Profligate Coalition spending promises, a “build bigger” Labor campaign, and limited efforts by either major political party to rein in debt dominate the economic choices facing Victorians as they go to the polls, analysts say.
Victoria, which generates just under a quarter of Australia’s annual GDP, suffered the sharpest economic slowdown in the nation because of its lengthy lockdowns, leaving it with a bigger fiscal repair job, according to rating agency S&P.
“It’s the biggest fiscal shock we’ve seen among the Australian states,” Anthony Walker, a senior S&P analyst, said. Victoria’s finances are “in their weakest position since the 1990s”.
Victoria now has S&P’s lowest credit rating, at “AA”, among Australian states after it was cut in December 2020. Rival agency Moody’s rates Victorian debt at AA2 after a downgrade in May.
“It’s not like elections we’ve had in the past where [Victoria’s] coming from a very strong fiscal position,” Walker said, adding, “most voters wouldn’t understand the fiscal position of the state – and that’s true across all states”.
David Hayward, a public policy professor at RMIT, said that surveys suggest the state of Victoria’s finances is not high on the list of voters’ concerns, compared with issues such as cost of living. Without a fiscal restraint, spending promises have mushroomed.
“The really profligate [party] looks to be the Libs,” Hayward said. As of Wednesday, he tallied hundreds of promises from both major parties with the Liberal-Nationals far ahead of Labor.
For instance, the Coalition’s key promise to scrap Labor’s signature infrastructure project – the suburban rail loop – might save about $9.6bn in upfront spending or $35bn-plus over time.
That money, though, will be mostly go towards 24 new or refurbished hospitals. “It’s a staggering number,” Hayward said.
S&P’s Walker said voters – and analysts – remained in the dark about the Coalition’s plans to fund its promises, particularly the extra hospital staffing needed.
The Coalition has promised not to introduce new taxes, will reduce other ones and will impose a cap of debt, he said. “Are there other savings measures that haven’t been announced yet or are they looking at re-profiling some of the operating policies?”
By contrast, Labor’s “build bigger” approach seems to provide “on the ground results”, even if the bill is starting to swell. “People are actually happy seeing rail-crossing removals, seeing new train lines, and they’re getting something for the money,” Walker said.
Victoria, as elsewhere, receives about 40% of its annual revenue from the commonwealth either through grants or the GST distribution. Debt is already on track to approach 215% of annual revenue by 2025, so any weakening of the state’s operating position or increased capital spending could trigger another ratings cut, Walker said.
Moody’s holds a similar view, estimating the debt burden is unlikely to stabilise before the year ending June 2027. By a year earlier, the debt level will have reached 229% – a high level compared with similarly rated jurisdictions.
“Although debt affordability is currently strong, the rapid and prolonged growth in debt combined with a steepening yield curve will raise interest costs and test institutional capacity,” Moody’s said in its June update.
Hayward, though, cautioned that the rating agency formulae were less useful when comparing governments than companies.
Victoria’s relative debt load was twice as high in 1960, and remained lower than Canadian provinces such as Ontario or some German states.
His concern, though, was both major parties were spending up at a time of full employment and a Reserve Bank in the midst of hiking interest rate to curb inflation.
Victoria’s jobless rate was 3.5% in October – close to the national average of 3.4% – and as low as 1.2% in regional towns such as Warrnambool.
“Is this a time of merriment?” Hayward said of the Liberals’ spending splurge. Labor should delay its suburban rail loop plans a few years – “you take your foot off the pedal”, he said.
The CEO of the Victorian Council of Social Service, Emma King, said other economic goals should be getting greater attention, such as setting a deadline for wiping out the social housing list.
“Governments currently get away with not setting public targets for progress on a whole range of social indicators,” King said. “It makes is very difficult to track progress and apply scrutiny.”
Wellbeing targets would ensure the budget “purposefully” allocated funding to programs that will help monitoring and achieve of those goals.
“A wellbeing budgeting approach puts people, health, environmental and social outcomes on a level pegging with more traditional economic indicators, such as gross domestic/state product and inflation,” King said.
Both Labor and the Coalition are set to release the costings behind their election promises on Thursday.
