Pallas’ farewell tax hike shows disconnect between government and the people

There is a great lesson for all of us in what happened when Victorian Treasurer Tim Pallas resigned recently.

Yes, some of those lessons could include the problem with building up massive government debt or even the importance of timing but this is not the biggest lesson.

The biggest lesson is to never believe people who make simplistic comparisons between running your household budget and any Government Budget.

When you hit trouble balancing your household budget, there is little choice between either boosting your income by working an extra job or cutting your expenses.

Governments have a third option that is simply not available to mere mortals – they can increase taxes.

When they do that there is no personal pain for the politician at all, although there can obviously be a political cost unless the tax is dressed up in exactly the right way.

Pallas poll tax

Despite already running Australia’s highest taxing and most indebted State Budget, Tim Pallas’ final act before handing in the reins for his retirement was to introduce a new tax on top of the many property and other tax hikes he had already introduced during his decade long reign.

In true political style this new tax was nicely dressed up as a way of funding emergency services with the former Fire Services Levy being magically transformed into an “Emergency Services and Volunteers Fund”.

Along with this fancy changing of the name came a similarly fancy rise in the amount of the tax – from 8.7% of every $1,000 of capital improved value to a whopping 17.3%.

That is a tremendous increase that will milk on average an extra $60 from every Victorian who pays council rates and will raise a compulsory extra $2.1 billion from every person who pays council rates in Victoria.

Being an average, of course, some people will end up paying a lot more than $60 per person and some less.

Tax names irrelevant

Another lesson to learn is to ignore the misleading waffle about this being a way to fund the state’s emergency services, including Fire Rescue Victoria, the CFA, Vic SES, Triple Zero Victoria, the State Control Centre and Emergency Recovery Victoria.

This is a meaningless bit of window dressing designed to trick the public into believing that these extra tax dollars will in some way be specifically earmarked to help their much-appreciated emergency services.

In reality, virtually all tax revenue finds its way into the same big bucket and is then divvied out to pay for all government services as required.

All of these emergency services would have been supported by the taxpayer whether this fancily named tax had been introduced or not.

Funding bureaucracy or debt not an appealing prospect

Of course, it is not as exciting for the public to learn that their hard-earned extra taxes are going to fund salaries for Victoria’s bloated public service, which single handedly blew out its projected wages bill by $2.7 billion to reach a staggering $37.5 billion for 2024-25.

Not to forget the interest costs on the projected net debt level of $187 billion by 2028 which will make even this tax increase look like an extra drop or two in a bucket with a big hole in the bottom.

Pallas also announced a hefty rise in the congestion levy on inner city car parks – and a handy expansion in the area it applies to along with the removal of a car registration discount for electric cars.

All of this goes to show the dramatic way in which Governments can simply add taxes as a straightforward alternative to tightening their spending.

Pay rises all around?

Just imagine if the average household had the ability to give itself a pay rise to counteract any increase in spending.

It would be a sure-fire path for an orgy of consumption followed by hefty and widespread pay rises.

Which is sort of what we are seeing happen with the Victorian Government which is pressing hard on the tax lever at the same time as it pushes forward with a raft of expensive infrastructure projects.

The general theory as pushed by none other than Tim Pallas is that as long as the State economy keeps growing, it will be able to absorb the growing debt pile and levels of taxation.

Of course, this fails to account for the risk of what happens if economic growth slows and then reverses, or the risks of credit ratings worsening and debt repayments rising fast.

Hopefully we don’t get to experience this problem but if we do, the only answer is even further new taxes coupled with government spending cuts which will eventually – and painfully – lead to a slow recovery in the state’s fiscal position.