Transcript Lenders buget No. 2

Lenders Budget No. 3
“GFC Gone. Growing Again!”
or
“The Bicentenary Budget”
Presentation by
Dr Vince FitzGerald
Director, the Allen Consulting Group
to
IPAA Victoria State Budget Briefing
5 May 2010
Bicentenary??
Mr Lenders is Victoria’s Treasurer
No. 46
And this is Victoria’s Budget
No. 154
46
+154
= 200!
Apologies for starting with trivia
2
Criteria to assess a Budget
Last year’s list:
1.
Sustainable financing
2.
Meeting major challenges, notably population growth
(& effects – congestion, excess demand for housing)
also environment-related (water, bushfires, prospective
carbon pricing)
3.
Maintaining, improving core services (esp health)
4.
Maintaining the State’s competitiveness
5.
Optimising engagement with the Federal system.
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Criteria cont’d
List, as always, remains much the same, but the order changes
This year, ‘sustainable financing’ drops a couple of notches below
‘meeting major challenges’
Linked to it, ‘optimising engagement with the Federal system’ rises
in significance, with the Commonwealth:
Seeking to exert greater control over areas of State responsibility and
expertise (health, education)
Taking back 30% of the GST
Impinging on State payroll and resource tax bases
(and Henry canvassed ‘federalising’ some other taxes).
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Growing dependence on the Commonwealth is not a happy road for
the States, or the citizens to whom they deliver services
Source: Victoria’s submission to Henry
5
The economic basis of the budget projections
What a difference a year makes!
The GFC is behind us, unless the ‘Acropolis now’ scenario
plays out and there is a return to global credit drought
Victoria clearly remains the best economic performer among the non resource
States (and recently vis-à-vis the resource States)
And revenues are bouncing back, e.g. conveyancing stamp duty back to 2008
levels.
Economic forecasts in Budget if anything conservative
GSP growth 3.25% 2010-11 then 3.0%, c.f. private sector forecasters 3.25-3.5%
Employment 2.0% then 1.75% c.f. private forecasters over 3%
next 2 years (but slower later)
Nevertheless Budget assumptions well within the credible range.
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Jobs created, last 12 months
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Sustainable financing
Projected operating surpluses of $872m 2010-11 and
average $1.2 billion over FE period credible and commendable –
especially as all will go to financing infrastructure investment
Operating surplus ($m)
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Quibbles, and emerging risks
Is it prudent to reduce the payroll tax further, albeit
marginally, to 4.9%?
This is the only truly broad tax base the States have
at present, and in Henry’s thinking would be ‘federalised’
Commonwealth’s raising of employer super contributions
by 3% of payrolls puts further pressure on this base
as well as costing the State as an employer
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Payroll tax rate (%)
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Risks (cont’d) … and tax possibilities
The Commonwealth is also (indirectly, using a super profits tax)
intruding into resource taxation, constitutionally a State prerogative
Notwithstanding that States can still levy mining royalties
Is it time for another review of taxation options open to the States?
(Last done in Victoria in early 80’s – Nieuwenhuysen review)
Such a review could pick up some of the neglected Henry ideas e.g.
congestion (or possibly cordon) taxes, and again, look at re-entering the
income tax field, at wider use of land tax, even inheritance tax!
(N.B. Congestion taxes pre-suppose good public transport.)
And generally seek ways to reduce fiscal dependence on Canberra
and improve tax structure efficiency.
11
The State’s Balance Sheet
The State’s balance sheet is now remarkably strong.
Projected at 30 June 2011:
total financial assets $74.8 bn (c.f. $48.9 bn March 2009)
Total non-financial assets $97.7 bn (c.f. $67.1 bn March 2009, but
mainly boosted by adding in about $19 bn of land under roads!)
total liabilities $46.7 bn (c.f. $42.5 bn). NB super liabilities -$400m
net debt $11.7 bn (c.f. $4.4 bn)
However projected net debt to GSP ratio is quite low
at not much over 4% c.f. around 5% projected last year
No risk to State’s AAA rating – which should not be a primary
objective in any case, especially given infrastructure needs.
