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Budget 2021/22

In rising to speak on the appropriation bill and the budget papers for this year’s budget I have to say at the outset that this is a budget which completely misses the mark. It is a budget which completely misjudges, completely misunderstands the economic environment that Victoria is currently in and completely misunderstands the damage which has occurred to the Victorian economy over the last 12 months and the types of measures which are required to repair that damage. In fact this budget could not be further from the mark in terms of what needs to be done to repair the Victorian economy.

It is a budget which is predicated on a rapid and substantial increase in taxes at a time when in fact the government should be encouraging new investment. It has put in place measures which do exactly the opposite of that. If the government was in any doubt as to how their budget was received, they only needed to look at the headlines which came from the commentators, came from the media over the course of the week following the release of the budget to see near universal condemnation of the measures which are included in this budget. We spoke earlier in the week, in dealing with the State Taxation and Mental Health Acts Amendment Bill 2021, about the impact of some of the major taxation rises which are included in this budget, on the negative effect they are going to have on employment and on investment in Victoria.

The Treasurer could not have got this more wrong. We have seen bad budgets before from this government—we have seen that a number of times over the last six years—but the way in which this budget was pitched this year has absolutely missed the mark. It is actually setting Victoria up for an even worse economic performance over the next 12 months than that which it has suffered through the last 12 months. I guess one of the best illustrations of that—one of the best illustrations that the budget is incorrectly pitched—is no sooner was this budget released than Victoria went into yet another lockdown. Another lockdown which has had and continues to have enormous economic consequences and which has also had budgetary consequences because the government has been forced to step in with further limited compensation, inadequate compensation as we have heard in this house on numerous occasions—the level of compensation provided for those small businesses which have been affected by this latest lockdown has been nowhere near adequate—but nonetheless that has cost hundreds of millions of dollars to the budget. While the government continues to do those types of lockdowns, the effect on the budget and the effect on the economy is going to be dramatic. Again, it just highlights that this budget is the wrong budget.

What we have seen in the budget this year is a raft of new taxes which are effectively the wrong taxes at the wrong time. Extraordinarily this budget is forecasting an increase in aggregate taxes over five years of 40 per cent—a 40 per cent increase in taxes over five years—at a time when the Treasury is forecasting the Victorian economy is only going to grow by just on 18 per cent. So we have economic growth of 18 per cent over five years, assuming all the targets are met and assuming we do not have these continual rolling lockdowns every 5 minutes when we have half a dozen cases of COVID, yet we are increasing taxes by 40 per cent in the same period of time. That simply does not add up. You cannot have economic growth of 18 per cent and impose tax increases of 40 per cent and expect to have economic wellbeing improve in this state. It simply does not work like that. It is not a magic pudding. You cannot get better outcomes for the Victorian community if you are taxing at that level versus economic growth.

This is a recurring problem with this government, because each and every year when we have got up to talk about a budget that has been brought down by the Andrews government we have seen in the forward estimates that the government forecasts a big rise in spending in the budget year and then promises to cut back spending in the following years. In each and every budget the budget papers come down, the government forecasts that spending will rise 4, 5, 6 per cent this year but in the out years it will only be 1 or 2 per cent, and it never happens. Each and every time when they commit to spending rises of only 1 or 2 per cent in the out years, in reality when the next year’s budget comes down it is not 1 or 2 per cent, it is 6, 7, 8 per cent, and we have seen that year after year after year. None of the constraint the Treasurer claims he will have in future years ever comes to fruition, and thus it will be the same this year. We see in the 2019–20 financial year budget spending grew by 8.5 per cent. For the current year, 2020–21, budget spending is growing by a massive 19 per cent, and we know we have been running massive deficits this year and we know that we had a deficit last year, which the government will claim was triggered by the start of the COVID pandemic in the last half of the 2019–20 financial year but which in reality was always going to occur.

The Victorian budget was already on a trajectory to deficit long before COVID started. COVID effectively saved this government from the embarrassment of a budget deficit which would have occurred without COVID by the end of the 2019–20 financial year.

We have got an increase in spending of 8.5 per cent in 2019–20 and of 19 per cent in 2020–21, and the Treasurer is now asking us to believe that spending will be cut by 3 per cent in 2021–22 and that it will be cut by a further 3 per cent in 2022–23 before growing at 1.4 per cent and 2.9 per cent in the out years. Regrettably those numbers cannot be believed, because at no point in six years has the Treasurer ever been able to rein in spending. Despite a promise every year that the next year will be different—‘Next year we will constrain spending’—each and every year the government has failed to deliver. So the suggestion that in the budget year we are going into, 2021–22, which of course is leading up to an election, this government will cut spending by 3 per cent is absolutely laughable. They have not been able to deliver it in good times, and there is certainly no prospect of them being able to deliver it over the next 12 months and in the years beyond that. Of course that has major ramifications for the Victorian economy. It has major ramifications for the people of this state.

