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Economic and financial considerations

In making its Determination, the VIRTIPS Act requires that the Tribunal consider:

  • current and projected economic conditions and trends (s24(2)(c))
  • the financial position and fiscal strategy of the State of Victoria (s24(2)(b))
  • any statement or policy issued by the Government of Victoria which is in force with respect to its Wages Policy (or equivalent) and the remuneration and allowances of any specified occupational group (s24(2)(a)).

Current economic and financial conditions and trends, and relevant Victorian Government policies, are set out below. In addition, the Tribunal proposes to consider the financial implications for Councils of setting different allowance values.

Australian Bureau of Statistics (ABS) data show that Australia’s Gross Domestic Product (GDP) grew by 1.8 per cent over the March quarter 2021, and by 1.1 per cent over the preceding 12 months. This followed consecutive quarters in which GDP growth exceeded 3 per cent — the first time this has occurred in the history of the National Accounts. As a result, GDP is now 0.8 per cent higher than its level before the COVID-19 pandemic.86

The Reserve Bank of Australia’s (RBA) latest Statement on Monetary Policy (May 2021) noted that the Australian economy is continuing to recover strongly from the impact of the COVID-19 pandemic, and is:

… transitioning from recovery to the expansion phase earlier and with more momentum than expected.87

The RBA’s Statement observed that the recovery has been supported by favourable health outcomes, the removal of restrictions and substantial fiscal and monetary support, as well as stronger household spending, dwelling investment and exports. Nonetheless, the recovery is expected to be uneven as the COVID‑19 pandemic continues to weigh on some parts of the economy (e.g. tourism and educational service providers).88

In the RBA’s baseline scenario, GDP is expected to grow by 4.75 per cent over 2021 and 3.5 per cent over 2022. The baseline scenario assumes that:

  • the domestic vaccine rollout accelerates in the second half of the year
  • international borders are reopened gradually from early 2022
  • there are no further large virus outbreaks and extended hard lockdowns, and any restrictions imposed are brief.89

ABS data show that the national unemployment rate has continued to fall, reaching 5.1 per cent in May 2021. This is the lowest the unemployment rate has been since February 2020.90

The RBA’s Statement forecast that the unemployment rate will continue to decrease, reaching 5 per cent by the end of 2021 and 4.75 per cent by mid-2022. This is expected to put some upward pressure on wages and inflation, which currently remains ‘subdued’ according to the RBA.91 The RBA expects the Australian Wage Price Index (WPI) to grow by a little under 2 per cent over 2021, with growth to increase to around 2.25 per cent by mid-2023. Meanwhile, underlying inflation is expected to increase gradually to 1.75 per cent by mid‑2022.92

According to the RBA Governor, Dr Philip Lowe:

The [RBA] Board wants to see the recent recovery transition into strong and durable economic growth, with low unemployment and faster growth in wages than we have seen recently.93

Victoria’s Gross State Product (GSP) fell by 0.5 per cent during the 2019‑20 financial year, as economic activity was curtailed due to lockdown measures.94 However, recent data suggest that Victoria’s economy has begun to recover. State Final Demand95 grew by just under 10 per cent in the 6 months to March 2021, the highest growth rate of all states and territories. This was driven by a 15 per cent increase in household consumption following the easing of public health-related restrictions.96

The Victorian Budget 2021/22 (Victorian Budget), released in May 2021, reported the following economic outlook for Victoria:97

  • real GSP is estimated to have contracted by two per cent in 2020‑21 (down from the previous Budget’s forecast of four per cent) and is forecast to grow by 6.5 per cent in 2021-22
  • the unemployment rate is expected to average 5.75 per cent in 2021‑22, before reaching 5.25 per cent in 2023‑24.

Regarding price movements, ABS data show that the All Groups Consumer Price Index (CPI) for Melbourne grew by 0.8 per cent between March 2020 and March 2021, the lowest growth rate of all capital cities.98 Meanwhile, the Victorian Budget forecast annual growth in CPI for Melbourne to increase to above two per cent by 2024‑25.99

Regarding wage movements, ABS data show that the Victorian WPI increased by 1.5 per cent for the 12 months to March 2021.100 The Victorian Budget forecast annual growth in the Victorian WPI to increase to 2.5 per cent by 2024‑25.101

Another commonly used measure of wage movements, full-time average weekly ordinary time earnings (AWOTE) of Victorian adults, grew by around 4.4 per cent between November 2019 and November 2020.102

Victoria’s financial position and fiscal strategy

The Tribunal is required to consider the financial position and fiscal strategy of the State of Victoria (s24(2)(b) of the VIRTIPS Act).

