Highlights of the Victorian State Budget 2023-24

In dissecting this year’s budget, it is worth considering the economic climate in which the State Government is currently operating.

We have already seen several large projects being paused amid a tightening of funding, with 372 initiatives set to expire at the end of this year, amounting to $17.2 billion of taxpayer funding. During COVID, the government persevered with many of its “Big Build” projects but is now forced to reconsider many of its other shovel ready initiatives – notably the Melbourne Airport Rail Link and Geelong Fast Rail projects, now going unmentioned as part of this year’s transport and infrastructure budget measures.

Cost blowouts on large infrastructure projects are common, with some indications already that current projects including the North East Link, Westgate Tunnel and Metro Rail Tunnel are currently over budget. With the added commitment of the 2026 Commonwealth Games, which has received no additional funding in this year’s budget, there will no doubt be some conservative heads wanting to pull back on other potential cost blowouts over that same period which could scupper plans to return the budget back to surplus.

Melbourne recently pipped Sydney for being the most populus city in Australia, and that is not without its infrastructural headaches. Housing supply in Victoria has, despite a construction and investment boom, and with interest rates being at their lowest point until last year, been on a 10-year downward trend in terms of quarterly volume of properties hitting the market for sale. At its highest watermark in early 2015, Melbourne properties were selling at a rate of over 32,000 for the quarter, and that has declined steadily to the latest December 2022 quarter volumes of just over 17,000. For regional and other parts of Victoria, property volumes are now returning to the same stable pre-COVID levels, after having briefly doubled during the pandemic years.

Housing supply will continue to slow with the rising cost of materials, peaking interest rates and financial collapse of several building companies. Whilst there are forecasts that land taxes will rise by 21% over the next three years, much of Victoria’s property development is now heading upwards as strata developments, rather than outwards into suburban growth, which will only add additional pressure to revenue raising from property taxes.

For a state that relies heavily on property-related tax revenue, in the form of stamp duty and land tax – close to 60% of total state tax revenue in 2021-22 is roughly split equally between land tax, stamp duty and payroll taxes – the decline in property transactions will have a significant impact on government revenues.

This year’s budget will be predicated on expected wages growth to 3.5%. Given the pre-budget announcements that it expects to cut 10% to ongoing Community and Public Sector Union staff (which includes not just public servants, but nurses, teachers, police and firefighter services) this may not be enough to curb the current $33 billion wages bill if wage growth proves stronger than forecast.

What was ultimately borrowed during the pandemic years will also be a major factor in considering where spending will need to be cut. While news of the tug of war over the national debt ceiling in the United States has made headlines in the past fortnight, it is worth noting that Victoria’s own debt ceiling has grown significantly.

The Labor Government in Victoria had maintained a debt ceiling at 6% of gross state product pre-pandemic (close to $30 billion), however that quickly doubled to 12%, and is soon tipped to reach 25%. This level of debt to revenue is the highest across the country and close to double that of its nearest neighbour New South Wales.

Victoria was hardest hit by the pandemic so it may come as no surprise that it borrowed most heavily to sustain the economy during this period, but the interest rate goalposts have now changed and interest on that debt and the expected $7.32 billion interest bill will be of concern, not only to the government, but also to the State’s credit rating, which was downgraded by S&P to a AA Rating, putting it far behind its fellow AA+ Rating states.

Payroll tax will be another pinch point from a revenue collection perspective as businesses continue to struggle with rising costs, and looking to, where possible, downsize their workforces or outsource labour overheads. These factors will constrain businesses looking for ways to continue to fund their existing workforce.

Added to this is the expected overall rise in WorkCover premiums (expected to increase on average 42% this year amid a deficit between premiums paid and the tripling of WorkCover claims being made in the past decade). There is however expected to be a curtailing of the eligibility criteria applied to mental injury claims for stress and burnout, no longer able to access weekly WorkCover benefits but instead receiving provisional payments for up to 13 weeks, which is estimated to go some way towards closing this gap.

Being in the first year of a four-year term, the government can afford to be unpopular in its stance for cutting costs and boosting revenues. The budget projects a $10.3 billion deficit for 2023 followed by a $4 billion deficit next year, but with the long-term view that it will return to surplus in 2027.
Having already courted the Federal Labor Government to provide additional financial support, which seems to have come to naught, there appears to be no panic at this stage of a repeat 1990’s-esque style Federal Government bailout being required.

Stamp Duty Changes for Non-Residential Property

Stamp duty for commercial property is proposed to be abolished and replaced with an annual property tax.

