Hope springs eternal as Victorian Budget promises ongoing infrastructure projects
For a document that pours billions of dollars into concrete infrastructure, the Victorian budget figures feel very shaky.
No new taxes, a $611 million surplus, lots of cost-of-living relief like free kinder, public transport for children and seniors: all good right?
Yeah … maybe. But the numbers get scary, fast.
An eye-watering amount of debt (hey, what's $194 billion between friendly lenders?) means that by 2028-29 more than 9 per cent of what the state spends will be on interest payments.
For the coming three years, the state is borrowing between $1.7 billion and $5 billion a year to keep the infrastructure projects going. On cash flow, the Education State is going backwards at a rate of $7 billion to $10 billion a year.
The old joke goes: a billion here, a billion there, pretty soon you're talking about real money.
The current reality is nowhere near jesting about.
In the past decade Victoria had problems other states would dream about — cash pouring in the door, people flooding in to live here and spend, and a healthy economy growing like spring grass.
Then bang: the COVID pandemic.
Immense spending.
A spike in the price of construction materials and the labour cost of mega-projects.
More demands on health and education.
So here we are.
The economic vision of new Treasurer Jaclyn Symes and Premier Jacinta Allan continues the mantra of their predecessors, Tim Pallas and Daniel Andrews, which would be summarised as:
That's before immense amounts of spending on social programs — everything from dental vans at schools and $859 million for free kinder for three and four year olds to rebates on power bills and $18 million to help pharmacies deliver more medicines without the need to see a doctor for a script.
You can buy or decry the vision, but there's no shifting the government from it.
Potentially, the vision is edging towards being made real.
Government infrastructure investment is said to have peaked at $24.2 billion in 2023-24, part of an immense $213 billion in projects underway.
That cost will "moderate", the papers suggest, to $15.6 billion by 2028/29.
Similarly, the debt position is set to improve.
The ratio of net debt to gross state product — the value of all the goods and services created in Victoria in a given year — is set to fall from 25.2 per cent in the 2026/27 financial year to 24.9 per cent two years later.
If ratings agencies change their mind about the state's 'rating' (which affects the costs of borrowing money) maybe even faster.
The calculations and detail of how the budget will be trimmed in are similarly fingers-crossed and difficult to divine.
The promise is $3.3 billion in savings over the coming four years, which is called the "forward estimates" period.
But how? You tell me.
This is what is listed — a theoretical $3.3 billion list that boils down to seven dot points.
To save a lot of words: cuts. But here they are.
To make it clear: cuts.
Cuts to programs aren't necessarily a bad thing, nor is reducing expenditure growth.
But the detail — what they'll cut, who will go — has been kicked into the future.
Much of it is in the hands of the ongoing Silver Review that won't land until June.
Around 1,200 employees will go, although many of them are "not necessarily real people" the Treasurer noted, but roles that aren't being filled when they end.
Previously the figure discussed has been 3,000 roles. So that means a lot more when the review lands.
"Entities" like government agencies will be cut or absorbed, but again it's difficult to define and kicked into the future.
One of the most surprising numbers is that the Victorian government is projecting population growth to fall — for the longer term.
(Don't worry, Melbourne will soon be larger than Sydney due largely to our access to land for housing and the lower cost of it.)
The Education State has roared by putting the richest and most mobile young international students into universities and education institutions, luring many to stay permanently.
Federal government changes put a hammer through that mirror.
What is currently a 2.4 per cent population growth rate for 2023/24 is projected to fall to 1.7 per cent for the forward period the budget looks at.
That's a problem for the fairly simple finances of the Victorian government.
Money comes in through grants from the federal government, which is largely the result of the goods and services tax (GST) and income tax.
The rest of the cash comes from state taxes on employment (largely payroll tax), land transfer fees — better known as "stamp duty" — and land tax.
All of these elements are based on population.
That's people coming to Victoria, buying a house, keeping it, being employed here.
Victoria doesn't get royalties from resources. ("Unlike WA where they can literally dig money out of the ground," Jaclyn Symes noted dryly.)
So Victorians have to make their own way.
The vision is of connected suburbs, a thriving capital city and healthy regional centres all bustling with happy new arrivals.
There's just a lot of hope involved in getting there.
Close your eyes, put down the pedal and drive over the unfinished bridge.