One of the areas where we are seeing much of this growth is actually not in grants to the Victorian community or grants to support businesses which have being shut down by the policies around COVID that this government has put in place. Much of that growth is actually in the public sector wage bill. Over the next five years the public sector wage bill will grow from $27 billion, which is already substantially higher than it was five years ago, to more than $34 billion, so public sector wages will continue to grow each and every year. We will not see a return to surplus. We will not see a meaningful narrowing of the budget bottom line over the next five years, and it is simply unsustainable for that level of growth in the public sector to continue over the next five years.

The Victorian Public Sector Commission has reported that as of 2020 the public sector had grown to 322 000 people, which is 45 000 people more than five years earlier, and that type of growth is simply not sustainable. It is not sustainable for the Victorian population, and it is not delivering good outcomes to the Victorian people. And we know that from the Productivity Commission’s annual report on government services, where it benchmarks the quality of services delivered by each state and it benchmarks the cost of those services delivered by each state. We see across a whole range of state services that the quality delivered in Victoria, be it health, be it education, is falling behind and the cost per service of those services delivered to Victoria—versus New South Wales, versus the rest of Australia—is increasing rapidly. So we are paying more for worse services in Victoria, and again that is simply not sustainable.

A consequence of this massive increase in spending and this uncontained flow of spending over the forward estimates period is that the debt profile in Victoria is continuing to deteriorate. The Treasurer is forecasting that over the next five years net debt is going to increase by 250 per cent. We currently have net debt of $44 billion in Victoria, which is I think a record high to date, and that is going to increase to $156 billion. Currently debt sits at about 9.5 cent of gross state product, and that is forecast to increase to almost 27 per cent of GSP by the end of the forward estimates period.

What is concerning about that is there is no tapering off; there is no point over the next five years where either in dollar terms or even as a proportion of GSP that debt peaks and starts to fall. So for all we know, beyond the forward estimates period, beyond the 2024–25 year that the government have reported on, their expectation is that debt will continue to grow. It is fine to argue interest rates are low and borrowing costs are low, but that is only now. We are already seeing in an international context that inflation in some parts of the world is starting to rise, and as a consequence of inflation starting to rise we are seeing bond yields start to rise. So it is inevitable over the next five years, if that trend picks up and if that continues, that the interest paid on these borrowings by the Victorian government will also increase, and because the dollar amount is going up by 250 per cent in five years the impact on interest cost is going to be massive. We only need a small increase in bond yields to see our interest bill in Victoria absolutely blow out, as we saw in the late 1980s and early 90s, when we were last in an economic crisis delivered by a Labor government.

Rather than setting Victoria up with this budget for repair, this government is actually setting Victoria up for further heartache, further economic difficulties and frankly a flight of capital from this state, and that is something which we all should be deeply concerned about. We are already seeing population leave this state, and budget settings like we are seeing in the budget this week will do nothing but compound that problem and lead us further down that path. It is concerning that there is no vision, there is no strategy, that will put us on the path to recovering the budget situation.

I spoke on Tuesday about the increase in taxes that the government is bringing forward. As I said earlier, that is a 40 per cent increase in tax over the next five years. Concerningly, much of that tax burden is in areas like payroll tax—introducing the new mental health levy, which is a loading on the payroll of larger businesses, which has a direct impact on job creation and has a direct impact on the attractiveness of Victoria as a place to invest. Taking average yearly earnings of $92 000 in Victoria in the last reported period, the impost of that mental health levy is worth around 4000 jobs in the first year, rising to about 8500 jobs in 2024–25. So by 2024–25 that is an extra 8500 jobs which cannot be created or 8500 people who cannot be employed because of that burden of $800 million in extra payroll tax which will be imposed on those larger employers in Victoria. Importantly, the way in which that levy is struck is that not only does it look at the payroll in Victoria, it also looks at the total payroll of any Victorian-based employer, so if someone paying payroll tax in Victoria has a payroll in New South Wales or elsewhere, that is also counted towards the assessment of whether they fall within the net of this mental health levy, which will create a big question for companies based interstate. If somebody is headquartered in New South Wales and the majority of their workforce is in New South Wales, there would be very little incentive for them to subsequently open in Victoria or invest in Victoria. Frankly Victoria cannot afford to put roadblocks in the way of investment. There are already too many, and the situation is getting worse on that front.

