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Victorian budget: difficult measures

Victoria’s 2023-34 budget was released on Tuesday. Despite a raft of new or increased taxes, Victoria’s public debt is expected to continue rising until 2025-26.

Critically, there’s no rivers of gold for Victoria in the budget, compared to more fortuitous budget settings for the Commonwealth and Western Australia. With the exception of a minor GST offset (under the no-worse-off relativity test), Victoria won’t benefit from elevated commodity prices, nor record-breaking levels of income tax.

Budget revenue is instead predominantly sourced from government grants (e.g. GST), property-related taxes (land tax and stamp duty), and payroll tax. Property-related taxes are highly volatile and current economic conditions are working against them. Indeed, changes in Victoria’s economic outlook since November 2022 have produced mixed effects for future revenue, with a higher level of employment and stronger population growth offset by declines in property prices and sales volumes in 2023. 

The COVID Debt Repayment Plan will assist Victoria to pay off COVID-related debt (equal to $31.5 billion) through a mix of revenue measures, including additional payroll tax for big businesses, higher land tax and returns from Victoria’s Future Fund, as well as public sector cost savings. The COVID Debt Repayment Plan is expected to be active from 2023-24 to 2032-33.

Other revenue initiatives introduced since the government’s Pre-Election Budget Update (PEBU) include increasing the absentee owner surcharge, wagering and betting tax rates to align with New South Wales, and the removal of payroll tax exemptions for approximately 110 high-fee private schools. 

The budget’s new revenue initiatives are expected to contribute more than $2 billion per year to the state’s purse.

On the other side of the equation – expenditure – the most notable budget cuts targeted the public sector, with savings and efficiencies estimated at $2.1 billion over the next four years. This includes reduced labour hire, lower consultancy fees and up to 4,000 corporate and back-office job cuts to be made in 2023-24, with the government reiterating its intention to return public sector employment to pre-COVID levels.

Conversely, there was little news regarding potential cuts to the government’s public construction plans since the Commonwealth’s 90-day infrastructure review remains ongoing, having only been announced in April. This review could lead to the cancellation or delay of Victorian projects such as Geelong Fast Rail and Melbourne Airport Rail. For now, funding remains allocated to these projects. 

Major cost cuts were otherwise non-existent in the budget – indeed new output initiatives, mostly related to election promises, added another $9.0 billion in spending between 2023-34 and 2025-26, compared to PEBU estimates.

Consequently, Victoria’s overall fiscal outlook is relatively unchanged since the election, due to the combined effect of new revenue initiatives, public sector cuts, fresh outlays and the state’s macroeconomic outlook. The state’s net operating deficit is projected to continue shrinking, reaching surplus by 2025-26. Net debt to GSP is expected to decelerate, but still rise from 19.4% in 2021-22 to 24.5% in 2026-27. While this is an improvement on the government’s 2022-23 Budget, net debt to GSP remains approximately twice the level of NSW.

Chart 1: Victoria’s projected path to surplus

Source: 2023-24 Victorian State Budget, Victorian State Budget aggregate financial statements 

Furthermore, while a slowdown in domestic demand is priced into the Budget’s economic assumptions, there is a risk that the downturn in consumer spending could be sharper than anticipated, with flow-on implications for employment, wages, and dwelling demand.

Deloitte Access Economics believes the likelihood of this scenario is quite high. Our latest Business Outlook forecasts, released April 2023, predict a slower economy with weaker consumer spending and lower business investment than Victorian budget estimates. This could see lower revenue collections and a slower return to surplus than forecast. 

This blog was co-authored by William Mullins, Senior Economist at Deloitte Access Economics.