Victoria’s debt burden to reach 24.5% of state economy by 2027, even after tax increases

The scariest thing about Dan Andrews’ Victorian Budget is not the bevy of new taxes – which are scary enough – but the fact that it might still not be enough to stabilise Victoria’s massive debt load.

Despite new, higher taxes on property, private schools and payrolls, the Budget itself made it clear that the debt burden will not decline in any meaningful way soon.

Analysis by ratings agency Standard & Poors (S&P) shows Victoria not only has the highest debt burden of any state in the country, it also carries more debt than these sub-sovereign states in Canada and Germany – two countries that are similar to Australia.

Net debt still rising after big tax increases

Even after whacking 860,000 property investors with $4.7 billion of increased land tax over four years and businesses with a payroll of more than $10 million with an extra $3.9 billion over four years, the budget showed that Victoria’s net debt would still rise from $135.4 billion next financial year to $171.4 billion by 2027.

That is equal to 24.5% of the state economy and is twice as high as its revenue – hardly an enviable or flexible fiscal position.

While S&P said that debt level was sustainable given the relative prosperity of Victoria, it is still the highest of any comparable jurisdictions the credit ratings agency looks at.

Spending was hardly touched

The reason why such a nasty Budget has made little impact on the debt level is not just to do with the way debt snowballs over time but with the fact that spending was hardly touched in the Budget.

Sure, 4000 public servants might get the boot for a “saving’’ of $2.1 billion but that is a drop in the ocean and net debt will be only $3.5 billion lower than it was projected to be in last year’s budget.

The really big spending programs on infrastructure were hardly touched, although some of them look like being delayed courtesy of the Federal Government’s infrastructure review.

All debt, of course, has to be repaid and even with the extra tax revenue interest repayments which are currently 4.9% of total revenue in 2023 will jump to 8% by 2027, according to the S&P figures.

What about a recession?

Of course, all of these rosy assumptions assume that the music keeps playing and that the economy sails along with slower growth and with rising real estate prices.

Factor in a recession of any size and the projections could turn nasty very quickly, with Victoria’s revenue falling and the percentage of revenue used to pay back debt rising fast.

Amid all of the hoopla and nonsense marketing talk about the state paying back the “credit card” debt – whoever heard of credit card debt with an interest rate below 2%? – there were three really “interesting” changes outlined in the Budget.

Broadening of land tax base an important change

One was a really large broadening of the tax base for land tax – one that you can bet your bottom dollar won’t disappear at the end of “ten-year” Covid debt repayment period.

By starting land tax at the tiny level of $50,000, the reform will greatly broaden and “mainstream’’ this tax, with virtually all investment units and apartments to be included under the net.

Unlike stamp duty, which is paid only at the time of purchase – land tax increases over time and under this reform will become an important growth tax for the state Budget that is unlikely to disappear.

It is a similar situation for business and industrial properties which will migrate from paying stamp duty to annual land tax.

Steal from the Feds

Secondly, the Budget effectively diverted hundreds of millions of dollars from the Federal Budget to the state.

Just as the ill-conceived and now court challenged EV car tax tried to divert road taxes from the Federal Government, the land tax broadening and increase will effectively let some of the bill be paid by the Federal Government.

With investment landowners able to deduct their land tax bills from the annual profit or loss on their investment, the Federal Government will be getting less income tax from property investors, both negatively geared and otherwise.

AMP chief economist, Shane Oliver, predicted about a third of the $4.7 billion in extra land tax revenue forecast over the next four years could be claimed back at a federal level, which would cost the Commonwealth around $400 million a year.

More fuel for the property versus shares debate

Thirdly, and most importantly for investors, this Budget showed the limits of revenue hungry State Governments when it comes to taxing your investments.

Direct property investors are very effectively caught in the net, with the State Revenue Office gearing up to send out many hundreds of thousands of new and much larger land tax bills.

An amazing 380,000 Victorians will be dragged into the land tax net for the first time and once in, they will find it difficult to escape.

The SRO won’t be sending out any bills to people who own shares, however – even those who own shares in real estate trusts, although those trusts themselves might be hit with some extra costs.

It is a small but very important distinction to note in comparing the benefits and risks of different asset classes.

Property has been one of the best returning asset classes to own in Australia for a very long time but it is also one of the easiest to tax compared to shares, which only form part of the Federal Government’s tax base through capital gains.

Being hopefully out of the tax reach of grasping state governments represents another tick in the “shares” column for the endless “property versus shares” debate.