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Austerity ends, but where’s the vision?

5 May 2015

Victoria’s Labor treasurer might have echoed Tolstoy in his budget speech, writes Tim Colebatch, but the fine print doesn’t rise to the challenges facing the state


Populist, in a responsible sort of way: Victorian treasurer Tim Pallas (second from left) shakes hands with premier Daniel Andrews as transport minister Jacinta Allan and education minister James Merlino applaud after the Victorian State budget for 2015–16 was handed down in the Legislative Assembly today. Julian Smith/AAP Image

Populist, in a responsible sort of way: Victorian treasurer Tim Pallas (second from left) shakes hands with premier Daniel Andrews as transport minister Jacinta Allan and education minister James Merlino applaud after the Victorian State budget for 2015–16 was handed down in the Legislative Assembly today. Julian Smith/AAP Image

Victoria’s treasurer Tim Pallas has the kind of figure his friends might describe as soft and cuddly. His first budget, delivered on Tuesday, is sort of similar. Pallas calls it a budget “for families.” It relaxes the extreme constraints the previous Coalition government placed on spending on schools, hospitals and other services. But it is not a budget for tough times. And it does not try to tackle the huge infrastructure backlog that is making Melbourne choke on its traffic.

Rather, Labor has set out to make itself the family’s friend. Here is Pallas, rewriting Tolstoy at the start of his budget speech:

Every family is different, but every family wants the same thing. They want their kids to have the best start in life. They want jobs that will exist next year, in industries that will exist next decade. They want a home they can be proud of. A street they can feel safe in. And a government they can rely on.

And if someone they love gets sick, they want the care and precision and peace of mind that only a modern hospital can provide. These are the things that matter. None of it is too much for families to ask… The budget I hand down today has fairness at its heart and families in its reach. It gets us back to basics: jobs, schools, hospitals and transport. The things families need to live a good and healthy life.

And so it goes on. This is going to be a Labor government focused on caution, not on the vision thing or long-term problems. This budget defines it as populist, in a responsible sort of way. Like the first budget of the Bracks government in 2000, it is really about relaxing the austerity imposed on government spending by its Coalition predecessor.

Spending on hospitals in the coming financial year, 2015–16, is forecast to grow by 6.7 per cent from the equivalent figure in last year’s budget. Spending on primary schools is forecast to grow by 6 per cent, on secondary schools by 5.3 per cent, and on public transport services by 6 per cent.

Labor is also the unions’ friend. The state’s wage bill is forecast to grow by 7.7 per cent next financial year, with most of that coming from increased staffing levels, not increased wage growth. With revenue estimated to grow by only 3.4 per cent, it’s a shift that could derail the budget if it continued, but Pallas assures us that it will be a one-off event. Wage growth is forecast to average 4 per cent in future years, and total spending growth just 3.1 per cent. The ratings agencies will be wary, but will probably wave it through.

Pallas has been helped by some rosy forecasts by his Department of Treasury and Finance. It predicts that Victoria’s growth rate will accelerate to average 2.75 per cent over coming years, which would, if correct, be a big improvement on its track record since the global financial crisis. (Official figures show the state’s output per head has grown just 0.5 per cent in six years.)

Treasury forecasts that the state will add 250,000 new jobs over the five years to 2019, and state revenues will soar by 28 per cent. That will be quite a feat, given that those years will see the demise of Victoria’s traditional linchpin industry, car manufacturing, which has a mesh of linkages to other industries in the state. Other forecasters are less optimistic.

Pallas would not admit it, but he has also been helped by his Coalition predecessors, who bequeathed him a string of forecast budget surpluses, estimated to average a hefty $2.35 billion a year over the next three years. In short, he has helped himself to $1 billion a year of that, leaving him with average forecast surpluses of $1.3 billion a year ahead.

(State governments define surpluses differently from the federal government’s eccentric definition. In Victoria’s case, a surplus of $1.3 billion means the state’s revenue that year is $1.3 billion greater than the amount it spends on delivering health, education and other services. That surplus helps pay for its capital spending, which is not included in the bottom line, and most of which is financed by borrowing.)

Premier Daniel Andrews had promised not to raise taxes, and so far, more or less, he hasn’t. The only tax rises are aimed at foreign property owners. From 1 July, foreigners buying homes in Victoria will have to pay a 3 per cent surcharge on the property’s value, which is forecast to raise $280 million over the next four years; and landowners who are not usually resident in Australia will face a surcharge of 0.5 per cent on their land tax. Pallas confirmed that the surcharge would apply to foreign-owned companies, implying that it will hit BHP and Rio Tinto, among others.

Where is the increased spending going? This is a cautious government, so by and large it will be spent exactly where they promised to spend it in the election campaign. On the jobs front, for instance, there is $500 million over four years for the Premier’s Jobs and Investment Fund, intended to finance startups and promising industries. There is another $500 million for the Regional Jobs and Infrastructure Fund, $200 million for the Future Industries Fund, and $80 million to attract more major events.

