Victoria to pursue austerity

By Leith van Onselen

This morning’s post on the deterioration of the Victorian Government’s budgetary position included the following warning:

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.

As expected, the state government has responded to the slide in revenues by promising to find an additional $750 million in expenditure savings as well as increasing taxes. From the AFR:

The Victorian government has announced a $750 million savings program as it tries to keep the budget in surplus.

Victorian Premier Ted Baillieu said the steps had to be taken to offset falling revenues.

“Victoria is one of only two states in Australia forecasting budget surpluses over the forward estimates,” he said.

Departments will be asked to find additional efficiency savings and licence fees will be lifted as the government seeks to hit a targeted surplus of at least $100 million.

This is what happens when a government becomes overly reliant on pro-cyclical taxes like stamp duties. The booming revenues enjoyed by the former Bracks/Brumby government allowed it to expand the bureaucracy to unsustainable levels and embark on billions of dollars worth of wasteful projects, such as the MYKI public transport ticketing system, the Wonthaggi desalination plant, the HealthSmart project, amongst others. Now that the stamp duty and GST rivers of gold have stopped flowing, the current Baillieu Government has been left with a budgetary black hole, which it must now fill via cuts to expenditure and public sector jobs, or risk downgrading from the ratings agencies.

The situation in Victoria is being played out to varying degrees around the nation at both the state and federal levels.

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.

 

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Comments

  1. Another $750 million trimmed from outlays – should do wonders for Real Estate buyer sentiment and prices….

    not

  2. “embark on billions of dollars worth of wasteful projects, such as the MYKI public transport ticketing system”

    Glad to know that you agree with me that the Myki saga was a monumental folly. Tragically, the end is still not in sight and the saga will surely keep bleeding more money. All this occurred when the old Metcard was working just fine. It was almost criminal.

    • I am not convined that MYKI was a ‘monumental folly’ as the concept was good but the execution horrendous. Just go to Hong Kong (and presumably London, as I haven’t) and see how good it can be.

      • thomickersMEMBER

        also after London’s ticketing system (which had budget blowouts) other cities replicated this type of card system for the cost of only $100-250 mill.

        • Exactly.

          The Myki saga is a classic case of what to expect when you give a large sum of somebody else’s money to politicians. After all, they only care about what is popular, not what is right in the long haul.

  3. Not sure I agree with “unsustainable levels of bureaucracy”- I remember macro business publishing a graph after the qld cuts showing Vic was much leaner than all other states and would have to increase numbers to hit the ratio/level they were advocating for qld.

  4. State austerity on top of Fed austerity/fiscal consolidation increases chance of recession and unemployment unless external or private sectors grow to more than offset the fall in G. (GDP = P + G + E)

    The ANZ housing chartbook says as a headline: “AUSTRALIAN ECONOMIC ACTIVITY SOFTENING, UNEMPLOYMENT RATE TO TREND HIGHER” That would seem to indicate that the private sector growth in Australia is unlikely to offset contraction of G.

    That leaves E which is highly dependent on increased total revenues from exports, so it is really up to the income from increased resource exports coming on stream to increase E sufficiently. Maybe the increase in volumes will be sufficient even if commodity prices fall (further).

    • Why can’t we reduce the Imports part of net E ?
      Yes it will cause dislocation. We will need long-term retraining from Till operators to more relevant skills. We will need to build and operate factories instead of luxury houses. We will need higher interest rates to fund it all. We will have to spend money in regional Australia instead of just in cities.
      All those ‘bad’ things will happen.

      The alternative is just increasing foreign debt and all its risks and ramifications.

      As I’ve said before it’s up to people who vote to decide not me (until I get elected dictator) However the idea that just increasing Govt expenditure will solve economic problems is just plain wrong. It MAY solve short term problems but does so at the cost of further debt and long-term problems.

      If we eventually want to persuade MSM to give the full story and facts how about we start facing them in here.

