamp duty forecasts, with the Government today expected to announce big cuts to stamp duty receipts on the back of the weak Melbourne property market. From The Age:

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VICTORIA’S budget has been king-hit by a collapse in revenues of almost $1 billion, forcing the Baillieu government to consider inflicting further spending cuts or tax increases to deliver its promised surplus.

Updated budget figures to be released on Friday are believed to reveal a precipitous drop in stamp duty collections compared to predictions in the May budget – suggesting the housing market could remain soft for some time despite low interest rates.

The alarming downgrades will make the task of delivering a promised minimum $100 million annual surplus even harder. Just seven months ago the government predicted a $155 million surplus for the current financial year.

But the updated budget figures will show predictions for stamp duty collections have been slashed by $285 million for 2012-13, with a loss of almost $1.2 billion over four years…

Since the Coalition came to power in late 2010, estimates of GST collections have been downgraded by an extraordinary $6.1 billion over four years, while stamp duty forecasts have been cut by almost $2.7 billion.

The budget update will warn that solid economic growth has not brought the revenue gains normally expected, in a sign that Victorian households are paying back debt rather than spending amid ongoing worries about the global economy…

The weakness of the Victorian (Melbourne) housing market has been well documented on this site, with the slump in stamp duty revenues caused not just by falling home prices – down by around 9% since peak according to RP Data – but also collapsing sales volumes (see below chart). With stamp duties levied on housing transactions, this combination of lower prices and sales volumes is a toxic mix for the state government, which has become overly reliant on stamp duty receipts to fund the budget.

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The point about Victorian households paying back debt rather than spending is also captured in the Department of Sustainability and Environment’s mortgage statistics, which show that the annual number of mortgage discharges have outnumbered the number of mortgage lodgements since March 2012:

With budget revenues continuing to fall, there is now the risk that the state government will make further cuts to spending and jobs in attempt to return the budget to surplus. Such moves would further weaken the Victorian economy, which is already in technical recession following two consecutive quarters of negative growth in state final demand.

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Twitter: Leith van Onselen. He is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.