The Victorian government is set to hand down its budget this week. Premier Ted Baillieu is committed to returning Victoria back into the black, after it spent the first six months of this year in a $341 million deficit. But is a surplus the right move for a stagnant economy?
A sluggish housing market and cautious consumer sentiment are two hallmarks of an anaemic economy. In Victoria, announcements of a $1.4 billion loss in revenue from the GST - as well as the $1.1 billion cut in the forward estimates of stamp duty proceeds - hinted at the state’s considerable budgetary pressures.
Given these factors - and Australia’s high level of foreign and private debt - it’s all the more reason for state and federal governments to pursue a fiscally conservative agenda, argues Monash University’s Jakob Madsen.
In the lead-up to the budget, the Victorian government has signalled a $1.4 billion cut in projected revenue from GST receipts, in addition to a fall in revenue from stamp duty taxes. What factors are behind the decline?
When we’re looking at state revenue, we’re looking at house sales, GST and car sales. Stamp duty depends on the number of houses sold and the price levels. We can see house prices have gone down by 6.1% over the last year and clearly that has reduced stamp duty by 6.1%.
We know there’s a very strong relationship between house price and turnover. When we have a booming market, more people are able to climb the property ladder - a lot of new buyers entering the market. That all adds to the boom. But now, that’s gone in reverse. The reason for this decline is that access to credit is much more difficult. The ease of getting credit from the bank drives house prices in the short term.
It’s a strange combination, but what happens often is that as soon as house prices start to fall - which is partially because credit from the banks is drying up - the banks become even more cautious when they lend out. This is because as collateral, the value of the house goes down. The credit-house price relationship is very strong. The banking sector has been a large part of this decline. Another issue is the flow of immigrants, which has also declined. This is putting less pressure on the demand for houses.
The economy has been pretty flat for a while, and that too has certainly been a factor. The private debt here in Australia is enormous. When debt is really high, people realise that, at some stage, there’s only one way to get rid of it: it’s to pay it off. That comes from your income. There’s a change in attitude now.
Car sales are also a big revenue generator for the states. It’s very hard to determine car sales: we don’t have any good models for it. Again, car sales depend on the credit situation. We’ve had a very high boom in sales for cars - clearly the market is saturated with cars. There are too many cars. Clearly, this reliance on revenue from car sales has to be unwound, as people can’t continue to renew their cars.
Then, of course, comes GST. GST is almost entirely determined by consumer demand, and consumer demand is determined by the general economy.
We have seen that the economy is pretty flat and therefore, consumption will also be flat. This is partly because people are realising that they have to pay off their debts, and partly because of expectations of increasing unemployment.
Do you think, then, that state treasurers’ calls to reform the GST are sensible given this broader structural shift in the economy? Some of the reforms suggested include a widening of the tax base or an increase in the tax rate, as well as the per capita distribution of proceeds from GST.
The last suggestion (per capita distribution) is very hard to do with GST unless you tax luxury goods more.
I’m a strong suppporter of the GST - the higher, the better - and lower income tax. No question about that. There’s a large fraction of the economy that is not being taxed and the only way to tap revenue from this sector is by GST.You want to tax consumption. We should not be interested in taxing savings and taxing work effort.
Do you think another problem is that the states, in terms of raising revenue, lies with the inefficiency of state taxation?
Yes. It’s totally crazy! It makes no sense whatsoever. They derive so much revenue from stamp duty and car sales. I’ve never thought stamp duty was ideal because it penalises those who move around a lot.
The states should be able to have an independent income tax. A GST is a good idea, and certainly a broader base would be good.
And lastly: given the parlous situation that some of the states are in, what do you think about the decision by governments - state and federal - to pursue a budget surplus?
I don’t consider myself a conservative at all - far from it! But when it comes to that, I am really conservative. I like that they are targeting a surplus. Not at any cost, of course.
If the private sector suddenly dies because of a financial crisis, then you are simply fuelling the downturn by having a budget deficit. We’ve seen that to abundance in Greece, Ireland and so on. The only way to put a brake on the downturn is to be very conservative.
For Australia, one big structural problem is the high level of foreign debt. At some stage, foreign investors will have had enough. If foreign investors start to consider debt to be a serious issue, we will start to see a capital flight.
The foreign debt comes predominantly from private debt. And the private debt, in turn, comes from the housing market, because that has been partially driven by too much private credit.
The only way for Australia to address this structural problem, is to be very conservative. We’ve seen that when things go nasty, if the government has a big deficit, the consequences are that the interest rate on lending goes up. Look at Greece: it has an interest rate of 15% on lending. This is outrageous, and it’s a certain way to cause a collapse in the economy.
Of course, Australia is not Greece. But that is because previous governments here - and the current government - have been very responsible. I think that’s the only reason why Australia has not experienced a big capital flight. Have we had a deficit like the southern European countries, we would have seen a collapse in the Australian dollar that would have lasted for a long time.