Victoria’s mounting debt burden will force the Andrews government to scythe staffing levels and delay costly rail projects to avoid a further deterioration of finances, analysts predict.
The state, which accounts for about a quarter of Australia’s economy, has “a very weak” budget outlook compared with other states, S&P Global Ratings analyst Anthony Walker says.
“Its large infrastructure program ensures the budget will remain in large cash deficit, even if the government delays major projects in [Tuesday’s] budget,” Walker said.
By 2025, Victoria’s total debt is expected to hit 210% of operating revenues – or triple pre-Covid levels – when S&P expects it will reach $194.2bn.
John Manning, a senior analyst at Moody’s investors service, said general government debt should swell even further by 30 June 2026, to about 229% of annual revenue.
“The operating deficits combined with significant levels of debt-funded capital spending are really what’s driving the state’s debt burden to very high levels,” Manning said.
Prior to the pandemic, the Andrews government undertook huge borrowings to fund signature infrastructure projects, such as level crossing removals and Metro Tunnel. It then spent billions propping up the health system and supporting small businesses.
The premier, Daniel Andrews, has sought to distinguish between “borrowing to build” and the Covid-19 “emergency funds”.
“That makes the economy bigger, that keeps people in work, that protects our quality of life,” he said. “It’s a bit like a mortgage – it’s paid back over time and you derive a direct benefit from that.
“Covid debt’s a bit more like a credit card, and we have to get that balance back down to zero.”
According to the Sunday Age, Tuesday’s budget will also distinguish between the two and will include a $31.5bn plan that will work to repay Covid debt, via savings and new revenue measures.
The health minister, Mary-Anne Thomas, would not comment on the report on Sunday but said the budget would “deliver on each and every” election commitment.
Victorian government staff levels jumped during the pandemic. Expect more winding back in Tuesday's budget. (H/T David Hayward) pic.twitter.com/AC332SzJnE
— @phannam@mastodon.green (@p_hannam) May 21, 2023
Labor MPs have told Guardian Australia the budget will be tough but deliver a small operating surplus in the forward estimates and include initiatives to support first home buyers.
Andrews said getting to a surplus will require “some challenging decisions, some difficult decisions” due to the economic climate.
“As a government, we’ve always taken the view that a taxpayer deserves to be satisfied that we are placing the effort and spending resources in a way that’s responsible,” the state’s treasurer, Tim Pallas, said when asked if his ninth budget would slash jobs.
“But we are definitely of the view that the provision of services to the community should not be adversely affected.”
The shadow treasurer, Brad Rowswell, said the budget would reveal the government was “getting tired, getting lazy” as it began its third term.
“We’re on [the] cliff’s edge of another [credit] rating’s drop,” he said. “We’re the highest-taxed state in the nation.”
Taxes, net debt and interest payments are all expected to rise.
David Hayward, an emeritus professor at RMIT university and chair of the Victorian government’s social housing regulation review, said the traditional pre-budget spray of announcements had been absent for “the first time I can remember”.
“I think everybody here is expecting it to be tough,” he said.
Several key infrastructure projects, such as the Melbourne airport rail and improvements to the Geelong rail line, have already been paused. Whether this is to allow the federal government to reassess their viability or to ease the state’s debt burden, such delays would be “a good thing” given the high cost of materials and staff at present, Hayward said.
The state spent about $80bn more than it planned during the Covid lockdowns to keep the economy going, with about half of that on infrastructure, he said.
With the jobless rate at 3.9% in April and down to just 1% in Geelong and Shepparton, Hayward said: “It’s the time to be winding back deficits and debts if ever there was a time.”
