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Building Victoria: Who wants to pay more tax?

Date: February 05 2013

Michael Pascoe

I had no idea that the Victorian economy was as hopelessly stuffed as local industry leaders claimed today. Time to join the trek to WA and Queensland or reverse the traditional flow moving to South Australia and Tasmania.

If “a unanimous chorus of industry leaders from lobby groups, peak bodies, unions and economists” are correct in claiming that “capital spending is the lifeblood of the Victorian economy”, the Victorian economy has little future.

Capital spending, investment in infrastructure, is certainly important, but if that is all an economy has going for it you will soon run into the little problem of who might be prepared to pay for it.

Victoria and the rest of the states have already hit that fiscal wall, but I somehow doubt many of the lobby group and unions are prepared to stick up their hands for an increase in their taxation. (And given the contribution the Victorian branch of the CFMEU has made to construction costs, it's a wonder unions aren't embarrassed to show their face in any discussion that even mentions the desalination plant.)

Some of the economists would, as they realise Australians are relatively lightly taxed and can afford to pay for the things we need from government, but the group definitely running away from that idea is the politicians.

Some of the economists also might agree with the five present and former Reserve Bank board members recommending that the federal government borrow at present low interest rates specifically for infrastructure projects, but again, you'll be stopped by politicians full of fiscal rectitude and running scared of the “debt” word in their search for a surplus.

Victoria needs greater investment in infrastructure to clear the bottlenecks that restrict productivity. It also will need greater investment in education, health and aged services as we face our demographic certainties and the proportion of working age people in the population shrinks. But to have those investments, businesses and individuals will have to be prepared to pay for them.

What it doesn't need and certainly can't afford is anything that remotely smells like a “make work” project. You know, employing folks to dig holes and then fill them in again and calling it job creation. It's not the job of state government to make jobs, but to make the state attractive for other people to do so while meeting social necessities.

There's always some fat that can be trimmed in government spending, but it's not of the scale that can deliver the cash required. Neither side of federal politics is going to ride to Victoria's aid, which is why Victoria and the other states are on the front line of tax reform, however much they try to deny it.

They know they need to resuscitate their payroll tax base and institute a broad land tax to replace their stupid reliance on economically and socially bad real estate stamp duties and transfer fees. But that takes political courage and that's sadly lacking.

As for fast-tracking infrastructure projects, good luck. The complicated beasts can't be rushed – or politicians end up with school shed and Pink Batt scandals.

If it's any comfort, Victoria is not alone. The decline in non-resources construction employment is not new and has been widespread. It has the dubious distinction of being the nation's biggest employment loser. Even manufacturing did better last year.

When the expansion phase of the resources boom was at full speed, that wasn't such a problem. Indeed, it was somewhat necessary to free up the required skills for jobs that weren't being funded by taxpayers. There's still plenty of resources investment going on, but the pace is easing off as it must.

And that's why the federal treasury and the Reserve Bank are betting on reduced interest rates being enough to reinvigorate housing construction. With politics ruling out the alternatives, that's what we're all left hoping for anyway.

Michael Pascoe is a BusinessDay contributing editor.


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