Victorian Auditor-General’s Office financial report

The Victorian Auditor-General’s Office (VAGO) financial report on the State of Victoria, released in November 2020, noted that the COVID-19 pandemic had:

…. necessitated a significant reset in the state’s revenue and expenditure policies… [with] significant unexpected falls in revenue and increases in expenditure, and consequently debt.103

Victorian Budget

The Victorian Budget forecast an operating deficit (for the general government sector) of approximately $11.6 billion for 2021‑22, with smaller deficits expected in the following years. Meanwhile, net debt is forecast to be $102.1 billion (20.3 per cent of GSP) in 2021-22 and to increase to $156.3 billion (26.8 per cent of GSP) in 2024-25. These forecasts reflect an improvement relative to the previous Budget, which the Victorian Budget stated is principally due to improvements in the Victorian Government’s operating position.104

The Victorian Budget noted that uncertainty around Victoria’s revenue outlook remains elevated due to the COVID-19 pandemic. In particular, deviation from forecasting assumptions — which include that further domestic outbreaks of COVID-19 are contained and result only in localised, short-term restrictions — would weigh on the revenue outlook over the Budget and forward estimates.105 The Victorian Budget also outlined the Victorian Government’s four-step fiscal strategy:

  • step 1: creating jobs, reducing unemployment and restoring economic growth
  • step 2: returning to an operating cash surplus
  • step 3: returning to operating surpluses
  • step 4: stabilising debt levels.

The Victorian Budget includes significant infrastructure spending to support economic recovery, with annual Government infrastructure investment expected to average $22.5 billion over the Budget and forward estimates.106

The Victorian Government has also outlined several efficiency measures for departments, and the broader public sector, as part of its strategy to return to an operating surplus in the medium term. In particular:

  • indexation of departments’ base funding will be revised, with different rates to apply to wage and non-wage components107
  • from 1 January 2022, guaranteed annual wage increases for non-executive public sector employees will be reduced from two per cent to 1.5 per cent through the Victorian Government’s Wages Policy.108

Victorian Government Wages Policy

The Tribunal is required to consider any statement or policy issued by the Government of Victoria that is in force with respect to its Wages Policy (or equivalent) and the remuneration and allowances of any specified occupational group (s24(2)(a) of the VIRTIPS Act).

Box 3 reproduces the Victorian Government Wages Policy and the Enterprise Bargaining Framework (Wages Policy) which applies to employees in the Victorian public sector.

Victorian Government Wages Policy and the Enterprise Bargaining Framework

The Victorian Government Wages Policy and the Enterprise Bargaining Framework has three pillars:

  • Pillar 1: Wages – increases in wages and conditions will be capped at a rate of growth of 2 per cent per annum over the life of the agreement. In practice this means employee wages and conditions will be allowed to grow at this rate.
  • Pillar 2: Best Practice Employment Commitment – all public sector agencies will be required to make a Best Practice Employment Commitment, which will outline measures to operationalise elements of the Government’s Public Sector Priorities that reflect good practice within Government and can be implemented operationally or without significant costs.
  • Pillar 3: Additional strategic changes – additional changes to allowances and other conditions (not general wages) will only be allowed if the Government agrees that the changes will address key operational or strategic priorities for the agency, and/or one or more of the Public Sector Priorities.

A ‘Secondary Pathway’ is also available for public sector agencies whose current enterprise agreement reaches its nominal expiry date on or before 30 June 2020 which permits one annual wage and allowance increase capped at 2.5 per cent (instead of at 2 per cent).

Source: Industrial Relations Victoria, ‘Victorian Government Wages Policy,’ Wages Policy and the Enterprise Bargaining Framework (State Government of Victoria: Melbourne, Victoria, 2019).

Victorian Government Wages Policy from 2022

The Victorian Government has announced changes to the Wages Policy that will apply from 1 January 2022. From that date:

  • the annual cap on wages and conditions, under Pillar 1 of the Wages Policy, will be adjusted from 2 per cent to 1.5 per cent
  • additional changes to allowances and other conditions (not general wages) under Pillar 3 of the Wages Policy will be capped at 0.5 per cent of the salary base per annum
  • a limited one-year rollover option with a 2 per cent increase will be available for parties whose current enterprise agreements reach their nominal expiry date in 2022.109

Financial impacts of varying allowance levels

The Tribunal also seeks submissions on the financial impacts of any proposed changes to allowance levels for Council members.

