An unpleasant state budget looms for Victorians as the government confronts skyrocketing debt levels.
Tackling soaring net debt and interest repayments are expected to be at the heart of Victorian Treasurer Tim Pallas' ninth state budget on Tuesday.
Latest forecasts project net debt will rise from $116 billion at the end of June to $165.9b by mid-2026, accounting for 24.6 per cent of state revenue.
That figure was hovering at $40b, or 8.5 per cent of revenue, in mid-2019 before the COVID-19 pandemic hit.
While the budget bottom line isn't as dire as that faced in the early 1990s under the Cain/Kirner government, independent economist Saul Eslake says Victoria's position is the weakest of any state.
"If you look at measures such as debt to gross product or interest as a proportion of revenue Victoria's is the most onerous of any of the states," he told AAP on Monday.
He said the re-elected Andrews government must slow the debt growth to ensure Victoria wasn't exposed to further interest rate hikes, with Victoria on track to pay $20 million a day in debt repayments within three years.
It does not need to lower debt close to zero but should instead aim to stabilise net debt as a percentage of gross state product.
With a $31.5b COVID-19 debt repayment plan mooted, Mr Eslake said the government could either opt to reduce spending and in turn compromise service and infrastructure delivery or raise revenue through levies and taxes.
One new revenue measure he suggested could be a payroll tax surcharge on large businesses, as previously deployed in Western Australia.
"This is the most propitious time in the electoral cycle to make politically difficult and unpleasant decisions," Mr Eslake said.
"There's not much in the way of pleasant revenue options."
It could also push back the start date for some infrastructure projects, including jointly funded initiatives like Geelong Fast Rail and Melbourne Airport Rail.
Mr Pallas' last budget shifted focus to stabilising debt levels and established a $10b future fund to help pay it down.
But rampant inflation and subsequent interest rate hikes have made servicing the debt more challenging.
Premier Daniel Andrews this month took aim at the Reserve Bank over its advice to national cabinet amid the pandemic that interest rates would not rise, spurring on his government and others to borrow to curb unemployment.
His deputy Jacinta Allan doubled down on the criticism on Monday, declaring Victoria faced a big task to repay its COVID-related debt.
"The debt that was drawn down at the urging of the Reserve Bank, at the urging of federal treasury, to protect Victorian businesses, families, households, communities through that one-in-100-year pandemic," she told reporters.
Mr Eslake said it was not unreasonable for government to cast aspersions towards the bank but it was a partial explanation and not the complete story.
"All state governments would have been affected in the same way," he said.
"That is to say they all received the same advice and although it turned out to be wrong, Victoria ran bigger deficits and borrowed more.
"Victoria was harder hit by COVID. Some of that was bad luck but some of that was a consequence of decisions by the Andrews government on how to manage it."
