Last week, I showed how the Victorian Government is overly addicted to property taxes and discussed how next year’s State Budget is likely to get hit hard by falling stamp duty receipts, which are likely to send the budget into deficit.
Included in this article was the below chart showing the Victorian Government’s heroic forecast that property taxes will continue climbing into the forward estimates, reaching nearly $6 billion by 2014-15:
Obviously, with Victorian home prices rolling over and transaction volumes near decade lows, the Government’s forecasts will likely end up being way too optimistic. And it seems that the Victorian Treasurer, Kim Wells, has caught on and is now softening-up the electorate for the inevitable budget downgrades. In an interview with the Saturday Age, Mr Wells had the following to say:
Mr Wells said a growing sense of trepidation was already hurting the bottom line, with stamp duty revenues lower than expected because of a soft property market.
”Stamp duty is softer and it is because of [lower] turnovers,” Mr Wells said. ”The actual number of [property] transactions that is less than we expected.”
He said land tax collections could also be lower than expected ”because property values have not increased as much as they have in past years” although payroll taxes had held up well because the unemployment rate was low.
The latest state budget, in May, predicted a $140 million surplus for 2011-12, with net debt expected to almost double from about 12 per cent of the state economy this year to 23 per cent in 2015.
A more recent Treasury update showed the budget was in deficit by $171 million during the first three months of the 2011-12 financial year, compared with a surplus of $491 million for the corresponding period last year.
The budget situation is so tight the government last month quietly introduced new laws to Parliament giving home buyers less time to pay stamp duty in a bid to shore up the bottom line by dragging revenue that would have been paid next year into the current financial year. Mr Wells said the goals of delivering a surplus of at least $100 million, preserving Victoria’s AAA credit rating and stabilising debt were ”not negotiable”.
Mr Wells then followed up on Wednesday with some warnings that Victoria’s GST take is going to be hit hard as well, blowing yet another hole in the State Budget:
THE slowing national economy has triggered another plunge in GST revenue that is set to punch a $670 million hole in the fragile Victorian state budget over the next four years…
The GST is collected by Canberra, but is entirely distributed to the states and territories and is their biggest single source of revenue.
Before yesterday’s $670 million GST downgrade, Victoria had already lost $2.1 billion because of changes to the GST carve-up between the states, and $1.6 billion due to a previous downgrade based on lower national economic growth.
”Victoria’s GST revenue had already been cut by $4.1 billion since January this year and today’s cut is another significant hit to Victoria’s finances,” Mr Wells said. ”In 2011-12 and over the forward estimates period the Coalition government will manage these significant external financial challenges to achieve surpluses of at least $100 million a year”…
…Victoria will get almost $200 million less this financial year, enough to plunge the state budget into the red unless the state government inflicts further cuts.
Mr Wells’ comment about stabilising Victoria’s debt levels in order to maintain the state’s AAA credit rating are interesting. The below chart shows historical net debt levels along with the ratio of debt to gross state product (GSP). Included in the chart are the Government’s own forecasts covering the period 2012 to 2015.
Interestingly, the Victorian Government expects net debt to increase by around $10 billion over the forward estimates and to stabilise at only 6% of GSP by 2015. But with falling property tax receipts and lower GST revenues, you can expect Victoria’s debt levels to rise much further than this, potentially placing pressure on the state’s credit rating.
Further, the Government has predicted that Victoria’s unemployment rate will fall to 4.8% by 2014 from 5.3% currently:
How the Government could possibly expect to reach such a low level of unemployment in the face of falling house prices, lower transaction volumes, anaemic credit issuance, and a probable slowing of housing construction (from current high levels) is beyond me.
All indicators suggest that the Victorian Budget and economy are cruising for a bruising.
