Victorian troubles

In my recent budget analysis piece I spoke about public final demand.

Forecast 6: Public final demand, having risen strongly in 2009‑10, is forecast to moderate in 2010‑11 and 2011‑12, reflecting the unwinding of the Government’s fiscal stimulus measures and a broader moderation in spending growth across other levels of government.

Analysis: I am going to give them a tick for this one, but at the stage the country is at in the economic cycle I am not sure that is a good thing. With the loss of government stimulus spending and the mandated aim for a surplus budget this was a bit of a no brainer. The problem however is that there are major flow-on effects from this forecast success. The natural disasters in Queensland, NSW and Victoria have led to significant budget issues for the State governments. On top of that we have the slow down in housing sales which again adds to the state’s woes. Victoria has been served a double whammy in regards to this but they are not alone. In my own State of Queensland I am aware that government departments have been asked to find significant savings ( 15% + ) in next year’s budget. I suspect this will mean large falls in corporate expenditure. The private sector may not have noticed yet as projects rush to meet their June 30 spending deadlines, but after July 1, I think many IT, HR and finance consultancies are in for a rude shock as state government contracts suddenly dry up.

And in the conclusion I stated

From Mr Swan’s speech today, I detect that he doesn’t quite understand what the problem is, and I see little evidence that the government is about to launch into another stimulus program to kick start credit. In fact, the reverse is clearly true. As I said in my analysis of Forecast 6, this lack of new stimulus will have significant flow-on effects to downstream economic participants.

As I have talked about recently the states are at the front line of the down turn in housing and they are also about to wear the flow-on effects of the Federal governments push to surplus. Today I note Victoria has joined the queue.

The state government will be forced to borrow to pay public servants’ wages unless it dramatically pares spending in the budget, an independent analysis of the state’s finances has concluded.

The finding comes as Treasurer Kim Wells puts the final touches on next week’s budget, with unions and the welfare sector braced for deep cuts as the government struggles to free up cash to deliver $5.2 billion worth of election commitments.

The report, by three leading public finance experts, also reveals the budget has been in deficit by about $1 billion for each of the past two years – a fact that was ”obscured” because billions of dollars of federal stimulus spending had been added to the bottom line.

The report, commissioned by the state government after the November 2010 election, also warns Victoria is ”not well placed to withstand another material financial shock”, with unsustainable spending, rising debt and a huge infrastructure spending shortfall.

”Without a change of direction, the future financial position will be characterised by an undesirable combination of negative net operating balances [deficits] and an increasing accumulation of debt.”

It said government spending on infrastructure would need to ”increase substantially” by about $2 billion a year to keep pace with population growth and meet public expectations for better services.

”This will present a considerable fiscal challenge in the face of the state’s current financial position,” it said.

Despite Victoria’s budget surpluses over the past decade, it said Treasury’s ”accounting treatment” of billions of dollars of federal stimulus spending, including cash for school infrastructure, had ”obscured” $1 billion budget deficits this financial year and last.

In a blunt warning to the Baillieu government to cut spending and pay down debt, it said on current trends the budget was heading for a deficit of $6.5 billion by 2021, and by 2015 the government would be unable to meet everyday expenses such as wages without borrowing.

Borrowing to pay wages? California here we come !

You can see from RPData’s transaction graph that the real estate sales volume in Victoria is sharply trending downwards and that means significantly less revenue for the Victorian government. ( Please see a recent post by the unconventional economist for more on this topic)

On top of that you have the lack of new stimulus from the Federal government and let us not forget the GST.

A slowing national economy is set to slice another $1.5 billion off Victoria’s GST payments. In the latest blow to the state’s finances, Treasury officials have told the Baillieu government to expect a sharp fall in revenue due to a weaker-than-expected economy.

The advice has been factored into budget projections and is on top of the $5bn setback outlined in last week’s pre-budget Treasury announcement. This means the government will have to plug a $6.5bn hole in the state’s finances over the next four years while dealing with a slowdown in the economy.

The Australian believes the state Treasury is telling the government that growth nationally is looking “much weaker” and that consumers have become more frugal while investment has shrunk. It is almost certain that Victoria will record — and forecast — significantly lower growth just as the Gillard government prepares to make some savage cuts.

The Victorian government seems to have little choice but to cut back spending which once again will have a flow-on effect to the broader state economy. You never can tell which path a politician will take, but from where I am sitting Victoria looks like it will be joining Queensland on its way to WA on the island of recession.

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  1. As a resident of Melbourne I read this report in today’s local papers and cringed.

