After coronavirus comes the spending wave

Victoria will spend its way out of the slump inflicted by its disastrous second wave, piling on $49bn in new expenses.

Victorian Treasurer Tim Pallas says the massive debt is ‘to keep Victoria’s economy and livelihoods afloat’. Picture:Getty Images

Victoria will try to spend its way out of the slump inflicted by its ­disastrous second COVID-19 wave, piling on $49bn in new ­expenses on social housing, stamp duty discounts and other subsidies and concessions designed to get hundreds of thousands of people back to work.

Victorian Treasurer Tim Pallas on Tuesday handed down a budget that forecast net debt would reach $154.8bn by 2024 — the highest of any state and up from $44bn this year.

Ratings agencies S&P and Moody’s warned that borrowings could be difficult to deal with “as the state targets fiscal repair over an extended period of time”.

Victoria’s cash splash — ­including support targeted specifically at women over the age of 45, young people and those without formal qualifications — is the latest in a number of big-spending budgets including those handed down by the federal and NSW governments in the past two months.

Mr Pallas said the massive debt was “to keep Victoria’s economy and livelihoods afloat”.

“Yes, there are short-term costs to the state’s financial position,” the Treasurer said. “But by using the strength of our balance sheet, we are able to protect the budgets of households and businesses across Victoria … we are putting our credit rating to work when it is needed most: to help Victorians now and into the future.”

The NSW budget, released last week, showed that state would also be plunged into unprecedented deficits and $104bn in debt by 2024, a year before it returns to surplus. South Australia’s net debt is forecast to peak at $33bn in 2022-23, according to its budget handed down this month.

 

Victoria, which had strict restrictions reimposed in July after COVID-19 jumped from hotel quarantine into the community and spread quickly, could take many more years than other states to recover from the pandemic, ratings agency S&P warned.

Among the measures that Mr Pallas said would create 200,000 jobs within 18 months and 400,000 by 2025 is a 50 per cent waiver on stamp duty for newly built or off-the-plan homes valued at up to $1m until the end of next June. Existing homes will be eligible for a 25 per cent waiver.

There is $619m set aside to subside businesses employing workers, with $150m of that money earmarked to assist 6000 women back to work. One-third of that is reserved for women over 45.

There is also $500m set aside to help people who do not have a 20 per cent deposit to buy homes by contributing to the purchase price in exchange for equity in the property.

As was the case in the October federal budget, Victoria’s economic recovery assumes the introduction of a coronavirus vaccine and the return of international travel next year.

 

Despite the deep deficits, Premier Daniel Andrews denied that the Victorian lockdown — significantly stricter than measures imposed in other states — had caused more economic carnage than necessary. “You simply can’t have a situation where you can repair economic damage, get people back to work, start to create confidence and investment, get back to a normal economy, you just can’t do, that unless you get the sequence right,” Mr Andrews told ABC’s 7.30 on Tuesday.

Josh Frydenberg said the Victorian budget made clear the ­impact of the extended lockdown, during which businesses were shuttered and households put under curfew, with the state’s economy forecast to decline 4 per cent this year compared with a 1.5 per cent national fall.

“Just last week the most recent employment figures showed the effective unemployment rate in Victoria falling from 14 per cent to 10.5 per cent in October, compared with an effective unemployment rate nationally of 7.4 per cent,” the federal Treasurer said. “The Morrison government has committed an estimated $75bn in support for Victoria, helping more Victorians get back to work and more businesses to stay in business.”

To push down the unemployment rate, the Victorian budget also includes $1.5bn in tax relief by increasing the payroll tax threshold, expected to help 7000 businesses. There is also $2bn for a new research and innovation fund targeting the health, agriculture and clean energy sectors.

 

There is a $5.3bn fund to build 12,000 new public and affordable housing units, while a 50 per cent land tax discount from 2022 to 2040 is expected to create 5000 new rental properties.

Victoria’s public sector wages bill is forecast to jump 21 per cent over the budget forward estimates, rising to $37bn by 2024. Public sector employee expenses are predicted to rise by 9.5 per cent this financial year, and will be at least $2bn higher annually than forecast in last year’s budget.

“Securing the health and safety of the community was our first job,” Mr Pallas said.

“Building a Victoria that’s rich with new ideas, opportunity, and excitement … that’s our next job.”

The significant deficits forecast over the next four years — including $23.3bn in 2020-21 and $13.1bn in 2021-22 — has left Victoria with a one-in-two likelihood that its credit rating will be cut.

Moody‘s Investors Service vice president John Manning said Victoria’s second lockdown had eroded the state’s finances and weakened its capacity to pursue fiscal repair. “While record-low interest rates will enable the state to absorb such a sharp rise in debt, borrowings will remain elevated for an extended period of time and significantly constrain Victoria’s operating profile over time,” Mr Manning said.