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Building A Road Back to Surplus In Victoria

Australia | Jun 06 2023

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Victoria's Andrews government's infrastructure agenda has multiple hurdles to overcome.

-The 23-24 Victorian budget illustrated a challenging path back to surplus awaits the Victorian government, especially when factoring in its signature infrastructure agenda
-The ongoing woes surrounding the construction industry represent a significant hurdle in the path of the Victorian economy’s resurgence
-It’s forecast the Victorian government shall achieve a operating surplus of $1.2bn by 25-26, but net debt is projected to be over -$160bn by June 2026

by Ed Kennedy

The Victorian government’s 2023-24 budget was recently unveiled. Recent years have seen the state agenda dominated by the Covid-19 pandemic. Also, in addition to the pandemic, the lead-up to the 2022 election in November occupied much of the state’s focus. 

Yet, this year can be seen as one which offers the opportunity for a ‘hard reset’. The government has good news to sell with this budget that a surplus north of $1bn is expected by 25-26. But, with net debt also anticipated to rise from -$116bn to more than -$160bn by 25-26, it’s certainly set to be a nervous march back to balancing the books. 

Constructing a Plan

For many years now the Victorian government has relied substantially on the ongoing revenue from activity surrounding population growth and construction, to add big dollars to the state’s coffers. 

This dynamic, and the setbacks to these activities since the pandemic’s outbreak, significantly informs the state’s present headaches surrounding the budget. 

There’s no doubt the government deciding to take on such substantial debt for its infrastructure agenda was always going to be regarded as risky by many. 

After all, it was initially claimed by the government that the Suburban Rail Loop (SRL) alone would cost -$50bn, yet more recent analysis by Victoria's Parliamentary Budget Office said the total cost of the project would be north of -$200bn. 

Yet, when the SRL was announced in the year 2018, Melbourne was also making news as one of the fastest-growing cities in the developed world. 

Thus, big projects like the SRL – which would presume an ongoing population surge, and help ease the rapidly rising challenge of congestion – were able to find sufficient popularity among the public. 

Then the pandemic hit, and so many presumptions surrounding Melbourne (and wider Victoria’s) future economic growth were thrown up in the air. 

When it comes to population, strong signs of a return to pre-pandemic form exist. 

Notably, recent Treasury forecasts indicate Australia will – in net terms – see 400,000 new migrants taken in this financial year. 

So too is the forecast of net 315,000 expected for the 23-24 financial year. 

With Melbourne an education epicentre, and also a city offering comparable opportunities at a lower cost of living than Sydney, Victoria’s capital city can be expected to take in a sizeable portion of new arrivals. 

Yet, the slowdown of construction in Victoria is proving to be a particular point of pain for the state’s finances.

A recent estimate from KPMG held that over 10,000 new units, townhouses, and freestanding homes had all approvals necessary for building – but such work was yet to begin. 

Furthermore, news broke in April that Victoria-based builder Simonds Group ((SIO)) was to lay off -10% of its staff due to market conditions. 

In turn, news broke in May that another Victorian builder A1A Homes went into administration- and this following on from the high-profile shift of Porter Davis into liquidation in March – will make those looking for signs of a new dawn in the sector wince further.  

It’s indeed the case that the setbacks in the construction sector are certainly not confined to Victoria. 

It was recently estimated by the Australian Construction Industry Forum that -61,000 jobs would be lost within the Australian industry by 2026. 

Yet, by many measures a slowdown in construction, the pandemic’s impact on population growth, and soaring interest rates, have represented key ingredients of a ‘perfect storm’ for the Victorian economy. 

Many of the new initiatives to raise revenue in this budget such as the Covid Debt Levy on larger businesses – which is estimated to bring in $8.6bn by 26-27 – and the surcharge on absentee property owners – that applies to foreign investors – increasing from 2% to 4%, will help alleviate the state’s present fiscal pain. 

But it could be such measures are perhaps the initial treatment, before a round of more serious surgery is required, with deeper incisions to accompany it. 

In light of this, the success (or otherwise) of the state’s infrastructure agenda over the coming years becomes even more important.

The Infrastructure Agenda

The weeks (and months) before a budget is unveiled invariably have some dramatic developments. 

Governments identify in this period scope to leak tidbits that seek to ‘soften the blow’ about some bad news incoming, or set the stage for some welcome announcements before their ‘big reveal’ when a budget is fully unveiled.

The news out in early May that federal funding for all infrastructure in Victoria – barring the SRL – would be under a 90-day review has created a climate of uncertainty around many key infrastructure projects in Victoria. 

