Rate increase adds to Victoria’s debt woes
As Victoria hurtles towards a record debt level, the Andrews government is unable to say what the true impact of rising interest rates will be. FULL REPORT
Victoria
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The Reserve Bank’s rate rise will impact Victoria’s record debt levels, but the government says it’s too soon to say by how much.
The RBA lifted the official interest rate by 0.25 percentage points on Tuesday, increasing the cash rate from 2.6 per cent to 2.85 per cent.
Victoria is hurtling toward a record debt level of $165.4bn by 2025-26 – including $22.5bn in interest payments.
On Monday the government announced an expected operating loss of $9.7bn, more than $18bn than expected.
However a government spokesperson said the fiscal update released by Treasurer Tim Pallas factored in market expectations for future rate rises.
It means interest rate rises have no impact on the substantial proportion of bonds that are already locked in at fixed rates for extended periods.
“We used our balance sheet to protect Victorians during the pandemic, which laid the foundations for the strong recovery in jobs and economic activity we have seen,” he said.
“We are investing in people and projects and driving growth, and our plan to return the budget to surplus is on track.
“The last thing we need now is Liberal Party cuts to put our recovery at risk.”
The spreading of largely fixed-rate borrowings evenly over a 15-year period is expected to smooth the impact of rate rises.
The strategy is expected to reduce the risk of large annual fluctuations in budget interest costs due to movements in interest rates, however Victoria will not be shielded completely.
Shadow treasurer, David Davis, said as interest rates surged upwards it would become progressively harder for the government to service its debt.
Moody’s Investors Service vice president John Manning has warned rising rates would have a clear impact on Victoria’s fiscal position.
“Rising inflationary pressures, and hence, interest rates, as well as likely more volatile global economic growth amid elevated geopolitical volatility will increase cost pressures for the state and make the budgeted expenditure levels challenging to achieve,” he said.
He made the comments in June following the government’s mid-year update but has yet to comment on the latest update.
In a report published last month Moody’s warned the state’s “large scale unbudgeted debt funded infrastructure” would further erode Victoria’s fiscal capacity.
“In contrast to the re-profiling toward smaller projects evident in some states, Victoria has retained its focus on very large projects,” the report warned.
“This includes its commitment to the multi-decade Suburban Rail Loop (SRL).
“Victoria currently projects sustained budgeted fiscal deficits across the forward estimates that will drive a material increase in its debt burden.
“We expect additional large scale unbudgeted debt funded infrastructure will further significantly erode the state’s fiscal capacity over time.”
Victoria’s credit score was downgraded by both Moody’s, and S&P Global, in late 2020.
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