Waking from the dream with a headache

Is Steve Bracks' dream run coming to an end?

It has been a dream to be in Government in Australia this decade, Victoria being no exception.  However, there are emerging signs that dream is coming to an end.

The state's economy is slowing.  While there is no recession on the horizon, the tea leaves point to a much more challenging time for the next Victorian government.

The Bracks Government has had the luxury of a "magic pudding" economy over the past six years.

Despite steadily increasing spending, a booming economy delivered ever more revenue and budget surpluses.

Each year the government would cautiously predict a slight slowing in revenue, only to given large increases.  Every tax and every revenue source flowed like the mighty Snowy of the past.

Even the Federal Government has been generous in the extreme.  As a result the Bracks Government has received a revenue windfall of more than $20 billion over the past six years.

Of course, all states and territories and the Federal Government experienced similar dream runs, even the erstwhile rustbelt states of Tasmania and South Australia, but Victoria has done better than most.

The key has been a robust, fast growing economy.  Each year Victoria's Treasury predicted that the boom would wane slightly, only to be surprised by even more rapid economic growth.

Moreover the growth was largest in the very areas which the state taxes most:  housing, insurance, cars and, through the GST, consumption.

In its latest budget, Treasury did something different.  It predicted that that state's growth rate would actually increase from 2.5 per cent last year to 3.25 per cent in 2006-07 and 3.5 per cent in 2007-08.

It seems to have been a bad time for optimism.  The latest ABS data shows not only a sharp slowing in the overall Victorian economy, but sharp declines in the areas on which the state relies most for revenue.

In the June quarter the state economy ground virtually to a halt, growing just 0.1 per cent.

For the year ending June 30, 2006, the economy grew by 1.4 per cent, which is a full percentage point below Treasury's prediction.

The data shows that the slowdown has been in train for months and the trend is down.

The most rapid and significant declines has been in household consumption which is now running at half the rate of a year ago.  The housing market has slowed, as have car sales.  Private sector capital investment has also declined.

While Treasurer John Brumby remains optimistic that the good times will inexorably roll again, there is a growing consensus among readers of the economy's tea leaves that the boom times are over.

Household budgets have become geared to the maximum and it is only a matter of time before this will bring the unprecedented spending spree of the past decade to an end.

Nothing surprising, but certainly a challenge to a state government hooked on an apparently never-ending flow of easy money.

There is also a growing consensus that the slowdown is not just cyclical but in part a result of the failure of governments, including Victoria's, to reinvest reform bonuses in reform.

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