Fiscal crunch means state must kick spending habit

From north to south, east to west, state governments are facing a massive fiscal crunch.  Victoria is not alone in feeling the pressure.

There is little question that we are feeling the effects of an economic slowdown.  The mainstay of the state's economy, manufacturing, has been hard hit in recent times.  A number of high-profile job lay-offs have taken place in companies such as Ford and SPC.  Businesses are pulling down the shutters, with investment growing at only half the national rate.

While Santa Rudd has been trying to artificially pump-prime Christmas spending, consumers have been keeping their wallets in their pockets.  This has shown up in falling consumer confidence and slowing retail spending in Victoria.  Further evidence of the spending "strike" has been revealed in the housing market, with subdued auction clearance rates and moderating prices.

Despite the assurances of Premier Brumby and his Treasurer that all is well, the state budget is heading towards meltdown.  The Government's budget update, released in early December, tells a worrying tale.  In about six months, the forecast budget surplus for this financial year has been slashed by more than half.  In May, Treasurer Lenders predicted a $828 million surplus.  Since then economic reality has hit, winding the surplus back to $382 million.

Tax receipts linked to economic activity, such as property duties, vehicle and gambling taxes, are expected to fall compared with the May budget forecast.  GST revenue is to fall by $342 million.  Taking out specific purpose grants, which the State Government cannot spend for its own purposes, we find overall revenue falls by more than $200 million.

However, any hint of an economic slowdown hitting the state ends there.  This is because we find a Government unable to kick its spending habit.  In six months, it has revised its expenditure up by $606 million.  Some of the increases will come from more superannuation payments for bureaucrats, interest on debts and more grants churned out by the big washing machine of government.

Another concern is the expected surge in net debt over the next four years, from $4 billion this year to almost $10 billion by 2012.  The Government's strategy to raise more debt comes at a precarious time for the international financial system.  It has also been revealed recently that the Federal Government's bank deposit guarantee has increased the difficulties for states in making calls on the capital market.  The taxpayer is likely to wear the consequences of higher interest costs.

If the economic slowdown persists into the new year, as most economists expect, then the worst may yet be to come for the Victorian Government budget.  However, like most other states, Victoria has become accustomed to spending taxpayers' money freely on the assumption that the taxpayer can keep forking out.  The latest figures show the Government is still operating with this "spend-quick" mindset.

To avoid catching the deficit bug, Victoria must take swift action to rein in wasteful, inefficient spending.

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