Rather than providing a rundown on all the new spending and revenue items from the 2013-14 Victorian Budget, which will be well covered in the mainstream media, we have captured some of our team’s key thoughts on what this Budget means, and what’s to follow over the remaining 18 months of the first term of the Coalition Government in Victoria.

Convention rules again in Victoria

The first Napthine/O’Brien budget has been delivered 2 months after the surprise change of leadership in the Coalition from the previous Baillieu/Wells team.

It provides a clear marker of a return to a more conventional or traditional approach to government, budgeting and politics in Victoria.

Decisions, once laboured over, are now being made. Unpopular cuts to service areas such as TAFE funding are being reversed. Antipathy to ‘spin’ and dealing with the media is being replaced with an appreciation of the need for strategic government communication.

In this context the 2013-14 budget represents a return to the principles of sound political management as much as it does economic management.

Return of the ‘pre budget sell’.

The first budget delivered by Treasurer Michael O’Brien sees the return of political management as the guiding force behind the budget’s delivery.  In contrast to long accepted practices at state and federal levels, by all parties, during the Baillieu/Wells reign, Victorians literally had to wait for the Treasurer’s speech to learn what the budget meant for their households, community organisations and businesses.

Over recent weeks we have seen a string of hints and announcements on what Victorians could expect to see in the budget.

On the morning of budget day, The Age carried details of the expected surpluses, and in the last fortnight the Napthine Government released a steady stream of major announcements including upgrades to rail lines, the first stage of East West Link, various rail crossing and road upgrades, and a stream of ‘localised’ announcements for Government MPs.

What does this all mean? Simply, that under Denis Napthine the Victorian Government is more keenly aware of how it is perceived, and is already pursuing an ongoing communications strategy based on aggressively selling its achievements and actively engaging with stakeholders.

A promise is a promise

This budget ticks a further set of the Coalition Government’s election commitment boxes. Amongst these are the $50m allocated to build a 32 bed community hospital at Waurn Ponds, level crossing upgrades and new stations including Southland, and the substantial further investment of $78m to provide facilities at rail stations to support the rollout of the Protective Service Officers program.

The Baillieu/Napthine Government is not the first government to place such emphasis and focus on delivery of its election promises – this is becoming increasingly commonplace, especially for first term governments.

(Of course the definition of what constitutes delivering on election promises can be somewhat elastic.)

This should be particularly instructive for those looking at the likely agenda of a potential first term Abbott Government federally.

Whilst a healthy lead in the polls and modern campaign strategies strongly suggest the Federal coalition will follow a small-target approach to policy announcements in the lead up to the election, those that are announced will be writ in stone.

Which explains why the battle is raging now, internally and externally, over such issues as the Coalition’s long-established plan to introduce a generous, and costly, paid parental leave scheme.

Any organisations wishing to inform the policy settings of a potential Abbott Government need to move quickly and adroitly to maximize their chances of incorporation of their ideas and concerns into a first term agenda.

 Blue skies from now on

It is striking that the Victorian Budget, formulated around a rosy view of good economic times ahead, was released on the same day that the Reserve Bank has reduced interest rates to a record low to support a struggling national economy.

The Victorian budget builds in annual increases in the tax take of 4.1%, based on a significant improvement in economic growth in coming years.

The thinking is that continuing population growth underpinning housing demand will support sales and prices – and increased stamp duty and land tax returns to the state. It will also drive construction, jobs and payroll tax proceeds which will flow with more Victorians in employment.

Given the mixed results in the real estate market of late – RP Data figures show a 0.6% fall in Melbourne house prices in the last month – this rates as an optimistic assumption.

Treasury also notes that the Victorian economy is still very much subject to movements – up and down – in the global economy and our international markets.

East-West Link funding – some answers, more questions.

The Napthine Government, through this budget is pressing ahead with its plans for the East-West link. The$294m funding announced in this budget,  together with the commitment of $1.5b to the project should Tony Abbott be elected in September, provides a  sufficient financing base to commence works for the first stage at the eastern end of the proposed works.

