State budget short on shock absorbers

Money may not grow on trees, but this year’s state budget seems to deny that reality. It is a budget headlined by billions in new spending, adding yet more billions in fresh deficit and debt to the state’s balance sheet.

The state’s health system is the biggest recipient of all this, with $12 billion allocated for elective surgery, nurses, paramedics and emergency call takers. Another $1.3 billion is being handed to the mental health system on top of last year’s record $3.8 billion allocation. It is hard, considering what The Age has reported about the crisis in hospitals, in ambulance ramping and in the triple-zero dispatch centre, to begrudge any of this. The worst of the pandemic may be behind us, but the recovery does not come cheap.

The government’s “big build” will gobble up another $21 billion this year, which Labor argues is for infrastructure that will increase productivity. With a Commonwealth Games to run in 2026, regional Victoria has been allotted $2.6 billion for sports infrastructure and athlete hubs. More than $1 billion has been earmarked for the education system to reduce the time teachers spend in front of the class and to upgrade 36 special schools. There are also hundreds of millions for more trains, police and renewable energy.

If the money tree were a little larger, you could argue that Melbourne’s CBD is in desperate need of a financial kickstart to help it recover from its pandemic hangover, and little was mentioned about housing affordability.

The flipside to all this spending is, of course, the payback. The state is facing significant public debts for many years. Net debt is expected to rise from $101.9 billion by this June to $167.5 billion by June 2026, equivalent to 26.5 per cent of the state economy.

Treasurer Tim Pallas is banking on growth to balance the books.Credit:Joe Armao

Treasurer Tim Pallas’ money tree comes in the form of economic growth – an approach apparently legitimised by Josh Frydenberg at the federal level. In this world, governments can keep spending high and never increase taxes, and the expanding economy and return of population growth will simply replenish the government’s coffers over time. In an ideal world, that is right.

Some of those conditions already exist. At 4 per cent, Victoria’s unemployment rate, its lowest in decades, translates to more taxes and fewer expenses for the government.

But if you go back to the state budget of three years ago, an enormous uptick in infrastructure spending was also predicated on a belief in a sound economy. The pandemic was not even on the radar, let alone the bushfires, floods and other negative factors that have affected the lives of all Victorians.

Expect the unexpected is surely the mantra of our times. That was evident on Tuesday, when the Reserve Bank lifted the official interest rate by 0.25 percentage points in a bid to quell inflation, an economic problem that is increasing but which many experts initially thought was a post-pandemic glitch that would quickly resolve itself.

Throw in a slowing and still-pandemic-disrupted economy in China, a war in Europe that is not expected to end any time soon and mid-term elections in the United States this year that are likely to heighten the political gridlock in Washington. There is good reason to believe more economic shocks are on the way.

Simply put, the state government is not preparing for shocks. Instead, it is hoping for the best and reassuring us all will be OK. We hope Tim Pallas is right. But we are both sceptical and concerned that in this budget the government is making too little provision for a future beyond November 26, when it will confront the electorate and ask for a third term in office.

Gay Alcorn sends a newsletter to subscribers each week. Sign up to receive her Note from the Editor.

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