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Net debt (% to GSP)
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Addressing major challenges
The State is still ‘playing catch-up’ in the face of strong population growth (including
in the regions), but is responding with record levels of infrastructure investment
Total TEI:
‘economic’, mainly transport $13.7 bn ($3 bn already done)
‘social’, i.e. health & education $6.4 bn
Other $3.9 bn
PPPs $4.2 bn
It is difficult to see in the Budget papers (despite new document giving detail) where
the individual projects fit into overall plans for the respective systems, but one can
look elsewhere e.g. to the Victorian Transport Plan
I also query the benefit/cost of some items
Myki, obviously; also the $4.3 bn Western ‘Regional Rail Link’. Aren’t the Loop and the
Flinders Street viaduct the bottlenecks? What of other Eddington road proposals?
Nevertheless, much being done to address the pressures.
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Infrastructure spending ($ billion)
15
Maintaining core services – especially health
Victoria’s health system was in many ways the model, not the
reason, for the Commonwealth intervention in health
But Victoria has suffered with the others in the retreat from 50%
Commonwealth funding to little over 40%
The Premier achieved considerable gains in COAG
(albeit not the retention of all the GST)
Commonwealth effective share 41 to 45% (extra $4.7 bn over 10 years)
State still running the system
Hence the pleasing $4 billion “two health budgets in one” or
“Putting patients first package”, including
Extra $935m over 4 years for more hospital and sub-acute services,
and extra $386m for Commonwealth health and aged care services in
Victoria (primary health care, mental health etc)
$2.3 bn of asset investment.
16
Maintaining core services – community safety
Once again (it must be an election year), the Government
and the Opposition are competing on funding of more
front line police!
1966 more over 5 years, after substantial previous increases
And unfortunately, with more need for prison places (notably for
women), $127m to be spent to increase prison capacity,
over 4 years
Plus $26m on programs to reduce imprisonment rates for women
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Maintaining core services – education and training
Commendably, among other school education initiatives, the
Government is set to exceed its 2006 commitment to upgrade
schools
553 cf 500 promised, after this Budget
And worked with the Commonwealth to get best value for Victoria from
Canberra’s $2.6 billion spending in its (somewhat inflexible and reoriented to stimulus) ‘Building the Education Revolution’ program
However there does not seem to be the same focus on TAFE
(but $24m and $19m for facilities at North Metro and Holmesglen,
some other miscellaneous funding)
Despite the fact of recurrent skill shortages in Australia and the
importance of skills in Victoria’s competitiveness
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Competitiveness
The State is clearly performing very competitively vis-à-vis the
non-resource States and recently, even vis-à-vis the resource
States, especially Queensland
Demonstrating that low tax rates are not the only significant dimension
of competitiveness (and need to balance low tax rates against other
considerations, as mentioned earlier)
Others are non-tax on-costs (e.g. WorkCover premiums, which the
Budget projects to fall), the quality of infrastructure, the availability of
skills, availability of land, ‘user-friendly’ regulation and reduced red tape
etc
Also (Chapter 5 in Budget Paper 2), continuing commitment to reform
This budget scores well on most dimensions, although
query the projected red tape savings of $500m p.a. by 2012
and query the need to pare down payroll tax.
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Summing up
Once again, the Budget scores well
Victoria, absent further significant moving of the fiscal ‘goal posts’ by
the Commonwealth, will have very sound finances, going forward
The State is, within its fiscal parameters, maintaining and steadily
improving core services
The State, while still ‘playing catch up’ in the face of population growth
pressures, is addressing the major challenges it faces
The State is maintaining its competitiveness vis-à-vis other States
(but may also need to protect and extend its tax bases rather than
compete on tax rates)
The State has made the best of the recent hand dealt to it in
Federal financial relations, but that game has yet to run its course!
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