Tuesday, May 01, 2018

Victorian state budget 2018-19: Pallas tests the limits

Tim Pallas describes his budget as a statement of faith. It is, and not only of faith that Victoria’s extraordinary population boom will continue and necessitate the building of even more schools, roads, railways and hospitals. It’s also a statement of faith in property prices.

Buried within the budget is an assumption about how fast property prices will continue to grow. Amazingly, after briefly dipping to about 2.5 per cent, price growth is assumed to bounce back to more than 5 per cent a year for the last three years of the budget projections and presumably beyond.

The latest figures for Melbourne property prices, released as the Treasurer prepared to deliver his speech, show a drop of 0.7 per cent over the past three months, which is pretty much the same as a plateau, after almost a decade of continual increases.

Had the budget instead assumed steady property prices it would take in about $250 million less than forecast from stamp duty and land tax in 2018-19 and as much as $2 billion a year less by 2021-22.

Treasury officials believe they’ve good reasons for assuming price growth will bounce back.

Historically, average price growth has been more than 5 per cent a year, and,  discounting events such as the global financial crisis, prices have never stopped growing for long.

Also, Melbourne’s rapid population growth is affecting prices in an unusual way. Price growth is slowing in inner and metropolitan Melbourne, but continuing strongly in outer Melbourne.

Treasury’s methodology doesn’t allow it to assume a recession or a crisis, so is forced to assume an overall pickup, even though Pallas has asked it to be conservative.

It is on stronger ground predicting a jump in grants revenue of 10.3 per cent next financial year, most of it from the Commonwealth which doles out GST collections.

The Grants Commission has told it it will be compensated for very strong population growth (about 150,000 people a year, which is the population of Canberra every three years) and also to a lesser extent for getting less than its fair share of Commonwealth infrastructure funding.

In future it is expecting more modest growth in grants revenue of 3 per cent a year, a figure that very much depends on the Commonwealth’s decision about a change in Grants Commission formula due later this year.

Pallas is correct to call it an infrastructure budget, but it is more cautious than it seems. He is spending $13.7 billion on infrastructure in the coming year, but only $2.8 billion of it will be on new projects.

His new road and rail programs amount to $4 billion, but only $383 million will be spent during 2018-19. His new program of schools upgrades will cost $1.4 billion, but only $658 million will be spent during 2018-19.

It is true that major projects take time, but it’s also true that Pallas regards himself as bound by his commitment to keep government debt below the level he inherited in 2014, which is about 6 per cent of gross state product. It’s an unreasonable straitjacket. Victoria’s needs are growing much faster than before he took the job.

In earlier budgets he wasn’t as bound by the straitjacket. He could privatise things to fund infrastructure instead of running up debt. He has more or less run out of things to privatise, which means he feels there are limits to what he can do.

There are also real limits. Victoria is running low on concrete, and running low on the skills that are needed to build what needs to be built, which is one of the reasons so much of the budget is centred around building up skills.

Pallas is pushing up his wages bill by 10.1 per cent in the year ahead to take on the teachers and police and public servants and hospital and other staff to keep up with demands. He is testing the limits where he can.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald