Ride for free or pay the fine

Double Double Toil and Trouble...
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In his second budget, Victorian Treasurer Kim Wells is aiming for a surplus of $155 million, of which $109 million is due to increased fines. The Government has budgeted for $662.5 million in total fines, including $306 million from road-safety cameras, in 2012-13.

Exceeding the speed limit by less than 10km/h will now cost you more than $175.*

The Government assures us that this is for our own safety. Considering that travel by public transport is at least 20 times safer than travel by car (estimates of the factor range from 20 to 170), I would have thought that the surest way to make commuters safer is to get them out of cars and into public transport. The budget fails on that score. V/Line gets 30 new carriages, but the new and modified routes conspicuously favor road users rather than public transport users. There’s $350 million over 3 years to remove three level crossings in Springvale and Mitcham. There’s $42 million for duplicating the Western Highway from Buangor and Beaufort. There’s $13.7 million over four years for the Dingley Bypass. And there’s $15 million for a “business case” for the long-awaited East-West Link, whose actual construction depends on federal and/or private funding!

Of course, if any of these road projects passes a cost/benefit test, the uplift in land values caused by the project will exceed the cost. If a sufficient fraction of that uplift is clawed back through the tax system, the project will pay for itself without burdening any taxpayers who do not share in the benefit. Instead, Mr Wells hopes that car registration revenue will jump by 16.6%.

The same logic applies to funding of public transport projects. The biggest free-riders on public transport are property owners whose land values are increased by the availability of the service. If travel by public transport were free (except perhaps for peak-time congestion fares to encourage off-peak travel), the uplift in land values would be even greater. But only minuscule fractions of such uplifts are recycled through the State tax system (chiefly by land tax). Meanwhile, if you absent-mindedly put your foot on a seat, or forget to validate your ticket, or miss your stop and consequently overtravel your zone, you’ll be hit with a fine of more than $200.*

The same logic applies to funding of schools. Real estate agents love to spruik the proximity of schools when talking up the price of the property. Yet the budget finds funding for only one new school – at Doreen South, where the local land owners will profit at your expense and mine.

The budget forecasts an 11.9% increase in land tax receipts, not from any increase in rates or lowering of thresholds, but from a tightening of the rules on companies and family trusts. In view of the continuing decline in home prices, which is really a decline in speculatively-inflated land prices, any increase in receipts must be regarded as optimistic. If speculative bubbles are to be prevented, and if infrastructure such as transport and schools is to be adequately and equitably funded, then land tax – or some alternative mechanism for capturing uplifts in land values – must become the mainstay of State budgets.

The Government says that from mid 2014, it will save business $715 million a year by cutting red tape. Getting rid of the job-destroying and arguably unconstitutional payroll tax would surely help on that front.

The building industry, reeling from the long decline in new home sales, has been shoved under a bus with the abolition of the First Home Bonus, a State-funded supplement to the First Home Owners’ Grant.

Up to the end of 2006, the Bonus made no distinction between new and established homes. From January 2007 to June 2009, it was $5000 for a new home and $3000 for an established home. In 2009-10, it was $11,000 and $2000 respectively. Since then, it’s been $13,000 for new homes only. Had it been that way from the beginning, it might have slowed the growth of the price bubble. After 30 June it will disappear altogether, along with the Regional Bonus (currently worth an extra $6500). Instead, first home buyers are to receive a stamp-duty discount of 20%, rising to 30% after one year and eventually to 50%.

If the abolition of the Bonus is meant to prop up home prices by squeezing supply, it will fail. If it is meant to prop up rents at the expense of the poor, it will succeed. The supply-demand argument is more immediately applicable to rents than to prices. While prices cannot decouple from rents indefinitely, they can do so for years at a time, following a momentum of their own. For almost two years the momentum has been downward. When the market showed a similar downward momentum in late 2008, it took 425 points of interest-rate cuts plus the First Home Owners’ Boost to turn it around. A piecemeal cut in stamp duty and a further slowdown in construction are not in the same league.

Nevertheless, Mr Wells somehow reckons that a recovery in the housing market will raise stamp duty receipts by 4.9% (what? — 4.9% rather than 4.8% or 5.0%?), in spite of the end of the Bonus. Similarly unrealistic is the unemployment forecast, which has been raised from 5.5% to 5.75%, although the current rate is 5.8% and the State is probably in recession as I write.

Then come the unoriginal tricks, such as instructing departments to find another $180 million in savings (delegate it!), laying off 4200 public servants instead of the initially planned 3600 (out of 36,000), and extracting about $700 million in additional “dividends” from WorkCover, water authorities, and the State Electricity Commission.

Some downward trends are acknowledged, however inadequately. The expected surplus for the current year has been revised down to $126 million from $148 million. The $155 million surplus for 2012-13 is less than the $220 million predicted six months ago. Revenue from GST has been written down by $1.6 billion for 2012-13. Revenue from State taxes has been written down by $827 million for 2012-13 and by more than $3 billion over four years. Since late 2010, total revenue for the next four years has been written down by $8.3 billion.

Will Mr Wells hit his surplus target? Considering the housing market and its effect on stamp-duty receipts, the labour market and its effect on payroll-tax receipts, and the heavy reliance of State governments on these two ridiculous taxes, I think not.

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* At the time of writing, only “estimates” had been reported in the media. However, the “penalty unit” is to rise from $125 to $140.

1 Comment

  1. Bryan Kavanagh02-05-2012

    Congratulations on a surgical analysis of the Victorian budget, Dr Putland.

    The Treasurer raises the level of personal fines for minor breaches which will obviously affect the poor more than his cronies. That sits well with the State payroll tax fining employment and with all the federal taxes that penalise productive activity.

    The litany of fiscal favours to landowners continues.

    So, I guess we can all now look forward to the next budget of the Baillieu government acceeding to the property lobby’s usual call for a cut in land tax “because our property values have fallen”?

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