The first purchaser of a commercial property after 1 July 2024, will be able to choose to either pay the property’s final stamp duty liability as an upfront lump sum, or pay fixed instalments over 10 years equal to stamp duty and interest with a government-facilitated transition loan.

Once a property enters the new system (being sold after 1 July 2024), stamp duty will no longer be payable on a transaction and the new annual property tax will be payable from 10 years after the transaction. The annual tax will be set at a flat 1 per cent of the property’s unimproved land value.

These arrangements will not apply to the current owner of any commercial property purchased prior to 1 July 2024.

COVID Debt Levy

A temporary 10-year levy (ending in 2033) will be imposed to fund some of the budget deficit resulting from COVID-related government spending, estimated to recoup $8.6 billion over four years. This is intended to be reflective of larger businesses having performed well during the pandemic, and ongoing increases in capital land values for those holding property investments.

The levy will have two components:

1. Large businesses with national payrolls above $10 million a year – estimated to be around 5% of Victorian businesses – will pay additional payroll tax of 0.5%. Businesses with national payroll of more than $100 million will pay a further 0.5%.
2. Lowering the land tax threshold from $300,000 to $50,000 and levying temporary fixed charges of $500 for properties up to $100,000 in value and $975 on those up to $300,000.For land holdings worth more than $300,000 (and properties owned by trusts worth more than $250,000), yearly land tax payments will rise by $975 plus 0.1 percentage point of the value of the land over $300,000.

Payroll Tax Reform for Smaller Businesses

Uplift in the payroll tax threshold from $700,000 to $900,000 from 1 July 2024, with a further increase to $1 million from 1 July 2025. This is estimated to remove the burden of payroll tax for 4,200 businesses and reduce the amount of payroll tax payable for a further 22,000 business as a result of the uplift for the first change to thresholds, and a further 1,500 businesses that will become exempt once the threshold increases to $1 million.

It is also proposed that the payroll tax-free threshold will be phased out for larger businesses over time.

Insurance Duty Phasing Out

The rate of insurance duty on fire and industrial special risks, public and product liability, professional indemnity, employers’ liability, and marine and aviation insurance will be reduced by one percentage point each year from 1 July 2024.

These reforms are proposed to save, on average, $3,200 on professional indemnity insurance and $2,400 on fire and other special risk insurance cumulatively over 10 years.

Land Tax Concessions & Absentee Charges

Homeowners whose builder goes into liquidation will, from 1st January 2024, be able to apply to the State Revenue Commissioner to extend for up to two additional years the land tax exemption on principal places of residence under construction or renovation, when additional time is needed because of builder insolvency.

Absentee property owners’ surcharge will increase from 2% to 4% in line with the rate in New South Wales.

Expanding the Workforce Incentives

• Free and subsidised early childhood education, including free three and four-year-old kinder (between 5 and 15 hours of funded learning each week).
• $10 million to offer free vehicle registration for eligible apprentices and tradespeople, expanding the current motor vehicle registration discount from 50% to 100%.
• $186 million to expand the eligibility criteria for Free TAFE and other subsidised training courses and $90 million for TAFEs to provide priority skills, job placement support, improve student wellbeing and to maintain high-quality workforces and to meet the expected demand for training.
• $37 million in sign‑on bonuses for new nursing graduates to encourage them to enter the public system.
• $32 million for medical graduate incentives to undertake general practitioner (GP) training.
• $15 million to expand the health workforce, including financial and international recruitment incentives.
• $32 million to attract and retain more teachers across regional Victoria, including allowances for pre-service teachers to undertake placements at regional and remote schools.
• $14 million to attract new and returning First Peoples into teaching degrees and government school teaching roles.

Other Budget Measures

• Fourth round of the $250 Power Saving Bonus, providing the cost-of-living relief for households that use the Victorian Energy Compare (VEC) website – the Victorian Government’s independent price comparator website – to search for the cheapest electricity deal.
• Introduction of the Victorian Veterans Card, providing access to discounts on vehicle registration (up to $100), free fishing and boating licences.
• $35 million to support live music and community broadcasting, including support for 10,000 gigs through grants for musicians and $23 million to expand the Major Events Fund.
• $20 million to deliver a pilot for pharmacists to treat minor illnesses like minor skin conditions and uncomplicated urinary tract infections, reissue contraceptive prescriptions and administer more public health vaccinations.
• $87 million to support the growth and sustainability of the Victorian racing industry.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.