CHAPTER 1
Between early 1990 and early 1991 Victoria "led" the Australian economy into recession, with employment falling while it continued to hold in the rest of Australia. Further, while early in 1991 unemployment has not yet hit the peak of 1982-83, it has risen faster than in that recession and seems likely in due course to exceed levels not previously reached since the 1930s. There was over this period a collapse in consumer confidence (as reflected in a very large real fall in retail sales) and in business confidence (as reflected in a much larger drop in business investment than in the rest of Australia).
To an extent the more rapid deterioration in the Victorian economy over the year from early 1990 is a rebound from the higher levels associated with the credit boom of the last half of the 1980's. Thus, even after the chastening experience of 1990 the Victorian economy was on some interpretations continuing to function early in 1991 at a level that was still at or above the rest of Australia. At March 1991, for instance, unemployment of 9.2% was no higher than in Australia as a whole, while the work force participation rate was no lower.
Few, however, expect the deterioration to stop at early 1991 levels, particularly as the end of the office construction boom and the full impact of the rural downturn are yet to be felt.
The Victorian economy was bound to slowdown, even to go into recession, as a result of national economic policies, particularly the high interest rate policy which the Federal Government imposed progressively from April 1988 and the failure of the Accord to bring the growth in labour costs, vis-a-vis productivity increases, down to internationally competitive levels. But the extent of the deterioration, and the widely held pessimistic outlook, is largely a function of the failures of Victorian Government policies. The most obvious of these failures, those occurring in the financial sector, have been well documented and we do not explore them further here.
Chart 1.1
VICTORIAN SHARE OF AUSTRALIAN EMPLOYMENT (August)
RBA, 6202.0, 6203.0 & Vic Yearbook
March 1991 data is seasonally adjusted.
Chart 1.2
UNEMPLOYMENT RATES (August)
RBA, 6202.0, 6203.0 & Vic Yearbook
However, we believe it is important to recognise that the problems that have emerged in Victorian based financial institutions, both government and private sector, importantly reflect the wider "moral hazard" problem which the Victorian Government created. It did this through the interventionist policies it pursued in many areas of the economy, not only by controlling and regulating the private sector but also by taking a lead role itself in the private decision-making process. Of course, the Victorian Government is not the only State Government -- nor even the first Victorian Government -- to have involved itself in "encouraging" private sector development, and there is no suggestion that the Victorian Government has used its involvement to obtain personal benefits or political funding as "side-benefits".
Even so, there is no doubt that the extent of Government intervention in Victoria, in the sense of purporting to direct and regulate the State's economy, has been considerably greater than in other States. This intervention even involved the purported pursuit by the Government itself of "Keynesian" type policies, supposedly making the rate of capital investment responsive to the state of the economy and the economic cycle even though the "leakages" overseas and to other States from "pump-priming" an individual State's economy would be high (1).
Many in the business community thus came increasingly either to take the lead from the Government or to feel that they had little alternative but to do so. With the backing of the Government's interventionist policies, business risks seemed to be reduced and risk-assessment procedures could be minimised. In a word, the Victorian Government, along with the Federal Government's Accord and accommodatory monetary policy prior to 1988, were perceived to be almost "guaranteeing" economic performance. The repeated assertions that Victoria was out-performing the rest of Australia re-inforced that perception and enhanced business and community confidence. In one sense, therefore, it would be surprising if this had not led to higher levels of spending and employment in Victoria than in other States.
As with all "guarantees", once the guarantor is seen to be fallible there is a reversal of the confidence-enhancing process. And, because of the Victorian Government's pervasive role in the State's economy, that reversal has had effects which have spread throughout the economy. In an important sense, Victorians have had too many of their eggs in one basket -- the Government basket.
