Victorian budget: observations from outside the tent Danielle Wood, Grattan Institute IPAA State Budget Briefing Breakfast 2 May 2018

Budget observations A pre-election budget… Healthy headline figures – net operating surplus, net debt not above 6% GSP, AAA credit rating More on social/economic services – skills, education, health, More (lots more) on infrastructure What has contributed to spending and revenue changes? Health spending (and many other types of spending) grown faster than GSP Revenue boom: property taxes and GST have grown as a share of the economy Has government done enough for long-term budget sustainability? Small surplus and plenty of downside property market risks No substantial savings measures No attempt to reform taxes while times are good Surpluses – 1.4, 2, 2.7, 2.9

Another good news budget…. Victorian expenditures and revenues per cent of nominal GSP Forecast Operating balance

A range of pre-election goodies…. Skills $304 million new TAFE and training places $172 million for 30 priority TAFE courses and pre-apprentices free of charge $100m capital works for TAFEs Schools $1.3 billion for 28 new schools and to upgrade 130 others $288 million to support students with a disability Health $1.2 billion to build and expand hospitals $2.1 billion to address demand pressures (including elective surgery waiting times) $705 million mental health and addiction services Tax Reducing payroll tax regional business to 2.425% Trial third pathway – studying VCE certificate – finish with apprentiship from high school. Start in workforce as trained apprentice.

Infrastructure spending will remain high by historical standards Victorian Government infrastructure investment $ billion Source: Victorian Budget 2016-17, Budget Paper No. 2

Budget observations A pre-election budget… Healthy headline figures – net operating surplus, net debt not above 6% GSP, AAA credit rating More on social/economic services – skills, education, health, More (lots more) on infrastructure What has contributed to spending and revenue changes? Health spending (and many other types of spending) grown faster than GSP Revenue boom: property taxes and GST have grown as a share of the economy Has government done enough for long-term budget sustainability? Small surplus and plenty of downside property market risks No substantial savings measures No attempt to reform taxes while times are good Surpluses – 1.4, 2, 2.7, 2.9

Why has size of government continued to grow? Victorian expenditures and revenues per cent of nominal GSP Forecast Operating balance

Change in Victorian government expenditure Real change in forward expenditure, 2015-16 to 2018-19, $2017 billions Real change Change if growing at same rate as GSP Many categories of spending where spending outstripped economic growth – public services, safety and welfare all stand out But health has been a huge contributor both because its grown fast and its such a big part of the total spend (around 29% of total spending this year)

As all OECD countries got richer, they spent more on health (except Iceland) Health spending and GDP, 2000 to 2012 $51k, 16.4% USA Germany France Switzerland Iceland Norway Australia Hungary Health spending as proportion of GDP, % Ireland Luxembourg $91k, 6.6% Chile Korea No GDP growth Turkey Health growing faster than GDP Health stable relative to GDP GDP / capita, PPP Source: OECD

Policy choices, not population ageing, drives health spending increases Real increase in health expenditure 2003-2013, $2012 billion More, improved, and new services per person GDP growth Health inflation >CPI Population ageing Population growth Andrews: People want best care, want it quickly, want it close to home. That’s not going away. Source: Grattan Institute, Budget Pressures 2014

Property taxes and GST have seen revenues grow as a share of the economy Real change in forward revenue, 2015-16 to 2018-19, $2017 billions Real change Change if growing at same rate as GSP Taxation Other own-source C’wth transfers Why has government revenue increases as a share over the economy during the most relevant = period. Extraordinary growth in property taxes – collected 6x more land tax and 3 times more stamp duties than if those items had grown along with GDP. Also did very well out of GST collection over period partly – Victoria's relativity increases with population growth and lack of Commonwealth infrastructure money working its way through the formula.

Budget observations A pre-election budget… Healthy headline figures – net operating surplus, net debt not above 6% GSP, AAA credit rating More on social/economic services – skills, education, health, More (lots more) on infrastructure What has contributed to spending and revenue changes? Health spending (and many other types of spending) grown faster than GSP Revenue boom: property taxes and GST have grown as a share of the economy Has government done enough for long-term budget sustainability? Small surplus and plenty of downside property market risks No substantial savings measures No attempt to reform taxes while times are good Big downside risks to property tax collections