At what cost: Tax reality bites as Victorians digest the budget

Save articles for later

Add articles to your saved list and come back to them any time.

As with the Commonwealth budget two weeks ago, the Victorian budget feels like the start of a conversation that Australia needs to have about the services it wants and the price it is willing to pay for them.

With Australia’s overall tax take around 15 per cent below the OECD average, there is some room for us to reasonably move on lifting revenue to meet the costs of delivering government services.

Premier Daniel Andrews has led a big build agenda.Credit: Eddie Jim

Yet, every time a government looks to increase revenue the response focuses only on the negatives, not on the positives that the additional revenue will afford our economy and our society.

As Grattan CEO Danielle Wood pointed out in her Press Club speech earlier this month, the media focus on revenue measures is too often not proportionate. She highlighted the coverage of the recent changes to superannuation tax as an example, where the winding back of very generous tax breaks for 80,000 Australians led to it being labelled a ‘death tax by stealth’ and a ‘super sized broken promise’.

This opposition to any tax changes belies the reality that governments cannot deliver a world-class education, health and social safety net without more revenue.

Structural deficits across the Commonwealth and most states will not magically disappear as our population ages and demand for more quality services increases.

There is no doubt that since coming to power almost a decade ago, the Victorian Labor government has had a big agenda – arguably at times too big – to deliver everything well and efficiently.

But that agenda, from investing in hospitals, mental health and infrastructure to addressing domestic violence, has had widespread public support and is setting Victoria up for higher living standards in the future. What has had less support and focus is how we pay for this agenda.

Even before the pandemic hit, Victoria’s debt was increasing as new expenditure was not offset with savings or new tax initiatives. The one exception was the increase in mental health spending, which was funded by an increase in the payroll levy on big business.

As the state’s interest bill is forecast to hit 8 per cent of expenditure, the reality of not squaring spending with revenue is stark.

The Victorian government will raise an additional $10 billion in taxation revenue over the next four years, including through its headline increases in payroll tax and land tax. The measures have been tightly targeted, hitting larger businesses, people with second homes and the top private schools.

If you listened to the commentary, these tax changes will lead to widespread unemployment, higher rents, landlords selling properties and private schools hiking up fees.

There is some concern that the payroll tax changes, albeit temporary, will reduce the attractiveness of Victoria as a place for businesses to operate. If this occurs, jobs growth maybe slower than otherwise forecast and investment opportunities will be lost to other states.

But evidence does indicate that other factors, such as access to a highly skilled workforce and proximity to markets, are bigger drivers of business investment decisions.

Victoria is likely to continue to benefit from having the most highly educated population in the country, and not pay the full price of the hike in business taxation.

Reform to replace stamp duty with land tax for commercial properties is long overdue, but the government has baulked at the wholesale reforms called for by economists to help alleviate the housing crisis.

Notwithstanding that broader reforms would have been preferred, the changes to land tax are in of themselves an efficient way to raise more revenue. This is because they do not distort decision-making or the tax base.

Stamp duty is an inefficient tax and replacing it with land tax for residential as well as commercial properties would make all Victorians better off. Abolishing stamp duty would act to stimulate property turnover, allowing people to downsize or relocate more easily, while also discouraging land hoarding and speculative investment.

This improvement in efficiency would benefit homebuyers and underpin higher economic growth.

Concerns that the land tax increases will lead to rent increases are being overblown, with rents overwhelmingly determined by the interaction of supply and demand.

Economists expect to see rents increase in the short term, but that will have very little if anything to do with the increases in land tax in the budget, nor higher interest rates. Rather rents are increasing because vacancy rates are at record lows.

While no one likes paying more tax, the bigger revenue question for Victoria, as for the Commonwealth, is, has it gone far enough? In 2022-23 alone, health expenditure in Victoria is 9 per cent higher than forecast a year ago.

And the pressures on government finances to maintain services are only going to increase in the years ahead.

Unless we are willing to accept fewer or lower quality services into the future, governments will need to raise more revenue. In accepting this reality, we need to shift the debate in Victoria – and nationwide – to how we raise the revenue needed to maintain services in the most efficient and equitable way possible.

Failure will risk unsustainable government finances, higher debt-costs and lower living standards.

The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. Sign up here.

Most Viewed in Politics

From our partners

Source: Read Full Article