30 Nov 2020

As Victoria emerges from five months of stage four lockdown conditions, the nation asks how will the state recover from one of the world’s most severe COVID-19 restrictions?

Urbis’ Chief Economist Richard Gibbs stated, “what will be important is the speed of bounce back. The state can recover if it can find a way to augment demand growth that would have otherwise come from substantial population growth and net overseas migration.”

Although Victoria’s economic output is predicted to fall by 4% in the current financial year, the state has encountered similar headwinds before, with the 1991-92 recession incurring a 0.25% contraction.

The Victorian Budget 2020-21 predicts that the state’s economy will move from severe contraction to exceed Australia’s national growth rate.

The Budget reflects a Keynesian strategy for a spending enabled recovery, with initiatives focused on workforce participation and skills, in addition to turbo boosting employment multipliers from a significant capital expenditure program.

The Victorian Government is significantly increasing its expenditure and debt levels, which has dramatically altered the state’s net budget position to support recovery – outlined below.

The Budget aims to create 400,000 jobs by 2025, with an interim target of 200,000 jobs by 2022. A contributing factor will be the 30% increase in annual government employment expenses, set to increase from $26 billion this year to $33 billion by the end of 2024.

Urbis Future State Director Nathan Stribley stated, “as we have seen in previous recessions, the quicker you can get people back into the workforce, the more you reduce job scaring and associated negative economic impacts.”

The Budget will also see capital expenditure increase by around half to an average of $20 billion per year over forward estimates. Social infrastructure receives strong Budget support, in addition to transport, and social and affordable housing.

The Budget’s focus on the ‘demand’ side of the economy mirrors the Commonwealth Budget strategy. Whereas the New South Wales Budget appeared to embrace more of a balance between support for both the ‘demand’ and ‘supply’ sides of the economy.

The Government has done what needed to be done in the ‘here and now'

Richard Gibbs View Profile

Victoria’s Budget strategy also targets cyclical initiatives, in contrast to the New South Wales Budget which has a much broader focus on structural reforms and initiatives.

Mr Gibbs observed, “the main challenge for the Victorian Budget will be to offset the deficit in relation to population growth, with an expected reduction of 300,000 people over the forward estimates until the end of 2024.”

“The Government has done what needed to be done in the ‘here and now,’ to re-establish the momentum and attractiveness of the Victorian economy.”

What we will see in Victoria in the next 10 years will be transformational

Nathan Stribley View Profile

It is no secret that the infrastructure delivery pipeline in Victoria is running hot, but Mr Stribley says it will not be until the end of the decade that we see a lot of infrastructure projects supported by the Budget underway.

“The Government has done the right thing in funding existing projects where possible and getting delivery underway. What we will see in Victoria in the next 10 years will be transformational, similar to what has happened in New South Wales,” said Mr Stribley.

Regarding the Victorian Budget’s focus on transport, there is a lot of activity, particularly in the Melbourne metropolitan area, but we should be aware of the reality v. recent headlines. For instance, the Suburban Rail Loop gained $2.2 billion in the latest Budget, but it is expected to cost around $50 billion or more.

The Budget’s emphasis on social and affordable housing has been applauded as a measure which has been a proven stimulus in times of economic downturn (such as when employed by the Rudd Government following the Global Financial Crises) but also has a significant social benefit.

There appears to be a multi-pronged attack supporting housing across the state, boosting the pipeline and flow on effect for jobs. The most talked about initiative is the stamp duty waiver on all residential property, with a higher rate of 50% on new properties.

Urbis Director Mark Dawson stated, “we will just have to wait to see whether the stamp duty waiver makes overall property prices more attractive.”

Build-to-Rent has also been brought into the mix, ensuring Victoria which was already attracting about half the pipeline for these projects, remains competitive with New South Wales. Land tax on new Build-to-Rent developments will be halved from 2022 until 2040.

