Economic factors

In accordance with the Victorian Independent Remuneration Tribunal and Improving Parliamentary Standards Act 2019 (Vic) (VIRTIPS Act), in relation to economic factors in making a Determination, the Tribunal is required to 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))

The Australian economy is going through a significant downturn as a result of the response to COVID-19 with a severe detrimental effect on the labour market. There remains considerable uncertainty about the duration and nature of the path to economic recovery. The Tribunal has considered and relied upon the trend and forecast data available to it at the time of publication of this Statement of Reasons.

2.1 Current and projected economic conditions and trends

Australian and Victorian economic conditions have been significantly impacted by the global outbreak of COVID-19. Victorian economic activity has also been affected by bushfires experienced in early 2020.

Australian economic conditions

Australian Bureau of Statistics (ABS) data show that Australia’s Gross Domestic Product (GDP) contracted by 0.3 per cent in the March quarter 2020.^[1] The annual growth rate of 1.4 per cent to March 2020 was the lowest recorded since the Global Financial Crisis in late 2009.^[2]

The Reserve Bank of Australia’s (RBA) Statement on Monetary Policy – May 2020 noted that combating the spread of COVID-19 has required severe restrictions on economic activity in many countries. The RBA’s statement also noted that GDP is expected to fall by around 10 per cent from peak to trough as a result of the COVID-19 pandemic. In the RBA’s baseline scenario, GDP should be stronger over 2021 as business and dwelling investment gradually recover.^[3]

In early April 2020, the national unemployment rate was forecast to peak at around 10 per cent in June 2020.^[4] Updated analysis from the Commonwealth Department of Treasury suggests a revised peak in the unemployment rate of 8 per cent around September 2020, due in part to better than expected health outcomes.^[5]

Headline inflation is expected to turn negative in the June quarter 2020, and to remain below 2 per cent for some time.^[6] The RBA has noted that wages growth is likely to slow due to the impact of COVID-19:^[7]

As has been the case during other downturns, it is likely that businesses will make most of the adjustment to their labour costs through reducing both hours worked and the number of employees. However, it is also expected that many businesses and employees will agree to wage freezes and, to a lesser extent, to some cuts to hourly wages.

In June 2020, the RBA Governor also noted that while the global economy is experiencing a severe downturn, conditions in global financial markets are stabilising, and that pending the continued decline in rates of infection and corresponding easing of restrictions, recovery in the global market will begin.^[8]

Victorian economic conditions

Prior to the disruption to economic activity caused by bushfires and the outbreak of COVID-19 in Victoria, the Victorian Budget 19/20: 2019/20 Budget Update (Budget Update) released in December 2019, reported that the Victorian economy started the year on a solid footing, with strong employment growth and high levels of infrastructure investment.^[9]

The impact of bushfires on Victorian economic activity is estimated to have subtracted around 0.1 per cent (equivalent to around $500 million of economic activity) from Victoria’s Gross State Product (GSP) in 2019-20.^[10]

In April 2020, the Victorian Department of Treasury and Finance (DTF) released modelling estimating the potential effects of COVID-19 on economic activity and employment based on Stage 3 restrictions being in place for 6 months (table 2.1).^[11] The changes in these measures provide an indication of the significant change in outlook for the Victorian economy and labour market.

_{Note: (a) ‘+’ indicates growth/increase; (b) ‘-‘ indicates decrease/reduction; (c) estimate is for the calendar year 2020.}

_{Sources: DTF, Victorian Budget 19/20: 2019/20 Budget Update; DTF, Coronavirus Economic Outlook - fact sheet.}

The DTF modelling also estimates that in the wake of the COVID-19 outbreak, Victoria’s GSP could be around 14 per cent lower in the June and September quarters relative to forecasts underlying the Victorian Budget 19/20.^[12] The DTF modelling suggests that the magnitude of the economic impact of COVID-19 makes it likely that Victoria will record negative economic growth in 2019-20 and 2020-21.^[13]

The employment forecast for Victoria has also been significantly revised down following the COVID-19 outbreak, with early effects already evident in data for April and May 2020. Total employment in Victoria fell by 70,752 people in May, following the 127,937 people who lost a job in April.^[14] The unemployment rate in Victoria increased to 6.9 per cent in May.^[15] The underutilisation rate in Victoria rose to 22.1 per cent, while hours worked fell by 1.9 per cent in May, following a 10.7 per cent reduction in hours worked in the month of April.^[16] Employment growth is expected to remain weak in the near term.^[17]

Economic indices

Caution needs to be exercised in relation to the movements in prices and wages over the 12 months to 31 March 2020. The data largely pre-date the impact of COVID-19, in particular the need for restrictions on business activity and flow-on job losses.

The Melbourne All Groups Consumer Price Index (CPI) increased by 0.8 per cent for the March 2020 quarter.^[18] For the 12 months to 31 March 2020, the CPI for Melbourne increased by 2.7 per cent.^[19]

The Wage Price Index (WPI) for Victoria grew by 2.5 per cent in the 12 months to 31 March 2020.^[20] The WPI for the public sector grew by 3.3 per cent, compared to 2.4 per cent in the private sector.^[21]

2.2 Financial position and fiscal strategy of the State of Victoria

The financial position and fiscal strategy of the State of Victoria is set out in the Budget Update, the 2019-20 Quarterly Financial Report No.03 (Quarterly Report)^[22] for the 9 month period ending 31 March 2020, and the outlook for the State’s credit rating.^[23]

The Budget Update reported that the operating surplus was expected to be $618 million in 2019-20, and to average $3.3 billion per year over the forward estimates.^[24] Revenue growth was forecast to average 4.4 per cent over the Budget and forward estimates, exceeding expense growth of 3.3 per cent.^[25] Net debt was forecast to be 8.5 per cent of GSP at June 2020 and to increase to 10.5 per cent by June 2023.^[26]

Published in May 2020, the Quarterly Report takes into account the effect of the bushfires and the early impacts of COVID-19 on the State’s financial position. The Quarterly Report states that at 31 March 2020:^[27]

• Victoria had a deficit of $773 million, a decline from the projected $618 million surplus reported in the Budget Update in December 2019.
• net debt increased to $38.9 billion, up from $29.3 billion at 1 July 2019.

The Victorian Government passed legislation in response to COVID-19 allowing it to appropriate up to $24 billion in emergency funding over 2019-20 and 2020-21 to support community and businesses and to rebuild the economy following the easing of COVID-19 restrictions. The Government has announced it will invest $2.7 billion in ‘shovel ready’ projects such as school upgrades, water infrastructure improvements and road resurfacing works.

This funding is in addition to the $3.5 billion the Victorian Government previously committed, including a $1.7 billion economic survival and jobs package offering payroll tax refunds for eligible businesses, business support grants and help to workers who have lost their jobs to find new opportunities.^[28]

The Government has delayed the State Budget for 2020-21 until October 2020, which means that a more comprehensive view of the impact of COVID-19 on the Victorian economy and the Budget over the forward estimates will not be known for some time.

In early April 2020, Standard and Poor’s (S&P) revised its credit-rating outlook for Victoria to ‘negative’ (implying that Victoria’s AAA credit rating from S&P could be revised down in the future) because of a rise in public debt due to Victoria’s response to COVID-19.^[29]

2.3 Victorian Government’s Wages Policy

Box 2.1 re-produces the Victorian Government Wages Policy and Enterprise Bargaining Framework (Wages Policy) effective from April 2019, which applies to departments and agencies in the Victorian public sector.

_{Source: Wages Policy.}