Interest rate rise rings alarm bells over Victoria’s soaring debt burden

Shadow treasurer Brad Rowswell has warned the latest interest rate rise will add another $400m to Victoria’s ballooning debt bill.

The Moody’s report has warned of major challenges for Premier Daniel Andrews and Treasurer Tim Pallas as they attempt to balance the budget. Picture: AAP

Shadow treasurer Brad Rowswell has warned the latest interest rate rise will add another $400m to Victoria’s ballooning debt bill.

Mr Rowswell said Victorian Budget’s sensitivity analysis forecast the increase would add almost $400 m to general government net debt by 2025-26.

Victorian net debt, as a share of the economy, grew from 5.5 per cent in 2018-19 to 19.3 per cent in 2021-22.

Government forecasts predict it will reach 24.6 per cent in 2025–26 when the state’s debt hits an expected $165bn record.

“We need a real plan to get Victoria’s spiralling debt levels back under control,” Mr Rowswell said.

“This latest interest rate rise will slap hundreds of millions of dollars on the state’s credit card, leaving a significant dent on Victoria’s bottom line.

“Tim Pallas and the Andrews Labor government must show the Victorian people how they are going to fix the debt burden without taxing hard-working families more than they already are.”

The record debt level would see Victoria exceed the combined level of New South Wales, Queensland and Tasmania.

Mr Rowswell warned Victorian families would suffer higher taxes and limited services in order to pay it down.

The state’s interest bill is tipped to reach more than $7bn by 2026.

Victoria has the biggest debt bill of any state. Picture: Aaron Francis

It comes after a leading credit agency warned that Victoria and New South Wales’ efforts to balance their budgets were at further risk as health costs continue to bite along with labour and interest rate pressures.

In a new report, Moody’s Investors Service flagged ongoing issues for Australia’s two biggest states as they manage their massive debt burdens.

Victoria is under intense pressure as it has the biggest debt bill of any state, which is expected to hit $165.4bn by 2025-26.

According to Moody’s analysis of state budgets, spending on healthcare remains much higher than anticipated and Covid outbreaks have meant these costs have not fallen as quickly as hoped.

Soaring inflation has also meant wages expectations are tipped to hit as high as 4 per cent and this will create pressure on the state budget to meet its labour costs.

Adding to the problem is a weaker housing market that is limiting the amount of money coming into the government’s coffers.

The softer property market is expected to hit NSW and Victoria particularly hard if it continues.

John Manning, vice-president of Moody’s Investors Service, said lower stamp duty revenue had largely offset the gains some states had made from stronger GST and payroll tax.

“Softer-than-expected residential prices and transactional activity through 2024 are likely to weigh more on NSW and Victoria because transfer duty represents a higher proportion of total revenue in these states than for their domestic peers,” he said.

The softer property market is expected to hit Victoria and NSW particularly hard if it continues. Picture: David Crosling

Interest payments are also a major issue, with Moody’s report highlighting that Victoria will pay 8.6 per cent of its income on interest payments in 2026, up from 3.9 per cent in 2022.

By 2025-26, the annual bill for interest payments is forecast at $7.4bn.

This figure could blow out further if the cash rate continues to rise.

“Although high debt burdens pose a risk for all states, NSW and Victoria are more affected than the others given the significant forecast increase in their debt burdens in the period up to 2026 and amid additional expenditure headwinds from high healthcare spending and wage inflation,” Mr Manning said.

“ However, the states’ fiscal positions are supported by strong institutional frameworks, which we expect to allow them to adjust capital expenditure as required if borrowing costs continue to rise.”

A Victorian government spokesman said: “We know that all Victorians are facing cost of living challenges including rising interest rates and inflation and the government is also dealing with the current economic conditions.

“The budget will reflect prevailing economic conditions and forecasts as we continue our strong economic recovery.”

Senior Labor minister Melissa Horne reassured Victorians the government was “very confident” it would return the budget to surplus.

“We’ve got a strong pipeline to be able to return the budget into surplus. The Treasurer is working very hard to be able to do that,” Ms Horne said on Friday.

“We’re lucky we’ve got a strong economy. We’ve got the one of the lowest unemployment rates in the country.

“So having that pipeline of economic growth makes the state feel very confident that we’ll be able to achieve that return to surplus.”

Shadow Treasurer Brad Rowswell said the report confirmed it was going to be harder to pay off the Andrews government’s debt.

“Victoria’s debt levels are unsustainable and robbing the state of the ability to invest in what really matters,” he said.

“Every dollar added to our debt and interest repayments is one less for the things that really matter.

“Increasing interest rates highlight the need for a fair dinkum plan to pay off debt and reduce government waste.”