    • Federal Labor government of the 1980s under Dawkins as education minister promoted a policy of developing international education as a direct export earner, plus related e.g. tourism, short term accommodation etc. However, one policy (and Australia’s brand) designed to try balance the current account deficit, especially Victoria, has been trashed due to falling victim to superficial analysis (informed by anti immigration, anti growth, anti population and simply racist lobbies), MSM and politicians dog whistling on foreigners, race, population growth (new politely acceptable code) etc.. Maybe it is a point in time when reform like that led by Keating and Kennett who were sympathetic to the social side of internationalisation and embracing Asia is renewed….. vs following the prejudices of our MSM and becoming an old 1950s white Australian anachronism in Asia….. think we alreaydy are?

  5. So this long saga of epic fails from inneptitude and incompetence;

    “the former Bracks/Brumby government allowed it to expand the bureaucracy to unsustainable levels and embark on billions of dollars worth of wasteful projects, such as the MYKI public transport ticketing system, the Wonthaggi desalination plant, the HealthSmart project, amongst others. Now that the stamp duty and GST rivers of gold have stopped flowing, the current Baillieu Government has been left with a budgetary black hole, which it must now fill via cuts to expenditure and public sector jobs, or risk downgrading from the ratings agencies.”

    Is simply explained away by this?;

    “This is what happens when a government becomes overly reliant on pro-cyclical taxes like stamp duties”

    No.

    This is what happens when leftist Gov’t rorts the Treasury to malinvest and horrendously execute projects that in many cases don’t even pass a simple CBA. The hopelessly flawed reasoning behind that is the dangerously stupid mind set that you can tax and spend ad infinitim. Coupled with the DNA of no skills execution , said Govt runs the state bankrupt to leave it to the adults to fix.

    Cue the whining and moaning now.

    • Fair enough. I agree with your sentiment. But the huge increase in tax revenues allowed the incompetence to continue and enabled the government to claim that they were good economic managers because the budget stayed in surplus (thanks to the surging tax revenues). The same could be said for the Howard Government.

      • I’m glad we agree Leith.

        No, it cannot be said of the Howard Govt. That Govt paid down almost 100Billion in Labor Debt and ran regular surplusses through good management. They delivered a stable economy and stable fair social agenda within budgetted targets. Our Govt was run by experienced adults as opposed to textbook graduates from Union hierachy looking to indulge (waste money on) social and green experiments.

        I know that this (control of expenditure) is a huge sin to many conditioned that debt is good , ok in certain doses or who view Govt as wealth distribution mechanisms (in favour of THEM).

        I am not by any means saying that the Howard Govt was anywhere near perfect. But, it is quite misleading to say that “the same could be said of the Howard Govt.” Because patently, it indeed cannot.

          • Never any comment on the structural deficit Howard & Costello left behind either. Nor the huge amounts of middle class welfare and other Government spending they instituted. Nor the CGT concessions that helped fuel today’s real estate bubble.

            This is before even getting into his homophobic legislation, gutting of worker’s rights, gutting of public education and gutting of public healthcare.

        • There were many missed opportunities not the least of which were road, rail and port projects that are still sorely missed. Instead the money got spent on frivolous things like school chaplains and huge private subsides so your average struggling medical specialists can afford that new Bentley.

          • This argument misses the role the states play however, I mean it’s never pure Liberal or pure Labor, and sometime you wonder by having the electorate try to hedge their bets if the outcome is worse.
            Look at the lack of infrastructure build in NSW under Carr, 10yrs of delays, it was cockup after cockup, but hey the Olympics were OK so its all forgiven.
            Barrys trying to turn it around, but gee its a tough ask when you cant afford to blow the budget out.

        • That Govt paid down almost 100Billion in Labor Debt and ran regular surplusses through good management.
          You misspelled “through sales of public infrastructure and the benefits of an unimpeded mining boom”.

