NSW borrows and builds to generate recovery, jobs

After the Morrison government’s budget last month, the NSW budget delivered on Tuesday is the most influential economic blueprint in Australia for encouraging post-COVID enterprise and recovery. It will stand the nation in good stead, especially the people and businesses of NSW. At the best of times, payroll tax is a tax on jobs. And in cutting the impost from 5.45 per cent to 4.85 per cent, the lowest in the nation, Premier Gladys Berejiklian and Treasurer Dominic Perrottet will make it more attractive for firms to take on new staff. The measure is timely when unemployment will peak at 7.5 per cent by next month before easing to 5.25 per cent in mid-2024. The reduction will remain in place for two years, giving businesses certainty. To Mr Perrottet’s credit, the budget also leads the way in embarking on a major reform of stamp duty, an onerous state tax that acts as a brake on investment in every jurisdiction of the nation.

In line with the Reserve Bank of Australia’s advice, the Berejiklian government has lifted spending and increased borrowing to boost demand, to save businesses and to encourage hiring. RBA governor Philip Lowe told a House of Representatives committee in August that “by borrowing today to support the economy we are avoiding an even bigger loss of output and jobs that would damage our economy and society for years to come, which would put ongoing strain on the budget”. With interest rates at their lowest level since Federation, the government’s financing costs have never been lower.

While Mr Perrottet acknowledged that public spending was not a permanent solution to economic ills, he has applied the RBA’s advice well. In response to the impact of drought, bushfires and COVID-19, the budget includes a record $107bn in infrastructure spending across four years. Of that, two-thirds will be invested in road, rail and other transport infrastructure with a view to creating 145,000 jobs a year. The projects will double capacity of the Sydney Metro West rail link between the Sydney and Parramatta CBDs, with a travel time of 20 minutes, and provide $9.2bn for the rail link to the new Western Sydney International Airport. From Tweed Heads to Sydney, health infrastructure also will receive a boost. The budget also includes upgrades for schools and the TAFE system. It provides for the extension of 15 hours of free preschool to the end of next year and more than 100 mental health nurses in schools. Intensive tutoring will be funded to assist students affected by the COVID disruptions. Such measures will result in long-term benefits for NSW. By contrast, the $100 worth of vouchers for every adult in NSW for spending at restaurants, cafes, cultural venues and tourist attractions is geared to providing an immediate stimulus. From a fiscally conservative government it’s an extraordinary giveaway at an extraordinary time.

NSW, as Mr Perrottet says, has a long road to travel but is in a better financial position than most nations and states around the world. The state’s ballooning debt, Yoni Bashan reports, will expand to $53bn by June next year before increasing further to $75.4bn and finally topping out at $104bn by 2024.

No start date has been provided, but Mr Perrottet’s move to give home buyers in NSW the choice of whether to pay stamp duty or to opt for a much lower annual property tax could be the start of one of the most significant reforms to state taxes for decades. Replacing stamp duty with a tax based on the value of land has been advocated in every taxation review since the 1970s, Adam Creighton reports. Labor’s Henry review found stamp duty was the most economically damaging of all taxes levied in Australia.

NSW Treasury believes the switch would boost growth and make homes cheaper. But property buyers would need to think carefully. “Once a property is subject to the property tax, subsequent owners must pay the property tax,” the budget papers reveal. There is also the possibility that future, big-taxing governments would hike up land tax. As Creighton writes, stamp duty is a volatile source of revenue and discourages owners from buying and selling homes. Taxes on unimproved land values are relatively stable and encourage owners to develop their land. The proposal, like the budget’s spending provisions, will have long-term implications.