In stark contrast to the grovelling send-off given to Rupert Murdoch in Saturday’s News Corp papers, The Australian and the Herald Sun came out guns blazing against the retiring Victorian Premier Dan Andrews this morning, focusing heavily on his debt legacy.
While Andrews is one of the few politicians globally to brazenly stare down a baying Murdoch press and depart unbeaten on his own terms, the Victorian government’s budget and balance sheet are certainly in more strife than any other Australian government’s.
This is largely because of its unprecedented infrastructure spending program, as well as the state being home to Australia’s longest and toughest pandemic lockdowns, forcing the government, as its revenues plummeted, to spend like never before.
Strapped for cash
By any measure, Victoria has limited financial capacity left in the tank and will increasingly rely on federal support to keep delivering the Andrews spending program, which has soared from the $51.5 billion it inherited from the Coalition in 2014-15 to a projected $93.3 billion in 2023-24. This is due to state revenue bases being constitutionally narrow, and Victoria having no onshore resources sector to turn to like the other mainland states.
After the Queensland government introduced the world’s highest coal royalty taxes, peaking at 40% ahead of its 2022-23 budget, it then received $10 billion more in royalty revenue than it had predicted. Queensland also still has state-owned energy assets worth tens of billions, whereas the Kennett government flogged off the lot, pocketing $30 billion from 15 privatisations in the 1990s, leaving Labor’s Steve Bracks with a debt-free inheritance in 1999.
Similar to Queensland, last week’s NSW budget also went after the privately owned coalminers with a royalty increase, and WA iron ore royalties are now pushing $10 billion a year, even though they remain at the globally low level of around 7%.
Andrews and his long-serving Treasurer Tim Pallas progressively blew the budget during their first five years in office before COVID struck, ramping up gross debt to a then-record $55 billion in 2019, even after raising $9.7 billion by privatising the Port of Melbourne in 2015 and $2.9 billion selling off the Land Titles office in 2018.
In 2022 it then pocketed another $7.9 billion in upfront proceeds by privatising the VicRoads database and future revenues, but it will be up to motorists to pay this back over the 40-year privatisation contract. It was a similar strategy with Transurban’s $10 billion West Gate Tunnel, which the state partially funded by recklessly granting a 10-year extension to one of the world’s most lucrative tollroad contracts through until 2045.
Debts and delays
Even with all these controversial one-off deals to bring forward cash or defer liabilities onto future road users, state net debt is now above $150 billion and is forecast to hit $171.4 billion by 2027.
The debt-funded infrastructure spending has been nothing short of extraordinary. The 2023-24 Andrews government budget gloated that capital works averaged just $4.5 billion a year in the 10 years to 2014-15 when Andrews became premier, and will average $19 billion a year going forward. That’s a four-fold increase — and much of it is due to project blowouts.
In 2016, the North East Link — Australia’s longest tunnel — was said to cost “up to $10 billion”, but this has blown out to $16.5 billion. The West Gate Tunnel ballooned from $5.5 billion — when conceived by Transurban after Andrews spent $1 billion cancelling the East West Link — to a ridiculous $10 billion now.
The Metro Tunnel’s 2015 business case said it would cost $7.5 billion, but the new rail tunnel underneath Melbourne will now cost $12 billion, something Andrews didn’t mention yesterday when trumpeting it as one of his proudest achievements.
However, the big daddy of them all is the Suburban Rail Loop, which was promised shortly before the 2018 election at a projected cost of $50 billion. The first stage, which is less than 40% of the original proposal, is now budgeted to cost a staggering $34.5 billion.
After making too many big unfunded infrastructure promises and failing to contain the size and cost of the public sector workforce, Andrew’s successor will have very little wriggle room.
Canberra helped directly pick up Victoria’s tab during the pandemic through programs such as JobKeeper, and the Morrison government provided direct financing support by greenlighting the Reserve Bank to use its money-printing capacity to directly buy up Victorian bonds to settle nervous investors. A lot more of this will be needed down the track as Australia’s resource-rich states effectively bail out big-spending Victoria through federally orchestrated wealth redistribution.
Transparency and cash clawbacks
Just like in the final years of the Cain-Kirner government, there is a distinct lack of transparency around Victoria’s debt management.
The federal government’s centralised borrowing authority, the Australian Office of Financial Management (AOFM), makes a public announcement with every bond tender and publishes the total outstanding debt on its home page. It’s currently $891.7 billion.
Due to excellent real-time transparency, we already know that the $800 million auction of 12-year federal government bonds conducted on September 20 cleared at a yield of 4.26% with 11 successful bidders.
Compare that with Australia’s most active state debt management authority — the Treasury Corporation of Victoria — which under the “recent announcements” page on its website hasn’t said anything since appointing a new CEO in December last year — and is still yet to release its 2022-23 annual report.
Back in the early 1990s, Jeff Kennett and his treasurer Alan Stockdale were bellyaching about Labor’s $33 billion state debt and $18 billion unfunded superannuation liability, which triggered a famous double downgrade by rating agency Moody’s shortly after Labor’s 1992 landslide defeat following the loss of the State Bank and other scandals.
It was only after the Kirner government was voted out that it was disclosed Victoria had deceptively breached its federal Loans Council limits, sparking an emergency meeting of the body in Perth on December 7, 1992.
There is no functioning federal Loans Council any more, which partly explains how Andrews has been able to issue about $1 billion a month of new net debt to mainly private investors since COVID, with no plausible plan on how this will ever be repaid.
Unfortunately, Victoria has little left to privatise, save for the water sector and its compulsory third-party insurer for people injured on the roads, the Transport Accident Commission. Victoria still also underwrites the state’s monopoly workers compensation system and controversially jacked up premiums by 40% after last year’s election to try to eliminate a $1 billion-plus shortfall after mental health claims rocketed in the COVID aftermath.
All of this explains why Andrews has in recent years turned his attention to the property sector, imposing the highest property taxes in the country, including his unprecedented 7.5% Airbnb tax announced only last week.
During COVID, Dan’s mastery of the media cycle saw him effectively jawbone Josh Frydenberg and Scott Morrison to open the federal chequebooks more for Victoria than any other state. Once his former Queanbeyan flatmate Anthony Albanese moved into the Lodge, there was an increase in federal infrastructure spending in Victoria, and yesterday Andrews declared it was great Australia no longer had “a prime minister for Sydney”.
His successor will be praying that federal generosity continues because Victoria is in no position to pay back its unprecedented and spiralling debts.
Disclosure: Stephen Mayne was Alan Stockdale’s press secretary from December 1992 until June 1994.
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