For years Victoria has worn the ignominy of being a rust bucket state, dragged down by the demise of its traditional manufacturing base, with businesses and population migrating to the mining states of Queensland and Western Australia.
The 2017-18 state Budget papers reveal a remarkable turnaround in prospects, with economic growth, surging jobs and population underpinned by the housing boom, but also a major transformation towards a service and technology driven economy.
Victoria’s growth exceeded all other states in 2015-16 and if state Treasury predictions are correct, it will continue to grow above the Australian trend over the next four years.
This has created a major windfall for the Andrews government, which has unashamedly nearly doubled infrastructure investment and ramped-up major programs, most notably a formidable $1.9 billion family violence commitment. This commitment is huge, with Victorian Treasurer Tim Pallas saying this year’s spend on family violence programs would be more than the total expenditure of all the states and the Commonwealth combined.
The growth has been supported by a cleverly designed economic development program, targeting growth in start ups, bio sciences, cybersecurity and the rapidly accelerating internet of things economy.
This has produced strong growth in health care, professional services, finance and construction jobs, with the latter underpinned by the booming apartment and home building sector.
A traditional stronghold for the public sector, Victoria’s renaissance is being accompanied by a large increase in government spending, with employee costs up 4.1% this year. General government expenses are predicted to continue to grow at a robust 3.2% annual rate over the next four years, offset by a predicted 3.7% increase in revenues.
While budget purists would push for the surpluses to be banked and debt lowered, the Labor government is determinedly using its taxation windfall to boost infrastructure and social programs. Net debt is expected to rise marginally, from 4.6% to 6% by 2021.
The turnaround in the southern state’s economic prospects has been accompanied by a major change in population flows, ending a nearly 50 year-long period where Victoria lost people to the fast growing states. Most of these are younger people, with almost two-thirds of the population growth coming from people aged 15 to 44.
Most movers from interstate settle in inner Melbourne, underpinning the boom in apartment construction over the last few years. The renaissance of Melbourne is expected to once again make it Australia’s largest city, with ABS population models suggesting it will grow to be larger than Sydney over the next twenty years.
While surging dwelling construction and property values have driven much of the economic growth, this remains the major risk to the transformation. National data shows a household sector with unprecedented debt levels. With interest rates expected to rise, how this plays out will be critical to the longevity of Victoria’s transformation.
Much of the overall population and investment growth is coming from middle class migration from both China and India, a marked change from previous migration surges where migrants tended to arrive from poorer communities.
A sudden global economic or strategic shock could end the party very quickly, potentially prompting investors into taking profits and selling out. This would leave many dwelling owners with the risk of very high mortgage repayments at a time of declining growth, spurring a collapse in consumption and business investment.
Prudence would then see many of the big ticket infrastructure programs pulled back to a more sustainable spend, as well as a much sharper review of underlying program costs.
The same risks are equally true of the highly leveraged NSW marketplace, but in the meantime Victoria is enjoying bragging rights as the power economy of the nation.