Victoria desperately seeking revenue

Victorian Treasurer Tim Pallas, unsurprisingly, has leaked some of the bad news that will be part of the state’s budget to be handed down this Thursday. This is a common tactic used by all treasurers these days.

In this instance, the announcement has been made that stamp duty on more expensive residential properties will be raised from 5.5 per cent to 6.5 per cent and land tax on investment properties and commercial real estate will be jacked up significantly. There also will be a levy payable by property developers holding rezoned land. Pallas is hoping to raise $2.4bn across the next four years.

It’s not surprising that Pallas is desperately seeking revenue, even though it is expected that revenue from stamp duties will be significantly above the amounts anticipated last year in the depths of COVID.

The Victorian property market has been on fire all year and this will be reflected in many additional millions of dollars flowing into state coffers.

Pallas’s desperation partly arises from his mismanagement of the state’s budget over several years. Each year there would be forecasts of modest growth in employee expenses — a key line item in the budget — and each year the actual outcome would far exceed the forecasts. The end result is a very expensive, bloated public sector.

Difficult though it may be for a Labor treasurer, Pallas also is foreshadowing a reduction in the number of public sector employees, although not frontline workers, and a hard cap on public sector wage rises of 1.5 per cent a year.

Having run a tight ship on debt, Pallas decided before COVID that taking on more debt seemed more fun. Victoria’s government debt now exceeds $60bn, having hovered around $20bn for some time.

The tragedy is that a lot of the new spending is on over-budget and seriously delayed mega-projects such as the new river crossing and the Metro underground rail project.

Again unsurprisingly, Victoria lost its AAA credit rating last year. The fear would be that the state could be marked down again, with the ratings agencies focusing on a credible pathway to budget surpluses. It’s one thing for a national government to be putting the grocery bill on the national credit card; it’s another thing altogether for a sub-national government to do so.

The decision by the Victorian government to raise property taxes in the foreshadowed way is truly bizarre, with property development one of the few bright spots of the economy. Having bungled hotel quarantine last year and with the lockdowns imposing high local costs, the Treasurer no doubt feels constrained in the options available to him.

Having said this, it makes Victoria look very unattractive when it comes to investment in property — stamp duty rates are much lower in Queensland and NSW is moving to allow some new buyers to pay annual property taxes instead. But I guess that’s what happens when you’re desperate.