Victorian Budget 2012-13: “Living within our means,” but at whose expense?

“Living within our means” has become Treasurer Kim Wells’ key selling point for the Victorian State Budget, which is the first to encompass the findings of the Independent Review of State Finances (IRSF). Commissioned by the Victorian Government in January 2011, the interim report concluded that Victoria’s financial position would become unsustainable into the medium term without a change in strategy. This was attributed to: (1) the outpacing of trend growth in expenses relative to trend growth in revenue; (2) an inadequate buffer to effectively absorb external financial and economic shocks; (3) insufficient spending on net infrastructure investment; and (4) a significant recent rise in debt. The 2012-13 Budget has clearly heeded the recommendations of this report, forecasting a net operating surplus of $155 million and imposing a cap in expenditure growth of roughly 2.9%.  At its core, the Budget reflects an unrelenting commitment to maintain a surplus and protect the state’s AAA credit-rating at all costs.

Earlier this week, I attended a public review of the Budget with some other ESSA members, where Professor Ian Harper (IRSF panel member) proclaimed that with “every potential to stabilise Victoria’s finances when they were on the path to being unsustainable… this is an economist’s budget”. Sitting in the confines of the Treasury Theatre, I found myself unable to dispute the simple arithmetic of state finances presented by Professor Harper and Treasury Secretary Grant Hehir. Based on the principles adopted in the IRSF, the State Government has the responsibility of managing three key fiscal aggregates: the net operating balance, the level of debt, and the level of net infrastructure investment. The positions assumed in each of these aggregates meant that achieving a final Budget outcome akin to where it currently stands was essential.

Firstly, the State Government is committed to funding infrastructure to deliver services in an ongoing manner. Secondly, it intends to fund this infrastructure through operating surpluses to reduce reliance on debt. Thirdly, Victoria has faced significant revenue shocks, with a reduction in revenue of $7.6 billion over four years from GST and stamp duty alone. The above points collectively imply that policy-making could retain its flexibility only on the expenditure side of things, and namely, in reducing expenditure growth. Even now that I’ve had the chance to absorb the key Budget fundamentals and priorities, I agree wholeheartedly that a disciplined approach to state finances is appropriate given its soundness in logic and economic reason.

Of course budgets rarely pass the test based on economic reason alone, and whether or not this is an “economist’s budget” appears to matter little in the face of public scrutiny. Many would look beyond the underlying budget balance to probe exactly WHERE the savings are being made. During the probing process however, it is easy to forget that the primary purpose of a budget is to outline changes in the size and composition of revenues and expenses, with obvious constraints generating both winners and losers. It is also paramount to keep in mind that there is no equivalent ‘macroeconomic fiscal policy’ in state budgets. The fact that Victoria is currently experiencing subdued growth in the context of our two-speed economy does not imply that the State Government should aim to engage in active demand management. That role is suited more for monetary policy and Commonwealth budgetary policy (as evidenced for example, by the cash rate reductions and stimulus packages during the GFC). State governments are left with reducing regulatory barriers and providing sufficient infrastructure to drive productivity growth and business efficiency.

Nevertheless, the decisions regarding ‘size’ and ‘composition’ are where the key issues manifest. We have a State Government committed to restoring a sustainable balance between expenditure and revenue. This commitment is reinforced by the recommendations made in the IRSF, which amongst other things clearly states in its interim report that in order “to invest sustainably in infrastructure, the State’s operating account needs to be in surplus” (p. 9). Criticism of this conclusion would be akin to promoting a weakening in Victoria’s financial position that is characterised by negative net operating balances and the continued accumulation of debt. When considering that this deterioration would likely occur at the expense of expenditure on recurrent services, the recommendation for an operating surplus is entirely valid.  However ultimately, the size of the net operating balance is merely a figure. The real issue that begets criticism is the second dimension of any budget, namely the composition of receipts and outlays and its major target areas.

Although several stakeholders have spoken out in response to different components of the State Budget, the cuts in TAFE funding seem to have garnered the most media attention and opposition.  The Budget attempts to bring TAFE funding rates in line with private sector providers in order to boost competition and choice, which effectively implies reductions in funding rates for some courses. The Victorian Government argues that the new demand-driven system introduced by the previous government in 2009 failed to produce training in areas of industry need, causing it to become financially unsustainable. As such, cuts in TAFE subsidies were made in the Budget to ensure sustainability in response to significant and somewhat misguided demand growth. Perhaps unexpectedly however, the backlash to this particular initiative has been substantial. CEO of Gippsland’s TAFE institute Peter Whitley has denounced the changes in TAFE funding, forecasting the redundancy of 35 staff and a $5 million drop in his budget. In particular he laments the loss of opportunities for young people to train in hospitality, as they are unlikely to have the financial capacity to pay higher student fees. More generally the Victorian TAFE Association has forecast retrenchments in numbers of up to 1,200, condemning these funding changes as a de facto privatisation of TAFE. Representatives of TAFE institutes are coming out in their masses to forecast impending course closures, job losses and a diminished quality of education. As such, this initiative is a prime example of how choices made in the name of ‘sustainability’ are pounced on by the public to highlight the predicaments of those directly impacted.

Other key initiatives illustrative of this ‘tough’ budget include further slashes in public sector jobs, the removal of the school start bonus for low-income families and the scrapping of the first home owners’ bonus. Is the building of a new prison more important than supporting the TAFE sector? A comparison of this nature reflects underlying normative judgements on the value of (in this case) law enforcement relative to education. In fact, any views on what policies ought to be are based on normative judgements that cannot be empirically tested. Budgets require governments to make their own normative judgements and under tight fiscal constraints, choices between options are inevitable. The Victorian Government has made a statement on where it perceives the needs to be greatest, although there appears to be general consensus that it has adopted the wrong priorities. Whether the decried impacts will come to fruition remains a matter to be seen, or, as with many things in politics, may just depend on whose cries are the loudest.

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