Victoria’s Budget rides the house price boom

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By Leith van Onselen

The Victorian Government yesterday afternoon released the State Budget for 2014-15, which included the following headlines:

  • An operating surplus of $1.3 billion in 2014-15, with surpluses totaling $11 billion projected over the next four years;
  • Up to $27 billion in new infrastructure projects covering road, rail, level crossings and schools;
  • Payroll tax reduction of 0.5% to 4.85% from 1 July 2014;
  • Gross State Product to grow by 2.25 per cent in 201415 (from 1.6% in 2012-13 and 2.0% in 2013-14), rising to 2.75 per cent over the medium term;
  • Unemployment rate of 6.25% in 2014-15 (same as 2013-14), falling to 5.5% by 2017-18;
  • Net debt of 6.3% of Gross State Product in 2014-15, falling to 4.5% in 2017-18; and
  • Ongoing strong population growth of 1.8% per annum over the forward estimates.

The Budget Papers clearly give the impression that this is an election Budget, with the Coalition Government at pains to prove its economic credentials, including its ‘superior’ cost control:

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It’s superior infrastructure investment:

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And the fact that it has a AAA credit rating – the strongest amongst the states – with Victoria also being “the only state or territory to forecast surpluses for each of the next four years”.

While the Victorian Government’s cost control is admirable, the strong Budget result has been well and truly driven by a surge in stamp duty receipts on land transfers, which rose by a whopping $1,017 million in 2013-14 to $4,189 million, smashing by $729 million the forecast of $3,460 million in last year’s state Budget (see next chart).

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The State Budget attributes the strong uplift in stamp duty revenues on “an increase in activity since late 2012 (and especially in the latter part of 2013) with sales volumes, auction clearance rates and house prices all rising”.

However, it does also note that the Budget’s fortunes are tied to the volatile property market:

The property market exhibits strong cyclical behaviour which flows directly to movements in land transfer duty. This translates to uncertainty in forecasting estimates of revenue for future years, in relation to both when the current strength of the property market will end, and to what degree transaction revenue will slow or retract. Chart 4.2 shows the history of annual movements in land transfer duty. Given the degree of volatility, the forecasts return to trend growth, balancing the risks on either side.

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Given the high degree of volatility, the Budget forecasts 6% per annum growth in stamp duty receipts, although in reality anything in the -25% to +45% range is possible in any given year, making accurate forecasting and planning next to impossible.

Land taxes on investment properties also registered a rise lift to $1,628 million in 2013-14, and are also expected to grow solidly on the back of rising values (to $2,030 million by 2017-18). Note also the greater inherent stability of land taxes, which are revalued every two years:

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One wonders why the Victorian Government is not looking to move away from stamp duties on housing transfers to a broad-based land tax. Apart from their greater efficiency and equity, land taxes are inherently more stable (see above). They would also make infrastructure investments, like the East-West Link, self-funding, since any land value uplift brought about through increased infrastructure investment would be partly captured by the government via increased land tax receipts.

Prosper’s David Collyer makes similar salient points in his report on the State Budget:

[Stamp duty] imposes a very heavy burden on property buyers – over and above the money diverted to Treasury.

In The Excess Burden of Australian Taxes commissioned by the Australian Treasury, KPMG Econtech says conveyancing Stamp Duties:

  1. Drive a wedge between producer and consumer prices of property
  2. Cause some people to switch to renting rather than owning their property
  3. Cause people to adjust their property consumption less frequently

KPMG’s estimates the Median Excess Burden at 34 cents in the dollar and the Average Excess Burden at 31 cents.  So Victoria’s $3.4 billion take cost citizens $4.5 billion.  The difference is an out-and-out loss – hard earned dollars destroyed forever.

It gets worse.  KPMG acknowledges its computer model only captures the cost of the first distortion above and underestimates the total cost.  It does not put a price on the very real costs imposed on those obliged to rent or trapped in unsuitable housing by the SD impost.

The study says business passes its SD costs on and its incidence falls on labour incomes, while residential purchases flow straight to increased prices. In other words, workers pay – twice.

The sins of this very bad tax don’t end there. The revenue stream is utterly unpredictable, dramatically rising and falling with transaction volumes…

Elsewhere, the other driver of budget revenues is payroll taxes, which are expected grow steadily into the future, in line with past performance, despite a small cut in the rate to 4.85% (see next chart).