Fundamental questions remain, however, over the project’s outstanding financing requirements. These may be met by financing from the private sector, further government spending or some combination of both. The private sector’s likely involvement means sensitive questions around the project’s design (how many and where will the off-ramps go, how will demand risk be allocated, what will the funding mechanism – i.e. tolling – entail?) will need to be answered shortly.

The gap between the overall forecast project cost (many have estimated it as $10b plus) and the State Government’s capacity to contribute financially, serves again to remind us of the new reality that all state governments are now heavily dependent on federal funding for big-ticket infrastructure items like major road and rail projects.

Frankston does well

From the day Ted Baillieu and Kim Wells took control of the purse strings, the consistent mantra was their commitment to restoring the state’s finances – at any cost.

Not surprisingly, more than a few Government MPs were nervous about the absence of political considerations in decisions. For example the closure of government offices and TAFEs in regional areas has proved contentious with many of the government’s natural constituents and supporters.

This budget marks the first time the Coalition has squarely turned its attention to the politics of retaining government, currently held by a slender one seat majority. 

In excess of $100million has been allocated to the Frankston electorate and its bayside train line, and other marginal electorates are seeing a boost to their police stations, schools and health services.

Government spending has stabilised

The 2013-14 budget forecasts growth in government spending of 2.1% per year over the four coming financial years.

After having cut 4,200 public service positions over its first two years in government, the remaining government workforce can rest a little easier with no further cuts to numbers anticipated.

The efficiency dividend required in departmental spending has been increased from 2% to 2.5% per year, so some constraints on government spending remain.

The top-line 2.1% spending growth is required to meet increased demand for government services driven largely by population growth, and inflationary cost increases to government.

Nothing radical here

Those hoping that the change of leadership may see the adoption of a more radical economic agenda will be disappointed by this budget and recent comments from both the new Premier and Treasurer.

Upon coming to office, the Coalition established a Review of State Finances, commonly known as the ’Vertigan Report’ (after its co-author, former DTF head Michael Vertigan).

The report has been handed to the Victorian Government, but was never made public during the Baillieu/Wells period.

The Vertigan Report was a root and branch review of government, and is widely believed to have recommended smaller government through: 

• contracting out of delivery of public services
• privatisation and asset sales
• reduction of industry assistance programs.

The Report and its authors also strongly advocated the policy of government funding infrastructure spending through budget surpluses, an approach which clearly resonates in the Baillieu and Napthine Government’s approach to fiscal policy.

However, this Budget, like its predecessors, fails to realise any of the more radical reforms likely to have been suggested in the Vertigan Report.

Flagged as an important document in informing development of state budgets by both Ted Baillieu and Kim Wells, both Premier Napthine and Treasurer O’Brien have recently denied having read the report or having any intention of reading it.

 With only some smaller scale sale of excess government land holdings included in this year’s budget, and an election to be held late next year, the Vertigan Report and its politically sensitive recommendations may, largely, gather dust on a government shelf for some time to come. 

What’s to come?

Current surplus and infrastructure investment forecasts suggest there’s plenty of room for further announcements on infrastructure spending between now and the next state election in November 2014.

Spending on infrastructure is forecast to peak at $6.6b in 2014-15 declining to $3.5b in 2016-17. Over that same period the surplus is estimated to increase from $398.7m to $2,547.4m.

As the following chart demonstrates, of particular note is the budget capacity in out years 2015-16 and 2016-17, when budget surpluses are notably healthy and planned infrastructure spending falls away dramatically. 

 

Notwithstanding the Coalition Government’s stated commitment to a 5 year rolling averaged target of infrastructure spending of 1.3% of gross state product, there is plenty of scope for new infrastructure spending and initiatives to be announced in an election year budget, or as election policy during the campaign itself.

It should be noted that some of the infrastructure initiatives announced in this budget – the latest tranche of level crossing upgrades is a case in point – have not yet been fully funded, and will require further allocations not yet budgeted. The $52m in this budget funds pre-construction works for the level crossing upgrades – the actual construction works will require currently unbudgeted commitments of hundreds of millions of dollars more.

The political imperative for the Government will be to use the 2014-15 budget to incorporate most of its new initiatives, thereby limiting the discretionary spending options for Opposition to whatever unallocated financing capacity remains, post budget.