State spending key to recovery
The states will provide the economic stimulus to get through the current recession by spending on infrastructure, a Victorian civil servant has predicted.
But the funding for this work will come from the Commonwealth, as it is the biggest generator of revenue through taxes.
Victorian Department of Treasury and Finance secretary Grant Hehir said while the Commonwealth had focused on small scale infrastructure spending, the states were managing larger projects.
“The states play a vital role in the delivery of infrastructure for such projects as roads, which will support economic activity,” he told a macroeconomic workshop at Deakin University.
“In Victoria we have increased our spending on infrastructure from $1 billion in 2001 to $2 billion this financial year.”
However, major projects such as roads and Victoria’s desalination plant are long-term projects that can sometimes come to fruition after the recession, Hehir warned.
Therefore, small-scale projects, such as the Commonwealth’s school building program, can be implemented quicker and provide stimulus to the economy by generating employment growth.
The states will not be able to fund this spending without Commonwealth help as local taxes are particularly hit during recessions.
Hehir said taxes levied by the states, such as stamp duty and land tax, suffer drops in revenue of up to 30 per cent if the figures from the last recession are a guide.
In contrast, Commonwealth levied taxes such as income tax are relatively unaffected by the economic downturn.
“The states are very exposed to recessions when it comes to taxes,” he said.
“In the last recession it took five years before revenues from land tax and stamp duty returned to their previous levels.
“Therefore, it is critical the states look at fiscal expenditure and [their] ability to repay debt.”
Hehir said the ability to repay debt was a factor in maintaining economic confidence.
He cited the loss of the ‘AAA’ rating by the previous Labor Government in Victoria as an example of how the electorate can lose faith in the economy.
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