Victorian 2019-20 Budget Response

I am pleased to rise this morning to open the Council debate on the 2019–20 budget. This is the first budget of the re-elected Andrews government, and it is the first budget where the government needs to reconcile the commitments it made for the election last year with the realities of the constraints of the budget settings and the budget parameters that exist in the state of Victoria. We have seen through the course of last year a slowing property market, which has had a significant impact on the budget, and we have seen this week the way in which the government and the Treasurer have sought to cut the cloth to address that significant revenue change. I will come to that in some detail in a minute, but I would like to start with a bit of scene setting for the 2019–20 budget. Of course one of the few times when we get to look at the way in which the Victorian economy is performing is in the context of the budget, because the budget papers do report on what the government forecasts economic growth to be and what the government or Treasury forecasts employment growth and unemployment to be. It is really the one time of the year when we look at the Victorian economy in the context of the policy settings which are made by the government. It is fair to say that a state budget is not a huge driver of economic activity in the state, despite what the state government likes to claim from time to time. The reality is most of the policy levers for economic activity are not driven through the state budget. They can, however, be driven through policy settings of the government, policy settings which either encourage or deter investment and policy settings which encourage or deter employment. We have seen a number of those levers pulled by this government over the last four years, policy settings which have acted to deter investment in Victoria, and we are seeing now with the implementation of the labour hire legislation levers which deter employment. We are yet to see the full impact that that legislation is going to have in a whole number of sectors where impact was not anticipated. One of those sectors which looks to be heavily impacted by that labour hire legislation is in fact the ICT consulting and contracting sector, which was never on the radar with the passage of that legislation, but it appears it is now going to be an unintended victim—an unintended consequence—of the passage of that legislation. Looking at the policy settings the government has made over the last four or five years, it is worth looking at where the Victorian economy is performing relative to our biggest neighbour, New South Wales, the other large state in Australia which has a comparable broad-based economy. We see in the most recent data released by the Australian Bureau of Statistics that the Victorian economy is actually substantially underperforming that of New South Wales. Economic output in New South Wales on a per head basis for the most recent financial year, 2017–18, shows that GDP per capita in New South Wales was $74 900. However, in Victoria it was only $66 000, so there is a substantially greater level of economic output per head of population in New South Wales than there is in Victoria. Over the course of the life of the Andrews government, back to 2014, that gap has been widening. New South Wales has been pulling further and further ahead of Victoria on a per capita basis. And we see that repeated in wages. Average weekly earnings, according to the most recent data, for a full-time worker in New South Wales is $1685 and only $1624 for a Victorian worker. So the citizens of New South Wales, as a result of the New South Wales economy, produce substantially more per head of population. People living and working in New South Wales earn more than Victorians, and this is a margin which has been growing. Interestingly we hear the Victorian government talk about Victoria’s fair share, and we saw the outrageous political campaign run in the lead-up to the federal election arguing that Victoria is not getting its fair share. The government’s basis for arguing whether Victoria is getting its fair share or not is to reference Victoria’s population share. The fact is that Victoria has a little over a quarter of the nation’s population—around 25.8 per cent of the nation’s population live here in Victoria. It is interesting with that knowledge to look at the economic activity in Victoria, because despite the fact that we have 25.8 per cent of the nation’s population in Victoria we are only producing 23 per cent of the economic output. So Victoria is under-represented in economic output—we are not producing our population share of economic activity. You could think that that is because Victoria is not a mining state and that states like Queensland and Western Australia, which are heavy in mining, heavy in mineral exports, are producing above their population share. However, when you look at New South Wales, which is also not a substantial mining economy given the diverse nature of its economy, New South Wales is in fact producing above its population share. New South Wales accounts for just under 32 per cent—31.9 per cent—of the nation’s population and is in fact producing 32.7 per cent of the nation’s economic output. So New South Wales punches above its population weight in economic output and Victoria is below its population share in economic output, and the difference is the policy levers, the policy settings, of the state governments. That highlights where government policy settings can have an impact on economic performance in the state, on the propensity of business to invest in the state and on the propensity of business to employ people in the state. Where you set up a regime which has a series of hurdles to investment, a series