Surplus must set up the state to cut debt and taxes

In budgeting for a small surplus of $600m for the coming financial year, and $1.9bn over the forward estimates, Jaclyn Symes is making an effort in her first budget as Victorian Treasurer on Tuesday to set the state’s finances on the road to recovery. Welcome as a surplus is, she needs to guard against overtaxing the state’s productive private sector by clamping down on unaffordable spending. The unfunded Suburban Rail Loop “to nowhere”, which will cost at least $34bn to build just the first stage, from Cheltenham to Box Hill in Melbourne’s east, should be chopped or postponed indefinitely. Ratings agency S&P Global warned last week that the project, mooted to eventually cost $216bn, could weaken Victoria’s credit rating, leading to higher interest payments on the state’s $157bn debt, which is forecast to balloon to $187bn by 2028. S&P Global downgraded Victoria’s credit rating by two notches, from triple A to AA, in 2020. Unless Ms Symes gets spending under control, it risks a further downgrade. That was a real risk given the state’s recent history of major projects running over budget, S&P Global analyst Rebecca Hrvatin said last week.

While under pressure to increase taxes to boost revenue, Ms Symes and Premier Jacinta Allen should avoid killing the proverbial “goose that laid the golden egg” by further tearing the heart of the most productive sectors of the state economy. Damon Johnston and Lily McCaffrey reported last week on Victorian businesses struggling to pay the Labor government’s land tax grabs, which for some firms have soared by 2300 per cent. Ms Symes’ response to cases such as Angie Romas’s sandblasting small business – whose land tax bill has spiralled from $8700 to more than $203,000 in a decade – did not inspire confidence in other enterprises. Businesses have a greater capacity to pay, the Treasurer said. Until they can’t. In his letter to Ms Symes, Mr Romas, who employs 14 people, said he was looking at closing the business because land tax had “become too large a cost to justify”.

In its budget submission, the Victorian Chamber of Commerce and Industry warned that state-based business taxes – which include land tax, land transfer duty, stamp duty, payroll tax, the mental health levy and the Covid debt levy – were stalling business investment, slowing transactions and choking growth. “Just three taxes alone – ­payroll tax, land tax and land transfer duty for commercial and industrial land – represent an average 40 per cent of Victoria’s total tax revenue,” the chamber’s chief executive, Paul Guerra, told The Australian. Those taxes had increased at an average annual rate of 7.6 per cent, well above inflation. The state is expected to rake in $9.3bn from land taxes – including its Covid debt levy on landholdings – in 2027-28, up from $5.2bn in 2022-23.

Despite a budget position that remained “weaker than other states”, according to S&P, and exerting major pressure on businesses that drive the economy, Ms Allan’s government is standing by planned budget sweeteners and the state’s transition to renewable energy. In a sweetener that will cost taxpayers more than $320m over four years, children under 18 will travel free on public transport, and seniors will travel free at weekends. Those freebies are an adaptation of the ousted Queensland Labor government’s 50c fares across all zones on trains, buses and ferries, which the LNP government has retained.

As independent economist Saul Eslake told The Australian on Sunday, $320m was “a lot of money to be throwing around, however worthy the objective might be … It’s not the sort of thing that I would have expected a government under significant financial pressure, at risk of having its credit rating downgraded again … to be doing”.

Despite the surplus, Ms Symes will rescue the state’s finances only if she can produce a credible plan for spending and debt reduction.