    Not wanting to get political here, but it seems like the former Labor Government were playing porkies with the actual budget figures for the past couple of years.

    Given the massive blow out in costs (Desal Plant, Myki Ticketing fiasco, IT screw ups with the Health and police databases just to main a few) – lots of money wasted with bugger all delivery I might add, I kept wondering how the books could be balanced.

    Honestly, it’s a lot like constantly borrowing money from Mum and Dad for a year or two and then telling the bank everything is just dandy with your income and expenses.

    Sometimes I weep for this place. Grim times ahead again. Even worse when you understand how much Gov. income is based on (declining) property taxes…. urrrgh.

    • >Given the massive blow out in costs (Desal Plant, Myki Ticketing fiasco, IT screw ups with the Health and police databases just to main a few) – lots of money wasted with bugger all delivery I might add, I kept wondering how the books could be balanced.

      Thank you for reminding me about government IT projects. I need to do a post on this, as it is a constant trend and something I have quite a lot of experience with.

      The “Myki Ticketing fiasco” is something I can’t even comprehend.

      In Brisbane we have the “go card system” which I believe is based on a south korean system. Lots of people complain about it, but it is a integrated card for all public transport and in my opinion works as well as any other I have used ( Japan, South Korea, UK ).

      I will never understand why the first phone call from any government department isn’t a call to other Australian Authorities with the words “Hey what have you guys got? Does it work?”

      • Without giving away too much a few years ago I presented to a Qld dept about a transport etc and options and international experience etc. The dept wanted to beat Vic and NSW – easily done – but didn’t want to learn anything from those states directly. It was simple competition between states so it allowed for wastage. Some commentary in that meeting I cannot divulge but it did not reflect well on the key folks.

      • >> I will never understand why the first phone call from any government department isn’t a call to other Australian Authorities with the words “hey what have you guys got? Does it work?”

        DE i’ve wondered that so many times as well – I guess it is too practical, straightforward and obvious to do that. Oh how I would love a politician to think AND ACT in this manner.

      • Agreed. As long as there is a proven turnkey system available I struggle to see why a government/business would spend insane amounts of cash building something from scratch. GoCard has its flaws but having used it for a few years now I certainly can’t complain. However QLD can’t really hold its head up high after QLD Health managed to mess up their new HR system. The mind really does boggle at that one.

          • Please do. And don’t forget to mention the lunacy of completely transitioning to a new payroll system without first running it in parallel with the existing system (with small numbers of people) to ensure it actually functions correctly.

            The ridiculous amounts of money spent on other Qld govt systems can also easily be targeted in an essay.

      • The problem with Myki as I understand it was that Victoria has something in the order of 40 different transport ‘zones’ across the state and the Govt wanted the new card to work across all of them, so had to get something purpose built due to the complexity.

        Why they didn’t instead take the opportunity to simplify that mess into <5 zones and then use a bog standard off the shelf system makes me very angry everytime i think about it..

          • never said it was a GOOD reason to go it alone, but I remember reading it as a justification in the early stages. somewhere around the $800m to $1bn stage of the project..

            Surely they’re overcomplicating it somehow though, even if you started with a blank sheet of paper you could build a full oyster card system for less than $1.5bn?

        • Just about everything about Myki that could be wrong IS wrong. Down to the hopeless website top-up that tells you at the end of the process that the funds won’t be available for 24 hours, and the scanners that take too long, if they’re even working. I fail to understand the mentality behind the whole thing, which seems to have been to deliberately make it as huge and complex as possible: why didn’t they content themselves with a card for Melbourne transport? There was simply no need and no clamour by the public for a card that covered the whole state with all its local bus systems and intercity trains which all go to Melbourne.

      • Totally agree. Given that you can go to Singapore in about 8 hours and see how it can / should be done. Hong Kong, Japan, London, even Perth have managed to roll out a pretty darn good system at a decent price.

        The really awful thing is, even though Myki is now mostly functional (years late, still buggy and millions over budget) hardly any commuters are actually using the system. Maybe 20% of commuters would be generous and everyday you see people having problems with the cards at the stations and hear stories of constant foul ups and weirdness.

        It would almost be “Yes Minister” amusing if it wasn’t our money they have wasted.

        Sheesh! Sadly there are numerous other classic infrastructure & IT SNAFU’s of a similar scale and cost.

        • The reason why I’m not using it yet (other than the reliability issues) is that you need to identify yourself to buy one. Being tracked every time I use public transport is a little hard for me to sign up for.

