VIC State Budget 2018/19 | Overview

By Craig Whatman - May 1, 2018

Victorian Treasurer Tim Pallas delivered a traditional election-year Budget, with significant investment in health, education, employment, law and order and infrastructure projects. The state’s coffers are bursting at the seams with taxation revenue, allowing the Andrews Labor Government to spend up big in the lead in to the election later this year.

Read: Access full Victorian State Budget 2018/19 review here

Strong economic growth

On the back of strong economic growth, which has averaged 3.2% over the past three years, Victoria’s operating surplus for the 2018/19 financial year is forecast to be $1.4 billion, with total surpluses of $7.6 billion forecast over the next three years. Taxation revenue is projected to reach $24 billion this year, and is then expected to grow by a further 4.5% over the forward estimates. Although this growth rate is below the five year average of 7.6%, it nonetheless continues to provide the government with a very strong platform from which to deliver on its spending commitments.

Balancing the books with property taxes revenue

The government continues to rely heavily on property taxes to balance the books. In 2018/19 the total property taxes revenue of $11.5 billion is forecast to comprise a whopping 48% of the total tax revenue of $24 billion. However, of note from the forward estimates is the fact that property taxes revenue as a proportion of total tax revenue is expected to remain at 48% in 2021/22.

This is the first time in many years that the government’s numbers do not predict a continuing increase in the size of the property taxes pie over the forward estimates. This is consistent with the feedback from our clients, who are telling us that a combination of factors including the removal of the off-the-plan stamp duty concession for investment properties, the stamp duty and land tax foreign surcharges, a non-user friendly planning environment and the increasingly complex finance landscape are impacting their sales figures and making projects more difficult to get off the ground.

We are concerned that measures such as the changes to the off-the-plan duty concession and the foreign surcharges could eventually result in a significant and sustained downturn in the property development sector. If such a downturn occurs, it would have a negative impact on housing affordability through a decrease in supply, employment (given the significant number of people employed in the building and construction sector), and the government’s bottom line. The forward estimate projections in respect of land transfer duty may well be overly optimistic when you consider that many of the apartment projects, which are now struggling to find buyers, will complete in two to three years’ time.

No tax relief in sight for the majority of middle market businesses

The Budget measures specifically targeted at middle market businesses are limited to the further reduction in the payroll tax rate for businesses based in regional areas. Although this tax relief will no doubt be welcomed by the small number of clients who qualify for the reduced rate, their counterparts in the metropolitan areas could well be forgiven for asking why they haven’t been given more relief from an ever increasing tax burden, including significant bracket creep in the areas of land tax, payroll tax and stamp duty. On the basis of the government’s spending commitments in this Budget and on the assumption they are still in office following the election later this year, it is unfortunately hard to foresee any real reduction in the cost of doing business in Victoria on the horizon.

Significant investment in health, education and infrastructure projects

Health and education will be major beneficiaries of the spending announced in the Budget. A total of $7 billion will be spent on improvements to Victoria’s health infrastructure and services together with the construction of new schools and upgrades of existing schools. In addition, TAFE will receive a significant boost with more than $300 million directed to new training places, and 30 TAFE priority courses to be made available for free.

The government will continue to make significant investment in public infrastructure, including both road and rail projects, many of which are planned for regional Victoria. Infrastructure investment is forecast to average $10.1 billion per annum over the next four years. The most significant projects had already been announced prior to 1 May, including the Metro Tunnel and the North East Link. However, a number of other road and rail upgrades have been provided for in this Budget.

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