Challenges Facing the Newly Elected Victorian Government

This is an article of mine that was originally published in the Melbourne Age on 29th November 2010.

Saturday’s election of a Coalition government is unlikely to have much impact on Victoria’s economic direction. As The Age’s economics editor Tim Colebatch noted last Friday, there was remarkably little difference between Labor and the Coalition in terms of the impact of their policies on the State’s finances: both plan to maintain operating budget surpluses of at least $800 million a year, and Labor’s net spending plans amount to 0.1 per cent more than the Coalition’s over the remainder of the current financial year and the following four years.

There were of course differences in the detail of the Coalition’s and Labor’s spending and saving priorities. Labor promised bigger spending on schools than the Coalition, while the Coalition promised larger spending on hospitals and policing. A Baillieu Government will take more out of recurrent government spending (including on advertising, IT, human resources management and consultants) than would have a returned Brumby Government. And it would use those savings to make bigger reductions in State taxes, especially the promised 50% reduction in stamp duty for first home buyers.

But these differences are not large enough to have a material impact on the prospects for the Victorian economy. The Coalition’s proposed cuts in stamp duty, for example, are as likely to result in higher prices for the types of dwellings favoured by first home buyers as have almost every other policy which allows home-buyers to pay more for their preferred dwelling than they could otherwise, without doing anything at all to lift home ownership rates.

Whoever forms Victoria’s next government, when the final votes are tallied and all the preferences have been distributed, will face an economic environment that is in some respects more challenging than at any time since the early 1990s.

The latest set of State Accounts published by the Statistics Bureau twelve days ago paints Victoria’s recent economic performance in a less flattering light than it had previously seemed. In particular, they show that although Victoria’s economy has continued to grow more rapidly than New South Wales’ (and Queensland’s) since the onset of the global financial crisis, this has been entirely due to its relatively rapid population growth. Strip that out, and Victoria’s real per capita economic growth rate was actually negative in both 2008-09 and 2009-10.

Victoria hasn’t experienced that since 1990-91 and 1991-92. Queensland has been the only other State to have recorded consecutive annual declines in real per capita gross product since the onset of the financial crisis. And although the labour force figures suggest that Victoria has enjoyed more rapid growth in employment, especially in 2009-10, than other States, the corollary of this is that Victoria’s productivity performance has deteriorated sharply, which does not augur well for the future.

During the election campaign the Coalition correctly pinpointed exports and business investment as the weak points in Victoria’s economic performance. Weakness in these two areas is likely to be accentuated as the mining boom passes Victoria by (since mining accounts for just 2.2% of Victoria’s economy, along with Tasmania the smallest of any State), while Victoria’s other trade-exposed industries (which account for a relatively high share of the State’s economy) are disadvantaged by a strong dollar and other sectors by relatively high interest rates. Confronting those challenges will test the economic management skills of Ted Baillieu and his colleagues in the new Victorian Government.

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4 Responses to Challenges Facing the Newly Elected Victorian Government

  1. JJ says:

    Thanks very much Saul – very interesting. What can be done about it?

  2. Saul Eslake says:

    JJ, there’s certainly not much the Federal Government, or the Reserve Bank, can or should do about the challenges for Victoria which I noted. The best thing that the Federal and Victorian Governments can do is to create an environment in which individual firms can improve their productivity, which would provide the most sustainable means of preserving their competitiveness in the face of unfavourable trends in the exchange rate and interest rates, materials costs and the cost and availability of skilled labour. That in turn means delivering real progress on the COAG deregulation agenda, well-targeted and appropriately priced additions to infrastructure (as opposed to infrastructure spending designed primarily to meet electoral objectives), investment in skills acquisition and upgrading, less emphasis on ‘security’ measures, and policies aimed at improving the environment for innovation.

  3. The Beverage Curve says:

    The Victorian government will have to waste money on law and order because of a non-existent problem.

    Moreover is not their policy on energy prices unsustainable?

    However even given that politically Peter Brent is on the money today

  4. Saul Eslake says:

    I certainly agree with ‘The Beverage Curve’ about money being wasted on ‘laura norder’.

    But then most governments these days exaggerate the threat to peoples’ security, and then proceed to spend (and require companies to spend) enormous amounts of money protecting people against these purported threats, in part I suspect in order to create a climate of fear in which people will not object to further increases in security agencies’ budgets and powers over individual citizens. Look at all the things that have been done allegedly in the name of ‘national security’ since September 11, 2001 – and yet since 2005 more people have been killed in Western countries by security officials than by terrorists.

    I heartily commend to people’s holiday reading Louis Begley’s Why the Dreyfus Affair Matters which argues that this sorry tale of the incarceration (in France’s equivalent of Port Arthur) of a completely innocent man on a trumped up charge of threatening ‘national security’ still resonates today.

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