I would like to turn to look at the issue of economic performance. We saw, I think it was last week, some commentary by Saul Eslake, who was the chief economist of the ANZ bank, looking at how Victoria had performed economically over the last 20 years relative to Australia and relative to New South Wales. There are some very telling figures there on the way in which Victoria is now lagging New South Wales in economic performance, and one of the most stark reminders of the second position Victoria holds now relative to New South Wales is the level of gross state product we produce per head of population, because the economic output in Victoria is now almost $8000 a person lower than New South Wales.

That is a very substantial difference. The average economic output in New South Wales is almost $8000 a person higher than in Victoria. So each and every year, the average wealth of the New South Wales population increases $8000 more than that of the average person in Victoria—and that is a substantial difference, a substantial difference. And because it is per capita it takes into account the fact that the New South Wales economy and population are larger. On a per head basis they are $8000 a year better off than Victorians are. And this is for a state, Victoria, which used to be the economic hub of Australia, used to be the manufacturing hub of Australia. It now plays second fiddle to New South Wales—and is getting worse. That was the point that the Saul Eslake piece made last week: over the last 20 years under this Labor government and the previous Labor government Victoria’s relative performance has deteriorated and continued to deteriorate.

Another measure, and a deeply concerning measure, in relation to our economic performance is the level of private sector investment in the state, and it is private sector investment which will drive economic activity. Is not government spending, it is not the government hiring more public servants, it is the private sector being willing to invest in Victoria—create new businesses, create employment, create economic activity. In New South Wales the level of private sector investment in their economy is now 25 per cent higher than in Victoria. Last year New South Wales received $12 billion more in private sector investment than Victoria did. And what is the Victorian government’s response to that? Its response is to make it harder to invest in Victoria—it is to increase the barriers for investment, it is to make it harder to employ people by increasing payroll tax, it is to create disincentive for investment in Victoria. At a time when we need to be attracting more capital to Victoria we are in fact sending a message that Victoria is shut to investment, that Victoria does not want investment from interstate or overseas.

This Treasurer and this government are happy to allow New South Wales to have a substantial competitive advantage on the level of taxation and happy to allow a flow of investment to New South Wales rather than to Victoria, and we are going to see the consequences of that. We are starting to see the consequences now, but they will compound year after year after year—and the next decade is going to be pretty bleak in Victoria relative to other states as a consequence of the decisions made by this government over the last two years in particular.

That brings me to the issue of the COVID impact. There are a couple of points I would like to make here, one of which is the settings in this budget have frankly already been thrown into doubt because a week after this budget came down, Victoria, once again, went into a lockdown. The Acting Premier announced we would have a seven-day—he called it a—circuit-breaker lockdown, and here we are two weeks later and it is still going. It is not ending tonight. The rhetoric might be it is ending tonight. All that happens tonight is the cage gets bigger. Businesses are still shut down. People cannot move around the state. We saw when this was announced two weeks ago that people fled the state. People were on the Hume Highway heading out of Melbourne. People were heading on the Western Highway out of Victoria, on the Hume Freeway out of Victoria—and that flight of people out of this state is going to continue, and not just for a couple of weeks while the lockdown is on; that flight of people out of this state is going to be permanent. The brightest people, the smartest people in this state will be leaving this state and capital will be going with them. That means the impact on Victoria over the coming years is going to be absolutely significant, and we will fall further and further behind New South Wales, we will fall further and further behind our international competitors.

The cost of these lockdowns cannot be overstated. KPMG did some significant work last week in putting a dollar figure on the cost of these lockdowns in terms of the impact on gross state product. It estimated, looking at the lockdowns in the two final quarters of last year, that the cost of those lockdowns to gross state product were $125 million a day—in lost gross state product—comparing lockdown days to non-lockdown days in the last two quarters of the year. $125 million a day: that means the lockdown of the last two weeks has already cost more than $1.5 billion.

The lockdowns last year cost the Victorian economy more than $20 billion in lost economic output—lost wealth creation for the Victorian people. While this government continues to react with panic, continues to react in a way which is inconsistent with the risk, continues to react in a way which does not reflect the realities of the damage their measures are doing, we will continue to lose ground in Victoria, we will continue to fall behind.