          • Good point – you can buy an Oyster card at any London tube station within 30 seconds and use it immediately, and the next time you’re in London, and the time after that. The implementation of Myki has been well nigh idiotic. Most people are still using the Metcard, if they’re paying at all.

          • Absolutely, There’ that and $10 charge to be provided with the ticket. $10 for nothing – If I had to get one for each member of the family that is $50 for 5 RFID cards with NO credit on them. In Singapore it is only $1 for an actual temp smart card ticket and it is fully refunded at the other end of the journey.

            The tickets are also not transferable according to the transport act. This in theory means if I am not using a perfectly valid Myki ticket that day and give it to my wife, she can be fined for using ‘my’ ticket. Absolutely stupid.

    • Declining property taxes??? How can that be–ever since I moved to Australia I have been told that there is a shortage of houses because of migrants like me.

      The government can now argue that we no longer need negative gearing as there is clearly a surplus of homes in Australia. Low auction rates and high stock levels show that supply is much greater than demand.

  2. We don’t have a recession in Australia. What we have is runaway inflation. We need an immediate rate rise of at least 50bps! Just ask Adam Carr.

  3. Rather than keep borrowing money on the public credit of the Commonwealth through the issuance of bonds, why can’t parliament just legislate and issue digital credit into the system (federal or state) under Section 51 part xii and xvi of the Australian Constitution?

    There would be no interest component on the funds put forward for tendered public works and as the government collects revenue from the business activity generated, it can remove it from the system or reissue it for other projects. We would have infrastructure fully paid for by the people’s money, which if applied to in the right areas, should add to an increase in economic efficiency.

    Does this seem too simple or have I missed something? I understand it would be inflationary initially, but better than the noose of debt (with interest) in the long run in my opinion.

    • Inflation is still effectively a tax, just a sneaky one.

      What you are proposing is the govt putting itself before the people it is supposed to be serving.

      The inflation ould firstly be greater than expected, and would effectively be wealth transfer from the people to govt.

      I would personally prefer debt, if we had to go down the govt-does-stuff route.

      My 2c

      • When this nation borrows money it needs to place collateral into the hands of international financiers and investors. We won’t need to do this with credit.

        I disagree with the Government putting itself before the people with the issuance of credit. They already do this when they borrow money and mortguage the future of my children and their children.

        The assets will be owned by the nation and not by the represented government.
        We must not forget that government has been placed in a position of trust. If they violate this trust then they should be held accountable. ‘We the people’ have the real power.

        As I said before, this will be inflationary in the beginning but better than the long term debt burden which creates a massive cost blow-out over the long term.

        That’s my 1c worth 🙂

  4. michael francis

    The Australian transport ticketing company, Erg, developed the most advanced smart card public transport ticketing system about 15 years ago with instalations in Singapore, Hong Kong (the Octopus card), Stockholm, Washington, San Francisco, France, Beijing, Mumbai-the list go’s on.Won many prestigous awards for its ticketing systems.
    Company did well until the NSW Government destroyed it.
    Motto of the story, don’t invest anything that relies on State Government funding. You’ll lose the lot like I did. Anyway, off to mum and dad for a handout.

    • Amazing.

      A high skill company that earned export dollars.

      They probably didnt rent an office from a Frank Lowy owned company however. The deserved to die.

  5. At the risk of repeating myself, Melbourne is a catastrophe waiting to happen: Huge run up in prices in 2009-10, super generous first home owner bribes, massive apartment overbuild, manufacturing and education decimated by the dollar, stalling population growth, rapidly rising cost-of-living (petrol, food, utilities). Its gonna get ugly.

    Victoria is an economic horror movie that’s only 5 minutes in.

    • I agreed x1000.

      Totally pro-cyclical and highly leveraged. No nuts and bolts core industries to provide robust support in a downturn.

      The unwind will be extremely ugly.

      I sit in Luxembourg and admire the madness. But when I return home, I fear I’ll be crying too… and unemployed.

  6. michael francis

    Don’t forget to mention that the new Premier of Victoria is an ex- Real Estate agent.

    • holy shiite, now we’re all stuffed. THis guy is going to try and keep all his buddies from going broke at the expense of the state.

  7. he better Not ban bongs thats all im saying…LOL Victoria should legalise marijuana, tax it and that will provide the billions it needs. Add herion and coke and vic richer than most countries and the taxes come from people who will be happy 2 pay them….i shoulda been premier, oh and id scrap income and property taxes as well and just have GST i know tu would all vote 4 me.