Victorian Budget: a good mix of short, medium and even longer-term fiscal stimulus measures
The Budget suggests the Victorian economy will be severely hit this financial year due to impacts associated with the coronavirus lockdowns.
The short-term spending and stimulus measures contained with the Budget are enormous, but questions remain how this run up in debt will be repaid given limitations in State taxation arrangements.
The Budget contains a good mix of short, medium and even longer-term fiscal stimulus measures that have the capacity to deliver on multiple objectives for the population of Victoria. Public investment in social housing, education facilities, transport networks, and arts facilities result in an economic stimulus and job creation and can also deliver social benefits to those on low incomes, the young, the old and the general public.
The question that arises is whether the envisaged substantial increase in debt (a) can be serviced sustainably, and (b) can be (substantially) retired in the medium term. Today’s yield curve suggests that the coupon rates for long-dated government bonds remain historically low, although the coupon rate for a 20-year bond is nearly double that of a 10-year bond. Over the next decade, the Victorian government will need to set the economic foundations for achieving operating surpluses, in order to slowly let down this coronavirus- induced debt balloon. The challenge is that Victoria, either voluntarily or due to competition from other states, is likely to see payroll tax and stamp duty revenues fall during this period as it moves to more economically efficient tax arrangements.
The best way of ensuring Victoria’s debt position is stabilised and reduced is to create a framework to facilitate economic growth in the state faster than would have been the case in the absence of COVID. Investments in productivity-enhancing infrastructure, both economic (eg: transport) and social (eg: community housing), plus implementing public sector reforms aimed at easing the burden of doing business in the state (e.g. reforms to the planning system) are vitally important developments that should contribute to increased growth.
While the Government has put forward an array of these growth-enhancing reform measures, the economic forecasts presented within the Budget appear strong. Victoria is the second-largest state economy, behind New South Wales (which also has a relatively more diversified economy). During the past ten years NSW has achieved compound average annual real (CAAR) GSP growth of 2.3 percent compared to Victoria’s 2.4 percent. However, over the forward estimates period NSW Treasury is anticipating CAAR GSP growth of 1.6 percent for NSW, compared to Victorian Treasury’s forecasts of 2.4 percent. This average growth forecast for Victoria is strongly influenced by the 7.75 percent forecast for 2021-22, which also compares to the national GDP growth forecast of 4.75 percent proposed by Commonwealth Treasury in the 2020-21 Federal Budget.
Despite the optimistic forecasts in the Budget, the Victorian economy at the end of the forward estimates will be between 1 and 2 percent smaller than would have been the case in the absence of the COVID shock. This emphasises the importance of stimulating productivity growth, which is vital for improvement to living standards.
The Victorian Government also anticipates growth in private sector employment, which combined with the Budget’s stimulus measures, will see “at least 200 000 new jobs by 2022, and 400 000 new jobs by 2025, compared to the trough in employment in 2020”. However, employment growth forecasts presented in the Budget only suggest between 250,000 and (maybe up to) 300,000 new jobs in Victoria by the end of the forward estimates period, of which around 40,000 are new employees within the Victorian Public Service.
- The Budget contains a good mix of fiscal stimulatory measures aimed at meeting more than one policy objective.
- While the intent of the Budget is clear, there will be a legacy debt cost that will be challenging to repay into the medium term, especially if property tax reform is implemented.