Victoria’s new tax grab will white-ant business recovery

Spare us. Just as the economy is rebounding from the pandemic, the last thing the nation needs is a tax grab by our second-largest state. Victoria comprises about a quarter of the Australian economy, which is why the tax grab in Thursday’s state budget will act as a brake on recovery. Victorian Treasurer Tim Pallas has announced a land tax rise of 0.25 percentage points for properties worth more than $1.8m, and 0.30 percentage points for those exceeding $3m, as well as a “windfall gains tax” on profits made from land rezoning. The new imposts will raise $2.7bn in revenue. As Property Council of Australia executive director Danni Hunter says, the tax slug is “aimed squarely at Victorian families, small businesses and the property sector”, which have all contributed to the state’s recovery after last year’s 112-day lockdown. Land tax does not apply to principal places of residence. But the tax increases will be passed on to commercial and residential tenants.

Victorians deserve better. Property Council of Australia chief executive Ken Morrison is right when he says this “retrograde step” is “not a top end of town” tax. It will result in new projects being cancelled and jobs lost. Rents, pushed up by landlords’ land tax bills, are a headache for many small businesses, acting as a brake on jobs. Nor will higher land taxes encourage investment. As Josh Frydenberg told The Australian: “This is the worst possible time to put up taxes and slow our economic recovery.” While the Morrison government was supporting the private sector to create employment, the Andrews government was increasing taxes and putting Victoria’s recovery at risk, the federal Treasurer said.

It would be bad for the nation if other states followed Victoria’s lead, especially while economic recovery remains a work in progress. Raising property taxes goes against the grain of current economic thinking in advanced economies. In the minutes of its May meeting, released on Tuesday, the Reserve Bank board notes: “In countries where health outcomes were becoming more favourable, the focus of this fiscal support was likely to turn toward boosting public and private investment and other longer-term priorities.”

The RBA was more reserved in its assessment of wages growth than would otherwise be expected amid the fastest 10 months of employment growth on record, as Patrick Commins reports. While the union movement is driving an increasingly heated political debate on whether the Morrison government is doing enough to lift workers’ pay, the RBA minutes say: “It would take some time for spare capacity to be reduced and the labour market to be tight enough to generate wage increases consistent with achieving the inflation target.” New wages figures, to be released on Wednesday, are expected to be subdued, showing an annual increase of about 1.3 per cent to 1.4 per cent. In this environment, Victoria’s land tax snatch will not help business confidence. Nor should it help workers’ confidence.

Release of the RBA minutes coincided with a generally upbeat speech by Treasury secretary Steven Kennedy to an Australian Business Economists lunch in Sydney. Dr Kennedy said federal spending would need to be reined in at the appropriate time to close a structural gap that saw the budget still in deficit in a decade, Tom Dusevic reports. Low debt-servicing costs were such that Canberra retained the fiscal firepower to combat another crisis. Australia had reduced its debt-to-GDP ratio from higher levels in the past, Dr Kennedy said. The key to doing so, as he said, was a strong economy, restrained government spending and supportive economic reforms.

While fallout from COVID-19 is ongoing, Victoria’s business tax rise is the opposite of what the state and the nation need.