Council operations are primarily funded through rates and charges and government grants and contributions. Councils use these funds to provide services for their communities and to renew and maintain infrastructure assets.110 These funds are also used to pay Council wages and Council member allowances.

The Results of 2019-20 Audits: Local Government, published by VAGO, stated that the local government sector remained resilient over the short term. However, it also noted that the COVID-19 pandemic affected the sector’s financial performance in 2019-20, and was expected to have a greater impact on the sector’s performance during 2020-21.111

In 2015, the Victorian Government introduced the Fair Go Rates System, also referred to as ‘rate capping’. Under the Fair Go Rates System, the Minister for Local Government may make an Order setting a maximum increase in the average rates bill that Councils can charge each year. Councils can apply to the Essential Services Commission for an exemption to the rate cap.112 The Fair Go Rates System may limit the capacity of some Councils to raise additional revenue to address increases in required expenditure (for example, if they are required to pay Council members a higher allowance).113 However, the rate cap does not prevent a Council from increasing expenditure in one part of its budget by re-allocating funds from another.

References

  1. ABS, Australian National Accounts: National Income, Expenditure and Product, March 2021.
  2. RBA, Statement on Monetary Policy – May 2021 (Reserve Bank of Australia: Sydney, NSW, February 2021), 71.
  3. RBA, Statement on Monetary Policy – May 2021, 1, 29, 71.
  4. RBA, Statement on Monetary Policy – May 2021, 71.
  5. ABS, Labour Force, Australia, May 2021.
  6. RBA, Statement on Monetary Policy – May 2021, 71.
  7. RBA, Statement on Monetary Policy – May 2021, 71, 77.
  8. Phillip Lowe, From Recovery to Expansion, keynote address at the Australian Farm Institute Conference, Toowoomba, 17 June 2021.
  9. ABS, Australian National Accounts: State Accounts, 2019-20.
  10. Defined by the ABS as a measure of the total value of goods and services sold in the state to buyers who wish to either consume them or retain them in the form of capital assets.
  11. ABS, Australian National Accounts: National Income, Expenditure and Product, March 2021.
  12. DTF, Victorian Budget 2021/22 - Overview (State Government of Victoria: Melbourne, May 2021), 4.
  13. ABS, Consumer Price Index, Australia, cat. no. 6401.0, March 2021.
  14. DTF, Victorian Budget 2021/22 - Overview, 4.
  15. ABS, Wage Price Index, Australia, cat. no. 6345.0, March 2021.
  16. DTF, Victorian Budget 2021/22 - Overview, 4.
  17. ABS, Average Weekly Earnings, Australia, cat no. 6302.0, November 2020.
  18. VAGO, Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2019-20 (Victorian Auditor-General's Office: Melbourne, November 2020), 1.
  19. DTF, Victorian Budget 2021/22 – Budget Paper No. 2: Strategy and Outlook (State Government of Victoria: Melbourne, May 2021), 6.
  20. DTF, Victorian Budget 2021/22 – Budget Paper No. 5: Statement of Finances (State Government of Victoria: Melbourne, May 2021), 166.
  21. DTF, Victorian Budget 2021/22 – Budget Paper No. 2, 6.
  22. DTF, Victorian Budget 2021/22 – Budget Paper No. 2, 6.
  23. Victorian Government, ‘Contributing a Fair Share for a Stronger Victoria’, media release, 15 May 2021, https://www.premier.vic.gov.au/contributing-fair-share-stronger-victoria.
  24. Industrial Relations Victoria, ‘Victorian Government Wages Policy,’ Wages Policy and the Enterprise Bargaining Framework (State Government of Victoria: Melbourne, Victoria, 2021).
  25. VAGO, Results of 2019-20 Audits: Local Government (Victorian Government Printer: Melbourne, Victoria, March 2021), 5-6.
  26. VAGO, Results of 2019-20 Audits: Local Government (Victorian Government Printer: Melbourne, Victoria, March 2021), 20.
  27. Parliament of Victoria, Final report of the inquiry into the sustainability and operational challenges of Victoria’s rural and regional councils (Victorian Government Printer: Melbourne, Victoria, March 2018), 292; Local Government Act 1989 (Vic), ss185D and 185E.
  28. Under the Local Government Act 2020 (Vic), Council members are entitled to receive an allowance from their Council in accordance with the Tribunal’s Determination.

Updated

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