of barriers of entry to investment, where you set up a regulatory framework which discourages employment, over time you get the state underperforming, and that is why we are now seeing GDP output per head lower in Victoria than New South Wales. That is why we are seeing Victoria producing less than its population share of economic output compared to that in New South Wales. Of course where is that felt for the citizens? It is felt in the hip pocket, with average weekly earnings in Victoria being lower than average weekly earnings in New South Wales. Turning to the revenue expenditure side of the budget, away from the economic policy settings to the actual impact of this budget on the state finances, the Treasurer presented this budget on Monday as a budget where he needed to respond to a revenue problem. The Treasurer in his delivery and in his public commentary has suggested that we have suddenly found a softening of the property market which has had a hit on stamp duty revenue on property transactions and the government has needed to respond to that. What the Treasurer did not talk about in his speech and has not talked about in his public commentary is that that downturn in stamp duty revenue was entirely foreseeable. It is a function of an economic cycle. It is a function of ebbs and flows in the economy. Every government over a period of time sees that. There are strengths in some revenue items and weaknesses in others, and that is on a regular cycle. The previous coalition government in Victoria had to deal with it and the current Labor government has to deal with it. What we have not seen from this government, though, is recognition of that economic cycle. Through the first half, or the majority in fact, of the first term of the Andrews government we saw a big upswing in revenue. We saw a strong payroll tax revenue line and we saw a buoyant property market which led to very strong land tax receipts, very strong stamp duty receipts on property transactions, effectively delivering massive windfall revenue to the state Treasury—revenue far ahead of, in the billions of dollars ahead of, what had been forecast over the longer term. Rather than the government recognising that that revenue was windfall revenue—it was above average revenue and it would not continue—we saw the government take that revenue and build it into baseline expenditure. So rather than recognising that a big proportion of this revenue is a one-off—it is not going to occur every year; it is well above the baseline and therefore we will put it into capital—the government decided, 'Well, we’ve got the revenue this year and we’ll spend it. We’ll build it into the cost base of the state’. What we have seen over the life of the Andrews government is a massive blowout in the state’s cost base. Rather than being prudent, rather than recognising that revenue ebbs and flows, the government has simply taken every extra dollar of revenue and expended it and built it into the cost base of the state. So we have seen in the period since this government came to office in 2014, if you compare the last benchmark of the previous coalition government, which was the pre-election independent budget update released by the Treasury immediately prior to the 2014 election, that pre-election budget forecast expenditure by the state government of $51.9 billion for that financial year. This budget that has been brought down this week forecasts state expenditure of $69.9 billion—almost $70 million. That is an increase of just under 35 per cent in five years—more than 6 per cent compound growth every year for the last five years. I would say to the people of Victoria: who in Victoria has had their household budget growing at the rate of 6 per cent each and every year for the last five years? We have seen massive growth in expenditure by this government, which has seized on windfall revenue gains and rather than taking them to the bank, recognising they are one-offs, they have built them into the cost base of this state. So we are now spending 35 per cent more than we were just five years ago, and that growth rate of course is unsustainable. We have seen over the last five years, every year the Treasurer brings down a budget he says, 'Oh, next year we’ll be prudent. Next year we’ll only have expenditure growth of 1 or 2 per cent’. But when next year comes around, every time, it has not occurred and we have seen massive blowouts in expenditure growth, which has resulted in us having a budget bottom line, an expenditure bottom line, that is 35 per cent higher in just five years. Where has a lot of that revenue gone? Where has a lot of the expenditure? We have seen it go into employee expenses, growing the public service, increasing the cost of the public service, which is up by almost 42 per cent over that same five-year period. Now, the problem when the government builds that surplus revenue, that windfall revenue, into the bottom line and the economic cycle turns is that it then has to scramble to find that revenue to make up the shortfall, and that is what we have with the budget from the Treasurer this week. Rather than having been prudent on expenditure, rather than having maintained prudent and sustainable expenditure growth over the life of the government over the last five years, we have seen massive expenditure growth every year, soaking up every extra dollar of windfall revenue, and now that the property market has softened the government is scrambling for revenue. Just to put that in context, it is worth looking at the forecasts for expenditure which were produced in the budget last year and which have been forecast in the budget this year to give an indication of just what the shift has been. Looking at the 2018–19 budget and the forecasts for the current year, being 2019–20, 12 months