Cooling property market delivers $5 billion blow to Victorian budget

Victoria's cooling property market has delivered a $5 billion blow to the state's budget forecasts less than a month before the state election.

An average of $1.3 billion a year is set to be shaved from the state's tax revenue over the four-year forecast period, according to a fiscal update handed down today.

"This is primarily driven by downgrades to land transfer duty and land tax, reflecting a decline in property market activity amid higher interest rates and other factors," the update said.

The government is still on track to deliver operating surpluses over the outlook period — but the expected average of $300 million a year is a significant reduction from the $1 billion forecast in the May budget.

And net debt will be slightly lower than previously forecast, owing to a lower-than-anticipated debt position in 2025-26.

Debt will climb to $197 billion in 2029-30, about $2 billion less than previously forecast.

But interest expense payments continues to eat into state coffers.

The fiscal update shows annual interest payments will be $8.9 billion this year — $24.3 million a day — rising to $11.9 billion in 2029-30, or $32.8 million a day.

The books spell out nearly half a billion in savings since the last budget and also clarify that a clandestine myki surcharge uncovered by the auditor-general earlier this year, which Premier Ben Carroll said would abolished, will formally cease to exist on January 1. 

Migration changes, material costs threatening state's outlook

The tax-reliant state is still expected to capture $9.2 billion in land transfer duty and $7.6 billion in property-related taxes in the current financial year.

The drop in property-related taxes was just one of several risks to Victoria's economic outlook that the report said "have increased in recent months and are elevated".

Among them was recently announced federal changes to migration.

"If net overseas migration declines by more than currently expected, this could weigh on the longer-term economic outlook for the state through fewer consumers, lower education exports and a smaller pool of workers," the report said.

It also warned increased fuel and material costs, some linked to the prolonged conflict in the Middle East, could cause further cost headaches for Victoria's infrastructure projects.

Asked if his government took responsibility for the property market downturn, Treasurer Colin Brooks said the entire country had witnessed a similar decline, particularly in the eastern states.

"This is something that's impacting the whole country, driven by inflation, interest rates and also some changes in the federal budget settings as well," he said.

Mr Brooks said the $2.4 billion operating surplus recorded last financial year assured the state could responsibly deliver projects moving forward.

Melbourne has been at the forefront of a cooling property market, with declining auction clearance rates and subdued price growth linked to a slowdown in investment.

Mr Carroll has vowed to reverse increases to land tax unveiled in 2023 as part of a post-COVID budget repair plan if Labor is re-elected next month.

The tax, along with high interest rates and changing tenancy laws, have been credited with an exodus of property investors from Victoria.