Ultimately, even if the review recommends for a project to be scrapped, the money is set to stay in Victoria. 

Nonetheless, it does mean projects like the North East Link and M80 Ring Road have some potential new hurdles in their path to progress. 

In the meantime, the prior momentum behind the Melbourne Airport Rail Link (MARL) and the Geelong Fast Rail (GFR) – both also included in the 90-day review – has stalled due to budgetary pressures. 

News of these setbacks emerged in mid-April before news of the federal government’s 90-day review arose once April gave way to May.

Among the projects still to be completed, based upon the pre-budget timeline, is the West Gate Tunnel Project (WGTP). 

Although the WGTP has faced delays in the past, the timeline for its completion by the end of 2025 is unchanged since the budget. 

For Transurban Group ((TCL)) and its shareholders, this is surely welcome news. 

At present, Transurban operates 22 roads in Australia and North America, and once completed the WGTP will join CityLink in Melbourne. 

CityLink was the company's first toll road, opened in 1999, and is set to be a toll road until 2045, with the WGTP also agreed to be a toll road until that year. 

The fact the WGTP remains on track, whereas other projects have been delayed, is undoubtedly also a big relief for those working and residing in Melbourne’s west. 

While this region of Melbourne has been seeing a huge boom in population, the reality is its transport infrastructure is already regarded as underdeveloped in many places, and not keeping up in others. 

Nonetheless, particularly painful is the delay of the MARL – and (once again) especially to many folks residing in Melbourne’s rapidly growing west. 

It’s now held that completion of the project could be delayed by up to four years due to the aforementioned budgetary pressures, among other factors. 

Originally set for completion in 2029, the MARL is set to link Melbourne’s main airport Tullamarine, with a ‘transport superhub’ at Sunshine station – a suburb which is regarded as a leading candidate to be a ‘second CBD’ – and ultimately connect Melbourne Airport to Victoria’s metro and regional rail network. 

Gambling on Harmony 

Recent times have seen some substantial turbulence amidst the gambling sector in Victoria, with more potentially on the way. 

The scandal surrounding Crown Casino’s locations in Melbourne and Perth – part of Crown Resorts Limited’s ((CWN)) holdings – has ultimately led to AUSTRAC and Crown Resorts reaching agreement for the latter to receive a -$450m penalty. 

This amounts to one of the largest fines in Australian corporate history – for conduct that occurred at the Perth and Melbourne locations – with the Victorian premises notably held to be the largest single-site private sector employer in the state. 

It’s estimated over 10,000 Victorians work for the Southbank-based operation.

In looking ahead elsewhere in the sector, it’s also expected the federal government will introduce reforms which would seek to toughen rules surrounding gambling, following recommendations from a parliamentary enquiry due to conclude shortly. 

The Andrews government has expressed support for some change in this area. 

Yet, given the AFL (and other major codes) have opposed a change to existing laws that diminish the revenue they receive from online betting, it can be expected – even though it is the federal government expected to lead with such reforms – that a greater focus on the revenue all governments receive from gambling will follow in the second half of the year. 

And with it, the potential for greater pressure to be placed upon Victoria (alongside other governments) to reduce their reliance on gambling revenue going forward. 

Such pressure would not be welcome by state bean counters at a time when avenues for ongoing – and increased revenue – are being sought out so intently. But, it’s indeed an issue on the horizon that may yet become much larger further down the road.

Will Historic Ambitions Come to Hamper Victoria’s Future?

As aforementioned at the outset, the Andrews government won another term in late 2022. 

With this budget it could be said the Victorian government has the opportunity to make some painful decisions for hip-pockets nerves across the state, knowing it has multiple years on its side for the electorate to forget (though perhaps not forgive). 

But, any notion this will be the most painful budget of the government’s term – reliant on the typical understanding no government wants to dish up doom and gloom close to a poll – could yet run aground. 

Ultimately, the infrastructure agenda of the Andrews government is – save for some truly unimaginable series of events – set to be its defining legacy. 

Seeing through such a big agenda from vision to reality was always going to be tough, and the unforeseen ‘curveball’ that the pandemic served up, has unquestionably contributed to the difficulty in charting a course ahead to better days.

If this year and those to follow give the Victorian government clear air to carry out its comeback plan, then this budget could indeed be looked back upon as one that put the state on the road to sunnier climes.

But should more substantial setbacks to major projects arise – and/or another economic rogue wave arrive like the pandemic brought – then it could mean the government’s present plan for a march back into the black by 25-26 is disrupted, and if so, unfortunately more fiscal pain could be en route for the state and its citizens. 

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