ago the Treasury was forecasting that stamp duty on property transactions was going to be $7.212 billion. This year, for the same period, that forecast has now been cut to $5.896 billion—a loss of $1.4 billion in expected stamp duty revenue. Interestingly, we are seeing the government continue to forecast strong land tax revenue, at $3.16 billion. But the big hit to the budget has been on the expectation of stamp duty, with a loss in the order of the magnitude of $1.3 billion or $1.4 billion in revenue from stamp duty on the transfer of property. And of course that is a figure which is highly susceptible to changes in economic conditions because it is driven by both the value of property and the volume of property transacted. We have seen over the last 12 months that property prices have certainly fallen. and because stamp duty on property is a very progressive scale of tax it takes only a minor decline in property values for the amount of stamp duty payable on a given property to fall dramatically. Likewise, with the drop-off in the number of properties being sold as the other key driver of stamp duty revenue, we have seen a drop-off, in aggregate, of almost $1.4 billion. So rather than the government cutting its cloth on expenditure to match its revenue—as it should have done prudently over the last five years, recognising what was windfall and what was baseline revenue—it has had to scramble to be able to accommodate the spending commitments it made in the election last year on top of the massive blowout in expenditure, which has occurred as baseline expenditure over the last five years, and accordingly we see the Treasurer now scrambling to increase the revenue base of the state to make up for that hole in stamp duty revenue. And so we have in this year’s budget a number of revenue initiatives. The Treasurer, in presenting the budget, has forecast for the budget year a surplus of $1.050 billion, but in order to get to that bottom-line surplus figure the Treasurer has taken some extraordinary steps in gathering revenue for this year’s budget. And one of the extraordinary steps the Treasurer has taken is in respect of dividends. Now, all governments take dividends from financial corporations, like the Transport Accident Commission (TAC), WorkCover, the Victorian Funds Management Corporation and the Victorian Managed Insurance Authority; all governments take dividends from the water boards and another trading corporations that sit within the public sector in Victoria. But the rationale for those dividends has always been one of having those entities operate on a commercial basis. In the same way that a private-sector insurer would pay a dividend to its shareholders, it has been policy to have a dividend paid by the state insurers as well, and traditionally that dividend had has been tied to the profits of the corporation. In the case of the TAC and WorkCover that has either been the bottom-line profit or it has been the performance from insurance operations, but there was always a basis for the levying of a dividend from those corporations—a proportion of bottom-line profit or a proportion of insurance profit. What we have seen in this year’s budget, though, is simply a cash grab. The Treasurer has said he wants a surplus of a little over a billion dollars. Where is he going to get it? Well, this year he has decided to take $890 million out of the Transport Accident Commission to deliver his billion-dollar surplus. And he has said that over the next two years, as he is seeking to deliver further surpluses, that will increase to $982 million next year and a billion dollars the year after. So those amounts bear no resemblance to the profit that the TAC is forecast to produce in those years. They have no relationship to the operating performance of those corporations, as has traditionally been the basis for levying dividends in the past. They are simply the gap the Treasurer needs to make up, and the convenient cash cow for the next couple of years is the TAC, with $890 million to be pulled out this year. Interestingly we see in the out years that the government has taken the same approach with WorkCover, seeking to take from WorkCover $125 million in 2021–22, and then a further $575 million in 2022–23. I have to say the hypocrisy of this government is now taking a dividend from WorkCover is extraordinary. When the mechanism was introduced by the previous government to allow for the collection of a dividend from WorkCover, which was done when I was WorkCover minister, the now government, which was then in opposition, screamed blue murder—that it was outrageous to be taking a dividend from WorkCover, that it was the money of employers, that it was the money of workers, and they would never do it. Yet we now see in this budget, when they have failed to manage expenditure over the last five years, a footnote showing that some $700 million is to be taken out of WorkCover. I might add that this is far in excess of the amounts that had been forecast by the previous government to be taken as a dividend in proportion to operating performance. We are seeing some $700 million to be ripped out of WorkCover in forward estimates. I have to say that the silence coming from those parties who were vocal five years ago about the very concept of a WorkCover dividend—the Trades Hall Council among others—is extraordinary, but not surprising. We see the surpluses in this year’s budget being propped up and delivered almost in their entirety by the dividends which are being taken out of the financial corporations which sit outside the general government sector of the state of Victoria. But we also see a number of tax measures, and these are something that the house will have an opportunity to talk about in more depth when the State Taxation Acts Amendment Bill 2019 