Sunday, May 03, 2015

What's Pallas getting right that Hockey is getting wrong?

What's Tim Pallas doing right that Joe Hockey is doing so wrong?

On Tuesday, Victoria's new treasurer will deliver surpluses as far as the eye can see. A week later in Canberra, Joe Hockey will deliver only deficits. Pallas will claim to have met every one of his election commitments. Hockey could only hope to meet his.

Partly it's the advice they got before their elections. Hockey's told him what he wanted to hear. He could abolish the carbon tax, keep paying out compensation for the carbon tax, abolish the mining tax and cut the company tax rate and match Labor on funding schools and hospitals while paying down debt.

Pallas'> advisers were more cautious. Tearing up the East West Link would save billions (despite the concern about letting the few hundred million the Coalition had already spent go through to the keeper). While building level crossings and the Melbourne Metro would be expensive, the spending would build up slowly.

But mainly it's where they are making their money. Victoria's budget is powered by real estate. In the past year Melbourne house prices have surged 7 per cent. Every new sale hands Pallas a whack of stamp duty. Hockey's budget used to be powered by iron ore. But in the past year prices have plunged 38 per cent.

What can we expect from Pallas on Tuesday? Less than you might think. The end of the East West Link contract means he will commit to less infrastructure spending than Denis Napthine did in his final budget.

But it makes sense. Napthine didn't release the benefit-cost analysis behind the East West Link before the 2014 election because it was appalling. It showed the project would return a benefit of just 45¢​ for each $1 spent. More than half of the money would be wasted. When it expanded the benefit by factoring in so-called "agglomeration benefits" (what happens when businesses cluster near each other) it got a loss-making return of 84¢ per $1 spent.

Labor won't make that mistake. Melbourne Metro will return about $1.90 per $1 spent. Infrastructure Australia (the body that never got to look over the East West Link) ranked it as among Australia's best projects. Many of Labor's level crossing projects look good as well. Labor is committed to these projects as well as the Westgate Distributor and widening the Tullamarine Freeway because it took them to the election, but after them it'll turn off the tap for a while.

All future road and rail projects, including small and medium-sized ones, will have to run the gauntlet of Infrastructure Victoria, a new body it'll set up in the second half of the year. Its reports will be made public. If the projects don't stack up, it'll say so.

That's why Pallas won't be announcing any new projects in Tuesday's budget. He'll have to wait until Infrastructure Victoria has run its ruler over them. He will set aside a small amount for the sort of small projects he thinks will get up (they will be buried in sections with names such as "unallocated capital expenditure" and "decisions taken but not yet announced") but he won't commit to them until the new umpire has taken a look.

He won't even commit to Melbourne's second container port. Labor took to the election a clear preference as to its location, but said it would decide only after advice from Infrastructure Victoria.

It's a new way of governing. It'll make budgets and elections less contentious. And it'll mean that when the government next changes hands the new mob will be far less likely to repudiate contracts after discovering that the old mob hadn't been telling the truth.

Pallas has been lucky in other ways as well. He is expecting a large sum from the long-term lease over the Port of Melbourne. When he uses the proceeds for his own projects including Melbourne Metro and those approved by Infrastructure Victoria he'll be eligible for the 15 per cent Commonwealth contribution introduced by the Abbott government to encourage asset recycling. And the Grants Commission has just given him $400 million over the next four years by changing the way it divides the goods and services tax revenue between the states, much to Western Australia's annoyance.

Two treasurers will be delivering budgets over the next two weeks. One of them will be relaxed.

In The Age and Sydney Morning Herald