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Like stamp duties, the Henry Tax Review found payroll tax to be the most distorting, creating a “marginal excess burden” (i.e. the loss in consumer welfare relative to the net gain in government revenue) of 41%. Again, one wonders why the Government does not attempt to shift the state’s revenue base to a broad-based land tax, whose marginal excess burden is near zero by comparison.

Notwithstanding Victoria’s dangerous reliance on volatile (and distortionary) stamp duty revenues, this looks like a fairly good Budget, with some much needed spending on infrastructure projects – covering road, rail, level crossings, and schools – which are desperately required to keep up with the state’s population ponzi.

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Comments

  1. Apparently the loss of 300,000 jobs two years from now when an entire automotive industry disappears from the Melbourne area will have no impact on growth.

  2. 300,000 jobs ? The auto industry in Victoria has been dying a slow death for 15 years now, with significantly reduced significance. I would have thought one-tenth that amount, but maybe you have some data I have not seen.

  3. Give them their dues, they forecast this stamp duty bonanza a few years back and we were flabbergasted. Question now is whether they’ll reinvest any in the form of infrastructure of just find a way to direct it back into the pockets of their sugar daddies e.g. first home owner grant?

    Clearly they’ll not deviate one inch from the population Ponzi strategy with results like this.

  4. flyingfoxMEMBER

    One wonders why the Victorian Government is not looking to move away from stamp duties on housing transfers to a broad-based land tax

    We have a saying/parable where we come from that loosely translates to

    “Jumping between feast and famine”. The whole idea of the “parable” is to show that it is better to have a smaller, constant meal is better than jumping between feasts and famines.

  5. notsofastMEMBER

    Who would spend $10 Billion on a rail tunnel from nowhere, going to nowhere and passing through nowhere. It makes no sense. Melbourne is turning into China.

    The previous rail tunnel proposal made much more sense because it could take trains from the outer suburbs of Melbourne and potentially in future trains from regional areas near Melbourne, move them quickly into the city centre and then quickly move them out again. But as Brisbane found out recently, you aren’t allowed to have a rail tunnel that does this.

    • “Who would spend $10 Billion on a rail tunnel from nowhere, going to nowhere and passing through nowhere. It makes no sense. Melbourne is turning into China.”

      Agreed.

      There are two consolation points though – firstly, the Coalition may well lose the election, and secondly, they have no intention of actually building the railways anyway.

      Remember their railway building promises before the 2010 election?

    • It has to last six and a half months. It can’t be built where they plan on building it.

      • Care to elaborate, ‘flakes?

        The new route looks like it was dreamed up over a whisky at the club.

        It adds a station at Fisherman’s Bend – ideal for speculative landowners – while subtracting a much needed exchange at Parkville knowledge precinct. Dandenong line travellers would get one single city station at Southern Cross (Spencer St) before going to the airport the long way.

      • “The new route looks like it was dreamed up over a whisky at the club.”

        Yeah, it’s just a joke. But again, they have no plans to actually build anything.

      • “The new route looks like it was dreamed up over a whisky at the club.”

        You’re not wrong David!

        http://www.theage.com.au/victoria/rail-tunnel-plan-based-on-common-sense-20140508-37xbc.html

        The State Government prepared no thorough business case before committing to a revamped route for Melbourne’s city rail tunnel, instead relying on “common sense”.

        Planning Minister Matthew Guy made that startling admission on Thursday under questioning about why the government had dumped plans for a rail tunnel linking Parkville with South Yarra in favour of one that creates a new train station at Montague, near South Melbourne.

        The government says the new station will service the planned new mega suburb at Fisherman’s Bend, despite being kilometres away from that location.

  6. Don’t forget the unfunded pension liabilities. Where’s another $20B+ going to come from?

    This is what will bring down the states.

      • The Patrician

        If an audit of existing Melbourne dwelling sales reveals voidable unapproved sales to foreign nationals, would the stamp duty have to be refunded to the illegal purchaser on the voided sale?

  7. The payroll tax cut looks like it was dreamed up at the last minute, and looks out of place in an election year budget.

    It’s not going to please any of the punters (most of which have no idea that payroll tax even exists) and those who pay the tax (i.e. businesses) dont vote.

    I reckon they would’ve got much more bang for buck, both politically and economically, if they’d cut stamp duties by an equivalent amount. There’s a higher dead weight loss on stamp duties than payroll tax, and cutting stamp duties would’ve won some of the electorate over

    ah well.. it’s not the worst budget I’ve ever seen. some good stuff in there