The same macroeconomic factors that constrained the state’s growth relative to other states in recent years are now tipped in Victoria’s favour.
Limited exposure to commodity price drops and the falling Aussie dollar spells good news for Victorian exporters, but bad news for foreign manufacturers with falling demand for imports driven by relative price increases.
Overall outlook and drivers of growth
In his speech to Parliament, the Treasurer said this 2015-16 budget “sends this very powerful message: Victoria is open for business.” The Andrews Government has laid out an extensive program to encourage business in Victoria in the hopes of amplifying broader economic trends finally swinging in the state’s direction.
The budget papers show the Victorian Government is running a surplus of $900 million in 2014-15, projected to grow to $1.2 billion in the coming year and $1.8 billion by 2018-19, despite Victoria’s economy growing at a below trend 2.25 per cent. Net debt is forecast to scale back to a meager 4.4 per cent of gross state product.
In just a few years, Victoria’s position relative to other states’ budgets has changed markedly. Once hamstrung by limited mineral resources and mining royalties, the Victorian economy is now benefiting from its immunity to a global commodity price plunge.
Victoria has almost no mining, meaning it is invulnerable to the same falling terms of trade that have caused Western Australia budgeting strife. Additionally, the lower Australian dollar is actually helping manufacturing exporters, still a major sector of Victoria’s economy despite the complete withdrawal of car manufacturing by 2017.
Falling Aussie dollar
The Treasurer highlighted the falling dollar as an opportunity for the state’s exporters in his second reading speech: “As the US is recovering, our economy is rebalancing – and our dollar is depreciating. Right now, it’s about 20 per cent below its peak in 2013.
It’s making exporters more competitive, local products more affordable and businesses more willing to invest.”
Key sector strengths of the Victoria’s economy such as professional services, education, agriculture and advanced manufacturing will benefit from increased investment and consumption, and domestic spending will shift towards local products as international alternatives become relatively more expensive.
Imported goods and services will grow overall in line with state final demand, but industries such as outbound tourism will become relatively more expensive due to the lower exchange rate.
What does this budget do for exporters?
Future Industries Fund and Premier’s Jobs and Investment Fund
Some economists may be dubious that a state government can pick winning industries to guide growth, but setting aside $200 million for its Future Industries Fund combined with a lower dollar shows promise of targeting growth in a new export winner in sectors such as biotechnology or professional services. The fund encourages growth in six key sectors with the potential to drive longer term economic growth: medical technology and pharmaceuticals, new energy technology, food and fibre, transport, defence and construction technology, international education and professional services.
The Premier’s Jobs and Investment Fund advised by a panel led by senior industry leaders on job-creating industries will be funded by an impressive half a billion dollars, including a $60 million start-up initiative.
The Government has set aside $12 million over four years to bring investors from around the world to Victoria in inbound super trade missions. This seems a prudent shift from a focus on outbound super trade missions given the state of the Australian dollar and relative expense of ferrying hundreds of business leaders overseas.
The budget also lays out $6 million to set up Victorian small business offices in key trading regions such as South America, Singapore and Turkey, and $5.2 million for trade negotiations.
Agricultural jobs were not the primary focus of the 2015-16 budget, but a $200 million Regional Jobs Fund promises to ‘focus on creating jobs and industries that are vital to the continued economic prosperity of rural Victoria,’ no doubt including a large swathe of agricultural investment in addition to the $800,000 set aside for scholarships to attract young people to farming.
The government will spend $1 million on a horticulture innovation fund, $1 million to promote cellar door visits and expand wine exports, $130,000 for a wine industry advisory council. To ease agricultural export processes the state budget apportions $9.4 million to support biosecurity services, and $600,000 to examine food labelling laws in the hopes of cutting down on waste through international red tape conversions.
Freight and logistics
What promises to help exporters of consumer goods and manufactured goods is this government’s focus on transport infrastructure investment and freight pathways.
The biggest spend in this area is up to $220 million for the Murray Basin Rail Project. About half of Wimmera and Mallee grain is currently transported by rail, and this would fill a vital gap in the state’s rail freight pathways also used by horticultural and mineral sands sectors. The project would need federal contribution, however, and the government says it will continue negotiations with federal counterparts for Commonwealth contribution to the project.
Some other projects that will ease freight pathways include:
- $150 million for the next stage of the M80 Upgrade, including the upgrade of the Sunshine Avenue interchange
- $40 million for constructing the first stage of the West Gate Distributor project, aiming to significantly increase productivity for the freight industry widening Whitehall Street to provide an upgraded connection to Footscray Road, and strengthening and widening Shepherd Bridge over the Maribyrnong River
- $2.2 billion to remove the first 17 of 50 congested level crossings will speed up passenger and freight rail alike
Small business and construction industry
The Treasurer stated in his speech, “two thirds of our gross state product centres on the home: housing investment and household consumption. Both are growing.” Much of the small business targeted budget items are focused on the former, housing investment and construction.
Business investment is expected to grow moderately as consumer spending improves and exports strengthen, supported by low borrowing costs and Victoria is also expecting to bring in $5.4 billion in payroll tax revenue in 2015-16, nearly a third of its forecast $19 billion tax income.
That Payroll Tax amount is tipped to expand to $6.4 billion in 2018-19 as the state returns to normal growth levels in line with national growth, but the $550,000 Payroll Tax threshold is to remain unchanged.
Even with this unchanged threshold, for the 500,000-odd small businesses the government has outlined some small business tax relief geared towards small businesses in Victoria’s booming construction industry.
In addition to start-up funding under the Premier’s Jobs and Investment Fund, the government has allocated $11.4 million over four years for motor vehicle stamp duty relief aimed at small businesses investing in new mobile plant equipment. All vehicles classified as mobile plants (under 4.5 tonnes) and plant-based special purpose vehicles (over 4.5 tonnes) such as backhoes, excavators, bulldozers, scrapers, tractors and off-road water sprayers will be exempt from motor vehicle stamp duty from July 1.
What about foreign property investors?
The ongoing property boom is fuelling strong growth in land transfer fees, expected to surpass $5 billion next financial year. This growth is heavily driven by investors, and foreign investors.
This budget applies a 3.0 per cent stamp duty surcharge to foreign buyers of residential real estate, and a 0.5 per cent land tax surcharge to absentee owners of property in Victoria, in addition to any other land tax payable.
These measures are ostensibly to make sure “all property owners contribute to funding the improved infrastructure and services which contribute to rising property values.”
It remains to be seen whether these modest surcharges have an effect on foreign investment in Victorian property.