Victorian budget takes a hit

By Leith van Onselen

Recent macroeconomic data coming out of Victoria has been poor.

Since house prices peaked in the June quarter of 2010, Victorian economic growth, as measured by state final demand, has severely underperformed the national average, growing by only 1.8% in real terms since June 2010 – less than population growth:

It’s a similar story with employment. Over the past 12 month’s, total employment has fallen in Victoria by -1.2% (-33,600) compared with 0.2% (22,300) of jobs growth nationally:

Melbourne home prices have also been falling, down -5.4% over the past 12 months according to RP Data:

And we know from the State Government’s data that property transfers aand mortgage growth are in the doldrums too:

Now the worsening macroeconomic conditions are adversely impacting state government finances, with a Victorian Treasury budget update revealing that Victoria recorded a $341 million deficit during the second half of 2011, compared with a surplus of $482 million over the same period in 2010 [my emphasis]:

The state budget has fallen deeply into the red as the strong dollar, a housing slowdown, international uncertainty and job losses hit the bottom line…

Treasury warned the results were an “imperfect guide” to the 2011-12 financial year, because they did not include revenues increases that tend to be recorded during the second half of the financial year such as land taxes, or delayed payments from the Commonwealth for the regional rail project and the Victorian Comprehensive Cancer Centre project.

But the report said the economy was facing “headwinds” including the strong dollar, which has dramatically cut the competitiveness of local manufacturing. Treasury also said employment growth had softened, while fewer house sales was crimping stamp duty collections.

“Weak consumer sentiment is also dampening consumer demand, which has been reflected in the relative poor performance of the retail sector,” it said. “These conditions have translated into a softening of State taxation revenue and goods and service tax receipts.”

Today’s news comes after The Age last week reported Victoria was on the brink of recession and South Australia and Tasmania were already in one.

The figures suggest the state government is facing an uphill battle to deliver on a promise to produce surpluses of at least $100 million. Stamp duty collections were particularly weak, with the government collecting $1.7 billion during the final six months of 2011, compared to $2.1 billion in the same six months of 2010.

The last point – the reduction of stamp duty receipts – is key to why the Victoria Government’s finances are under pressure. Victoria has the highest level of stamp duties in the nation, with around $21,000 payable on a median priced house:

Over the past decade, as Melbourne’s home prices skyrocketted, stamp duty and land tax receipts rose significantly, from around $1.3 billion in 1997-98 to around $5.3 billion in 2010-11:

With property prices and stamp duties growing strongly, property taxes’ share of total tax revenues rose sharply, from around 15% in 1998-99 to a around 36% in 2010-11:

The explosion of property tax receipts on the back of the booming housing market also enabled the Victorian Government to maintain a surplus in spite of strong growth in government employee wages and salaries:

However, now that transaction volumes have slowed significantly, and home prices have fallen, stamp duty receipts are on the decline. The most recent Victorian Treasury Budget Update revised down the State’s stamp duty receipts by $116m in 2011-12 – a forecast that seems wildly optimist given the above report of a $400m decline in stamp duty receipts in the second half of 2011 compared with the same period in 2010:

The Victorian Treasury has also ambitiously forecast that the decline in stamp duties will be a temporary blip only, with stamp duty receipts expected to hit new highs of $4.1 billion in 2014-15, an increase of $213m on 2010-11 levels.

An added worry for the Victorian economy is that dwelling construction, which has for so long been a key driver of employment and growth, is beginning to fall from record highs, although it still remains elevated:

Should the downward trend in dwelling construction continue – and I see no reason why it wouldn’t given Victoria’s relatively high rental vacancy rate (currently 3% according to SQM Research), elevated stock on market, and plummeting new home sales – there would obviously be further negative consequences for employment, growth, and Government finances.

Expect State Government finances to worsen from here.

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Unconventional Economist

Comments

  1. I’ll been waiting for awhile, but I’m still looking forward to the political justifications of continued land tax rises (to compensate for the stamp duty shortfalls) while property prices fall. But I can’t see any way around it, particularly as the State Govt cap in hand pleas for further Fed Govt handouts are being met with silence (along with the budget surplus forecasts).

