Tuesday, April 26, 2016

Budget 2016: Pallas rides high while Morrison dithers

Who wouldn't want to change places with Tim Pallas? Scott Morrison would. Pallas is offering Victoria surpluses as far as the eye can see; Morrison is offering Australia continuing deficits. Pallas is swimming in revenue yet on the lookout for more; Morrison isn't, and isn't keen to raise much more. Pallas has the confidence of the ratings agencies; Morrison has them worried.

Here's how Pallas explains his determination to continue to raise a bit more here, a bit more there, even though Melbourne's real estate boom is showering him with a record $6 billion a year in stamp duty: "You've got to be prepared to show that you can defend your bottom line by taking decisions about revenue, whether or not you need to. That's how you get a AAA credit rating, mate, and that's how you keep it."

Thinking perhaps of his federal counterpart, or of state governments past, Pallas says: "If you basically show that you are really good at keeping in surplus but all you're doing is dispersing the benefit of bounty or providence, it will count against you – you've got to also show you are prepared to secure and protect your revenue base."

It's what the ratings agencies are telling Morrison. Here's the Moody's agency this month expressing a lack of confidence in a federal treasurer who talks about cutting spending but isn't too keen on sandbagging revenue: "Without such measures, limited spending cuts are unlikely to meaningfully advance the government's aim of balanced finances by the fiscal year ending June 2021, and government debt will likely continue to climb, a credit negative for Australia."

Morrison's treasury is losing more and more to negative gearing and will lose even more now Morrison and Turnbull have acted as if it is a protected species; GST revenue isn't holding up as it once did; and the temporary deficit reduction levy is about to come off, even though the deficit hasn't been reduced. Yet with the notable exception of ultra-high-income superannuation tax concessions, Morrison has shown next to noscant interest in plugging the leaks.

It would be bad enough, were company tax revenue not also collapsing – although hopefully on a temporary basis – and record-low wage growth all-but neutering bracket creep as an engine of income tax growth.

Pallas is inching up taxes on foreign home-buyers and absent landowners, and royalties on the miners of brown coal. He's doing it while raking in billions from the fastest home price growth in the nation, and while planning to invest an unprecedented amount in the infrastructure that will support that population.

In his words, there's about to be a "change in the pace and feel of the government".

"It will inconvenience you," he says. "And not just around the Melbourne Metro. Metropolitan Melbourne itself could resemble a worksite."

Pallas is planning to fund the Melbourne Metro and the Western Distributor himself, without funds from the Commonwealth, plus 50 level crossings, the biggest upgrade of schools in the state's history, and much more, right up to the limit that his advisers tell him it's safe to borrow, which is 6 per cent of gross state product.

When he gets the money from the sale of the long-term lease over the Port of Melbourne in the coming financial year, he'll borrow more to move back up to that limit, just as any prudent chief executive would, where the projects can be shown to have benefits that exceed their costs.

He says he is "not prepared to run a lazy balance sheet".

"Public debate about government debt has often focused on the desirability of eliminating net debt," his budget papers say. "A reluctance to use debt can deter sensible investments in productivity-enhancing infrastructure. Intolerance for debt has the potential to slow economic growth and limit opportunities to improve the quality of life of Victorians.

"Without debt financing, Victoria would not have much of the core infrastructure enjoyed today. The International Monetary Fund has pointed out that infrastructure is under pressure, particularly in urban areas, and that Australia has an infrastructure deficit. The IMF considers that a boost in infrastructure spending funded by borrowing would have short and long-run benefits."

Morrison is less ambitious.

Rather than protect revenue or do much of the hard work needed to identify specific savings, he is expected to hit the public service with another overarching "efficiency dividend". Rather than tackle taxation rorts (superannuation excepted), he'll try to strip unemployment benefits from "rorters" by making it harder still for them to get the dole.

His budget mightn't even include the infrastructure commitments his prime minister has been working towards. They might be postponed until during the election campaign so they can be announced after the budget, when they won't show up in the bottom line.