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Alan Kohler: In 2001, the Reserve Bank cut interest rates six times that year. News report: Nervous anticipation for one of the Reserve Bank's most expected interest rate cuts, the sixth and last this year. Alan Kohler: And that was in response to the dot-com crash in the United States, which happened on basically in March of 2000. It continued for a while. The Nasdaq halved, more than halved. And there was a recession in the United States. The Reserve Bank was concerned that the Australian dollar would rise too much because of that, because obviously the US Federal Reserve was cutting interest rates in response to the recession. So the Reserve Bank of Australia cut interest rates in precaution, even though there was no recession in Australia. The economy did slow a bit. There was a bit of a fall in the share market, but not anything like what happened in the US. 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Up to that point, foreign students' visas were issued on the basis of either gazetted countries or non-gazetted countries. China and India were included in the non-gazetted countries and it was very difficult for students from those places to get a visa. After July 1st, 2001, that changed and became the same for everybody, which is the way it ought to be, of course. But that led eventually to a huge increase in students from China and India from the mid-2000s. And that led to a doubling and then tripling of net overseas migration into Australia. At the time. Sam Hawley: Wow. All right. So we get a pot and then we put all these things into it and we stir it around. So there's the capital gains tax, there's the first homeowner's grant, the rates are dropping and there's this massive increase in immigration. And when you stir it all around, you come out, Alan, with house prices rising. Alan Kohler: Yes. 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So, Alan, that's the history of the skyrocketing house prices and how we ended up here. Now, today, interesting that we have exactly the same conditions. Alan Kohler: That's right. The Reserve Bank is cutting interest rates, probably not by six times, but by probably four or five times this year, possibly into next year as well. We've got first time buyer grants back on. We've got a big increase in migration. I mean, the Treasury forecast in the budget for this financial year, net overseas migration is 335,000. But in the first nine months of the year, it's already 360,000 and looks like being 400,000 this year. There's no targets on immigration, but there's a Treasury forecast and net overseas migration is going to well exceed the Treasury forecast. And of course, there's been no change in the capital gains tax discount because the Labor Party failed to win in 2016 and 2019, where that is their policy to reduce it 25%. All the conditions are in place for another rise in house prices. Sam Hawley: Exactly. So what are we seeing already and what do we expect to see then when it comes to the cost of housing in Australia? Alan Kohler: Between November last year and January this year, house prices actually fell by close to 1%. This is the national median price, having increased 17% in the previous 12 months or so. And since January, they've risen again by more than the increase in average wages over that period. News report: House prices are continuing to rise across the country, with experts predicting property values to grow between 6 and 10% by the end of the year. All the capitals rose more than 0.4 of a percent in May. That brings the national index 1.7% higher over the first five months of the year. Alan Kohler: House prices are already starting to rise in excess of the rise in incomes. And the thing is, you know, everyone says houses are unaffordable, which is kind of true, which you would think would mean house prices don't rise very much now, because if they're unaffordable already, then people can't afford them. But in fact, falling interest rates makes them more affordable. The determinant of affordability is the amount you can afford in terms of interest repayments or mortgage repayments. Really, a better measure might be time to save a deposit, because the problem is that deposits are becoming unreachable for a lot of people. So housing is becoming inaccessible. It's OK if you've got a deposit, because your parents have given you one, given you the money, but those who don't have access to some sort of provision of a deposit can't get into housing. And that's the problem. Sam Hawley: Yeah. There's just a certain number of people that keep buying properties and pushing the amount or the cost of properties up. I mean, there's enough people that can afford the properties because the property price keeps going upwards and upwards. Alan Kohler: Correct. The truth is that if you don't have a parent who can give you the money for a deposit or some other way of getting ahold of a deposit, as opposed to saving it, you're a renter. You cannot buy a house. That is the reality of the situation, particularly in Sydney, Brisbane and Melbourne, but increasingly in Perth and Adelaide and Hobart as well, and also everywhere in Australia. I don't know what's to be done about it, really. Sam Hawley: All right. Oh, gosh. So, dare I ask you then, if you don't have the bank of mum and dad or any family members that can actually help you in this process of getting this massive deposit to buy a home, is there really no chance ever that you're going to land in the property market at this point? Alan Kohler: Well, there has to be a big shift in the value of housing versus incomes. Prices would need to go back to the sort of relationship to incomes that they were 25 years ago, which is three to four times instead of the current sort of nine or 10 times. And the only way that's going to happen is if house prices stay where they are for a while, like a long time, like 20 years. Now, that will only happen if there's an oversupply of housing for that period. Both the federal government and the state governments are all doing what they can. They're working hard. I know, you know, they're genuinely working hard to increase supply, but there's a problem. The trouble is that the construction industry doesn't have the capacity, partly because productivity is so low. In fact, the Committee for Economic Development in Australia, CEDA, released a report about construction productivity and why is it so low. And they do say in the report that we're building now half as many houses per worker as we did in the 70s. So that's fallen by half. But not only is productivity low, the number of workers is also in decline because the average age of builders tends to be quite high. They're all retiring and there's not enough apprentices coming through. The government is talking about increasing the number of tradies who they bring in as migrants, which is definitely what's needed. They're not talking about anywhere near enough of them coming in. And any way, the regulator of the industry is reluctant to recognise foreign qualifications in the construction industry. So, you know, there's a real kind of blockage of kind of productivity and number of people in the construction industry. I think it's going to be difficult to achieve the kind of oversupply of housing over the next sort of decade or two that is required. Sam Hawley: And Alan, while we're waiting for all these houses to be built, conditions are absolutely ripe for house prices just to keep surging. Alan Kohler: Yeah. And the governments, in addition to doing the work that they're doing on supply, which is good, they're also kind of doing short-term band-aid measures, including helping first homebuyers, either through help to buy schemes or grants and so on. And so that just tends to increase demand and increase prices, because a lot of those grants just end up on the price. So, yeah, look, I don't think it's particularly good news on the subject of housing. I'd like it to be different. And there's no big magic bullet. There's just going to be a lot of sort of small work, grinding work to be done. And, you know, the fact is we have to go through a period where housing is a really bad investment. Sam Hawley: Alan Kohler presents the Finance Report on the ABC's 7pm News. This episode was produced by Sydney Pead. Audio production by Adair Sheppard. Our supervising producer is David Coady. I'm Sam Hawley. Thanks for listening.