    But outside of WA these State Govt Treasuries are going to have to find cash somewhere to cover these 9 figure revenue shortfalls.

    • Lothar Grosserschlongen

      Might be time to get our speedometers calibrated……

      I’m predicting a flood of new speed cameras.

  2. I’m noticing more empty buildings and ‘closing down sales’ around Melbourne lately. Also the vitamin store where I used to buy my vitamins has gone bust and was replaced by a ‘for lease’ sign. Our triple drivers of housing and population and credit are all exhausted. The Victorian economy needs a new driver.

    • Was that “Vitamin Me” by any chance, Sherlock? They appear to have quietly gone bust – I can’t even find them on the internet any more. Their shop in Chapel Street Prahran has been empty for months – obviously the landlord wants too much in rent.

      • darklydrawlMEMBER

        I knew they were in a spot of bother, but I hadn’t noticed their online site was gone… Wow…

    • Friends leased a shop in Chapel Street 6 months ago(small chain) for half the previous lease amount.
      They may do even better as the market worsens.
      Js

  3. darklydrawlMEMBER

    Thanks Leith,

    As usual – excellent analysis. Victoria (Melbourne especially) has had the writing on the wall for the past 18 months or so. I called early, but I usually do on these things.

    I am not seeking work, but I still get a daily job vancany list from Seek and I have noticed it has gone from dozens of options down to a handful over the past month or so.

    Today there were a total of 4 positions advertised that matched my filter. It was really only 2 as one position was advertised 3 times. This is a huge change over the past few months when there were many more adverts.

    Speaking with some local business owners last week and they all said the bottom has fallen out in the last few months. No-one they said was spending, unless it was for an ‘occasion’ (b’day, wedding, whatever).

    Melbourne has much further grimness to face yet I feel – still early days.

    • daily job vancany list from Seek and I have noticed it has gone from dozens of options down to a handful over the past month or so.

      Same here. Daily SEEK e-mail used to average about 15 new jobs a day last year — this year it’s about 3 or 4. Victoria is playing Ireland to WA’s Germany.

  4. Surely, the best example of a need to move to a comprehensive Land Tax based system of revenue collection? The revenue is there ‘year in/year our’, then regardless of property market transactional volumes.

  5. thomickersMEMBER

    This is karma for having the highest stamp duties in the nation. High stamp duties on housing by government IMO is a one-way long bet on endless increases in tax collection on 1 asset class.

  6. State governments all over the country are desperate… but here in Victoria the situation is particularly bad. Ted is very dependant on Stamp Duty to fund the bottom line (as per your charts above) and also most of the revenue increases in the last ten years have been due to the rocketing house prices in Melbourne – presently we are being hit by the double-whammy of reduced turnover combined with saggy prices therefore plunging the bottom line into the red (as discussed).

    Expect deep cuts to government programs in the next twelve months as well as steep increases in prices of services – we’ve already seen public transport fares go up by 9 percent (more than double inflation); expect rego, stamp duty, traffic fines and all the other state government fees to accerlate by the same percentage.

    I can’t see how we can avoid a steep rececession in the coming few years given all the fundamentals point towards decreasing revenues and cuts in services.

    • Rego has already gone up, my rego is one hundred bucks more (each vehicle) than last year on both my motorcycle and car.

      • I don’t own a car any longer (as a cost-saving measure and also the fact that I live in one of the most public transport saturated areas in Australia); however I have noticed that public transport has been getting worse lately, particularly the trains. Prices have gone up and sometimes the trains are so ridiculously overcrowded you can’t actually get on. My personal fear is that in five years we’ll be paying through the nose for less and less… for everything.

    • Waynes Black Swan

      ACT’s not much better and things are only going to get worse after the Federal and local budgets. All the small Depts have announced cuts; the big ones are yet to come.

  7. Procyclical model of govt funding – rising property prices = more govt revenues, more demand in the economy, repeat…

    But once it reverses, bust time as the govt will have to contract, reducing demand at the worst time. And not much scope for stimulus as whod want to risk the AAA rating in this macroeconomic climate?