Support for shared equity will bring in some of the more hybrid models

Mark Dawson View Profile

The Homebuyer Fund is not being spoken about much since it only provides $500 million to boost home ownership. However, Mr Dawson believes the measure reflects a broadening of the housing spectrum.

“Support for shared equity will bring in some of the more hybrid models and encourage us to think of new ways to not only consume housing but deliver it,” said Mr Dawson. 

The Budget also reflected the link between health outcomes and economic performance, increasing support for health sector capacity – not just in terms of hospitals and primary health services, but also the delivery of those services.

Health sector highlights include over $1 billion provided for three new hospitals, in addition to $66 million from the Metropolitan Health Infrastructure Fund for land acquisition and commencement works for 10 community hospitals. Funding for local home visits ($121 million) and dispersed community model funding was also included, signifying a rethink of the model of care.

Urbis Director Sarah Macklin noted the precinct role of health was leveraged, with $10 million going towards relocating components of the Royal Melbourne Hospital and part of the Royal Women’s Hospital to Arden, which will generate growth in the area.

“The Victorian Government is switched on to the idea of large institutions acting as a catalyst for employment precincts,” said Ms Macklin.

The precincts agenda is backed by the Breakthrough Victoria Fund, which will deliver $2 billion over 10 years to the research and higher education sector, supporting and leveraging industry investment, with a particular focus on precinct delivery.

“Incentivising an alliance with industry, leveraging strengths of the higher education sector, will boost outcomes for research and development. Through public and private partnership we can expect to see new offices and research resources relocating around key health and university spaces,” commented Ms Macklin.

Fisherman’s Bend constitutes a great case example, with the area set to benefit from private investment from the University of Melbourne for a new campus.

Victoria’s position over the years has been due in no small part to its brand

Matthew Cleary View Profile

Another example was a surprise to some – $1.4 billion to kick off the Melbourne Arts Precinct transformation, with most the money going towards delivery of a new Gallery of Contemporary Art.

Urbis’ Victoria Regional Director Matthew Clearly stated, “Victoria’s position over the years has been due in no small part to its brand, with the state being renowned as an arts and culture destination.”

With infrastructure delivery ramping up in Victoria and along the Eastern Seaboard, Mr Gibbs cautions that we will need to watch out for price inflation and delivery risks.

“To mitigate inflation, infrastructure will need to be rolled out strategically, reducing resourcing and capacity constraints which typically drive prices up,” said Mr Gibbs.

With planning becoming more complex, and the length of time it takes to process approvals costing the state in terms of infrastructure supply and economic benefit, the Budget dedicated $50 million to enhance the planning system.

Currently, a few options for improvement are being considered by the Minister for Planning Richard Wynne. They were based on extensive planning process mapping by Better Regulation Victoria and Building Victoria’s Recovery Taskforce.

There is good progress to be made to the planning system at this stage

Sarah Macklin (nee Walbank) View Profile

Ms Macklin says we can expect to see planning process tweaks, such as different streamlines based on projects’ risk profiles, stricter approval timeframes and digital lodgement.

“There is good progress to be made to the planning system at this stage, but I would not expect bold reforms,” said Ms Macklin.

The most obvious risk is most likely the one any Victorian dreads – another lockdown due to COVID-19.

However, with a vaccine on the way it is more likely, we will see a resumption of people movement and population growth ahead of what most people expect.

the debt should sweat down rapidly in proportion to Gross State Product

Richard Gibbs View Profile

Mr Gibbs also pointed out two key risks with the Budget – one being that if Government led demand growth doesn’t produce an increase in consumer confidence, and the second being the sustainability of Victoria’s debt and negative commentary from rating agencies, which could also impact market confidence.

“The key mission now is to re-establish momentum on the reflation strategy, then the debt should sweat down rapidly in proportion to Gross State Product,” said Mr Gibbs.

Richard Gibbs View Profile
Nathan Stribley View Profile
Sarah Macklin (nee Walbank) View Profile
Matthew Cleary View Profile
Mark Dawson View Profile