Rewarding hospitals’ budget dummy spit was a risky thing to do

After the golden spending years during the pandemic, keen budget watchers have been waiting for the Victorian government to be more prudent. Did this year’s budget deliver the goods?

The short answer is “no”. There are 250 service delivery initiatives, amounting to $6.5 billion for next year, or almost $3 billion after savings and contingencies. There is an additional $1.6 billion for new infrastructure initiatives.

The state budget includes money to open the new Footscray Hospital.Credit: Joe Armao

This has been paid for partly by a $3.5 billion increase in GST payments from the Commonwealth, $600 million from the expanded fire and emergency services levy, $100 million from the new taxes on city car parks, $1.3 billion from sales of goods and services, and almost $157 million in fees and fines, which are up by a whopping 22 per cent.

The end result is a balanced budget for government operations, and a very large $12.1 billion deficit for the still-substantial infrastructure spend to be funded solely by debt.

That’s less than last year, but eye-watering nonetheless. So how should we view all this apparent extravagance?

One view is that this is undoubtedly bad. Government, like business, should balance its books.

An alternative view is that businesses, especially in infrastructure, property, energy and mining, also borrow money to buy long-term assets.

What they must do is cover all their operating costs, including depreciation and finance. And so it is with government, which has the added responsibility of not just managing the finances, but also the economy more broadly.

On this view, Victorians should not be alarmed by the 2025-26 budget being in deficit, as all of it is accounted for by long-term spending on assets, with the big infrastructure bill being accumulated during the pandemic.

That extra spending kept employment high when it would otherwise have tanked.

That may be true. But it is also wise for governments to have substantial operating surpluses when the economy is running strongly, so as to pay down debt and get ready for the next downturn.

Victoria has weathered the pandemic years extremely well. The government should take a bow for managing difficult economic times, setting out a budget repair plan, and sticking to it.

The budget papers suggest sunny times ahead for our economic growth, employment and real wages.

But if ever there was a time to start running larger surpluses to get ready for the bad economic weather that is undoubtedly ahead, it is now. Treasury forecasters are very good, but not so much at predicting a recession.

So what might have waited until another time? There were a lot of headline-grabbing announcements that actually will cost very little, including free public transport for seniors, which will cost less than $1 million per year, and free public transport for kids, which will cost only $40 million per annum.

The big announcement on community safety arising from the government’s crackdown on bail laws brings with it necessary costs to try to minimise the number of children who get caught up in this mess before it is
too late.

There is $278 million allocated for this purpose next year and that is largely a good spend.

It is health that stands out as the major beneficiary when it might have been kept in the queue. Last year, the government got tough with health, arguing that our hospitals were still spending post-pandemic as if there were still a pandemic.

No more was it going to put aside a couple of billion for hospital bailouts when they failed to meet their allocated budgets.

One thing health services are very good at is chucking their dummies out of the cot, and that is exactly what they did with startling effect. Within a couple of months Premier Jacinta Allan folded, and in last December’s budget update the $1.5 billion that was taken away in May was swiftly given back.

In this year’s budget, the health services are the big winners, with an additional $2.8 billion a year. Rewarding bad behaviour so extravagantly is a risky thing to do, especially by a treasurer delivering their first budget.

The other major loser in last year’s budget was education. As revealed by The Age last week, the government decided to delay by six years increasing spending to a level needed to meet the “School Resourcing Standards” set out in the Gonski agreement with the Commonwealth.

The education unions will have seen all this, and are about to enter bargaining over the terms of a new enterprise agreement. Expect tears to flow from these talks rather than champagne.

And remember, that wafer-thin operating budget balance is underpinned by $500 million of banked savings from the Silver review into government operations that won’t be made public until July this year.

Expect the unions affected by those cuts to be highly motivated by the tactics employed in health.

Yes, this is a big spending budget when it might have been wiser for the government to finally be more prudent.

-Dr David Hayward is Emeritus Professor of Public Policy and the Social Economy at RMIT University.

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