Victoria’s debt soars to $178bn, mid-year budget review reveals

Victoria’s debt pile is set to hit a mammoth $178bn by 2027, a blow out of close to $7bn in the past six months, the latest budget forecasts show.

Victoria’s net debt will soar to almost $178bn by 2027, an increase of $6.4bn more than predicted six months ago.

The Allan government on Friday released its 2023-24 budget update which revealed the state’s debt bill will reach a whopping $135.5bn by June next year.

Net debt is then forecast to increase to $152.9bn by 2024/25 before reaching $177.8bn by June 2027.

This is a $6.4bn increase compared with projections in this year’s budget handed down in May.

Premier Jacinta Allen blamed the Covid pandemic and Ukraine war for the cost blow outs. Picture: Alan Barber

The government has blamed the increase as being driven by government infrastructure investment (GII), which is expected to average $21.3bn a year over the forward estimates - up from $19.6bn flagged in the 2023/24 budget.

“As a proportion of GSP, net debt is projected to be 22.3 per cent at June 2024 and 25.1 per cent by June 2027,” the budget document states.

The state will be in deficit by $3.5bn in 2023-24, according to the budget update.

But the government predicts that will improve to an estimated surplus of $1.1bn in 2025-26.

The operating surplus is then forecast to increase slightly to $1.2bn in 2026-27, the document states.

Treasurer Tim Pallas doubled down on his financial plan, insisting Victoria must keep spending its way out of its debt nightmare.

Mr Pallas said he is confident the early stages of his four step plan — to restore economic growth and create jobs and return to an operating cash surplus — is working.

The final two steps of the plan is to return to operating surplus before stabilising debt levels.

“Those four steps are sequential. We’ve definitely achieved the first two steps,” he said.

“You can’t really get to a position of debt stability and debt reduction if effectively you’re running in deficit.”

He didn’t reject the idea that the state’s finances could get worse before they get better.

Victorian Treasurer Tim Pallas. Picture: Luis Enrique Ascui

North East Link will now cost Victorian taxpayers $26b.

Despite that, Mr Pallas said the government would proceed with its big spend, maintaining he had not privately rallied for the Suburban Rail Loop to be paused or cancelled entirely because of budget concerns.

“We cannot afford to disinvest in the Victorian community,” he said.

Asked whether the cost of the first stage of the project will remain at $35bn as initially budgeted, Mr Pallas said: “I’m not going to prognosticate about how things are going to go.”

A debt levy isn’t under active consideration, Mr Pallas said, but the threat of further taxes has not been ruled out.

Opposition leader John Pesutto said Premier Jacinta Allan was taking Victoria in the wrong direction.

“Labor’s nine-year trend of cost blowouts, greater debt and higher taxes is going from bad to worse under Premier Jacinta Allan,” he said.

“All of the key indicators in today’s budget update are going in the wrong direction.

“This government can’t manage money, it can’t manage major projects and Victorians are paying the price.”

Shadow Treasurer Brad Rowswell said the state’s economy is “an absolute and utter bin fire”.

“The budget update confirms once again that Labor simply cannot manage money,” he said.

Leader of the Opposition in Victoria John Pesutto slammed the budget update. Picture: NCA NewsWire / Luis Enrique Ascui

Transport and Cities program director at think tank the Grattan Institute, Marion Terrill, said it was hard to understand why the government would this week proceed with signing a $3.6bn tunnelling contract for the Suburban Rail Loop.

“It clearly knew when it signed that contract that there was a blow out on the North-East Link,” she said.

“We’ve seen our debt blow out massively. It’s hard to put those two things together and see how it was a good idea to sign a contract.

“That seems like a very imprudent decision with taxpayers money when they already knew what their debt figure was going to be.”

Ms Terrill said the government’s desire to build was contributing to severe labour and material shortages which is driving costs up.

“Now is just not a great time to be launching into an enormous project like the Suburban Rail Loop,” she said.

“This is a very expensive time to be building and it’s partly because the state government is pushing heaps of projects into the market, which is an already overheated market, and so too many projects are chasing the same resources.”

Former ANZ chief economist Saul Eslake said the updated figures should encourage the government to reconsider forging ahead with the Suburban Rail Loop.

“There is a good case for the Victorian government to delay or push back the start of infrastructure projects that have not yet commenced in the same way the federal government has done,” he said.

When the Andrews government was elected in 2014, it inherited just $22bn in debt - accounting for just under six per cent of gross state product.

But by 2026-27, when Victorians next head to the polls, debt will account for more than one quarter of GSP.

Former Victorian Premier Daniel Andrews Picture: NCA NewsWire / Andrew Henshaw

“It’s a big number,” Mr Eslake said.

“Victoria’s debt is the worst of any jurisdiction. It’s now worse than the Northern Territory’s.

“Debt is continuing to be revised upwards. The amount that the government will be spending on that interest has been revised up by $1.8bn over four years to $28.8bn.”

But he said the Andrews government, and now the Allan government, have both “consciously” decided to take on more debt.

“Victoria had a much rougher experience of Covid, and that was to some extent self inflicted by the much harsher lockdowns. Victoria has also consciously chosen to borrow more money to build more infrastructure,” he said.

“Victoria, as a result of the choices it’s made is much more exposed to increases in interest rates.”

Mr Eslake said if government business enterprises — like Melbourne Water — were to be included in the overall figure, the total public sector debt would be forecast to reach a whopping $211bn by June 30 2027.

The revelation comes as the cost of building the North East Link blew out to $26bn — well ahead of the $10bn price tag first put in the project — in the latest Big Build budget overrun.

The project was first spruiked in 2016 to cost just $10bn but was later revised to $15.8bn in 2019 when designs were locked in.

But on Friday, the Premier conceded the costs had blown out even further.

“The extra investment that comes with this … will add to those debt levels,” she said.

Ms Allan blamed the cost overruns on a “massive escalation” in construction costs across Australia and the world, as well as the Covid pandemic and the war in Ukraine.

In August, the Herald Sun revealed Victoria’s total debt was predicted to hit a whopping $226bn by 2026-27, putting the state’s credit rating at greater risk.

At the time the total debt estimate was $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.