Tuesday, May 06, 2014

Vic budget 2014: Big spending, but not for some time

A big-spending budget that delivers steadily increasing surpluses? Joe Hockey would like to see that.

Michael O'Brien has managed it partly by not spending big at all. Spending will climb merely in line with inflation at 2.8 per cent in the coming financial year, and then scarcely at all (0.7 per cent) as a number of big spending initiatives wind down or are transferred elsewhere. The biggest is the National Disability Insurance Scheme. It'll be funded by Joe Hockey from 2015-16. And by us, from a higher Medicare levy beginning this July. Commonwealth-state spending partnerships on health and early childhood education are also set to expire in 2015-16 and if the Commonwealth doesn't renew them Michael O'Brien won't volunteer the money.

What big spending there is is concentrated on infrastructure. But most of it won't be spent for some years, and when it is it won't immediately hurt the budget. Capital spending doesn't contribute to the surplus or deficit at the time it takes place. It contributes later via an accounting rule called 'depreciation'. Bits of the cost turn up in the budget a piece at a time over the life of the project. It’s a sort-of magic and its increasing use has seen annual depreciation expenses soar. They will climb to $2.4 billion this financial year. By 2017-18 they will be $3 billion. Interest costs would climb as well were it not for the sale of the Port of Melbourne.

And that's not the only magic. The Commonwealth is coming good with two lots of $1.5 billion to fund both stages of the East West Link. The wonder of state budget accounting means both feed straight into the budget bottom line. The grants add to the surplus when they come in, but they don’t detract from it when the money comes out to build roads and railways, except for later as depreciation.

Other income is rolling in. Land tax revenue will jump an extraordinary 16.9 per cent next financial year, and stamp duty 6 per cent. (To his credit the Treasurer hasn't assumed it will continue like that. How could he?) Victoria's population is climbing at the second-fastest rate in the nation after Western Australia, 1.8 per cent. It means more taxpayers and more pressure on house prices, in a sort-of virtuous revenue spiral. Tax hikes on gambling and motor vehicle registration will also help.

All up, tax revenue is set to climb an exceptional 10.7 per cent next financial year and by an astounding 32 per cent in the five years to 2017-18.

And that's without considering Victoria's share of the goods and services tax revenue. Next financial year Victoria will receive its lowest share in a decade - just 88.3 cents for every dollar of GST collected within its borders. But the dip is temporary and historical. It reflects the circumstances in the past, several years ago. The process of dividing up the GST revenue works slowly and with a lag. Victoria’s economy was stronger than the NSW economy several years ago and it is being punished for that, but it’s weaker now and it will be rewarded for that. By 2017-18 it should be receiving 94 cents per dollar of GST collected in (delayed) compensation.

GST income will climb by about a billion a year right through to 2017-18.

And Victoria’s economy is picking up. The forecasts have employment growing and state economic growth climbing from 1.6 per cent per year to 2.75 per cent by 2015-16.

The budget figures aren’t as good as they look, but Joe Hockey would happily do a trade.

In The Age and Sydney Morning Herald