August 11, 2020
The NSW Budget announced yesterday contains some major spending announcements across all categories – including infrastructure, public health, and various forms of fiscal stimulus. It projects a $16 billion budget deficit, which will not return to surplus until 2024-2025.
We go through more of the detail below. But the big story is this: in the middle of the biggest recession in a century, Government has found a way to avoid cuts, and to continue its high levels of spending, to power the economic recovery. This is a bold budget, that takes advantage of historically low interest rates to borrow money, and also points the way to the most significant tax reform in many years.
THINGS WE REALLY LIKE
A bold proposal to phase out stamp dxuty
Stamp duty is one of the most inefficient taxes because it discourages sales of property – making it harder for people to become homeowners and less likely for people to move to the right house or the right location. But the dilemma has been how to get rid of it when it accounts for a quarter of the revenue for NSW government.
Yesterday, we saw the answer: when people buy a home, allow them to choose if they would like to pay the stamp duty (with a high one-time upfront cost) or pay the property tax (a lower, annual payment in perpetuity).
The tax would be based on unimproved land values, much like council rates.
To begin with, only properties up to a certain value will be allowed to opt into the annual property tax, so the state can continue to receive stamp duty payments from high-value home sales. The intent is that that vast majority of home buyers would be eligible. Eventually, the intention is to convert all properties to the property tax.
The Treasurer will go into consultation on the details over the next several months—and this will be a key focus for the Committee (see Treasury’s consultation paper here).
We note that there is an important market opportunity here for banks to make it easy for people to pay the property tax by offering a product that bundles together the mortgage, the property tax, council rates, insurance, strata fees (and anything else that may fit) into a single monthly payment — thereby ensuring that homeowners are not presented with a big property tax bill at the end of the year.
This reform has been talked about in hushed tones for decades; congratulations to Treasurer Perrottet for finding a way to get it done.
Huge investment in infrastructure – big and small
There were no surprise announcements on infrastructure, which really means that the Government has found a way to keep almost all of the announced projects moving ahead. The Budget allocates $107 billion for infrastructure projects over the next four years.
Key transport projects include:
Key Western Sydney Aerotropolis investments include:
We’re also pleased to see investment in small scale infrastructure like suburban stadiums and $157 million for LED lighting in schools – these are the sorts of programs that will support jobs quickly and widely during our recovery.
Recovering from COVID
Some of the other big moves we really like include:
Promoting NSW to the rest of the world
If we want to capitalise on the opportunity to bring people, firms and capital back to Sydney then we need to invest in telling our story. $728 million will be invested over the next four years to attract visitors, investment and international students to NSW.
The Budget acknowledges that international education is the state’s largest service export, and takes some measures to help bring the students back.
Sydney’s global reputation has been significantly enhanced by the expert handling of the pandemic, and now is a perfect opportunity to build on that success by enhancing our offer as a safe, open and attractive city for talent, for students, and for investment.
STEPS IN THE RIGHT DIRECTION
Investment in social housing
The announcement of $812 million in funding for social housing is a step in the right direction. An additional $139 million to remove high-risk cladding in residential areas is also a welcome move. The numbers are also dwarfed by the $5.3 billion announced by the Victorian Government, and it’s clear that to really make a dent in the need for social housing would require an investment of well over $1 billion per year, but we are encouraged by the direction here.
Public spaces and places
The Budget commits $54 million for the upgrade of parks and public buildings, which will make a difference to the quality of life of many Sydneysiders. (And we’re pleased to see a small $200,000 allocation for the development of some ideas from our Public Space Ideas Competition!). Funding for feasibility studies into active transport links between Sydney and Parramatta along the harbour is a welcome surprise – these links have the potential to create one of Sydney’s great tracks. Again, we know that the real public space renaissance people want to see will take bigger dollar amounts, but we believe this is an emerging priority that can grow over time.
$29 million in funding to solve homelessness for long-term rough sleepers is a welcome announcement. Because this is a relatively small population, the money really may be enough to make progress. For this particular cohort of people, political will and an effective model for delivery is what is needed.
There are of course some things we’d love to see more of in future budgets. These include:
THE BIG PICTURE
NSW, like Australia as a whole, entered the COVID recession with very low levels of debt. At both the state and federal level, Government has made the biggest decision correctly, which is to borrow significant amounts of money to fund the public health response and to stimulate the economy. The NSW Budget gets added firepower by continuing its asset recycling program with plans to sell the rest of Westconnex and potentially the remaining state interest in NSW Lotteries. (We should also note that NSW is now planning to redirect coal mining royalties into its sovereign wealth fund, in recognition of the inevitable decline over time, another sound move).
The spending priorities are largely on target and will bring major long-term benefits to Sydney.
And the path to reform of stamp duty stands as one of the biggest wins of all — an example of the kinds of true economic reform that Sydney will need in order to grow the economy and enable long-term prosperity in the years ahead.