Victoria confesses

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By Leith van Onselen

Earlier in the week I warned how the Victorian economy and Budget are being placed under increasing pressure from the state’s sharply slowing property market, which is acting to reduce growth and employment whilst hammering the state’s tax take.

Today, we received additional confirmation of Victoria’s plight, when it was revealed that the Government is set to unveil its first budget deficit since the mid-1990s on the back of lower stamp duty receipts:

THE Baillieu government could be forced to unveil Victoria’s first budget deficit since the mid-1990s after the loss of hundreds of millions of dollars in stamp duty revenue.

Throwing the government’s political and economic strategy into doubt, next week’s state budget will reveal a massive $366 million hit to expected stamp duty collections for this financial year, triggered by the property market slowdown.

Treasury now expects to rake in $14.36 billion in stamp duty for the four years to 2014-15 – a $1.13 billion slump compared with its previous estimate in December.

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Below is a chart showing the growth of Victorian stamp duty receipts since the late-1990s, along with projections as outlined in last year’s State Budget and the December Budget Update. Clearly, the Victorian Government had been overly optimistic in its revenue projections:

Back to the article:

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Treasurer Kim Wells confirmed a property slowdown since October had triggered a ”huge loss” in stamp duty.

“The loss of this revenue has compounded the challenges we already faced from lower national economic growth, which has resulted in further GST write-downs,” Mr Wells said. ”We are committed to maintaining a responsible budget, but the loss of stamp duty and GST revenue makes it more difficult to achieve our targets.”

Revenue losses will be particularly acute this financial year, with Treasury set to slash its stamp duty prediction for 2011-12 from $3.65 billion to $3.29 billion.

Suggesting the state economy could stay sluggish for some time yet, Treasury’s stamp duty revenue predictions have been cut by $332 million for 2012-13, $265 million for 2013-14 and $170 million for 2014-15.

The revenue hit follows news Victoria’s expected GST share has been slashed by about $428 million in 2011-12 because of slower than expected national spending.

The downgrades mean Treasury’s prediction last December of a $148 million surplus in 2011-12 will be almost impossible to achieve.

So it looks like slower credit growth has claimed another victim, this time the Victorian Government in the form of declining stamp duty receipts from the slowing property market, as well as lower GST receipts from lower consumption expenditure. The news on the jobs front is equally bad:

The state economy has also been shedding an average of more than 900 jobs a week since last September, suggesting payroll tax collections – and predictions for job growth – are also likely to be weaker than expected.

Too right. As shown by the latest Australian Bureau of Statistics (ABS) labour force survey, Victoria has lost nearly 23,000 jobs over the past year at time when Australia, as a whole has added nearly 38,000 jobs (see below chart):

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As expected, the Labor State Opposition has lambasted the Government for it’s ‘poor economic management’:

Shadow treasurer Tim Holding said unless the government ”fiddles the books” it would now appear certain this year’s budget is in deficit.

”The worst part is that this government has nothing to show for it – no new projects, services are being slashed, and only Tasmania has a higher unemployment rate,” he said.

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Yet, it was the former Labor State Government, under Premiers Bracks and Brumby, that gorged on a near 300% increase in stamp duty receipts (see first chart above and below):

And used the bounty from these taxes to expand the state’s bureaucracy to unsustainable levels (see below chart), as well as invested in a range of unnecessary and costly infrastructure projects, such as the MYKI public transport ticketing system and the Wonthaggi desalination plant.

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Now Victoria’s state finances are under pressure, leaving the Government in a position whereby it is looking to sell the family jewels to pay the bill:

Premier Ted Baillieu has raised the prospect of asset sales to meet the shortfall, although this week he played down the prospect of selling one of the state’s largest remaining assets, the Port of Melbourne, at least in the short term.

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I suspect the winner of the next Federal election will face a similar situation of troubled revenues and sticky costs left behind from older mistakes.

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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.