What’s behind Victoria’s expanding budget?

By David Donaldson

Wednesday May 2, 2018

The Victorian budget has expanded significantly over the past couple of decades, with health spending the biggest driver.

“Government is now a much bigger share of the total pie”, noted Danielle Wood, budget policy director at the Grattan Institute, at Wednesday morning’s IPAA Victoria post-budget breakfast — or “budget boxing day”.

Government spending and revenue have grown from 9% of the economy at the turn of the century to around 15% in today.

“That’s a really sizeable structural change,” Wood said.

The growth is in both spending and tax, so the government isn’t in danger of going broke — Victoria currently has low debt and is expecting another surplus.

The biggest area of expansion has been in health — which is now around 29% of Victoria’s public sector spending — though not for the reasons many expect.

Although ageing had contributed to spending — and will grow in future — the biggest factor “by far” has been that people are choosing to use more services. New and better services are continually being made available and, as incomes have grown, the share of total incomes spent on health has grown.

Victoria is not alone in this regard — all OECD countries (except Iceland) have done the same as they have grown richer.

“That I think largely reflects the fact that we value the sort of things health spending delivers, we value longer lives, we value better lives,” Wood told the audience — people want better, faster services that are closer to home.

Spending on safety, welfare and “public services” has also grown faster than average, while government investment in housing has been much lower by comparison.

There has been a “very large” increase in the tax take over the past couple of decades, largely driven by land tax and stamp duties.

The good times have meant the state hasn’t had to face hard choices between more spending and higher taxes, Wood noted.

So has the government done enough to ensure budget sustainability?

“Yes, we’ve had operating surpluses and there’s forecast to be more surpluses over the forward estimates,” she said.

But there are “considerable risks” to those forecast surpluses that could be eroded by a pre-election spending spree or a weaker than expected property market.

Plus the extra money Victoria said it would put into the Gonski education reforms was not in the budget, and neither was any money for the Victorian government to spend on an airport rail link, if it decides to take up Prime Minister Malcolm Turnbull’s offer of federal money and go ahead with the proposed project.

The current government has been “quite good” at picking projects that will generate the strongest future returns, she thinks, and said a rail line to Tullamarine airport should not be a priority, with studies showing there are cheaper ways to have the same impact.

There are no substantial new savings measures in this budget, though Treasury Secretary David Martine pointed out that there is an annual 2.5% general efficiency dividend, plus a one-off $1.2 billion public sector savings measure made last year.

Wood added that there may have been a “missed opportunity” to undertake tax reform while the government has plenty of money to compensate any losers. She pointed to the economist’s favourite, cutting stamp duty and increasing land tax, a change the ACT is currently undertaking.

Martine responded that despite the popularity of such ideas among wonks, implementing such reforms is “very, very hard”, and that it was posing challenges in the ACT, despite reformers being blessed with a more forgiving constituency and the tax switch being phased in over a long period.

“There are so many transitional issues. How do you deal with those people who just bought a house and paid $100,000 in stamp duty and are now going to get slogged with annual land tax?” Martine said.

“It’s not as if it’s an issue we as treasuries around the country don’t talk about, but it is very, very difficult.”

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