The government is facing higher than anticipated stamp duty writedowns, partly sparked by a 35 per cent downturn in the number of house and unit sales between December 2018, and the previous December. Since then, house prices have continued to fall. Last year, the Victorian government was upbeat in its revenue forecasts, predicting $7 billion in stamp duty would flow into Treasury coffers in the past financial year. Since then, Mr Pallas has warned the state was facing a $2.4 billion writedown in stamp duty. He told The Age this week Treasury was still calculating the cost to the state's coffers of falling house sales, and prices, ahead of the Victorian budget. Loading The public sector wage bill is one of the highest costs facing the state government, while stamp duty and other property taxes are among the major taxation income earners.

Mr Pallas said the government would not offer agreements of less than CPI, which currently sits at 1.8 per cent, saying he did not want to see real wage erosion. But he would not comment on reports from union officials that the government had offered an initial 2 per cent wage rise in early negotiations. "We’re going to have to have, as we always do, an honest and open and frank discussion with the union movement about what capacity the state has around wages," Mr Pallas said. "But we do have to temper our expectations on the circumstances of the time. And because states have a very high dependence on property taxes, when those markets do start to come off the boil a bit, then we have to adjust our capacity to pay in those circumstances." Wayne Gatt, secretary of the powerful Police Association, said his union was canvassing its members on the offer, and would not comment on the negotiations while they were at such an early stage.

However, Mr Gatt warned the union would be watching negotiations closely "with respect for fair and reasonable wages for the dangerous and difficult work that they do". Martel Menz, deputy secretary of the Australian Education Union, said the low offer was "certainly something that causes us concern". The education union has prepared a claim to bring kindergarten educators - who are paid as little as $21 an hour - to wage parity with primary school teachers. For some, this would represent a whopping 40 per cent pay rise. In 2016, the Andrews government struck what was feted as a "historic" deal with 40,000 nurses and midwives across the state. The four-year agreement, which will see nurses' wages rise by four per cent this year, was designed to bring the state's nurses and midwives' pay into line with their New South Wales counterparts. Mr Pallas described this as an anomaly.

"We’ve been pretty generous and I think there was a measure of catch-up in our last wage round, in our last term of government," Mr Pallas said. "Our expectation is that those wage rounds will not be as generous this time around. "When I told Victorians that this was going to be a budget of hard choices, it means that we have to share that responsibility collectively. "All I ask is that the union movement do is respect the fact that the government is giving them the first opportunity to have their say and tell me what they think about both the proposal and the reason for the need for a tighter, a greater level of rigour around wage increases." CPSU secretary Karen Batt said Mr Pallas was "entitled to start the bargaining at any figure he likes".

"No one will settle at just cost-of-living adjustments when he’s put interstate parity and 3 per cent annual increases into some agreements," she said. "He knows this. He also knows that by January 2020 federal bargaining laws will have been strengthened if he’s barracking for a change of federal government like we are."