The Victorian premier has blamed advice provided to national cabinet by the Reserve Bank governor, Phillip Lowe, for the huge borrowings undertaken by the government during the pandemic.
Ahead of a state budget that’s expected to slash spending across several portfolios, Daniel Andrews criticised the bank’s decision to raise interest rates for the 11th time in a year as “smashing families” and “causing real pain”.
The premier said national cabinet received briefings from Lowe during the early months of the Covid-19 pandemic, during which leaders were told to borrow while interest rates were low.
“I remember at national cabinet being told, ‘Go and borrow. If you don’t borrow, then we’re going to have 25% unemployment, we’re not going to get through this, we will not survive this. And by the way – interest rates won’t be going up’,” he said of the advice on Wednesday.
“That was the message to governments. The same message was applied to households right across our country, that interest rates would not be going up.
“I’m not sure that 11 interest rate rises in 12 months is smashing inflation. I’m certain it’s smashing families.”
The Victorian government borrowed $24.5bn to deal with the economic fallout of the coronavirus pandemic. This was in addition doubling its debt ceiling from $30bn to $60bn from 2018 to 2022 to fund major transport infrastructure projects.
Andrews told reporters his government would not have borrowed as much money as it did in 2020 without the RBA’s advice.
“The government of Victoria made decisions, but the advice that informed those decisions were very simple – you’ve got to borrow to get through,” he said.
“So, of course, we went and borrowed.”
“But, I just want people to know just as families are feeling the pinch really profoundly with moving from fixed mortgages to variable rates … 11 hikes in a year, the government feels that pain too.”
Andrews reiterated that the government will be making “difficult decisions” in the May budget as it works to get state finances on track post-Covid lockdowns.
Spending is expected to be slashed on infrastructure projects, the public service and community health funding.
Andrews would not confirm whether funding for the Melbourne Airport Rail would be cut, as government sources have flagged, but said he was committed to delivering the billions of dollars worth of promises made in the lead-up to November’s state election.
According to Treasury’s pre-election budget update, Victoria’s net debt is forecast to surge from $116bn in 2022-23 to $166bn by 2025-26, which is equivalent to 26.5% of gross state product.
Interest payments on state debt were forecast to total $7.5bn in 2025-26, up from $3.9bn in 2022-23.
In a statement following Tuesday’s rate rise, Lowe, said inflation had passed its peak but it was “still too high” at 7%.
“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today,” he said.
Andrews blamed Australia’s stubbornly high inflation not on household spending but on several “complex factors” including international events, supply chain issues and a shortage of housing.
“Interest rate rises is not the answer to that. A national housing plan is the answer to that,” he said.
