Has the Inheritance Been Well Spent?

When the Bracks Government came to power eighteen months ago, it enjoyed a huge inheritance built on seven year of vigorous reform.

The question was:  Would it squander its inheritance?

With the release of its second budget this week, we have finally got some indication.  And while there are some positives there is also cause for concern.

The main concern lies with the growth of spending on operating costs -- mainly public servant's salaries.  During its first year, the Bracks Government allowed this spending to increase by $1.5 billion or 10 per cent, which is large by any standard.  The Government argued that this increase was a one-off adjustment to meet election commitments.  However, in the latest budget, this coming year's spending on operating costs is forecast to increased by a further $690 million or 4 per cent.  While this is not a huge figure in itself, it represents a threefold increase over the level forecast the previous year.  Far from being one-off adjustments, the spending base has been ratchetted up.

Moreover, as shown by the reaction of the public sector unions to the latest budget, this Government confronts same constituencies for fiscal debauchery as did its Labor predecessors.

The latest budget puts in place a very large capital works program -- $2.4 billion in new spending over the next four years.  While the overall priority given to capital spending and many of the specific initiatives are appropriate, the program has its weaknesses.

First, the large increase in capital and recurrent spending has pushed the budget -- measured on the old cash basis -- into the red.  While, the projected level of borrowing is no cause for concern, given the state's low levels of debt, the speed with which the inheritance has been consumed is a worry.

Second, the budget gave no priority to the private-public partnership program or any other measures to drive value for money and innovation.  The budget restricts the partnership program to a limited range of previously announced projects.

Third, many of the capital initiatives add little to the state's productive capacity.  For example, the decision to open up the passenger train lines to Mildura, Ararat, Bairnsdale, and South Gippsland costed at $33 million is really nothing more than shopping subsidy for a few lucky pensioners.

The highlight of the budget was the Government's cuts to business taxes.  This initiative not only gave tax relief of $774 million over the next four years to overtaxed Victorian businesses but removed a number of particular onerous taxes.

Nonetheless, there remains significant scope for further tax cuts.  Even after the announced tax cuts, Victoria remains a high tax state.  The Victoria tax take after the tax cuts will still be $800 per person higher than the tax take imposed in Queensland and Western Australia.  Also the cuts to payroll tax did little more than give back revenue gained by bracket-creep over the last few years.  Indeed even after the tax cuts, the Government expects to earn more this year in payroll tax receipts than it forecast it would two year ago.

In summary, the Bracks Government has done the easy things by quickly spending its fiscal inheritance.  And it claim to being a fiscally responsible new Labor Government remain to be proven.

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