Instead of removing benefits from welfare recipients, Pallas says Victoria will tackle dependency by introducing New Zealand-style social impact bonds, in which private investors will be asked to stump up the money for alcohol and drug rehabilitation and juvenile recidivism programs. If the projects pay off, reintegrating people into society and boosting Victoria's economy, the investors will get extra.

Pallas is luckier than Morrison, and being part of a state rather than a federal government means he is naturally more more attuned to the welfare of his citizens. But personal and political differences come into it as well.

It isn't clear from his speeches why Morrison got into politics, except perhaps to ensure that business is "not unreasonably burdened" by government. That's what he said in his first speech to Parliament. He seems to believe in not getting in the way.

Since he and Turnbull have been in their jobs, there's always been some sort of crisis or election around the corner, something that's prevented them from governing. Their greatest curse has been the three-year parliamentary term, as well as the false start with Tony Abbott. It's made it hard to be bold.

Pallas and Premier Daniel Andrews face the voters only every four years, and so are actually able to govern. It's Victoria's secret weapon. It ought to be national.

In The Age and Sydney Morning Herald

Victorian State Budget 2016: Pallas redoubles bets on economic growth

Blessed with the highest population growth and the fastest property price growth in the nation, as well as the fastest economic growth this side of Darwin, Tim Pallas has decided to double down.

He is going to invest the proceeds in schools, roads, rail links and hospitals that will allow it continue.

At around the turn of this century NSW made a different decision. Enjoying faster population growth than Victoria, it under-invested in the things that were needed to make the state work, partly to pay for the stadiums that housed the Olympics. Its population growth slid below Victoria's and never recovered.

Victoria's treasurer could have given the bounty back in tax cuts. He could have allowed the surplus to soar. He could have spent it on monuments of little value as did NSW. Instead, he wants to use it to ensure the city and suburbs and regions work.

He'll spend a record $7 billion in the coming financial year, followed by as much, if not more, the next year, and up to $8 billion in 2020-21. Not all of it is on projects that are yet known. It includes what Mr Pallas calls "headroom". It's the amount his treasury officials believe is safe to spend on worthwhile projects when they are identified.

Heading the list is the Melbourne Metro, all the way through to completion in 2026. If a "future Commonwealth government" wants to help, Mr Pallas will accept its money, but he is sick of being messed around.

He says Melbourne is on track to overtake Sydney as Australia's biggest city from 2030. So he is spending big on suburban rail lines, regional lines and the Western Distributor, all "without a dollar from the Commonwealth government". He is going to spend $900 million upgrading and building schools, "the biggest single school investment in Victoria's history".

It's a commitment that can only be safely made by someone who thinks he'll have the money.

Income from stamp duties has shot up 23 per cent in the past year. He is raking in $1 billion more than he expected this time last year. Treasury is wisely expecting some pullback, a slide of 6.4 per cent in 2016-17, and then growth, eventually reaching a long-run average of about 6 per cent a year. There's not much science to its projection. Treasury staff freely concede they don't know when or if prices will pull back. The only reason for expecting growth to eventually revert to the long-term trend is because it's the long term trend.

If property prices turn down sharply and stay down, Mr Pallas might find he doesn't have the money he thinks he will have. But his decision to boost spending on the things that make the city more livable will enhance his odds. The extra spending should itself ensure that Australians keep flocking to Victoria and gain jobs, boosting revenue further.

He is certain it won't deprive him of his prized triple-A credit rating. In fact he says the only chance he has of losing it is if the Commonwealth loses its top rating first, something that's entirely possible.

The ratings agencies have been told the investment is for projects that will set up Victoria for the future, ones that pass a strict cost-benefit test. Spending on the ordinary business of government is set to climb by less than revenue over each of the four years. To keep the agencies happy he is lifting an array of taxes and charges by far more than he is cutting payroll tax, by around $150 million more each year.

In The Age and Sydney Morning Herald