A few home truths on tax spoil outlook for Tim Pallas’ Victorian budget bonanza

by John Daley and Brendan Coates

Published by The Age, Thursday 28 April

With Treasurer Tim Pallas’ second state budget released on Wednesday, the Andrews government is pitching itself as being focused on the future. There are billions of dollars for new infrastructure projects – including a commitment to fully fund the $10.9 billion Melbourne Metro and $1.5 billion for the Western Distributor, plus billions more for schools. These are bold initiatives to meet the demands of Melbourne’s rapidly expanding population.

Yet the Treasurer is relying heavily on a revenue bonanza to make these good things happen. His government would do well to remember the Commonwealth’s current budget woes: such revenue booms tend to be temporary, and higher spending is hard to reverse.

Rather than banking on the good times lasting, the Victorian government should be setting itself up for the long haul with tax reforms to secure a future of balanced budgets and a growing economy.

Both the government’s infrastructure spending promises and strong budget surpluses are underpinned by rapid growth in stamp duty on property transfers and in payroll tax receipts. A booming property market has provided an unexpected windfall to the states’ coffers, worth $1 billion in 2015-16 alone. Stamp duty revenues have risen by about 20 per cent a year in each of the past three years; the budget assumes these revenues will be sustained.

Yet stamp duties, which account for 30 per cent of all state tax revenues in 2015-16, will weaken as the Melbourne property market slows. Stamp duty has long been the most volatile state tax base.

In last year’s state budget, the Victorian Treasury estimated that every 1 per cent decline in property values would reduce the budget bottom line by $116 million. The effect would be even larger if property transaction volumes fell at the same time, as one would expect when prices fall.

The rapidly growing presence of foreign investors in Victoria’s residential property market deepens such concerns. Recent figures from Westpac, based on Foreign Investment Review Board data, suggest that in 2013-14 (the latest figures available) foreign buyers accounted for about 14 per cent of all Victorian residential property sales and up to 30 per cent of sales by property value. Higher stamp duty premiums on foreign real estate owners – one of the few revenue measures in the budget – will further increase the state’s dependence on a hot property market.

Other threats to the budget outlook also loom.

First, the budget assumes the state will continue to receive a growing share of the national GST pie, rising from 22.4 per cent this year to 23.5 per cent in 2019-20. Yet Victoria’s GST distributions have been inflated by the mining boom, as record mining royalties in Western Australia shifted GST revenues to the eastern states.

The collapse of commodity prices will reverse this trend. WA’s last budget forecast that as the state’s mining revenues fell, its share of national GST revenue will rise from 3.4 per cent in 2016-17 to 7.7 per cent in 2018-19. At least some of this will be at Victoria’s expense.

Second, the budget barely mentions a serious challenge to Victoria’s budget position – uncertainty over Commonwealth funding for schools and hospitals. A new funding agreement for hospitals will increase Commonwealth funding over the next four years, but the long-term outlook remains uncertain.

Similarly, Canberra has yet to commit to a real increase in schools funding beyond 2016-17.

Finally, the budget’s planned boost to infrastructure investment must ultimately be repaid. Some money can be recouped via user charges, such as extending road tolls on Melbourne’s CityLink to pay for the Western Distributor, or capturing the uplift in property values around new Melbourne Metro train stations.

But most of the cost of new infrastructure will have to be funded from future tax collections. Interest and depreciation charges, largely a legacy of increased capital spending, have already increased from 5 per cent in 2008 to more than 8 per cent of Victorian government revenue over the past decade. With infrastructure spending rising further, the burden on future budgets is not rising only because interest rates have fallen.

Shifting away from stamp duties and towards broad-based property taxes would provide a more secure and sustainable revenue base. And a more resilient budget should be matched by a more efficient economy. But the government’s time in power has been marked by a reluctance to pull the policy lever that could make the biggest difference: tax reform.
Stamp duties are among the most inefficient taxes because they discourage people from moving to better jobs, or to housing that better suits their needs. In contrast, broad-based property taxes are among the most efficient taxes in the toolkit.

Unfortunately next year’s budget is likely to be too late for such reform. With the November 2018 state election then little more than a year away, appetite for politically difficult reforms will be even less than today.

It’s a shame Victoria has missed an opportunity to shift its budget away from volatile and inefficient stamp-duty revenues. That would be a real legacy for a government focused on the future.