Victorian Premier Daniel Andrews is in talks with Prime Minister Anthony Albanese on the need for federal help in the May 9 budget, as the financial hangover from the world’s longest lockdown bites and the state’s growing $115 billion debt threatens thousands of jobs across the public sector.
Ratings agencies will closely watch Victoria’s May 23 state budget – which has the lowest rating of the states after a double-notch downgrade during the pandemic in December 2020 – with the state’s net debt expected to grow from $115 billion to more than $165 billion by 2025-26. The interest expense on the debt is expected to increase to $7.32 billion by 2026.
Mr Andrews confirmed that the May budget would be challenging, with cuts of up to 10 per cent expected across the public sector, and that “tens of billions of dollars [spent] to protect health and save lives” now “has to be paid back”.
But the government’s coffers are being squeezed by union demands over the wage cap, a slowing property market, blowouts in the state’s major projects and a broken WorkCover system.
The Australian Financial Review understands from government sources that discussions with the federal government are on the agenda, amid concerns the growing debt and deep cuts could slow the Victorian economy and put a handbrake on hopes for a soft landing of the national economy.
The premier confirmed he is in talks with the PM over the parlous position of the state’s finances, although he denied the description of a federal bailout and it is not clear what form any additional financial support might take.
“I wouldn’t put it in those terms, but we’ll always lobby, push, pressure and advocate and put a good quality case to the Commonwealth government for more and more support,”
Mr Andrews said, when asked by the Financial Review whether Victoria needed a federal bailout.
“You would expect nothing less. That’s what I’ve done regardless of the political make-up of the federal government. And beyond that … lobbying, that standing up for Victoria comes in the context of having been fundamentally ripped off for almost a decade by the Liberal National Party.”
A spokesperson for Treasurer Jim Chalmers said the government would work with the states to help fund essential services.
“Budgets at both the state and federal levels are facing significant pressures,” the spokesperson said. “The Albanese government will continue to work constructively and co-operatively with the states and territories to help fund the essential services the Australian people depend on, and to build to work a stronger and more resilient economy.”
Mr Andrews said that the “challenging” budget position was partly a product of being short-changed by the former Morrison government.
“Best politics is always about the future, not about the past, but it is important to acknowledge that we did not get a fair share, whether it’s infrastructure funding, health funding, in lots of different areas,” he said.
Victorian Treasurer Tim Pallas has long complained that under the Morrison government, Victoria received “less than 6 per cent of new [infrastructure] funding, despite us having 26 per cent of the nation’s population” and under a “distorted” GST carve-up engineered by Mr Morrison, Victoria could lose more than $1 billion a year.
Economist Saul Eslake said even though the Victorian government had some legitimate complaints, the growing debt was largely a problem of its own making.
“Victoria’s financial position is by most measures in worse shape than any of the other jurisdictions, except the Northern Territory,” Mr Eslake told the Financial Review.
“To some extent that reflects the fact that Victoria had a harsher experience during COVID than most other states. But it also reflects conscious policy decisions ever since they came to office, to embark on very big, largely debt-funded infrastructure spending programs. All of those projects have suffered from cost overruns, as big projects almost inevitably do,” he said.
“A tough budget is never pleasant and is always challenging for the government that brings it down. But this is probably the least challenging period in the political cycle and things need to be done.”
Major pressures
S&P associate director Rebecca Hrvatin said the rating agency would examine the May state budget closely.
“Major pressures we’ll look at in the budget would be added inflationary pressures – obviously that has some revenue impact but also on the expenditure side,” she said.
“Wage growth could be higher than what was previously budgeted for, we’d have to look at things like that and how it might impact the operating balance. Another concern or thing we’d be looking for would be cost pressures on infrastructure projects … we’d have to see what pressures there are around those infrastructure project blowouts.”
Victoria would have to show sustained improvement in operating surpluses, which could potentially indicate slower debt growth to improve its rating, she said. But an operating surplus is not expected until 2025/2026.
Mr Albanese has already committed $2.2 billion to Mr Andrews’ signature $125 billion suburban rail project in a sign that there could be a rebalancing between the “good mates”.
Mr Andrews warned last week that the state’s pandemic bill meant there were billions to be paid back, as the premier flagged the May state budget would be “challenging”.
The Andrews government is also facing a battle against key unions after the government increased its wages cap from 1.5 per cent a year to 3 per cent, but declined to follow NSW’s lead in scrapping the wage cap.
The state’s public sector wages bill – which includes public servants, nurses, teachers, police, firefighters and others – is already expected to climb from $33 billion to more than $35 billion over the next three years.
The Australian Nursing and Midwifery Federation Victorian secretary Lisa Fitzpatrick questioned if Victoria could pay “comparable wages to NSW and Queensland” and suggested the Albanese government could help fund more wage rises for nurses.
“How will the federal government contribute to the retention of our experienced workforce across the country?” she asked.
On the state’s debt, Victorian Labor had long maintained a debt ceiling of 6 per cent of gross state product, or about $30 billion, before the pandemic, which Treasurer Tim Pallas doubled to more than $60 billion in the lead up to the 2018 state election. The debt is soon expected to reach 25 per cent of GSP, and the debt ceiling is no longer referred to by the government or in budget papers.
‘Cost blowouts’
In the state’s last budget, Mr Pallas announced that the Victorian government would establish a $10 billion Future Fund from the proceeds of partially privatising VicRoads to try to pay down its record debt.
But the state’s WorkCover liability claims have tripled since 2010 and the gap between the annual cost of claims and premiums collected has resulted in an annual premium deficit of $1.1 billion and growing.
The Victorian Liberals calculate more than $30 billion in waste and cost blowouts under the Andrews government including the North East Link, West Gate Tunnel and Metro Tunnel.
“Of course you would expect us to fight for every brass razoo of GST income that we can get from the feds in the interest of fighting for ‘Team Victoria’. But the only person that Daniel Andrews has to blame for the parlous state of Victoria’s economy is himself,” shadow treasurer Brad Rowswell said.
“The blame for more than $30 billion of waste on Victoria’s major projects can’t be pinned on others. I’m desperately concerned about the state of Victoria’s economy – we’re paying more than $10 million a day in interest payments alone. That’s climbing to $20 million a day in a few short years.”
The Community and Public Sector Union has urged the Victorian government to slash the $177 million spent on consultants in the past financial year, up from $59 million in financial 2015, to save core public servant jobs which are now under threat.
The Department of Treasury and Finance Secretary David Martine has written to the heads of each government department ordering them to detail plans to cut their budgets by 10 per cent, which the union estimates could equate to a loss of as many as 5000 jobs.
A stagnation in revenue from property transfer duties is also likely to weigh on state revenue over the next couple of years due to flat real estate prices.
The auditor who examined Victoria’s debt-laden finances during the 1990s, Bob Officer, AO, who audited the finances of both the Kennett and Howard governments, also warns that we are watching history be repeated when Victoria required a bailout during the 1990s under the Cain and Kirner government.
Mr Eslake warned of the risk that the state – already ranked the hardest in which to do business – could further raise taxes.
“Victoria is not going to default on its debt,” Mr Eslake said. “I don’t think Victoria’s situation is quite as dire as it was in the late 1980s, early 1990s. But it’s worse than it has been at any other time since then. Of course Victoria, with a lot of debt, is vulnerable to higher interest rates too.
“It may well be that they have to do more on the revenue side. In that sense you’re looking at the usual suspects – payroll tax, stamp duty, land tax, and maybe taxes on gambling if that’s not constrained by contractual arrangements with Crown,” he said.