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. 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. 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.
There are billions of dollars for new infrastructure projects in the budget – including a commitment to fully fund the $10.9 billion Melbourne Metro. The rapidly growing presence of foreign investors in Victoria's residential property market deepens such concerns. Higher stamp duty premiums on foreign real estate owners 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. Yet Victoria's GST distributions have been inflated by the mining boom. The collapse of commodity prices will reverse this trend. 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. 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 or capturing the uplift in property values around new train stations. But most of the cost of new infrastructure will have to be funded from future tax collections. 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.
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