2021-22 VIC State Budget Update

A surprise new $4 billion mental health levy on national businesses and a $2.4 billion property tax package are the key features of a large spending Victorian Budget, that the Andrews Government believes will lead Victoria to both a strong social and economic recovery.  

More than $6 billion in new taxes over the forward estimates – including an increased payroll tax surcharge on businesses with national payrolls above $10 million – and public sector spending cuts are the hallmark of this year’s Victorian State Budget. These tax measures, which business will claim will undermine long-term economic recovery and cost jobs, will fund an expansion of social spending in mental health, schools, and TAFE.
 
The Budget shows the Andrews Government balancing an unprecedented high debt program with the need for post-COVID recovery just 18 months from a State Election. Treasurer Tim Pallas declared the post-pandemic recovery to be ‘on track’, despite an $11.6 billion budget deficit.

Mr Pallas acknowledged the delicate balance for government to continue to invest while addressing and reducing the State’s high debt levels. Calling 2021 “a year defined by relief and normal life returning”, he said the Budget would “deliver care where it is needed most’.

Forecasting debt to peak at $156 billion across the forward estimates, the Government faces a complex task of balancing community demand, with the knowledge low interest rates will not hold indefinitely.

Where jobs stood as the centerpiece of November 2020 Budget, the 2021/22 Budget is a more complex picture with some positives despite the economic shocks caused by COVID. Key statistics include an unemployment rate of 5.5 per cent, record workforce participation, nation-leading 6.5 per cent GSP growth in in 2021/22 and a return to a budget operating cash surplus in 2022/23. But the Treasurer cautioned the pandemic “isn’t over until it is over for all of us” and said his focus was on “vulnerable Victorians, struggling small business, and Victorian families”. 

A Restructured Victorian Health System

Reflective of the deficiencies in Victoria’s health system identified by the COVID pandemic, the 2021-22 Budget contains further measures totaling $7.1 billion. They highlight the need for technology and availability to match the work of front-line health workers, who had rallied to the COVID response:

• $1.3 billion in further pandemic response funding.
• 200,000 additional student placement days to support training of a larger, better equipped health service.
• Modern hospitals for Maryborough, Phillip Island and Torquay.
• $70 million to provide public system fertility treatments for 4,000 recipients per year.
• New pediatric emergency department zones, to extend specialist emergency care for children across major hospitals.

Major push on mental health

The Victorian mental health system will be a major target for new investment to improve service delivery. Based on the 65 recommendations of the Royal Commission into Mental Health , the Government will invest $3.8 billion over fours years for systematic change.

To pay for the investment, business with a national payroll in excess of $10 million will face a mental health levy, a further recommendation of the Royal Commission. This will pay for:

• $953.4 million for 20 local mental health services.
• $370 million for 50 new beds across five new youth mental health prevention and recovery centres in regional, rural, and metropolitan Victoria.
• $172 million for suicide prevention and recovery services.
• $842 million for new youth mental health care streams, up to 11 years, and 12-25 years.

The Government estimates the measures will also produce 3,000 new jobs.

Education, Families, and Indigenous Victorians

Having set education as a theme since the government’s election in 2014, the 2021/22 Victorian Budget continued investment in schools, early childhood, and TAFE, while acknowledging that bricks and mortar would only deliver outcomes where services, training and skilled workforces existed:

• 13 new local schools, in addition to the 15 under construction – bringing school building investment to $10.9 billion since first elected.
• Establishment of the Victorian Academy of Teaching and Learning and the new Victorian Skills Authority to guide teaching upskilling and the State’s TAFE system, respectively.
• $167 million for continued three year older kinder rollout.
• Expanded mental and health services across primary and secondary schools

The forthcoming Truth Telling Commission, a key step towards treaty and self-determination for Victoria’s Indigenous residents, and the continued work towards measures from the Family Violence Royal Commission also featured strongly with:

• $448 million in Indigenous Victorians funding, including $98 million towards truth and treaty.
• $521.6 million to end family violence, including measures from employment programs for women fleeing violence, to gender equality programs and women’s health services.

Tourism, the Melbourne CBD, and Business

Concerns over the recovery of the Melbourne CBD and its importance to the Victorian economy are growing, while the tourism industry and small business continue to hurt from the long tail of the pandemic. These sectors were the flip side of the 2022/23 Budget’s social investment; business-focused measures to drive activity. Including investment and tax relief, highlights include:

• $107 million to reinvigorate the CBD and new campaigns to support recovery
• $43 million business events pipeline funding.
• $55 million for tourism campaigns.
• $288 million to support the cultural industry and employers.
• Land tax-free threshold lifted to $300,000, a tax cut for up to 60,000 taxpayers.
• Payroll tax threshold rises to $700,000; regional rate drops to 1.2125 per cent.

But Who Will Pay?

With new spending across many programs, the continued absence of international students and migration along with the continuation of the already over-budget Big Build program and previously announced measures, the question of how to manage debt levels and pay it down is at the forefront of the reaction to the Budget..

Without a resources sector or similar industries available to other jurisdictions, Mr Pallas outlined a range of measures he argued would ask those who had benefited most from the pandemic to help fund recovery:

• The mental health payroll tax levy – approximate $900 million per year across each year of forward estimates
• Increases in property tax to 6.5 per cent for property valued in excess of $2 million, property rezoning capital gains tax rate of 50 per cent for profits over $500,000 and various smaller measures – $2.4 billion over forward estimates.
• Approximately $3.4 billion in public sector efficiency, including spending caps, capped wage rises and potential size reduction, with frontline services specifically excluded.

However, as already noted by ratings agencies Moody’s and S&P, significant questions over long-term debt reduction go unanswered. While debt is cheap this may not represent such an issue but long-term is far less certain. In this case, the Government has bet that the public prefer stronger investment in services, kicking the can if debt reduction down the road.