Victorian State Budget 2023
Market Insights

Anne-Marie Tassoni, Partner

William Fisher, Senior Analyst

More often than not, the Victorian State Budget is delivered each year without too much fanfare. This year was different. After years of big-spending, Treasurer Tim Pallas handed down a big-taxing State Budget this week which, despite new taxes, will still see debt continue to grow in the coming years until an expected surplus in 2026-27. With the period of cheap money over, the State Government is buckling under its accumulated debt, laying blame on the RBA and Covid. In a similar vein, they have handed the bill to Victorians.
Posted 25 May 2023

Such is the style of the modern government, the simplest way to return to balance is to raise more money via taxes; rather than pull the other lever, which introduces restraint and spending in a more fiscally responsible manner. We note that the Victorian Government remains committed to re-establishing the State Electricity Commission of Victoria for over $1 billion (and presumably instrumentality debt on-top). As the financial managers of the country’s most indebted state, the Andrews Government is introducing a number of measures under its decade-long “fiscal repair plan” that seeks to payback the significant so-called $31.5 billion of Covid-debt. The rating agencies will be appeased by budget repair (if albeit through higher indirect taxes rather than a meaningful reduction in structural spending). So too will the broader community, but significant elements will not.

Even despite these measures (discussed in more detail below), net debt is still expected to balloon from $117 billion this financial year to $171.4 billion by 2026-27 with the interest bill for Victorians at $5.2 billion in 2023-24, rising to $8 billion by 2026-27. It will be big business, property investors, private schools and public sector workers most affected by the new measures; big business and property investors in particular have been targeted by the Government as "those most able to pay”.

Key announcements from the Budget include:

For Victorians with a second property (not the family home), the tax-free threshold for general land tax rates will be reduced from $300,000 to $50,000. An extra 380,000 landowners are expected to be captured based on this threshold reduction. The tax rate will increase by 0.10% for holdings over $300,000 for general taxpayers and $250,000 for trust taxpayers. Both changes, effective from 1 January, will raise $4.7 billion over four years.

This is a further loss for under-pressure renters, given the likelihood that landlords will merely pass on these additional costs to tenants via higher rents.

Stamp duty on commercial and industrial property will be abolished and replaced with an annual property tax. A transitionary period will commence from mid-2024, with a flat 1% rate of tax on unimproved land value applying after ten years.

A new “Covid debt levy” will hit companies with a national payroll of more than $10 million and is expected to raise $3.9 billion over four years. Businesses with payrolls up to $100 million will pay an additional 0.5% tax, while those with payrolls above $100 million will pay 1%. Only 5% of employers sit within that latter category; these are large businesses the Government hopes are big enough to absorb the additional 1% levy without threat of reducing operations in Victoria.

There is however a win for small business, with the payroll tax-free threshold being raised from $700,000 to $900,000 on 1 July 2024, then to $1 million on 1 July 2025.

As part of an “efficiency drive”, 4,000 Victorian public servants’ jobs will be cut over four years for an expected saving of $2.1 billion. The offered redundancies will see a 7.5% reduction in the 54,000 Victorian Public Service. To note that during the pandemic, employee expenses increased by $7 billion or 27%. The real problem though, to get back to pre-COVID employment levels in the Victorian Public Service, you would need to reduce the payroll by 40,000 full time equivalent public servants.

$2.8 billion has been committed over ten years to fixing the State’s roads, driven by the damaging floods from October 2022.

The $10 billion Airport Rail Link is on pause following a Federal Government review of major projects where it has committed funding.

Speak to one of our advisers to learn more:

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