Moreover, the political leaders who have replaced those who were responsible for "under writing" the guarantees have, not surprisingly, found it difficult to restore confidence even though they have asserted the abandonment of key elements of previous policies, such as the "picking of winners" and the resort to debt. The problem has been excacerbated by the fact that the local trade union movement has been able to take advantage of the deterioration in the Government's position to increase its influence, (2) thereby increasing the reluctance of business to invest.
It is important also not to overlook that, even with the Government's "underwriting" of Victorian business, the performance of the economy up to 1990 was not, relative to other States, as strong as might have been expected. It is true that, as the Government has claimed, Victoria's share of new private capital expenditure has increased significantly since 1982-83 (Chart 1.3).
Chart 1.3
VICTORIAN SHARE OF AUSTRALIAN NEW PRIVATE CAPITAL EXPENDITURE
AB8 5646.0
Chart 1.4
VICTORIAN SHARE OF TOTAL AUSTRALIAN MANUFACTURING
AB8 5220.0
However, this partly reflects the fact that, as a State with a low share of mining output, Victoria did not participate to the same extent as other States in the resources investment "boom" that occurred in the years immediately preceding 1983; thus, when that "boom" ended, Victoria's share of the lowered total increased. Also, a major factor in the strong growth of private investment has been the surge in construction of office buildings and retail complexes, which are unlikely to have made outstanding contributions to productive capacity or productivity generally. Moreover, given that there is now certain to be an extended period of negative growth in such investment, it seems probable that when (say) in 1995 private investment in new buildings and structures is averaged over the previous 15 years, the surge in the last half of the 1980's will be seen in perspective.
Victorian manufacturing investment has also increased strongly since 1982-83, with very strong growth in each of the three years 1984-85 to 1986-87. An important component of this investment would presumably have come from the highly protected motor vehicle and textile, clothing and footwear industries. With the phasing down of protection, this investment may, again, seem less significant for Victoria when viewed from 4-5 years hence. In any event, manufacturing investment does not seem to have resulted in any surge in manufacturing production, whose share in Victorian GDP actually fell (at least up to 1988-89, the latest year for which comprehensive figures are available). Indeed, while retaining its position as Australia's leading manufacturing State, Victoria's share of Australian manufacturing production actually declined between 1983-84 and 1988-89 (Chart 1.4).
Chart 1.5 also suggests that an important component in Victoria's growth -- expansion in the wholesale and retail industry -- has been oriented to consumption, where Victoria's per capita share increased up to 1988-89. Moreover, while the share of "public administration" in Victorian GDP declined after the peak reached in 1982-83, it remained well above pre 1981-82 levels. Both the wholesale/retail industry and public administration are heavy users of labour and their contributions to Victorian GDP were reflected in the strong growth in employment and relatively low levels of unemployment since 1982-83.
However, even there Victoria's performance has not been as good as the Government has sought to convey. Certainly, Victoria's share of total Australian employment has been above its share of the population (Chart 1.1). But that was also the situation prior to 1982-83, and there has been a marked fall in Victoria's employment share since 1986-87 to the point where it is now down close to its share of population (now down to around 25.7% from close to 28% in 1960 and 32% back in 1900). Similarly, while Victoria's rate of unemployment has consistently been lower than the Australian average since 1982-83 (Chart 1.2), so it was prior to that year (though less so). Further, that "gap" has now disappeared.
Chart 1.5
SHARE OF SELECTED INDUSTRIES' OUTPUT IN TOTAL VICTORIAN GDP
AB8 5220.0
In terms of the "bottom line" -- GDP -- Victoria's performance has again been rather poorer than the Government has sought to convey. Its overall share of Australian GDP has been on a downward trend since 1980-81, as has its per capita share. The Government has "explained" this by reference to the large fall in the volume of oil production from Bass Strait and suggests that Victoria's share of national GDP, excluding Bass Strait production, trended upwards during the 1980's. (3) While there may be something in this "explanation", to make a comprehensive assessment it would be necessary to make adjustments to other States' GDPs to take account of the effect of depletions in their natural resources. In the absence of any such analysis, the "raw" GDP data remains the most appropriate guide to overall trends in the economy.
