Victorian government debt to hit $226bn by 2026, Moody’s rating agency predicts

Experts warn Victoria’s debt will hit a mammoth $226bn in the next four years, as concerns grow over repeated budget blowouts since the Andrews government came to power.

Victoria’s total debt is predicted to hit a whopping $226bn by 2026-27, putting the state’s credit rating at greater risk.

Moody’s, one of the world’s “big three” ratings agencies, has forecast the eye-watering figure in its most recent credit report for Victoria.

The total debt estimate is $55bn higher than the $171bn net debt figure foreshadowed in the state budget in May, as it analyses the “whole of government”.

It would see the total debt increase by 85 per cent increase in just five years, up from $122bn in 2022.

The state government has defended May’s $171bn budget estimate, saying it is based on longstanding accounting principles and standards for financial reporting purposes.

The government figure does not consider sector-wide gross borrowings and debt burdens of other government entities, including water corporations, the Victorian Managed Insurance Authority and the Transport Accident Commission.

Premier Daniel Andrews has been accused of $30m in cost blow outs since being elected. Picture: Tony Gough

But Moody’s lead analyst John Manning said it was critical the agency looked beyond the reported net debt figure.

“We look at the whole of government, we don’t just look at the general government,” Mr Manning said.

“Quite often there could be operating deficits sitting through the non-financial public sector which aren’t included in the general government,” he said.

“They need to be funded.”

In its report, Moody’s warned Victoria’s credit profile had weakened in recent years and predicted it would continue to do so because of sustained infrastructure spending which would drive debts higher.

“Despite the underlying strength of the Victorian and broader Australian economy, the state’s debt burden is unlikely to stabilise before the end of the fiscal year ending in June 2028,” it said.

“This rapid (and prolonged) growth in debt amid higher interest rates will raise borrowing costs and weaken debt affordability over time, limiting headroom under current rating tolerances.”

Any unexpected spike in the state’s debt levels would increase downgrade pressure on Victoria’s credit rating, it said.

“The state has large debt funding requirements over the next four years which combined with rising interest rates and the prospect of them remaining high whilst the state’s net debt grows, will test institutional capacity as the state targets fiscal repair over an extended period of time,” the report said.

“Although debt affordability is currently adequate with interest payments at an estimated 4.9 per cent in fiscal 2023, higher interest rates will significantly constrain Victoria’s operating profile over time.”

Shadow Treasurer Brad Rowswell says Victoria is the highest-taxed state in the country. Picture: Valeriu Campan

Moody’s has also warned of further capacity constraints in coming years, foreshadowing the likelihood the government will be forced to walk back from election commitments.

“We note the recent announcement by Victoria to cancel the 2026 Commonwealth Games, citing projected cost overruns from $2.6bn in the 2024 Budget to around $7bn.”

On Tuesday, Deputy Premier Jacinta Allan dodged questions about whether the government would be forced to walk back election commitments due to financial pressures.

“That is speculation,” she said.

“You are speculating on the basis of one report that has come out today.”

“Moody’s, on that report, have used a different accounting methods than what is used and what has been used for a long time now in the in the budget processes.”

Ms Allan said the government’s figures were “on track”.

“The data that has come out since (the budget) demonstrates that the fiscal strategy is on track,” she said.

“Access Economics is recording the fastest-growing economy in the country.”

Ms Allan declined to say whether she was worried about Victoria’s credit rating weakening.

“In terms of the decisions that credit rating agencies may make, that’s really a matter for them,” she said.

Tim Pallas has shrugged off concerns that Victoria’s credit rating is at risk of falling, saying the state still has ‘headroom’. Picture: Luis Enrique Ascui

Treasurer Tim Pallas on Tuesday said the Moody’s estimates were calculated using “entirely different measures”.

“The state’s debt, of course, is generally reflected under standard accounting principles and it works out to over $171bn by 2027 and we will report consistent accounting principles and our fiscal strategy,” he said.

“The more substantive issue I think is that what the Moody’s number that was used in the article really demonstrates is that the gross debt is opposed to the net debt ... the difference between gross and net debt is you incorporate not just the general government sector but all of the quasi trading entities.”

“It’s unlike the general government sector where the state effectively relies on tax and commonwealth receipts for the purposes of services instead.”

Mr Pallas shrugged off concerns that Victoria’s credit rating was at risk of falling, saying the state still had “headroom”.

“I think if you look at the commentary from both Moody’s and Standard and Poor’s, I think it’s pretty clear that the general perception is that the state still has headroom regarding existing credit ratings,” he said.

“Those are numbers as I say that deal with trading entities that are making business decisions about generating income and revenue.

“If you wanted to look at gross debt against assets, and you looked at Qantas and compared it to the state of Victoria, you’d probably form a view that the state of Victoria was probably in a pretty good position,” he said.

“And even compared to the commonwealth we stand, comparatively, pretty well.”

Shadow treasurer Brad Rowswell said Victoria was “the highest-taxed state in the nation, with more debt than Queensland, NSW and Tasmania combined”.

“The Andrews government is addicted to waste, with more than $30bn in cost blowouts since they were elected nine years ago. When the Andrews government wastes, every Victorian pays,” Mr Rowswell said.

But a state government spokesman said Victoria’s economy remained strong, citing a recent Deloitte Access Economics report which forecast Victoria’s economic growth would outstrip all other states over the next two years.

“Our fiscal plan is delivering the services that Victorians need and the projects that grow our state,” he said.

“There have never been more Victorians in work and the Budget papers show our strategy is on track.”