Victoria’s budget deficit blows out by another $1.8bn

Victoria will have to foot a staggering amount in interest repayments as the state’s debt continues to soar.

Tim Pallas and Daniel Andrews in parliament. Picture: Luis Enrique Ascui

Victoria will have to pay a staggering $22.5bn in interest alone on the state’s soaring debt over the next four years.

In a pre-election blow for the government, a mid-year update on the state’s finances reveals that the net debt in 2025-26 will reach $165.4bn – more than the total debts of NSW, Queensland and Tasmania combined.

The nightmare numbers, delivered by Treasurer Tim Pallas on Halloween, further reveal the operating loss for this year is expected to increase to $9.7bn – that’s $1.8bn (or more than 20 per cent) higher than predicted in May.

A key driver of the blowout is a massive increase in Victoria’s wages bill.

Major projects have cost the government an extra $240m. Picture: David Crosling

Interest expenses on the state’s mammoth debt are predicted to rise to $3.9bn this financial year and reach $7.3bn in 2025-26, $1bn more than was forecast in May.

Over the next four years, the $22.5bn interest bill equates to $9000 for every one of Victoria’s 2.5 million households.

The net debt figure has been marginally offset by cash expected to be raised from privatising part of VicRoads.

But Mr Pallas acknowledged net debt was on track to increase over the next seven or eight years and would peak at about 25 per cent of gross state product.

The Treasurer further flagged on Monday that the figures could get even worse, with another update prior to the election to factor in the cost of the state’s floods.

It comes amid Treasury warnings of significant uncertainty in the future, with $2.7bn added to the debt every time the cash rate rises increase by 0.5 per cent.

Shadow Treasurer David Davis said unacceptable cost blowouts were leading to skyrocketing debt. Picture: Andrew Henshaw

Former federal Treasury ­official turned economics consultant Gene Tunny said servicing the government’s large debt had left it vulnerable to interest rate increases.

“That’s certainly a big risk to the budget,” he said.

Mr Tunny added while Covid had added to the debt, there was significant spending prior to the pandemic.

“The state governments of both Victoria and NSW have been on a bit of an infrastructure building spree,” he said.

“It shows the importance of being prudent and not wasting too much. This shows parties should be careful in the lead-up to the election about what they promise.”

The Metro Tunnel construction was largely responsible for the major projects costs. Picture: David Crosling

Defending the debt, Mr Pallas said: “It will still remain in comparative terms, GSP compared to GDP, still below the commonwealth’s numbers.

“It’s also a very vitally important point to make that two thirds of the debt that the commonwealth government are currently carrying they incurred before they went into Covid.

“Two thirds of the debt that the state of Victoria is currently dealing with we incurred when Covid hit. Our debt was incurred to look after the wellbeing of Victorians during the pandemic.”

Opposition Treasury spokesman David Davis said: “This report confirms Victoria is on a terrible trajectory.

“It’s like a debt skyrocket,” Mr Davis said.

Originally published as Victoria’s budget deficit blows out by another $1.8bn