  8. Emphasises the reliance across the country on property related revenues – all else small cheese in comparison.

    (Jeez – over $1billion in revenues from gambling and fines! Who said crime doesn’t pay…)

    • The gambling revenue makes me sick. As an avid punter (poker mainly but some sports betting when Im bored), I refuse to gamble anywhere but online.

      The house odds/rake at crown are extortionate. It’s easily 4x more expensive than casino’s in the US and Maccau and they charge bar prices for alcohol while your at the table, then have one maybe two waiters serving 20 tables!

      Horrible, horrible, horrible.

    • darklydrawlMEMBER

      Heh… Since we have dug up most of the gold in the 1800’s, the Vic Government has started money mining instead.

      Actually the Gambling thing is evil. The bulk of the money comes from a handful of problem gamblers.

      The Government makes occasion limp noises about how awful this is and ‘something’ must be done, but in truth, they are hideously addicted to the revenue and can’t stop, even if they wanted too.

      • State Governments – just another vested interest – makes you wonder if pressure on the Gillard government to exit the Wilkie deal came from quarters other than the pokie industry alone…

        The reference to ‘crime doesn’t pay’ was in relation to the laundering long acknowledged to take place in gambling houses – how many smallish problem gamblers would it take to match this bloke (and again note the range of vested interests):

        http://www.theaustralian.com.au/national-affairs/opinion/unwatched-star-a-glittering-high-stakes-gamble-for-government/story-e6frgd0x-1226295369670

        • “makes you wonder if pressure on the Gillard government to exit the Wilkie deal came from quarters other than the pokie industry alone”

          I’ve been convinced of this for a while.

        • I agree with you on this one MineBot. Its a miracle the Wilkie deal got as far as it did with state governments so addicted to pokie revenue.

          Say what you like about Wilkie (and Xenophon) but I reckon he’s a man of principle who stood up against incredibly powerful vested interests. Sadly Gillard caved. Very disappointing.

      • Actually, the bulk of the money comes from mega rich international high rollers and average punters that know how to control themselves who just want a bit of fun on the weekend. At least that’s the Casino.

        Problem gamblers make up a much smaller percentage of the profit/population that many would have you believe. In my view ‘problem gambling’ is just an excuse to prevent further casino’s being built that would increase competition and drive down prices. The vast vast vast majority of punters are perfectly capable of controlling themselves.

    • How much does WA get from mining royalties? I doubt that is “small cheese” and I doubt Victoria raises much in the way of royalties.

        • So more than Victoria raises from stamp duty for a state with a much smaller population. Not a bad little earner eh?

          While I’m not defending Victoria’s reliance on property taxes in any way, its pretty clear that the Victorian budget (and economy) would be in much better shape if Victoria owned some valuable dirt.

          Are we going to sacrifice the states of Victoria and Tasmania in the name of the mining boom? Is that a reasonable price to pay? How do Victorians and Tasmanians feel about this?

          • How do Victorians and Tasmanians feel about this?

            Probably the same way the Greeks, Irish, Portugese feel.

          • Probably the same way the Greeks, Irish, Portugese feel.

            Perhaps they should exit the AussieZone?

            MattR: That link is broken. If its true, WA must be doing something very wrong.

          • Lorax, the article refers to post GST redistribution – WA lowest return to State in the nation, recently mooted to go to something like 57c (if I recall correctly). Coincidentally, the GST redistribution was to be a point I also was to make.

            Link not broken.

          • The Victorian government is welcome to put 4×2’s on 650sqm for $190k if it wants.

            I’ll take my wife and children from Perth and be a taxpayer there if they like.

          • Link worked for me, Lorax. The gist of the article is that GST revenue is distributed more to states with lower royalty revenue (surprise). That is what happens when you have a federation and a method of equalizing income between states.

            But it does mean that Vic and Tas profit from the mining boom just as much as WA does.

          • Link working now.

            Alex Heyworth: Yes, I was about to say, WA gets all the jobs, Victoria gets welfare.

            Its a great example of the Australia’s future if the mining boom persists: A welfare state supported by mining income. Perhaps we should just put the entire south-east on welfare?

            No doubt this is the kind of wealth redistribution that infuriates Gina and Twiggy, but all I can say, is Thank Christ for fiscal equalisation. Without it the south east would be in a depression.