The Premier of New South Wales, leading up to this latest Victorian lockdown, said she feared for what the Victorian government would do to the Victorian people, and she was right to say that, because we saw the seven-day circuit-breaker lockdown now turn into two-weeks, and the running of the lockdown is continuing tonight with just a bigger cage. She has previously made the point, and Gladys Berejiklian has been one of the few bright spots in leadership in this country over the last 18 months, that New South Wales in considering its response to COVID looks at the economic impact, looks at the social impact and looks at the mental health impact as well as looking at the health impact. This government in Victoria has thrown out economic impact, has thrown out mental health, has thrown out social impacts. Its mantra is, ‘We follow the health advice’—health advice it will not release. But we have governments elsewhere in this country, and New South Wales has been the shining light in leadership in this area, recognising that it is not just health considerations—there is mental health, there is social wellbeing, there is economic impact which need to be factored in, which this government has ignored. So we are in a situation of a continuing lockdown, which last year was costing $125 million a day, which is putting Victoria further and further behind the rest of the nation, further and further behind our competitors internationally.

One thing that COVID has shown over the last 18 months is the weaknesses in our economy. Over the last 20, 30 years there has been a big push in the way in which reform has taken place in this country. There has been, as we know, a loss of our manufacturing capability in this country. One thing the last 18 months has highlighted and continues to highlight and in fact is getting worse at the moment is the supply chain risks that Australia has taken on because of our outsourcing in manufacturing and our outsourcing in so many other areas where there was a perceived inefficiency in manufacturing. In many respects aspects of Australian manufacturing were inefficient, and having manufactured goods imported has been more efficient in many areas, but the loss of that sovereign manufacturing capability has meant we have huge risks in the Australian economy which have been coming home to roost over the last 18 months. We have been very fortunate that by and large supply chains to Australia have remained open, but it would be very easy for those supply chains to be cut. We are seeing constraints in supply chains. There is a global shortage of computer chips, and that is having enormous consequences in manufacturing of all sorts of goods—motor vehicles and electronics are all in short supply globally as a consequence.

Fuel supply and fuel security have become a huge issue for Australia. I was very pleased to see the commonwealth government announce just last month its policy of supporting the remaining two fuel refineries in Australia. We had seven fuel refineries—five have closed, two remain, and the commonwealth government has stepped in to provide some support to those refineries to ensure that we continue to have some domestic refining capability. Because if we lost all onshore refining capability and our supply chains were cut, Australia would be in a very perilous situation. So the fact that we are retaining some capability—it would be good to see new investment in refining capability, see some efficiency in our refining capability—is at least a positive. But it is not enough. There are other areas where we need onshore capability as well. Energy security is an area where we have gone backwards in Victoria over the last two decades.

We have got a government whose energy policy is driven by focus groups and driven by Twitter feeds. While they might love running around talking about their wind farms and solar farms, the reality is that has not delivered the secure energy Victoria requires. It is not delivering the stable energy Victoria requires, and that is a huge problem. The government will happily say, ‘Oh, wholesale energy prices were down in Victoria this year’, but not in a stable and predictable way, and that is the problem. This government has introduced enormous instability, enormous unpredictability to our energy market, which has made it all but impossible for investment in secure, reliable baseload power, which has put our manufacturing sector even further in jeopardy. I was pleased to see the commonwealth government has announced its support for a gas peaking plant which will provide some stability in energy supply, some certainty in energy supply, but again it is not enough. Victoria’s great strength traditionally has been reliable, stable and secure power. If we are to support manufacturing, if we are to rebuild manufacturing in this country, we need to return to stable, secure power supply in this state, and the path this government is going down is not going to do that. We need a reliance on base load, and that means a reliance on fossil fuel-powered electricity.

As I said, while the other side’s energy policies may be driven by Twitter, they may be driven by focus groups, the reality is that Victoria needs secure, reliable and stable power. If you look around the rest of the world at the way in which they are developing energy, the sources of power they are developing for energy, it is very clear what is required in Australia to provide the energy security this country needs, because we cannot rely on being an energy importer. The last 12 months have demonstrated that we need security of supply in all forms of energy. We need security of supply and security of capability in our manufacturing sector as well.

So what we have with this budget is a lack of vision, a lack of strategy and a lack of a plan. This budget is a budget about the next election. It is a budget about getting the government through the next 18 months. It is not a budget which sets down a vision for the Victorian economy, it is not a budget which sets down a pathway to restore the Victorian economy. In fact the measures this budget puts in place do the opposite. The tax rises—the extraordinary tax rises at double the rate of economic growth—absolutely undermine investment in this state. This does not set out a pathway forward, it does not set out a vision and it does not put in place the targets, put in place the levers and the incentives to promote investment in this state. This is a budget that is about the next election, it is not a budget about the future of Victoria, and Victorians will be all the poorer for this government and this budget over the coming years.

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