Victoria’s Budget contains less horror than expected

Victorian Budget Premier Daniel Andrews deficit infrastructure
Victoria's budget is heavily focused on building new infrastructure, which will see the state's debt levels double by the next election.

For a first year Budget that was delayed because of the Federal Election that did not go his way, Premier Daniel Andrews might have been expected to unveil much more horror than he actually did.

Instead the relative drought of stamp duty money that has left a $5.2 billion revenue void and the $2.6 billion less due to the election result is being made up for with some extra debt and with the hope that the property market will turn around fairly promptly.

Wealthy land bankers and car buyers hit

Mind you, this is a horror Budget for some people – you really don’t want to be living in Toorak on two land titles while you are in the market for an expensive Maserati because they really have been whacked.

Likewise, the picture has worsened for foreign property investors and absentee landowners, not that too many people are crying for any of these groups, which is why they are perfect targets for a State Government hungry for extra revenue wherever it can find it.

Also slugged will be mining companies in the state, as they are set to face a 2.75% gold production royalty.

For the average person the nasties are much more subtle such as the $1.8 billion in efficiency savings for state public servants and more austerity on the pay rise front for the growing army of State Government workers and possibly even higher speeding camera fines, depending on behaviour.

By the end of this four-year term, the Andrews Government still expects to be paying an amazing $29.4 billion annually in wages alone.

Infrastructure spending rises with immigration

Certainly, on the spending side the Andrews Government has continued with its approach of investing heavily in new infrastructure ($14.2 billion) such as level crossing removals and also on new programs such as dental van care for all public-school students and an expanded solar panel scheme.

With three and a half years until the next election, there is plenty of time for those infrastructure projects to start being delivered in time for voters to reward the Government for keeping up with continuing population growth.

Surpluses with rising debt

In terms of actual financial management, this Budget has so far been successful in getting the broad tick of approval from ratings agencies such as Moody’s who have said that the run up in debt from the current $23 billion to $54.9 billion by the time of the next election is still consistent with Victoria’s current AAA debt rating.

That may be true but as any homeowner knows, with increasing debt comes increasing risk and while the debt increase should be easily dealt with, it does reduce the options should the economic winds suddenly turn frosty.

The other thing that may mystify many people who run their own budget is how the State Government can be forecasting Budget surpluses as far as the eye can see while at the same time increasing debt markedly.

The answer is in how it accounts for what they call “operating surpluses’’, given that the infrastructure projects remain in the State Government’s hands even though they may not generate any cash.

Budget deficit in cash flow terms

In pure cash flow terms, the projected actual budget position over the next four years is deficits each year, beginning with $7.7 billion and following that with $7.2 billion, $1.3 billion and $1.7 billion.

They are the “real” numbers an ordinary household would look at and perhaps still be reasonably satisfied with, given that the outlook is steadily improving at the cash flow level.

It is that improving cash flow outlook that explains why the AAA rating is not under threat – it should be easily manageable at very low interest rates available to the State of around 2% over ten years.

That assumes, of course, there are no really unfortunate external events that upset the apple cart such as a really bleak turn for the US-China trade war or some other poorly timed X-factor.

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