State Treasury has ramped up its budget surplus predictions for the 2015-16 financial year to $1.7 billion, from an earlier estimate of $1.2 billion made six months ago in the May budget.

Treasurer Tim Pallas hailed the result as evidence of Victoria's strengthening economic position.

But the budget update, released on Friday, reveals the $500 million upgrade was built mainly from a stamp duty windfall, fuelled by Melbourne's rampant real estate market. Treasury is now expecting to collect $5.4 billion in stamp duty in 2015-16, $390 million more than its May budget prediction.

Mr Pallas said housing affordability was "one of the biggest" policy issues confronting the state government, saying the government was working to tackle the problem "root and branch into the future".

"We've been working diligently now for the better part of eight months on a strategy that incorporates action in co-operation with the Commonwealth but also action that could be taken by the state," Mr Pallas said.

He said "all of the settings" to help make housing more affordable needed to be reviewed. "Over the last few months housing affordability has improved slightly in this state and in this city, but over the long run, over the last 12 months or more, I think it is quite apparent that ... the dream of home ownership has become more problematic."

He suggested the review would extend to rental accommodation and public and social housing. "The dream of being able to move into rental accommodation has become more problematic and the capacity for the state to provide for public and social housing has been inadequate in the past," he said.

The comments follow revelations in The Age in September that Treasury is working on a major housing strategy that could lead to the dumping of a stamp duty discount for first home buyers. The discount costs the budget $170 million a year, but is seen as ineffective as a form of assistance because it simply adds to prices.

High-level sources have confirmed that scrapping a 50 per cent stamp duty concession for first home buyers purchasing properties worth up to $600,000 – a saving of up to $15,500 – is being actively considered as part of the overhaul, although it remains unclear how it might be replaced.

The budget update also confirmed that the wage bill for public servants been growing rapidly, with the government expecting to fork out about $20.1 billion for employee expenses in 2015-16, up from an actual bill of $18.8 billion the previous year and $18 billion the year before that.

Mr Pallas attributed the increase to an increase in the number of public servants, the result of population growth and better service delivery, but shadow attorney-general John Pesutto leapt on it as evidence that Labor was caving to union wage demands.

It follows figures from the Bureau of Statistics last week showing hourly pay rates for Victorian public sector workers surging at the fastest pace for six years, with only Western Australia recording stronger growth.