Pallas repeated Labor’s ludicrous line that these initiatives will create 100,000 new jobs. The funds would have to be very well-run to do that. The risk is rather that they will be targeted where the government thinks they will be most electorally rewarding, like so many other slush funds we have seen.

In health, there is $391 million to expand neglected outer suburban hospitals, mostly in Labor’s western suburbs heartland, $200 million to “rescue” unused hospital beds, an extra $1 billion for hospitals generally, $889 million for the community sector to meet the wage increases flowing from Fair Work Australia’s equal remuneration order, and improved funding for disability services, mental health and child protection services. Yet in the same breath, Labor will shell out $95 million to expand crowd facilities at the Geelong and St Kilda ovals. Fortunately, this budget does not as yet burden taxpayers with Labor’s plan to spend another $30 million so that the Western Bulldogs can play occasional games in Ballarat.

In education, $1.4 billion of new funding has been allocated to meet the state’s share of the Gonski report’s funding for disadvantaged schools, although Pallas warned again that the state could not pick up the federal government’s share if it pulls out from 2018, as the Abbott government has flagged. There is an extra $1.375 billion of general funding for government and private schools to meet forecast growth in demand, $200 million to “rescue” Victoria’s TAFE colleges after the Coalition’s severe funding cuts left half of them operating in the red, and $148 million to pay for kids from poor families to participate in school camps, sport and excursions.

Policies like these are essentially plugging gaps opened up by the Coalition’s funding cuts, much as Bracks and John Brumby did when they took office after the Kennett years. Pallas points out that the average growth in overall spending over the forward estimates has risen only from 2.5 per cent under the Coalition to 3 per cent (actually, 3.1 per cent) under Labor. One can question some of Labor’s priorities, and the optimistic revenue assumptions underlying them, but so far, the budget can be broadly given a tick.

But where this budget really drops the ball is on infrastructure. I have written on this elsewhere, but the reality of the budget in this area turned out to be even worse than I had foreshadowed.

It was one thing for Labor to scrap the Coalition’s wastefully extravagant East West road tunnel – whose own proponents found would return, on a conventional cost–benefit analysis, only 45 cents of benefit for every $1 spent. But as Pallas conceded, it has actually cut infrastructure spending.

A year ago, the Coalition was budgeting to spend $3.93 billion on transport infrastructure in the year ahead. Much of that was never spent, but this year, as far as one can tell from the budget papers, Labor at best has budgeted to spend about $3 billion, and probably even less.

This is not because of a lack of projects. The budget papers show Labor has around $30 billion of transport projects in the pipeline, and around $20 billion even if you take out the biggest one, the Melbourne Metro rail line, on which construction is not due to start until 2018. The projects are there if the money is there. But the money isn’t there, because Labor does not see tackling congestion as a priority, and plans to do it slowly.

Take one example. Between Kew and Fairfield, traffic slows to a crawl for hours every day, as two or three lanes of traffic have to squeeze into one to cross a nineteenth-century bridge over the Yarra. A recent survey by the Royal Automobile Club of Victoria found motorists rate it as the worst congestion spot in Melbourne. In its election campaign, Labor promised to duplicate the bridge.

And so it will. Next year, it will allocate $2 million to draw up plans. Sometime in 2016–17, it will actually start building it. By late 2018, around the time of the next state election, it hopes to have finished it. This is not a particularly complicated or big project; it is estimated to cost $110 million. It is just not a priority.

Labor’s big transport promise going into the election was its pledge to eliminate fifty of Melbourne’s worst level crossings over eight years, at an estimated cost of $5 billion to $6 billion. But the only crossings the budget specifically commits funds to remove are the four projects Labor inherited from the Napthine government, and the official website tells us that only two of these – Burke Road, Glen Iris, and Main Road, St Albans – will see construction take place in the coming financial year. The budget allocates just $299 million for them.

The Andrews government has now promoted another thirteen level crossings to the planning stage, but it would have to double or treble the pace of spending to have them completed by the next election. And even adding them to the four inherited from the Coalition, that adds up to just a third of the level crossings Labor has pledged to replace.

There’s a myth that a government needs to be building mega-projects to provide work for local contractors. No, it doesn’t; it just needs to be spending more money where work needs to be done. This budget cuts funds for resurfacing Melbourne’s roads by $480 million in the year ahead, even though it concedes this will mean 7.5 per cent of metropolitan road surfaces remain “distressed.” Funding for resurfacing country roads has been frozen at current levels, although 8.3 per cent of country road surfaces are likewise distressed.

It is striking that the performance indicators set for the transport authorities in the budget papers do not include measures of congestion. If they did, this budget might have found more useful ways to tackle them: not with mega-projects, but by duplicating congested single-lane main roads, especially in the outer western suburbs where so much of Melbourne’s population growth is taking place, and so little of its road infrastructure spending is being directed. •

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Cost-shifting: the proposed West East tunnel and bridge would be funded by extending the toll on Melbourne’s CityLink freeway beyond 2035. Alan Lam/Flickr

Cost-shifting: the proposed West East tunnel and bridge would be funded by extending the toll on Melbourne’s CityLink freeway beyond 2035. Alan Lam/Flickr