          You also left out the part where the Howard Government’s phenomenal vote-buying largesse left the budget in a structural deficit. But to be fair, you’ve only been reminded about that probably a dozen times or so.

          They delivered a stable economy and stable fair social agenda within budgetted targets.
          So “fair” that it legislated discrimination against homosexuals, gutted worker’s rights, increased inequality and decreased social mobility.

          Our Govt was run by experienced adults as opposed to textbook graduates from Union hierachy looking to indulge (waste money on) social and green experiments.
          Our Government was run by textbook Rich Old Neoliberal White Men who, unsurprisingly, did everything they could to make the country a great place to be for Rich Old Neoliberal White Men, and anything from average to terrible for anyone else.

          I know that this (control of expenditure) is a huge sin to many conditioned that debt is good , ok in certain doses or who view Govt as wealth distribution mechanisms (in favour of THEM).
          The Liberals are _huge_ wealth distribution advocates. They just aim to distribute it from the poor to the rich, rather than the other way around.

          I am not by any means saying that the Howard Govt was anywhere near perfect. But, it is quite misleading to say that “the same could be said of the Howard Govt.” Because patently, it indeed cannot.
          The same can not only be said, but much harsher judgement can be laid. Surging Government revenues and a massive resources boom could have been spent on upgrading infrastructure across the country, providing first-class education to everyone, regardless of their background, complete renewable energy independence or establishing a sovereign wealth fund.

          Instead, we got tax cuts mostly for people who didn’t need them, breeding bribes, a world-leading real estate bubble and an immigration policy that is almost incomprehensible in its moral bankruptcy.

          The Lucky Country, indeed.

        • As I read this, all I could keep thinking about was “Yes, well, that’s the sort of blinkered, philistine pig ignorance I’ve come to expect from you non-creative garbage.”

        • Oh please. Give us all a break with your political bias. There is no evidence what so ever that the right are better economic managers. This is utter nonsense and pure hyperbole.

          Both sides of politics are just as good as each other in wasting tax payers money.

  6. Sorry mate, I can’t agree. The Howard Government were not good economic managers, at least in the last few terms. Revenues ballooned from the soaring terms-of-trade and the explosion of private debt. Yet they pissed away the proceeds on middle-class welfare and other rorts (e.g. halving capital gains taxes). They undertook minimal reform (unlike Hawke) and basically we have very little to show from their time in government.

    Outside Kennett and Hawke, I can’t remember too many governments that were ‘good economic managers’ in Australia.

    • Although the balloon spans both political parties terms in office, I think it fair to say that the rot started on little Johnny’s watch.

      At least from looking at Steve Keene graphs. Subsequent governments did nothing to discourage the rise in personal debt, in some cases pouring fuel on the fire in the form of FHB grants/boosts turbos whatever you want to label it.

      It was still interfering with the market in favour of RE and land bankers.

  7. Didn’t see it mentioned here, but it was also reported in The Age that the eligibility conditions for getting the FHBG would be changed, with buyers have to live in their new dwelling at least a year rather than 6 months expected to save ~$90 million over four years.

  8. I’m going to have to say that one of your examples of waste is inappropriate. The desalination plant a victim of timing not of a bad decision. The drought was very long. Longer than normal. The entire Murray system was threatened by the drought. The entire population of Victoria was threatened by the drought.

    The desalination plant, whatever issues it may have in practice was an entirely appropriate decision given the realities at the time. There was no rain to fill a new dam. There was no time left to wait for the rain that now leaves it dormant.

    The fact of the matter is, it was the only appropriate decision at the time.

    • Sorry. I couldn’t disagree more. It would have been far more cost effective and arguably better for the environment to have dammed the Mitchell River, which floods every year or so. But the idiotic Bracks Government effectively outlawed doing so when the former environment minister John Thwaites turned the Mitchell into a state park. So instead we have built a costly white elephant that uses brown coal power to pump salt water up hill for processing.