Austerity beckons for Victoria

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By Leith van Onselen

Over the past two weeks (here and here) I have warned how the Victorian government is under increasing pressure from the state’s sharply slowing property market, which is acting to reduce growth and employment and has blown a $1.1 billion hole in the State Budget.

Now it has been reported that the Victorian Budget faces a massive $8.3 billion revenue hit, driven by a combination of lower GST, stamp duty, and payroll tax receipts:

Treasury revenue forecasts in tomorrow’s budget are expected to be $8.3 billion less over the four years to 2015/16 than estimated in December 2010.

The majority of the expected revision – $5 billion of the $6.1 billion less in GST revenue – is due to the weaker national economy.

In the coming financial year, revenue is tipped to be $2.2 billion less than forecast in December 2010.

Expected GST revenue for 2012/13 is likely to be down $1.5 billion, while there will be $473 million less forecast stamp duty revenue.

With Victoria having the highest mainland unemployment rate, projected payroll tax receipts for 2012/13 are $168.4 million down. Over the four years to 2015/16 payroll tax revenue is likely to be $762 million lower than forecast in December 2010.

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With the sharp reduction in Budget revenues, there is the prospect that Victoria could lose its prized AAA credit rating, unless expenditure can be brought back into line, raising the prospect of further public sector job losses:

Before winning power, the coalition promised Victoria would have minimum $100 million surpluses.

Premier Ted Baillieu told the Liberal state council meeting that delivering surpluses and maintaining a triple-A credit rating were crucial to the government’s economic strategy.

In addition, keeping expenditure growth in line with revenue was also important.

“Base expenditure needs to reflect base revenues; that’s a pretty basic approach,” the premier said.

The budget update last December estimated the state’s average expenditure growth would be 3.1 per cent.

There may be further public sector job cuts tomorrow on top of the 3600 non-frontline positions already announced last December.

Treasurer Kim Wells said earlier this month Victorians should stay tuned about the prospect of further public sector job losses.

But any expenditure cuts and redundancies are likely to further weaken the Victorian economy, which is already in a funk. Victoria shedded some -23,000 jobs in the 12 months to March at a time when the Australian economy as a whole added 38,000. State final demand also fell sharply in the December quarter, and is below the level of June 2011.

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This year’s Victorian State Budget, which is due to be released later today, should be an austerian doosy.

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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.