  9. Diagnosis of Victoria’s economic under-performance might be a little too property centric? There are some well publicized difficulties facing education as well (e.g. http://www.theaustralian.com.au/higher-education/bn-hit-to-economy-as-foreign-students-slump/story-e6frgcjx-1226291242474), though one can argue to what extent is the education industry the immigration industry?

    However, Victorian economic under performance seems clear. Strange that there is very little alarm in main stream media and public discourse about the causes and solutions though!

    • In regards to land tax, is there a potential for structural impediment?

      Rationally, the populace would be keen to have have land prices minimised, and that is a good thing.

      However, if a government becomes structurally reliant on land tax as revenue, and these come up short, what is the proposed response from the government?

    • David – I watched your video – quite good, despite the rather droney narrative – I do think your idea of a 6% land tax creates cash flow problems for households though. What about retirees like my grandparents who buy a house in 1963 and work hard and pay off the house so they can retire on the pension, the house happens to be worth $1m+ but they don’t have the cash flow to pay $60k per year! How does that work? Is it an untintended consequence of the land tax that those that are cash flow poor are forced to downsize??

      • Ah, the teary widow argument.

        LVT applies only to the land component, not the house, so they are up for less than the number you suggest.

        When the property is sold (that’s when, not if) there will be no Stamp Duty. They will be able to move around the corner to a modern single level house with no steps for the cost of an agent.

        Actually, it goes much further. LVT pays to remove all the 125 taxes Ken Henry was ever so rude about. A significant deadweight burden would be lifted from the economy by eliminating much of the tax administration and compliance/minimization/avoidance accountant’s business (no, I’m not sorry for them).

        I remind you we struggle to achieve 0.5 per cent annual rises in real earnings. Ending many of the disincentives to work and enterprise would galvanize the economy while costs would fall considerably. Your aged P would benefit.

        Now let me be rude: Arguments led by active adults about disadvantaging granny are largely motivated by their expectation of a windfall gain when one’s beloved goes to join her ancestors. Somehow, this craven lust for lolly trumps a good tax system and a dynamic economy.

        No one wants to hurt the elderly with punitive taxes, least of all me. There a a number of ameliorative measures that could be taken, the final design of which would be a matter for Treasury.

        • Spot on David

          I doesn’t sound that nice, but one of the benefits of a broad based land tax is that it helps transfer land to more productive users.

          If a couple of retirees are cash poor and living on a $1 million block of land in the middle of the city, doens’t it make sense for them to move to a property with twice the amenity for half the price in the suburbs (which incidentally also frees up $500k to finance their retirement). The property will be purchased by someone with the disposible income to finance the land tax, and who also values living close to the city more highly than the retirees. Sounds like a good outcome all round.

          Unfortunately, under the current system, instead of a stick (land tax) pushing the couple to downsize, we have a different stick (stamp duty) encouraging them to stay put.

          The “losers” from the shift to land tax are the retirees kids, who won’t like it the loss of inheritence, but if a nest egg from your parents is a key plank of your financial plans then you’re just not taking proper responsibility for your own financial future.

          If a Government was ever to look at going down this path, one significant challenge would be to manage the transition from stamp duties to land taxes. It would need to be done gradually, and consideration may need to be given to grandfathering existing tax arrangements for property owners – you’d be pretty frustrated if you just paid $20k in stamp duty to buy your own home, and six months later the Government scraps stamp duty but starts hitting you with an annual land tax bill instead.

        • drsmithyMEMBER

          When the property is sold (that’s when, not if) there will be no Stamp Duty. They will be able to move around the corner to a modern single level house with no steps for the cost of an agent.

          Another option I have seen mooted (possibly on MB, can’t remember) is for the land tax owed by retirees to accumulate (presumably with some upper cap – say, 10 year’s worth) and be payable from the eventual sale of the property (either when they downsize or die).

          • outsidetrader: thanks for the encouragement. A transition arrangement – over say five years for those who recently bought would be essential (or a credit for SD paid, etc)

            drsmithy: yes, this could be done too. It would crimp the kids’ inheritance though. Many would rather their aged P lives tax free in a crummy old house on a big block for that lotto bonanza later. Current tax arrangements that assume a linear housing career merely trap the elderly.

