The government’s spending commitments continue to be supported by a strong tax revenue position, which will generate totaloperating surpluses of $9.6bn over the forward estimates period.
The government’s investment in infrastructure is set to increase quite dramatically over the next five years. In last year’s Budget it was estimated that spending on infrastructure would average $7.4bn a year over the following 4 years.
The average per annum spend identified in this year’s Budget is now $9.6bn, representing an increase of more than 20% over last year’s forward estimates. The increased funding will be allocated to schools, hospitals, urban and regional road and rail transport projects, as well as other community infrastructure projects such as the ongoing upgrade of Melbourne Park.
Law and order has been in the news in recent times, and the government has allocated $2bn in this Budget to recruit new police and upgrade police stations, as well as $1.9bn to deliver on the 10-year strategy Ending Family Violence: Victoria’s Plan for Change, released in November 2016.
We commend the government for its continuing commitment to deliver major projects for Victoria, which will in turn create opportunities for our clients to engage with the government on the delivery of those projects.
Despite the continued upswing in tax revenue, the operating surplus for the 2016-17 year has been revised downwards quite significantly from the $2.9bn stated in last year’s Budget to $1.3bn. Although the Budget papers predict an ongoing surplus position each year over the forward estimates period, it is not until 2020-21 that the annual surplus returns to the $2.5bn mark.
It will be important for the government to ensure that its spending is kept sufficiently in check to avoid sliding into a deficit position in the lead up to the next election in November 2018.
Property-related taxes are set to make up more than 45% of the total tax revenue in 2017-18. As a clear sign of the government’s ever-increasing reliance on property taxes to fund its spending commitments, land transfer duty will overtake payroll taxes as the biggest piece of the state taxes pie. Estimated property taxes revenue of $9.8bn in 2017-18 is set to increase by a further 19% to $12.1bn in 2020-21.
The government had already announced changes to stamp duty leading up to this year’s Budget, and Pitcher Partners remains concerned about the impact of those changes on the Victorian property market. In particular, the removal of the off-the-plan concession for residential and commercial property investors from 1 July has the potential to severely impact the ongoing demand for new development stock, which could in turn have negative flow on effects for developers and a range of other businesses that service the property development industry.
On the other side of the coin, many of our clients will welcome the announcement that the government intends to accelerate the planned increase in the payroll tax threshold, such that it will be $650,000 from 1 July 2018. Although this threshold is still relatively modest when compared to other states, the increase will translate into real savings for middle market businesses that are seeking to grow and expand their workforce.
The 25% reduction in the payroll tax rate from 4.85% to 3.65% for employers with at least 85% of employees in regional areas is a significant change that is clearly aimed at encouraging businesses to employ regional Victorians. It is unclear, however, how many businesses will be able to satisfy the 85% threshold as many workers now travel some distance to their place of employment and don’t necessarily live in the same area that their employer is based in.
If the 25% payroll tax rate reduction were to be applied across the board to all Victorian employers, that would provide a significant stimulus to the Victorian economy by allowing increased employment, without a corresponding increase in cost.
Overall, the state’s financial position remains strong and continues to be sustained by a buoyant property market, which replenishes the government’s coffers each year through increased property taxes revenue. That in turn is allowing the government to fund the spending programs announced in both the current and previous Budgets.
In that context, we continue to believe that the strong Budget position should be viewed by the Andrews Government as an opportunity to provide further targeted tax relief to the middle market businesses that are the backbone of Victoria’s economy.