Inflation, a Covid comeback, Russia’s invasion of Ukraine and Josh Frydenberg “short-changing” his home state – these are the major battles Victoria’s treasurer, Tim Pallas, faces as he plots a narrow course towards a small budget surplus within four years’ time.
To fight his way back to surplus, Pallas is relying on economic growth – fuelled by the state’s speedy bounceback from a Covid-19 recession and a full-to-overflowing $21bn-a-year infrastructure pipeline, which itself contains significant potential pitfalls – rather than cutting spending or increasing taxes.
He is optimistic about the state’s economy. But, as is always the case with budgets and battles, his plans risk running into an uncooperative reality.
Pallas forecasts Victorian inflation of 3% this year, falling to as low as 2.25% by 2023-24, which seems a big call given the shock national figure of 5.1% announced by the Bureau of Statistics last week.
He reckons the bigger number “wouldn’t have had a profound effect on the fiscal aggregates”, but the budget papers call out the risk of higher inflation in the future feeding into higher interest rates, which could reduce consumer spending.
However, rate rises this year are already baked into the budget – “the market has already moved,” Pallas told reporters at the budget lockup on Tuesday.
Just as well – an hour and a half after Pallas rose in Victorian parliament to give his budget speech, the Reserve Bank increased official rates by 25 basis points, moving from a record low of 0.1% to 0.35%.
Victoria’s Treasury predicts home prices will fall by 4% next year, ending a red-hot market over the past two years that was fuelled by record low interest rates.
Russia’s invasion of Ukraine has also increased the risk of an inflation breakout, through higher prices for oil, wheat and barley.
There’s also the risk that wages, which have not risen in real terms for a decade in Australia, will fail to keep up with inflation, despite Pallas predicting unemployment will stay low at about 4%.
The Victorian treasurer is forecasting wages growth of 2.75% a year, growing to 3% a year over the following three years. But the budget papers concede that outside professional services and construction, there has so far been “little evidence that wages were rising beyond the relatively subdued rates of growth seen in the years leading up to the pandemic” and note that employers and workers have been “conditioned by a decade of low wage growth and business’ sharp focus on controlling costs”.
Victoria’s budget is also at risk if a new Covid-19 variant emerges, slapping the brakes on the world – and state – economy. This would cut about 0.5% a year from Victoria’s gross state product, according to research commissioned by the government.
But while the premier, Daniel Andrews, might have liked to call Covid a “wicked enemy”, Pallas focuses his ire on Frydenberg, who the state government has taken to saying is from Victoria but not for Victoria.
An entire, and entirely new, chapter of Budget Paper 2 is dedicated to how Victoria has powered ahead “despite insufficient Commonwealth support”.
Pallas makes the – true – assertions that Canberra has consistently given Victoria less than its fair share of infrastructure funding, and that a sweetheart deal with Western Australia puts the state’s GST revenue at risk.
He described the deal as “the worst public policy disaster this nation’s had since we decided to build Canberra”; this was a clear riff on Frydenberg’s statement during the Melbourne lockdowns that they were the worst public policy disaster in Australian history.
He says Victoria had been disadvantaged under the GST carve-up, to the tune of $3bn and NSW $4bn, saying: “I’m on a unity ticket with treasurer Kean in NSW.”
Despite the lack of money from Canberra, Pallas is pushing ahead with Victoria’s “big build” of infrastructure including roads, rail and removing even more level crossings.
It is a pipeline Pallas proudly says has so far generated 140,000 jobs – but carries with it significant risk of its own.
“Public investment has contributed profoundly to the economic growth of the state,” he says.
But he admits that, at somewhere between $18bn and $20bn in government orders a year, the construction sector is “starting to tap out” of capacity to build things.
This congested pipeline has already caused significant cost and time blowouts on the big build, especially the beleaguered West Gate Tunnel Project, where the government has had to tip in an extra $1.9bn.
On average, big infrastructure projects are 4% over budget – 1% if the West Gate Tunnel project is excluded – and are taking 20% longer to complete than previously expected.
As a result the government is establishing new oversight of projects bigger than $100bn and reconsidering the use of public-private partnership contracts, which are supposed to share risk between the state and the private sector but don’t always work.
Pallas says PPPs will continue to be used where appropriate and the government wants to make sure the taxpayer does not become a “banker of last resort” for contractors.
In the meantime, the focus is on controlling blowouts – something he claims the government is already improving.
“The further on we go, the better we get at this,” he says.
