Republished with kind permission from

By Leith van Onselen

The Victorian Government has released its 2013-14 Annual Financial Report, which revealed a $2 billion surplus in 2013-14 – the largest Budget surplus recorded for the state in 15 years.

The result smashed the $935 million surplus forecast in the May budget, and was driven by the early receipt of a $1.1 billion federal grant for the East West Link road project and higher stamp duties on property transfers:

Total revenue from transactions for the year was $52.4 billion, which represents growth of 7.7 per cent compared with 2012 13. State taxation revenue was $16.9 billion, consistent with the revised 2013 14 estimate and $1.4 billion more than in 2012 13. This increase was partly due to higher land transfer duty reflecting a stronger property market, and higher payroll tax due to growth in aggregate employment and wages over the year. Grants revenue was $3.2 billion higher in 2013-14 than in 2012 13, mainly reflecting higher specific purpose grants from the Commonwealth, including for the East West Link and Regional Rail Link projects.

Grants revenue was $1.1 billion higher than the revised estimate. The variance is largely due to the early receipt of grants revenue from the Commonwealth for the East West Link.

However, these revenue gains were offset in part by a $540 million court-ordered payment to Tatts Group after it was found the company was entitled to compensation over a botched gaming machine deal with the former state government.

As reveled in the May State Budget, Victoria’s finances are riding the housing boom, with stamp duty receipts on land transfers increasing by a whopping $1,017 million in 2013-14 to $4,189 million, smashing by $708 million the forecast of $3,460 million in last year’s state Budget (see next chart).

ScreenHunter_4529 Oct. 16 08.17

As shown above, the State Government also expects the bonanza to continue, with stamp duty receipts forecast to grow by around 6% per year over the forward estimates.

Obviously, such forecasts are foolhardy given the volatile nature of stamp duty receipts, which fluctuate on the back of both changes in values and volumes. As noted in the May State Budget:

The property market exhibits strong cyclical behaviour which flows directly to movements in land transfer duty. This translates to uncertainty in forecasting estimates of revenue for future years, in relation to both when the current strength of the property market will end, and to what degree transaction revenue will slow or retract. Chart 4.2 shows the history of annual movements in land transfer duty. Given the degree of volatility, the forecasts return to trend growth, balancing the risks on either side.

ScreenHunter_2291 May. 06 21.36

In reality, anything in the -25% to +45% range is possible in any given year, making accurate forecasting and planning next to impossible for the state treasury.

The 2013-14 Annual Financial Report also reported a lift in land taxes on investment properties also registered a rise to $1,658 million in 2013-14, and are also expected to grow solidly on the back of rising values (to $2,030 million by 2017-18). Note also the greater inherent stability of land taxes, which are revalued every two years:

ScreenHunter_4530 Oct. 16 08.25

One wonders why the Victorian Government is not looking to move away from stamp duties on housing transfers to a broad-based land tax. Apart from their greater efficiency and equity, land taxes are inherently more stable (see above). They would also make infrastructure investments, like the East-West Link, self-funding, since any land value uplift brought about through increased infrastructure investment would be partly captured by the government via increased land tax receipts.

Of course, this has not stopped the Property Council of Australia (PCA) from demanding cuts to land tax,arguing that it undermines property investment:

“We are calling on the state government to reduce the upper land tax threshold from 2.25 per cent to 1.7 per cent to ensure Victoria keeps pace with NSW,” Ms Cunich said…

“Victoria’s current land tax ar­rangements are uncompetitive and act as a disincentive to investment and job creation. Policy reform is ­essential in regards to the upper land tax thresholds and property aggregation arrangements,” she said.

I presume by undermining investment, the PCA is referring to the record share of Victorian home loans going to investors (see next chart)?

ScreenHunter_4531 Oct. 16 08.32

Once again, the property lobby has placed its own vested interests above those of the community. Good policy demands that land taxes be expanded to replace volatile, inefficient, and inequitable stamp duties.