is debated in this house. On the back of a federal election barely 10 days ago, when the Australian population absolutely rejected the platform which was advanced by the Labor Party and Bill Shorten—a platform that sought to divide the Australian community, set up a class war in the Australian community between what the Labor Party claim were the haves and the have-nots, with a taxation regime which in reality would have hit working families in Victoria, working families across the nation—we see with the budget introduced on Monday the Victorian government going down the same path, seeking to set up what it regards as a tax regime to soak what it thinks are the rich in the Victorian community through increased property taxes, expanding the base of land tax and indeed introducing a new levy on what it regards as luxury cars. I will touch on those two points in particular. I note that they are among a number of tax changes which seek to typically broaden the base of taxes in this state with the intent of collecting in the budget year in total an extra $170 million in tax revenue, but the two in particular I want to refer to are what are described in the budget papers as 'Remove the land tax exemption for contiguous land in metropolitan areas’. This is a tax increase which the Treasurer has characterised as the swimming pool tax or the tennis court tax. It applies where a landowner has two properties next to each other on different titles, but because they are next to each other, next to the principal place of residence, they have been exempt from land tax. The Treasurer has said, 'This is outrageous. This is all the rich people in Toorak who have got tennis courts and swimming pools on a second block, and we are going to tax them’. In reality, many of these families for whom the adjoining property is owned on a separate title are families throughout the suburbs. They are migrant families who bought the adjoining property 30, 40 or 50 years ago and they have a vegie patch or a garden on it. They have held that second property, that adjoining property—it might only be a couple of hundred square metres—in a separate title because that is the way they bought it. Suddenly they are going to be hit by a land tax for the first time because this government thinks they are rich. While the government has forecast revenue from this measure, I think in reality they will get very little revenue from this measure, because what it will do is force these landowners, who as I have said, have maybe held the adjoining property for 30 or 40 years, to simply consolidate their titles, which will lead to no revenue to the state. One of the other examples of where the Treasurer and the government have sought to divide the Victorian community into what it regards as the haves and the have-nots is the introduction of its ill-considered so-called motor vehicle duty on luxury vehicles. The Treasurer has set a threshold of $100 000 as the trigger point for this expanded stamp duty on vehicle purchases, with a higher threshold for the next level up. He has basically said, 'Anyone who’s spending $100 000 on a vehicle must be rich and we’ll soak them’. On Tuesday the Treasurer was asked at a Victorian Chamber of Commerce and Industry (VCCI) lunch as to what he would say to a family who may have been saving up 20 years to buy a vehicle that falls into that category. They may have been saving for 20 years to buy a Toyota LandCruiser Sahara, which costs a bit over $100 000. They might be approaching retirement, and they may have been saving for 20 years to buy this Toyota LandCruiser to tow a caravan around Australia in their retirement. The Treasurer’s extraordinarily dismissive response to the question at the VCCI lunch as to what he would say to a family that had saved for 20 years to buy a Toyota LandCruiser was, 'I would tell them to get a life’. The Treasurer of Victoria, in his arrogance and in his dismissiveness of Victorian citizens, thinks anyone who has actually saved for a Toyota LandCruiser over a number of years should 'get a life’. That is the approach of this government and that is the approach of this Treasurer to the concerns of regular Victorians. Because of the fact that the Treasurer does not understand that Victorians may have dreams and aspirations of this nature, that they may save for 10 or 20 years for an acquisition like that, he thinks it is fair game to tax them because in his eyes and in the Premier’s eyes those people must be rich despite having saved for 20 years. His dismissive approach really highlights the arrogance and attitude of this government. It was rejected by the people when Bill Shorten tried it 10 days ago, leading up to the election. I think you would find that if the Andrews government had been honest with the people of Victoria going into the election last November and put these proposals on the table, they would have been rejected as well. The budget we are dealing with today and the difficulties and the challenges in this budget were not brought about because of the winds of economic cycles. They were brought about by the failure of this government to manage over the last five years. Everyone knew that the windfall revenue the government had over the last five years was just that—windfall revenue. The fact that the government failed to bank it and instead decided to spend it and build it into the cost base of the state over five years has now come home to roost as property stamp duty has come off the boil. The government is now increasing taxes on people in Victoria who cannot afford them. It is not because it has been prudent over the last five years but because it has failed to manage the budget properly and Victorians are now paying the price.

Gordon Rich-Phillips MP

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