In any event, it could also be pointed out that, just as the Australian Government has, until the last year or so, achieved a high rate of employment growth since 1983 by an unsustainable policy of heavy increases in the country's net foreign liabilities position, so has an unsustainable policy of continued heavy reliance on net borrowings contributed to the achievement by the State of Victoria of a relatively high rate of growth of state GDP (Bass Strait oil apart).
Where does this leave us? Even with the most recent sharp deterioration, Victoria remains a wealthy State with the highest per capita GDP and with many natural advantages. Most of these have been well delineated in other publications and we do not elaborate on them here.
CHART 1.6
VICTORIAN SHARE OF AUSTRALIAN GDP
ABS 3101.0 & 5220.0
One that has not received much attention, however, is the fact that, according to analyses by the Commonwealth Grants Commission -- and in line with what common-sense would suggest of a more compact and relatively populated State, Victoria has fewer "disabilities" than other States in providing government services to its citizens. This means that it has the potential to provide the same standard of services as in other States with a lower per capita current expenditure. Victoria also has the highest taxable capacity, which allows it to raise more tax revenue per head at the same rates of tax. The "bottom line" in this context is that Victoria can manage with a smaller government sector than other States, relative to GDP, and still provide the same level of services.
Prior to the current financial year, that has not been the case. From 1982-83 Victoria has had a bigger public sector than N.S.W., relative to GDP, and, although that situation is now reversed in the current financial year, that is entirely due to the sharp reduction in public capital expenditure. The proportion of Victorian resources going on current outlays of the public sector has declined since the peak reached in 1986-87 but has been above N.S.W. levels since 1985-86 and well above levels of the early 1970's. Victoria is the only State (apart from South Australia) to have actually increased the proportion of its population employed in the public sector since 1982-83.
By far the greater part of the reduction in the size of the public sector since 1986-87 has reflected falling capital expenditure, which is now at historically low levels. Whatever view is taken of the reasons for this cut-back, that situation is clearly not sustainable on any longer term basis. That is, either public sector capital outlays will have to be expanded (with obvious implications for the State's finances) or much greater responsibility will have to be handed over to the private sector for the provision of infrastructure. Some tentative moves in this direction have commenced.
The declining trend in public sector capital outlays has not prevented the emergence of a serious public sector debt problem, which has led to the first down-grading of any State's domestic debt since World War II. While Victoria's credit rating remains at a high level, given that the extent of net debt servicing costs is now very high (taking nearly 22 percent of each year's public sector revenue), and given the difficulties being experienced by the Government in getting the State's finances into better shape at a time when the economy is in recession and the prospects are for much slower growth in the State's revenue base, the situation remains a serious one.
Against this background, and in the light of Victoria's disastrous experience with government intervention during the 1980's, there is now both an opportunity and a need to implement a major reduction in the role of government -- to shift more eggs into the private sector basket. Victoria could take a leaf out of the book of the Tasmanian Government, which has made a useful start in that direction since the new (Labor) Government was installed there in 1989. Particularly noteworthy is the action taken by the new Tasmanian Government to create greater community awareness of the extent of the State's financial problems and what needs to be done about them.
But Tasmania has barely begun to explore the scope which exists for improving a State's economic performance. The remainder of this Report draws out the opportunities which exist for Victoria to reverse the downward trend in its relative position in the Australian economy.
Endnotes
(1) There is also doubt as to whether the Government's claim to have timed public capital investment to coincide with periods of economic "slack" can be substantiated. The pattern of total public sector fixed capital expenditure has been one of a more or less continuous decline since 1982-83, relative to GSP.
(2) This was highlighted by the strong attack on sections of the union movement early in 1991 by the Victorian Government's own Minister for Labour.
(3) See Budget Paper No. 2, 1990-91: 53.
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