        • David – well said, I am completely on side with you here. Whilst yes, you have nailed me in one by suggesting I am contemplating my inheritence, I find it somewhat alarming that so much of my inheretence is tied up in property…so much for diversification!

          The other thing that this does is create a class divide – I think your land tax idea would tip the scales of wealth equality which is very, very important – the gap between the haves and the have-nots seems to have escalated in recent years due to the property bubble.

          Loving your work David – now, how on earth do we get things moving??

    • Hi David,

      Saw the video yesterday and I was amazed! I’m 28 and never heard things presented this way – at first I was thinking land tax will just be another bloody tax, but if they DO implement it and DO take away income tax, it is a bloody good idea! And your argument with the old widow is spot on too.

      My mother lives in a 3br 17sq house on a 650m^2 block, cant maintain it, won’t sell it because she’s been in it for 20 years. I think its ridiculous she lives there while we’re a young couple and are looking at 1-2br crappy units to live in.

      The main hinderance for people moving around and trading to a smaller place is stamp duty. I totally agree – remove it completely and just charge land tax.

      The video mentions speculators holding house/land because there is no cost to them – a perfect example is near where I live in edithvale, 2 properties on the beach (1 is beachfront), falling apart, nobody lives there, hasn’t for years. Another is a 1br unit which was converted to a 2br to try sell it for even more, been on the market over 1.5 years empty. This is absolutely WRONG and land taxing the prick who owns it would be the only way to stop the madness.

      You say you guys are starting a campaign next week – how can I get involved? I’m so sick of not seeing changes for the better. Brumby and Bailleu along with federal labor have basically been on holidays since they got in power. Nothing ever changes, we just drone along into the inevitable recession.

      I feel you guys have it spot on and we need for this to get out there. The doco was a huge step in the right direction (I kept trying to go to screenings in Melb but missed out, so glad its now online). What happened to showing it on ABC/SBS? Did they reject it (due to some vested interest there too?).

      Keep up the good work, and let us know what can be done to make a change!

  10. Sadly this does not mention the true nasty buried in the State accounts. Victoria now has a $27.2 billion unfunded pension liability, that continues to grow, as the emergency services staff are still permitted to contribute, longevity is increasing and investment returns are considerably below the 7.5% p.a. the actuaries and APRA believe is a fair estimate of future returns on assets (as is …). Divide that off balance sheet liability between each man, woman, child, dog and donkey in Victoria and the load is enough to break the burro’s back, particularly if the equity markets take a tumble and hence the liability grows

  11. As an extension, I’m looking forward to the old double edged sword, Local Government land rates and the eventual pressure in that space. Everyone wants their property value at max, yet they cringe when the rates notice arrives. As the pressure builds on households, councils will be in the firing line. They’ve also gorged on the bubble.

    The municipality I worked for has increased its workforce five fold over the last 15 years, with marginal increase in the rate base (infill only). Expect some major cuts there as we accelerate downhill.

  12. This is not really in context, but a reply in the MSM directed at the “Dr” Andrew Wilson which was quite amusing.

    “Hey Big Spruiker. Everyone knows you borrowed too much and are losing money on your Sydney properties. But what rubbish are your trying to ‘report’ now? That Sydney properties are more overvalued than Melbourne, in order to convince investors to switch cities? You are Deluded Spruiker. Investors are buying properties overseas now. Australia is going down the drain pipe. And you are going down with it. APM is going down with it. Your job is going down with it. You will soon be trying to get back your other job. Selling used cars in Blacktown.”

  13. First thing to go should be the boondoggle happening at Albert Park this weekend, Australia simply does not have the money they are giving away to Global Rent seekers like Bernie Ecclestone.

    • Hear, hear. Stupid car race – it has really narrow global audience appeal (despite what we are told); the locals hate it and it costs A FORTUNE… 55 million is clearly too much for a few days annual car race party. Even Bernie Ecclestone hates it and wants it moved to a more European-friendly time zone… I say let him have his crappy car car race. I’m sure if I had a budget of 55 million I could come up with a much more exciting and interesting party than a silly car race.